Impact of Financial Ratios on Non-Performing Loans of Publicly Traded Commercial Banks in Bangladesh

Abstract

This study investigates the influences of a set of financial ratios on non-performing loans and to show to what extent of listed commercial banks in Bangladesh. In this study, we applied an econometric model to find out correlations among financial ratios and a sample of 96 observations has been analyzed from 20 banks out of 30 listed commercial banks during 2010-2015. This paper mostly agrees with the existing literature that, credit-deposit ratio, net interest margin have a positive influence on the non-performing loans and capital adequacy ratio, return on assets have a negative influence on the non-performing loans. This research also reveals that, sensitive sector’s loan, priority sector’s loan have significant positive influence on the non-performing loans and unsecured loans, profit per employee, investment deposit ratio have significant negative impact on gross non-performing loan. The findings of this research would help commercial banks to maintain standard financial ratios in order to improve their loan qualities and it would be beneficial to the central bank to examine its existing policy in banking supervision relating to the ratios of regulatory requirements like capital adequacy ratio the banks shall maintain.