Loan growth and bank risk: empirical evidence from SAARC countries

During the last few decades, the world financial crisis sheds on the bank risk, which creates a direct threat to the existence of banks. This paper investigates the relationship between bank risk and loan growth in the South Asian economies. The study has collected data from BankFocus of 118 commercial banks from 2011 to 2019. This study explores three hypotheses explaining the relation between (i) Bank Risk and Loan Growth; (ii) Loan growth and Bank Profitability; and (iii) Loan growth and bank solvency. Results show that loan growth can induce bank risk in the South Asian economic region. At the same time, Banks' solvency and profitability are correlated to bank risk with statistical significance. Primarily OLS has been applied, followed by GMM estimation. Non-Performing Loan (NPL) has been used as the proxy of bank risk. Further, to check the robustness of the investigation, we have used ZSCORE as a replacement to NPL. The results derived from regressions can put light on banks' poor performance in the South Asian counties and, simultaneously, may set guidance for policymakers of emerging economies.