A STUDY OF RELATIONSHIP BETWEEN CREDIT RISK

MANAGEMENT AND FINANCIAL PERFORMANCE OF

SELECTED PUBLIC SECTOR BANKS IN INDIA

PROJECT REPORT

Submitted by
AYSHWARYA SUDHEER
TVE18MBA38
Under the guidance of
Mr. Abhilash V S
in partial fulfilment of the requirements
for the award of the Degree of

MASTER OF BUSINESS ADMINISTRATION

of
A P J Abdul Kalam Technological University

CET SCHOOL OF MANAGEMENT

COLLEGE OF ENGINEERING TRIVANDRUM
FEBRUARY 2020
A STUDY OF RELATIONSHIP BETWEEN CREDIT RISK
MANAGEMENT AND FINANCIAL PERFORMANCE OF
SELECTED PUBLIC SECTOR BANKS IN INDIA

PROJECT REPORT

Submitted by
AYSHWARYA SUDHEER
TVE18MBA38
Under the guidance of
Mr. Abhilash V S
in partial fulfilment of the requirements
for the award of the Degree of

MASTER OF BUSINESS ADMINISTRATION

of
A P J Abdul Kalam Technological University

CET SCHOOL OF MANAGEMENT

COLLEGE OF ENGINEERING TRIVANDRUM
FEBRUARY 2020
 DECLARATION

I , Ayshwarya Sudheer hereby declare that the project titled “A study of relationship between
credit risk management and financial performance of selected public sector banks in India ” is
submitted in partial fulfilment for the award of Degree of Master of Business Administration
of A P J Abdul Kalam Technological University is a bonafide record work done by me under
the guidance of Mr. Abhilash V S, CET School of Management, College of Engineering
Trivandrum. This report has not previously formed the basis for the award of any degree,
diploma, or similar title of any University.

Place: Trivandrum Ayshwarya Sudheer

 CET SCHOOL OF MANAGEMENT

College of Engineering Trivandrum

2020

CERTIFICATE

This is to certify that the report titled “A study of relationship between credit risk
management and financial performance of selected public sector banks in India” is being
submitted by Ayshwarya Sudheer, TVE18MBA38 in partial fulfilment of the requirements for
the award of the Degree of Master of Business Administration, is a bonafide record of the
project work done by Ayshwarya Sudheer of CET School of Management.

Mr. Abhilash V S Dr. Suresh Subramoniam

Assistant Professor Director
 ACKNOWLEDGEMENT

Thanks to the Almighty to the successful completion of this internship.

This report titled “A Study of relationship between credit risk management and financial
performance of selected public sector banks in India” has been made possible with the help and
active cooperation of many people to whom I wish to express my sincere gratitude.

I am highly indebted towards my project guide Mr. Abhilash V S, Assistant Professor for his
effort in coordinating with my work and guiding in right directions.

I escalate a heartfelt regards to our Institution Director Dr. Suresh Subramoniam for giving me
the essential hand in concluding this work.

It would be injustice to proceed without acknowledging those vital supports I received from
my beloved classmates and friends, without whom I would have been half done.

I also use this opportunity to offer my sincere love to my parents and all others who had been
there, helping me walk through this work.

Ayshwarya Sudheer
 LIST OF CONTENTS
CHAPTER TITLE PAGE
NUMBER NUMBER

1 INTRODUCTION 1-5

1.1 Background of the study 1

1.2 Statement of problem 3

1.3 Need and significance of the study 4

1.4 Scope of the study 5

1.5 Objectives of the study 5

1.6 Limitations of the study 5

2 LITERATURE REVIEW 6-15

THEORETICAL FRAMEWORK 16-26

3
3.1 Credit 16-29

3.2 Credit Risk 19-21

3.3 Credit Risk Management 21-23

3.4 Financial performance 23-26

4 RESEARCH METHODOLOGY
27-29
4.1 Objectives 27
4.2 Hypothesis 27-28
4.3 Research Design 28
4.4 Sources of data 28
4.5 Primary and secondary data 28
4.6 Population 28
 4.7 Sample design 28-29

4.8 Sampling method 29

4.9 Method of data collection 29

4.10 Data analysis techniques 29

5 30-85
DATA ANALYSIS

5.1 Variable statistics of the PSBs in India 30-38

5.2 Correlation Analysis of the PSBs 39-47

5.3 Test of Hypotheses for State Bank of India 48-56

5.4 Test of Hypotheses for Punjab National Bank 56-64

5.5 Test of Hypotheses for Bank of Baroda 64-71

5.6 Test of Hypotheses for Union Bank of India 71-78

5.7 Test of Hypotheses for Canara Bank 78-85

6 FINDINGS 86-88

7 RECOMMENDATIONS 89-90

8 CONCLUSIONS 91

9 REFERENCES 92-95
 LIST OF TABLES

TABLE TITLE PAGE

NO. NO.

1 Return on assets of the PSBs 31

2 Return on equity of the PSBs 32

3 Net Interest Margin of the PSBs 33

4 Net Profit Margin of the PSBs 34

5 Capital Adequacy Ratio of the PSBs 35

6 Non-Performing Asset Ratio of the PSBs 36

7 Credit-Deposit Ratio of the PSBs 37

8 Advances / Loans Funds Ratio of the PSBs 38

9 Correlation Matrix among Dependent and Independent Variables of the SBI 39-40

10 Correlation Matrix among Dependent and Independent Variables of the 41

PNB

11 Correlation Matrix among Dependent and Independent Variables of the 42-43

Bank of Baroda

12 Correlation Matrix among Dependent and Independent Variables of the 44

Union Bank of India

13 Correlation Matrix among Dependent and Independent Variables of the 45-46

Canara Bank

14 Regression Model Summary of SBI(Dependent Variable: ROA) 48

15 ANOVA of the State Bank of India(Dependent Variable: ROA) 49

16 Regression Coefficients of the SBI(Dependent Variable: ROA) 49

17 Model Summary of the SBI (Dependent Variable: ROE) 51

18 ANOVA of the SBI (Dependent Variable: ROE) 52

19 Regression Coefficients of the SBI (Dependent Variable: ROE) 52

20 Model Summary of the SBI (Dependent Variable: NPM) 54

21 ANOVA of the SBI (Dependent Variable: NPM) 54

22 Regression Coefficients of the SBI (Dependent Variable: NPM) 55

23 Model Summary of the PNB (Dependent Variable: ROA) 56

24 ANOVA of the PNB (Dependent Variable: ROA) 57

25 Regression Coefficients of the PNB(Dependent Variable: ROA) 58

26 Model Summary of the PNB (Dependent Variable: ROE) 59

27 ANOVA of the PNB (Dependent Variable: ROE) 60

28 Regression Coefficients of the PNB (Dependent Variable: ROE) 60

29 Model Summary of the PNB (Dependent Variable: NPM) 62

30 ANOVA of the PNB (Dependent Variable: NPM) 62

31 Regression Coefficients of the PNB (Dependent Variable: NPM) 63

32 Model Summary of the Bank of Baroda (Dependent Variable: ROA) 64

33 ANOVA of the Bank of Baroda (Dependent Variable: ROA) 65

34 Regression Coefficients of the Bank of Baroda (Dependent Variable: ROA) 65

35 Model Summary of the Bank of Baroda (Dependent Variable: ROE) 67

36 ANOVA of the Bank of Baroda (Dependent Variable: ROE) 67

37 Regression Coefficients of the Bank of Baroda (Dependent Variable: ROE) 68

38 Model Summary of the Bank of Baroda (Dependent Variable: NPM) 69

39 ANOVA of the Bank of Baroda (Dependent Variable: NPM) 70

40 Regression Coefficients of the Bank of Baroda (Dependent Variable: NPM) 70

41 Model Summary of the Union Bank of India (Dependent Variable: ROA) 72

42 ANOVA of the Union Bank of India (Dependent Variable: ROA) 72

43 Regression Coefficients of the Union Bank of India (Dependent Variable: 73

ROA)
44 Model Summary of the Union Bank of India (Dependent Variable: ROE) 74

45 ANOVA of the Union Bank of India (Dependent Variable: ROE) 75

46 Regression Coefficients of the Union Bank of India (Dependent Variable: 75

ROE)

47 Model Summary of the Union Bank of India (Dependent Variable: NPM) 76

48 ANOVA of the Union Bank of India (Dependent Variable: NPM) 77

49 Regression Coefficients of the Union of Bank of India (Dependent Variable: 77

NPM)

50 Model Summary of the Canara Bank (Dependent Variable: ROA) 79

51 ANOVA of the Canara Bank (Dependent Variable: ROA) 79

52 Regression Coefficients of the Canara Bank (Dependent Variable: ROA) 80

53 Model Summary of the Canara Bank (Dependent Variable: ROE) 81

54 ANOVA of the Canara Bank (Dependent Variable: ROE) 82

55 Regression Coefficients of the Canara Bank (Dependent Variable: ROE) 82

56 Model Summary of the Canara Bank (Dependent Variable: NPM) 83

57 ANOVA of the Canara Bank (Dependent Variable: NPM) 84

58 Regression Coefficients of the Canara Bank (Dependent Variable: NPM) 85

 LIST OF FIGURES

FIG NO. TITLE PAGE NO.

Fig 1 Tools for performance appraisal 25

Fig 2 Return on assets of the PSBs 31

Fig 3 Return on equity of the PSBs 32

Fig 4 Net Interest Margin of the PSBs 33

Fig 5 Net Profit Margin of the PSBs 34

Fig 6 Capital Adequacy Ratio of the PSBs 35

Fig 7 Non-Performing Asset Ratio of the PSBs 36

Fig 8 Credit-Deposit Ratio of the PSBs 37

Fig 9 Advances / Loans Funds Ratio of the PSBs 38

 CHAPTER 1
INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Banking system in India is one of the most essential components in the Indian financial market.
Banks are the prevalent purveyors of credit and they too attract most of the savings from the
population. The banking industry, dominated by public sector banks, has so far acted as an
efficient partner in the growth and development of the Indian economy. Driven by the socialist
ideologists and the welfare state notion, public sector banks have long been the supporters of
agriculture and further priority sectors. The Indian banking has come from a long way from
being a sluggish business institution to a highly proactive and vibrant entity. This revolution
has been mostly brought about by the hefty dose of liberalization and financial reforms that
permitted banks to discover new business opportunities rather than generating revenues from
conventional streams (i.e. borrowing and lending). The world of banking has presumed a new
dimension at the emergence of the 21st century with the advent of tech banking, thereby
offering the industry a stamp of universality. In common, banking may be categorized as retail
and corporate banking. Retail banking, which is intended to meet the necessities of individual
customers and embolden their savings, includes payment of utility bills, consumer loans, credit
cards, checking account balances, ATMs, relocating funds between accounts and the like.
Corporate banking, on the other hand, caters to the requirements of corporate customers like
bills discounting, opening letters of credit and managing cash.

Commercial Banks (CBs) are playing a vital role in developing economies like India.
Commercial Banks are profit-making organizations acting as mediators between borrowers and
lenders attracting momentarily existing resources from business and individual customers as
well as granting loans for those in need of financial support. Commercial banks are in the
business of mobilizing deposits, lending money, investing funds and holding bonds and other
securities. The traditional role of a CB is lending and make up the bulk of its assets. Loans
govern asset holding and produce the largest share of operating income. Commercial Banking
mainly has two functions, which are accepting deposits and granting credit. Out of these two,

1
it is the latter which is an income generation activity for the bank. So, it is imperative that banks
transmit out this function with extreme efficiency and due meticulousness.

Banks raise funds by assembling deposits from businesses and individual depositors and makes
out loans to individuals, businesses and the government over buying bonds. Hence the primary
assets,of banks are loans and bonds while primary liabilities are composed of deposits. A banks
balance sheet has loans demonstrating the majority of a bank's assets, but the loans emanate
with risk. If the bank makes bad loans to corporations or customers for example, the bank will
be in a crisis if those loans are not reimbursed. Bank loan is a debt, which involves the
restructuring of the financial assets between the lender and the borrower. The bank loan is
usually referred to the borrower who acquired an amount of money from the lender, and need
to pay back, known as the principal. In addition, the banks commonly charge a fee from the
debtor, which is the interest on the debt. In unbalanced economic environments interest rates
charged by banks are immediately overtaken by inflation and borrowers find it hard to repay
loans as real incomes drop, insider loans surge and over concentration in definite portfolios
increases providing a rise to credit risk.

