Factors of Non-Performing Loans

Non-Performing Loans (NPL) can define as a loan (principal + interest) which

borrower unable to pay back to the bank. According to Alton and Hazen (2001), non
performing loans are those loans which are more than ninety days past due or no
longer accruing interest. It will causes many negative impact to the banking
institution. Commercial banks and Islamic banks NPL also increases especially in
purpose of perchasing transportation. So, lets discuss the factors that can let NPL
happen.
1.) Weak loan portfolio management by bank staff in the credit analysis.
The weak analysis by the bank staff can causes the borrower cant repay the
loans that they lending from the bank. The traditional way of credit analysis is
evaluate the 5cs. The borrowers credit assessment should be done by 5Cs of lending,
such as , collateral, character, capacity and conditions. Because of bank staff need to
hit their target, then they will approve the loans without done the 5Cs analysis with
details. Another reason that bank staff fails in credit analysis is because of the issued
under different term. Insider lending has the potential to bring about the collapse of
the bank (Nkusu, 2011). So, with the weak loan portfolio, the bank always wrongly
approve the loans to the borrower that unable to repay back the loans. Unable to pay
back the loans, it increases the level of non-performing lans level in Malaysia.
2.) Lack of transparency by borrower.
Nowadays, the borrowers are smarter and dishonest than before. They will
make a fake documents to cheat the banks. For example, if borrowers salary is not
achieve the term of the lending, then he will make a fake salary payment slip to fulfill

the term of the bank. Because of emerged the new technology in the market
nowadays, agents have become experts in duplicating document and then turn into a
faking documents. It is because the salary nowadays is not high after graduate and
they also cannot afford the daily expenses. The banker cannot distinguish between the
real documents and the fake documents. When the borrowers use the fake documents,
it means the borrower make a fraud and did not has the ability to pay back the loans
and it will cause the credit risk of bank increase. It can let the non- performing loan
increase. For example in transportation purchase, the younger people nowadays
always want to show off, so they will buy the vehicle they cant afford. It is the reason
that non-performing loans of purchasing transportation increasing in our country.
3.) Banks lenient the credit terms of borrowers.
Banks did not strict in their credit terms can let the non-performing loans
amount increases. Warue(2013) say the terms of credit must be very strict to the
borrower, then it can reduce the defaulting risk as much as possible. For example, if
the borrower unable repay the car loans, the bank should give a punishment to the
borrower such as to drag away their car and they just can get it back after settle the
non-performing loans payment. The borrower will scare after they get the punishment
and then will pay the loans on time. So, the banks should not lenient credit term to the
borrowers. The loans that are given under lenient credit terms is more hard to collect
from the borrower than loans that are provided under very strict credit terms
(Warue,2013). So, the percentage of non-performing loans in bank under the lenient
credit term is higher than the loan that given by very strict credit terms.
4.) Unemployment in the country.

From the index mundi Malaysia, the Malaysias unemployment rate in 2012 is
3% and increases 0.1% to 3.1% in year 2013. The unemployment rate still increase
until 3.2% in September 2015. Minister in the Prime Minister's Department Datuk
Seri Abdul Wahid Omar says 161,000 out of 400,000 unemployed are graduates. The
unemployment rate will related to the non-performing loans in the bank. If the
borrower loss their jobs, then they will unable to pay back their loans. Nkusu (2011)
explains that unemployment will reduces the borrowers level of income and increase
their debt burden. Loss of job can affected borrowers with outstanding loans to
service the loans. So, it also increases the non-performing loans in the banking
institution. Unemployment will reduces the purchasing power of the customer and
they cant purchase the goods and services offered by any banking institution. This
also can affect the revenue of the bank. In a report by the Finance Ministry, it was
shown that from January to August 2011, 90.1 percent or 308,371 persons among job
seekers registered with the Human Resource Department are young people aged
between 15-29 years old, both graduates and non-graduates. Because of these younger
people unemployment, therefore they cant pay back the loan they borrowed in
purpose of purchasing vehicle. So, unemployment is positively related with the nonperforming loans, it is because, when the unemployment rate increases, the nonperforming loans level also increases.
5.) Interest rate of the loan.
Collins and Wanjau (2011) explains that interest rates are the rent or fee that
the borrowers need to pay on debt, that they borrow from the bank or financial
institution. Interest rate of loans can influence the level of non-performing loans
especially in the case floating interest rate. Higher interest rate of loans means the
borrower need to pay more money on the loans they borrowed. In this situation, the

bank will gain their interest income. Because of younger people nowadays wanna to
buy that things, then they did not care so much about the interest rate and also
sometimes did not read the agreement with details, because they just want get that
things. For example, they want to buy a car, and then they did not care the interest rate
charges by banks. After that, they cant pay back the loans. It increase the level of
non-performing loans in the verhicle purchasing. High interest rate makes it hard for
borrowers to repay back their loans, which means increase in the level of nonperforming loans.

Alton R. G and Hazen J. H (2001), As Economy Flounders, Do We See A Rise in

Problem Loans?, Federal Reserve Bank of St. Louis.

Nkusu, M. (2011). Nonperforming Loans and Macro-financial Vulnerabilities in

Advanced Economies. IMF Working Paper 11/161.

Warue, B. J. (2013). The Effects of Bank-Specific and Macro Economic Factors on

Non-Performing Loans in Commercial Banks in Kenya: A comparative Panel
Data Analysis, Advances in Management and Applied Economics. Vol. 3, No. 2,
pp. 135 164.
Article about Minister in the Prime Minister's Department Datuk Seri Abdul Wahid
Omar says 161,000 out of 400,000 unemployed are graduates. The Malaysian
Insider

filepic,

May

12,

2015.

http://www.themalaysianinsider.com/malaysia/article/graduates-among-400000currently-unemployed-in-malaysia-says-minister#sthash.IR3OV1xx.dpuf
News from Malaysiakini, Young Malaysians are poor, jobless and yet taxed
https://www.malaysiakini.com/letters/298477

Nkusu, M. (2011). Nonperforming Loans and Macro-financial Vulnerabilities in

Advanced Economies. IMF Working Paper 11/161

Collins, N. J. & Wanjau, K. (2011). The Effects of Interest Rates Spread on the Level
of Non-Performing Assets: A Case Study of Commercial Banks in Kenya,
International Journal of Business and Public Management. Vol. 1, No. 1, pp. 58 -65