Bank-specific and Macroeconomic Determinants of Credit Risk in the Banking System: A Panel Data Analysis

This study examines the determinants of credit risk in Nepalese commercial banks, emphasizing macroeconomic and bank-specific factors. The study utilizes a random effects regression model to investigate the impact of various factors on non-performing loans using panel data from 10 commercial banks in Nepal from 2013–2022. The study's theoretical framework draws on established economic theories, including Kalecki's business cycle theory and Diamond & Dybvig's banking theory. It aims to contextualize the relationship between credit risk and various influencing factors. The theory sets the stage for analyzing credit risk determinants in Nepalese banks. The findings demonstrate that non-performing loans are significantly and positively associated with bank size and return on assets, whereas asset quality and bank age have a negative and significant impact. The capital adequacy ratio exhibits a positive but insignificant impact. Among macroeconomic variables, the inflation rate has a positive and significant impact on non-performing loan, whereas real gross domestic product growth reveals a positive but insignificant relationship. These findings are of utmost importance for bank managers and policymakers in Nepal, as they provide valuable insights to enhance credit risk management practices and maintain financial stability in the banking sector.