Credit Risk Management and Loan Portfolio Performance: Evidence from Selected Banks of Bangladesh

Abstract

The increasing non-performing loan ratio and the inability of maintaining the standard capital adequacy have triggered deteriorating performance for the Bangladeshi banking industry. Hence, this research aims to assess the impact of credit risk management on the loan portfolio performance of Bangladeshi commercial banks. Given the current records of non-performing loans (NPL) of both state-owned commercial banks (SOCBs) and private commercial banks (PCBs), it is hypothesized that credit risk management (CRM) is a crucial driver of bank’s loan portfolio performance. A comparative analysis of the Capital Adequacy Ratio (CAR) and the Non-performing Loan Ratio (NPL) of SOCBs and PCBs is conducted. The analysis demonstrates that the SOCBs had higher NPL and lower CAR than the PCBS, adversely affecting the industry average. To identify the influence of CRM over loan performance, data has been collected from 98 bank employees working in the CRM divisions of 21 listed commercial banks. Employees of 18 PCBs and 3 SOCBs are surveyed in this study. Structural Equation Modelling (SEM), based on Covariance, is applied to analyse the data. The findings reveal that the components of CRM: credit policy and appraisal, and credit recovery policy have significant associations with the loan portfolio performance. However, few of the CRM factors are found to have insignificant linkage with the overall risk of the banks. The outcomes of the research have crucial policy and implications as it highlights the significant drivers of loan performance, which can be controlled and improved to mitigate the NPL issue and to influence superior bank performance.

Keywords: Non-performing loan, Credit risk management, Capital adequacy ratio, Covariance based Structural Equation Modelling (SEM), Credit policy and appraisal, Credit recovery policy, Loan portfolio performance.

DOI: 10.7176/EJBM/15-14-03

Publication date:July 31^st 2023