The Determinants of Credit Risk in Commercial Banks of Pakistan

Abstract

Purpose: The purpose of the concern study is to investigate the determinants of credit risk (CR) of commercial banks in Pakistan.Variable Specification: The explanatory variable of the concern study are macro and bank specific variable that has been used in the study. Macro variable includes GDP growth (GDPGR) and growth in interest rate(IRGR), while the bank specific variable consist capital adequacy ratio(CAR), growth in advances(ADVNGR), operation inefficiency(OPINF), loan to depots ratio(LD), loan loss provision (LLP) and size of the bank. The dependent variable of the study was credit risk (CR) which is measured as the ratio of non-performing loan to total loan.Design/Methodology: The size of the sample consist 26 commercial banks covering data period from 2007-2013. This macro date was collect from state bank website and annually financial statement of commercial banks. The relationship among independent and dependent variable will be estimated through OLS regression (ordinary least square method). Panel data model such as, fixed affect model and random affect models were used to conduct detail panel data analysis. The robustness of the results will be statistically checked through Hausman specification test.Findings: The results show that there capital adequacy ratio and loan loss provision had highly significant positive correlate with credit risk, while this study shows that operating inefficiency, growth in GDP and growth in advances had significant relation with credit.  Furthermore return on asset (ROA) and size have been significant but negative impact on credit risk in commercial banks of Pakistan. Growth in interest rate has no impact on credit risk in commercial bank of Pakistan. The correlation value independent variables have less than one.While though applied the fixed effect and random affect models will be used to conduct detail panel data analysis. It was revealed that operating inefficiency, loan deposit ratio, and size has insignificant relation with credit risk in commercial banks of Pakistan. The relationship of growth in advance is negative with capital adequacy ratio having value (-0.48). While the relation with credit risk and growth in GDP is positive. Growth in advances has negative relation with LD, LLP, OPINF, ROA and size.

Keywords: Credit risk, Macroeconomic factors, bank specific factors