Determinants of Non Performing Loans

Determinants of NPLs (Non-Performing Loans): A case study of Pakistan 1
CHAPTER # 1
Introduction
1. Introduction
1.1. Background
NPLs (Non-Performing Loans), is name given to loans which are
overdue for more than 90 days or any other period in the agreement. Loans
which are part of the default list or near the default date and entering the non
performing state are categorised as NPLs. his situation occurs when
!orrower shows reluctance in paying the interest and the principle amount of
the loan
"
.
his situation is not desira!le for the !an#s and other loan issuing
firms. $an#s and other loan issuing firms consider such activities as there !ad
de!t e%penses and want them to !e as low as possi!le. Large num!er of NPLs
causes failure for !an#s. NPLs increase the e%penses of !an#s and their net
income suffers !ecause of them.
&n the end !an#s have to sell off when their income statements start
showing negative values. &n such scenario 'sset management companies too#
charge of those !an#s on discount. his situation is always undesira!le for the
!an# and no one would li#e to stic# with such situations.
here are numerous varia!les which have their negative or positive
impacts on NPLs. &ndependent (aria!les which are !eing e%amined over here
1
)riga( *00+)
are interest rate, inflation and e%change rate from the macro economic
varia!les. Loans to total asset and growth in loan are independent varia!les
which are !an# specific. his paper deals with that how all these varia!les
effect on NPLs (Non-Performing Loans) of !an#s.
1.2. Problem Statement
,any studies have !een done in the past related to the relation
!etween NPLs and macroeconomic indicators. ,any researchers have
conducted the study on what is the impact of macroeconomic or !an#
specific factors on NPLs. Past studies indicate that the macroeconomic
indicators and !an# specific factors have significant impact on NPLs.
he impact of macroeconomic indicators and !an# specific factors on
NPLs has !een assessed separately in the Pa#istani scenario, where as
no research has so far !een conducted comprising !an# specific as well
as macroeconomic indicators together in the case of Pa#istan,
herefore- still there is a need to e%pand the study the impact of !oth
macroeconomic factors as well as !an# specific factors on NPLs in the
conte%t of Pa#istan.
1.3. Reearc! "b#ecti$e
he o!.ective for commencing this study is to figure out the
determinants of non-performing loans in the !an#ing sector of Pa#istan.
,oreover, the ma.or purpose of this research is to highlight the possi!le
effects of NPL in the economy. &n addition, this research will put light on the
fact that how NPL is playing its role in ma#ing companies and !an#s
defaulters. his research will also throw light on how !an#s and companies
can avoid such mishaps.
1.%. Reearc! &uetion
/hat are the factors affecting on (Non-Performing Loans) of different
!an#s in Pa#istan0
1.'. Sco(e o) t!e tud*
his study will !ecome a remar#a!le contri!ution in already e%isting
#nowledge a!out NPLs and its determinants. 'fter this study determinant of
NPLs will !ecome more evident. &t will !e !eneficial for the future and
reducing this rapidly increasing num!er of NPLs.
1.+. ,imitation o) t!e tud*
'lthough this research is dealing with a new and une%plored viewpoint
!ut e%istence of some constraint is always there during research. 1esearcher is
relying on online resources which are due to shortage of time and funds.
CHAPTER# 2
,iterature Re$ie-
2. ,iterature Re$ie-.
2.1. T!eoretical Background
,any theories have !een identified as real interest rate has ma.or
impact on the non performing loans. /hen real interest rate of !an# is too
much high, investors fail to pay off the loans. 1esearchers have empirically
and theoretically analy2ed that the NPL and real interest rate is having
negative association
*
.
&nflation is very important macroeconomic varia!le considering when
the policy ma#er wants to sta!ilise the economy, especially the central
authority li#e state !an# regulate the economy with the help of commercial
!an#s as all the lending and !orrowing ta#es place, continuous rise in price
will cause the inflationary trend in the environment which put the economy
towards down turn and soon the economy face depression.
&nflation has shown positive impact on the non performing loan. 's
inflation enhances the NPL also enhances. heory has shown that as inflation
increases, investor have to pay more money for the raw materials. hus their
production cost enhances. his enhances the chances of ris# of NPLs. Profits
shrin#s and chances of loss increases. his reason lays ground for enhancing
the NPL.
3
2
4hemra. 5 Pasha ( *006)

3
7a!a et. Al (*00+)
's growth in terms of loan increases, the chances of NPL )ecrease.
his is due to the fact that the ratio of NPL is very low as compared to
Performing loans. ,ore loans increases the ratio of performing loans and thus
decrease NPL.
2.2. Em(irical Studie
8r#ens et al. (*0"*) investigated the effect of corporate governance on
financial firms of 30 countries for the period of *006 to *009. 1egression
analysis was applied on the data. he adoption of this analytical techni:ue has
facilitated the researchers in foreseeing the results and reaching to the
conclusive remar#s, with assistance of this empirical analysis. &t was found
firms which have more independent !oards and high num!er of institutional
ownership are e%periencing poor stoc# returns during period of crisis. &t is
!ecause of the firms which have more institutional ownerships ta#e many ris#s
which result more losses in times of crisis. ;n the other hand firms which
have more independent !oards can earn more num!er of capitals as e:uity in
time of crisis. he researchers have suggested to replicate the same research
!y e%panding the scope of the present research wor#.
