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

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