Balgova, to loan defaults and investment demand. Even

Balgova, M., Nies M. and Plekhanov A. (2016) suggested that reduction in Non-performing
loans has a positive effect on growth of GDP per capita and growth
opportunities in investment. It also depicted that economy is affected more
positively in case of NPA reduction. Countries which experience inflow of fresh
credit, grow in the fastest pace, and their economies actively seek to resolve
NPLs. Emerging economies have to focus more on quick NPA reduction through
Asset Management Companies and strict policy guidelines to enable and boost the
economy. Reduction in NPA will further result in development of economy and
real GDP will have an impact on overall employment rate and repayment capacity
of borrowers.

Aiyar, S., Bergthaler W., Garrido J.M.,
Ilyina, A., Jobst, A., Kang, K.,  Kovtun,
D.,  Liu, Y.,  Monaghan, D. and Moretti, M. (2015) analysed situation of NPLs in Europe and
concluded that credit growth can be facilitated only when stressed assets are
reduced through proper and speedy insolvency measures. Proper Supervision of
loans, Reforms in insolvency procedures and Development of debt market can help
in increasing credit demand, which will in turn help the economy to grow and
perform better.

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Louzis, D.P., Vouldis, A.T and Metaxas, V.L.
(2012) studied impact of macroeconomic
factors and bank specific factors on three different loan categories in Greece
– Consumer, Business and mortgage loans. The study found that, as per changes
in macroeconomic conditions, Mortgage-based loans are least responsive to
changes. Also, he included “Management Quality” as one of the factors in
macroeconomic variables along with GDP growth rate, interest rates,
unemployment etc. that affect the increase/decrease of NPLs.

Selvarajan, B. & Vadivalagan, G. (2013) studied the lending pattern of advances with
reference to Priority Sector of Indian Bank and compared it with other Public
Sector Banks. Even though the total number of advances of Indian Bank were more
than other public sector banks on an average, they were still better in NPA
management than other public sector banks.

According to
Bernanke, B. and Gertler, M. (1989),
borrower’s net-worth is very important when it comes to loan defaults and
investment demand. Even in times of business fluctuations, the lender and
borrower can be secure and the loans will not default. At the time of credit
appraisal, the lender should give more focus on borrower’s net-worth.

Blavy, R. and Souto, M. (2009) found that Domestic Interest Rates are major
determinant of loan defaults in Mexican Banking Sector. As different banks have
different business models, their sensitivity to macro-economic factors are
different. High Asset prices are related with lesser credit risk whereas
volatility increases credit risk and thereby, results in more loan defaults.

Glen, J. and Mondragón-Vélez, C. (2011) concluded that the two main factors influencing
loan performance is ecomonic growth, followed by interest rates. Higher loan
defaults are attributed to poor loan asset quality, supervision, limited area
penetration and low capital of banks.

According to
research conducted in 26 advanced economies by Nkusu, M. (2011), lower asset prices (changes in house prices),
credit-to-GDP ratio and Inflation are positively correlated with NPL
(non-performing loans). Higher accumulation of NPLs is because of state owned
banks that have a relatively weaker recovery capacity as compared to the banks
that are privately owned. Moreover, the level of NPLs is seen to be lesser in
banks that are owned jointly by the state and/or private entities.

Berger, A. N., DeYoung, R. (1997) examined three main parameters and their
interrelationships – Capital of Banks, Cost efficiency and Quality of Loans.
Increase in NPL results in decrease in measured cost efficiency, which
indicates high levels of loan defaults that, in turn, cause banks to spend more
on monitoring and possibly become more aware in administering existing loan

Dong, H. (2002) emphasized on the role of AMC (Asset
Management Companies) in resolution of NPA problem in Indian Banking system.
Policymakers should give importance to the role of AMCs and can be given
independent goals for faster resolution of NPAs. Incentives can be devised for
AMCs, they can have legal enforcement powers and AMCs in India should follow
international best practices for better results. There should be transparency
between banks and AMCs on terms and conditions. Banks should speed up process
for debt restructuring in case of small unviable borrowers.

Bofondi, M., Ropele, T. (2011) investigated the macroeconomic variables
affecting NPLs in Italy from 1990 to 2010 and concluded that Net NPA ratio
increases with unemployment rate while it decreases with increase in durables
consumption. Also, net NPA ratio varies inversely with real GDP growth rate.
Reduction in short term interest rates also results in rise in NPLs.

Boudriga, A., Boulila, N. and Jellouli, S.
(2009) studied data of 59 countries
from 2002-2006 and concluded that higher capital adequacy ratio and strict
provisioning norms reduce the level of loan defaults. NPA reduction is possible
with strengthening legal system and increasing transparency among institutions.
Three institutional variables of Corruption, Degree of political intervention
and rule of law also impact credit outcomes. 
Conclusion was drawn that NPLs are mainly driven by bank-specific

Caprio, G., Klingebiel, D. (1996) suggested the need of development of
indicators which can assess bank performance, both at individual bank level and
banking system as a whole. Emphasis was given on Mexican crisis of 1994-95 and
how various countries respond to loan defaults. Also, focus was given on role
of capital levels that should be maintained by the Banks to prevent bank

R. & Prasad, A. (2010)
concluded that both macro-economic and bank-specific factors determine the
level of NPLs. There is an inverse relationship between real GDP and NPLs. The
study also illustrated that global financial market conditions have correlation
with NPLs of banks, regulators and banks in the GCC region have to be cautious
about increasing NPLs during low growth phases. Among bank specific factors,
efficiency and balance sheet expansion were found to be relevant. Panel VAR
method was used to see interrelationship between NPLs and economic growth. 


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