A Conceptual Paper for Macroeconomic Determinants of Non-Performing Loans (NPLs) In Banking Sector of Pakistan
This paper develops a conceptual framework to understand the importance of the most relevant macroeconomic factors that may affect the level of non-performing loans (NPLs) in conventional banks of Pakistan. The conceptual framework asserts that the energy gap, the bank credit to private sector with corruption and political stability should also be analyzed along with GDP, lending interest rate and the unemployment rate to encapsulate the overall impact of systematic risk in the changes in the level of conventional banking NPLs. In developing countries, the gap between the demand and supply of energy (energy gap), corruption and political stability have far reaching effect on the overall economy through hampered business activities. When bank credit creation is damaged due to pile up of the bad loans, better regulations and policy making can rescue the banking system and economy. The rationale behind considering these variables in the proposed model is to provide better insights of influential external factors and to devise better policies and regulations to cope up with these for the stability of the banking sector and economy.
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