Impacts of Financial Inclusion on Non-Performing Loans of Commercial Banks: Evidence from China

Abstract

Non-performing loans of commercial banks have long hampered the development of the banking sector, and directly reflect the credit risk and asset quality. With the continuous development of the financial industry, the introduction of financial inclusion has greatly eased the shortage of funds, and narrowed the gap between poor and rich. However, whether the promotion of financial inclusion in the financial industry could affect the non-performing loans of commercial banks has not been verified. Therefore, this paper discusses the possible associations between financial inclusion and non-performing loans of commercial banks on the regional level, constructs a panel data model by selecting the data of 31 provinces (including 4 municipalities) in China from 2005 to 2016, and uses the fixed effect model for empirical test. The empirical results (from an overall national sample) reveal a negative impact of the financial inclusion on non-performing loans. Moreover, the development of the banking sector and the regional consumption could enhance the impact of financial inclusion, while government intervention and unemployment could reduce the impact of financial inclusion. From the analysis of the regional sample, when the development of financial inclusion reaches a high level, the lagged financial inclusion promote the non-performing loans of commercial banks; however, when the financial inclusion is underdeveloped, the development of commercial banks act as a disincentive to non-performing loans. Therefore, the local governments should pay more attention to the influences of financial inclusion on the financial industry, in order to maintain the stability of banking asset quality. In addition, the negative impact of financial inclusion on non-performing loans of commercial banks is significant in China central region, while its impacts in China eastern and western regions are not significant. This indicates that the development of the financial industry and economy can hamper the effects of financial inclusion. It is necessary to adjust the financial resource allocation according to the characteristics of different regions in China, so that the financial inclusion can effectively promote the regional financial industry upgrade, improve regional capital flow efficiency, and fundamentally reduce the non-performing loans of commercial banks. According to the sample analysis by time, there is a significant negative impact relationship between inclusive finance and commercial banks’ non-performing loans after the financial crisis, while the impacts before and during the financial crisis are not significant. This demonstrates that the impact of the global financial crisis on China’s regional economy has further enhanced the inefficiency of the inclusive financial system on credit risk, which in turn, helps commercial banks better maintain asset quality stability.

Nexus between financial innovations, remittances and credit performance: Evidence from augmented ARDL and nonlinear ARDL

“…The study utilizes annualized time series data for the period 1981-2019. As a dependent variable, non-performing loans are measured by the ratio of NPLs to gross domestic product (Chen et al, 2018). Because of broad regional economic growth…”

The Impact of Financial Sector Development and Sophistication on Sustainable Economic Growth

“…Our methodology is consistent with the following previous studies: Rana and Barua [34] used panel regression and tested the impact on economic growth (proxied by GDP growth rate) of five variables selected for financial development (Domestic Credit Provided by Financial Sector, Total Debt Services, Gross Domestic Savings, Broad Money, and Trade Balance); Mercan and Gocer [35] used panel regression on five developing countries with data covering 1989-2010 to test the influence of financial development (proxied only by M2 to GDP) on the GDP growth rate and used foreign direct investments to GDP and total foreign trade to GDP (exports + imports) as controlling variables; Fufa and Kim [36] used dynamic GMM panel regression on 64 countries with data covering 1989-2012, the impact of the stock markets (described by the value of the traded shares divided by the total value of listed share, the value of all domestic shares traded in the stock market divided by GDP and the total value of listed shares in the stock market divided by GDP) and the banking system (deposit money banks to the private sector as a share of GDP, credit issued by deposit banks and other financial institutions, excluding central banks, to the private sector divided by GDP and by broad money M3 to GDP) on economic growth estimated by the real per capita GDP growth rate; Eryılmaz and others [37] applied panel data regression on 23 OECD countries using GDP per capita as the dependent variable and the ratio of domestic total credit to GDP and ratio of total domestic savings to GDP as a financial development indicator (independent variable); and Chen and others [38] investigated the impact of financial inclusion (decomposed by four dimensions: availability of financial services, usability of financial services, utility of financial services and receptivity of financial services) on the non-performing loans rate using a panel data regression in 31 provinces of China with data covering 2005-2016.…”

Financial inclusion in China: an overview

“…Similarly, the impact of financial inclusion on employment, consumption, and production is also significant (Dupas and Robinson 2013). Some studies examine the effect of financial inclusion on credit risk (Chen et al 2018). From individual and family perspectives, studies show that the inclusive nature of financial services can promote educational opportunities for individuals and the social credit level of families (Anzoategui et al 2014;Chiapa et al 2016).…”

“…Lastly, there is emerging research in recent years regarding financial inclusion in the Chinese market. Some studies focus on the reach of banking outlets and financial services by reviewing the historical development of the banking system (Bai et al 2018;Peng et al 2014;Sparreboom and Duflos 2012); some examine the use of formal credit in China to emphasize the importance of financial inclusion (Chen and Jin 2017; Fungáčová and Weill 2015); others study the impact of financial inclusion on commercial banks in China (Chen et al 2018;Yang and Zhang 2020).…”