Department of Business Administration in Finance and

Banking

Faculty of Business Studies

ALD2204 Advanced Business Statistics

Term Paper Proposal

Topic name: Analysis of Non-Performing Loans in

The Banking Sector of Bangladesh

Submitted To:

Md. Nahid Alam

Assistant Professor
Department of Business Administration in Finance and Banking
Faculty of Business
Bangladesh University of Professionals

Submitted By:
Mehrin Mostofa Addrita
ID: 2222151049
Section: A
Batch-2022
Department of Business Administration in Finance and Banking
Bangladesh University of Professionals

Submission Date: 4 April 2024

Problem Description :

According to the International Monetary Fund (IMF), which defines NPLs as the portion of
interest and principal outstanding for 90 days or more, the problem of non-performing loans
(NPLs) in Bangladesh is a serious one. Based on the length of past due payments, NPLs in
Bangladesh are divided into three categories: substandard, dubious, and bad or loss. For a
number of reasons, NPLs are becoming more common in Bangladesh's different kinds of
banks. These include approving loans without doing an adequate appraisal, having upper
management meddle in the loan application process, valuing assets improperly, and bankers
making careless loan decisions. In addition, banks frequently hesitate to designate loans as
non-performing loans (NPLs) due to concerns about potential legal consequences and
reputational harm. However, the growth of non-performing loans (NPLs) has a detrimental
effect on banks since it lowers their ability to lend, makes extra reserves necessary to cover
losses, and increases total risk exposure, all of which jeopardise profitability.

Growing non-performing loans have an impact not just on specific banks but also on the
economy and banking industry as a whole. In addition to impeding banks' ability to provide
credit, non-performing assets (NPLs) force them to devote greater resources to risk
management and mitigation. Moreover, the existence of non-performing loans (NPLs) erodes
the banks' overall credit quality, impacting investor trust and perhaps creating systemic
concerns in the financial system.Therefore, addressing the root causes of NPLs and
implementing effective risk management practices are crucial for restoring confidence in the
banking sector and ensuring sustained economic growth in Bangladesh.

Objectives
The main objectives of this research are:
 Perform a thorough analysis of Non-Performing Loans (NPLs) in Bangladesh's
banking industry
 Provide light on the reasons behind and consequences of the growing number of non-
performing loans (NPLs) in Bangladeshi banks of different kinds.
 Identify and investigate the factors—such as insufficient loan evaluation procedures,
managerial meddling, inaccurate asset value, and loose lending standards—that are
responsible for the increase in non-performing loans.
 Evaluate the effects of non-performing loans (NPLs) on bank performance and
financial stability, as well as the consequences these loans have for the economy as a
whole
Literature Review:

There are several reasons for the nonperforming loan. But recently fund diversion, pol
itical instabilityaggressive banking, fall in real estate business, weak monitoring, lack
of coordination among related parties are aggravating non-performing loan. Strong and
regular monitoring, collaboration among connected parties and strict enforcement of active
laws help to reduce NPLs. Bangladesh Bank must play a very important role in these issues.
Commercial banks should ensure transparency in credit granting and Bangladesh Bank
should ensure that the application of credit sanctioning guidelines is being followed to issue a
new loan .

Appropriate steps should be taken for debt recovery and new investment must be safe
and sound to decrease NPLs. The determinants of NPLs are categorized into two form: firm-
specific determinants and system-wide/macroeconomic determinants. Whereas some authors
give their attention only on one of the two categories, other studies consider both categories
as important in explaining NPLs. There are few previous studies which indicate the impact of
internal variables on NPLs. Towhid, Havidz and Alnawah (2019) applied pooled OLS, fixed
effect and random models to trace main factors responsible for non-performing loans in
Bangladesh considering 16 private commercial banks. Mondal (2016) underscores the
consequence of lax credit policies in exacerbating NPLs, echoing the importance of stringent
credit evaluations highlighted by Jiménez and Saurina (2004). Recent research by Mohanty,
Das, and Kumar (2018) establishes a negative correlation between NPLs and profitability,
emphasizing the financial risks posed by NPLs.

