Factors affect NPL in Taiwan Banking Industry

Ming-Chang Cheng, Chien-Chi Lee, Quynh Nhu Tran Pham and Hui-Yu Chen

This study examines whether government policies have an impact on non-performing loans (NPL )ratio of domestic banks during dissimilar financial periods from 1994 to 2008.Theinfluence variables in the NPL ratio include the followings: loan to deposit ratio (DL), debt ratio(DB),bank size (ASSETS), earnings per share (EPS), capital adequacy ratio (Basel ratio; BIS) and directors and supervisors shareholding ratio (HOLD). To comprehend the relation between a bank’s ownership structure and its NPL ratio, we categorize banks according to their ownership structure: public banks, privatized banks, financial holding banks and private banks. During the 15 year period, the following conclusions can be made: Every bank can expand assets and reduce debt ratio to effectively reduce the probability of NPL ratio occurrence. During the first financial reform implementation, banks not only restrict loans to increase lending quality but also use their own capital or retained earnings to write off loans to reduce NPL ratio. Regarding HOLD, we find that when the government promotes policies to lower NPL ratio, directors and supervisors perform their supervision responsibilities more diligently.