Loan quality in Iranian banking systems

The banking system as an essential foundation for the economy is affected by various factors both internal and external. Loan quality is one of the factors affecting the proper functioning of the system. Because the low quality of loans leads to rise in the ratio of non-performing loans and reduce profitability. Moreover, this can cause to withdrawals by clients that are rooted in fear of losing money and finally lead to a crisis due to a high level of uncertainty in deposits repayment by the banks. In this study, we evaluate the effects of some factors such as loan growth rate and credit risk of which measured by Non-Performing Loan ratio on loan quality in the banking system. We also examine the effect of macroeconomic variables on the loan quality. The results of GMM estimation came to the conclusion that there is a significant relationship between the independent variables and loan growth rate and NPL in the short and long term. According to the results, the relationship between return on asset and the loan quality is significant and positive. Additionally, the findings show a negative and significant relationship between capital adequacy ratio and NPL. Accordingly considering asset quality plays a key role in banks risk management.