Investigating the Influence of Credit Risk on Financial Performance of Conventional Commercial Banks in Bangladesh
DOI:
https://doi.org/10.18034/ajtp.v13i1.758Keywords:
Credit Risk Management, Financial Performance, Commercial Banks in Bangladesh, Non-Performing Loans (NPL), Return on Assets (ROA), Return on Equity (ROE), Capital Adequacy Ratio (CAR)Abstract
In Bangladesh, the banking sector is an essential part of the economy, driving long-term growth and productivity. Its advancement is essential to maintaining economic stability. Effective credit risk management is becoming increasingly important in preventing crises, promoting equitable economic development, and increasing profitability. The main objective of this study is to explore the impact of credit risk indicators and internal bank factors on financial performance indicators of the conventional commercial banks in Bangladesh. To achieve this objective, this study compiledthe required data from the sample banks' audited annual reports over the ten-year period. The study employed regression analysis to assess the collected data. Simple regression analysis revealed both significant and insignificant relationships between various dependent and independent variables. Multiple regression analysis results indicate that, while RAR, LDR, CAR, BA, and BS (measured by total assets) have no effect on financial performance as evaluated by NPR, LER, and NPLR, LER and NPLR have a statistically significant impact. Furthermore, ROA, a measure of financial performance, is affected by LER, BS, and NPLR, but not by RAR, LDR, CAR, or BA. In addition, when it came to financial performance as evaluated by ROE, BS, and NPLR, these metrics showed an influence on attitudes, whereas RAR, LDR, LER, CAR, and BA showed no such influence. Finally, as a measure of financial performance, earnings per share are statistically significantly affected by LDR, LER, CAR, BA, and BS, whereas RAR and NPLR had no significant effect. It is recommended that the banking sector regularly review its credit risk control policies to minimize loan defaults. Effective credit management policies should be implemented to ensure financial stability by adopting prudent lending rules, encouraging responsible borrowing, and reducing the risks and losses associated with borrower defaults, as the banking sector is essential to economic strength and sustainability.
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