Determinants of credit risk: Empirical evidence from Indian commercial banks


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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.

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    • 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
    • Conceptualization
      Tisa Maria Antony, Suresh G.
    • Data curation
      Tisa Maria Antony
    • Formal Analysis
      Tisa Maria Antony
    • Investigation
      Tisa Maria Antony, Suresh G.
    • Methodology
      Tisa Maria Antony
    • Software
      Tisa Maria Antony
    • Validation
      Tisa Maria Antony, Suresh G.
    • Writing – original draft
      Tisa Maria Antony
    • Writing – review & editing
      Tisa Maria Antony, Suresh G.
    • Visualization
      Suresh G.