7a!a et al. (*0"*) analyse that what are the factors responsi!le for non-
performing rate in <7 economy for the year of "99= to *0"0. hey have used
correlation and regression analysis in their research. he adoption of this
analytical techni:ue has facilitated the researchers in foreseeing the results and
reaching to the conclusive remar#s, with assistance of this empirical analysis.
(aria!les which were part of the study were 1eal >)P per capita, inflation
and total loans. 'll of the varia!les which were part of the study were found to
have significant impact on NPLs. $eta values were although low in the results
found. &n the end it was suggested that !an#s should change their policies if
they want lower NPLs ratio which is of course desira!le for them. he
researchers have suggested replicating the same research !y e%panding the
scope of the present research wor#.
Leon and racey (*0"") e%amined the impact of NPLs on loan
growths in the economies of ?amaica and rinidad. ;L7 regression was
conducted in the research. he adoption of this analytical techni:ue has
conclusive remar#s, with assistance of this empirical analysis. Loans growth
rate, NPLs growth rate, investment, capital growth rate and deposit growth
rate were the varia!les of the study. he result showed that with high level of
NPL to loan ratio !an# !ecome unwilling to the ris# which made them ris#
averse when it@s a!out loan dis!ursal. /ell over all NPLs have negative effect
on creations of loans. he researchers have suggested to replicate the same
research !y e%panding the scope of the present research wor#.
N#usu (*0"") have analysed the relationship !etween NPLs and
macroeconomic performance. Panel regression and panel vector
autoregressive model were used in the research. he adoption of this analytical
techni:ue has facilitated the researchers in foreseeing the results and reaching
to the conclusive remar#s, with assistance of this empirical analysis. hey
have conducted this research in two stages first was that they investigated
macroeconomic varia!les effecting on NPLs and secondly on feed!ac#
!etween NPL and their macroeconomic determinants in P('1 model. )esired
response functions to NPL as a central role in relation !etween micro financial
vulnera!ility and mar#et friction. he researchers have suggested replicating
the same research !y e%panding the scope of the present research wor#.
7haher et al. (*0"") investigate that what are the ma.or factor which
effect on performance of commercial !an#s in ,iddle 8astern region. Aactor
analysis was conducted on the data which consist of *3 varia!les. he
adoption of this analytical techni:ue has facilitated the researchers in
foreseeing the results and reaching to the conclusive remar#s, with assistance
of this empirical analysis. he new thing in the research was that it include
religious !elievers of the sample which made it uni:ue. (aria!les which were
considered in the research were >)P per capita, !an# operating cost, si2e and
duration of loans, religion !elieves, economic growth, competition,
government regulations etc. /hich resulted that !an# characteristics is most
impactful factor0 1eligious !elievers and awareness of !an# performance has
least impact on the performance on commercial !an#s in ,iddle 8ast. he
(ogia2as and Ni#olaidou (*0"") investigated the determinants of
NPLs in !an#ing sector of 1omania for the period of *00" to *0"0. he
of this empirical analysis. <nivariate regression and multiple regression were
applies on the data. (aria!le which were part of the study were
unemployment, constructions, investment e%penditures, total consumption,
total gross e%ternal de!t to >)P, money supply, e%ternal de!t, loss loan
provision to total loans, different !onds, interest rate and per capita income.
>ree# crisis were considered as they can !e the reason of 1omanian NPLs.
Aindings of this research suggested that influential factors for NPLs are
constructions, investment e%penditures, inflation, unemployment, money
supply and de!t to >)P in cooperation with >reece crisis which effect the
credit ris# in the !an#ing system of 1omania. he researchers have suggested
replicating the same research !y e%panding the scope of the present research
wor#.
$urde#in and ao (*0"0) present lending pattern for lending firms in
the economy of Pa#istan. NPL7 over *0B in the year *006 and attention in
China@s poverty hit areas. '$C which stands for 'gricultural !an#s of China
is found to !e not a very good issuer of initial pu!lic offerings. &t is stated in
the paper that in the end of *009 capital was in.ected in the '$C which signed
reduction in productivity to give loans to state owned loss ma#ing companies
of China. here are many evidences found that re distri!ution of loans is still a
practice in China. ,any state owned !an#s although in the years *00= to *00D
have ta#en on initial pu!lic offerings. he researchers have suggested
wor#.
Aofac# (*00=) has used the model !ased on the Pseudo panel model,
ta#en several su! saharan 'frican countries to find the relationship !etween
macro economic varia!les li#e e%change rate, interest rate and economics
growth. hey also consider inter !an# loans as independent varia!les.he
result findings shown that these varia!les have significant association with
NPL@s in these countries. he study also demonstrates that the relationship
!etween NPL and macro economic varia!les are positive.
.
