This study examines the impact of macroeconomic variables on loan defaults in BRICS countries. It uses a dynamic generalized method of moments model to analyze quarterly data from 2005 to 2020. The findings show that GDP growth, unemployment, inflation, interest rates, and industrial productivity all have statistically significant effects on non-performing loans in BRICS countries. Specifically, GDP, industrial productivity, and interest rates are negatively associated with defaults, while unemployment and inflation are positively associated. The results indicate macroeconomic policies focused on growth, employment, stable prices, and controlled interest rates can help reduce non-performing loans.

1. Impact of Macroeconomic Variables on Loan
Default: An Empirical Analysis of BRICS
Countries
Author Details:
Dr. Aamir Aijaz Syed
Assistant Professor
Institute of Management, Commerce, and Economics
Shri Ramswaroop Memorial University, Lucknow, India
Dr. Ravindra Tripathi
Associate Professor
Department of Humanities and Social Sciences
Motilal Nehru National Institute of Technology, Prayagraj, India

2. BACKGROUND OF THE STUDY
The recent financial crisis over the years has attracted
increasing attention to the consequences that banking
system instability can have on an economy or vice
versa (Agnello and Sousa, 2011). Hence, it has inspired
academics to examine in greater detail the factors that
may trigger a banking crisis. In this context, exploring
the factors that affect credit problems is an important
issue for regulatory authorities in order to maintain
financial stability, and to enable banks to pursue
responsible management.

3. A banking crisis may occur following volatility in the
macroeconomic environment (Festic et al.,2011; Louzis et
al., 2012; Nkusu, 2011) such as a fall in growth, or
increases in levels of unemployment, interest rates, and
inflation. Llewellyn (2002) also observes that, among other
issues, banking system problems are commonly preceded
by the accumulation of structural weaknesses in the
economy and the financial system, hazardous banking
practices, incentive structures, and moral hazard. Neverthe-
less, it seems that a banking crisis is primarily caused by
banks’ incapacity to satisfy their payment obligations, a
situation that is essentially trigged by impaired loans on
their balance sheets.

4. Financial crisis and economic Relation
• Savings and loan crisis of Untied States which resulted into the
failure of 747 out of 3234 savings and loan association of
United states due to failure of Non repayment in 1980 and
1990’s,
• Finnish banking crisis took place in 1991-1993 because of
economic disturbance and banking problems
• Venezuela crisis is also another example of banking failure
which resulted in closure of 17 out of 49 commercial banks
representing 53 percent of system assets
• Asian financial crisis of 1991 is another big crisis which
resulted due to excessive foreign debt and currency devaluation
resulted in overextension of credit in real estate sector and
resulted in economic meltdown due to contagion effect

5. Financial crisis and economic Relation
• Global financial crisis of 2007-2012 which resulted in
the collapse of large financial institutions, bailing out
of large banks and slowing down of world economy.
• Sovereign Debt crisis resulting in slowdown of Greece
economy and falling banking structure.
• The main conclusions which we can draw from these
crisis is that economic disturbance and banking
structure are highly correlated if any untoward
incident happens in the economy than that will
consequently affect the banking structure and vice
versa.

6. Major Problem of Banks
• Over the years considering the above crisis period it’s been found that
banking problem has been increased both in developed and developing
economies (Basel 1998-2004) and the major reason for the banking
problem is Nonperforming Loans or Nonperforming Assets. Increased
Nonperforming Loans lowers the profitability of banks and also
hampers the lending capacity of banks thus affecting decline in
business activities, lowering of output and contraction of economic
activity.

7. Nonperforming loans
Nonperforming Loans are generally those loans which
fail to generate principle and interest within a
stipulated period of time. This period of time generally
differ from country to country but specifically to meet
universal criteria this period of time is confined to 90
days, meaning if a borrower is not able to pay
principle and interest for 90 days continuously than in
that case such loans can be termed as Nonperforming
loans.

8. Why BRICS
• The average GDP per capita for the population of the BRICS countries
(5.4%) is three times higher than worldwide (1.7%).
• The share of BRICS in the global GDP has added 10 p.р., standing in 2019
at 33%. It is predicted that the growth rate of the BRICS member-states
which is higher than the global rate (4.5% as compared to 2.5% in the
coming years) will lead to further increase in the share of the five countries.
• By 2030 it will exceed that of the USA and European countries combined,
reaching 37% of the global economy.
• The BRICS countries represent 19% of global exports, 16% of global
imports, 19% of incoming and almost the same amount of outgoing direct
investment.
• The BRICS countries represent 42% of the global population

9. NPLs in BRICS countries

10. Over the years Transitions:

11. Current Situation of NPLs in BRICS

12. Review Literature

13. Literature Review GAP
• First, there is no comprehensive study that studies the relationship
between macroeconomic variables and nonperforming loans among
the BRICS countries.
• Second, this study incorporates certain other macroeconomic variables
like industrial productivity rate, that are not included in previous work.
• Third, this study uses the robust dynamic generalized moment of
method technique, which provides the best results for small sample
data.
• Lastly, the time frame of this study is also quite different as it covers
the pre and post-recession period along with COVID timelines as well.
Thus, providing a suitable literature gap.

