Determinants of Non-performing Loans in Non-Bank Financial Institutions: Evidence from Sri Lanka

This study investigates the factors affecting non-performing loans of non-bank financial institutions in Sri Lanka, employing a panel regression model on data from ten firms from 2011 to 2020. The sample comprises five licensed finance companies and five specialized leasing companies, accounting for 65 percent of the NBFIs industry. The regression model includes profitability, operating efficiency, capital adequacy, company size, GDP growth, inflation, and interest rates as explanatory variables. The results show that capital adequacy and interest rates are positively related, and GDP growth and inflation are negatively related with non-performing loans. Further, it was found that firm size, profitability, and efficiency do not have a significant relationship with NPLs. These findings underscore the important influence of the firm’s capital ratio and macroeconomic factors on non-performing loans of non-bank financial institutions in Sri Lanka.