Effect of Credit Risk Management on Financial Performance of Joint Venture Commercial Banks of Nepal (A Comparative study of Nabil Bank Ltd, Standard Chartered Bank Ltd, Nepal Bangladesh Bank Ltd, Nepal SBI Bank Ltd)

Abstract

Risk management is essential for the survival of a bank and this enables the management to allocate resources of the risk units based on a compromise between risk and potential return. The diversity of the business and economic conditions has led to the development of highly sophisticated tools and models to measure the exposure of a financial institution to credit risk. In case of an individual loan portfolio, the probability of default, loss given default or credit rationing are the most commonly used ones to measure the exposure to credit risk. The invention of various credit scoring models that use observed loan applicants characteristics either to calculate a score representing the applicant‘s probability of default or to sort borrowers into different risk classes bring the ability to address credit risk on a new level. Credit is the amount of money lent by the creditors (banks) to the borrower either on the basis of security or without security. Credit and advances is an important item on the asset side of the balance sheet of commercial bank. Bank earns interest on credit and advances which is one of the major sources of income for banks. Bank prepares credit portfolio; otherwise it will not only effect debts but also affect profitability adversely (Varshney &Swaroop,1994). Credit is regard as the most income generating assets especially in commercial bank. It also regarded as the heart of commercial bank in the sense that, it occupies large volume of transactions. It covers the main part of investment. It is the main factor for creating profit and determining the profitability. It affects the overall economy.