Journal of Commerce and Accounting Research

Open Access Open Access  Restricted Access Subscription Access
Open Access Open Access Open Access  Restricted Access Restricted Access Subscription Access

The Impact of Credit Risk Management on Profitability of Public Sector Commercial Banks in India


Affiliations
1 School of Management Studies, Punjabi University, Patiala, Punjab, India
     

   Subscribe/Renew Journal


The banking industry has experienced many financial crises in the past few decades. In the recent times, US subprime lending crisis of 2007-08 has appeared to be as one of the worst financial crisis. Credit risk management has gained lots of importance due to financial crises faced by the banking system which affected many countries across the globe. Credit risk is to be handled carefully and effectively in a banks because it determines the bank’s survival, growth and profitability. This present study tries to explore an empirical association between the credit risk management and banks’ financial performance. An attempt has been made to know the statistical impact of credit risk management indicators on profitability of public sector commercial banks for the period 2010-2017. The present research focuses on top ten public sector commercial banks selected on the basis of total assets. The panel regression is applied for the purpose of analysis of data. In panel model equation, credit risk management is considered as independent variable measured by non- performing loans ratio (NPLR), loan loss provision ratio (LLPR), capital adequacy ratio (CAR), asset quality ratio (AQ), management (M), earnings (E) and liquidity (L) whereas banks’ profitability is taken as dependent variable measured by return on assets (ROA). The results of the research reveal that credit risk management indicators have a significant influence on the financial performance of selected public sector banks in India. The empirical findings indicate that ROA (profitability) is positively related to CAR, management quality and earnings ability whereas it is found to be negatively related to AQ and liquidity.

Keywords

Credit Risk, Return on Assets, Non-Performing Assets, Profitability, Capital Adequacy Ratio.
Subscription Login to verify subscription
User
Notifications
Font Size


  • Idowu, I., & Samuel, O. A. (2014). The impact of credit risk management on the commercial banks performance in Nigeria. International Journal of Management and Sustainability, 3(5), 295-306.

  • Achou, T. F., & Tenguh, N. C. (2008). (2008). Bank performance and credit risk management. Master Thesis. University of Skived.

  • Adeusi, S. O., Akeke, N. I., Adebisi, O. S., & Oladunjoye, O. (2013). Risk management and financial performance of banks in Nigeria. IOSR Journal of Business and Management, 14(6), 52-56.

  • Aduda, J., & Gitonga, J. (2011). The relationship between credit risk management and profitability among the commercial banks in Kenya. Journal of Modern Accounting and Auditing, 7(9), 934-946.

  • Alshatti Ali, S. (2015). The effect of credit risk management on financial performance of the Jordanian commercial banks. Investment Management and Financial Innovations, 12(1).

  • Basel (1999). Principles for the management of credit risk. Consultative paper issued by the Basel Committee on Banking Supervision, Basel.

  • Basel Committee on Banking Supervision. (2001). Risk Management Practices and Regulatory Capital: Cross-Sectional Comparison. (Available at www.bis.org)

  • Boahene, S. H., Dasah, J., & Agyei, S. K. (2012). Credit Risk and Profitability of Selected Banks in Ghana. Research Journal of Finance and Accounting, 3(7).

  • Fredrick, O. (2012). The impact of credit risk management on financial performance of commercial banks in Kenya. DBA Africa Management Review, 3(1), 22-37.

  • Gakure, R. W., Ngugi, J. K., Ndwiga, P. M., & Waithaka, S. M. (2012). Effect of Credit Risk Management Techniques on the performance of Unsecured Bank Loans employed Commercial Banks in Kenya. International Journal of Business and Social Research (IJBSR), 2(4).

  • Gizaw, M., Kebede, M., & Selvaraj, S. (2015). The impact of credit risk on profitability performance of commercial banks in Ethiopia. African Journal of Business Management, 9(2), 59-66.

  • Greuning, H. V., & Bratanovic, S. B. (2009). Analysing banking risk: A framework for assessing corporate governance and financial risk (3rd ed.). The World Bank, Washington D.C.

  • Gujarati, D. N. (2004). Basic econometrics (4th ed.). McGraw-Hill Companies.

  • Hempel, G. H., & Simonson, D. G. (1998). Bank management text and cases. Wiley, New York.

  • Hempell H. (2002). Testing competition among the German banks. Discussion paper 04/02 of the deutsche bundesbank.

