Determinants of loan defaults in South Asia: Macroeconomic, regulatory, and institutional factors

Abstract

Previous studies primarily focus on bank-specific factors that influence NPL. This study investigates macroeconomic and institutional factors affecting loan default in South Asian countries (SAC) from 2010 to 2022. It used the Fixed-effect (FE) (robust) estimator to obtain baseline regression results and the Random-effect (RE) model for sensitivity analysis. The findings show that economic prosperity reduces loan defaults in SAC. The robust result indicates that a 1% increase in GDP growth would reduce NPL by 0.175%. Inflation increases loan defaults, with a 1% rise in inflation raising NPL by 0.081%. Additionally, a 1% increase in the employment rate leads to a 0.049% decrease in NPL. Capital and geographical diversification (branch) have negligible impacts on NPL. Notably, political stability adversely impacts NPL in SAC, while the control of corruption shows an insignificant positive effect on credit risk. Policymakers could use these findings to reduce loan defaults in the region. This study offers new insights into how economic prosperity, higher employment, political stability, and reduced corruption could decrease loan defaults in this region.