Impact of Credit Risk Management on Bank’s Performance: Empirical Study on Commercial Banks of Pakistan

Abstract

This practical study examines the relationship of "Credit Risk Management, over performance of commercial banks in Pakistan. Utilizing credit risk management-CRM indicators such as Non-Performing Loan (NPL), Advance to Deposit Ratio (ADR), and Capital Adequacy Ratio (CAR), our study spans 15 years of financial data from 21 out of 33 commercial banks. Employing panel data analyses, including Descriptive statistics, Unit Root Test, Panel Least Square Model and Hausman test. The study reveals noteworthy insights, Firstly, an increase in NPL negatively impacts bank profitability, advising systematic customer information collection and widespread analysis for lending decisions. Secondly, a negative relationship between CAR and bank performance emphasizes complicated balance between regulatory compliance and operational efficiency. Notably, ADR did not significantly impact performance, suggesting the need for further exploration. These findings contribute to bridging existing research gaps and offer practical insights for lending department and regulatory authorities in shaping the financial landscape of Pakistan's banking industry.