DETERMINANTS OF CREDIT RISK
Keywords:
Credit Risk, Non-Performing Assets, Loan Defaults, GMM Model, Dynamic Effects.
Abstract
This study aims to empirically examine the impact of managerial effectiveness on the credit risk of the Indian public and private sector banks. We consider the return on assets as a proxy for managerial effectiveness and gross non-performing assets (GNPA) to total advances as a proxy for credit risk. The study uses fixed effects and dynamic panel data models to examine the impact. The econometric model estimations suggest a negative impact of return on assets on credit risk. Further, we analyze the impact of return on assets by the information of microeconomic and macro-economic variables in dynamic generalized methods of moments (GMM) approach. The results remain the same after using dynamic GMM modelled with lagged credit risk and lagged return on assets. Further, the effect of macroeconomic variables such as repo rate and reverse repo rate confirms the theory. Heterogeneity checks at regions and sector levels substantiate the robustness of results.
JEL Classification Codes: G20, G21.
References
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Baranwal, G. (2018). Links between foreign direct investment and human capital formation: Evidence from the manufacturing sector in India, The Journal of International Trade & Economic Development, 28(2), 137-160, https://doi.org/10.1080/09638199.2018.1508304
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Bhattarai, B. (2018). Assessing Banks Internal and Macroeconomic Factors as Determinants of Non- Performing Loans: Evidence from Nepalese Commercial Banks. International Journal of Accounting & Finance Review, 3(1), 13-32. https://doi.org/10.46281/ijafr.v3i1.28
Bielecki, T. R., & Rutkowski, M. (2004). Credit Risk: Modeling, Valuation and Hedging. Springer Finance. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-04821-4_1
Curak, M., Poposki, K., & Pepur, S. (2012). Profitability determinants of the Macedonian banking sector in changing environment. Procedia-Social and Behavioral Sciences, 44, 406-416.
Cai, J., & Leung, P. (2020). A note on linkage between gross value added and final use at the industry level. Economic Systems Research, 32(3), 428 437.https://doi.org/10.1080/09535314.2020.1718617
Castro, V. (2013). Macroeconomic determinants of the credit risk in the banking system: The case of the GIPSI. Economic Modelling, 31, 672-683.https://doi.org/10.1016/j.econmod.2013.01.027
Das, A., & Ghosh, S. (2007). Determinants of Credit Risk in Indian State-owned Banks: An Empirical Investigation. Economic Issues Journal Articles, 12(2), 27-46.
Digal, S. K., Satpathy, A., & Behera, S. (2015). Macroeconomic factors affecting the NPAs in the Indian banking system: An empirical assessment. The IUP Journal of Bank Management, 14(1), 57 - 74.
Ghenimi, A., Chaibi, H., & Omri, M. A. (2017). The effects of liquidity risk and credit risk on bank stability: Evidence from the MENA region. Borsa Istanbul Review, 17(4), 238-248. https://doi.org/10.1016/j.bir.2017.05.002
Ghosh, A. (2015). Banking-industry specific and regional economic determinants of non-performing loans: Evidence from US states. Journal of Financial Stability, 20, 93-104. https://doi.org/10.1016/j.jfs.2015.08.004
Gulati, R., Goswami, A., & Kumar, S. (2019). What drives credit risk in the Indian banking industry? An empirical investigation. Economic Systems, 43(1), 42-62. https://doi.org/10.1016/j.ecosys.2018.08.004
Guerrero, T. E., Guevara, C. A., Cherchi, E., & Ortuzar, J. D. (2020). Addressing endogeneity in strategic urban mode choice models. Transportation. https://doi.org/10.1007/s11116-020-10122-y
Hofmann, B. (2005). Procyclicality: The Macroeconomic Impact of Risk-Based Capital Requirements. Financial Market Portfolio Management, 19, 179–200. https://doi.org/10.1007/s11408-005-3385-1
Khemraj, T., & Pasha, S. (2009). The Determinants of Non-performing Loans: An Econometric Case Study of Guyana. In Caribbean Centre for Banking and Finance Bi-annual Conference on Banking and Finance, St. Augustine, Trinidad.