Bankers are fretful with six main types of risk. These are the credit risk, liquidity risk, market
risk, interest rate risk, earnings risk and solvency risk that can be grouped as credit risk, market
risk and operational risk. Moreover, currency risk, country risk and cross-border risk should be
considered when international lending is the focus matter. Among these risks, credit risk plays
the chief role since by far the largest asset item is loans, which mostly account for half to almost
three-quarters of the total value of all bank assets. Credit risk is a major concern for lenders
worldwide as it is the most critical of all risks faced by a banking institution. Credit risk occurs
because an probable payment might not occur. Credit risk management is the process of
measuring and assessing the risk that originates from earnings and capital due to borrowers late
and non-payment of the loan obligation, and then developing strategies to manage the risk. It
looks forward to the rewards of good performance of the bank’s financial growth and increase
on the bank’s lending Power. The bank’s main goal is to ensure well financial performance of
internal early warning systems and management responses that prevent small problems from
exploding into large ones by focusing on credit risk management. Poorly managed credit risks
result in financial losses for banks, donors, investors, lenders, borrowers and savers. This is
because all tends to lose confidence in banks and funds begin to dry up. And when funds dry
up, the commercial bank is not able to meet its objective of providing services and rapidly goes

2
out of business. This research tries to answer the main question, “Does the credit risk
management impact on financial performance of the Indian Public Sector Banks”.

1.2 STATEMENT OF THE PROBLEM

A bank is a commercial or public institution that offers financial services, including issuing
money in various forms, receiving deposits of money, lending money and processing
transactions and the creation of credit. Financial performance is the company’s ability to
generate new resources, from day-to-day operation over a given period of time and it is gauged
by net income and cash from operation. During the 1980’s and 1990’s when the financial and
banking crises became global, new risk management banking techniques arose. To be able to
manage the different type of risks one has to define those before one can manage them. The
risks that are most applicable to banks are credit risk, interest rate risk, liquidity risk, market
risk, foreign exchange risk and solvency risk. Risk management is a human activity which
integrates recognition of risk, risk assessment, developing strategies to manage it and
mitigation of risk using managerial resources whereas credit risk is the risk of loss owing to a
debtor’s non-payment of a loan or extra line of credit (either the principal or interest or both).
The default rate is the possibility that a borrower will default, by failing to repay principal and
interest in a timely manner. Credit risk management is very vital to banks as it is a fundamental
part of the loan process. It maximizes bank risk, adjusted risk rate of return by maintaining
credit risk exposure with the view to shielding the bank from the adverse effects of credit risk.
The Bank is investing a lot of funds in credit risk management modeling. There is a need to
investigate whether this investment in credit risk management is viable to the banks. This study,
therefore, seeks to investigate the impact of credit risk management on a bank’s financial
performance of PSBs in India.

3
1.3 NEED AND SIGNIFICANCE OF THE STUDY

Bank is a very old institution that is contributing towards the development of any economy and
it’s treated as an important service industry in the modern world. It is one of the significant
financial pillars of the financial system which plays a vital role in the success/failure of an
economy. Banks are one of the oldest financial mediators in the financial system. They play a
key role in the mobilization of deposits and payment of credit to various sectors of the
economy. Basically, banks are in place not only to receive deposits but also to grant credit
facilities, hence they are bare to credit risk. Credit risk is by far the utmost important risk faced
by banks and the triumph of their business depends on precise measurement and proficient
management of this risk to a better extent than any other risks.

Poorly managed credit risks will result in financial losses for banks, donors, investors, lenders,
borrowers, and savers. This is because all tends to lose confidence in banks and funds begin to
dry up. And when funds dry up, the commercial bank is not able to meet its objective of
providing services to the poor and quickly goes out of business. This research tries to answer
the following main question (Does the credit risk management impact on financial performance
of the Indian Public Sector Banks). The purpose of this study is to investigate the impact of
credit risk management on the financial performance of the Public Sector Banks (PSBs) in
India. The study had the following contributions:

 The study shall be of help to the public sector banks in India to mitigate and reduce credit
risk so as to stimulate their financial performance.

 The study shall contribute to the existing wealth of knowledge on financial performance and
credit risk management in public sector banks in India.

 The research shall help to identify the other factors that may hinder the financial performance
of public sector banks apart from the credit risk and this shall help improve the profit margins
and at the same time reduce costs of the bank.

 The study shall be of help to the employees of public sector banks to improve their skills of
management so as to improve performance.

4
1.4 SCOPE OF THE STUDY

This research tries to answer the following main question (Does the credit risk management
impact on financial performance of the selected Indian Public Sector Banks). So, the purpose
of this study is to investigate the impact of credit risk management on the financial performance
of the selected Public Sector Banks (PSBs) in India. This study is based on secondary data. The
data required for this study was collected from the various sources like monthly RBI bulletins,
published by RBI, Govt. of India, Annual reports of various banks ,etc.

The population of interest for this study was Pubic Sector Banks (PSBs) in India. The sample
comprises of five state banks: State Bank of India, Punjab National Bank, Bank of Baroda,
Canara bank, and Union Bank of India.

1.5 OBJECTIVES OF THE STUDY

The overall objective of this study is to investigate the impact of credit risk management on
banks financial performance in PSBs in India. A positive relationship would imply that better
risk management results in better performance of the bank and vice versa, while a negative
relationship would imply that a better credit risk management results in worse bank
performance and vice versa. The specific objectives are to:

 To investigate the impact of credit risk management on the banks financial performance of
PSBs in India.
 To identify the relationship that exists between financial performance and credit risk
management of PSBs in India.
1.6 LIMITATIONS OF THE STUDY
 The study includes only public sector banks in India. Therefore, the results cannot be
generalized to all commercial banks.
 Even the ratios selected for the quantitative research are widely accepted as related to
banks’ credit risk management and financial performance are already used in other
literatures, their representativeness cannot be guaranteed. After all, it is difficult to find out
that how many ratios will be enough for providing a comprehensive measure, or whether
the ratios chosen in this research are the most important ones related to the management of
credit risk and its relationship with financial performance.

5
 CHAPTER 2
LITERATURE REVIEW

A literature review is generally conducted to review the present status of a particular research
topic. From the survey of the literature, a researcher is able to know the quantum of work
already done on his/her new research topic so far not touched, or yet to be undertaken. There
are numerous researches on the effect of credit risk management on financial performance, and
how could the effective credit risk management assist in reducing the possibility of failure and
restricting the uncertainty of achieving the required financial performance. Some scholars e.g.,
(Li Yuqi 2007; Naceur and Kandil 2006; Kinthinji 2010; Kolapo, Ayeni and Ojo 2012; Kargi
2011;) amongst others have carried out extensive studies on this topic and produced mixed
results; while some found that credit risk management impact positively on banks financial
performance, some found negative relationship and others suggest that other factors apart from
credit risk management impacts on bank’s performance. This review is divided into three main
topics: Measuring Bank’s financial performance, Credit Risk Management and Relationship
between Credit Risk Management and Financial Performance.

According to Hingorani (1973), “Accounting ratios are relationships expressed in

mathematical terms between figures with a cause and effective relationship or which are
connected with each other in some manner or the other.”

According to Avkiran (1995), financial performance is a subjective measure of how well a

bank can use assets from its primary mode of business and generate revenues. This term is also
used as a general measure of a firm's overall financial health over a given period of time, and
can be used to compare similar firms across the same industry or to compare industries or
sectors in aggregation.

Seiford and Zhu (1999), although an important and relevant information about bank's
financial performance can be provided by accounting and financial ratios, assessing the
relationship among many factors that are related to bank performance such as assets, revenue,

6
profit, market value, number of employees, investments, and customer satisfaction can assist
in improving bank productivity .

Kunt and Detragiache (1999) suggested that bank profitability is an important predictor of
financial crises. Therefore, the study of the determinants of the bank profitability becomes an
important issue which could help banks understand the current conditions of the banking
industry they are involved in and the critical factors they should consider in making decisions
and creating new policies either for recovery or improvement.

To understand the superior performance and struggle for it, managers and policy makers stated
the major question is "What drives performance?" To address this question, researchers have
focused their efforts on the operational details (Soteriou and Zenios, 1999). An important
requirement, to answer this question, is the profitability measurement. The widely used
measures to assess commercial banks‟ performance are return on total assets (ROA) and return
on total equity (ROE).

Bhatia S. and Verma S. (1999) exercised to determine empirically the factors influencing the
profitability of public sector banks in India by making use of the technique of multiple
regression analysis. For analysis, the study made use of time series data from 1971- 1995 and
ratios have been used to measure bank profitability such as profit to income, return on deposits,
operating earnings to total assets, net profit to working funds. They found that profitability of
banks depends both on exogenous, i.e. policy determined variables such as reserve
requirement, directed credit programs, and on endogenous variables such as composition of
deposits, establishment expenses, spread and burden, etc.

KoeMekasha (2001) investigated the credit risk management and its impact performance on
Ethiopian Commercial Banks. The researcher used 10 years panel data from the selected
commercial banks for the study, to examine the relationship between ROA and loan provision,
non-performing loans and total assets. This study shows that there is a significant relationship
between bank performance (in terms of return on asset) and credit risk management (in terms
of loan performance). Better credit risk management results in better bank performance. The
study shows that there is a direct but inverse relationship between return on asset (ROA) and
the ratio of non-performing loans to total loan (NPL\TL) and loan provision to total loan.

Garai, Sanjib and Prabir (2002) "Comparative Performance of Scheduled Commercial

Banks Operating In India : An Econometric Study", applied multivariate discriminate analysis
technique for differentiating a priori bank group operating in India using the data of some

7
financial ratios published by the RBI relating to individual banks for the financial year 1995-
96, 1996-97 and 1997-98.

Bagchi (2003) examined the credit risk management in banks. He examined risk identification,
risk measurement, risk monitoring, risk control and risk audit as basic considerations for credit
risk management. The author concluded that proper credit risk architecture, policies and
framework of credit risk management, credit rating system, monitoring and control contributes
in success of credit risk management system.

Muninarayanappa and Nirmala (2004) outlined the concept of credit risk management in
banks. They highlighted the objectives and factors that determine the direction of bank’s
policies on credit risk management. The challenges related to internal and external factors in
credit risk management are also highlighted. They concluded that success of credit risk
management require maintenance of proper credit risk environment, credit strategy and
policies. Thus the ultimate aim should be to protect and improve the loan quality.

Brealey and Myers (2003) in their research argued that there are various important measures
in determining profitability of an organization. These include: net profit margin, return on
assets, and return on equity.

Tarawaneh (2006) examined the financial performance of Omani Commercial banks. He has
used multiple regression analysis and correlations to test the financial performance of Omani
Commercial banks. He used the ROA and the interest income as performance proxies
(dependent variables), and the bank size, the asset management and the operational efficiency
as independent variables. Findings of his research revealed that there is a positive and strong
correlation between financial performance and operational efficiency and a moderate
correlation between ROA and bank size.

Kumar (2007) conducted study on “Financial Performance of Private Sector Banks in Indiaan
Evaluation” in his article on an evaluation of the financial performance of Indian private sector
banks wrote private sector banks play an important role in development of Indian economy.
After liberalization the banking industry underwent major changes. The economic reforms
totally have changed the banking sector. RBI permitted new banks to be started in the private
sector as per the recommendation of Narasimham committee. The Indian banking industry was
dominated by public sector banks. But now the situations have changed new generation banks
with used of technology and professional management has gained a reasonable position in the
banking industry.

