Link Between Non-performing Loans (NPL) And Economic Growth: Evidence From An Emerging Economy

Managing bad loans or Non-Performing Loans (NPL) is a deep-rooted and persistent issue of many emerging economies. Banks are experiencing NPLs which eventually are affecting the profitability of the banks. The purpose of this paper is to investigate the influence of factors of economic growth on NPLs of an emerging economy. In this study, GDP growth rate, real interest rate, inflation rate, one period lag value of NPL and unemployment rate are used as independent variables and ratio of Non-Performing Loans (NPL) to Total Loans is used as dependent variable. Data was collected from World Bank Open Data for Bangladesh and Bangladesh Bank for the year 1990 to 2018. The study employs multiple regression analysis and Multicollinearity test is also performed to test whether there is any strong correlation among the independent variables. This study reveals that NPLs rate can be significantly influenced by unemployment rate, inflation rate, real interest rate and one period lag value of NPL. However, GDP growth rate is found to be insignificant to NPLs rate in Bangladesh. This study might help policymakers to manage NPLs rate of Bangladesh in a better way to ensure sustainability of banks in future.