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Is this adverse selection or something else to determine the non-performing loans? Dynamic panel evidence from South Asian countries

Md. Shahidul Islam and Shin-Ichi Nishiyama
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Md. Shahidul Islam: Department of Banking and Insurance, University of Dhaka

No 1723, Discussion Papers from Graduate School of Economics, Kobe University

Abstract: In the South Asian region, one of the major causes of higher non-performing loans (NPL) is the adverse selection of borrowers by the banks. Using the GMM estimator, we empirically studied the bank-specific, industry specific and macroeconomic specific determinants of non-performing loans of banks in the South Asian countries (Bangladesh, India, Nepal and Pakistan) for the period of 1997-2012 and found that the adverse selection hypothesis of Stiglitz and Weiss (1981) still effective. We found evidence for the bad luck, bad management, skimping and moral hazard hypotheses of Berger and DeYoung (1997) and their effect on the credit risk determination. Bank size, industry concentration, inflation and GDP growth rate all significantly affect the sample countries’ non-performing loans. Empirical results show a moderate degree of persistence of NPL and a late-hit of the global financial crisis in the banking sector of the region.

Keywords: NPL; cost inefficiency; moral hazard; adverse selection (search for similar items in EconPapers)
JEL-codes: G21 C23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-cfn
Date: 2017-12
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