8
Financial performance refers to the act of performing financial activity. In broader sense,
financial performance refers to the degree to which financial objectives being or has been
accomplished. It is the process of measuring the results of a firm's policies and operations in
monetary terms. It is used to measure firm's overall financial health over a given period of time
and can also be used to compare similar firms across the same industry or to compare industries
or sectors in aggregation.

Richard, et al. (2008) develops a conceptual model to be used further in understanding credit
risk management (CRM) system of commercial banks (CBs) in an economy with less
developed financial sector. They found that the components of CRM system differ in CBs
operating in a less developed economy from those in a developed economy. This implies that
the environment within which the bank operates is an important consideration for a CRM
system to be successful.

Aktan and Bulut (2008) studied that financial performance is company’s ability to generate
new resources, from day-to-day operation over a given period of time and it is gauged by net
income and cash from operation. The financial performance measure can be divided into
traditional measures and market based measures.

Jensen (2008) , ROE takes the retained earnings from the previous periods into account and
tells the investors how efficiently the capital is reinvested .Over the past several years, an
increased attention has been received by financial institutions (particularly commercial banks)
on performance analysis. As a result, the research focus has been shifted from characterizing
performance in simple ratios as ROA or ROE to a multidimensional systems perspective.

Gitman( 2009) examines that ratio analysis involves methods of calculating and interpreting
financial ratios to analyse and monitor firm’s performance. The basic inputs to ratio analysis
are the firm’s income statement and balance sheet.

Madura (2009) ratios play a pivotal role in the management accounting function of any
organization. The main objective of ratio analysis is to use the results for decision-making
purposes.

Pai (2009) based on “A Study of Profitability and Efficiency of Banks in India” makes a
comparison of profitability and efficiency of banks operating in India. Four categories of banks
(based on RBI classification) were considered for his study. These were SBI and Associated
Banks, Nationalized Banks, Scheduled Commercial Banks and Foreign Banks. The period of

9
study was 2006-08. First, ANOVA was used to determine whether there existed variability
among the bank groups with regard to Return on Assets (ROA) and Profit per Employee (PPE).
The tests revealed significant variation in profitability and efficiency with regard to the bank
groups being studied. It was then decided to use discriminate analysis to classify the groups as
high profitable cum high efficient banks' and 'low profitable cum low efficient banks' relative
to each other. The discriminate analysis revealed foreign banks as high performing banks where
as the remaining three groups as low performing banks.

Hosna, Manzura and Juanjuan (2009) conducted study on “Credit risk management and
profitability in commercial banks in Sweden” This study was tried to find out how the credit
risk management affects the profitability of banks. The main purpose of this study was to
describe the impact level of credit risk management on profitability in four commercial banks
in Sweden. The data was collected from the sample banks annual reports (2000-2008) and
capital adequacy and risk management reports (2007-2008). The study used regression model
to do the empirical analysis. In the model ROE was used as the profitability indicator while
NPLR and CAR were used as credit risk management indicators. In their study they used
quantitative method to fulfill the main purpose of the study. The findings and analysis reveal
that credit risk management has effect on profitability in all four banks. Among the two credit
risk management indicators, NPLR has a significant effect than CAR on profitability as
measured by ROE.

Kithinji (2010) conducted a study on credit risk management and profitability of commercial
banks in Kenya he measured credit risk by the ratio of loans and advances on total assets and
the ratio of non-performing loans to total loans and advances and Profitability by return on total
asset ratio in Kenyan banks between 2004 to 2008. The study revealed that the bulk of the
profits of commercial banks were not influenced by the amount of credit and non-performing
loans.

Dangwal and Kapoor (2010) evaluated the financial performance of nationalized banks in
India and assessed the growth index value of various parameters through overall profitability
indices. The data for 19 nationalized banks, for the post reform period from 2002-03 to 2006-
07, was used to calculate the index of spread ratios, burden ratios, and profitability ratios. They
found that while four banks had excellent performance, five achieved good performance, four
attained fair performance, and six had poor performance.

10
Jha and Sarangi (2011) conducted study on “Performance of New Generation Banks in India:
A Comparative Study.” In this study the authors have analyzed the performance of seven public
sector and private sector banks for the year 2009-10. They used three sets of ratios, operating
performance ratios, financial ratios, and efficiency ratios. In all eleven ratios were used. They
found that Axis Bank took the first position, followed ICICI Bank, BOI, PNB, SBI, IDBI, and
HDFC, in that order.

Aduda and Gitonga (2011) by using the regression model found a reasonable level
relationship between the credit risk management and the Kenyan banks profitability level. Both
qualitative and quantitative methods were used in order to fulfil the main purpose of the study.
The researcher used ROE as the indicator of the profitability in the regression analysis and they
chose NPLR (NPL ratio) as the independent variable because it is an indicator of risk
management which affects profitability of banks. The findings and analysis reveal that credit
risk management has an effect on profitability in all the commercial banks analysed.

Haque and Sharma (2011) assessing the health of an economy can be accomplished by
studying the financial performance of its banks.

Payne (2011) by highlighting areas of good and bad performance, ratios can assist management
to identify where their strengths and weaknesses are and where further effort should be
directed.

Said and Tumin (2011) investigates the impact of bank-specific factors which include the
liquidity, credit, capital, operating expenses and the size of commercial banks on their
performance, which is measured by return on average assets (ROAA) and return on average
equity (ROAE). The results imply that ratios employed in this study have different effects on
the performance of banks in Malaysia and China, except credit and capital ratios. Operating
ratios influence performance of banks in China, but this influence is not true for Malaysian
banks regardless of the measure of performance.

Seifollahi (2011) examined and studied the magnitude and the level of loss caused by credit
risk compared to others are severe to cause bank failures. Credit risk exists because an expected
payment might not occur. Credit risk can be defined as potential losses from the refusal or
instability credit customer to pay what is owed in full and on time.

Musyoki and Kadubo (2011) investigated the impact of credit risk management on the
financial performance of Banks in Kenya for the period (2000-2006). The objective of this

11
study was to assess various parameters pertinent to credit risk management as it affects banks‟
financial performance. The Return on Assets (ROA) is a ratio that measures company earnings
before interest & taxes (EBIT) against its total net assets. The ratio is considered an indicator
of how efficient a company is using its assets to generate before contractual obligation must be
paid. It is calculated as: ROA= EBIT/ Total Assets. Return on assets gives an indication of the
capital intensity of the banking industry, which will depend on the industry; banks that require
large initial investment will generally have lower return on assets (Appa , 1996). Parameters
covered in the study were; default rate, bad debts costs and cost per loan asset. The study
employed simple random sampling in order to pick 10 banks. Financial reports of 10 banks
was used to analyse profit ability ratio for seven years (2000-2006) comparing the profitability
ratio to default rate, cost of debt collection an cost per loan asset which was presented in
descriptive, regression and correlation was used to analyze the data. The study revealed that all
these parameters have an inverse impact on banks‟ financial performance, however the default
rate is the most predictor of bank financial performance vis-à-vis the other indicators of credit
risk management.

Kargi (2011) conducted a study on credit risk and the performance of Nigerian banks. Kargi
used non-performing loan portfolios and these significantly contributed to financial distress in
the banking sector. Financial ratios as measures of bank performance and credit risk were
collected from the annual reports and accounts of sampled banks from 2004-2008 and analyzed
using descriptive, correlation and regression techniques. The findings revealed that credit risk
management has a significant impact on the profitability of Nigerian banks. It concluded that
banks‟ profitability is inversely influenced by the levels of loans and advances, non-performing
loans and deposits thereby exposing them to great risk of illiquidity and distress.

Alam and Masukujjaman (2011), their study was about risk management practices of
commercial banks in Bangladesh, this study examined the types of risk facing a bank,
procedure and techniques used to minimize the risk. The study revealed that credit risk, market
risk and operational risk are the major risks to the bankers which are managed through three
layers of management system. The Board of Directors performs the responsibility of the main
risk oversight, the Executive Committee monitors risk and the Audit Committee oversees all
the activities of banking operations. It was founded that internal rating system and risk adjusted
rate of return on capital are relatively more important techniques used by banks.

12
Afriyie and Akotey (2012) have presented a different association between these two research
variables through a study on the credit risk management and profitability of selected rural banks
in Ghana. According to authors, there is a noteworthy positive association between the non-
performing loans and profitability levels of the banks performing in the rural areas. In other
words, the banks with higher loans can still show profits. This is due to the inappropriate
policies for credit risk management of the banks. The banks in Ghana shift their overall price
on non-payment of loan to other customers in the form of elevated interest rate on loans.

Funso, Kolapo, T., Kolade, Ayeni, R., et al; (2012) investigates the quantitative effect of
credit risk on the performance of commercial banks in Nigeria for the period 2000-2010. Profit
was measured by Return on Asset, as a function of the ratio of non-performing loan to loan &
advances, ratio of total loan & advances to total deposit and the ratio of loan loss provision to
classified loans as measures of credit risk. Panel model analysis was used to estimate the
determinants of the profit function. The results showed that the effect of credit risk on bank
performance measured by the return on assets of banks is cross-sectional invariant.

Poudel, (2012) studied on the impact of the credit risk management in bank’s financial
performance in Nepal indicates that credit risk management is an important predictor of bank’s
financial performance.

Onaolapo (2012), while analysing the credit risk management efficiency in Nigerian
commercial banking sector from 2004 through 2009 provides some further insight into credit
risk as profit enhancing mechanism. Data collections was mainly secondary spanning a six year
period before and after consolidation program of the Nigerian banking sector. Collected data
were regressed and unit root test was conducted to verify order of integration for each time
series data employed. Findings indicate minimal causation between Deposit Exposure (DE)
(Surrogate of credit risk management) and performance but greater dependency on operational
efficiency parameters. Test of stationary properties conducted using ADF indicated all
variables were non- stationary while the pair wise Granger causality suggested that Deposit
Exposure performance influence does not hold for the Nigerian Commercial banking sector.
Policy recommendations were made on these findings.

Muhammed, Shahid, Munir and Ahad (2012) used descriptive, correlation and regression
techniques to study whether credit risk affect banks performance in Nigeria from 2004 to 2008.
Financial ratios as measures of bank performance and credit risk were used and data collected
from secondary sources mainly the annual reports and accounts of sampled banks from 2004 -

13
2008. the ratio of Non-performing loan to loan & Advances and ratio of Total loan & Advances
to Total deposit were used as indicators of credit risk while the ratio of Profit after Tax to total
asset known as return on asset (ROA) indicates performance. The findings revealed that credit
risk management has a significant impact on the profitability of Nigeria banks.

Boahene, Dasah and Agyei (2012) used regression analysis to determine whether there is a
significant relationship between credit risk and profitability of Ghanaian banks.

James (2013) studied that ratio analysis also helps identify and highlights the areas of poor
performance and areas of satisfactory performance.

Charles, Okaro Kenneth (2013) examined the impact of credit risk management on capital
adequacy and banks financial performance in Nigeria. For this purpose six banks were selected
by using positive sampling technique. Data were obtained from the published financial
statements from 2004 to 2009. Panel data model was used to estimate the relationship that
exists among Loan Loss Provisions (LLP), Loans and Advances (LA), N0n-performing Loans
(NPL), Capital Adequacy (CA), and Return on Assets (ROA). Results showed that sound credit
risk management and capital adequacy related positively on banks‟ financial performance with
the exception of loans and advances which was found to have a negative impact on banks‟
profitability in the period under studied. Based on the findings, they recommended that
Nigerian banks establish appropriate credit risk management strategies by conducting rigorous
credit appraisal before loan disbursement and drawdown. It is also recommended that adequate
attention to be paid for Tire-one capital of Nigerian banks.

According to Lelissa (2014) high performance is related to the ability of banks to control their
credit risk, diversify their income sources by incorporating non-traditional banking services
and control their overhead expenses. Bank’s capital and liquidity status are not significant to
affect the performance of banks. On the other hand, the bank size and macro-economic
variables such real GDP growth rates have no significant impact on banks' profitability.

