Presentation on

Influence of Bank Profitability and

Stability on Non-Performing Loans of
Commercial Banks in Bangladesh
Introduction
• A Non Performing Loan (NPL) is a loan in which the borrower is in
default and hasn't made any scheduled payments of principal or
interest for a certain period of time. In banking, commercial loans are
considered nonperforming if the borrower is 90 days past due.
• The most recent statistics from the Bangladesh Bank shows that as of
the end of June, NPLs accounted for 10.11 % of all credits disbursed.
The amount of outstanding loans stood at Tk 15,42,655 crore.
• In Bangladesh, a lack of good governance, relaxed policies pursued by
the central bank, political interference and irregularities have largely
been responsible for the upward trend of NPLs.
Objectives

To assess the present situation of non-performing loans in the

banking industry in Bangladesh.
To find out the effects of NPL on bank profitability and financial
stability.
To identify the causes and remedies of Non Performing Loan.
To raise some issues and observations which need to be looked upon
quickly for ensuring a financially sound banking industry.
Methodology
The study employs a quantitative approach to investigate how Non-
Performing Loans (NPLs) influence profitability in the Bangladeshi banking
industry, using secondary sources of information.
Identification of Variables
Dependent Variable-
NPL to Total Gross Loan Ratio
Independent Variables-
1. Return on Asset
2. Return on Equity
3. Net Interest Margin
4. Capital Adequacy Ratio
Result of coefficient in the model
Estimation method
Dependent variable Pooled OLS Fixed effect Random effect

ROA 8.0403086*** 1.4631656 8.0403086***

ROE -.80782504** -.08994286 -.80782504**
CAR -.32079753** .16336756 -.32079753**
NIM -3.5859741** 1.8017597 -3.5859741**
Constant 23.590966*** 8.1323772** 23.590966***
N 40 40 40
Multiple R .835319 .6287 .835319
R square .6978 .3330 .6978
Adjusted R square .4265 .5496 .4265
F value 20.200351
rho .77156065
Sigma_u 7.989472 -
Sigma_e 2.9067302 2.9067302
Test of Model Specification

Hausman specification test

Chi-square test 28.80
p-value .0104

The P = 0.0104 is much lower than 0.05, and the Chi-square is 28.8. Consequently,
the null hypothesis is rejected at a 95% significance level. Therefore, using
independent factors to explain the dependent variable, the FE model performs better.
 B/P LM test
Chi-square test 11.145
p-value .0854

The P value is 0.0854, greater than the significance level of 0.05, and the Chi-square
is 11.145. That means that the null hypothesis is accepted at a 95% significance
level. Thus, it is better to use the Pooled OLS approach to explain the model.
Variable VIF 1/VIF

ROA 4.43 .2257

ROE 4.10 .2439

CAR 4.91 .2036

NIM 4.98 .1980

Mean VIF 4.605

The table displays results indicating that all Variance Inflation Factor (VIF) values
exceed 4, with a mean VIF of 4.605 consistent with individual VIF values,
suggesting that there is no significant concern regarding multicollinearity in the
regression model.
 White test for group heteroscedasticity in
pooled OLS
Chi-square test 20.67
P value 0.1103

With a Chi-square value of 20.67 and a P-value of 0.1103, exceeding the 0.05
significance level, the null hypothesis cannot be rejected at a 95% confidence level,
indicating a consistent variance in the model. Consequently, it can be inferred that
there is no issue of heteroscedasticity for the Pooled-OLS method.
 Findings
The occurrence of Non-Performing Loans in commercial banks in Bangladesh is
influenced by
• Loan quality
• Economic condition
• Borrower risk profile
The profitability and stability of banks play pivotal roles in determining non-
performing loan (NPL) levels, with reduced profitability increasing susceptibility
to NPLs, while stable banks with robust risk management systems tend to have
lower NPL levels.

The impact of regulatory measures on non-performing loans (NPLs) is

significant, with strict regulations enhancing risk management and flexible ones
potentially leading to higher NPLs.
Recommendation

1. Improving management effectiveness.

2. Reducing the unethical behavior of bank employees when it comes to
loan proposals and approvals.
3. Properly evaluating the borrower's credit risk.
4. Avoid authorizing excess loan for a novice or lack of experienced
borrower.
5. Banks should avoid having political influence during the borrower
selection procedure.
Continued…

Establishing government-affiliated asset management firms, can be

a strategy to reduce bad debt; however, successful implementation
requires a comprehensive ecosystem, legal frameworks, and
regulatory support. The study on non-performing loans in
Bangladesh underscores the urgent need for preventive and
recovery strategies in the banking industry, emphasizing the
negative impact of NPLs on profitability and the importance of
client characteristics over mere signature verification for
maximizing profits.
Thank You