“The Impact of Non-Performing Loans (NPLs) on the Profitability of Commercial Banks in Bangladesh”

Abstract

This study examines the impact of Non-Performing Loans (NPLs) on the profitability of commercial banks. The paper investigates how rising NPL ratios affect bank performance indicators such as Return on Assets (ROA) and Return on Equity (ROE). Using secondary data from multiple commercial banks, the study finds that high NPLs negatively affect profitability by reducing income and increasing provisioning costs. The findings suggest that effective credit risk management and strict supervision can help mitigate the negative effects of NPLs on bank profitability. This study examines the impact of non-performing loans (NPLs) on the financial performance and capital structure of commercial banks in Bangladesh by employing multiple profitability and leverage indicators as dependent variables. Bank profitability is measured using Return on Assets (ROA), Return on Equity (ROE), Return on Average Assets (ROAA), Return on Average Equity (ROAE), Net Interest Margin (NIM), Return on Investment (ROI), and Net Profit Margin (NPM). In addition, financial risk and leverage are assessed through Debt-to-Income Ratio, Debt-to-Equity Ratio, and Debt-to-Asset Ratio. To analyze the relationship between NPLs and these performance indicators, a simple linear regression model is applied for each variable, where non-performing loans serve as the independent variable. This approach enables the study to identify how changes in NPL levels influence banks’ profitability, operational efficiency, and financial stability.