Gholami and Salimi (2014) investigated the relationship between credit risk management and
liquidity management and the profitability in banking sector. Authors stated that that based on
the series of practical solutions, a significant relationship of credit risk management with
profitability was evident. It was further stated that banks‟ financial statements are immensely
affected by the credit risk. In other words, for increasing the business profitability, credit risk
monitoring must be perfect. The study concluded a negative relationship between the credit
risk and the profitability.

14
Awoyemi Samuel Olausi (2014) conducted study on “the Impact of Credit Risk Management
on The Commercial Banks Performance In Nigeria”. The main objective of this study was to
investigate the impact of credit risk management on the performance of commercial banks in
Nigeria. In the model, Return on Equity (ROE) and Return on Asset (ROA) were used as the
performance indicators while Non Performing Loans (NPL) and Capital Adequacy Ratio
(CAR) as credit risk management indicators. The data used in this study is a financial reports
of seven commercial banks for seven years (2005 – 2011). The panel regression model was
employed for the estimation of the model. The findings revealed that credit risk management
has a significant impact on the profitability of commercial banks’ in Nigeria.

Gizaw, Kebede, and Selvaraj (2015) have focused on the relationship between credit risk
management and profitability levels of the banks operating in Ethiopia on commercial basis.
The findings of research revealed that there is a significant relationship between the non-
performing loan, loan loss provisions and capital adequacy within the commercial banks of
Ethiopia.

15
 CHAPTER 3

THEORETICAL FRAMEWORK

This chapter discusses the credit risk management and financial performance in the banking
sector in four sections. The first section describes the credit, credit worthiness and credit score
and credit risk management and its objectives. The second section we discuss the definition of
credit risk and categories of credit risk. describes the financial performance and profitability
in banks. The third section describes the credit risk management, credit risk management in
banking and objectives of credit risk management. In the fourth section we discuss financial
performance, profitability, performance appraisal, tools used for performance appraisal and
process.

3.1 CREDIT

Credit is generally defined as a contractual agreement in which a borrower obtains something

of value now and agrees to reimburse the lender at a later date—generally with interest. Credit
also denotes to the creditworthiness or credit history of an individual or firm. It also refers to
an accounting entry that either decreases assets or increases liabilities and equity on a
company's balance sheet. In the first and most common description of the term, credit refers to
an agreement to purchase a good or service with the prompt promise to pay for it later. This is
well-known as purchasing on credit.

3.1.1 Types of Credit

There are many different forms of credit. The utmost prevalent form is bank credit or financial
credit. This kind of credit includes car loans, mortgages, signature loans, and lines of credit.
Essentially, when the bank lends to a consumer, it credits money to the borrower who must pay
it back at a future date.

16
3.1.2 Creditworthiness

Creditworthiness is how a lender outlines that you will default on your debt responsibilities, or
how worthy you are to obtain new credit. Creditworthiness is determined by several factors
including your repayment history and credit score. The decision the company makes is based
on how you've dealt with credit in the past. In order to do this, they look at several different
factors: your overall credit report, credit score, and payment history.

Credit report outlines how much debt one carries, the high balances, the credit limits, and the
current balance of each account. It will also flag any important information for the potential
lender including whether one has had any past due amounts, any defaults, bankruptcies, and
collection items.

Creditworthiness is also measured by ones credit score, which measures them on a numerical
scale based on their credit report. A high credit score means ones creditworthiness is high.
Contrariwise, low creditworthiness materialises from a lower credit score.

Payment history also plays a key role in determining ones creditworthiness. Lenders don't
generally extend credit to someone whose history demonstrates late payments, missed
payments, and overall financial irresponsibility. If one has been up-to-date with all their
payments, the payment history on their credit report should reflect that they should have
nothing to worry about.

Creditworthiness is important because it will determine whether one gets that car loan or that
new credit card. The more creditworthy people are, the better it is for them in the long run
because it normally means better interest rates, fewer fees, and better terms and conditions on
a credit card or loan.

Credit score

A credit score is a number ranging from 300-850 that illustrates a buyer's creditworthiness. The
greater the credit score, the more attractive will be the borrower. A credit score is based on

17
credit history: number of open accounts, total levels of debt, and repayment history. Lenders
use credit scores to evaluate the probability that an individual will repay loans in a timely
manner.

A credit score plays a key role in a lender's decision to offer credit. The credit score model was
created by the Fair Isaac Corporation, also known as FICO, and it is used by financial
institutions.

How Credit Scores Work

A credit score plays a key role in a lender's decision to offer credit. A credit score can
significantly affect ones financial life. It plays a key role in a lender's decision to offer one
credit. People with credit scores below 640, for example, are generally considered to be
subprime borrowers.

Contrariwise, a credit score of 700 or above is normally considered good and may end in a
borrower receiving a lower interest rate, which results in their paying less money in interest
over the lifespan of the loan. Scores greater than 800 are considered excellent. Though all
creditor outlines its own ranges for credit scores, the average FICO score range is often used:

 Excellent: 800 to 850

 Very Good: 740 to 799
 Good: 670 to 739
 Fair: 580 to 669
 Poor: 300 to 579

Credit Score Factors: How Score Is Calculated

There are five key factors evaluated when computing a credit score:

 Payment history
 Total amount owed
 Length of credit history
 Types of credit
 New credit

Payment history counts for 35% of a credit score and shows whether a person pays their
obligations on time. Total amount owed counts for 30% and takes into account the percentage
of credit available to a person that is currently being used, which is known as credit utilization.

18
Length of credit history counts for 15%, with longer credit histories being considered less risky,
as there is more data to determine payment history.

The type of credit used counts for 10% of a credit score and shows if a person has a mix of
instalment credit, such as car loans or mortgage loans, and revolving credit, such as credit cards.
New credit also counts for 10%, and it influences in how many new accounts a person has,
how many new accounts they have applied for recently, which end in credit inquiries, and when
the most latest account was opened.

How to Improve Credit score

Every consumer should keep track of their credit score because it is the factor financial
institutions use to decide if an applicant is eligible for credit, preferred interest rates, and
specific credit limits.

There are several ways one can improve their credit score to establish creditworthiness. The
most obvious way is to pay their bills on time. Make sure one get current on any late payments
or set up payment plans to pay off past due debt. Pay more than the minimum monthly payment
to pay down debt faster and reduce the assessment of late fees.

Keep credit card balances at 20% or less of the credit limit, although 10% is ideal. Verify debt-
to-income (DTI) ratio. An acceptable DTI is 35% but 28% is ideal. DTI can be calculated by
dividing total monthly debt by total gross monthly income. Lenders use DTI when assessing
an individual’s creditworthiness.

3.2 CREDIT RISK

Credit risk is the likelihood of a loss resulting from a borrower's failure to repay a loan or meet
contractual responsibilities. Conventionally, it denotes to the risk that a lender may not receive
the owed principal and interest, which results in an disruption of cash flows and increased costs
for collection.

When lenders offer mortgages, credit cards, or other types of loans, there is a risk that the
borrower may not repay the loan. Similarly, if a company offers credit to a customer, there is
a risk that the customer may not pay their invoices.

19
Credit risks are calculated based on the borrower's overall ability to repay a loan according to
its original terms. To assess credit risk on a consumer loan, lenders look at the five Cs: credit
history, capacity to repay, capital, the loan's conditions, and associated collateral.

Definition of Credit Risk

Bankers are apprehensive with six chief types of risk. These are credit risk, liquidity risk,
market risk, interest rate risk, earnings risk and solvency risk (Rose, 2002) that can be grouped
as credit risk, market risk and operational risk (Teker). Amongst these risks credit risk plays
the main role since by far the prime asset item is loans, which generally account for half to
almost three-quarters of the entire value of all bank assets. Generally, credit risk is associated
with the traditional lending activity of banks and it is simply described as the risk of a loan not
being repaid partly or in full. According to the Basel (1999a), credit risk is defined as “the
potential that a bank borrower or counterparty will fail to meet its obligations in accordance
with agreed term”.

Categories of Credit Risk

To gain a well understanding on the nature of credit risk, it is essential to introduce the types
of credit risk tangled in financial activities before any further discussion. Regarding the
categorizing of credit risk, different authors have conveyed various criteria. Horcher (2005),
defines six types of credit risk, including default risk, counterparty pre-settlement risk,
counterparty settlement risk, legal risk, country or sovereign risk and concentration risk.

Default Risk

According to Horcher (2005), traditional credit risk narrates to the default on a payment,
particularly lending or sales. Default risk, also called default probability, is the probability that
a borrower fails to make full and timely payments of principal and interest, according to the
terms of the debt security involved.

Counterparty Settlement Risk

According to Casu, Girardone and Molyneux (2006), settlement risk is a risk usually faced in
the interbank market and it refers to the state where one party to a contract fails to pay money
or deliver assets to another party at the reimbursement time, which can be associated with any
timing alterations in settlement.

Country or Sovereign Risk

20
Country risk arises due to the impact of deteriorating foreign economic, social and political
conditions on overseas transactions and sovereign risk refers to the possibility that governments
may enforce their authority to announce debt to external lenders void or alter the movements
of profits, interest and capital under some economic or political pressure.

3.3 CREDIT RISK MANAGEMENT

Credit risk management which refers to identification, analysis and assessment, monitoring and
control of credit has direct implications on the amount of loans and advances extended to
customers as well as on the level of nonperforming loans .The main source of credit risk
include, limited institutional capacity, inappropriate credit policies, volatile interest rates, poor
management, inappropriate laws, low capital and liquidity levels, direct lending, massive
licensing of banks, poor loan underwriting, poor lending practices, government interference
and inadequate supervision by the central bank. An upsurge in bank credit risk progressively
hints to liquidity and solvency problems. Increases in credit risk will raise the marginal cost of
debt and equity, which in turn increases the cost of funds for the bank (Basel, 2000). The goal
of credit risk management, as presented by the Basel (1999a), is to maximize a bank‘s risk
adjusted rate of return by maintaining credit risk exposure within acceptable parameters.

Credit Risk Management in Banking

Commercial Banks (CBs) are profit-making organizations acting as intermediaries between

borrowers and lenders attracting temporarily available resources from business and individual
customers as well as granting loans for those in need of financial support (Drigă, 2012).
Commercial banks are in the business of mobilizing deposits, lending money, investing funds
and holding bonds and other securities. A banks' balance sheet has loans representing the
majority of a bank's assets, but the loans come with risk. If the bank makes bad loans to firms
or consumers for example, the bank will be in a crisis if those loans are not repaid (Mavhiki et
al., 2012).

Credit risk is a major concern for lenders worldwide as it is the most critical of all risks faced
by a banking institution. The magnitude and the level of loss caused by credit risk compared to
others are severe to cause bank failures. The more banks know about the creditworthiness of a
potential borrower, the greater the chance they can maximize profits, increase market share,

21
minimize risk, and reduce the financial provision that must be made for bad debt . The main
challenge to CBs in their operations is the disbursement of loans and advances. There is need
for CBs to adopt appropriate credit appraisal techniques to minimize the possibility of loan
defaults since defaults on loan repayments leads to adverse effects such as the depositors losing
their money, loss of confidence in the banking system, and financial instability.

Though the effects of all risks types can cause negative consequences to the bank, credit risk
has been determined or identified as the key risk related with negative consequences in terms
of its effects on bank performance. This implies if credit risk is not managed properly, it can
tip to failure. Therefore, for any bank to prosper, its CRM must be handled with a lot of
momentousness. This is because should a loss befall, the bank will have to “extend its hands”
to get funds from other means to meet up or cover the losses.

The consultative paper issued by Basel (1999a) also points out that the major cause of serious
banking problems continues to be directly due to the loose credit standards for borrowers and
counterparties, poor portfolio risk management and so on. All such evidence proves the
tremendously vital role credit risk management plays in the entire banking risk management
approach as well as the sustainable accomplishment of the organization.

Objective of credit risk management

The objectives are to:

 Develop an integrated framework for charting/categorising several types of loans and

advances, and regulate implications on quality of credit and risk.
 Draw up appropriate strategies at the corporate level to accomplish the prescribed
levels/quality of exposure and issue guidelines to Strategic Business Units (SBUs).
Benchmarks might be in term of retrieval percentages, NPA levels, volume of exposure,
etc.
 Review the exposures and performance periodically.
 Devise suitable control/monitoring mechanisms.
 Develop and polish analytical tools to evaluate risk profiles, for guaranteeing healthy
portfolios and safeguarding against sickness.