Lou2is et al. (*0"0) investigate the determinants of NPLs in !an#ing
sector of >reece !y analysing three types of loans which are consumer,
!usiness and mortgage loans. he adoption of this analytical techni:ue has
conclusive remar#s, with assistance of this empirical analysis. (arious
varia!les were part of the study which includes unemployment, lending rate,
>)P growth rate and various !an# specific varia!les were also considered in
the research. hey resulted that all there a!ove mentioned macroeconomic
varia!les have their strong effect on NPLs. &t is also seen that different
categories on loans have varying results. ,ortgage is considered to !e of least
responsive in nature. he researchers have suggested replicating the same
research !y e%panding the scope of the present research wor#.
>reenidge and >rosvenor (*009) have attempted to !uild
models in order to forecast the NPLs of D foreign owned commercial !an#s in
economy of $ar!ados. 7tatistical techni:ues used in the analysis were
univariate '1&,' model and multivariate model. he adoption of this
NPL to total loan ration of each !an# was calculated and various models were
formed. he results in the end suggested that NPLs plays an important role as
it tend a !an# towards !ecoming fail and face crisis. his research has deal
with insights and given a good future description to new and already e%isting
!an#s. he researchers have suggested replicating the same research !y
e%panding the scope of the present research wor#.
/aweru and 4alani (*009) investigated the reasons !ehind
commercial !an# crisis in 4enya and what could !e the remedy to prevent
NPLs which !ecame reason of these defaulting !an#s. 7ample which was
collected include 30 managers of leading !an#s in 4enya. Eualitative research
was conducted in the research. he result suggested that most impactful
customer oriented factor was customers@ failure in disclosing vital information
and economic factor was another important factor. he study revealed that
there was a lac# of aggressive de!t collection which is ma#ing lots of effect on
NPLs in 4enyan !an#ing system. he researchers have suggested replicating
the same research !y e%panding the scope of the present research wor#.
'chou and enguh (*009) tried to give a clear picture of how !an#s
manage credit ris#s and prevent themselves from defaulting. 1egression
analysis was conducted in the research for the period of *00" to *00=. he
of this empirical analysis. (aria!les which were part of the study were
profita!ility !y using 1;' and 1;' as pro%y and interest income !oth were
dependent varia!les of two separate models and independent varia!les in the
research was NPLs. he result shows that !an#s performance when ta#en as
profita!ility has significant impact on credit ris# management of !an#s. $an#s
with god credit ris# management have lower defaults. he researchers have
suggested replicating the same research !y e%panding the scope of the present
research wor#.
4hemra. 5 Pasha (*006) attempts to analy2e the sensitivity of NPLs
(Non-Performing Loans) to macroeconomic and !an# specific factors in
>uyana $an#ing 7ystem !y using panel data set of si% commercial !an#s from
"99+ to *00+. ,acroeconomic varia!les are real effective e%change rate,
growth in real >)P and annual inflation rate. $an# specific Aactors are credit
growth, loan to asset ratio, real interest rate and !an# si2e. he impact of
varia!les is assessed !y employing regression model techni:ue. he adoption
of this analytical techni:ue has facilitated the researchers in foreseeing the
results and reaching to the conclusive remar#s, with assistance of this
empirical analysis. 1esult shows that >)P has negative and 1881 has strong
positive association with NPLs, !oth impact significantly, inflation is
unimportant in >uyana $an#ing 7ystem, interest rate has positive as well as
significant relationship with NPLs. &t is suggested that commercial !an#
should ta#e e%port oriented sectors and >)P growth in to account while
e%tending credit and finally, !an# should constantly review the interest rate on
the loans. he researchers have suggested replicating the same research !y
7orge (*00+),in an study identify the sensitivity of NPL (non
performing loans) with respect of macro-economics and !an# specific
varia!les.he study conducted on the guyana !an#ing sector and the data of "0
year period is covered from ("99+ to *00+).he correlational study
demonstrates in findings that !oth macro economic and !an# specific factors
have impact on NPL. he 1eal e%change rate shown positive significatn
ralationship with NPL. he study also demonstrates that the non performing
loans also have positive relationship with NPL.
7alas and 7aurina (*00*) have conducted a study on the determinants
of non performing loans of spanish commercial and saving !an#s, the
researchers have used the data from "99=-"996. he varia!les used in the
studies were real >)P growth, !an# si2e, rapid credit e%pansion, and capital
ratio. Non performing loan is used as dependent varia!le. he result findings
shown diversified impact of independent varia!les on dependent varia!les.
?imene2 and 7aurina (*00=) perfomed a research study on the spanish
data with having data for the period from "99+ to *003. he study reveals that
NPL has significant association with interest rate, >)P growth and credit
terms. he study also shows that due to the e%cessive lending in !oom period
of the economy the NPL increases.
)riga (*00+) analysed the means that causes reduction in credit ris#s.
Eualitative research approach is adapted the research. he varia!les which
were considered were character, capital, capacity, collateral, condition and
control. Figh num!er of NPLs can !ecome reason of decline in profita!ility of
a lending institution very rapidly which can !ecome reason of !eing in default
list. 'll these characteristics were found to prevent a !an#ruptcy situation
which is very undesira!le for any !an#. he researchers have suggested
wor#.
'ndreeva (*00+) e%plained that how pro!a!le is !an#ruptcy and what
is its role in e%plaining loan losses of a !an# in Norway for the period starting
from "999-*00". 1andom effect >L7 regression and dynamic model >,,
estimation was applied in the e%tracted data. he adoption of this analytical
techni:ue has facilitated the researchers in foreseeing the results and reaching
to the conclusive remar#s, with assistance of this empirical analysis.
