Determinants of credit risk: Empirical evidence from Indian commercial banks
-
DOIhttp://dx.doi.org/10.21511/bbs.18(2).2023.08
-
Article InfoVolume 18 2023, Issue #2, pp. 88-100
- Cited by
- 720 Views
-
358 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
Credit risk is a significant factor affecting the financial stability of banks. Keeping the credit risk under control is essential to maintain a bank’s cash flow. This paper examines the various profitability, microeconomic and macroeconomic indicators that affect a bank’s credit risk. The study uses the dataset of 31 banks from 2012 to 2021 and employs a panel data modelling approach to account for any variations in risk-taking behavior. The results revealed a statistically significant negative relationship between return on equity and credit risk when nonperforming loans proxy credit risk. This finding was consistent across fixed effect, random effect, and pooled OLS methods, at 1 percent significance (P value < 0.00), indicating that the extent of credit risk decreases as profitability increases. It was further found that bank age and ownership type positively affect a bank’s credit risk, while factors such as bank size and operational efficiency negatively affect credit risk when nonperforming loans proxy credit risk. Further, macroeconomic variables showed that gross domestic product is positively associated with credit risk, while inflation negatively affects credit risk. Overall, the findings of this paper demonstrated that credit risk is affected by both micro and macroeconomic factors. The paper also addresses significant policy implications as it helps various stakeholders to examine the determinants of credit risk, make credit decisions, and ultimately lower their credit risk.
- Keywords
-
JEL Classification (Paper profile tab)G32, G21
-
References59
-
Tables6
-
Figures0
-
- Table 1. Variables used in the study
- Table 2. Descriptive statistics
- Table 3. Pearson correlation matrix
- Table 4. VIF test results
- Table 5. Summary of model estimation results
- Table 6. Summary of model estimation results
-
- Abbas, F., Iqbal, S., & Aziz, B. (2019). The impact of bank capital, bank liquidity and credit risk on profitability in postcrisis period: A comparative study of US and Asia. Cogent Economics and Finance, 7(1), 1605683.
- Abdelaziz, H., Rim, B., & Helmi, H. (2020). The Interactional Relationships Between Credit Risk, Liquidity Risk and Bank Profitability in MENA Region. Global Business Review, 23(3), 561-583.
- Al-Eitan, G. N., & Bani-Khalid, T. O. (2019). Credit risk and financial performance of the Jordanian commercial banks: A panel data analysis. Academy of Accounting and Financial Studies Journal, 23(5), 1-13.
- Almaqtari, F. A., Al-Homaidi, E. A., Tabash, M. I., & Farhan, N. H. (2018). The determinants of profitability of Indian commercial banks: A panel data approach. International Journal of Finance and Economics, 24(1), 1-18.
- Al-Qudah, A. A., Hamdan, A., Al-Okaily, M., & Alhaddad, L. (2022). The impact of green lending on credit risk: evidence from UAE’s banks. Environmental Science and Pollution Research.
- Aluko, O. A., Kopalo, F. T., Adeyeye, P. O., & Oladele, P. O. (2019). Impact of Financial Risks on the Profitability of Systematically Important Banks in Nigeria. Paradigm, 23(2), 117-129.
- Alzoubi, T., & Obeidat, M. (2020). How size influences the credit risk in Islamic banks. Cogent Business and Management, 7(1), 1811596.
- Balla, E., & Rose, M. J. (2019). Earnings, risk-taking, and capital accumulation in small and large community banks. Journal of Banking and Finance, 103, 36-50.
- Baltagi, B. H. (2005). Econometric Analysis of Panel Data (3rd ed.). Wiley.
- Battaglia, F., & Mazzuca, M. (2014). Securitization and Italian banks’ risk during the crisis. The Journal of Risk Finance, 15(4), 458-478.
- Belaid, F., Boussaada, R., & Belguith, H. (2017). Bank-firm relationship and credit risk: An analysis on Tunisian firms. Research in International Business and Finance, 42, 532-543.
- Ben Jabra, W., Mighri, Z., & Mansouri, F. (2017). Determinants of European bank risk during financial crisis. Cogent Economics and Finance, 5(1).
- Bikker, J. A., & Vervliet, T. (2017). Bank Profitability and Risk-Taking Under Low Interest Rates (Working Paper No. 560). De Nederlandsche Bank.
- Brei, M., Jacolin, L., & Noah, A. (2020). Credit risk and bank competition in Sub-Saharan Africa. Emerging Markets Review, 44, 100716.
