The Impact of Industry-Specific Factors on Non-Performing Loans: “Evidence from Licensed Banks and Finance Companies in Sri Lanka”

Abstract

Introduction: Diverse studies have been undertaken on different aspects of the industry and their respective impacts on the amount of non-performing loans in licensed banks and finance companies in Sri Lanka. These generalizations apply to every financial institution and concern both profitability and stability. These data will be considered based on quantitative measures that will cover a range of years from 2012 until 2023, which include gross amounts of loans as well as liquidity ratios, loans-to-deposit ratio, return on assets (ROA), size of the bank, and the level of capital adequacy ratio (CAR) as potential explanatory variables for NPL levels among the responding banks in the study.

Methodology: The research relies on panel data analysis and regression models. Data was collected from the annual reports of 10 licensed banks and 5 licensed finance companies. The statistical techniques used included normality tests, correlation, regression analyses, and diagnostic checks (e.g., heteroskedasticity, and multicollinearity).

Findings: Gross loans, liquidity ratios, and CAR have direct positive effects on NPLs as loan amounts and regulatory capital requirements increase, the risks get higher. In contrast, the loan-to-deposit ratio and ROA exhibit negative relationships with NPLs, which implies that improved profitability leads to fewer loan defaults. Thus, mixed results were given on bank size since larger institutions are linked to higher risks and operational complexity.

Conclusion: The results highlight the necessity for fortified risk management, custom credit policies, and enhanced regulatory frameworks to mitigate NPLs. The research adds to the scant literature on dynamics in NPL in Sri Lanka and offers facts for policymakers and financial executives to consider.