Macroeconomic Determinants of Bank NPAs: Insights for a Sustainable Financial System

This paper examines the effect of macroeconomic factors on bank NPAs using 19 years (2004–2022) of data from a sample of 155 banks, resulting in 1827 observations. The dependent variable is the NPAs, with the independent variables being the lending rates, inflation, GDP growth, uncertainty index, and bank size acting as a control variable. Data preparation involved treating the missing values, making the monthly data into annual averages, and then standardizing the variables. This multiple regression model was deployed using R programming to analyze the relationship between the macroeconomic indicators and the NPAs. It was found that higher interest rates, inflation, and GDP growth rates are significantly associated with lower NPAs, while the uncertainty index's negative relationship with NPAs was counterintuitive. In fact, larger banks were found to have higher NPAs due to the difficulties in managing credit risk. The model gave a good fit, indicating an R-squared of 0.774 and an adjusted R-squared of 0.773. These results further show how important it is to have macroeconomic stability for the sustenance of the banking sector's health and hence offer further insight for policymakers and bank managers in designing strategies to cushion the impact of economic fluctuations on NPAs more effectively and ensure more resilient financial systems.