The reduction cost of nonperforming loan: evidence from China’s commercial bank

ABSTRACT

The nonperforming loans (NPLs) are co-generated by creating the profit in a bank, and this article build a joint production model to measure the reduction cost of nonperforming cost. By using a data set of China’s 13 commercial banks, the conclusions show that the reduction cost of NPLs is lower, which suggests that it is not a good choice for China’s commercial bank to hold the NPLs.

KEYWORDS:

• Nonperforming loans
• reduction cost
• joint production
• directional distance function

JEL CLASSIFICATION:

• G14
• C63
• G21

Acknowledgements

We would like to express our thanks to the support of the CPEZ Joint Innovation Centre for Research on Urbanization, and the views in this article are those of the authors.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Meanwhile, there are two alternative methods to handle nonperforming loans (NPLs). One is to treat NPL as an input, whereas this method would be against the material product balance criterion. Another is to use the inverse term of NPL as a normal output, and it would be similar to the method used in this article, but this method would cause it hard to define the marginal cost of NPL. Thus, NPL is treated as one undesirable output in this article.

² We also calculate the correlation index between NPLs’ reduction cost and labour employed by banks, and get the same results with the correlation analysis between NPLs’ reduction cost and fixed assets.

Additional information

Funding

The research carried out in this article was made possible with the support of the National Statistical Science Fund of China under Grant No. 2015LZ52.