Macro-Economic and Bank-Specific Determinants of Credit Risk in Commercial Banks

(2021): Empirical Quests for Management Essences IT
Inadequate credit risk assessment procedures may have a significant negative influence on a financial institution’s operational performance, perhaps leading to liquidity concerns. It is hypothesized that different factors such as macroeconomic, and bank-specific factors affect the credit risk in financial institutions. The objective of this study is to check those factors responsible for credit risk. The data came from WDI and Bankscope databases. The data is balanced panel data of 106 private and state-owned commercial banks for 6 years (n=106, t=6). This study used Fixed Effect (FE), and Random Effect (RE) models. The results suggest that if inflation, interest rate, unemployment increase, the credit risk of commercial banks increases. The results also suggest that if GDP growth, efficiency, and bank size increase, the credit risk become minimized. Additionally, the credit risk is lower in private banks than in state-owned banks. The findings of this research, however, do not support the hypotheses that exchange rate and regulatory capitals influence credit risk.