determinants of non performing loans

5/23/2018 Determinants of Non performing loans

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

CHAPTER # 1

Introduction


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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

1riga( *00+)


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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! "becti$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 maor 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


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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#istan

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.


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CHAPTER# 2

,iterature Re$ie-


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2. ,iterature Re$ie-

2.1. T!eoretical Background

any theories have !een identified as real interest rate has maor

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

24hemra 5 Pasha ( *006)

37a!a et. Al(*00+)


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'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 *00. 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


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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


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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 maor 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 factor 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




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of this empirical analysis. 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 *00 capital was inected 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#.


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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


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analytical techni:ue has facilitated the researchers in foreseeing the results and


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 (*00) 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




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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


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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 "9=-"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 "9+ 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.


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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 "9-*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




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1anan 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#.


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4eeton ("999) investigated that does rapid growth in loans lead a !an#

towards higher losses in =0 states of Colom!ia for the period "9* to "99D.

ector 'uto regression was applied on the data. he adoption of this

analytical techni:ue has facilitated the researchers in foreseeing the results and


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 "90s 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 ("99) 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.


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4eeton and orris ("96) 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 "9=.

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



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CHAPTER#3

/et!odolog*


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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 maor

o!ectives of e%planatory e%ploration. 'round the some studies that has


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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 Sie

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!niue

1egression was applied on the data !ecause it caters the need of the

researcher to e%plore the relations among the dependent and independent


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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.. /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*

++++++= GLLTARR!N"R!RNPLs=+3*"0

/hereas NPLs I Non-performing loans,

1&1 I 1eal interest rate,

&NA I &nflation,


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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.


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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


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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.


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CHAPTER # %

0ata Anal*i


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%. 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* 0.3* 0.0+"

Ln1&1 =.*36 *."*D 0.0++ ".3=*ln>L -0.*0+ -*.=*D 0.0"9 ".033

L' -"=.6"D -*.=9 0.0"D "."36

181 0.0D+ *.D* 0.009 ".D*+

&nflation 0.090 ".6" 0.06+ ".=0*

Ad. R2 0.+=

".00+

=.90D (0.00")

0 < tat

;:tat =(rob>

Regreion model

6P, ? 3.'+2 @ '.23 RIR .2% ,n8, 1'.1+ ,TA @ .+% RER @

.5 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


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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, adusted 1* value, value of ur!in

/atson and A-stats. 8mpirically o!tained results will !e ustified with the

proper evidences.

he value of adusted 1* o!tained from the results is 0.+=. his value

is demonstrating that +=.B 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.


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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 =.*36units,

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"Dunits, 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


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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 0.090units,

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



31/41


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.


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CHAPTER # '

Concluion


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'. 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

(1anan 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, *00).

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.


34/41


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


35/41


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 proects !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


36/41


&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.


37/41


Bibliogra(!*.


38/41


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