Determinants of Non-Performing Loan Ratios in Emerging Market Commercial Banks

Abstract

Elevated non-performing loan ratios continue to constrain lending capacity and profitability among commercial banks operating in emerging markets, prompting renewed interest in the macroeconomic and institutional factors that drive credit deterioration. This study examines bank-level and country-level determinants of non-performing loan ratios across a panel of commercial banks in several emerging economies, integrating financial statement indicators with measures of regulatory quality and credit information infrastructure. Rather than treating macroeconomic conditions and bank governance as separate explanatory tracks, the analysis considers their interaction, testing whether stronger governance and supervisory oversight moderate the sensitivity of loan quality to economic downturns. Findings indicate that banks with more concentrated ownership structures and weaker internal audit functions exhibit sharper increases in non-performing loans during periods of economic stress, while the presence of comprehensive credit bureaus appears to dampen this sensitivity. We discuss implications for prudential supervision, arguing that credit information infrastructure investment may offer a more cost-effective stabilization lever than capital buffer requirements alone in markets where enforcement capacity is limited. The study contributes comparative evidence relevant to banking supervisors navigating credit cycles in developing financial systems.