Manab, N. A., Theng, N. Y., & Md-Rus, R. (2015). The Determinants of Credit Risk in Malaysia. Procedia - Social and Behavioral Sciences, 172, 301-308. https://doi.org/10.1016/j.sbspro.2015.01.368
Misman, F. N., Bhatti, I., Lou, W., Samsudin, S., & Rahman, N. H. (2015). Islamic Banks Credit Risk: A Panel Study. Procedia Economics and Finance, 31, 75-82. https://doi.org/10.1016/s2212-5671(15)01133-8
Nikolaidou, E., & Vogiazas, S. D. (2014). Credit Risk Determinants for the Bulgarian Banking System. International Advances in Economic Research, 20(1), 87-102. https://doi.org/10.1007/s11294-013-9444-x
Nkusu, M. (2011). Nonperforming Loans and Macro financial Vulnerabilities in Advanced Economies. IMF Working Papers, 11(161), 1-27. https://doi.org/10.5089/9781455297740.001
Ranjan, R., & Dhal, S. (2003). Non-Performing Loans and Terms of Credit of Public Sector Banks in India: an Empirical Assessment. Reserve Bank of India Occasional Paper 24(3), 81–121. Retrieved from https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/60613.pdf
Salas, V., & Saurina, J. (2002). Credit risk in two institutional regimes: Spanish commercial and saving banks. Journal of Financial Services Research, 22(3), 203-224. https://doi.org/0.1023/a:1019781109676
Tang, D. Y., & Yan, H. (2006). Macroeconomic Conditions, Firm Characteristics, and Credit Spreads. J Finan Serv Res 29, 177–210.https://doi.org/10.1007/s10693-006-7625-y
Turan, H. (2016). The Weighting of Factors Affecting Credit Risk in Banking. Procedia Economics and Finance, 38, 49-53. https://doi.org/10.1016/s2212-5671(16)30175-7
Valencia, F., & Laeven, L. (2008). Systemic Banking Crises: A New Database. IMF Working Papers, 08(224), 1. https://doi.org/10.5089/9781451870824.001
Vasishtha, G., & Rajaraman, I. (2002). Non-Performing Loans of PSU Banks. Economic and Political Weekly, 37(5).
Yurdakul, F. (2014). Macroeconomic Modelling of Credit Risk for Banks. Procedia - Social and Behavioral Sciences, 109, 784-793. https://doi.org/10.1016/j.sbspro.2013.12.544
Athanasoglou, P., Delis, M., & Staikouras, C. (2006). Determinants of the banks profitability in the south eastern European region. Munich Personnel Repec Archive.https://mpra.ub.uni-muenchen.de/id/eprint/10274
Baranwal, G. (2018). Links between foreign direct investment and human capital formation: Evidence from the manufacturing sector in India, The Journal of International Trade & Economic Development, 28(2), 137-160, https://doi.org/10.1080/09638199.2018.1508304
Bhattarai, B. P. (2019). Determinants of Commercial Banks’ Lending Behavior in Nepal. International Journal of Accounting & Finance Review, 4(1), 51-60. https://doi.org/10.46281/ijafr.v4i1.338
Bhattarai, B. (2018). Assessing Banks Internal and Macroeconomic Factors as Determinants of Non- Performing Loans: Evidence from Nepalese Commercial Banks. International Journal of Accounting & Finance Review, 3(1), 13-32. https://doi.org/10.46281/ijafr.v3i1.28
Bielecki, T. R., & Rutkowski, M. (2004). Credit Risk: Modeling, Valuation and Hedging. Springer Finance. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-04821-4_1
Curak, M., Poposki, K., & Pepur, S. (2012). Profitability determinants of the Macedonian banking sector in changing environment. Procedia-Social and Behavioral Sciences, 44, 406-416.
Cai, J., & Leung, P. (2020). A note on linkage between gross value added and final use at the industry level. Economic Systems Research, 32(3), 428 437.https://doi.org/10.1080/09535314.2020.1718617
Castro, V. (2013). Macroeconomic determinants of the credit risk in the banking system: The case of the GIPSI. Economic Modelling, 31, 672-683.https://doi.org/10.1016/j.econmod.2013.01.027
Das, A., & Ghosh, S. (2007). Determinants of Credit Risk in Indian State-owned Banks: An Empirical Investigation. Economic Issues Journal Articles, 12(2), 27-46.
Digal, S. K., Satpathy, A., & Behera, S. (2015). Macroeconomic factors affecting the NPAs in the Indian banking system: An empirical assessment. The IUP Journal of Bank Management, 14(1), 57 - 74.
