Determinants of Non-Performing Loans in the Banking Sector of Pakistan

Abstract

This study investigates This study examines the impact of bank-specific factors on non-performing loans (NPLs) in selected Pakistani banks over the period 2015–2025. The study uses panel data from five commercial banks and investigates the influence of Return on Assets (ROA), Capital Adequacy Ratio (CAR), and Income Diversification (ID) on NPLs. Descriptive statistics, correlation analysis, pooled regression, fixed effect model, random effect model, and Hausman test were employed to analyze the data using EViews.

The results indicate that Capital Adequacy Ratio (CAR) has a significant negative effect on non-performing loans, suggesting that stronger capital positions contribute to lower credit risk. Return on Assets (ROA) and Income Diversification (ID) were found to have statistically insignificant effects in the final fixed effect model. The Hausman test confirmed that the fixed effect model is the most appropriate estimation technique for the study. The model demonstrates strong explanatory power, explaining a substantial proportion of variation in non-performing loans.

The findings emphasize the importance of maintaining adequate capital levels to improve asset quality and strengthen risk management practices in the banking sector. The study provides useful insights for bank management, regulators, and policymakers seeking to reduce non-performing loans and enhance financial stability in Pakistan.