  • Hosna, A., Manzura, B., & Juanjuan, S. (2009). Credit Risk Management and Profitability in Commercial Banks in Sweden. Master thesis, University of Gothenburg.

  • Isanzu, J. S. (2017). The impact of credit risk on the financial performance of Chinese Banks. Journal of International Business Research and Marketing, 2(3), 14- 17.

  • Kaaya, I., & Pastory, D. (2013). Credit risk and commercial banks performance in Tanzania: A Panel Data Analysis. Research Journal of Finance and Accounting, 4(16).

  • Kithinji, A. M. (2010). Credit Risk Management and Profitability of commercial banks in Kenya. School of Business, University of Nairobi, Kenya.

  • Kolapo, T. F., Ayeni, R. K., & Oke, M. O. (2012). Credit risk and commercial banks’ performance in Nigeria: A panel model approach. Australian Journal of Business and Management Research, 2(2).

  • Li, F., & Zou, Y. (2014). The impact of credit risk management on profitability of commercial banks: A study of Europe. Master Thesis, Umea University.

  • Muriithi, J. G., Waweru, K. M., & Muturi, W. M. (2016). Effect of credit risk on financial performance of commercial banks Kenya. IOSR Journal of Economics and Finance, 7(4), 72-83.

  • Noor, M. A., Das, P. C., & Banik, B. P. (2018). Impact of credit risk management on financial performance of banks: A study of major state-owned commercial banks in Bangladesh. The Cost and Management, 46(1).

  • Oke, M. O., Ayeni, R. K., & Kolapo, T. F. (2012). Credit risk and commercial Bank`s performance in Nigeria: A panel model approach. Australian Journal of Business and Management research, 2(2), 31-38.

  • Poudel, R. P. S. (2012). The impact of credit risk management on financial performance of commercial banks in Nepal. International Journal of Arts and Commerce, 1(5).

  • Psillaki, M., Tsolas, I. E., & Margaritis, D. (2010). Evaluation of credit risk based on firm performance. European Journal of Operational Research, 201(3), 873-888.

  • Rozzani, N., & Rahman, R. A. (2013). Camels and performance evaluation of banks in Malaysia: conventional versus Islamic. J Islamic Finance Bus Res, 2(1), 36-45.

  • Sayrs, L. W. (1989). Pooled Time Series Analysis. Issue 70.

  • Shanmugan, B., & Bourke, P. (2003). The management of financial institutions: Selected readings. Addison-Wesley Publishing, Reading, MA.

  • Singh, A. (2015). Performance of credit risk management in Indian commercial banks. International Journal of Management and Business Research, 5(3), 169-188.


Abstract Views: 333

PDF Views: 0




  • The Impact of Credit Risk Management on Profitability of Public Sector Commercial Banks in India

Abstract Views: 333  |  PDF Views: 0

Authors

Liaqat Ali
School of Management Studies, Punjabi University, Patiala, Punjab, India
Sonia Dhiman
School of Management Studies, Punjabi University, Patiala, Punjab, India

Abstract


The banking industry has experienced many financial crises in the past few decades. In the recent times, US subprime lending crisis of 2007-08 has appeared to be as one of the worst financial crisis. Credit risk management has gained lots of importance due to financial crises faced by the banking system which affected many countries across the globe. Credit risk is to be handled carefully and effectively in a banks because it determines the bank’s survival, growth and profitability. This present study tries to explore an empirical association between the credit risk management and banks’ financial performance. An attempt has been made to know the statistical impact of credit risk management indicators on profitability of public sector commercial banks for the period 2010-2017. The present research focuses on top ten public sector commercial banks selected on the basis of total assets. The panel regression is applied for the purpose of analysis of data. In panel model equation, credit risk management is considered as independent variable measured by non- performing loans ratio (NPLR), loan loss provision ratio (LLPR), capital adequacy ratio (CAR), asset quality ratio (AQ), management (M), earnings (E) and liquidity (L) whereas banks’ profitability is taken as dependent variable measured by return on assets (ROA). The results of the research reveal that credit risk management indicators have a significant influence on the financial performance of selected public sector banks in India. The empirical findings indicate that ROA (profitability) is positively related to CAR, management quality and earnings ability whereas it is found to be negatively related to AQ and liquidity.

Keywords


Credit Risk, Return on Assets, Non-Performing Assets, Profitability, Capital Adequacy Ratio.

References