Credit Risk Management and Its Impact On the Performance of Commercial Banks in Pakistan: An Application of Penal Var Approach

Abstract

Credit risk is nothing else but the default by the borrower. Credit risk management practices are adopted by the banks to mitigate this risk. It is crucial for every bank or financial institution to follow the effective risk management system to avoid or mitigate the credit risk. This paper is an attempt to investigate the effect of default or credit risk management on the financial performance of banks and how factors of CRM affect each other. VAR approach has been used to analyze the penal data. Sixteen private commercial banks have been taken into the consideration. Data has been collected from the year 2012 to 2021. Granger causality and impulse response have also been identified and analyzed. E view has been used for the purpose of analysis. Results of Granger causality reveal that almost all the variables are affecting or explaining each other. There is a bidirectional association ship between LTDR and ROE. In variance decomposition analysis, all the variables are mostly being affected by themselves or by their own shocks and shocked of other variables. Finally, short term relationship has been found or identified through VECM. This study is helpful for all the stakeholders of commercial banks. This study is also helpful for the students using penal var approach for understanding and analysis purpose. This study is also helpful for the decision makers to frame policy of credit risk management and see how effective risk management affects the financial health of commercial banks.