How digital transformation affects credit risk: Evidence from Chinese commercial banks

Based on bank-level data from 214 Chinese commercial banks spanning from 2011 to 2023, our study investigates the impact of digital transformation on their credit risk. The empirical results reveal that digital transformation in banks leads to an increase in credit risk. The digital transformation process of banks has diminished the utilization of soft information, as shown in the mechanism analysis, thereby impacting the overall credit risk. This effect varies with changes in the proportion of loans to small and micro enterprises (SMEs) and the bank's capability to apply digital technology. A higher proportion of loans to SMEs intensifies the impact of digital transformation on credit risk, whereas enhancing the bank's digital capabilities can mitigate this effect. Furthermore, we observed a strong heterogeneity in the relationship between digital transformation and credit risk across different types of banks. These findings offer a deeper understanding of the digital transformation behaviors of Chinese banks and highlight the potential risks for local, smaller banks that undertake digital transformation initiatives without due consideration or over-rely on digital technology.