Forbearance with Nonperforming Loans and Moral Hazards in Banking System: A Survey on Selected Iranian Banks

Document Type : Research Paper

Authors

Faculty of Economics, University of Tehran, Tehran, Iran.

Abstract

Present study investigates the impact of banking forbearance of Nonperforming loans using monthly data during the period of 2016-2024 for listed banks of Tehran Exchange Market. Facing nonperforming loans, one way is to deal with the collaterals and take NPL off the balance sheet. Conventional method being largely carried in Iran, without the presence of effective surveillance of central bank, is obtaining creative accounting and transfer the NPL to performing loans. This action as a Moral Hazards represents higher levels of loans to deposit ratio and will cause a systemic risk over banking system and then to aggregate monetary environment. Paper tests the mentioned hypothesis adopting PSTR model with variables consisting interest spread, loan to deposit ratio, NPL and Return on Equity of 10 banks. According to results, transition variable is loan to deposit ratio and divides banks into two regimes of high-risk and low-risk banks. In both regimes, the main determinant of reducing NPL is higher loan to deposit ratio which confirms the hypothesis which banks with more NPL take risky action and increase loans. Interest spread decreases NPL in both regimes and ROE has a significant effect for high-risk banks. As loan to deposit ratio tends to increase by bank actions, disturbs the destruction of bank money and simulates the growth of balance sheet of banks. It seems effective surveillance of central bank and reforming the auditing system of banks will be count as the crucial steps of controlling systemic risk caused by NPL and related crisis.

Keywords

Main Subjects

Berger, A. N., & DeYoung, R. (1997). Problem Loans and Cost Efficiency in Commercial Banks. Journal of Banking & Finance, 21(6), 849-870.

Bofondi, M., & Ropele, T. (2011). Macroeconomic Determinants of Bad Loans: Evidence from Italian Banks. Bank of Italy Occasional Paper, 89, 1-42.

Boudriga, A., Boulila, N., & Jellouli, S. (2009). Does Bank Supervision Impact Nonperforming Loans: Cross-Country Determinants Using Aggregate Data? Retrieved from https://mpra.ub.uni-muenchen.de/18068/1/MPRA_paper_18068.pdf.

Chen, H. J., & Lin, K. T. (2016). How do Banks Make the Trade-Offs among Risks? The Role of Corporate Governance. Journal of Banking & Finance, 72, S39-S69.

Christaria, F., & Kurnia, R. (2016). The Impact of Financial Ratios, Operational Efficiency and Non-Performing Loan towards Commercial Bank Profitability. Accounting and Finance Review (AFR), 1(1), 1-8.

Colletaz, G., & Hurlin, C. (2006). Threshold Effects of the Public Capital Productivity: An International Panel Smooth Transition Approach. HALSHS, Retrieved from https://shs.hal.science/halshs-00008056/.

Dijk, D. V., Teräsvirta, T., & Franses, P. H. (2002). Smooth Transition Autoregressive Models—A Survey of Recent Developments. Econometric Reviews, 21(1), 1-47.

Dimitrios, A., Helen, L., & Mike, T. (2016). Determinants of Non-Performing Loans: Evidence from Euro-Area Countries. Finance Research Letters, 18, 116-119.

Espinoza, R., & Prasad, A. (2010). Nonperforming Loans in the GCC Banking System and their Macroeconomic Effects. Middle East and Central Asia Department, IMF Working Paper, WP/10/224, 1-20.

Fofack, H. (2005). Nonperforming Loans in Sub-Saharan Africa: Causal Analysis and Macroeconomic Implications (3769). Washington, DC: World Bank Publications.

Ganioğlu, A., & Us, V. (2014). The Structure of the Turkish Banking Sector before and After the Global Crisis. Central Bank of the Republic of Turkey, Working Paper, 14(29), 1-39.

Ghosh, A. (2015). Banking-Industry Specific and Regional Economic Determinants of Non-Performing Loans: Evidence From US States. Journal of Financial Stability, 20, 93-104.

