Macro-Financial Covariates of Non-Performing Loans (NPLs) in Pakistani Commercial Banks: A Reexamination Using GMM Estimator

Non-performing loans has been a limiting factor in smooth growth of commercial banking. To augment the literature in this dimension, this paper subjects the findings of Mehmood et al. (2013) to rigorous statistical treatment and reexamines the relationship found therein. It empirically tests the macro-financial determinants that cause non-performing loans to change. A panel of 13 commercial banks for period of 2003-2012 is subjected to empirical analysis. A more efficient estimator Generalized Method of Moments (GMM) is used to cope with potential endogeneity issues in model that has not been addressed in Mehmood et al. (2013). Macro-Financial determinants non-performing loans are found to be crucial. Policy implications include the policy steps to complement the sound financial system with a healthy macroeconomic environment to reduce non-performing loans in commercial banks in Pakistan.