Non-Performing Loans In Banking Sector In Pakistan

This research study is an attempt to explore the external and internal factors of Non-Performing Loans (NPLs) in the banking sector of Pakistan through Fixed Effect Model (FEM)/LSDV model using panel data of eight banks operating in Pakistan for the period 2003-2011. The external factors include various macroeconomic indicators such as GDP growth rate exchange rate lending interest rate inflation rate and unemployment rate while banking sector specific factors include bank size risk profile/risk appetite of the banks. The results suggest that GDP growth rate Bank size risk appetite of the banks for lending all have inverse relationship with the Non-Performing Loans (NPLs). Also the management policies practices and philosophies of the foreign banks operating in Pakistan are better than the local banks in dealing with Non-Performing Loans (NPLs). Also some of the time dummies capturing the time specific factors affecting the Non-Performing Loans (NPLs) have come out statistically significant.The findings of the study are important from the aspect of strategy and policy making on the part of the management of the banks.