Country governance nexus with non-performing loans: higher vs lower-quality country governance

Purpose This study aims to generalize the effect of country governance on NPL (non-performing loans) of commercial banks and measure whether higher-quality country governance outperforms lower-quality country governance in controlling NPL. Design/methodology/approach This study uses unbalanced panel data from the World Bank from 2010 to 2021. The unit root test is used for the stationary test, while multiple correlation and VIF (variance inflation factor) tests are used for multicollinearity diagnosis. Based on the results of heteroskedasticity, serial correlation and cross-sectional dependence tests, this study uses pooled OLS (Driscoll–Kraay standard error) and panel corrected standard error (PCSE) estimation to ensure robustness in the regression outputs. A robustness check has been done by the two-step system GMM estimation. Findings This study finds that all the country governance indicators have significant negative associations with NPL. It also finds that the negative impact of higher-quality country governance on NPL is significantly higher than that of lower-quality country governance. Moreover, the level of NPL has been significantly reduced during the COVID-19 period compared to the non-COVID-19 period. Practical implications The findings of this study will help formulate relevant and effective regulatory, financial and other government policies in controlling the aggregate NPL of the commercial banks at the national level. Originality/value This study overcomes the limited scopes and geographical contexts of past studies and generalizes the overall impact of country governance on commercial banks’ NPL. Furthermore, it shows how higher-quality country governance creates competitive advantages over lower-quality country governance in controlling NPL.