The impact of internal and external factors of credit risk on businesses: An empirical study of Chinese commercial banks

Credit risk has great impact on the banks' profitability as large chunk of banks' revenue and interest income comes from loans. Factors that affects credit risk can be classified into microeconomic and macroeconomic factors. These factors have an impact on credit risk levels. Using secondary data from 2005 to 2018 for listed commercial banks on the two stock exchanges in China mainland, the study explored the effect of both internal and external factors that influences credit risk in the banking industry. A positive relationship was found between bank solvency and credit risk. Similarly, the study revealed a positive correlation between credit risk and interest rate. On the contrary, operation efficiency and gross domestic product growth rate revealed an inverse relationship with credit risk. The findings will add up to existing literature and guide policy‐makers in implementing measures to control the influencing factors of credit risk in the banking industry.