Gonzalez, A., Teräsvirta, T., Van Dijk, D., & Yang, Y. (2017). Panel Smooth Transition Regression Models. Retrieved from https://www.diva-portal.org/smash/get/diva2:1152759/FULLTEXT01.pdf.

Hansen, B. E. (1999). Threshold Effects in Non-Dynamic Panels: Estimation, Testing, and Inference. Journal of Econometrics, 93(2), 345-368.

Hu, J. L., Li, Y., & Chiu, Y. H. (2004). Ownership and Nonperforming Loans: Evidence from Taiwan's Banks. The Developing Economies, 42(3), 405-420.

Keeton, W. R., & Morris, C. S. (1987). Why Do Banks’ Loan Losses Differ? Economic Review, 72(5), 3-21.

Khemraj, T., & Pasha, S. (2009). The Determinants of Non-Performing Loans: An Econometric Case Study of Guyana. Retrieved from https://mpra.ub.uni-muenchen.de/53128/1/MPRA_paper_53128.pdf.

Klein, N. (2013). Non-Performing Loans in CESEE: Determinants and Impact on Macroeconomic Performance. Retrieved from https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=2247224.

Kolapo, T. F., Ayeni, R. K., & Oke, M. O. (2012). Credit Risk and Commercial Banks' performance in Nigeria: A Panel Model Approach. Australian Journal of Business and Management Research, 2(2), 31-38.

Lee, C. C., & Chiu, Y. B. (2013). Modeling OECD Energy Demand: An International Panel Smooth Transition Error-Correction Model. International Review of Economics & Finance, 25, 372-383.

Louzis, D. P., Vouldis, A. T., & Metaxas, V. L. (2012). Macroeconomic and Bank-Specific Determinants of Non-Performing Loans in Greece: A Comparative Study of Mortgage, Business and Consumer Loan Portfolios. Journal of Banking & Finance, 36(4), 1012-1027.

Makri, V., Tsagkanos, A., & Bellas, A. (2014). Determinants of Non-Performing Loans: The Case of Eurozone. Panoeconomicus, 61(2), 193-206.

Messai, A. S., & Jouini, F. (2013). Micro and Macro Determinants of Non-Performing Loans. International Journal of Economics and Financial Issues, 3(4), 852-860.

Moinescu, G. (2012). Determinants of Nonperforming Loans in Central and Eastern European Countries: Macroeconomic Indicators and Credit Discipline. Review of Economic and Business Studies (REBS), 10, 47-58.

Pestova, A., & Mamonov, M. (2013). Macroeconomic and Bank-Specific Determinants of Credit Risk: Evidence from Russia. Economic Education and Research Consortium, Working Paper, 13/10E, 1-20.

Podpiera, J., & Weill, L. (2008). Bad Luck or Bad Management? Emerging Banking Market Experience. Journal of Financial Stability, 4(2), 135-148.

Psaila, A., Spiteri, J. V., & Grima, S. (2019). The Impact of Non-Performing Loans on the Profitability of Listed Euro-Mediterranean Commercial Banks. Retrieved from https://www.um.edu.mt/library/oar/bitstream/123456789/52963/1/The%20Impact%20of%20Non-Performing%20Loans%20on%20the%20Profitability%20of%20Listed%20Euro-Mediterranean%20Commercial%20Banks.pdf.

Reinhart, C. M., & Rogoff, K. S. (2011). From Financial Crash to Debt Crisis. American Economic Review, 101(5), 1676-1706.

Rinaldi, L., & Sanchis-Arellano, A. (2006). Household Debt Sustainability: What Explains Household Non-Performing Loans? An Empirical Analysis. ECB working paper, 570, 1-20.

Salas, V., & Saurina, J. (2002). Credit Risk in Two Institutional Regimes: Spanish Commercial and Savings Banks. Journal of Financial Services Research, 22(3), 203-224.

Sapienza, P. (2004). The Effects of Government Ownership on Bank Lending. Journal of Financial Economics, 72(2), 357-384.

Stern, G. H., & Feldman, R. J. (2004). Too Big to Fail: The Hazards of Bank Bailouts. Lanham: Rowman & Littlefield.

