Impact of Non-Performing Loans on Interest Income of Banks: Empirical Investigation of Commercial Banks in Pakistan

Abstract

Abstract

Banking sector is crucial to the stability of the economy. Non-Performing Loans (later on NPLs) have a direct impact on how well the banking system in developing countries facilitates financial intermediation. A major portion of Pakistan's whole financial system is the banking sector. Therefore, this study used the information asymmetry theory and the bad management hypothesis to determine how NPLs impacted banks' profitability. The study based on panel data of ten commercial banks working in Pakistan from 2007 to 2023. The Ordinary Least-Squares (OLS) regression method was used for data analysis. A strong negative link observed between NPLs, Return on Equity (t=-4.179, p=0.0001) and Return on Assets (t=-3.132, p=0.0006). The findings are consistent with the theoretical predictions. It is suggested that commercial banks should manage bad debts to maximize shareholder wealth. The conclusions of the study have both conjectural and administrative implications for the personnel involved both as practitioners and policy-makers.

      Keywords: non-performing loans, interest income, return on assets, return on equity, Pakistan