Non-performing loans and profitability in municipal savings and credit banks: Monthly panel evidence for 2024

Abstract

This study examines the relationship between non-performing loans (NPL) and profitability in Peruvian municipal savings and credit banks (cajas municipales de ahorro y crédito [CMAC]) using monthly supervisory panel data for 2024. Grounded in the credit-risk and microfinance literature, we construct a balanced panel of 10 CMAC institutions observed over 12 monthly periods (N = 10, t = 12; 120 observations) (Berger & DeYoung, 1997; Mersland & Strøm, 2009). Return on assets (ROA) and return on equity (ROE) are modelled as functions of the NPL ratio, loan-loss provision coverage, operating expenses relative to assets, leverage, and institutional size, with entity and time fixed effects (FE). Panel regressions yield a statistically significant negative coefficient for NPL on both ROA (β = -0.094, p < 0.05) and ROE (β = -0.464, p < 0.05), confirming that deteriorating asset quality erodes financial performance. Provision coverage mitigates this effect, while high operating expenses and excessive leverage amplify vulnerability to NPL shocks. The findings contribute to the evidence base for CMAC regulation and inform policy priorities for credit-risk management, dynamic provisioning and efficiency-enhancing investment in Peru’s microfinance sector.