Determinants of Non-Performing Loans in Licensed Commercial Banks: Evidence from Sri Lanka

Abstract

This study investigates the determinant factors of ex-post credit risk considering non-performing loans (NPLs) as proxy variable in Sri Lanka’s commercial banking sector and is carried out with a sample of nine licensed commercial banks for the period from 1999 to 2012. The study finds that the level of NPLs can be attributed to both macroeconomic conditions and banks’ specific factors. It reveals that, NPLs tends to increase with deteriorating bank’s efficiency. There is also a positive correlation between loan to asset ratio and NPLs. Meanwhile, banks with high level of credit growth associated with a reduced level of non- performing loans. Larger banks incur lesser loan defaults compared to smaller banks. With regard to macro-economic variables, NPLs vary negatively with the growth rate of GDP and Inflation and positively with the prime lending rate.