Terasvirta, T., & Anderson, H. M. (1992). Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models. Journal of Applied Econometrics, 7(S1), S119-S136.

Terasvirta, T. (2004), Smooth Transition Regression Modelling. In H. Lutkepohl and M. Kratzig (Eds.), Applied Time Series Econometrics. Cambridge: Cambridge University Press.

Us, V. (2015). Banking Sector Performance in Turkey Before and After the Global Crisis. Iktisat Isletme Ve Finans, 30(353), 45-74.

Vinh, N. T. H. (2017). The Impact of Non-Performing Loans on Bank Profitability and Lending Behavior: Evidence from Vietnam. Journal of Economic Development, 24(3), 27-44.

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Berger, A. N., & DeYoung, R. (1997). Problem Loans and Cost Efficiency in Commercial Banks. Journal of Banking & Finance, 21(6), 849-870.
Bofondi, M., & Ropele, T. (2011). Macroeconomic Determinants of Bad Loans: Evidence from Italian Banks. Bank of Italy Occasional Paper, 89, 1-42.
Boudriga, A., Boulila, N., & Jellouli, S. (2009). Does Bank Supervision Impact Nonperforming Loans: Cross-Country Determinants Using Aggregate Data? Retrieved from https://mpra.ub.uni-muenchen.de/18068/1/MPRA_paper_18068.pdf.
Chen, H. J., & Lin, K. T. (2016). How do Banks Make the Trade-Offs among Risks? The Role of Corporate Governance. Journal of Banking & Finance, 72, S39-S69.
Christaria, F., & Kurnia, R. (2016). The Impact of Financial Ratios, Operational Efficiency and Non-Performing Loan towards Commercial Bank Profitability. Accounting and Finance Review (AFR), 1(1), 1-8.
Colletaz, G., & Hurlin, C. (2006). Threshold Effects of the Public Capital Productivity: An International Panel Smooth Transition Approach. HALSHS, Retrieved from https://shs.hal.science/halshs-00008056/.
Dijk, D. V., Teräsvirta, T., & Franses, P. H. (2002). Smooth Transition Autoregressive Models—A Survey of Recent Developments. Econometric Reviews, 21(1), 1-47.
Dimitrios, A., Helen, L., & Mike, T. (2016). Determinants of Non-Performing Loans: Evidence from Euro-Area Countries. Finance Research Letters, 18, 116-119.
Espinoza, R., & Prasad, A. (2010). Nonperforming Loans in the GCC Banking System and their Macroeconomic Effects. Middle East and Central Asia Department, IMF Working Paper, WP/10/224, 1-20.
Fofack, H. (2005). Nonperforming Loans in Sub-Saharan Africa: Causal Analysis and Macroeconomic Implications (3769). Washington, DC: World Bank Publications.
Ganioğlu, A., & Us, V. (2014). The Structure of the Turkish Banking Sector before and After the Global Crisis. Central Bank of the Republic of Turkey, Working Paper, 14(29), 1-39.
Ghosh, A. (2015). Banking-Industry Specific and Regional Economic Determinants of Non-Performing Loans: Evidence From US States. Journal of Financial Stability, 20, 93-104.
Gonzalez, A., Teräsvirta, T., Van Dijk, D., & Yang, Y. (2017). Panel Smooth Transition Regression Models. Retrieved from https://www.diva-portal.org/smash/get/diva2:1152759/FULLTEXT01.pdf.
Hansen, B. E. (1999). Threshold Effects in Non-Dynamic Panels: Estimation, Testing, and Inference. Journal of Econometrics, 93(2), 345-368.
Hu, J. L., Li, Y., & Chiu, Y. H. (2004). Ownership and Nonperforming Loans: Evidence from Taiwan's Banks. The Developing Economies, 42(3), 405-420.
Keeton, W. R., & Morris, C. S. (1987). Why Do Banks’ Loan Losses Differ? Economic Review, 72(5), 3-21.
Khemraj, T., & Pasha, S. (2009). The Determinants of Non-Performing Loans: An Econometric Case Study of Guyana. Retrieved from https://mpra.ub.uni-muenchen.de/53128/1/MPRA_paper_53128.pdf
