Having the fastest growing economy in 2019, Bangladesh is moving forward to achieve the goal of becoming a developed country from the developing one. Because of the increasing number of banks and NBFIs along with the advanced facilities, now the financial sector can be considered as quite stronger than before (1990’s). However, a significant positive change is required in the financial sector to become a developed country, as it is the foundation of the economy of Bangladesh. As banks contain the largest part of the financial sector, it is crucial to ensure the profitability of banks. While identifying the factors hamper the banks’ and NBFIs’, non-performing loans are found on the top; which are basically default loans (loans that are non-recovered). Both internal and external economic factors are responsible for the upward movement of NPLs. However, this study is focused on a few macroeconomic variables, which affect the NPLs most and the research is conducted based on data from 1972 to 2017 to get a more reliable finding.
Among all the macro fundamental factors, some factors affect NPLs most and some factors affect less. The objective of this study is to determine which factors are more responsible for the movement of non-performing loans on a macro fundamental perspective.
This study is conducted using seven variables; out of which NPL is considered as the dependent variable and BM, DBD, DCP, RE and TO are independent. The unit root test (ADF, PP, and KPSS) is formulated for the purpose of finding stationarity in the time series variables. To determine the positive and negative effect of the independent variables on the dependent variable, the ARDL model is conducted along with ECM and OLS.
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A long-run relationship between the dependent variable and the other independent variables were found through the Linear ARDL Bound Test. According to the result of the ARDL model, BM was found to be the most significant positive influencer of NPL both in the long run and short-run because of having the largest coefficients; 9.63 (long run) and 1.96 (short-run). Moreover, FDV was found to have the most significant negative relationship with NPL because of having the largest coefficients; -7.91 (long run) and -4.86 (short-run). Most interestingly, except BM, all of the variables were found to have a negative relationship with NPL. In addition, an insignificant negative relationship was found between TO and NPL. The coefficients of TO are; -0.35 (long run) and -0.13 (short-run) express a very little impact on NPL.
According to the residual test, the findings say that these six independent variables are 95.8% responsible for the movement of non-performing loans, which ensures the most reliable outcome.
The result of this study can assist the Govt., FIs, and investors also. The strong positive relationship between BM and NPL reveals that NPL will tend to increase with the increment of money supply in the economy. Thus the findings of the study can be an alarm for the government to keep the money supply in a limit. The negative relationship between DBD, DCP, and NPL expresses that a decreased amount of domestic credit by the financial sector will increase NPL. So, this result can be helpful for the FIs to realize that there should not be a limit to providing domestic credits. According to the result, an increased amount of remittance decreases the NPL as people will prefer to take fewer loans. So, financial institutions may start to provide loans with less interest and different businesses can take the opportunity of having a huge amount of loans with less interest||en_US