Analysis of the Capital Adequacy Ratio and Nonperforming Loans Relationship in the Banking Network of Iran

The evidence of the recent years in the banking network of Iran indicates the increasing trend of nonperforming loans each year; thus, the main objective of the current study is to examine the impact of bank specific factors, esp. capital adequacy ratio on the NPLs. Six years dynamic panel data (2007-2012) of 19 banks are applied to scrutinize the relationship between capital adequacy ratio as well as other determinants and the NPLs. Applying correlation and regression analysis shows that the research model which has been utilized is of decent statistical qualification. Results emphasize that banks should control and amend their credit advancement policy with respect to factors influencing the NPLs to have lower non-performing loan ratio and should take into account their risk weighted assets and riskiness of their loan portfolio before they commence lending. In advance of lending to high risky projects and to low quality borrowers, banks should pay attention to the interests of both stakeholders and banks as well as they should consider the riskiness level of their loan portfolio to provide the accurate information relating to their performance because of the probability of high risk project failure which might evidently lead to the growth in NPLs.  JEL Classification:  C21, G23, G32