Economic Determinants of Non-Performing Loans: Perception of Pakistani Bankers

Abstract

This study provides the perception of Pakistani bankers regarding the economic factors causing non-performing loans in the Pakistani banking sector since 2006. This is the first time that any study is conducted in Pakistan to highlight the economic factors of NPLs via primary data collection from loan providing and approving authorities of Pakistani banking industry. This study was conducted via a well structured questionnaire and data was collected from 201 bankers who are involved in the lending decisions or analyze the credit risk or handling non-performing loans portfolio. Correlation and regression analysis was carried out to analyze the impact of selected independent variables (Interest Rate, Energy Crisis, Unemployment, Inflation, GDP Growth, and Exchange Rate) on the non-performing loans of Pakistani banking sector. Top 10 Pakistani banks were selected as a sample. According to the results Pakistani bankers perceive that Interest Rate, Energy Crisis, Unemployment, Inflation, and Exchange Rate has a significant positive relationship with the non-performing loans of Pakistani banking sector while GDP growth has significant negative relationship with the non-performing loans of Pakistani banking sector. This study also discusses how good loans are turning into bad loans due to disaster in energy sector of Pakistan and how these energy crisis are badly affecting the banking sector of Pakistan. In future social determinants of non-performing loans should be studied. This study is first of its kind opening door for further primary research on NPLS of Pakistani banking sector.

Key words: Non-performing loan; perception of Pakistani bankers; energy crisis; Economic determinants of Non-performing loans