Abstract:
1. Introduction
The banking sector acts as the backbone of the economy. While individual
impacts of loan loss provisioning (LLP), asset quality (AQ), and capital
adequacy (CA) on bank performance are well studied, their combined roles
are less understood. This study fills this gap by examining the direct effects
of credit risk management (CRM), loan loss provisioning (LLP), and asset
quality (AQ) on bank performance, with loan loss provisioning (LLP) and
asset quality (AQ) as mediators and capital adequacy (CA) as a moderator.
2. Research methodology
Twenty-four licensed commercial banks were considered as the
population, and using the "purposive sampling technique," 15 banks were
selected as the sample. Panel data from 2012 to 2023 were obtained from
financial reports to analyze the relationship among the variables BP, CRM,
LLP, AQ, and CA variables. The 3SLS model in STATA for hypothesis testing
and the Sobel Test for mediation analysis were used.
3. Findings and Discussion
The results indicate a positive and significant relationship between CRM
and BP. Both LLP and AQ mediate the relationship between CRM and BP,
while CA moderates it, highlighting the need for financial stability.
However, excessive LLP and AQ negatively impact the performance.
4. Conclusion and Implications
Theoretically, effective risk mitigation strategies, newer risk models, and
stress testing practices are needed to reduce non-performing loans and
LLP. Practically, policymakers need to implement capital standards and
asset quality regulations based on the banks’ risk profiles to enhance the
market disciplines, assist investors, and estimate better loss-given credit.
