MODELLING NON PERFORMING LOANS (NPLs) IN ABC BANK SRI LANKA

Abstract

Despite the rapid growth in the banking sector in Sri Lanka, there is an increasing trend of NPLs in most of the Sri Lankan state banks including ABC bank. Therefore, the main purpose of this study is to develop a time series model to forecast the NPLs in ABC bank, while bridging the gap of developing novel model to forecast future NPLs. Based on the nature of the research objective it has been applied quantitative research methodology for the study. Secondary data on gross NPLs of ABC bank from fourth quarter of 2008 to fourth quarter of 2018 has been taken for the analysis and applied the technique of ARIMA as the main analytical tool. Moreover, MAPE and MAD have been used to check the accuracy of the fitted model. ARIMA (0,2,1) model was identified as the best fitted model to forecast the future NPLs in ABC bank after checking the accuracy through MAPE and MAD by using both training and validation datasets. According to the findings, the increasing trend of gross NPLs in ABC bank will continue in future and there will be nearly Rs. 64929.6 million of gross NPLs in this bank at the end of 2019. This is the only study which has been touched the area of forecasting NPLs in Sri Lankan context. Hence, it would provide insights to the rare literature, while enhancing the knowledge of financial forecasting. The study would be favorable to the management of ABC bank along with the Central Bank of Sri Lanka in order to mitigate the risk attached with NPLs.