The Threshold Impact of Non-Performing Loans on Bank Lending Capacity- A Dynamic Threshold Panel Data Approach

The Non-Performing Loans of banks are per se derived from two distinctive components: The first elements which are evolved outside the direct purview of banks and banking authorities are included as macroeconomic conditions, changes in the exchange rate, rate of inflation, interest rate, etc. The other factors which are within the domain of responsibility of banking system are comprised with sheer negligence of banking authorities in the process of appropriate selection of credit customers, compiling the required rules and regulations for identifying these customers and conducting the prerequisite studies for investigating the well functioning of system and diagnosing the bottlenecks for preventing the growth of non-performing loans, in toto.
In this paper, an attempt is made to explore de facto, the impact of Non-Performing Loans on lending capacity of banking system viz-a-viz utilizing the Dynamic Threshold Panel Data Approach of Hansen, Ipso facto. Further, we have tried to evaluate de jure, the threshold effects of Non-Performing Loans on lending capacity of banks via estimating the square value of Non-Performing Loans ratio and designate it as "Threshold Variable", Sine qua non. The results prima facie indicate that the relation between Non-Performing Loans and lending capacity of banks are nonlinear and thus, we observe that in pre threshold level, the impact of Non-Performing Loans on lending capacity of banks is positive, while in post threshold level, the effect of Non-Performing Loans on lending capacity of banks is negative pro rata.