Determinants of Non-performing Loans in Non-banking Financial Institutions: Evidence from Sri Lanka

<p>This study attempts to investigate the factors affecting non-performing loans (NPLs) of non-bank financial institutions (NBFIs) in Sri Lanka by analyzing ten licensed finance and specialized leasing companies. The study employed a quantitative approach by using secondary data from corporate reports of the selected NBFIs for the period of 2011 to 2020. The sample of the study consist with five licensed finance companies and five specialized leasing companies which together claims for 65 percent of the NBFIs industry. The dependent variable under investigation is non-performing loans while independent variables include macro-economic and institutional-specific factors. The study used four proxies to measure institutional-specific factors; size of the company, return on assets, capital adequacy and efficiency. Considered macro-economic factors are GDP, inflation, and interest rates. The impact of macro-economic and institutional-specific factors on non-performing loans were observed through multiple regression model under ordinary least square method using EViews statistical software. The results of the model revealed that NPLs has a significant negative relationship with return on assets, GDP and inflation and a significant positive relationship with interest rates of the economy. Further, it was found that capital adequacy, efficiency and size factors do not have a significant relationship with NPLs. The findings highlighted the need for better credit risk mitigation practices in the non-banking sector to improve the stability of the financial system.</p>