Non-Performing Loans and Economic Growth: A Case of Nepal

Abstract

This study examines the relationship between non-performing loans and economic growth in the context of Nepal. Gross domestic product and per capita income are the dependent variables. The independent variables are non-performing loans, loan loss provision, lending interest rate, credit to deposit ratio, capital adequacy ratio and leverage ratio. This study is based on secondary source of data that are collected from 2015/16 to 2021/22, leading to a total of 105 observations. The data are collected from the Banking and Financial Statistics and bank supervision report published by Nepal Rastra Bank, annual reports of the selected commercial banks and macrotrend.net. The correlation coefficients and regression models are estimated to test the significance and impact of non-performing loans on economic growth of Nepal. The result showed that non-performing loans have negative impact on gross domestic product and per capita income. It indicates that increase in non-performing loans leads to decrease in gross domestic product and per capita income. Likewise, loan loss provision has a positive impact on gross domestic product and per capita income. It indicates that higher the loan loss provision, higher would be the gross domestic product as well as the per capita income. Moreover, lending interest rate has positive impact on gross domestic product and per capita income. It indicates that higher the lending interest rate, higher would be the gross domestic product as well as the per capita income. In addition, credit to deposit ratio has a positive impact on gross domestic product and per capita income. It indicates that higher the credit to deposit ratio, higher would be the gross domestic product as well as the per capita income.