Numerous varia!les were part of the study which was 'ggregate industry
!an#ruptcy pro!a!ility, loan losses to asset, loan losses to provision of asset,
e:uity to asset, real loan interest rate, unemployment, share of ris#y loan,
num!er of region etc. his research resulted that !an#s which are e%posed to
high ris# of !an#ruptcy have high loan losses when we control factor specific
to !an# and macroeconomic factors. 'lthough !an#s with efficient credit ris#
management can have control on their reduction of loan losses. he
1an.an and )hal (*003) analyses Commercial !an#s@ Non-
performing loans in &ndia. Panel regression model was applied on the research
data. he adoption of this analytical techni:ue has facilitated the researchers in
of this empirical analysis. (aria!les which were part of the study were terms
of credit, macroeconomic shoc#s and ris# preference made !y si2e of !an#s.
hey resulted that terms of credit have significant influence on NPLs of the
!an#s in presence of macroeconomic shoc#s and ris# preference made !y si2e
of !an#s. &t is also realised that if alternative measures of !an# si2e are
considered than different results can !e found. &n the end they suggested that
distinguished implications can cause some other responses of lenders and
!orrowers. he researchers have suggested replicating the same research !y
,a and Aung (*00*) have addressed the NPL@s pro!lem of !an#ing
system in China. >overnment of China have made four asset management
corporations. hey have decided to !uy !ad de!ts of four commercial !an#s
which are state owned. hey have realised that these corporation have not
done so well in their first two years of esta!lishment. 'sset management
corporations themselves are facing heavy financial losses and pressure on
them is increasing stress fully on them which is not a very desira!le scenario.
he researchers have suggested replicating the same research !y e%panding
the scope of the present research wor#.
4eeton ("999) investigated that does rapid growth in loans lead a !an#
towards higher losses in =0 states of Colom!ia for the period "99* to "99D.
(ector 'uto regression was applied on the data. he adoption of this
welve :uarterly lags were part of the study for each varia!le. Logs and
dummy varia!le were included in the research. wo sorts of evidences were
.udged which were evidence from seniors of Aederal 1eserve@s and evidences
of !an#s call reports. he result shows that growths in loan have inverse
relation with credit standards in "990s. $ut if we see on "960s to "990s we
can see that they move in same directions. &t is also stated that changes in
growth of loans are not always due to shift in supply. he researchers have
suggested replicating the same research !y e%panding the scope of the present
research wor#.
>ordy ("999) have done a !rief comparison !etween two popular
models of credit ris# management which are ?.P ,organ credit matri% and
7uisse financial product. Correlation and ro!ustness was applied in the
research. (arious models were formed using different varia!le which descri!e
different si2es of loans and portfolio. he adoption of this analytical techni:ue
has facilitated the researchers in foreseeing the results and reaching to the
conclusive remar#s, with assistance of this empirical analysis. &n the end
shows that dependency on low si2e is low, average default in portfolios are
found to !e sensitive and volatile. ,odels are found to !e dissimilar in their
functional forms.
4eeton and ,orris ("996) have e%amined the causes of loan losses
associated with the !an# loans in different cities, *=00 !an#s were part of their
sample. ime period which was e%amined was starting from "969 to "99=.
(arious ratios were under o!servation in the research which includes loan-
asset ratio, volatile fund ratio and e:uity asset ratio. he result suggested that
ratios which were treated as varia!les in the study are although impactful. $ut
there are several other influential factors for loan losses. &n the end it was
concluded that !an#s which ta#e more ris# are e%posed to the pro!a!ility of
!eing default. he researchers have suggested replicating the same research !y
CHAPTER#3
/et!odolog*
3. /et!odolog*
3.1. Reearc! A((roac!
1esearch approach adopted in this research is :uantitative. &t is
considered to !e the !est option whenever a researcher is dealing with numeric
values.
he :uantitative research approach is utili2ed within researches and
studies included information in type of numeral information, facts and figures.
he accumulation, !rea#downs and elucidation of information is the primary
center in :uantitative research. Fere and there information is gathered in
primed structure and some of the time the change of the information is o!liged
to apply :uantitative methodology. his research approach is ac#nowledged to
give accurate and simple to grasp comes a!out of the study.
3.2. Reearc! Pur(oe
1esearcher is conducting e%planatory research for understanding the
relationship !etween dependent and independent varia!les. 8%planatory
research will show that what role each considered varia!le plays on NPLs of
the !an#s.
his research is led for e%planatory purpose and gives the purposes for
truths that hail from past studies. )efinite illustration is one of the ma.or
o!.ectives of e%planatory e%ploration. 'round the some studies that has
recently done on a specific wonder, the e%planatory e%amination recogni2e the
!est one that e%act results. he hypotheses are trying, if the hypothesis was
correct or false. &t additionally demonstrates the relationship !etween the
varia!les utili2ed as a part of e%amination.
3.3. Reearc! 0eign
Co- relational research design is applied in this research as here the
researcher want to e%plore the relationship among the varia!les. he !asic fact
which tends researcher towards this particular option is its propensity to
measure relations when e%periments can@t !e conducted.
