Abstract
PurposeAmong all of the world's continents, Asia is the most important continent and contributes 60% of world growth but facing the serving issue of high nonperforming loans (NPLs). Therefore, the current study aims to capture the effect of credit risk management and bank-specific factors on South Asian commercial banks' financial performance (FP). The credit risk measures used in this study were NPLs and capital adequacy ratio (CAR), while cost-efficiency ratio (CER), average lending rate (ALR) and liquidity ratio (LR) were used as bank-specific factors. On the other hand, return on equity (ROE) and return on the asset (ROA) were taken as a measure of FP.Design/methodology/approachSecondary data were collected from 19 commercial banks (10 commercial banks from Pakistan and 9 commercial banks from India) in the country for a period of 10 years from 2009 to 2018. The generalized method of moment (GMM) is used for the coefficient estimation to overcome the effects of some endogenous variables.FindingsThe results indicated that NPLs, CER and LR have significantly negatively related to FP (ROA and ROE), while CAR and ALR have significantly positively related to the FP of the Asian commercial banks.Practical implicationsThe current study result recommends that policymakers of Asian countries should create a strong financial environment by implementing that monetary policy that stimulates interest rates in this way that automatically helps to lower down the high ratio of NPLs (tied monitoring system). Liquidity position should be well maintained so that even in a high competition environment, the commercial is able to survive in that environment.Originality/valueThe present paper contributes to the prevailing literature that this is a comparison study between developed and developing countries of Asia that is a unique comparison because the study targets only one region and then on the basis of income, the results of this study are compared. Moreover, the contribution of the study is to include some accounting-based measures and market-based measures of the FP of commercial banks at a time.
Highlights
Around the globe, depository institutions perform a crucial job in bringing financial stability and economic growth by mobilizing monetary resources across multiple regions (Accornero et al, 2018)
The current study investigates the interrelationship between credit risk, bank-specific factors risk and financial performance (FP)
The mean value of return on the asset (ROA) and return on equity (ROE) is 0.986 and 7.964 with a standard deviation of 1.905 and 39.175, respectively, which shows that ROE has much higher variation than ROA
Summary
Depository institutions perform a crucial job in bringing financial stability and economic growth by mobilizing monetary resources across multiple regions (Accornero et al, 2018). The commercial plays an intermediary role by collecting the excessive amount from savers and issuing loans to the borrowers. Accornero et al (2018) found that the country’s banking industry mostly collapses due to high credit risk. Banks tried to increase their financial performance (FP) by issuing loans while playing their intermediary role; banks have a high chance of facing credit risk. Sometimes, it leads to the failures of the whole financial system. Commercial banks’ FP is affected by two factors: one is external and the other is internal. The abovementioned financial problems are turmoil period in the banking/financial sector
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