Abstract:
The banking sector which acts as the backbone of the financial system in Sri
Lanka has contributed the country by maintaining an economic growth
However, at present banks in Sri Lanka face the problem of credit risk due to
deteriorating credit quality. This credit risk management connects with the
liquidity as well as profitability and overall risk management of the banks.
This study analyzed the impact of credit risk management on profitability of
commercial banks in Sri Lanka by using CAMEL model. CAMEL model
indicators used to measure credit risk management and model included capital
adequacy, asset quality, management efficiency, earning efficiency and
liquidity which are influencing to the credit risk management. The study based
on secondary data published by commercial banks in Sri Lanka. The sample
was 10 banks for 2009 to 2010. Ordinary Least Square (OLS) regression
method was used for data analysis. Findings noted that there is a positive
relationship between credit risk management and bank performance of
commercial banks in Sri Lanka. Further, Capital adequacy, earning efficiency,
Liquidity coverage ratio have significant positive relationship with the
profitability of commercial banks in Sri Lanka. Asset quality and management
efficiency have negative relationship with financial performance of Sri
Lankan commercial banks. The study envisaged that these ratios should be
improved by the banks for the better performance and CAMEL is a significant
tool to analysis of credit risk management.
