Abstract:
Credit risk is the most important part of all commercial banks performing their
works around the world. The objective of this study is to identify the
relationship between credit risk and commercial banks performance in Sri
Lanka. This study based on secondary data and data were obtained from
various sources such as selected commercial banks annual reports, relevant
articles, books and magazines etc. The panel data of a ten year period from
2006 to 2015 from the selected ten banks were used to examine the
relationship between credit risk and commercial banks performance.
Furthermore, Return on Assets (ROA) used as a profitability indicator while
Non-Performing Loan to Total Loan Ratio (NPLR), Capital Adequacy Ratio
(CAR) and Total Loan to Deposits Ratio (LTDR) used as credit risk indicators.
The correlation and regression analysis was used to examine the relationship
between credit risk and profitability indicators during the period and study by
using E-views software. According to the empirical results, it was observed
that NPLR and CAR has negative significant relationship with the commercial
banks profitability and LTDR has positive significant relationship with the
commercial banks profitability. Then this study concluded the credit risk has
a significant relationship with the bank profitability. Therefore, this study
recommended the banks to implement an effective tools and techniques to
reduce the credit risk of commercial banks in Sri Lanka.
