The impact of macroeconomic and institutional environment on NPL of developing and developed countries

Abstract

The study investigates what causes non-performing loans (NPLs) in developed and developing countries. To identify the relationship between bank-specific, macroeconomic determinants, and institutional environment non-performing loans on country-level panel data of Developing nations for the period extending from 2010 to 2020, the author used panel system GMM methodology. The long-held hypothesis that NPLs contribute to economic growth is tested using the Panel Granger causality test. Further panel cointegration tests were run to see whether the two variables have a long-term relationship. According to the study, loan defaults frequently happen at a lower rate during a rapid economic expansion, resulting in lower levels of non-performing loans. If there is a robust regulatory framework for systemic risk, a larger banking sector should be more stable than a smaller one. The current study also demonstrates the institutional environment’s importance in improving banks’ credit quality. In developing and developed countries, NPLs are significantly reduced when the institutional environment is improved.