The Effect of Non-performing Loan on State-owned Commercial Banks’ Profitability with Operating Efficiency as Mediating Variable

The study aims to investigate the effect of non-performing loans on profitability with operating efficiency as an intervening variable. The study is conducted on the state-owned commercial banks in Bangladesh. The purposive sampling technique is chosen to select the sample banks. Secondary data has been collected from the annual reports of sample banks. The technique of data analysis used is descriptive, multiple regression analysis, and path analysis. PROCESS Macro Mediation Model 4 has been applied to examine the mediation effect. The study finds that non-performing loan has a positive but insignificant effect on operating efficiency, on the other hand, operating efficiency has a negative and insignificant impact on profitability. The statistical result in the direct effect of non-performing loan on profitability shows that non-performing loan has a negative and significant impact on profitability in presence of the operating efficiency. The findings in PROCESS Macro mediation effect reveals that operating efficiency have no mediation effect on the relationship between non-performing loan and the profitability of state-owned commercial banks. The study recommends that bank management should take effective measures to minimize the percentage of the non-performing loan and the operating expense to operating income ratio to enhance the profitability of banks.