The Impact of GDP, Inflation, Exchange Rate, Unemployment and Tax Rate on the Non Performing Loans of Banks: Evidence From Pakistani Commercial Banks

Ihtesham Khan, Adnan Ahmad, Muhammad Tahir Khan, Muhammad Ilyas

Abstract

One of the important determinants of the banking sector
performance are the loans advanced for the purpose of profit.
Thus, banks take loans and repayment as a yardstick.
Specifically, banks take a serious note of its repayments and
those loans, which either default or declared as NonPerforming Loan (NPL). Many factors play an important role in
the repayment of loan advances as well as those that are
declared as NPLs. Such factors include but are not limited to
regulatory and institutional environment, bank-based micro economic indicators and macroeconomic determinants. Thus,
the main purpose of this paper is to assess the macroeconomic
factors such as GDP growth rate, exchange rate, inflation,
unemployment and tax rate as determinants of NPL.
Secondary data of NPL is taken from the respective banks’
annual reports and the macroeconomic data from the World
Bank for the period 2006-2016. Using a panel data, both Univariate and Bi-Variate analyses are used to investigate the
relationship of NPL with these macroeconomic variables. The
results show that GDP growth rate, exchange rate, tax rate,
inflation, and unemployment effect NPL in a respectively
different manner. The study conclude that macroeconomic
activities of a particular country are important indicators of a
sound financial institutional system.