Impact of credit risk management on financial performance: with special reference to Sri Lankan banking sector
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Date
2015
Journal Title
Journal ISSN
Volume Title
Publisher
Uva Wellassa University of Sri Lanka
Abstract
Credit risk is always treated as the major risk inherent in a bank’s trading and banking activities
since credit creation is the main income generating activity for banks (Kargi, 2011). According to
Danson Musyoki (2011) among the other predictors, credit risk is an important predictor of bank
financial performance. Good heart (1998) states that the poor Credit risk management (CRM)
which results in undue credit risk causes bank failures. Credit risk is the possibility of losing the
outstanding loan partially or totally, due to credit events. Sri Lankan banks continued to invest huge
sum of financial resources on CRM with the intention to maximizing returns and minimizing
bank`s risks. The significance of the study is to have a big picture of how commercial banks
manage their credit risk effectively. However contradictory findings and the scarcity of studies in
relation to this field in the context of Sri Lanka has created an area for study with regard to seek the
relationship between Credit Risk Management and Financial Performance (FP) of banks.
Parameters covered in the study were; default rate (DR), bad debts costs (BDC), cost per loan asset
(CLA) and Return on Asset (ROA). Accordingly, first objective was assigned to examine the
relationship between CRM and FP. Second objective was to identify the most affecting Credit Risk
Management factor on Financial Performance of banks.
Methodology
Descriptive research design was used for this study. Banking sector consider as the research
population. Here, population consist Licensed Commercialized Banks and Licensed Specialized
Banks. Due to unavailability of data and inconsistency between time periods only 21 banks
registered under Sri Lanka banking act considered as sample. Therefore, secondary data of 21
banks were taken from balance sheet, income statement and notes of banks` for five years of time
period. Further interview method was used to collect data from senior managers in various banks.
To achieve the objectives of the research, secondary data was analyzed by using correlation
coefficients analysis, regression analysis and descriptive statistical techniques. Moreover, the
independent variable such as Credit Risk Management was measured using Default Rate ratio, Cost
per Loan Asset Ratio and Bad Debt Cost ratio. Dependent variable such as Financial Performance
was measured using Return on Asset ratio.
Results and Discussion
According to the Descriptive analysis, the mean value with respect to Default Rate, Bad Debt Cost
and Cost per Loan Asset were 0.1043, 0.1014 and 0.2140 respectively. Considering the Bank
Financial Performance, the mean value with respect Return on Assets was 0.2365.
Description
Keywords
Financial Management, Management, Entrepreneurship and management, Banking, Financial