Government failures and non-performing loans in Asian countries

Abstract

Purpose: Non-performing loans (NPLs) may determine an overall weakness of the banking system within a country. The purpose of the present study is to analyze the impact of government failures on NPLs in Asian countries in the time span 2000–2020. The variables employed as proxies of government failures are public debt as % of gross domestic product (GDP) and a government ineffectiveness index proposed by the World Bank. Design/methodology/approach: The econometric approach employed is a panel generalised time series (GLS) model with heteroskedasticity and autocorrelation specific to each panel. Findings: The results confirm that public debt as % of GDP and governmental ineffectiveness impacted significantly on NPLs for Asian countries in the observed period. Originality/value: The literature offers similar results only for some individual Asian countries, while a wider analysis is lacking for Asian macroareas. The present paper considers 31 Asian countries, and supports the idea that a healthy financial sector is correlated to institutional quality and political regime. Hence, policy makers are advised to monitor governance indicators to reduce NPLs.