The relationship between credit risk management and non-performing assets of commercial banks in India

Abstract

PurposeThe purpose of this paper is to examine the impact of credit risk components on the performance of credit risk management and the growth in non-performing assets (NPAs) of commercial banks in India.Design/methodology/approachThe data are obtained from primary and secondary sources. The primary data are collected by administering questionnaire among risk managers of Indian banks. The secondary data on NPAs of Indian banks are from annual reports and Prowess database compiled by the Centre for Monitoring Indian Economy. Multiple linear regression is used to estimate the models for the study.FindingsThe results suggest that the 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 NPAs 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.Practical implicationsThe study has implications for Indian banks suffering from a 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 the Reserve Bank of India.Social implicationsThe 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.Originality/valueThere 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.