Abstract:
Non-performing loans are financial assets that do not produce any interest or
principal repayment for the banks. To ensure financial stability, financial
intermediaries should minimize their non-performing loans. The focus of this
study is to find out the impact of non-performing loans on the profitability of
licensed commercial banks in Sri Lanka. All licensed commercial banks are
considered for the study. Especially 17 licensed commercial banks are taken as
samples from 2014 to 2021. Descriptive statistics, correlation, multiple
regression analysis, and the Hausman test were used to analyze the collected
secondary data. In this study, a non-performing loan is measured by the non-
performing loan ratio, considered an independent variable, and profitability is
measured by return on assets and return on equity; these are used as dependent
variables. To improve the accuracy and reliability of the tests, liquidity, capital
adequacy ratio, and Firm size are used as control variables. According to the
correlation of the study Non-performing loan ratio, the Capital adequacy ratio
has a negative relationship with ROA, and liquidity has a positive relationship
with ROA. Furthermore, the Non-performing loan ratio has a negative
relationship with ROE; liquidity has a positive relationship with ROE. Based on
regression analysis, this study found that the Non-performing loan ratio and
capital adequacy ratio have a significant negative impact on profitability.
However, Liquidity and Firm size have an insignificant impact on profitability.
This study provides insight to commercial banks and other stakeholders on the
impact of non-performing loans on the profitability of licensed commercial
banks in Sri Lanka.
