Non-performing Assets and Institutional Quality Indicators: Evidence from Developing Countries

Abstract

This research studies the drivers of non-performing assets (NPAs) in developing countries. The author applied panel regression methodology to establish the links between bank-specific macroeconomic factors and institutional environment NPAs on country-level panel data of developing countries for the period spanning from 2010 to 2020. The long-held theory that NPAs cause economic growth is tested using the panel Granger causality test. Panel cointegration tests were further applied to look at whether there is a long-term relationship between the two variables. The findings of the study indicated that loan defaults often occur at a lower rate during periods of high economic growth, which consequently leads to reduced amounts of NPAs. A bigger banking sector should be more stable than a small banking sector if a strong systemic risk regulatory framework is in place. Finally, the present research shows how crucial the institutional environment is in enhancing banks’ credit quality. NPAs are significantly decreased in developing nations when there is a greater improved institutional environment.