Document Type : پژوهشی
Authors
1 Associate Professor of Economics, University of Tabriz
2 Assistant Professor of Economics, University of Tabriz
3 Ph.D. Candidate of Economics, University of Tabriz
Abstract
Extended Abstract:
1- INTRODUCTION
Playing the positive role of banks in the economic development of the country requires the health of the banking system. one of the most important criteria for measuring the health of the banking system is the ratio of non-performing loans to total loans. The higher value of this ratio can disrupt the role of banks as intermediaries. Non- Performing Loans (NPLs) are affected by various factors, including adverse selection and moral hazard.
High-risk customers are often willing to receive loans at higher interest rates, and banks due to lack of information about the level of risk-taking of those customers and in order to earn higher interest income, exposed at adverse selection risk by lending to high-risk customers. As a result, non-performing loans will increase.
Moral hazard occurs when bank managers ensure about the possibility of risk transfer of their activity to depositors or shareholders of the bank, so they usually take more risk and lend without proper checking credit of customers. In the other words bank managers do not the required care of choosing customers because they do not endure the consequences of additional risk. Thus, the likelihood of lending to high-risk customers increases, and consequently non-performing loans increase.
2- THEORETICAL FRAMEWORK
In this study we use the ratio of interest income to total loans to show the risk of adverse selection. Because as interest rates rise, the bank's interest income increases, but since high interest rate loans are usually chosen by high-risk individuals, the risk of adverse selection increases, and since high-risk individuals are more likely to not to be able to repay, so non-performing loans will increase.
In order to show the moral hazard risk between bank managers with depositors and shareholders of the bank, we use the indicators of liquidity ratio and capital adequacy of the bank, respectively. Regarding the reason for this, high liquidity ratio reduces liquidity risk and increases the ability of bank managers to provide more loans, since depositors do not have the necessary tools to monitor the behavior of managers and managers can transfer the risk of lending to them, so this leads to moral hazard risk.
3- METHODOLOGY
The model of the present study, which is taken from the study of Shahidul Islam & Nishiyama (2019), is presented as follows:
Where i and t indices represent the bank and the time period (year), respectively, and the model variables are introduced as follows:
NPL: Ratio of non-performing loans to total loans.
IL: Ratio of interest income to total loans (adverse selection risk index)
LR: Ratio of cash assets to total deposits (moral hazard risk index between managers and depositors)
ER: Ratio of equity to total assets (moral hazard risk index between managers and shareholders)
X: A vector of other control variables include banking level variables such as return on assets ratio and cost to income ratio, variables within banks such as the concentration ratio index of the three largest banks and macroeconomic variables such as inflation and economic growth.
D: It is a dummy variable that if the bank has ordered facilities, its value is one and otherwise it is zero.
The above model is estimated using data of 19 public and private banks during the period 2008-2015, by system generalized method of moments (system GMM) offered by Arellano & Bover (1995) and Blundell & Bond (1998).
Based on the Arlano-Bond test, the null hypothesis that there is no second-order autocorrelation of disturbances cannot be rejected. Also, based on Hansen test and Hansen difference test, the null hypothesis that there is no correlation between instrumental variables and residual variables is not rejected. Therefore, instrumental variables used in the models are valid. Then, based on the result of the Wald test, the null hypothesis that all coefficients are zero is rejected, and as a result, the validity of the estimated coefficients is confirmed. Based on the above, the results of the estimated coefficients are statistically confirmed and interpretable.
4- RESULTS & DISCUSSION
The results show that during the studied period, the ratio of interest income to total loans has a positive and significant effect on the ratio of non-performing loans to total loans. The increase in the above variable, which indicates an increase in the risk of adverse selection in the Iran's banking system, shows that when lending rates of the bank increase, borrowers with higher risk were more willing to receive loans. Given that the main source of income for banks is their interest income, it is recommended that banks choose their customers with more information to avoid wasting their capital and income. Banks can also be encouraged not to participate in higher risk projects.
Also, according to the results, capital adequacy ratio has a negative and significant effect on the ratio of non-performing loans to total loans.of the studied banks. Therefore, it can be concluded that moral hazard risk between bank managers and shareholders is effective on non-performing loans of the Iran's banking system. It is while that, no evidence of the effect of moral hazard between bank managers and depositors on NPLs is observed. Hence it is recommended that the ratio of capital adequacy be increased by more investment of banks shareholders.
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