Non-Performing Loans and its Impact on Profitability of Financial Institutions of Pakistan
Keywords:
NPLs, Inflation, Interest, GDP Growth, Financial InstitutionsAbstract
A loan is considered to be a NPL if interest and/or the principal be in amount outstanding over than 90 days; otherwise unpaid from more than 90 days was added to the principal, or the payments are overdue less than 90 days, but it is reasonable to suspect the possibility that the loan will be fully paid (Thanh, 2014).Similarly, (Alam, Haq, & Kader, 2015) highlighted, financial crises of Asia in 1997, that was the worst ever to hit the region. The Asian economic predicament flounced the region when it was once least anticipated and left reputedly irreparable result on the financial systems (van Mook, 2015).Current study was analyzed using E views, as it is time series study. In time series study, data sets were made among a period of 8 years among 2006 to 2014. In this study, secondary data was used and obtained from different sources. The data was collected by banks web sites; Google scholar, State banks of Pakistan sites where a financial statement/ data for the required time frame are accessible. Current study is not without limitations as most of things are out of budget and out of time constraints. The foremost limitation is that we could only include three macroeconomic variables in total like GDP, interest rate and inflation rate.We concluded that loan monitoring is an ignored part in previous researches as a consequence a very less attention is paid to the subject matter. Similarly, it is the main reason that amount of loans is miss-utilized and ultimately loan default is occurred. Moreover, non-performing loans not only created the liquidity problems for the banks but it also eliminated the interest income and bank profitability.
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