The Impact of Institutional Environment on the Asset Quality of Banks: A Study in Upper-Middle-Income Countries

Abstract

The Non-Performing Loans (NPLs) are a significant indicator of asset quality in banks. In this study, the impact of the institutional environment on NPLs in upper-middle-income countries during the period of 2010-2019 is investigated using the dynamic panel data analysis method. According to the findings obtained from the analyses, institutional quality has a significantly negative effect on NPLs. The lagged value of NPLs, on the other hand, positively influences the current period's NPLs. Additionally, concerning control variables, economic growth and non-interest income negatively affect NPLs, while the credit/deposit ratio and the inflation rate have a positive impact on NPLs.