Abstract:
This study investigates the factors impacting non-performing loans in commercial banks
in Sri Lanka. The primary objectives include determining the extent of non-performing
loans and identifying their key determinants, namely credit growth, profitability,
operational efficiency, equity to capital ratio, and income diversification. Additionally,
the study aims to analyze the relationships among these factors and their influence on
non-performing loans in Sri Lankan commercial banks.
To achieve these goals, the study utilized 120 observations from the financial statements
of 12 commercial banks over a 10-year period from 2011 to 2020. Secondary data were
employed to conduct descriptive statistical analyses on non-performing loans, credit
growth, profitability, operational efficiency, equity to capital ratio, and income
diversification using SPSS 22.0. The study also explored correlations and regressions
between non-performing loans and the influencing factors.
The descriptive statistics reveal that the average non-performing loan in commercial
banks of Sri Lanka is 2.24%, with a standard deviation of 1.8%. Correlation analysis
indicates a negative relationship between bank-specific factors such as credit growth,
operational efficiency, equity to asset ratio, and income diversification, and non
performing loans. Conversely, a positive correlation is observed between profitability and
non-performing loans. Regression analysis further confirms that all banking-specific
variables-credit growth, profitability, operational efficiency, equity to asset ratio, and
income diversification-significantly influence non-performing loans in commercial
banks in Sri Lanka.
