The Relationship Between Credit Risk Management and Non-Performing Assets of Commercial Banks in India

Managerial Finance (Forthcoming)

Posted: 11 Oct 2018

See all articles by Sirus Sharifi

Sirus Sharifi

School of Management, IIT Bombay

Arunima Haldar

S.P. Jain Institute of Management and Research

S.V.D. Nageswara Rao

Indian Institute of Technology (IIT), Bombay - Shailesh J. Mehta School of Management (SJM)

Date Written: September 18, 2018

Abstract

The study examines the impact of credit risk components on the performance of credit risk management and the growth in non-performing assets of commercial banks in India.The data is obtained from primary and secondary sources. The primary data is collected by administering questionnaire among risk managers of Indian banks. The secondary data on non-performing assets (NPAs) of Indian banks is from annual reports and Prowess database compiled by Centre for Monitoring Indian Economy (CMIE). Multiple linear regression is used to estimate the models for our study. The results suggest that identification of credit risk significantly affects the credit risk performance. The results are robust as credit risk identification is negatively related to annual growth in non-performing assets or loans. There is evidence in support of a priori expectation of better credit risk performance of private banks compared to that of government banks. The study has implications for Indian banks suffering from high level of losses due to bad loans. In addition, it will have implications for the implementation of new Basel Accord norms (Basel III) by Reserve Bank of India (RBI). The high and rising level of NPAs will have adverse consequences for credit flow in the economy in the absence of appropriate intervention by government and central bank in the form of changes in institutional and regulatory infrastructure. The problems in banking and financial services sector will lead to lower industrial and aggregate economic growth, and lower (or negative) growth in employment.There is little evidence on credit risk management practices of Indian banks, and its relationship with credit risk performance and NPA growth. The need for an effective risk management system to manage credit risk assumes importance and urgency in the context of high and rising NPAs of Indian banks, and the consequences for the Indian economy.

Keywords: Credit Risk, Risk Management, Non-Performing Assets, Indian Banks, Ownership, Risk Identification

Suggested Citation

Sharifi, Sirus and Haldar, Arunima and Nageswara Rao, S. V. D., The Relationship Between Credit Risk Management and Non-Performing Assets of Commercial Banks in India (September 18, 2018). Managerial Finance (Forthcoming), Available at SSRN: https://ssrn.com/abstract=3251668

Sirus Sharifi

School of Management, IIT Bombay ( email )

IIT Campus,
Powai
Mumbai, MA Mumbai 400076
India

Arunima Haldar (Contact Author)

S.P. Jain Institute of Management and Research ( email )

Munshi Nagar, Dadabhai Road
Andheri West
Mumbai, Maharashtra 119579
India

S. V. D. Nageswara Rao

Indian Institute of Technology (IIT), Bombay - Shailesh J. Mehta School of Management (SJM) ( email )

Powai
Mumbai 400076
India
91-22-25767789 (Phone)
91-22-25722872 (Fax)

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