Unveiling Bank-Specific and Macroeconomic Factors Driving Non-Performing Loans: Insights from Commercial Banks of Bangladesh

Non-performing loans (NPLs) pose a continual threat to the stability and expansion of Bangladesh's banking industry. The bank-specific and macroeconomic factors influencing non-performing loans in commercial banks listed on the Dhaka Stock Exchange were the key focus of this study. Secondary data from annual reports and financial statements to examine factors including CAR, EIR, ROA, ROE, LR, ADR, size, age, leverage, GDP, inflation, unemployment rate, and lending rate were used in this study. The study examines 34 banks over a period of 11 years (2013–2023) and utilizes descriptive statistics, correlation analysis, panel ordinary least squares regression, random effects regression, and feasible generalized least squares (FGLS). The results indicate that CAR substantially decreases NPLs, highlighting the importance of capital reserves in alleviating default risk. ROE adversely impacts NPLs, suggesting that increased equity efficiency results in less defaults. Likewise, ADR adversely affects NPLs, indicating enhanced credit risk management. Macroeconomic factors produce varied outcomes, GDP growth has a negligible impact, whereas inflation markedly elevates NPLs. Established and larger banks typically exhibit higher NPLs, possibly attributable to more hazardous lending practices and operational inefficiencies. Leverage is positively correlated with NPLs, highlighting the impact of excessive debt on heightened default risk. The research emphasizes the necessity of improving capital reserves, strengthen credit risk management, and rectify structural inefficiencies within the banking industry. The research provides empirical insights into the bank-specific and macroeconomic factors influencing NPLs, with practical and policy implications for financial institutions and policymakers to enhance the stability and sustainability of the financial sector.