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Journal of Advances in Economics and Finance
JAEF > Volume 4, Number 4, November 2019

Non-Performing Loans and Its Impact on Profitability: An Empirical Study on State Owned Commercial Banks in Bangladesh

Download PDF  (1434 KB)PP. 123-136,  Pub. Date:January 2, 2020
DOI: 10.22606/jaef.2019.44001

Author(s)
Tanvir Hasan Anik, Nandan Kumer Das, Md.Jahangir Alam
Affiliation(s)
Begum Rokeya University, Rangpur, Bangladesh
Begum Rokeya University, Rangpur, Bangladesh
Begum Rokeya University, Rangpur, Bangladesh
Abstract
State owned commercial banks in Bangladesh have experienced catastrophe loan scams over the last decade. The frequent loan scams have made banking activities questionable. Therefore, non-performing loans must get proper consideration and supervision to lessen the occurrence of loan scams. This research paper examines the effect of non-performing loans on profitability of SCBs in Bangladesh. NPL ratio, NPL growth rate, deposit growth rate, provision growth rate and capital adequacy ratio have been taken as independent variables and return on equity (ROE) as dependent variables. Secondary data has been taken from FY 2005 to FY 2016 to analyze the impact of independent variables on dependent variable. The relationship has been tested using a multiple linear regression model. This paper shows that there is statistically significant negative relationship between non-performing loan ratio and return on equity. The model shows there is strong correlation between the independent variables and dependent variable with correlation coefficient of 0.933. The overall model is statistically significant with p-value of 0.040. The independent variables explain up to 71.3% variations in dependent variable ROE. This research also exposes that, NLP ratio, NLP growth rate, deposit growth rate, provision growth rate and liquidity ratio are adversely(Negatively) related to ROE. Whereas, capital adequacy ratio is positively related to ROE. The study inspects that, the relationship among NPL growth rate with ROE and capital adequacy ratio with ROE is statistically significant. On the other hand relationship among NPL ratio with ROE, deposit growth rate with ROE, provision growth rate with ROE and liquidity ratio with ROE is not statistically significant.
Keywords
Multiple linear regression model, provision growth rate, deposit growth rate.
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