Reduction of Non-Performing Loans in the Banking Industry: An Application of Data Envelopment Analysis

Abstract

The increase in non-performing loans around the world has had quite a negative impact on many nations’ banking systems. To address these problems, many creative regulatory solutions and well-designed risk techniques have been utilized in the hope of reducing non-performing loans to an acceptable level. The purpose of this study is to apply a newly developed data envelopment analysis model to suggest the most efficient plan (called Plan 4) to reduce non-performing loans that can maximize the efficiency of the entire banking industry’s control over the bad debts. For comparison purpose, three other reduction plans are also represented. The four plans are presented using data from Taiwan’s banking industry. The empirical results show that among the plans presented, Plan 4 shows the most effective allocation of the industry-wide reduction target. The plan focuses on a finite number of banks, helping identify the key units to improve industry-wide efficiency. The findings implicitly suggest that the regulator should devise more incentive measures to encourage target banks to perform the non-performing loan reduction task. Our results also suggest that for the regulator, forcing banks to cut their non-performing loans by the same ratio will not help improve the relative efficiency of the industry.

Efficiency of banks and human resources

“…DEA models use linear programming. They transform multiple inputs into multiple outputs and construct nonparametric data envelopments (Yang, 2017). The subjects analysed are called Decision Making Units -DMUs.…”

Industry-Specific and Macroeconomic Determinants of Non-Performing Loans: A Comparative Analysis of ARDL and VECM

“…Non-performing loans play a crucial part in creating a poor performance of banks [6,7]. Banks are restrained from an intermediation role to the real economy and economic growth by NPLs [8,9]. NPLs have been termed "financial pollution" for their negative impacts on the economy [10,11].…”

Analisis Pengaruh Faktor-Faktor Fundamental Kinerja Bank Dan Makro Ekonomi Terhadap Stabilitas Perbankan Di Indonesia

“…NPL (Non Performing Loan) dijadikan alat ukur rasio kualitas aset, karena semakin tinggi nilai NPL mencerminkan semakin buruk kualitas kredit bank yang menyebabkan jumlah kredit bermasalah semakin besar dan bank mengalami kerugian. Selain itu, kinerja bank dapat dinilai dari kecukupan modal yang menjadi hal penting dalam berdirinya suatu bank, karena menunjukkan kemampuan bank dalam menyediakan dana yang digunakan sebagai cadangan untuk mengatasi kerugian sebagai akibat dari aktiva yang berisiko seperti penyaluran kredit, penyertaan surat berharga, maupun tagihan pada bank lain yang harus dibiayai oleh modal sendiri (Chiesa & Mansilla-Fernandez, 2018;Ozili, 2019;Yang, 2017).…”