An Empirical Study on the Effect of Credit Concentration on DSE Listed Banks’ Risk and Return

This study makes an endeavor to experimentally find out the impact of credit concentration on DSE (Dhaka Stock Exchange) listed banks’ risk and return. Banking industry in Bangladesh is going through a turbulent situation due to increase in the size of NPL (Non-Performing Loan) which undermines banks’ profitability. The objective of this paper is to assess the impact of credit concentration on banks’ risk and return. We took Hirshmann-Herfindahl Index to measure the portfolio concentration, RoE (Return on Equity) as measurement of banks’ return and NPL (Non-Performing Loan) as measurement of banks risk. In this report we have collected data of five DSE (Dhaka Stock Exchange) listed private commercial banks from 2014 to 2018. We found that the concentration is highest in manufacturing, trade finance and readymade garments sector. Of the total loan portfolio of five banks from 2014 to 2018, 34% is concentrated in manufacturing sector, 19% is concentrated in trade finance, and 18% is concentrated in RMG (Ready Made Garments). The banks have lowest concentration in agricultural sector 2% of its total loan portfolio is given to agricultural sector on average during the period of study. Although concentration in SME (Small and Medium-sized Enterprises) sector, one of the most promising sectors in our country, is increasing but even then the portfolio concentration in SME sector is barely 8%. We regressed the concentration measure on banks NPL (Non-Performing Loan) and ROE (Return on Equity). The major findings we got are bank’s return and loan concentration is inversely related and this relationship is established at 5% significance level. However, insignificant relationship is found between loan concentration and NPL (Non-Performing Loan). The recommendations for the banking sector are banks should diversify their portfolio as it would yield more return for the shareholders’ of the banks, more extensive study is required to establish the relation between NPL(Non-Performing Loan) and loan concentration, bank should increase its size of portfolio in the SME (Small and Medium-sized Enterprises) sector which is a promising sector for an emerging economy, and banks should try to reduce their loan concentration to the optimum level for RMG (Ready Made Garments), trade finance and manufacturing industry.