Macro economical and bank‐specific vulnerabilities of nonperforming loans: A comparative analysis of developed and developing countries

• Published date: 01 May 2022
• Author: Aamir A. Syed,Yeren Aidyngul
• Date: 01 May 2022
• DOI: http://doi.org/10.1002/pa.2414

ACADEMIC PAPER

Macro economical and bank-specific vulnerabilities of

nonperforming loans: A comparative analysis of

developed and developing countries

Aamir A. Syed

1

| Yeren Aidyngul

2

1

Institute of Commerce, Management and

Economics, Shri Ramswaroop Memorial

University, Lucknow, India

2

Department of Economics, Beijing

Technology and Business University, Beijing,

China

Correspondence

Aamir A. Syed, Institute of Commerce,

Management and Economics, Shri

Ramswaroop Memorial University, Lucknow,

India.

Email: aamirank@gmail.com

This research work intends to measure how bank-specific and macroeconomic deter-

minants affect nonperforming loans among developed and developing countries. To

achieve the objective dynamic Generalized Method of Moments (GMM) technique is

used covering the period from 1995 to 2019, apart from using fixed and random

tests for robustness checks.

Findings suggest that the common macroeconomic and bank-specific factors which

affect nonperforming loans among developed and developing countries are growth

rate, inflation, interest rate, capital adequacy ratio, credit to deposit ratio, and bank

credit to the private sector. Macroeconomic factors and bank-specific factors affect-

ing only developing countries are household consumption, unemployment, and

exchange rate, return on bank assets, bank asset to GDP, and bank credit to the gov-

ernment sector.

These findings will help policymakers in better understanding the impact of various

determinants on nonperforming loans. So that appropriate policies can be framed for

reducing nonperforming among the developed and developing countries.

1|INTRODUCTION

Various financial crisis over the years has questioned the instability of

banking structure and their direct relationship with economic distur-

bances (Agnello & Sousa, 2012). The global recession of 2008 shows

that how banking and macroeconomic variables are interrelated and

how a devastating change in one factor creates a vicious cycle and

ultimately affected all the interlinked variables creating distress in

financial and economic conditions. Since the U.S subprime crisis,

studying banking health has become a key topic among most of the

developed and developing countries (Khan, Siddique, & Sarwar, 2020).

The bank plays a principal role in the economic prosperity of a coun-

try, as banks are the medium through which countries generate funds

for investment opportunities. Studies show that banks of most devel-

oped and developing countries like India, Pakistan, Greece, Ukraine,

Russia, Brazil, and other African countries are suffering from the prob-

lem of nonperforming loans, which is affecting their monetary deci-

sion and thus their economic growth (Khafid & Anisykurlillah, 2020).

The economic conditions of developed countries are quite contrary to

the developing countries due to better resources, technology, and

other facilities. Similarly, banking conditions and resources also signifi-

cantly differ among developed and developing countries. So, it is quite

significant, to study how banking problems differ among developed

and developing countries and how these countries are resolving such

issues.

Banking distress in the form of nonperforming loans may occur

due to changing volatility in macroeconomic conditions like growth

rate, unemployment, inflation, and interest rate (Nkusu, 2011). Studies

like Llewellyn, 2002 and Chaibi, 2016 have also pointed that along

with macroeconomic conditions, bank or industry-specific variables

like banks' working strategy, credit distribution mechanism, incentives

appeasement policies, and excessive use of banks for political motives

also contribute toward nonperforming loans. Over the year, these rea-

sons have motivated researchers to study how banking and macro-

economic variables affect the credit mechanism of banks and thus

creating nonperforming loans, which act as a stimulus for fiscal crisis.

Received: 7 August 2020 Revised: 17 August 2020 Accepted: 19 August 2020

DOI: 10.1002/pa.2414

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https://doi.org/10.1002/pa.2414