The factors and objectives that shape up the bank’s policies towards credit risk management
are:

22
 To make available sufficient liquidity to meet loan ailments, interest, operational and other
costs and losses;
 To maximize profits;
 To support broad national policy objectives of liquidity, interest rate stability, financial
stability and above all, allocation of scarce financial resources efficiently to foster
economic growth.

3.4 FINANCIAL PERFORMANCE

The performance of the firm can be measured by its financial outcomes, i.e., by its size of
earnings. Riskiness and profitability are two major factors which jointly determine the value
of the concern. Financial decisions which upsurge risks will decline the value of the firm and
on the other hand, financial decisions which surge the profitability will rise value of the firm.
Risk and profitability are two crucial elements of a business concern. There has been a
substantial debate about the final objective of firm performance, whether it is profit
maximization or wealth maximization. It is observed that while considering the firm
performance, the profit and wealth maximization are linked and are effected by one-another.

3.4.1 Profitability

Profitability portrays the relationship of the complete amount of profit with various other
factors. Profitability is a comparative concept, which is quite valuable in decision making.
Another main subject here is profit planning, which entails of numerous steps to be taken to
develop the profitability of the bank. The term “Profitability” is collected of two words viz.
Profit and Ability”. The term “Ability” showed the authority of the corporate firm to make
profits. The term “Ability” is also stated to as “earning power” or “Operating Performance” of
the apprehensive investment. It can be remarked that “Profitability‟ is helpful in providing a
useful basic for measuring tool in point of view performance and overall efficiency for Indian
banking. Profitability is the most significant and dependable indicator as it gives a broad
indication of the aptitude of a bank to advance its income level.

Profitability indicates earning capacity of the banks. It highlights the managerial competency
of the banks. It also depicts work culture, operating competence of the bank.

23
Profitability ratios are the most important and appropriate indicators for the evaluation of the
financial performance of a bank. Profitability ratios serve as an important measurement of the
efficiency with which the operations of the banks are going on. In case of banking industry
income, assets, deposits and working funds can be used as measures for finding out
profitability.

3.4.2 Concept of 'Performance Appraisal'

"Performance Appraisal, is a developmental tool for a business. As a developmental tool, it is

not merely the end product or the final assessment. It is important as the whole process of
appraisal. The concept of human body is similar to the concept and case of a business
organisation. Human body requires medical check-up and examination for maintaining fitness
of body; similarly, the performance of a business organisation has got to be assessed
periodically. Erich (1977) stated, "The person analysing business performance has clearly in
mind which tests should be applied and for what specific reasons. One must define the view
point to be taken, the objectives of the analysis and possible standard comparison". Appraisal
refers to critical review with a view to improving performance. It contains the act to scrutinise,
to measure, to infer and to draw conclusions.

3.4.3 Financial Appraisal

Financial Appraisal is a scientific evaluation of profitability and financial strength of any

business concern. According to Howard and Upton (1953), "Financial Statements are end
products of financial accounting". According to Kennedy and McMillan (1962), "Financial
Statement Analysis attempt to unveil the meaning and significance of the items composed in
profit and loss account and balance sheet to support the management in the creation of sound
operating financial policies". . The financial statement analysis enables an adequate guideline
about the behaviour of financial variables for measuring the performance of different units in
the industry; it also eases to specify the current scenario of development in the organization.

24
3.4.4 Tools for Performance Appraisal

TOOLS

ACCOUNTING STATISTICAL
TOOLS TOOLS

COMPARATIVE
STATEMENT
ARITHMETIC
ANALYSIS MEAN

RATIO INDEX
ANALYSIS NUMBERS

TREND DIAGRAMS
ANALYSIS AND GRAPHS

F. TEST /
ANOVA

Fig 3.4 Tools for performance appraisal

 Accounting Tools:

For analysing performance of group of banks accounting tools like:

Trend Analysis

An effective use of financial ratios can be made by observing behaviour of ratios over a period
of time, is called trend analysis, depicting trends in the operations of a unit. "It is supportive in
clarifying proportionate variations over a time in selected financial statement data". This
method involves the interpretation of the percentage relationship that each statement item bears
to the same item in the 'base year’. Thus, Trend Analysis is useful in evaluation of profit and
profitability performance of the unit.

Ratio Analysis

Beaver was the first to use the ratio analysis tools in a modern way of predicting business
failure. Ratio analysis is employed to evaluate relationships amid financial statement items.
The ratios are used to ascertain trends over time for one company or to parallel two or more
25
companies at one point in time. Ratio analysis is a quantitative method of gaining insight into
a company's liquidity, operational efficiency, and profitability by studying its financial
statements.

Comparative Statement Analysis

Comparative Financial Statement Analysis is also entitled as Horizontal analysis. The

Comparative Financial Statement offers information about two or more years' figures as well
as any increase or decrease from the preceding year's figure and it's percentage of increase or
decrease.

 Statistical Tools:

For making the study more scientific and accurate following statistical tools are applied:

Arithmetic Mean

The arithmetic mean is very commonly used in various types of study. Adding all values and
dividing the total by the number of observations calculate it. In this study, it is calculated by
adding relevant item values and dividing it by the total number of years taken.

Index Numbers

Index Number is a number which is used to measure the level of a given phenomenon as
compared to the level of the same phenomenon at some standard date.

Diagrammatic and Graphic Presentation of data

Diagrams and Graphs are visual aids, which give a bird's eye view of a given set of numerical
data. They present the data in comprehensible and intelligible form. Diagrams and graphs
depict more information than the data presented in the tabular form.

ANOVA Technique / "F" - Test

Fisher (1925), developed Analysis of Variance and a test so developed by him is known as
Fisher's test or more commonly 'F'-test .It is also known as ANOVA. It is one of the most
important tools of statistical analysis. The analysis of variance furnishes a technique for testing
simultaneously the significance of differences among several means. From this technique one
is able to determine whether the samples have the same mean as the population from which
they have been drawn.

26
 CHAPTER 4

RESEARCH METHODOLOGY

4.1 OBJECTIVES OF THE STUDY

The overall objective of this study is to investigate the impact of credit risk management on
banks financial performance in PSBs in India. A positive relationship would imply that better
risk management results in better performance of the bank and vice versa, while a negative
relationship would imply that a better credit risk management results in worse bank
performance and vice versa. The specific objectives are to:

 To investigate the impact of credit risk management on the banks financial performance of
PSBs in India.
 To identify the relationship that exists between financial performance and credit risk
management of PSBs in India.

4.2 HYPOTHESIS OF THE STUDY

Based on the study problem and its objectives, the hypotheses can be formulated as follows:
Hypothesis 1
H0: There is no significant impact of credit risk management on banks financial performance
(ROA).
H1: There is a significant impact of credit risk management on banks financial performance
(ROA).
Hypothesis 2
H0: There is no significant impact of credit risk management on banks financial performance
(ROE).
H1: There is a significant impact of credit risk management on banks financial performance
(ROE).

27
Hypothesis 3
H0: There is no significant impact of credit risk management on banks financial performance
(NPM).
H1: There is a significant impact of credit risk management on banks financial performance
(NPM).

4.3RESEARCH DESIGN
The descriptive approach was quick and practical in terms of the financial aspect. The research
design employed in this report was descriptive research design. Descriptive research seeks to
establish factors associated with certain occurrences, outcomes, conditions or types of
behaviour. The design was appropriate because the study involved an in depth study of credit
risk management and the relationship between the two variables i.e. credit risk management
and the financial performance of public sector banks was described extensively.

4.4 SOURCES OF DATA

This part of study defines all the process of data collection. When it comes to data collection,
there are two methods in general used by researcher to collect data, primary and secondary
method.

4.5 PRIMARY AND SECONDARY DATA

Primary method includes observation method, interview/questionnaire method. Secondary

method is the process in which previously collected data is used.

Secondary data:

This study is done on the basis on secondary data. The required data for this study were
collected from the various sources like monthly RBI bulletins, published by RBI, Govt. of
India, Annual reports of various banks, publications and notifications of RBI etc.

4.6 POPULATION

The population of interest for this study was Pubic Sector Banks (PSBs) in India.

4.7 SAMPLE DESIGN

The study covers the credit risk management of public sector banks in India. Sample public

sector banks are selected on the basis of turnover of 2018-19. High turnover and low turnover
28
banks are elected as sample for this study Thus, the study includes the following Public sector

Banks: a) State Bank of India, b) Canara banks, c) Bank of Baroda d) Union Bank e) Punjab

National Bank. For this purpose, the detailed information were also collected from the various

special issues of RBI publication from the RBI bulletin, as this study was restricted to the public

sector banks in India.

4.8 SAMPLING METHOD

The study employed purposive sampling method.

4.9 METHOD OF DATA COLLECTION

The data was collected from the annual reports of the selected banks from the year 2015-
2019.

4.10 DATA ANALYSIS TECHNIQUES

The data were analysed using descriptive statistics, regression model by using SPSS software.
The tools used were correlation and Anova.

29
 CHAPTER 5

ANALSYSIS AND INTERPRETATION

5. Introduction

This chapter presents the analysis of data and discusses the results for each objective set for the
study. This study is based on the secondary data. The target population was 26 public sector
banks (six State Bank of India & Its Associates and twenty Nationalized Banks other than SBI
Group) in India. The first section presents the definition of variables, variables statistics and
conceptual framework of the study. The second section presents the impact of credit risk
Management on the financial performance of PSBs in India. The third section deals with the
impact of credit risk Management on the financial performance of the State Bank of India &
its Associates. The last section discusses the impact of credit risk Management on financial
performance of the Nationalized Banks other than SBI Group.

Operational definition of variables

The dependent variables represent the financial performance measured by Return on Assets,
Return on Equity, Net Profit Margin and Net Interest Margin. The independent variables
represent the credit risk management indicators, which include the Capital Adequacy Ratio
(CAR), Credit-Deposit Ratio (CDR) and Advances / Loans Funds Ratio

Variables statistics of the PSBs in India

Return on Assets (ROA)

Return on Assets (ROA) is an important performance indicator for measuring the performance
of the banks. ROA is a profitability ratio and shows how profitable a bank is relative to its total
assets. ROA also gives an idea as to how efficient management is at using its assets to generate
earnings. ROA is the ratio of annual net income to average total assets of a business during a

30
financial year. State Bank of India has shown a Return on Assets of 241.89% annualized in the
Financial Year 2018-19; Punjab National Bank & Bank of Baroda has shown a Return on Asset
of 89.5% & 173.66% respectively; Union Bank of India has shown a Return on Assets of
137.56%; Canara Bank has shown a Return on Assets of 394.68%; annualized in the Financial
Year 2018-19.

Table 5.1 Return on assets of the PSBs in India (2015-2019)

Name of Bank 2014-15 2015-16 2016-17 2017-18 2018-19

SBI 223.54 238.94 235.88 235.4 241.89
Punjab National Bank 203.24 180.61 179.03 135.44 89.5
Bank of Baroda 180.13 174.46 174.92 163.64 173.66
Union Bank Of India 288.4 295.44 340.9 214.76 137.56
Canara Bank 556.68 481.75 474.01 396.59 394.68

Return on assets of the PSBs

600 556.68
481.75 474.01
500
396.59 394.68
400 340.9
288.4 295.44
300 223.54 238.94 235.88 235.4 214.76 241.89
203.24
180.13 180.61
174.46 179.03
174.92 163.64 173.66
200 135.44 137.56
89.5
100

0
2014-15 2015-16 2016-17 2017-18 2018-19

SBI Punjab National Bank Bank of Baroda Union Bank Of India Canara Bank

31
 Return on equity
ROE is a key profitability ratio that investors use to measure of the amount of a company's
income that is returned as shareholder equity. State Bank of India has shown a Return on Equity
of 38.33% annualized in the Financial Year 2018-19; Punjab National Bank & Bank of Baroda
has shown a Return on Equity of -24.2% & 0.94% respectively; Union Bank of India has shown
a Return on Equity of -12.15%; Canara Bank has shown a Return on Equity of 1.16%;
annualized in the Financial Year 2018-19.

