The Impact of Non-Performing Loans on Credit Growth of Commercial Banks in Cambodia

Bunthe Hor and Siphat Lim ()
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Bunthe Hor: Department of Accounting and Finance, CamEd Business School, Phnom Penh 120211, Cambodia
Siphat Lim: Department of Accounting and Finance, CamEd Business School, Phnom Penh 120211, Cambodia

JRFM, 2025, vol. 18, issue 11, 1-12

Abstract: This study investigated how banks’ balance sheet fundamentals shape their credit growth using panel co-integration methods and two estimation methods—pooled mean group (PMG) and dynamic fixed effects (DFE). Both approaches yielded consistent core results. First, weaker asset quality, proxied by higher non-performing loans (NPLs), was strongly and negatively related to credit growth: PMG produced a large negative long-run coefficient, and DFE’s error-correction form confirmed a significant adverse effect, consistent with higher provisioning, thinner capital buffers, and lower risk-taking. Second, capitalization (equity to assets) supported long-run growth under PMG, while DFE—imposing common slopes—did not, suggesting heterogeneous capitalization effects across banks that PMG captured but DFE muted. Third, operating expense intensity showed a positive long-run association with credit growth in both models, consistent with expansionary spending accompanying durable lending rather than costs causing lending. Long-run effects for liquidity and market-risk sensitivity were weaker or mixed: liquidity’s role was imprecise, and market-risk sensitivity was positive in PMG but not significant in DFE, again pointing to cross-sectional heterogeneity. Error-correction terms were large, negative, and highly significant in both models, indicating rapid convergence—near full adjustment within one period, with slight overshooting in DFE. Short-run results showed that higher liquidity and temporary cost spikes dampened contemporaneous growth. Policy implications emphasize sustained oversight of asset quality and prudent capital planning to support long-run credit supply.

Keywords: credit growth; non-performing loan; panel ARDL model; PMG; DFE (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2025
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