Effect of Credit Risk Management on Financial Performance: Evidence from Commercial Banks in Sri Lanka

Abstract

Introduction – Credit risk is the primary focus of any risk management approach in commercial banks, which is defined as the risk of loss due to debtors’ non-payment of a loan or a line of credit which may include either the principal and interest, or both. With the banking systems’ increased involvement in all facets of the economy, the impact of credit risk on a bank’s profitability has been the foremost focus of many researchers. Therefore, in this study the objective is to identify the impact of credit risk management on financial performance of commercial banks in Sri Lanka. Design/methodology/approach – The investigation was performed using panel data regression for a sample of 12 out of 26 licensed commercial Banks of Sri Lanka during 2011-2019. Descriptive statistics, correlation matrix and panel regression analysis were used to analyze the collected secondary data. Findings – The results suggested that non-performing loan, Capital Adequacy have significant negative impact on Return on Equity while the Cost Per Loan Asset has positive impact on Return on Equity. Conclusion – This study has laid some groundwork to explore the impact of credit risk management on financial performance of Sri Lankan commercial Banks. Accordingly, based on above findings, it is recommended the Sri Lankan commercial banks to develop credit risk management policies and strategies to increase the financial performance.