CREDIT RISK MANAGEMENT AND ITS IMPACT ON NON-PERFORMING ASSETS: A STUDY OF SELECTED COMMERCIAL BANKS

Abstract

Credit risk management is important to ensure financial stability by keeping Non-Performing Assets (NPAs) of Indian commercial banks at the lowest level. The present study analyzes the influence of credit risk management on Non-Performing Assets (NPAs) of Indian commercial banks employing panel data regression analysis. The study concentrates on major financial ratios like Gross NPA, Net NPA, Capital Adequacy Ratio (CAR), Provision Coverage Ratio (PCR), Cost to Income Ratio (CIR), Net Interest Margin (NIM), Loan-to-Deposit Ratio (LTD), and spread. Fixed and random effects models are used in the study to identify the inter- relationships among these variables and NPAs. The results uncover that although Spread and Loan-to-Deposit Ratio have a serious impact on NPAs, others such as Provision Coverage Ratio, Capital Adequacy Ratio, Cost to Income Ratio, and Net Interest Margin do not display any significant contribution. The Hausman test affirms that this analysis is best performed using a fixed effects model. The study highlights the need for effective credit risk management strategies, particularly focusing on loan efficiency and interest rate policies, to enhance asset quality and financial stability in Indian commercial banks. The results offer valuable insights for banking institutions to develop strategies aimed at reducing NPAs and improving overall financial performance.