Linking Non-Performing Loans with Organizational Performance: Evidence from Banking Sector of Pakistan

Abstract

The contemporary study explored the impacts of nonperforming loans on banks profitability. In order to find the effects of non-performing loans on bank profitability, the study included controlled variables as deposit to total assets, liability to total assets and size of the bank. The study population comprises of Pakistani commercial banks. The study sample is made up of 10 years of data from 2006 to 2015. By testing the hypotheses, diverse econometric tests corresponding correlation, ordinary least square regression and autoregressive model were applied. The study originated a negative and significant association of non-performing loans on bank profitability. Deposit to total assets have positive, however insignificant association with bank profitability (return on asset, return on equity). Liability to total assets has negative significant relation with bank profitability. In the same way, the study also established a positive and significant relationship of the size of the bank and banks profitability. The study also found that NPLs is negatively associated with share prices.