Abstract
This study investigated the impact of banking management on credit risk using a sample of Indian commercial banks. The study employed dynamic panel estimations to evaluate the link between banking management variables and credit risk. The empirical results show that an increase in loan portion over total assets does not necessarily increase problem loans. The findings suggest that high capital requirements and large bank size do not reduce default risk, whereas high profitability and strong income diversification policies lower the likelihood of default risk. The overall empirical results supported the “operating efficiency”, “diversification” and “too big to fail” hypotheses, confirming that credit quality in the banking industry is mainly driven by profitability, banking supervision, high credit standards and strong investment strategies. The findings are relevant to bank managers, investors and bank regulators, in formulating effective credit policies and investment strategies.
Highlights
The non-performing loan (NPL) is a significant predictor of a bank run and is a major source of financial vulnerability all over the world
We empirically investigate the relationship between credit risk and banking management using a panel of Indian commercial banks
The empirical results suggest that large-sized banks have less efficient lending practices compared to small-sized banks and that bank size fails to work as a proxy for diversification. These findings suggest an increase in bank size does not necessarily reduce the possibility of bad loans (El-Maude et al 2017), contrary to the findings of Curak et al (2013) who argued that large-sized banks have low defaults on loans due to their ability to manage the problem of asymmetric information
Summary
The non-performing loan (NPL) is a significant predictor of a bank run and is a major source of financial vulnerability all over the world. Cost efficiency is represented by the ratio between operating expenses and total assets (Berger and DeYoung 1997) and is a primary factor for improving loan quality (Podpiera and Weill 2008) It is widely used as a proxy for the bad management hypothesis (Kwan and Eisenbeis 1997). Inefficient banks tend to advance loans with low credit standards to cover cost inefficiencies (Altunbas et al 2007; Williams 2004), whereas efficient banks tend to hold relatively safer loans (Fiordelisi et al 2011) This indicates that operationally inefficient banks (i.e., banks with inefficient management) have a high tendency to grant risky loans (Gorton and Rosen 1995; Kwan and Eisenbeis 1997). Several studies have suggested bank size as a strong determinant of problem loans, Khemraj and Pasha (2016) showed bank size as a statistically insignificant determinant of credit risk in the Guyanese banking industry
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
