Determinants of Non-Performing Loans: A Panel Data Analysis of Commercial Banks

Abstract

Chapter 1: Introduction This study investigates the determinants of credit risk within the Bangladeshi banking sector, with particular emphasis on the increasing volume of NonPerforming Loans (NPLs). Employing a longitudinal panel design, the analysis comprises 100 observations from 20 commercial banks spanning 2020 to 2024. The research explores the interaction between internal bank-specific variables, including Capital Adequacy Ratios, Return on Assets, and Bank Size, and macroeconomic factors such as interest rates in shaping challenge quality. The study addresses the challenge of balancing loan growth with risk mitigation to support the goal of offering evidence-based recommendations for strengthening governments, such as the once-and-recovery frameworks in institutions like Janata Bank PLC. Chapter 2: Literature Review The literature review demonstrates that NPLs serve as a key indicator of asset quality and pose a significant threat to financial stability. Existing scholarship classifies the determinants of NPLs into internal factors, such as deficiencies in credit analysis, loan management practices, and bank scale, as well as external macroeconomic pressures, including interest rate volatility and unemployment. The review underscores a theoretical transition from growth-oriented approaches to risk-adjusted frameworks, emphasizing that institutional stability depends on modernized administrative systems, digital transformation, and efficient judicial processes for debt recovery. Chapter 3: Organization Profile This chapter presents an overview of Janata Bank PLC, the second-largest state-owned commercial bank in Bangladesh, which is committed to advancing socio-economic development through corporate, retail, SME, and agricultural banking services. The bank's mission emphasizes resource mobilization, robust governance, and professionalism. The profile details the bank's diverse product portfolio, including deposit schemes, credit facilities, and digital banking services, and describes its structured approach to loan classification, provisioning, and recovery, which incorporates specialized local debt collection units and legal proceedings through Money Loan Courts. Chapter 4: Methodology The research utilizes a quantitative approach, employing a balanced panel dataset comprising 100 observations from 20 commercial banks. The methodology includes Ordinary Least Squares (OLS) regression, Variance Inflation Factor (VIF) analysis to ix assess multicollinearity, and the Hausman specification test to determine the appropriateness of random-effects models. Qualitative insights from professional internship experiences at Janata Bank PLC supplement secondary data from audited annual reports and central bank publications, contributing to a comprehensive analysis of credit risk determinants. Chapter 5: Analysis The analysis reveals that the NPL ratio in the sample averages 9.303%. Regression results consistently identify "Bank Size" as a statistically significant positive determinant of NPLs, indicating that larger banks face higher credit risk, while Return on Assets (ROA) shows a significant negative correlation with NPL levels. Diagnostic tests confirm the model's integrity, and although the model is statistically significant overall, the findings indicate that NPL levels are influenced by complex, latent factors beyond the selected financial ratios. Chapter 6: Findings, Recommendations, and Limitations The study concludes that persistent NPLs are driven by both quantitative financial metrics and operational constraints such as inadequate documentation and technological limitations. Recommendations include transitioning to a risk-adjusted growth strategy, standardizing documentation to ensure legal enforceability, and accelerating digital transformation to improve loan monitoring. Key limitations include reliance on publicly disclosed secondary data, a relatively short five-year timeframe, and unexplained variance in the regression model, suggesting that further research into non-financial and governance factors is warranted