Article: Macroeconomic and Bank-Specific Determinants of Non-Performing Loans: Evidence

from Nepalese Banking System

Journal: ournal of Central Banking Theory and Practice, 2018, 3, pp. 111-138 Received: 5 July
2017; accepted: 6 October 2017

Dependent Variable:
 NPL = Non Performing Loans

Independent Variables:
 Loans to assets ratio (LAR)
 Capital adequacy ratio (CAR)
 Return on Assets (ROA)
 Credit to deposit (CDR)
 Assets size (BS)
 Interest spread (IS)
 Inefficiency (OEOIR)
 GDP growth rate (GDPGR)
 Remittance (RE)
 Export to import (EIR)
 Inflation (IR)
 Debt per capita (PCOD)

Control Variables:
The macroeconomic variables and the bank-specific variables are assumed as exogenous (control
variables)
Mathematical Model:
NP L¿ =α + β 1 GD Pt + β 2∈ F t + β 3 ∈T t + β 4 EX Ct + β 5 P Dt + β 6 ET A ¿ + β 7 RO A¿ + β 8 RO E ¿ + β 9 ≪R ¿ + β 10 G L¿ + β 11 SI

Econometric Models:
NPLi,t = a0 + a1Xi,t + a2Mi,t + μi,t

NPLi,t = a0+ bNPLi,t-1 + a1Xi,t +a2Mi,t + μi,t

Conceptual Framwork:

LAR

CAR

ROA

CDR

IS

OEOIR
NPL
GDPGR

EIR

PCOD

BS

IR

RE

Regression Analysis:
The study uses both static panel estimation and dynamic panel estimation techniques to analyze
the data.
Static panel estimation is used to estimate the relationship between the dependent variable
(NPLs) and the independent variables (bank-specific and macroeconomic variables) in Equation.
Dynamic panel estimation is used to estimate the relationship between the dependent variable
(NPLs), the lagged dependent variable, and the independent variables in Equation.
The dynamic panel estimation is conducted using the Generalized Method of Moments (GMM)
approach proposed by Arellano and Bond (1991).
The GMM estimation helps to account for the endogeneity of the bank-specific variables and the
exogeneity of the macroeconomic variables
Post Estimation Analysis (Diagnostics):
To conduct post-estimation analysis (diagnostics) for the regression analysis used in this data, the
following techniques could be employed:
Unit root tests, specifically the Augmented Dickey-Fuller test, are conducted to check for the
presence of stochastic or deterministic trends and to prevent spurious regression results

To address the issue of endogeneity, the study uses the Generalized Method of Moments (GMM)
estimation approach, which helps to account for the endogeneity of the bank-specific variables
and the exogeneity of the macroeconomic variables .

Arellano-Bond first-order serial correlation and Sargan test of over-identifying restrictions are
used to check for autocorrelation and the validity of instruments in the dynamic panel estimation.

The Hansen J statistics test is used to test the null hypothesis that the over-identifying restrictions
are valid
.
The (AR) test is conducted to check for second-order serial correlation in the dynamic models .
The Hansen J (Sargan) test statistics are used to support the null hypothesis of valid instruments,
indicating consistent GMM estimation results

Model Specifications Test:

The model specification test used to select this regression analysis is Hausman test..

Significant Slope Coefficients:

The study found significant positive relationships between non-performing loans (NPLs) and the
export to import ratio, inefficiency, and asset size. It also found a significant negative
relationship between NPLs and GDP growth rate, capital adequacy, and inflation rate
The lagged dependent variable (last year's NPLs) had a significant positive coefficient in the
dynamic panel estimation, indicating its effect on current NPLs
.
The study's results were consistent with previous studies that found a positive correlation
between lagged NPLs and current NPLs, such as Jimenez and Saurina (2006), Makri et al.
(2014), Ghosh (2015), and Dimitrios et al. (2016)

Interpretation of the Results:

The findings suggest that factors such as economic growth, capital adequacy, and inflation rate
play a crucial role in determining the level of non-performing loans in the Nepalese banking
system. A low GDP growth rate and inadequate capital adequacy contribute to higher NPLs,
while efficient management and effective financial policies are necessary for a stable financial
system and economy.

The positive coefficient of the lagged NPLs indicates the persistence of NPLs over time,
highlighting the importance of addressing and managing NPLs effectively to prevent their
accumulation and potential negative impact on the banking system

The consistency of the results with previous studies suggests that the relationship between lagged
NPLs and current NPLs is not unique to the Nepalese banking system but is observed in other
banking systems as well.
.