PREVENTION OF BANK NON-PERFORMING ASSETS IN WORKING CAPITAL FINANCING: ROLE OF FINANCIAL LITERACY IN IMPROVING BORROWER CREDIT BEHAVIOUR

Abstract

Non-performing assets (NPAs) have emerged as a major concern for the stability and efficiency of the banking sector, particularly in the context of working capital financing provided to small and medium-sized enterprises and business units. Inefficient utilisation of borrowed funds, weak financial planning, and limited financial awareness among borrowers often contribute to repayment difficulties, eventually leading to loan defaults. This study examines the roles of financial literacy and borrower education in preventing the occurrence of NPAs in working capital financing. The research explores how financial knowledge influences borrowers’ credit behaviour, working capital management practices, and repayment discipline.

This study adopts a descriptive and analytical research design and utilises both primary and secondary sources of information. Primary data were collected through structured questionnaires from borrowers engaged in small business activities who had availed working capital loans from banks. Secondary information was obtained from banking reports, academic literature, and publications of financial regulatory institutions. The analysis focuses on assessing the level of financial literacy among borrowers and examining its relationship with loan utilisation and repayment performance.

The findings indicate that borrowers with higher levels of financial literacy demonstrate stronger financial planning abilities, improved cash flow management, and greater awareness of credit obligations. Such borrowers are more likely to utilise working capital funds productively and maintain timely repayment of loan instalments. Conversely, borrowers with limited financial knowledge often face difficulties in managing business finances, which increases the risk of delayed repayment and potential loan default. Therefore, strengthening borrowers’ financial literacy can play a significant role in preventing the accumulation of NPAs in the banking system.