The impact of non-performing loans on sustainable bank lending: Evidence from China

Abstract

Non-performing loans (NPLs) play a major role in impacting the bank efficiency and credit supply levels (Abdullah et al., 2024; Huljak et al., 2022). The presence of a high NPL ratio among banks indicates poor asset and institutional quality for banks. This, in turn, impacts the lending levels approved by banks. In the modern economy, it is necessary to have a constant lending level, as economic growth depends on it. However, in China, it has been observed that there has been a growth in NPLs and a fall in lending levels. Therefore, it is necessary to understand the impact that NPLs have on the lending levels in banks across China. In order to analyses the same, the paper uses data from Chinese commercial banks between 2010 and 2022. Using a two-way fixed effects (TWFE) and dynamic Arellano-Bond generalized method of moments (GMM) models, it is found that higher NPL ratios significantly reduce loan growth. The results indicate that as the NPLs rise, the asset quality of the bank falls. This leads to a fall in the credit levels as well. Overall, this research highlights the importance of internal financial efficiency in sustaining credit supply and maintaining stability in emerging banking systems.