Klein, N. (2013). Non-Performing Loans in CESEE: Determinants and Impact on Macroeconomic Performance. Retrieved from https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=2247224.
Kolapo, T. F., Ayeni, R. K., & Oke, M. O. (2012). Credit Risk and Commercial Banks' performance in Nigeria: A Panel Model Approach. Australian Journal of Business and Management Research, 2(2), 31-38.
Lee, C. C., & Chiu, Y. B. (2013). Modeling OECD Energy Demand: An International Panel Smooth Transition Error-Correction Model. International Review of Economics & Finance, 25, 372-383.
Louzis, D. P., Vouldis, A. T., & Metaxas, V. L. (2012). Macroeconomic and Bank-Specific Determinants of Non-Performing Loans in Greece: A Comparative Study of Mortgage, Business and Consumer Loan Portfolios. Journal of Banking & Finance, 36(4), 1012-1027.
Makri, V., Tsagkanos, A., & Bellas, A. (2014). Determinants of Non-Performing Loans: The Case of Eurozone. Panoeconomicus, 61(2), 193-206.
Messai, A. S., & Jouini, F. (2013). Micro and Macro Determinants of Non-Performing Loans. International Journal of Economics and Financial Issues, 3(4), 852-860.
Moinescu, G. (2012). Determinants of Nonperforming Loans in Central and Eastern European Countries: Macroeconomic Indicators and Credit Discipline. Review of Economic and Business Studies (REBS), 10, 47-58.
Pestova, A., & Mamonov, M. (2013). Macroeconomic and Bank-Specific Determinants of Credit Risk: Evidence from Russia. Economic Education and Research Consortium, Working Paper, 13/10E, 1-20.
Podpiera, J., & Weill, L. (2008). Bad Luck or Bad Management? Emerging Banking Market Experience. Journal of Financial Stability, 4(2), 135-148.
Psaila, A., Spiteri, J. V., & Grima, S. (2019). The Impact of Non-Performing Loans on the Profitability of Listed Euro-Mediterranean Commercial Banks. Retrieved from https://www.um.edu.mt/library/oar/bitstream/123456789/52963/1/The%20Impact%20of%20Non-Performing%20Loans%20on%20the%20Profitability%20of%20Listed%20Euro-Mediterranean%20Commercial%20Banks.pdf.
Reinhart, C. M., & Rogoff, K. S. (2011). From Financial Crash to Debt Crisis. American Economic Review, 101(5), 1676-1706.
Rinaldi, L., & Sanchis-Arellano, A. (2006). Household Debt Sustainability: What Explains Household Non-Performing Loans? An Empirical Analysis. ECB working paper, 570, 1-20.
Salas, V., & Saurina, J. (2002). Credit Risk in Two Institutional Regimes: Spanish Commercial and Savings Banks. Journal of Financial Services Research, 22(3), 203-224.
Sapienza, P. (2004). The Effects of Government Ownership on Bank Lending. Journal of Financial Economics, 72(2), 357-384.
Stern, G. H., & Feldman, R. J. (2004). Too Big to Fail: The Hazards of Bank Bailouts. Lanham: Rowman & Littlefield.
Terasvirta, T., & Anderson, H. M. (1992). Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models. Journal of Applied Econometrics, 7(S1), S119-S136.
Terasvirta, T. (2004), Smooth Transition Regression Modelling. In H. Lutkepohl and M. Kratzig (Eds.), Applied Time Series Econometrics. Cambridge: Cambridge University Press.
Us, V. (2015). Banking Sector Performance in Turkey Before and After the Global Crisis. Iktisat Isletme Ve Finans, 30(353), 45-74.
Vinh, N. T. H. (2017). The Impact of Non-Performing Loans on Bank Profitability and Lending Behavior: Evidence from Vietnam. Journal of Economic Development, 24(3), 27-44.
Journal of Economic Research (Tahghighat- E- Eghtesadi)
Volume 60, Issue 2 - Serial Number 151
September 2025
Pages 960-983

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History

  • Receive Date: 06 February 2025
  • Revise Date: 19 July 2025
  • Accept Date: 04 May 2025

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