mpact of Credit Risk on Financial Soundness of Commercial Bank in Bangladesh

Abstract

This study examines the impact of credit risk on the financial soundness of commercial banks in Bangladesh using panel data analysis with the STATA software. Financial soundness is primarily measured by Return on Equity (ROE), while key credit risk indicators include Non-Performing Loans (NPL), Loan Loss Provision Ratio (LLPR), and Loan-to-Deposit Ratio (LDR). In addition, Capital Adequacy Ratio (CAR), Capital to Risk-Weighted Assets Ratio (CRAR), and macroeconomic condition represented by GDP growth are incorporated to provide a comprehensive assessment. The analysis is based on secondary data collected from annual reports of selected commercial banks over a specified time period. The study applies econometric techniques such as descriptive statistics, correlation analysis, and regression modeling to identify the relationship between credit risk variables and bank performance. The findings suggest that credit risk has a significant influence on the financial stability of banks. Specifically, higher levels of NPL and LLPR negatively affect ROE, indicating that poor credit quality reduces profitability and weakens financial soundness. On the other hand, LDR shows a mixed effect, implying that while increased lending can enhance returns, excessive lending may expose banks to higher risk. CAR and CRAR are found to have a positive relationship with financial soundness, highlighting the importance of maintaining adequate capital buffers to absorb potential losses. GDP growth also plays a supportive role, as favorable economic conditions contribute to improved loan performance and overall banking stability. Overall, the study concludes that effective credit risk management is crucial for ensuring the financial health of commercial banks in Bangladesh. Banks should strengthen their loan monitoring systems, maintain optimal capital levels, and adopt prudent lending policies to minimize default risk. The results of this study provide useful insights for bank management, policymakers, and regulators in formulating strategies to enhance the resilience and sustainability of the banking sector.