Return on Equity = Net income / Shareholders Equity

Table 5.2 Return on equity of the PSBs in India (2015-2019)

Name of Bank 2014-15 2015-16 2016-17 2017-18 2018-19

SBI 41.41 36.58 37.33 35.7 38.33
Punjab National Bank 8.12 -11.2 3.47 -32.85 -24.2
Bank of Baroda 8.53 -13.42 3.43 -5.6 0.94
Union Bank of India 9.68 6.65 2.36 -20.9 -12.15
Canara Bank 10.21 -10.75 3.96 -14.51 1.16

Return on equity of the PSBs

50 41.41
36.58 37.33 35.7 38.33
40
30
20 10.21
8.12 9.68 6.65
10 3.96
3.47 2.36 1.16
0
-10 2014-15 2015-16 2016-17 2017-18 2018-19
-11.2 -10.75 -12.15
-20 -14.51
-20.9
-30 -24.2
-40 -32.85

SBI Punjab National Bank Bank of Baroda Union Bank of India Canara Bank

32
 Net Interest Margin (NIM)
Net Interest Margin (NIM) is a measure of the difference between the interest income generated
by banks or other financial institutions and the amount of interest paid out to their lenders (for
example, deposits), relative to the amount of their (interest earning) assets. State Bank of India
has shown a Net Interest Margin of 2.62% annualized in the Financial Year 2018-19; Punjab
National Bank has shown a Net Interest Margin of 2.24%; Bank of Baroda has shown a Net
Interest Margin of 2.49%; Union Bank of India has shown a Net Interest Margin of 6.96% and
Canara Bank has shown a Net Interest Margin of 2.23% annualized in the Financial Year March
2018-19.

Net interest Margin = Net Interest Income / Total Funds

Table 5.3 Net Interest Margin of the PSBs in India (2015-2019)

Name of Bank 2014-15 2015-16 2016-17 2017-18 2018-19

SBI 2.94 2.69 2.51 2.36 2.62
Punjab National Bank 2.88 2.42 2.17 2.02 2.24
Bank of Baroda 1.92 1.84 1.98 2.19 2.49
Union Bank of India 8.76 8.23 7.64 6.97 6.96
Canara Bank 1.88 1.79 1.75 2.05 2.23

Net Interest Margin of the PSBs

8.76
9 8.23
7.64
8 6.97 6.96
7
6
5
4 2.94 2.69
3
2.51 2.36 2.19 2.05 2.62 2.49 2.23
1.92 1.88 1.84 1.79 1.98 1.75
2
1
0
2014-15 2015-16 2016-17 2017-18 2018-19

SBI Punjab National Bank Bank of Baroda Union Bank of India Canara Bank

33
 Net Profit Margin

Net Profit Margin is the percentage of revenue remaining after all operating expenses, interest
taxes and preferred stock dividends (but not common stock dividends) have been deducted
from a company's total revenue. The State Bank of India has shown a Net Profit Margin of
0.9% annualized in the Financial Year 2018-19; Punjab National Bank has shown a Net Profit
Margin of -19.44%; Bank of Baroda has shown a Net Profit Margin of 0.86%; Union Bank of
India has shown a Net Profit Margin of 8.65%; and Canara bank has shown a Net Profit Margin
of 0.74% annualized in the Financial Year March 2018-19.

Net profit margin = (Net income / Net revenue ) * 100

Table 5.4 Net Profit Margin of the PSBs in India (2015-2019)

Name of Bank 2014-15 2015-16 2016-17 2017-18 2018-19
SBI 8.17 5.54 0.1 -1.98 0.9
Punjab National Bank 6.61 -8.38 2.8 -25.59 -19.44
Bank of Baroda 7.91 -12.24 3.27 -5.57 0.86
Union Bank of India 5.55 4.19 1.69 -16.02 -8.65
Canara bank 6.17 -6.38 2.71 -10.23 0.74

Net Profit Margin of the PSBs

8.17
10 6.61 5.55 5.54
4.19
5 2.8 1.69
0.1 0.9
0
2014-15 2015-16 2016-17 2017-18
-1.98 2018-19
-5
-10 -8.38 -8.65
-15
-16.02
-20
-19.44
-25
-25.59
-30

SBI Punjab National Bank Bank of Baroda Union Bank of India Canara bank

34
 Capital adequacy ratio

Capital adequacy ratio shows the proportion of owners’ equity to total asset. Central banks use
CAR as a protection of the depositors’ money from credit risk and other failures. For this
reason, the minimum CAR is determined by the regulatory agencies. Internationally BASEL
set 8% CAR for commercial banks. Table 5.5 indicated that the State Bank of India has shown
a Capital Adequacy ratio of 12.72% annualized in the Financial Year 2018-19; Punjab National
Bank has shown a Capital Adequacy ratio of 9.73%; Bank of Baroda has shown a Capital
Adequacy ratio of 13.42%; Union Bank of India has shown a Capital Adequacy ratio of 11.78%
and Canara Bank has shown a Capital Adequacy ratio of 11.9% annualized in the Financial
Year March 2018-19.

Table 5.5 CAR of the PSBs in India (2015-2019).

Name of Bank 2014-15 2015-16 2016-17 2017-18 2018-19
SBI 12 13.02 13.11 12.60 12.72
Punjab National Bank 12.89 11.28 11.66 9.2 9.73
Bank of Baroda 12.6 13.17 13.17 12.13 13.42
Union Bank of India 10.22 10.56 11.79 11.5 11.78
Canara Bank 10.56 11.08 12.86 13.22 11.9

CAR of all PSBs

13.17 13.1712.86 13.22 13.42
14 12.6
11.79 12.13 11.9
11.78
11.08 11.5
12 10.56
10.22 10.56
10
8
6
4
2
0
2014-15 2015-16 2016-17 2017-18 2018-19

SBI Punjab National Bank Bank of Baroda Union Bank of India Canara Bank

35
 Non-performing Asset ratio

Period of more than 90 days from the end of a particular quarter is called a Non performing
Asset. With regard to credit risk measures, Table 5.6 indicated that the State Bank of India has
shown a Non-performing Asset ratio of 3.95% annualized in the Financial Year 2019; Punjab
National Bank has shown a Nonperforming Asset ratio of 6.56%; Bank of Baroda has shown
a Nonperforming Asset ratio of 4.38%; Union Bank of India has shown a Non-performing
Asset ratio of 6.85%; and State Canara Bank has shown a Non-performing Asset ratio of 5.37%
annualized in the Financial Year March 2019.

Table 5.6 Non-Performing Asset Ratio of the PSBs in India (2015-2019)

Name of Bank 2014-15 2015-16 2016-17 2017-18 2018-19
SBI 2.12 3.81 3.71 3.01 3.95
Punjab National Bank 4.06 8.61 7.81 11.24 6.56
Bank of Baroda 6.32 5.45 6.21 7.98 4.38
Union Bank of India 3.08 5.25 6.57 8.42 6.85
Canara Bank 2.74 6.42 6.85 7.48 5.37

Non-Performing Asset Ratio of the PSBs

12 11.24

10 8.61 8.42
7.81 7.48
8 6.85
6.57 6.56 6.85
6.42
5.25 5.37
6
4.06
4 3.08
2.74

0
2014-15 2015-16 2016-17 2017-18 2018-19

SBI Punjab National Bank Bank of Baroda Union Bank of India Canara Bank

36
 Ratio of credit to deposit

The ratio of credit to deposit is the most commonly used measure of bank credit risk. The ratio
can also indicate how far the bank used depositors fund on credit activity which is prone to
default risk. A high credit-deposit ratio indicates that larger portion of deposits is put to use to
earn maximum interests. Table 5.7 indicated that the State Bank of India has shown a credit-
deposit ratio of 84.04% annualized in the Financial Year 2019; Punjab National Bank has
shown a credit-deposit ratio 76.6%; Bank of Baroda has shown a credit-deposit ratio of
69.54%; Union Bank of India has shown a credit-deposit ratio of 78.88%; and Canara Bank
has shown a credit-deposit ratio of 70.55% annualized in the Financial Year March 2019.

Table 5.7 Credit-Deposit Ratio of the PSBs in India (2015-2019)

Name of Bank 2014-15 2015-16 2016-17 2017-18 2018-19
SBI 73.94 72.47 77.61 82.72 84.04
Punjab National Bank 68.14 67.51 70.81 75.19 76.6
Bank of Baroda 72.87 67.95 65.24 68.13 69.54
Union Bank of India 71.04 73.1 76.8 79.29 78.88
Canara Bank 72.03 70.95 68.38 68.66 70.55

Credit-Deposit Ratio of the PSBs

90 82.72 84.04
77.61 75.19 76.6
80 73.94 72.03 72.47 70.95 70.81 68.38
68.14 67.51 68.66 70.55
70
60
50
40
30
20
10
0
2014-15 2015-16 2016-17 2017-18 2018-19

SBI Punjab National Bank Bank of Baroda Union Bank of India Canara Bank

37
 Advances / Loans Funds Ratio

Table 5.8 indicated that the State Bank of India has shown ALF ratio of 69.1% annualized in
the Financial Year 2019; Punjab National Bank has shown ALF ratio of 65.49%; Bank of
Baroda has shown a credit-deposit ratio of 68.96%; Union Bank of India has shown an ALF
ratio of 65.05%; and Canara Bank has shown an ALF ratio of 68.96% annualized in the
Financial Year March 2019.

Table 5.8 Advances / Loans Funds Ratio of the PSBs in India (2015-2019)
Name of Bank 2014-15 2015-16 2016-17 2017-18 2018-19
SBI 77.62 76.14 68.34 65.04 69.1
Punjab National Bank 72.73 71.1 65.79 63.53 65.49
Bank of Baroda 68.03 60.9 61.83 66.47 68.96
Union Bank of India 75.28 73.66 72.22 66.09 65.05
Canara Bank 68.03 60.9 61.83 66.47 68.96

Advances / Loans Funds Ratio of the PSBs

77.62 75.28 76.14
80 72.73 71.173.66 68.34 72.22
68.03 65.79 66.47 69.1
65.04 66.09
68.96
65.4965.05
70 60.9 61.83 63.53
60
50
40
30
20
10
0
2014-15 2015-16 2016-17 2017-18 2018-19

SBI Punjab National Bank Bank of Baroda Union Bank of India Canara Bank

38
 Correlation analysis for PSBs

Correlation analysis measures the relationship between two items. The resultant value (called
the "correlation coefficient") displays if changes in one item will effect in changes in the other
item (e.g., the security's price). Correlation is a way to index the degree to which two or more
variables are associated with or related to each other.

Null hypothesis: There is no association between Dependent and independent variable of

financial performance and credit risk of SBI.

Alternative Hypothesis: There is association between Dependent and independent variable of

financial performance and credit risk of SBI.