3.%. 0ata Source
he data, which is re:uired in this research, have !een o!tained from
different we!sites, which are e:uipped with data of Pa#istan. )ata which is
used in the research is secondary in nature and can !e ac:uired free.
3.'. Sam(le Si1e
)ata of si% !an#s from Pa#istan is used as sample si2e.Gears which are
under the consideration of researcher are from *00D to *0"0. he data is
availa!le from the we!sites of !an#s and state !an#@s we! page.
3.+. Statitical Tec!ni2ue
1egression was applied on the data !ecause it caters the need of the
researcher to e%plore the relations among the dependent and independent
varia!les. 's we #now that the least s:uare method is very favoura!le for
predicting the relationship !etween the dependent and independent varia!le,
through this techni:ue we ma#e a modal called as the predicted modal which
depend upon our investigation or research.
3.3. /odel H*(ot!ei
F"H 1eal interest rate has an insignificant impact on NPLs of Pa#istani
!an#s.
F*H &nflation has an insignificant impact on NPLs of Pa#istani !an#s.
F3H 1eal e%change rate has an insignificant impact on NPLs of
Pa#istani !an#s.
F+H Loans to total asset has an insignificant impact on NPLs of
Pa#istani !an#s.
F=H growth in loan has an insignificant impact on NPLs of Pa#istani
!an#s.
3.4. /odel o) Stud*
+ + + + + + = GL LTA RR !N" R!R NPLs
= + 3 * " 0

/hereas- NPLs I Non-performing loans,
1&1 I 1eal interest rate,
&NA I &nflation,
181 I 1eal e%change rate,
L' I Loan to total asset,
>L I >rowth in loan.
3.5. $ariable decri(tion
&n this research study on dependent varia!le is used and that is Non
performing loans (NPL). &ndependent varia!les are real interest rate, inflation,
real e%change rate, loan to total asset, growth in loan. ' !reif description of all
varia!les are given !elow.
6on (er)orming loan.
' whole of o!tained cash upon which the de!t holder has not made his or her
planned installments for no less than 90 days. ' nonperforming Loan is either
in default or near !eing in default. /hen an advance is nonperforming, the
chances that it will !e reim!ursed in full are recogni2ed to !e considera!ly
lower. &n the event that the inde!ted person !egins ma#ing installments again
on a nonperforming Loan, it turns into a reperforming credit, regardless of the
fact that the account holder has not made up for lost time with all the missed
installments.
Real interet rate.
'n interest rate that has !een changed in accordance with uproot the impacts
of swelling to reflect the genuine cost of stores to the !orrower, and the true
yield to the loan specialist. he true interest rate of a speculation is computed
as the measure !y which the nominal interest rate is higher than the inflation
rate. &t is used as independent varia!le in our study.
1eal &nterest 1ate I Nominal &nterest 1ate J &nflation
In)lation.
&n commercial concerns, inflation is an ascent in the general level of prices of
products and administrations in an economy over a time of time. he point
when the general price level clim!s, every unit of cash purchases fewer
products and administrations. hus, inflation reflects a diminishment in the
ac:uiring power for every unit of cash J a misfortune of true :uality in the
medium of trade and unit of record inside the economy. ' head measure of
price inflation is the inflation rate, the annuali2ed rate change in a general
price inde%.his macro economic varia!le is used as independent varia!le in
our study.
Real e7c!ange rate.
he purchasing power of the currecy of two countries in respect to each one in
turn. /hile two monetary standards might have a certain conversion scale on
the remote trade mar#et, this doesnKt imply that merchandise and
administrations ac:uired with one money cost the identical measures in an
alternate cash. his is !ecause of diverse e%pansion rates with distinctive
coinage. 1eal trade rates are hence computed as an ostensi!le swapping scale
!alanced for the distinctive rates of e%pansion !etween the two monetary
forms. 1eal e%change rate is used as independent varia!le in this research.
,oan to Aet ratio.
&n this study Loan to asset ratio is used as independent varia!le. he ratio is
used to measure the ratio !etween the loans giving to customers and the total
assets of !an#s. his ratio also shows the li:uidity of the !an#.
8ro-t! in ,oan.
he growth in loan is the independent varia!le used in the study. /ith the
growth in loan the non performing loan should !e increase as more money is
stuc# in the mar#et of !an#. his varia!le is also used in several previous
studies and is ta#en as !an# specific varia!le.
CHAPTER # %
0ata Anal*i
%. 0ata anal*i
he chapter of data analysis is prepared to give an insight a!out the
o!tained results- it is !ased on the results o!tained from applying the
regression analysis on gathered data which is a!stracted from the we!site and
some other source.he )ata is run with ta#ing "0B significance value and
thus shown that all the varia!les have significant relationship with NPL. 'll
the interpretation of o!tained value under the head of regression analysis has
!een done in this chapter
Table 6o. %.1
Pakitan 0ata
9ariable Coe))icient t:tat Prob. 9I;
C 3.=D* 0.93* 0.0+"
Ln1&1 =.*36 *."*D 0.0++ ".3=*
ln>L -0.*0+ -*.=*D 0.0"9 ".033
L' -"=.6"D -*.=99 0.0"D "."36
181 0.0D+ *.9D* 0.009 ".D*+
&nflation 0.090 ".96" 0.06+ ".=0*
Ad#. R
2
0.+=9
".00+
=.90D (0.00")
0 < tat
;:tat =(rob>
Regreion model.
