Bank efficiency and undesirable output: An analysis of non-performing loans in the Brazilian banking sector

This study aims to analyze the impact of non-performing loans (NPLs) on the technical efficiency of banks in the Brazilian banking sector and to identify determinants of bank efficiency. The Directional Distance Function (DDF) method is used to measure banks' technical efficiency and identify the factors that affect it. The results show that NPLs negatively impact efficiency, compromising banking operations and reducing the ability to produce new loans, affecting profitability. From 2003 to 2019, foreign banks were, on average, more efficient than domestic public and private banks. During COVID-19 (2020-2022), federal public banks were the most efficient. The analysis also suggests that the low efficiency of domestic public banks is associated with the lower technical quality of state public banks. The practical implications of this study are that banks must manage their NPLs effectively to improve their efficiency and profitability. This study's originality lies in analyzing the determinants of bank efficiency in Brazil, which can help banks improve their efficiency and performance.

Automated summary

This study analyzes the impact of non-performing loans on the technical efficiency of banks in the Brazilian banking sector and identifies determinants of bank efficiency. The results show that non-performing loans have a negative impact on efficiency, with foreign banks being more efficient on average than domestic public and private banks. During COVID-19, federal public banks were the most efficient. The study also highlights the association between the low efficiency of domestic public banks and the lower technical quality of state public banks.