Regulations, Governance, and Resolution of Non-Performing Loan: Evidence from an Emerging Economy

How do banks resolve a severe bad loan problem in a capital-constrained, low-income economy when a government bailout is not an option? We address this question by examining new evidence from a sharp decline in bad loan ratios in a panel of conventional commercial banks in Bangladesh. On the aggrega...

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Bibliographic Details
Published in:Emerging markets finance & trade 2019-08, Vol.55 (10), p.2275-2297
Main Authors: Amin, Abu S., Imam, Mahmood Osman, Malik, Mahfuja
Format: Article
Language:English
Subjects:
Bangladesh
Banking
banking sector reforms
Commercial banks
Economic development
Economic growth
Governance
Loans
Macroeconomics
market discipline
Markets
non-performing loans
Quality
regulatory discipline
Regulatory reform
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Summary:How do banks resolve a severe bad loan problem in a capital-constrained, low-income economy when a government bailout is not an option? We address this question by examining new evidence from a sharp decline in bad loan ratios in a panel of conventional commercial banks in Bangladesh. On the aggregate level, the bad loan ratio in this market has dropped from 41% in 1999 to only 10% in 2012. We find that at a micro level, this dramatic improvement is associated with bank management quality and internal governance that were substantially enhanced during a decade of large-scale regulatory reforms. The bank-level findings persist even after controlling for market monitoring, bank- and industry-level factors, and macroeconomic variables. Both economic growth and financial development paved the way for banks operating in this macroeconomic environment to reduce non-performing loans over time.
ISSN:1540-496X
1558-0938
DOI:10.1080/1540496X.2018.1523788