Effect of Credit Risk Management on Financial Performance of Banking Sector of Bangladesh: A Study on Generation Based Selected Listed Commercial Banks

Financial sector of the country is mostly comprised of banking institutions those are leading the economy with great exposure with the contribution in the development process. However, the banking sector of Bangladesh is disturbed with the large scale amount of non-performing loan while it has become an essential part of the finance of the industries. As part of the measurement of credit risk and macro factors average lending rate, inflation, npl size, capital adequacy ratio, liquidity ratio have been selected to test influence on the financial performance found through the return on asset of the selected banks. To conduct the study 9 banks of three generations have been selected for the period of 2016 to 2022. Robust least square method of regression , error correction term have been run to oversee the real impact on financial performance while endogenity and random walk in the values are being considered to overcome through dynamic regression model. NPL has negative impact on the performance and average lending rate, inflation, liquidity ratio and capital adequacy ratio brings positive impact on the financial performance of the banks.Breusch-Pagan LM test confirms that cross sectional dependency exists and VAR serial correlation test finds autocorrelation in the data set. Policy implication of this study suggests that high NPL ratio must be reduced and CAR and LR must be improved to get the desired results of the performance. Strong fiscal and banking regulation should implement so that governance can be ensured to create responsibility and financial strength.