Credit Risk Management and Bank Performance: With Special Reference to Specialized Banks in Sri Lanka

Abstract

The adoption of credit risk management is becoming a crucial factor for every bank. The objective of this study identifies the relationship between the credit risk management determinants revealed by banking soundness index indicators CAMEL (Capital adequacy, Assets quality, Management efficiency, Earnings, Liquidity) on the performance of the License Specialize banks in Sri Lanka. This study is based on secondary data from each bank annual reports. The data were collected from six development bank among seven development banks in Sri Lanka. The sample was selected from the population based on the availability, convenience method, and reliability of data over the set period. The panel data of a sixteen-year period from 2000 to 2016 from the selected banks, were used to examine the relationship between credit risk management and performance. The Return on equity is used as a performance indicator and Capital adequacy and Asset quality were used as indicators of credit risk management. The study used multiple regression to analyze the data. With these findings, it revealed there is a strong impact of the CAMEL components on the financial performance of specialized banks in Sri Lanka. As per the findings of analysis Capital Adequacy, and Asset quality has a negative significant relationship between bank performances of ROE. This study also documented that there is a significant relationship between credit risk management by CAMEL Indicators and the financial performance of specialized banks in Sri Lanka. Therefore, this study suggests that the CAMEL model can be used as a proxy for credit risk management in the context of License Specialize banks Sri Lanka.