The criticality of credit recovery in banking system stability: A GMM estimation

Abstract

This study examines the criticality of credit recovery on banking system stability in Nigeria using data from 2007 to 2020. The system generalized method of moments (SYS-GMM) was used to analyze the data and determine the presence of cointegrating relationships among the variables. The findings revealed that credit recovery positively and significantly influences banking system stability. It was discovered that the recovery rate positively and significantly impacts the banking system stability in the short and long terms. In contrast, recovery expense only negatively and significantly affects the banking system in the short term. This implies that credit recovery is critical in business endeavors and operations for banks. Hence, the longer the delay in recovering bad debts, the more banks lose the opportunity to earn income from substitute investments, and collateral may lose value. Therefore, this study recommends that banks' management aggressively pursue the repayment of bad loans and maintain favorable and minimal recovery expenses, particularly with external debt recovery agents, to ensure that the cost of recovery is not higher than the amount recovered.