Authors: Pankaj Kumar Patel, Neha Prajapati, Bharti Kushwaha, Sunil Kumar Meena
Abstract: Management of credit risk is a key factor that contributes towards financial stability and sustainability in the commercial banking industry in the international business environment. The current study seeks to analyze the effects of credit risk management on the financial performance of commercial banks in a ten year period starting in 2014 up to 2023. Using econometric modeling approach, the financial performance is measured using Return on Asset (ROA) and Return on Equity (ROE) and credit risk management using Non-Performing Loan Ratio (NPLR), Capital Adequacy Ratio (CAR), Provision Coverage Ratio (PCR), and Loan-to-Deposit Ratio (LDR). Secondary data was collected from the audited annual financial statement of 15 leading commercial banks as well as central bank macro-economic bulletins to arrive at 150 panel observations. Panel data regression analysis, namely the Fixed Effect Model chosen using the Hausman specification test, was used among other diagnostics such as tests for multicollinearity, heteroscedasticity and autocorrelation. From the analysis, it is clear that there exists a statistically significant negative relationship between NPL ratio and bank profitability in the form of ROA and ROE. This means that decline in the asset quality leads to a reduction in the earnings due to loan loss provision and loss in the capital. On the other hand, there exists a statistically significant positive relationship between the capital adequacy ratio and provision coverage ratio and bank performance, which clearly shows the significance of adequate capital cushion and loan provision to minimize risk of defaults. Loan deposit ratio has shown a non-linear relationship as an intermediate loan deposit ratio increases profitability whereas extreme loan deposit ratios increase the risk of defaults.