Table 5.9
Correlation Matrix among Dependent and Independent Variables of the SBI
Correlations

ROA ROE NIMR NPM CAR CDR ALFR NPAR

Return on Pearson
assets of the Correlation 1 -.712 -.595 -.582 .795 .472 -.489 .950(*)
PSBs in India
Sig. (2-
.177 .290 .303 .108 .423 .403 .013
tailed)
N 5 5 5 5 5 5 5 5
Return on Pearson
-.712 1 .875 .718 -.746 -.320 .638 -.615
equity Correlation
Sig. (2-
.177 .052 .172 .147 .600 .247 .270
tailed)
N 5 5 5 5 5 5 5 5
Net Interest Pearson
-.595 .875 1 .957(*) -.581 -.646 .926(*) -.473
Margin Correlation
Sig. (2-
.290 .052 .011 .304 .239 .024 .421
tailed)
N 5 5 5 5 5 5 5 5
Net Profit Pearson
-.582 .718 .957(*) 1 -.486 -.812 .991(**) -.461
Margin Correlation
Sig. (2-
.303 .172 .011 .407 .095 .001 .435
tailed)
N 5 5 5 5 5 5 5 5
Capital Pearson
Adequacy Correlation .795 -.746 -.581 -.486 1 .063 -.371 .897(*)
Ratio
Sig. (2-
.108 .147 .304 .407 .920 .539 .039
tailed)

39
 N 5 5 5 5 5 5 5 5
Credit- Pearson
.472 -.320 -.646 -.812 .063 1 -.848 .277
Deposit Ratio Correlation
Sig. (2-
.423 .600 .239 .095 .920 .069 .651
tailed)
N 5 5 5 5 5 5 5 5
Advances / Pearson
.991(**
Loans Funds Correlation -.489 .638 .926(*) -.371 -.848 1 -.354
)
Ratio
Sig. (2-
.403 .247 .024 .001 .539 .069 .559
tailed)
N 5 5 5 5 5 5 5 5
NPAR Pearson .950(*
-.615 -.473 -.461 .897(*) .277 -.354 1
Correlation )
Sig. (2-
.013 .270 .421 .435 .039 .651 .559
tailed)
N 5 5 5 5 5 5 5 5
* Correlation is significant at the 0.05 level (2-tailed).
** Correlation is significant at the 0.01 level (2-tailed).

The Pearson’s correlation matrices in table 5.9 indicate that the degree of correlation between
each pair of the independent variable is low which suggest the absence of multicollinearity
problem in the models (Bryman & Cramer, 2001). According to Brooks (2008), if it is stated
that y and x are correlated, it means that y and x are being treated in a completely symmetrical
way. Thus, it is not implied that changes in x cause changes in y, or indeed that changes in y
cause changes in x rather, it is simply stated that there is evidence for a linear relationship
between the two variables, and that movements in the two are on average related to an extent
given by the correlation coefficient. The result of the multicollinearity test for the variables
shows that the relationship between the variables. The above table 5.9 shows that NPAR is
negatively correlated with ROE, NIMR, NPM and ALFR while ROA, CAR and CDR are
positively correlated.

40
 Null hypothesis: There is no association between Dependent and independent variable of
financial performance and credit risk of Punjab national Bank

Alternative Hypothesis: There is association between Dependent and independent variable of

financial performance and credit risk of Punjab national Bank

Table 5.10
Correlation Matrix among Dependent and Independent Variables of the PNB

ROA ROE NIMR NPM CAR CDR ALFR NPAR

Return on Pearson
1 .808 .612 .821 .862 -.928(*) .711 -.300
assets of the Correlation
PSBs in India Sig. (2-tailed) .098 .272 .089 .060 .023 .179 .624
N 5 5 5 5 5 5 5 5
Return on Pearson 1.000( .972(*
.808 1 .697 -.770 .678 -.706
equity Correlation **) *)
Sig. (2-tailed) .098 .191 .000 .006 .127 .208 .183
N 5 5 5 5 5 5 5 5
Net Interest Pearson
.612 .697 1 .698 .826 -.683 .927(*) -.837
Margin Correlation
Sig. (2-tailed) .272 .191 .190 .085 .204 .023 .077
N 5 5 5 5 5 5 5 5
Net Profit Pearson 1.000( .974(*
.821 .698 1 -.782 .685 -.695
Margin Correlation **) *)
Sig. (2-tailed) .089 .000 .190 .005 .118 .202 .192
N 5 5 5 5 5 5 5 5
Capital Pearson .972(* .974(*
.862 .826 1 -.858 .824 -.728
Adequacy Correlation *) *)
Ratio Sig. (2-tailed) .060 .006 .085 .005 .063 .086 .163
N 5 5 5 5 5 5 5 5
Credit-Deposit Pearson
-.928(*) -.770 -.683 -.782 -.858 1 -.860 .365
Ratio Correlation
Sig. (2-tailed) .023 .127 .204 .118 .063 .062 .546
N 5 5 5 5 5 5 5 5
Advances / Pearson
.711 .678 .927(*) .685 .824 -.860 1 -.661
Loans Funds t Correlation
Ratio Sig. (2-tailed) .179 .208 .023 .202 .086 .062 .225
N 5 5 5 5 5 5 5 5
NPAR Pearson
-.300 -.706 -.837 -.695 -.728 .365 -.661 1
Correlation
Sig. (2-tailed) .624 .183 .077 .192 .163 .546 .225
N 5 5 5 5 5 5 5 5
* Correlation is significant at the 0.05 level (2-tailed).
** Correlation is significant at the 0.01 level (2-tailed).

The Pearson’s correlation matrices in table 5.10 indicate that the degree of correlation between
each pair of the independent variable is low which suggest the absence of multicollinearity

41
 problem in the models (Bryman & Cramer, 2001). According to Brooks (2008), if it is stated
that y and x are correlated, it means that y and x are being treated in a completely symmetrical
way. Thus, it is not implied that changes in x cause changes in y, or indeed that changes in y
cause changes in x rather, it is simply stated that there is evidence for a linear relationship
between the two variables, and that movements in the two are on average related to an extent
given by the correlation coefficient. The result of the multicollinearity test for the variables
shows that the relationship between the variables. The above table 5.10 shows that NPAR is
negatively correlated with ROA, ROE, NIMR, NPM, CAR and ALFR. CAR and CDR are also
negatively correlated while CDR and NPAR are positively correlated.

Null hypothesis: There is no association between Dependent and independent variable of

financial performance and credit risk of Bank of Baroda.

Alternative Hypothesis: There is association between Dependent and independent variable of

financial performance and credit risk of Bank of Baroda.

Table 5.11
Correlation Matrix among Dependent and Independent Variables of the Bank of
Baroda

ROA ROE NIMR NPM CAR CDR ALFR NPAR

Return on Pearson
assets of the Correlation 1 .505 -.390 .527 .503 .416 -.023 -.563
PSBs in India
Sig. (2-tailed) .386 .516 .362 .388 .486 .970 .323
N 5 5 5 5 5 5 5 5
Return on Pearson
.505 1 .147 1.000(**) -.026 .402 .538 -.030
equity Correlation
Sig. (2-tailed) .386 .814 .000 .967 .502 .350 .961
N 5 5 5 5 5 5 5 5
Net Interest Pearson
-.390 .147 1 .135 .155 .048 .678 -.281
Margin Correlation
Sig. (2-tailed) .516 .814 .829 .804 .939 .208 .647
N 5 5 5 5 5 5 5 5
Net Profit Pearson
.527 1.000(**) .135 1 -.004 .400 .523 -.050
Margin Correlation
Sig. (2-tailed) .362 .000 .829 .995 .505 .365 .936
N 5 5 5 5 5 5 5 5

42
Capital Pearson
Adequacy Correlation .503 -.026 .155 -.004 1 -.259 -.253 -.923(*)
Ratio
Sig. (2-tailed) .388 .967 .804 .995 .674 .681 .025
N 5 5 5 5 5 5 5 5
Credit- Pearson
.416 .402 .048 .400 -.259 1 .715 -.101
Deposit Ratio Correlation
Sig. (2-tailed) .486 .502 .939 .505 .674 .175 .872
N 5 5 5 5 5 5 5 5
Advances / Pearson
Loans Funds t Correlation -.023 .538 .678 .523 -.253 .715 1 -.053
Ratio
Sig. (2-tailed) .970 .350 .208 .365 .681 .175 .932
N 5 5 5 5 5 5 5 5
NPAR Pearson -
Correlation -.563 -.030 -.281 -.050 .923(* -.101 -.053 1
)
Sig. (2-tailed) .323 .961 .647 .936 .025 .872 .932
N 5 5 5 5 5 5 5 5
** Correlation is significant at the 0.01 level (2-tailed).
* Correlation is significant at the 0.05 level (2-tailed).

The Pearson’s correlation matrices in table 5.11 indicate that the degree of correlation between
each pair of the independent variable is low which suggest the absence of multicollinearity
problem in the models (Bryman & Cramer, 2001). According to Brooks (2008), if it is stated
that y and x are correlated, it means that y and x are being treated in a completely symmetrical
way. Thus, it is not implied that changes in x cause changes in y, or indeed that changes in y
cause changes in x rather, it is simply stated that there is evidence for a linear relationship
between the two variables, and that movements in the two are on average related to an extent
given by the correlation coefficient. The result of the multicollinearity test for the variables
shows that the relationship between the variables. The above table 4.11 shows that NPAR is
negatively correlated with ROA, ROE, NIMR, NPM, CAR and ALFR.

43
 Null hypothesis: There is no association between Dependent and independent variable of
financial performance and credit risk of Union Bank of India.

Alternative Hypothesis: There is association between Dependent and independent variable of

financial performance and credit risk of Union Bank of India.

Table 5.12
Correlation Matrix among Dependent and Independent Variables of the Union Bank of
India
Return on
assets of Return Net Net Capital Credit-
the PSBs on Interest Profit Adequac Deposit
in India equity Margin Margin y Ratio Ratio NPAR
Return on assets Pearson
1 .733 .666 .727 -.377 -.590 -.432
of the PSBs in Correlation
India Sig. (2-tailed) .159 .220 .164 .532 .295 .467
N 5 5 5 5 5 5 5
Return on equity Pearson .998(**
.733 1 .921(*) -.681 -.903(*) -.881(*)
Correlation )
Sig. (2-tailed) .159 .026 .000 .206 .035 .048
N 5 5 5 5 5 5 5
Net Interest Pearson
.666 .921(*) 1 .893(*) -.893(*) -.993(**) -.939(*)
Margin Correlation
Sig. (2-tailed) .220 .026 .041 .042 .001 .018
N 5 5 5 5 5 5 5
Net Profit Pearson .998(**
.727 .893(*) 1 -.636 -.875 -.859
Margin Correlation )
Sig. (2-tailed) .164 .000 .041 .249 .052 .062
N 5 5 5 5 5 5 5
Capital Psearson
-.377 -.681 -.893(*) -.636 1 .925(*) .838
Adequacy Ratio Correlation
Sig. (2-tailed) .532 .206 .042 .249 .024 .076
N 5 5 5 5 5 5 5
Credit-Deposit Pearson -
-.590 -.993(**) -.875 .925(*) 1 .950(*)
Ratio Correlation .903(*)
Sig. (2-tailed) .295 .035 .001 .052 .024 .013
N 5 5 5 5 5 5 5
NPAR Pearson -
-.432 -.939(*) -.859 .838 .950(*) 1
Correlation .881(*)
Sig. (2-tailed) .467 .048 .018 .062 .076 .013
N 5 5 5 5 5 5 5
*Correlation is significant at the 0.05 level (2-tailed).
** Correlation is significant at the 0.01 level (2-tailed).

44
 The Pearson’s correlation matrices in table 5.12 indicate that the degree of correlation between
each pair of the independent variable is low which suggest the absence of multicollinearity
problem in the models (Bryman & Cramer, 2001). According to Brooks (2008), if it is stated
that y and x are correlated, it means that y and x are being treated in a completely symmetrical
way. Thus, it is not implied that changes in x cause changes in y, or indeed that changes in y
cause changes in x rather, it is simply stated that there is evidence for a linear relationship
between the two variables, and that movements in the two are on average related to an extent
given by the correlation coefficient. The result of the multicollinearity test for the variables
shows that the relationship between the variables. The above table 5.12 shows that NPAR is
negatively correlated with ROA, ROE, NIMR, NPM and ALFR while CDR and CAR and
NPAR are positively correlated.