- Cerrato, M., Crosby, J., Kim, M., & Zhao, Y. (2017). The joint credit risk of UK global-systemically important banks. Journal of Futures Markets, 37(10), 964-988.
- Chowdhury, M. A. F., & Rasid, M. E. S. M. (2017). Determinants of Performance of Islamic Banks in GCC Countries: Dynamic GMM Approach. Advances in Islamic Finance, Marketing, and Management, 1(1), 49-80.
- Chu, S.-H., Yang, W., & Hu, J. (2016). The Impact of Interest Rates on Bank Risk-Taking: A Comparison Between State-Owned Banks and Joint-Stock Banks in China. Proceedings of 2015 2nd International Conference on Industrial Economics System and Industrial Security Engineering (pp. 359-365).
- Duho, K. C. T., Onumah, J. M., Owodo, R. A., Asare, E. T., & Onumah, R. M. (2020). Bank risk, profit efficiency and profitability in a frontier market. Journal of Economic and Administrative Sciences, 36(4), 381-402.
- Ekinci, R., & Poyraz, G. (2019). The Effect of Credit Risk on Financial Performance of Deposit Banks in Turkey. Procedia Computer Science, 158, 979-987.
- Focarelli, D., Panetta, F., & Salleo, C. (1995). “Why do banks merge?” Temi di discussione (Working Papers). Bank of Italy.
- Gadzo, S. G., Kportorgbi, H. K., & Gatsi, J. G. (2019). Credit risk and operational risk on financial performance of universal banks in Ghana: A partial least squared structural equation model (PLS SEM) approach. Cogent Economics and Finance, 7(1), 1589406.
- García-Alcober, M. P., Prior, D., Tortosa-Ausina, E., & Illueca, M. (2019). Risk-taking behavior, earnings quality, and bank performance: A profit frontier approach. BRQ Business Research Quarterly.
- Ghosh, A. (2017). Sector-specific analysis of non-performing loans in the US banking system and their macroeconomic impact. Journal of Economics and Business, 93, 29-45.
- Gujarati, D. N. (2003). Basic Econometrics (4th ed.). Tata McGraw-Hill.
- Gupta, J., & Kashiramka, S. (2020). Financial stability of banks in India: Does liquidity creation matter? Pacific Basin Finance Journal, 64, 101439.
- Gupta, N., & Mahakud, J. (2020). Ownership, bank size, capitalization and bank performance: Evidence from India. Cogent Economics and Finance, 8(1), 1808282.
- Iannotta, G., Nocera, G., & Sironi, A. (2007). Ownership structure, risk and performance in the European banking industry. Journal of Banking and Finance, 31(7), 2127-2149.
- İncekara, A., & Çetinkaya, H. (2019). Credit Risk Management: A Panel Data Analysis on the Islamic Banks in Turkey. Procedia Computer Science, 158, 947-954.
- Inekwe, J. N. (2020). Bank credit risk, grain production and the Indian economy. Applied Economics, 52(47), 5188-5202.
- Kharabsheh, B. (2019). Determinants of bank credit risk: Empirical evidence from Jordanian commercial banks. Academy of Accounting and Financial Studies Journal, 23(3).
- Klomp, J., & De Haan, J. (2014). Bank Regulation, the Quality of Institutions, and Banking Risk in Emerging and Developing Countries: An Empirical Analysis. Emerging Markets Finance and Trade, 50(6), 19-40.
- Lawrence, B., Doorasamy, M., & Sarpong, P. (2020). The Impact of Credit Risk on Performance: A Case of South African Commercial Banks. Global Business Review.
- Lee, T. H., & Chih, S. H. (2013). Does financial regulation affect the profit efficiency and risk of banks? Evidence from China’s commercial banks. North American Journal of Economics and Finance, 26, 705-724.
- Lepetit, L., Nys, E., Rous, P., & Tarazi, A. (2008). Bank income structure and risk: An empirical analysis of European banks. Journal of Banking and Finance, 32(8), 1452-1467.
- Liu, Y., Brahma, S., & Boateng, A. (2020). Impact of ownership structure and ownership concentration on credit risk of Chinese commercial banks. International Journal of Managerial Finance,16(2), 253-272.
- Louzis, D. P., Vouldis, A. T., & Metaxas, V. L. (2010). Macroeconomic and Bank-Specific Determinants of Non-Performing Loans in Greece: A Comparative Study of Mortgage, Business and Consumer Loan Portfolios (Working Paper No. 118). Bank of Greece.
