The Impacts of Non-Performing Loans on the Profitability of Private Commercial Banks of Bangladesh

Abstract

This paper investigates how non-performing loans (NPLs) exert influence on the financial out-turns of Bangladesh’s private commercial banks (PCBs). Data from 30 such banks, listed in Dhaka Stock Exchange (DSE) from 2013-17, have been considered for the same. The study discloses increasing trend in the amount of NPLs of the PCBs between the chosen time periods under study which is worrying for the entire banking sector of Bangladesh. It was found that return on asset (ROA) was positively influenced by capital adequacy ratio (CAR). On the other hand, the ROA of the PCBs under scrutiny was adversely affected by non-performing loan ratio (NPLR). The study also suggests that timely recovery of NPLs and appropriate legal measures to address the NPL issue should be taken into consideration with all seriousness. Proper care should be taken in granting loan facilities by developing precise tools and techniques, under the guidance of Bangladesh Bank, to discriminate between the willful defaulters from the genuine ones. Hence, a fitting implementation of the “Credit Risk Grading (CRG) System” by an appropriate authority would result in better identification and overseeing borrower’s risk in Bangladesh’s credit environment.