Determinants of Non-Performing Loans in Banking Systems
Summary
Non-performing loans (NPLs) represent a critical gauge of banking sector health, reflecting credit risk and asset quality across diverse economies. The incidence of NPLs is shaped by an interplay of macroeconomic forces—such as real GDP growth, inflation, unemployment and interest rates—and bank-specific factors, including profitability, capitalisation and lending strategy. Institutional frameworks, regulatory quality and country risk further modulate credit performance, with elevated political or financial instability often precipitating higher default rates. Empirical analyses reveal that robust capital adequacy, efficient cost-income management and conservative loan-growth policies tend to mitigate NPL accumulation, while rapid credit expansion, low interest-rate environments and severe economic downturns exacerbate it. Cross-country comparisons underscore the countercyclical character of NPL stocks, which swell during recessions and contract in recovery phases. Advances in econometric modelling—employing dynamic panel techniques and distributional estimation—have improved forecasting accuracy and stress-testing capabilities. In practice, these insights inform supervisory capital requirements, early warning systems and targeted interventions to preserve financial stability and sustain credit intermediation.
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Determinants of Non-Performing Loans in Banking Systems publication trend
The graph below shows the total number of articles in determinants of non-performing loans in banking systems across all publications each year (not limited to Nature Index journals).
Technical terms
Non-performing loan (NPL): A loan on which the borrower is significantly overdue—typically more than 90 days—or in default, serving as a key indicator of credit risk and asset quality.
Capital adequacy ratio (CAR): The proportion of a bank’s regulatory capital to its risk-weighted assets, measuring solvency and resilience to credit losses.
Dynamic panel data model: An econometric specification that incorporates lagged dependent variables and unobserved heterogeneity across entities, capturing temporal dynamics in panel data.
Quantile estimation approach: A statistical technique that assesses relationships at different points of the outcome distribution, enabling analysis of effects across varying levels of NPL exposure.
Return on assets (ROA): A profitability ratio calculated as net income divided by total assets, indicating how efficiently a bank utilises its assets to generate earnings.
References
- Does country risk impact the banking sectors’ non-performing loans? Evidence from BRICS emerging economies. Financial Innovation (2023).
- Analysis of macroeconomic determinants of non-performance in consumer and mortgage loans. Finance Research Letters (2024).
- Determinants of non-performing loans in conventional and Islamic banks: Emerging market evidence. Modern Finance (2023).
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