Analysis of Bank-Specific and Macroeconomic Factors on Non Performing Loans: A Study of commercial Banks in Bangladesh

Abstract

The banking sector plays a vital role in Bangladesh’s economic development by mobilizing savings and financially productive investments. However, the persistent rise in Non- Non Performing Loans (NPLs) poses a serious threat to the stability, profitability, and efficiency of commercial banks. Despite numerous policy interventions by the Bangladesh Bank, NPL ratios in Bangladesh remain the highest in South Asia, indicating structural weakness in the banking system. The main objective of the study is to empirically investigate the impact of both bank specific and macroeconomic factors on the level of NPLs in 15 commercial banks listed in the Bangladesh Bank over the 10 period 20214-2023. Key bank specific variables include Return on Assets (ROA), Capital Adequacy Ratio (CAR), Loan to Deposit Ratio (LDR), Bank Size and Cost to Income Ratio (CIR), while macroeconomic indicators encompass GDP growth rate, Inflation Rate (IFR), and Interest rate Spread (IRS). The study uses secondary data collected from annual reports, regulatory publications, and financial databases. A panel data regression approach is employed, and based on the Hausman test, both Fixed Effects and Random Effects Models are considered. After Several diagnostic tests, such as descriptive statistics, normality test, multicollinearity test, heteroscedasticity test, and autocorrelation test, are conducted to ensure model robustness. The findings reveal that ROA, CAR, and LDR have a significant negative relationship with NPLs, implying that greater profitability, stronger capitalization, and efficient loan utilization reduce credit risk. Conversely, bank size and CIR exhibit a positive association with NPLs, suggesting that larger banks and those with higher operational costs may face greater loan defaults. Among macroeconomic variables, GDP growth and interest rate spread show a weak positive influence on NPLs, while inflation and exchange rates appear insignificant. The study recommends enhancing bank profitability, maintaining strong capital buffers, improving cost efficiency, and adopting counter-cyclical lending practices. Regulatory authorities are urged to strengthen oversight, promote sound governance, and tailor monetary policies to support credit risk mitigation. These insights are crucial for developing resilient banking practices and ensuring long-term financial stability in Bangladesh