14. GMM test for analysis
• The dynamic Generalized Method of Moments model
is used in this study as it removes the time series
related problems of endogeneity, heteroskedasticity
and autocorrelation (Arellano and Bover, 1995). This
technique also removes unobserved heterogeneity and
the persistency of dependent variables. Apart from that
it is also suitable for small sample size i.e. where T<
N.

15. Features of GMM test
• GMM works to eliminate serial correlation
• GMM works to eliminate heteroskedasticity
• GMM covers endogeneity problem
• It can be used for panel, cross sectional, time series data
• GMM is more efficient when we have less time period and more cross sections.
*GMM is the method of choice for finance and asset pricing research these days.

16. Variables
Macroeconomic variables
Growth Rate: The previous study has shown that the economic growth of a country
has a negative relationship with nonperforming loans (Jimenez, 2005). A growing
economy generates sufficient resources for income generation and development,
which helps in reducing the chances of default. Hence concerning previous
literature, the hypothesis expects a negative relationship between nonperforming
loans and growth rates.
H1: GDP has an indirect impact on Nonperforming Loans
Unemployment: Unemployment reduces the earning potential of borrowers and thus
reduces the debt servicing capacity of borrowers. Based on the notion, we can
consider unemployment has a positive association with nonperforming loans.
H2: Unemployment has a direct impact on Nonperforming Loans

17. Variables
Inflation: Inflation creates a burden on the fixed income group as it reduces the purchasing
power. Different authors have concluded a mixed response between inflation and
nonperforming loans. Therefore based upon previous literature, this study incorporates a
positive hypothesis between inflation and nonperforming loans.
H3: Inflation has a direct impact on Nonperforming Loans
Real interest rate: The interest rate is a burden for loan borrowers, and an increase in
interest rate creates excessive pressure on the borrowers, resulting in loan default (Jimenez
and Saurina(2005). Therefore, the study expects a positive association between
nonperforming loans and real interest rates. (Jimenez and Saurina(2005)).
H4: Real interest rate has a direct impact on Nonperforming Loans
Industrial Productivity: Industrial productivity describes the contribution of the various
sectors toward industrial growth and development. High industrial productivity promotes
employment opportunities and income growth. Thus, help in improving the debt service
capability of the borrowers. Based on this premise, we expect a negative association
between industrial productivity and nonperforming loans.
H5: Industrial productivity rate has an indirect impact on Nonperforming Loans

18. Findings

19. Conclusion
• The result clearly shows that among BRICS countries, macroeconomic factors
have a significant contribution toward nonperforming loans. If the government can
focus more on macroeconomic policies like an investment in industrial
development and employment generation, controlled arbitrary interest rate, and
have a moderate inflation rate than nonperforming loans can be reduced to some
extent.
• Investment in industrial development will generate employment opportunities and
income generation, which will improve the debt servicing capacity of the
borrowers and eventually nonperforming loans. Investment also helps in
improving the growth rate of the economy, as we can see lower investment in
some countries like South Africa, Brazil, and India has negatively affected the
growth rate of these countries. On the other hand, in China, the growth rate is
quite good due to better investments and employment opportunities. So to improve
the banking nonperforming loans government should make appropriate policies
for managing the macroeconomic fundamentals of BRICS countries.

20. Conclusion
• Apart from the above, the other factors which have affected bank's nonperforming
loans in individual BRICS countries are:
• Brazil the other reasons are political turmoil, corporate bankruptcy, exchange rate
fluctuations, petroleum scam, and slow demand from the Chinese market.
• Russia, the other factors are soviet-union collapse, high fiscal deficit, recession,
the blow of Asian financial crisis, a currency pegged with the U.S dollar, falling
crude oil prices, declining foreign currency reserves, falling rubble, geopolitical
reason like the cut from western funds sanctions and loan loss from Ukraine.
• India’s increasing nonperforming loans are due to the nationalization of Banks, as
political parties start using them for their political vendetta, banking reforms like
income recognition and asset classification norms, slow growth in the world
market, and policy paralysis that affected the timely completion of different
projects.
• China and South Africa, nonperforming loans are considerably lower due to
professionally managed asset management companies and also due to adequate
and stable profitability and a stable buffer stock to meet any financial crisis.

21. Thanks to all the Respected Professors and
Academicians