Determinants of NPLs in Sri Lanka’s Non-Bank Financial Sector: Evidence from Finance and Leasing Firms

Purpose: This study investigates the determinants of non-performing loans (NPLs) among Licensed Finance Companies (LFCs) and Specialized Leasing Companies (SLCs) in Sri Lanka. It aims to assess how firm-specific and macroeconomic factors influence credit risk behavior within the non-banking financial sector.
Design/Methodology/Approach: A quantitative approach was applied using secondary data from the annual reports of 27 LFCs and SLCs, along with macroeconomic indicators from the Central Bank of Sri Lanka, covering 2015–2024. Descriptive analysis, correlation tests, and fixed-effects panel regression were conducted, supported by diagnostic checks for normality, multicollinearity, heteroscedasticity, autocorrelation, and stationarity to ensure model validity and robustness.
Findings: Profitability (ROA) exhibited a negative and significant effect on NPLs, indicating that higher profitability enhances credit quality. In contrast, capital adequacy (CAR) and firm size (SZE) had positive and significant relationships, suggesting that larger and more capitalized firms face greater credit exposure. GDP growth negatively and significantly influenced NPLs, while inflation and lending interest rates showed no significant impact. The model explained 61% of the variation in NPLs.
Originality/Value: The novelty of this study lies in examining the determinants of non-performing loans (NPLs) in Sri Lanka’s non-bank financial sector, particularly finance and leasing companies, an area that has received limited research attention compared to the banking sector. The findings provide industry-specific insights to support credit risk management and policymaking.