Impact of credit risk management on the performance of commercial banks in Sri Lanka

Abstract

The adoption of credit risk management is becoming a crucial factor for every commercial bank around the world. The objective of this study is to identify the impact of credit risk management on the performance of the commercial banks in Sri Lanka. This study is primarily based on both primary and secondary data. Primary data were collected from eight (08) commercial banks from 24 commercial banks in Sri Lanka. The sample was selected from the population based on the superior financial performance for the period under review and the availability of the consistent data over the set period. The primary data was collected mainly through an interview. The relevant authorities were interviewed personally in order to have their views on the problems and solutions. The secondary data were obtained from various sources such as Annual Reports of the selected commercial banks, relevant articles, books and magazines etc. The panel data of a five year period from 2009 to 2013 from the selected banks were used to examine the relationship between credit risk and performances. The Return on Assets (ROA) is used as performance indicator and Loan provision to Total (LP/TL), Loan Provision to Non-Performing Loans (LP/NPL), Loan Provision to Total Assets (LP/TA) and Non-Performing Loans/ Total Loans (NPL/TL) were used as indicators of credit risk. Further, a regression model was used to establish the relationship between amounts of loan as well as nonperforming loans and profitability during the period of study by using E-views software. The result shows that non-performing loans and provisions have an adverse impact on the profitability. Therefore, the study recommended the banks to implement an effective tools and techniques to reduce the credit risk management.