6P, ? 3.'+2 @ '.233 RIR A B.2B% ,n8, A 1'.31+ ,TA @ B.B+% RER @
B.B5B In)lation @ E
)ata is analy2ed with the help of regression analysis and the a!ove
e:uation has !een o!tained for the data gathered in case of Pa#istan. 8:uation
has presented positive association of inflation, real interest rate, e%change rate
and negative association with the varia!le of growth in loans and loan to the
asset with NPL.
a!le no +." is prepared to show the level of significance for each of
the varia!le, pro!a!ilities of varia!les, ad.usted 1
*
value, value of )ur!in
/atson and A-stats. 8mpirically o!tained results will !e .ustified with the
proper evidences.
he value of ad.usted 1* o!tained from the results is 0.+=9. his value
is demonstrating that +=.9B of the independent varia!les have accurately
defined the dependent varia!les, NPL. Fowever, =+.*B of the terms are
e%plained with the term of error. his is showing that =+.*B of the varia!les
are lac#ing in e%plaining the NPL which is then e%plained with the term of
error.
he value o!tained for the )ur!in /atson is ".00+. his value is
depicting that there does not sustain any auto correlation within the years of
the collected data. &n other words, it can !e stated that value of )ur!in /atson
".00+ is showing that each year has shown sign of differences from the other
years.
A-stats value o!tained in case of Pa#istani NPL data is =.90D with
0.00" pro!a!ility level. he value of A-stats with 0.003 significance level is
showing that the model falls under the set confidence interval of 9=B. he A-
stats value =.90D with 0.00" pro!a!ility is undermining the model is
ade:uately fit.
Coefficients of the independent varia!les are reflecting the individual
weights associated with the dependent varia!le, NPL. Constant with the
coefficient value of 3.=D* is having positive sign. his shows the positive
altitude over the regression line at the y-intercept. the p-value shows 0.0+" that
is significant as well &n other words, it shows that value of NPL will increase
every year !y 3.=D*, if all the other things will !e same.
Coefficient of the real interest rate is =.*36. his shows that when one
unit in real interest rate is increased, the NPL will !e increased !y =.*36 units,
if all the other things will !e same. the p-value shows 0.0++ that is significant
as well .his is interpreting the positive sign of association !etween NPL and
real interest rate.
Coefficient of the growth in loan is -0.*0+. his shows that when one
unit in growth in loan is increased, the NPL will !e decreased !y 0.*0+ units,
if all the other things will !e same. his is interpreting the negative sign of
association among NPL and growth in loan. the p-value shows 0.0"9 that is
significant as well .8nhancement in growth in loan will decrease the NPL.
Coefficient of the loan to asset is -"=.6"D. his shows that when one
unit in loan to asset is increased, the NPL will !e decreased !y "=.6"D units, if
all the other things will !e same. his is interpreting the negative sign of
association among NPL and loan to asset. the p-value shows 0.0"D that is
significant as well .8nhancement in loan to asset will decrease the NPL.
Coefficient of the real e%change rate is 0.0D+. his shows that when
one unit in real e%change rate is increased, the NPL will !e increased !y 0.0D+
units, if all the other things will !e same. his is interpreting the positive sign
of association among NPL and real interest rate. the p-value shows 0.009 that
is significant as well .8nhancement in real interest rate will increase the NPL.
Coefficient of the rate of inflation is 0.090. his shows that when one
unit in rate of inflation is increased, the NPL will !e increased !y 0.090 units,
if all the other things will !e same. the p-value shows 0.06+ that is significant
as well his is interpreting the positive sign of association among NPL and
rate of inflation. 8nhancement in rate of inflation will increase the NPL.
&n this analysis, the p values, t-stats and (&A has also !een analy2ed.
he p value which is showing less than =B value is significant for the study.
his means that they have significant relation with the NPL.
he p value of constant is 0.0+". 0.0+" is less than =B and thus it
reflects the significant impact over the NPL. he real interest rate with the p
value of 0.0++ is also depicting the significant impact on NPL, as it lies under
the =B level of significance.
he rate of inflation with the p value of 0.06+ is also depicting the
significant impact on NPL, as it lies under the =B level of significance.
he loan to the asset with the p value of 0.0"D is also depicting the
insignificant impact on NPL, as it lies under the =B level of significance.
he growth in loan with the p value of 0.0"9 is also depicting the
he real e%change rate with the p value of 0.009 is also depicting the
(alue of (&A which is showing ,ulti Collinearity among the
independent varia!les is ".3=*, ".033, "."36, ".D*+, and ".=0* for real interest
rate, growth in loan, loan to assets, real e%change rate and inflation
respectively. 's all these values lies under "0, then it means that there is no
sign of ,ulti Collinearity among the independent varia!les.