Methodology :

1. Variables to be selected:
(Dependent Variable)
Non-Performing Loan Ratio
Gross NPLs is a better indicator than Net NPLs for measuring defaulted loans of the
banks. Non-performing loans ratio is the sum of substandard loan, doubtful loans and
bad loans to total loans.
(Independent variable):
Bank specific variables:
Bank size (BS): Size of bank reflects the strength and their ability to cope with the
problem of information asymmetry. Salas and Scurina (2002) and Fernandez de Lis et
al. (2000) reported a negative relationship between NPL and Bank size which is
measured by taking the national logarithm of total asset. According to their studies,
large sized banks monitor loans regularly, have better risk management policies and
high diversification opportunities. Hence, a negative co-efficient of bank size is
expected.
Operating Inefficiency (OEOI) Inefficiency is measured as the ratio between
operating expenses and operating incomes. High value of this ratio indicates poor
management efficiency. Poor management and inefficient managers imply weak
monitoring in operating activities and borrowers (Berger and Deyoung, 1997), which
increases the probability of default.
Profitability: (Return on Assets) Return on assets (ROA) is a popular indicator to
measure the profitability of banks. High ROA indicates a sound financial performance
and a stable financial system. The profitable banks are less constrained to invest in
risky loans because of less pressure to generate more revenue.
Capital adequacy ratio The capital adequacy ratio measures the solvency level of
banks. It is measured by total capital to risk weighted assets. Those banks which are
having low-capital ratio face the problem of the high probability of failures. Capital
ratio is the fact about the decision making of banks management, predicts the face of
moral hazard hypothesis.
Credit to Deposit ratio (CDR) The liquidity is measured by loan to deposit ratio.
Higher credit to deposit ratio indicates that deposits are mobilized for generating
revenues and increasing profitability. The profitability encourages investing deposits
in the less risky sector with high credit standards. This activity prevents bad loans.
Similarly lower loan to deposit ratio indicates inefficiency in resource allocation and
low profit.

Macro-economic Variables
Gross domestic Product (GDP) The main macro-economic element, which measures
the development of an economy, is the gross domestic product (GDP). Louzis et. al.
(2012) argued that GDP growth has a significant negative effect on NPLs. This is
because growth in GDP creates employment opportunities, which increases the
 income level of borrowers and consequently reduces NPLs. Hence when, there is
slowdown in the economy, the level of NPLs increases.
Inflation Rate (IFL): The rise in price of goods and services in an economy, over a
period of time, is known as inflation. According to the price stability, indicator, a low
level of inflation is favorable, for the economic growth, whereas a high inflation rate
weakens the borrower’s ability to service debt by reducing their real income and
hence increases NPLs

2. Data analysis procedure

Descriptive Statistics of the dependent variable and independent variables will be
conducted. Correlation between the variables and regression analysis are also
employed in this study.
3. Sources of data:
Secondary data were gathered from official government publications, books that have
been published, journal articles, media, scheduled bank statistics, Bangladesh Bank's
Annual Report, Annual Reports of sample banks, and similar sources.
4. Sampling method
The commercial banks with various ownership structures that are active in
Bangladesh are included by the study. Our sample for this purpose is made up of two
public sector banks, two foreign banks, and seven private commercial banks in an
imbalanced panel.These banks are governed by the same regulations and operate quite
similarly even if they are owned by different parties. The 5-year analysis period runs
from 2019 to 2023.
5. Proper justification of the selected test or model:
For statistical computations including descriptive statistics, regression analysis,
correlation, , coefficient determination, and model summarising, Excel is used.
References:
1. Kumar, D., Hossain, M. Z., & Islam, M. S. (2020, April 13). Non-Performing Loans
in Banking Sector of Bangladesh: An Evaluation. International Journal of Applied
Economics, Finance and Accounting.
https://onlineacademicpress.com/index.php/IJAEFA/article/view/220
2. Akhter, N. (2023). Determinants of commercial bank’s non-performing loans in
Bangladesh: An empirical evidence. Cogent Economics & Finance, 11(1).
https://doi.org/10.1080/23322039.2023.2194128
3. Mahal, I., Rahman, B., & Ahmed, A. (2021, September). Non-Performing Loan
(NPL) Scenario of Banking Industry in Bangladesh During Pandemic: Do the
Changes Blessing or Curse? The Cost And Management, 49.
4. Dey, B. K. (2019, NOVEMBER). Managing Non Performing Loans in Bangladesh.
ADB BRIEFS.
5. Chowdhury, E. K. (2020, December 2). Non-Performing Loans in Bangladesh: Bank
Specific and Macroeconomic Effects. Journal of Business Administration, 41.
6. Khanam, D. F. A., Hasan, D. K., & Afsar, A.K.M. N. (2021, December).
Determinants of Non-Performing Loans of Banks in Bangladesh: An Exploratory
Study. AIUB Journal of Business and Economics, 18(1)
7. (n.d.). https://www.bb.org.bd/en/index.php