Credit Risk Management and Nonperforming Assets: A Study in Commercial Banks in India

Abstract

Purpose: The goal of this article is to analyze how different elements of credit risk affect the efficiency with which commercial banks in India handle credit risk and the rate at which their NPAs increase.

Research Design:The information comes from both primary and secondary resources. The risk managers of Indian banks fill out a survey to provide the bulk of the data. The Centre for Monitoring the Indian Economy uses the annual reports of Indian banks and the Prowess database to produce secondary data on nonperforming loans. The models for the research are estimated using multiple linear regression.

Findings: Based on the data, it appears that credit risk identification has a major impact on credit risk performance. The annual growth in nonperforming assets (NPAs) and loans is adversely correlated with credit risk identification, hence the findings are reliable. Private banks have been shown to have superior performance in terms of credit risk compared to their government counterparts.

Practical implications: Implications for Indian banks with large bad loan losses were found in the study. It will also affect the Reserve Bank of India's plans to implement the latest Basel Accord standards (Basel III).

Social implications:If the government and central bank don't act to reduce the large and rising number of NPAs by bolstering institutional and regulatory infrastructure, it would have a detrimental impact on credit flow in the economy, reduced industrial and aggregate economic growth, as well as reduced (or negative) employment growth, will result from the difficulties in the banking and financial services industry.

Originality/value:There is a gap in our understanding of the causes and effects of the rise in nonperforming loans in India and the credit risk management practices of Indian banks. Given the large and rising NPAs of Indian banks and the ramifications for the Indian economy, the necessity for an efficient risk management system to control credit risk gains relevance and urgency.