Determinants of Non-Performing Loans in Licensed Commercial Banks: Evidence from Sri Lanka

Nishani Ekanayake; A. A. Azeez

doi:10.18488/journal.aefr/2015.5.6

Determinants of Non-Performing Loans in Licensed Commercial Banks: Evidence from Sri Lanka

Nishani Ekanayake, A. A. Azeez

Research output: Contribution to journal › Article › peer-review

Abstract

This study investigates the determinant factors of ex-post credit risk considering non-performing loans (NPLs) as a proxy variable in Sri Lanka’s commercial banking sector and is carried out with a sample of nine licensed commercial banks for the period of 1999 to 2012. The study finds that the level of NPLs can be attributed to both macroeconomic conditions and banks’ specific factors. It reveals that NPLs tends to increase with deteriorating bank’s efficiency. There is also a positive correlation between loan to asset ratio and NPLs. Meanwhile, banks with a high level of credit growth associated with a reduced level of non- performing loans. Larger banks incur lesser loan defaults compared to smaller banks. With regard to macro-economic variables, NPLs vary negatively with the growth rate of GDP and Inflation and positively with the prime lending rate.

Original language	English
Pages (from-to)	868-882
Number of pages	15
Journal	Asian Economic and Financial Review
Volume	5
Issue number	6
DOIs	https://doi.org/10.18488/journal.aefr/2015.5.6
Publication status	Published - 4 May 2015

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title = "Determinants of Non-Performing Loans in Licensed Commercial Banks: Evidence from Sri Lanka",

abstract = "This study investigates the determinant factors of ex-post credit risk considering non-performing loans (NPLs) as a proxy variable in Sri Lanka{\textquoteright}s commercial banking sector and is carried out with a sample of nine licensed commercial banks for the period of 1999 to 2012. The study finds that the level of NPLs can be attributed to both macroeconomic conditions and banks{\textquoteright} specific factors. It reveals that NPLs tends to increase with deteriorating bank{\textquoteright}s efficiency. There is also a positive correlation between loan to asset ratio and NPLs. Meanwhile, banks with a high level of credit growth associated with a reduced level of non- performing loans. Larger banks incur lesser loan defaults compared to smaller banks. With regard to macro-economic variables, NPLs vary negatively with the growth rate of GDP and Inflation and positively with the prime lending rate.",

keywords = "Non-performing loans, Commercial banks, Bank-specific variables, Macro-economic variables, Credit risk, Sri Lanka",

author = "Nishani Ekanayake and Azeez, {A. A.}",

year = "2015",

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doi = "10.18488/journal.aefr/2015.5.6",

language = "English",

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journal = "Asian Economic and Financial Review",

issn = "2305-2147",

publisher = "Asian Economic and Social Society",

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TY - JOUR

T1 - Determinants of Non-Performing Loans in Licensed Commercial Banks

T2 - Evidence from Sri Lanka

AU - Ekanayake, Nishani

AU - Azeez, A. A.

PY - 2015/5/4

Y1 - 2015/5/4

N2 - This study investigates the determinant factors of ex-post credit risk considering non-performing loans (NPLs) as a proxy variable in Sri Lanka’s commercial banking sector and is carried out with a sample of nine licensed commercial banks for the period of 1999 to 2012. The study finds that the level of NPLs can be attributed to both macroeconomic conditions and banks’ specific factors. It reveals that NPLs tends to increase with deteriorating bank’s efficiency. There is also a positive correlation between loan to asset ratio and NPLs. Meanwhile, banks with a high level of credit growth associated with a reduced level of non- performing loans. Larger banks incur lesser loan defaults compared to smaller banks. With regard to macro-economic variables, NPLs vary negatively with the growth rate of GDP and Inflation and positively with the prime lending rate.

AB - This study investigates the determinant factors of ex-post credit risk considering non-performing loans (NPLs) as a proxy variable in Sri Lanka’s commercial banking sector and is carried out with a sample of nine licensed commercial banks for the period of 1999 to 2012. The study finds that the level of NPLs can be attributed to both macroeconomic conditions and banks’ specific factors. It reveals that NPLs tends to increase with deteriorating bank’s efficiency. There is also a positive correlation between loan to asset ratio and NPLs. Meanwhile, banks with a high level of credit growth associated with a reduced level of non- performing loans. Larger banks incur lesser loan defaults compared to smaller banks. With regard to macro-economic variables, NPLs vary negatively with the growth rate of GDP and Inflation and positively with the prime lending rate.

KW - Non-performing loans

KW - Commercial banks

KW - Bank-specific variables

KW - Macro-economic variables

KW - Credit risk

KW - Sri Lanka

U2 - 10.18488/journal.aefr/2015.5.6

DO - 10.18488/journal.aefr/2015.5.6

M3 - Article

VL - 5

SP - 868

EP - 882

JO - Asian Economic and Financial Review

JF - Asian Economic and Financial Review

SN - 2305-2147

IS - 6

ER -

Determinants of Non-Performing Loans in Licensed Commercial Banks: Evidence from Sri Lanka

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