- Madugu, A. H., Ibrahim, M., & Amoah, J. O. (2020). Differential effects of credit risk and capital adequacy ratio on profitability of the domestic banking sector in Ghana. Transnational Corporations Review,12(1), 37-52.
- Majumder, M. T. H., & Li, X. (2018). Bank risk and performance in an emerging market setting: the case of Bangladesh. Journal of Economics, Finance and Administrative Science, 23(46), 199-229.
- Menicucci, E., & Paolucci, G. (2016). The determinants of bank profitability: empirical evidence from European banking sector. Journal of Financial Reporting and Accounting, 14(1), 86-115.
- Misman, F. N., & Bhatti, M. I. (2020). The Determinants of Credit Risk: An Evidence from ASEAN and GCC Islamic Banks. Journal of Risk and Financial Management,13(5), 89.
- Mpofu, T. R., & Nikolaidou, E. (2018). Determinants of credit risk in the banking system in Sub-Saharan Africa. Review of Development Finance, 8(2), 141-153.
- Naili, M., & Lahrichi, Y. (2020). The determinants of banks’ credit risk: Review of the literature and future research agenda. International Journal of Finance and Economics, 27, 334-360.
- Naili, M., & Lahrichi, Y. (2022). Banks’ credit risk, systematic determinants and specific factors: recent evidence from emerging markets. Heliyon, 8(2), 1-16.
- Ngoc Nguyen. (2019). Revenue Diversification, Risk and Bank Performance of Vietnamese Commercial Banks. Journal of Risk and Financial Management,12(3), 138.
- Nikolaidou, E., & Vogiazas, S. D. (2014). Credit Risk Determinants for the Bulgarian Banking System. International Advances in Economic Research, 20(1), 87-102.
- Otero, L., Alaraj, R., & Lado-Sestayo, R. (2019). How corporate governance and ownership affect banks’ risk-taking in the MENA countries? European Journal of Management and Business Economics, 29(2), 182-198.
- Patra, B., & Padhi, P. (2020). Resilience of Indian banks: Macroeconomic stress test modeling for credit risk. Journal of Public Affairs, 22, 1-14.
- Saha, B., & Sensarma, R. (2013). State ownership, credit risk and bank competition: a mixed oligopoly approach. Macroeconomics and Finance in Emerging Market Economies, 6(1), 1-13.
- Saleh, I., & Abu Afifa, M. (2020). The effect of credit risk, liquidity risk and bank capital on bank profitability: Evidence from an emerging market. Cogent Economics and Finance, 8(1).
- Siddika, A., & Haron, R. (2019). Capital regulation and ownership structure on bank risk. Journal of Financial Regulation and Compliance, 28(1), 39-56.
- Sivasankaran, S. N., Shukla, A., Ayyalusamy, K., & Chakraborty, S. (2020). Do Women Directors impact the risk and return of Indian Banks? IIM Kozhikode Society & Management Review, 10(1), 44-65.
- Škrabić Perić, B., Rimac Smiljanić, A., & Aljinović, Z. (2018). Credit risk of subsidiaries of foreign banks in CEE countries: Impacts of the parent bank and home country economic environment. North American Journal of Economics and Finance, 46, 49-69.
- Soundariya, G., David, T. A., & Suresh, G. (2021). Nexus Between Interest Rate Risk and Economic Value of Equity of Banks. Global Business Review, 1-21.
- Srairi, S. (2019). Transparency and bank risk-taking in GCC Islamic banking. Borsa Istanbul Review, 19(1), S64-S74.
- Suresh, G., & Krishnan, A. P. (2020). Evaluating the performance of Indian banks: Eagles model approach. Finance India, 34(3), 999-1024.
- Suresh, G., & Zimik, M. Y. (2021). Corporate governance practices and shareholder protection in India. Finance India, 35(2), 545-562.
- Twum, A. K., Zhong Ming, T., Agyemang, A. O., Ayamba, E. C., & Chibsah, R. (2021). The impact of internal and external factors of credit risk on businesses: An empirical study of Chinese commercial banks. Journal of Corporate Accounting & Finance, 32(1), 115-128.
- Wang, J., Xia, B., & Huiling, Q. (2021). Time-varying impact of housing price fluctuations on banking financial risk. Managerial and Decision Economics, 43(2), 457-467.
- Yurdakul, F. (2014). Macroeconomic Modelling of Credit Risk for Banks. Procedia Social and Behavioral Sciences, 109, 784-793.