The study inspects the factors of Non-Performing Loans in Pakistan during the period 2000 to 2011 taking in account both of the macroeconomic as well as microeconomic variables. The study reveals that both of the macroeconomic as well as microeconomic variables are playing vital role in the evolution of NPLs in Pakistan, but the macroeconomic variables were found to have a high explanatory power as compared to microeconomic factors i.e bank specific factors. The examination of feedback using panel vector auto regressive and impulse response functions (IRF) broadly confirms strong macro-financial linkages. The results of IRF not only confirms the response of NPLs to macroeconomic conditions like inflation and real GDP, but the analysis also reveals strong impacts of banking system on the real economy, thus indicating that high level of NPLs in the country affect severely the pace of economic growth. Supervisor:- Dr. Hassan M. Mohsin