CHAPTER # '
Concluion
'. Concluion and Recommendation
'.1Concluion.
his research is a comparative study a!out the non-performing loans of
Pa#istan. his chapter will put light that what conclusions are o!tained from
the results derived in chapter no +. &n addition, this chapter will highlight the
matching of the results with the previous studies.
&n Pa#istan, real e%change rate has shown the positive relation with the
NPL. he same results have !een o!tained in the previous researches of
(1an.an 5 )hal, *003) and (?ohn, ,ehran 5 Eian, *009).
Positive relation of e%change rate with NPL is that when e%change rate
increases, the importer pays higher amount for the goods imported, which
results in inflation and ultimately impacts on the profita!ility of the importer
who !orrowed the money from financial institution, thus the importer !ecome
una!le to pay de!t.
he rate of inflation is showing positive association with the NPL. he
same results have found from the researches of (Chang, *00D) and ($ara#o 5
>atere, *009).
Positive association among the NPL and inflation rate sustains as found in our
results.
/hen price of goods increases, the !usinessmen who !orrowed the money
increase cost of goods, due to which the sale decreases, which results in low
profita!ility of the !usinessmen and thus chances of getting defaulter.

7imilarly, NPL and rate of interest is also having positive relationship.
his is !ecause when !an#s increase the rate of interest it creates hindrances
for the !orrower to pay de!t easily, thus the chances of getting defaulter are
very high.
his shows that positive association among interest rate and NPL.
1esearchers who have derived the same results are (8r#ens, Fung 5 ,atos,
*0"0), (/aweru 5 4alani, *009) and (,a 5 Aung, *00*).
he loan to the assets in Pa#istani !an#s is showing negative
association with the NPL. he same results have found from the researches of
(>reenidge 5 >rosvenor, *009) and ('ndreeva, *00+).
's per the results NPL and Loan to asset (L') have negative
relationship. /ith the p value of 0.0"D. his negative relationship shows that
!an#s with high L' ratio have low NPL. his result is a !it change from
previous studies.$an#s with high L' ratio have more li:uidity ris#. 7o they
provide loans to the applicants who are a!le to pay their loans installments on
time.$an#s also they also have recovery teams to collect more of their
loans.he NPL decreases as a result.
he growth in loan in Pa#istani !an#s is showing negative association
with the NPL. he same results have found from the researches of ()riga,
*00+) and (racey 5 Leon, *0"").
he relationship !etween NPL and grwoth in loans showsn negative
relationship along with p-value of 0.0"9. 's the policies of !an#s are their
procedures are so tough that the ratio of NPL is very low as compared to the
performing loans. 7o with the growth in loans the perfoming loans increases
and NPL decreases in the ratio. $an#s with higher NPL use this techni:ue as a
tool to decrease NPL. his also demonstrates the conservative lending
!ehavior of !an#s, as they will not give more loans to sectors where they have
!ad e%perience (4hemra. and pasha *006).
'.2 Recommendation.
/ith the derived conclusion, following recommendations are made in
this research. &f !an#s want to ensure the interruption free !an#ing, they
should have high controls over their NPL. hey must have esta!lished strict
policies to ma#e certain that companies and !usinesses who have !orrowed
money would not get default.
&nterest rate should !e offered with the great ease to the !orrower so
that it will !e easy to pay !ac# the principle amount and the interest on it. his
can reduce the !an#@s NPL.
&n addition, !an#s must re:uire to carefully analy2e the pro.ects !efore
lending the loans. hey must have get securities and chec# the documentations
!efore lending the money. &n this scenario, they will !e a!le to guarantee that
if !usiness who has !orrowed money gets default, they will sell the security
and fulfil their losses.
Central !an# must not issue e%tra money in the mar#et. 's money
e%cess money is directly related to inflation . 's a policy ma#er state !an#
should control the money supply that will help !an#s to decrease NPL
&f there is inflation in the economy, it is the duty of central !an#s to
implement effective and strict monetary policy to control the inflation. hey
must enhance the rate of interest so that people !elieve in ta#ing less loans and
less chances of NPL occurrence will result.
1is# free !an#ing is only possi!le when central !an#s of Pa#istan will
closely wor# with their !a!y !an#s and assure the implementation of the
already esta!lished policies.
'.3 ;uture Recommendation.
)ue to lac# of time duration we were una!le to wor# on
comparative study. ' comparative study is re:uired that covers
'sia region to find the trend in the su! continent.
,ore !an#s should !e included in the research to find the more
accurate trend.
he study does not include all of the varia!les due to its
limitations, further macro economic and !an# specific varia!les
should !e included in the research to identify their impacts and
their significance on NPL.
Bibliogra(!*.
Bibliogra(!*
'chou,.A. 5 enguh,N.C. (*009), $an# Performance 'nd Credit 1is#
,anagement,#ni$ersity %f &ko$de' "-39.
'ndreeva,;. (*00+), 'ggregate !an#ruptcy pro!a!ilities and their role in
e%plaining !an#s@ loan losses. Norges (ank)s *orking +a+ers, "-++.
$ara#o,).>. 5 >atere,P.4. (*009), ;utsourcing Practices of he 4enyan
$an#ing 7ector. African ,ournal of Accounting' conomics' "inance and
(anking Researc-' (ol. *(*)' 36-=0.