Ghenimi, A., Chaibi, H., & Omri, M. A. (2017). The effects of liquidity risk and credit risk on bank stability: Evidence from the MENA region. Borsa Istanbul Review, 17(4), 238-248. https://doi.org/10.1016/j.bir.2017.05.002
Ghosh, A. (2015). Banking-industry specific and regional economic determinants of non-performing loans: Evidence from US states. Journal of Financial Stability, 20, 93-104. https://doi.org/10.1016/j.jfs.2015.08.004
Gulati, R., Goswami, A., & Kumar, S. (2019). What drives credit risk in the Indian banking industry? An empirical investigation. Economic Systems, 43(1), 42-62. https://doi.org/10.1016/j.ecosys.2018.08.004
Guerrero, T. E., Guevara, C. A., Cherchi, E., & Ortuzar, J. D. (2020). Addressing endogeneity in strategic urban mode choice models. Transportation. https://doi.org/10.1007/s11116-020-10122-y
Hofmann, B. (2005). Procyclicality: The Macroeconomic Impact of Risk-Based Capital Requirements. Financial Market Portfolio Management, 19, 179–200. https://doi.org/10.1007/s11408-005-3385-1
Khemraj, T., & Pasha, S. (2009). The Determinants of Non-performing Loans: An Econometric Case Study of Guyana. In Caribbean Centre for Banking and Finance Bi-annual Conference on Banking and Finance, St. Augustine, Trinidad.
Manab, N. A., Theng, N. Y., & Md-Rus, R. (2015). The Determinants of Credit Risk in Malaysia. Procedia - Social and Behavioral Sciences, 172, 301-308. https://doi.org/10.1016/j.sbspro.2015.01.368
Misman, F. N., Bhatti, I., Lou, W., Samsudin, S., & Rahman, N. H. (2015). Islamic Banks Credit Risk: A Panel Study. Procedia Economics and Finance, 31, 75-82. https://doi.org/10.1016/s2212-5671(15)01133-8
Nikolaidou, E., & Vogiazas, S. D. (2014). Credit Risk Determinants for the Bulgarian Banking System. International Advances in Economic Research, 20(1), 87-102. https://doi.org/10.1007/s11294-013-9444-x
Nkusu, M. (2011). Nonperforming Loans and Macro financial Vulnerabilities in Advanced Economies. IMF Working Papers, 11(161), 1-27. https://doi.org/10.5089/9781455297740.001
Ranjan, R., & Dhal, S. (2003). Non-Performing Loans and Terms of Credit of Public Sector Banks in India: an Empirical Assessment. Reserve Bank of India Occasional Paper 24(3), 81–121. Retrieved from https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/60613.pdf
Salas, V., & Saurina, J. (2002). Credit risk in two institutional regimes: Spanish commercial and saving banks. Journal of Financial Services Research, 22(3), 203-224. https://doi.org/0.1023/a:1019781109676
Tang, D. Y., & Yan, H. (2006). Macroeconomic Conditions, Firm Characteristics, and Credit Spreads. J Finan Serv Res 29, 177–210.https://doi.org/10.1007/s10693-006-7625-y
Turan, H. (2016). The Weighting of Factors Affecting Credit Risk in Banking. Procedia Economics and Finance, 38, 49-53. https://doi.org/10.1016/s2212-5671(16)30175-7
Valencia, F., & Laeven, L. (2008). Systemic Banking Crises: A New Database. IMF Working Papers, 08(224), 1. https://doi.org/10.5089/9781451870824.001
Vasishtha, G., & Rajaraman, I. (2002). Non-Performing Loans of PSU Banks. Economic and Political Weekly, 37(5).
Yurdakul, F. (2014). Macroeconomic Modelling of Credit Risk for Banks. Procedia - Social and Behavioral Sciences, 109, 784-793. https://doi.org/10.1016/j.sbspro.2013.12.544
Published
2021-02-27
How to Cite
Riyazahmed, K., & Baranwal, G. (2021). DETERMINANTS OF CREDIT RISK. International Journal of Accounting & Finance Review, 6(1), 53-71. https://doi.org/10.46281/ijafr.v6i1.1005
Section
Regular Research Article/ Short Communication Article
Copyright (c) 2021 K. Riyazahmed, Gunja Baranwal
This work is licensed under a Creative Commons Attribution 4.0 International License.
