Dear Researchers,
I want to construct an index of financial stability using Six indicators. NPL/TL is contributing negatively. Can you please guide me how to treat this negative value during index construction
As we know negative NPL is practically not possible. It come in rare situation where provision for NPL was set higher in previous period than actual. There are two possibility, first adjust it with NPL of last period and make current period 0. second is mathematical solution of scaling, add maximum NPL+1 into all values. It will make it positive and statistical characteristics will also not change.
NPL ratio is pretty simple.its not possible for this to contribute negatively. In your case there could be an outside possibility with the issue of off-balance sheet items, eg loan commitments and financial guarantees which might have been clubbed twice due to the guidelines that if any part of an exposure is identified as non-performing, then bank must add the whole outstanding value of the on-balance sheet exposure is to be identified as NPL.
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