Does Non-performing Loans Affect Bank Lending Behavior?

The objective of this study was to examine the impact of non-performing loans on the bank lending behavior in The Association of Southeastern Asian Nations. The data from six countries has been obtained from the Refinitiv Eikon platform and the World Bank Database comprising 42 companies from 2010 to 2022. This paper applied the Generalised Method of Moments (GMM) to check the relationships between the dependent variable, which is Bank Lending Behavior, measured as loan growth with the independent variables comprised bank-specific variables (Lagged bank lending behavior, non-performing loans, Bank Size, Loan loss provisions, and Return on Assets) and the macroeconomic variables (Gross Domestic Product and Inflation). The study results showed that Non-Performing Loans and Loan Loss Provision had a negative relationship with Bank Lending Behavior, indicating that banks become more cautious in lending out loans when the Non-Performing Loan and Loan Loss Provision rise. All the other variables (lagged bank lending behavior, Profitability and Size) had a positive relationship with Bank Lending Behavior in the ASEAN region, indicating that they promote lending activities. Based on these findings, a critical recommendation for the ASEAN regulatory authorities to consider is establishing stricter risk management rules, particularly for Non-Performing Loans and Loan Loss Provision levels. If these risk indicators are appropriately monitored and controlled, banks may be more willing to lend, boosting regional economic growth.