The Impact of Credit and Liquidity Risk on Bank Performance

Abstract

Banks exist to make a profit so that they can continue to operate, grow, and expand. Bank stability has been challenged over the previous two decades as a result of political intervention, nonperforming loans (NPLs), and interest rate changes. They need to monitor these micro and macro-level factors to identify and manage risk. Thus, the current study explores the impact of credit risk (NPL, Z-Score) and liquidity risk (LR) on the performance of South Asian banks measured with ROA and ROE. The sample of the study comprised a total of 35 listed banks of South Asian Countries (Pakistan (20) and India (15)) and the sample period spans 10 years from 2011 to 2020. The information was obtained from data stream and the financial statements of selected banks listed on the Pakistan Stock Exchange (PSX) and Bombay Stock Exchange (BSE). The findings show that credit and liquidity risk has a major impact on the performance of South Asian banks. Overall, credit risk has a negative impact on bank performance. However, the Z-score value in the estimation derived with ROE, on the other hand, demonstrates a positive connection with bank performance. The current study’s findings suggest that bank management in developing countries should provide timely monitoring and supervision of their long-term borrowers to control credit risk.