Impact of Loan Default on the Sustainability of Financial Health: A Study on Selected Private Commercial Banks in Bangladesh

Abstract

This study aims to examine the influence of loan default over the sustainability of financial health of selected private commercial banks listed on Dhaka Stock Exchange (DSE) in Bangladesh. The banking sector of the country faces significant challenges in terms of loan defaults. The study applies panel data analysis to investigate how non-performing loan ratio (NPLR), capital adequacy ratio (CAR), provision maintenance ratio (PMR), credit deposit ratio (CDR), and cost-to-income ratio (CIR) influence the sustainability of bank performance, as measured by a profitability indicator- return on assets (ROA). The study utilizes secondary data of 19 private commercial banks over a 16-year period (2008-2023), representing strongly balanced panel data. Hausman specification test recommends fixed effect regression model which reveals that NPLR has a significant negative influence over ROA, whereas CDR shows a significant positive impact. This study provides valuable insights for bank management in Bangladesh to better manage non-performing loans and optimize credit strategies to maintain profitability. Keywords - Credit deposit ratio, fixed effect regression, nonperforming loan ratio, profitability