Impact of Credit Risk Management on Profitability of Commercial Banks: An Estimation of Dynamic Panel Investigation from Bangladesh

Abstract

The profitability of commercial banks is influenced by a variety of internal and external factors. This study aims to identify and evaluate the bank-specific and macroeconomic determinants that affect the profitability of commercial banks in Bangladesh. The analysis is based on a dynamic panel data model using annual financial data from 10 commercial banks over a tenyear period, from 2014 to 2023. Return on Assets (ROA) and Return on Equity (ROE) are employed as the primary indicators of bank profitability. It providing a comprehensive measure of financial performance. The study considers a range of bank-specific factors, including the loan loss provision to total loan ratio (LLPTR), total loan to total asset ratio (TLTAR), total loan to total deposit ratio (TLTD), capital adequacy ratio (CAR), and non-performing loans to total loan ratio (NPLTL). In addition, key macroeconomic variables such as GDP growth rate (GDPGRR), inflation rate (INFR), exchange rate (ER), and real interest rate (RIR) are included to capture the broader economic environment. The empiricalfindings reveal that several bank-specific factors—specifically LLPTR, TLTAR, and CAR—exert significant influence on bank profitability, as do the macroeconomic variables INFR, ER, and RIR. These variables demonstrate a statistically significant relationship with both ROA and ROE, suggesting that both internal management decisions and external economic conditions play a critical role in shaping bank performance. The results indicate that prudent loan loss provisioning and effective capital management are critical for sustaining profitability, while efficient asset allocation further enhances performance. Conversely, the total loan to total deposit ratio (TLTD) and GDP growth rate (GDPGRR) do not show a statistically significant impact on profitability, indicating their limited predictive power in this context. For regulators, the evidence suggests that enhancing the supervisory framework around credit risk exposure and enforcing stricter capital adequacy standards could improve the sector's stability and profitability. The results of this study have practical implications for bank management, regulators, and policymakers, highlighting the need to strengthen capital adequacy, manage credit risk efficiently, and consider macroeconomic trends when formulating strategies to enhance the financial performance and stability of commercial banks in Bangladesh.