$o#pin, >.'.(*009), ,acroeconomic development and capital structure
decisions of firms 8vidence from emerging mar#et economies, &tudies in
conomics and "inance' (ol. *D (*), "*9-"+*
$urde#in,1.C.4. 5 ao,1. (*0"0), 'n '$C >uide o Provincial Lending
Patterns &n ChinaH Progress 'nd Prospects, Ro.ert Day &c-ool /orking
Pa+er' "-*D.
Chang,G.. (*00D), 1ole of Non-Performing Loans (NPLs) and Capital
'de:uacy in $an#ing 7tructure and Competition, 00P /orking Pa+er' No.
0D"=' "-33.
Chaudhry,&.7., Aaridi,,.L., '!!as,,. 5 $ashir,A. (*0"0), 7hort 1un and
Long 1un 7aving $ehavior in Pa#istanH 'n 8mpirical &nvestigation,
,ournal of 1oney' !n$estment and (anking'(;L ("D)' =6-DD.
)riga,&. (*00+), ,eans ;f 1educing Credit 1is#, Annals of t-e #ni$ersity
of Petrosani' conomics' (ol. +, D9-6+.
8r#ens,).F., Fung,,. 5 ,atos,P. (*0"0), Corporate >overnance in the
*006-*009 Ainancial CrisisH 8vidence from Ainancial &nstitutions
/orldwide, De+artment of "inance' "-==.
>ordy,,.$. ("999), a cooperative anatomy of credit ris# model, (oard of
go$ernor of federal reser$e system,(ol *(=), "-*9.
>osnell, . 5 Ne.admalayeri, '.(*0"0), ,acroeconomic news and ris#
factor innovations, 2ournal of 1anagerial "inance (ol. 3D (6), =DD-=9*.
>reenidge,4. 5 >rosvenor,G. (*009), Aorecasting Non-Performing Loans
&n $ar!ados, Researc- De+artment 0entral (ank of (ar.ados' "-33.
?ohn,4., ,ehran,F. 5 Eian,G. (*009), ;utside ,onitoring and C8;
Compensation in the $an#ing &ndustry, ,ournal of 0or+orate "inance, "-+*.
4eeton,/.1. ("999), )oes Aaster Loan >rowth Lead to Figher Loan
Losses0, conomic Re$ie*, (ol 3 (*), =6-6=.
4eeton,/.1. 5 ,orris,C.7. ("996), /hy do !an#s@ loan losses differs0,
conomic Re$ie*, 3-*".
4hemra.,. 5 Pasha,7. (*006), he determinants of non-performing loansH
an econometric case study of >uyana, "-*=.
Lou2is,).P., (ouldis,'.. 5 ,eta%as,(.L.(*0"0), ,acroeconomic 'nd
$an#-7pecific )eterminants ;f Non-Performing Loans &n >reeceH '
Comparative 7tudy ;f ,ortgage, $usiness 'nd Consumer Loan Portfolios,
(ank %f Greece: conomic Researc- De+artmen3, (ol. ""9' "-++.
,a,>. 5 Aung,$.7.C. (*00*). China@s asset management Corporations, (!&
/orking Pa+ers'(ol. (""=)' "-*".
N#usu,,. (*0""), Nonperforming Loans and ,acro financial
(ulnera!ilities in 'dvanced 8conomies, !nternational 1onetary "und' "-
*9.
1an.an,1. 5 )hal,7.C. (*003), Non-Performing Loans and erms of Credit
of Pu!lic 7ector $an#s in &ndiaH 'n 8mpirical 'ssessment, Reser$e (ank of
!ndia %ccasional Pa+ers' (ol. *+(3)' 9"-"*".
7a!a,&., #ausar,1. 5 '2eem,,. (*0"0), )eterminants of Non Performing
LoansH Case of for non-performing rate in <7 economy.
7haher,.'., 4asawneh,;. 5 7alem,1 (*0""), he ,a.or Aactors that
'ffect $an#s@ Performance in ,iddle 8astern Countries, ,ournal of 1oney'
!n$estment and (anking' (ol (*0)' "0"-"09.
racey,,. 5 Leon,F. (*0""), he &mpact of Non-performing Loans on
Loan growth, !nternational 1onetary "und Resident Re+resentati$e %ffice
in ,amaica' "-*9.
(ogia2as,7.). 5 Ni#olaidou,8. (*0""), &nvestigating the )eterminants of
Nonperforming Loans in the 1omanian $an#ing 7ystemH 'n 8mpirical
7tudy with 1eference to the >ree# Crisis, conomics Researc-
!nternational' (ol. *0"", "-"3.
/aweru,N.,. 5 4alani,(.,. (*009), Commercial $an#ing Crises &n
4enyaH Causes 'nd 1emedies, African ,ournal of Accounting' conomics'
"inance and (anking Researc-' (ol. +(+), 45-66.

Determinants of Non Performing Loans

Hochgeladen von

Dokumentinformationen

Originaltitel

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Determinants of Non Performing Loans

Hochgeladen von

Copyright:

Verfügbare Formate

Determinants of NPLs (Non-Performing Loans): A case study of Pakistan 1

Das könnte Ihnen auch gefallen