Assessing the Impact of Credit Risk on Bank Profitability: The Moderating Role of Capital Adequacy and the Mediating Role of Loan Quality

Abstract

Aim:
This study aims to assess the impact of credit risk on bank profitability in the Delhi NCR banking sector, while examining the moderating role of capital adequacy and the mediating role of loan quality. The research addresses a key gap in existing literature by incorporating both moderation and mediation analysis within a regional banking context.

Methodology:
A quantitative, cross-sectional, and explanatory research design was employed. Data was collected from 435 banking professionals working in commercial, private, foreign, and other banks in Delhi NCR using a structured questionnaire. The study applied purposive sampling to ensure respondents had relevant expertise in credit, risk management, finance, internal audit, or executive functions.

Statistical Methods:

The analysis involved descriptive statistics, reliability testing (Cronbach’s alpha), normality assessment (Shapiro–Wilk test), Pearson correlation, multiple regression, moderation analysis, and mediation analysis using regression-based techniques.

Results:
Findings revealed a significant negative relationship between credit risk and bank profitability. Capital adequacy was found to positively moderate this relationship, reducing the adverse impact of credit risk. Loan quality partially mediated the relationship, indicating that improvements in asset quality can offset some negative effects of credit risk on profitability. The integrated model explained a substantial proportion of the variance in bank profitability, with strong statistical significance across all tests.

Originality/Value:
This study contributes to the literature by integrating moderation and mediation effects into the credit risk–profitability framework within an emerging market context, specifically the underexplored Delhi NCR banking sector. It provides both theoretical advancements—supporting the risk–return trade-off and capital buffer theories—and practical guidance for banking professionals and policymakers on strengthening capital structures and loan quality to sustain profitability.