Bank-specific determinants of non-performing loans in Bhutan: Does business strategy matter?

The study examines bank-specific determinants of Non-Performing Loans (NPLs) of commercial banks in Bhutan using time series data for the quarterly period from 2014 to 2021. Explanatory variables in this study are credit growth, deposit rate, return on equity and capital adequacy ratio. To investigate the relationship between explanatory variables and NPLs, multiple regression analysis is employed. The regression analysis exhibit that credit growth and deposit rate significantly contribute to the growth of NPLs, while return on equity and capital adequacy ratio lowers NPLs. The outcome of this study is relevant to policy makers and regulators, as the findings suggest higher credit growth and increasing cost of funds are more likely to escalate and expose the commercial banks to NPLs. In addition, adherence to regulatory norms reduces the likelihood of default risk. In this regard, investment in productive sectors and business diversification are seen as an alternative to interest income from loans and advances. The outcome of this study is consistent with past studies on the bank-specific determinants of NPLs. The findings from this study will help decision makers and commercials banks in Bhutan to develop an effective credit risk management framework.