Sectoral concentration in loan portfolio and risk relationship: The case of Turkey

The essential principle of risk management is portfolio diversification. Within the framework of portfolio theory, the commercial banks have to optimally distribute the credit risk to the loan portfolio of customers. Therefore, the concentration risk is one of the main reasons which could be cause to expose the loans of a bank to loss. The aim of this paper is to analyze the effect of diversification by sector on the credit risk of loans that the commercial banks lend in Turkey. It is used as a measure of concentration of loans' portfolio which is called The Herfindahl-Hirschman Index (HHI) and it is analyzed that the annual data over the years 2002-2018 based on the method of dynamic panel data, which is precisely called Generalized Method of Moments (GMM). It is also examined that the effect of some other determinants on the nonperforming loans in the study. According to the results obtained, the effective diversification reduces the credit risk of loan porftolio for the 22 commercial banks' in the sample. It is also determined that the credit risk has strong and positive effects.