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Is the relation between lending interest rate and non-performing loans symmetric or asymmetric ? evidence from ARDL and NARDL

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  • Bahruddin, Wan Athirah
  • Masih, Mansur

Abstract

Lending interest rate has an inherent implicit cost on the credit issued by banks with implication on loan defaults. In this regard, high level of non-performing loans ( NPLs) will depress economic growth owing to many banks refusing to lend. This paper makes the initial attempt to test the non-linear asymmetric relationships between lending interest rate and NPLs by using the NARDL approach and provides a direction of Granger causality between the lending interest rate and NPLs. Malaysia is used as a case study. The finding tends to indicate that lending interest rate and NPLs has an asymmetric relationship in the short-run and symmetric relationship in the long-run. This paper suggests that banks can improve their quality credit management by streamlining their collection process and the quality of customers in order to reduce the number of NPLs in the short-run. Besides, banks can keep their total risk low by diversifying their loan portfolios.

Suggested Citation

  • Bahruddin, Wan Athirah & Masih, Mansur, 2018. "Is the relation between lending interest rate and non-performing loans symmetric or asymmetric ? evidence from ARDL and NARDL," MPRA Paper 91565, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:91565
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    References listed on IDEAS

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    1. Beck, Roland & Jakubik, Petr & Piloiu, Anamaria, 2013. "Non-performing loans: what matters in addition to the economic cycle?," Working Paper Series 1515, European Central Bank.
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    4. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
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    7. Louzis, Dimitrios P. & Vouldis, Angelos T. & Metaxas, Vasilios L., 2012. "Macroeconomic and bank-specific determinants of non-performing loans in Greece: A comparative study of mortgage, business and consumer loan portfolios," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 1012-1027.
    8. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
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    Cited by:

    1. Tuna, Gulcay & Almahadin, Hamed Ahmad, 2021. "Does interest rate and its volatility affect banking sector development? Empirical evidence from emerging market economies," Research in International Business and Finance, Elsevier, vol. 58(C).
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    3. Krzysztof Kil & Radosław Ciukaj & Justyna Chrzanowska, 2021. "Scoring Models and Credit Risk: The Case of Cooperative Banks in Poland," Risks, MDPI, vol. 9(7), pages 1-15, July.

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    More about this item

    Keywords

    Lending interest rates; non-performing loans; ARDL; NARDL; Malaysia;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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