Contents
CHAPTER 01
INTRODUCTION
1.2 Problem statement
1.3 Research questions
1.4 Objectives of the Study
1.5 Significance of the study
1.6 Organization of the study
CHAPTER 02
2.1 REVIEW OF LITERATURE
2.2 Hypothesis of the study:
Chapter 3
3.1 Methodology
3.2 Variables of the Study:
3.3 Tools of Analysis:
3.3.1 Descriptive Statistics:
3.3.2 Correlation Matrix:
3.3.3 Regression.
REFRENCES
The Impact of Nonperforming Loans on Profitability of Banking Sectors in Pakistan
CHAPTER 01
INTRODUCTION
Strong financial system acts as a backbone of countries’ economic prosperity. In a country’s financial system, the financial intermediaries play a vital role. These intermediaries act as a bridge between the lenders and borrowers. They take the fund from those having surplus funds and distribute it among those whom are in deficit. The most important role that these intermediaries play is that they diversify the risk for different businesses by investing their funds in different businesses hence reducing the overall risk. It is proved that if you want to have a strong economic system you must have a strong financial system for it in the country (Economic Survey of Pakistan 2008-2009). Banks play function of financial intermediaries which are extremely subject to lending and borrowing in the market. The asset and liability are the major financial resources. On the basis of these financial resources the banks are facing so many risks in the market, like market risk liquidity risk, operational risk and credit risk. These risks can create un- recoverable damages to the banking system. The late crisis in the United State has showed that the banking system is facing various types of liquidity risk and credit risk. Various studies were conducted on the determinants of financial sectors and financial crises in the world. The financial crisis or banking crisis leads to failure of the whole economic system. If a single bank failed it shows the failure of the whole system. The failure of the banks has become an issue for public policy related, (Hashim et.al. 2010). The main causes for the financially weaker banks’ failure were the bad loans or classified loans (Chipalkati, and Rishi, 2007).
1.2 Problem statement
Non-performing loans as can be seen do not generate any income for a bank and reduces the bank’s profit by assigning of funds as a provision. For example, according to SBP banks are required a provision of 25 percent for an unsettled aging of more than 3 months, 50 percent for an unsettled aging of more than 6 months and 100 percent for an unsettled aging of more than one year. In addition to this, the other costs caused by such loans also include borrowing costs and opportunity cost of these loans. Furthermore, these loans cause an increase in the recovery costs, administrative costs and other legal costs. Other prominent consequences may include an effect on employee decision-making and determination, a poor image of the bank and a decrease in investors’ confidence. Performance evaluation is an indispensible and effective tool for an understanding of banks’ health.
1.3 Research questions
This study will provide answers to the following stated questions based on the above problem statement.
1. What is the impact of NPLs (Non-Performing Loans) on different measures of banks performance?
2. What is the impact of LLP (Loan Loss Provision) on different measures of banks performance?
1.4 Objectives of the Study
The main objective of this study is to examine the impact of Non- performing loans on Pakistani commercial banks’ performance. The objectives of the study are:
1. To examine the effect of non-performing loans on commercial banks profitability.