Abstract:

For shareholders, managers, investors, regulators, and the general public, a bank's financial performance is of the utmost importance. In order to better understand how credit risk affects the financial health of Indian’s commercial banks, this study focuses on non-performing loans. Economic value added and return on asset is employed as indicators of financial performance. Additionally taken into account are internal bank parameters including the bank's age and size. The analysis takes into account macroeconomic variables like the gross domestic product, inflation, and monetary policy rate. The analysis makes use of panel data on 15 commercial banks in India covering the years 2018 to 2022. Non-performing loans have a detrimental influence on both metrics of financial performance, according to the findings of the random effect estimate technique. Additionally, although not significantly for the economic value-added metric, the monetary policy rate has a detrimental effect on both financial performance indicators. Further research reveals that both indicators of financial success, except for return on asset, are significantly positively impacted by the size, age, and gross domestic product of the bank. It is recommended that commercial banks adopt strict credit risk management policies, which should also be updated on a regular basis to guide actions and processes to grant loans and monitor credit risk, based on the negative relationship between non-performing loans and financial performance. Furthermore, it is advised that the depreciable assets pledged to the banks as collateral be regularly (likely annually) examined to account for a fall in their value. The use of economic valueadded as a financial performance indicator, which prior research have mostly neglected in the examination of the credit risk and financial performance nexus, is innovative in the current study

Description:

Credit risk; financial performance; non-performing loans; economic value- added; India