Null hypothesis: There is no association between Dependent and independent variable of

financial performance and credit risk of Canara Bank

Alternative Hypothesis: There is association between Dependent and independent variable of

financial performance and credit risk of Canara Bank

Table 5.13
Correlation Matrix among Dependent and Independent Variables of the Canara Bank

ROA ROE NIMR NPM CAR CDR ALFR NPAR

Sig. (2-tailed) .011 .488 .062 .457 .254 .449 .431

N 5 5 5 5 5 5 5 5

Return on Pearson
assets of the Correlation .955(*) 1 .594 -.699 .604 -.711 .577 -.687
PSBs in India

Sig. (2-tailed) .011 .291 .189 .281 .179 .308 .200

N 5 5 5 5 5 5 5 5

Return on Pearson .997(

.414 .594 1 -.123 -.427 .393 -.765
equity Correlation **)

Sig. (2-tailed) .488 .291 .844 .000 .474 .512 .132

N 5 5 5 5 5 5 5 5

45
Net Interest Pearson
-.860 -.699 -.123 1 -.156 .184 .045 -.033
Margin Correlation

Sig. (2-tailed) .062 .189 .844 .802 .767 .943 .958

N 5 5 5 5 5 5 5 5

Net Profit Pearson .997(

.441 .604 -.156 1 -.451 .405 -.752
Margin Correlation **)

Sig. (2-tailed) .457 .281 .000 .802 .446 .499 .143

N 5 5 5 5 5 5 5 5

Capital Pearson
-
Adequacy Correlation -.631 -.711 -.427 .184 -.451 1 .809
.970(**)
Ratio

Sig. (2-tailed) .254 .179 .474 .767 .446 .006 .097

N 5 5 5 5 5 5 5 5

Credit- Pearson -
Deposit Ratio Correlation .448 .577 .393 .045 .405 .970(* 1 -.846
*)

Sig. (2-tailed) .449 .308 .512 .943 .499 .006 .071

N 5 5 5 5 5 5 5 5

Advances / Pearson
Loans Funds t Correlation -.473 -.195 .318 .805 .262 -.110 .328 -.526
Ratio

Sig. (2-tailed) .421 .753 .603 .100 .671 .860 .590 .362

N 5 5 5 5 5 5 5 5

NPAR Pearson
-.464 -.687 -.765 -.033 -.752 .809 -.846 1
Correlation

Sig. (2-tailed) .431 .200 .132 .958 .143 .097 .071

N 5 5 5 5 5 5 5 5

* Correlation is significant at the 0.05 level (2-tailed).

** Correlation is significant at the 0.01 level (2-tailed).

The Pearson’s correlation matrices in table 5.13 indicate that the degree of correlation between
each pair of the independent variable is low which suggest the absence of multicollinearity
problem in the models (Bryman & Cramer, 2001). According to Brooks (2008), if it is stated

46
that y and x are correlated, it means that y and x are being treated in a completely symmetrical
way. Thus, it is not implied that changes in x cause changes in y, or indeed that changes in y
cause changes in x rather, it is simply stated that there is evidence for a linear relationship
between the two variables, and that movements in the two are on average related to an extent
given by the correlation coefficient. The result of the multicollinearity test for the variables
shows that the relationship between the variables. The above table 5.13 shows that NPAR is
negatively correlated with ROA, ROE, NIMR, NPM, CAR and ALFR while CDR is positively
correlated with NPAR.

Regression Analysis
In the following analysis a multivariate model was applied to find out the effect of credit risk
management on financial performance of SBI. A linear regression model of SBI represented
by ROA, ROE, NIM, NPM versus credit risk management was applied to examine the
relationship between the variables. The relationship model was represented in the linear
equation below:
Y= α +β1X1 + β2X2 + β3X3 + e
Y= Financial Performance (ROA, ROE, NIM and NPM)
α = Constant term
β = Beta coefficient
X1 = NPAR
X2 = Capital Adequacy ratio
X3 = Credit-Deposit ratio

47
 STATE BANK OF INDIA

5.3.1 Test of Hypothesis 1

: There is no significant impact of credit risk Management on banks financial performance
(ROA) of the SBI
Subset hypotheses:
: There is no significant impact of CAR on ROA
: There is no significant impact of NPAR on ROA
: There is no significant impact of CDR on ROA
The result of the regression analysis is presented in the table below:

Table 5.14
Model Summary of SBI (Dependent Variable: ROA)
Model Summary

Adjusted R Std. Error of the

Model R R Square Square Estimate
1 .975(a) .951 .805 3.08328
a Predictors: (Constant), NPA, Credit-Deposit Ratio, Capital Adequacy Ratio
b.ROA
Source: computation through SPSS
The Multiple R for the relationship between the set of independent variables and the dependent
variable is 0.975, which would be characterized as very strong using the rule of thumb that a
correlation less than or equal to 0.20 is characterized as very weak; greater than 0.20 and less
than or equal to 0.40 is weak; greater than 0.40 and less than or equal to 0.60 is moderate;
greater than 0.60 and less than or equal to 0.80 is strong; and greater than 0.80 is very strong.
Table 5.14 shows the output for model fitness. The R coefficient of 0.975 indicates that the
predictors of the model which are CAR, NPAR and CDR have a correlation of 97.5% with the
dependent variable of return on assets that means there is a strong relationship between the set
of independent variables and dependent variable (ROA). The R square also called coefficient
of determination of 0.951 indicates that the model can explain 95.1% of the variations in the
return on assets of SBI and there are other factors which can only explain 4.9% of the variations
in return on assets. This shows that the independent variables (CAR, NPAR and CDR) of this
study are significant predictors of the (ROA) performance of the SBI.

48
 Table 5.15
Analysis of Variance – ANOVA of the State Bank of India
ANOVA(b)
Sum of Df Mean
Model Squares Square F Sig.
Regression 185.671 3 61.890 6.510 .279(a)
Residual 9.507 1 9.507
Total 195.177 4

a Predictors: (Constant), Advances / Loans Funds t Ratio, Credit-Deposit Ratio

b Dependent Variable: Return on assets of SBI

Table 5.15 shows that variations in the performance (return on assets) can be explained by the
model to the extent of 185.671 out of 195.177 or 95.13 % while other variables not captured
by this model can explain of the 4.87 % (9.507 out of 195.177) of the variations in financial
performance. The F value of the model produces a p-value of 0.279 which is not significantly
the same as zero. A p-value of 0.279 is more than the set level of significance of 0.05 for a
normally distributed data. This means that the model is not significant in explaining
performance (ROA) of the SBI.

Table 5.16
Regression Coefficients of the SBI (Dependent Variable: ROA)
Coefficients(a)
Unstandardized Standardized
Coefficients Coefficients
Mode Std.
l B Error Beta t Sig.
1 (Constant) 203.028 110.324 1.840 .317
Capital Adequacy
-1.541 8.828 -.097 -.175 .890
Ratio
Credit-Deposit
.280 .347 .206 .806 .568
Ratio
NPA SBI 8.978 5.278 .980 1.701 .338
a Dependent Variable: Return on assets of the PSBs in India

The regression model arising from the above data is of the form;
The regression equation is
ROA = 203 - 1.54 CAR + 0.280 CDR + 8.98 NPAR

49
From the above regression model, the beta coefficients to be used in this study are the
unstandardized coefficients. The results indicate that a unit change (1%) in the CAR causes a
decline of -1.541 (154.1%) change in the return on assets of the SBI, so CAR leads to the
decrease of financial performance of SBI. A unit change (1%) in CDR leads to an increase of
0.280 (28%) unit change in the return on assets of the SBI so, this indicates that CDR has an
influence on financial performance (return on assets) of SBI which means that CDR is a
predictor of financial performance SBI. A unit change in NPA of SBI leads to the increase of
financial performance. NPA leads to a positive change of 8.978 (897.8%) change in the
financial performance (return on assets) SBI. This indicates that NPA has an influence on
financial performance (return on assets) of the SBI which means that NPA is a predictor of
financial performance of SBI. Observation of t-test for the independent variables CAR and
CDR, the probability of the t statistic (-0.175, 0.806) for the b coefficient are 0.890 and 0.568
which are more than the level of significance of 0.05 and statistically not significant. So, we
accept the null hypothesis and conclude that there is not a significant impact of independent
variables (CAR, CDR) on dependent variable (ROA). The result shows that for the independent
variable NPA, the probability of the t statistic (1.701) for the b coefficient is 0.338 which is
greater than the level of significance of 0.05. We accept the null hypothesis and conclude that
there is no a significant impact of NPA on ROA.

Table 5.17
Summary result of Hypothesis 1
T
Performance (ROA) of PSBs in India
Ho Subset hypothesis Accepted Rejected
Ho There is no significant impact of CAR on ROA yes
Ho There is no significant impact of NPAR on ROA yes
Ho There is no significant impact of CDR on ROA yes

50
5.3.2 Test of Hypothesis 2
: There is no significant impact of credit risk Management on banks financial performance
(ROE) of SBI.
Subset hypotheses:
: There is no significant impact of CAR on ROE
: There is no significant impact of NPAR on ROE
: There is no significant impact of CDR on ROE

Table 5.18
Model Summary of the SBI (Dependent Variable: ROE)
Model Summary
Model Adjusted Std. Error of
R R Square R Square the Estimate
1 .850(a) .722 -.111 2.32151
a Predictors: (Constant), NPA PNB, Credit-Deposit Ratio, Capital Adequacy Ratio

The Multiple R for the relationship between the set of independent variables and the dependent
variable is 0.850, which would be characterized as very strong using the rule of thumb that a
correlation less than or equal to 0.20 is characterized as very weak; greater than 0.20 and less
than or equal to 0.40 is weak; greater than 0.40 and less than or equal to 0.60 is moderate;
greater than 0.60 and less than or equal to 0.80 is strong; and greater than 0.80 is very strong.
Table 5.18 shows the output for model fitness. The R coefficient of 0.850 indicates that the
predictors of the model which are CAR, NPAR and CDR have a correlation of 85% with the
dependent variable of return on equity that means there is a very strong relationship between
the set of independent variables and dependent variable (ROE). The R square also called
coefficient of determination of 0.722 indicates that the model can explain 72% of the variations
in the return on equity of SBI and there are other factors which can only explain 28% of the
variations in return on equity. This shows that the independent variables (CAR, NPAR and
CDR) of this study are significant predictors of the performance (return on equity) of the SBI.

51
 Table 5.19
Analysis of Variance – ANOVA of the SBI (Dependent Variable: ROE)
ANOVA(b)
Sum of Mean
Model Squares df Square F Sig.
1 Regression 14.018 3 4.673 .867 .638(a)
Residual 5.389 1 5.389
Total 19.408 4
a Predictors: (Constant), NPA SBI, Credit-Deposit Ratio, Capital Adequacy Ratio
b Dependent Variable: Return on equity

Table 5.19 shows that variations in the performance (return on equity) can be explained by the
model to the extent of 14.018 out of 19.408 or 72.23 % while other variables not captured by
this model can explain of the 4.87 % (27.77% out of 19.408) of the variations in financial
performance. The F value of the model produces a p-value of 0.638 which is not significantly
the same as zero. A p-value of 0.638 is more than the set level of significance of 0.05 for a
normally distributed data. This means that the model is no significant in explaining
performance (ROE) of the SBI.

Table 5.20
Regression Coefficients of the SBI (Dependent Variable: ROE)
Coefficients(a)
Unstandardized Standardized
Model Coefficients Coefficients t Sig.
B Std. Error Beta
(Constant) 135.948 83.067 1.637 .349
1 Capital Adequacy
-7.141 6.647 -1.423 -1.074 .477
Ratio
Credit-Deposit Ratio -.192 .261 -.448 -.735 .597
NPA SBI 2.270 3.974 .786 .571 .670
a Dependent Variable: Return on equity

The regression model arising from the above data is of the form;
The regression equation is
ROE = 136 - 7.14 CAR - 0.192 CDR + 2.27 NPAR
From the above regression model, the beta coefficients to be used in this study are the
unstandardized coefficients. The results indicate that a unit change (1%) in the CAR causes a
decline of -7.141 (714.1%) change in the return on equity of the SBI, so CAR leads to the
decrease of financial performance of SBI. A unit change (1%) in CDR leads to a decline of -
0.192 (19.2%) unit change in the return on equity of the SBI so, this indicates that CDR has no
influence on financial performance (return on equity) of SBI which means that CDR is not a

52
predictor of financial performance SBI. A unit change in NPA of SBI leads to the increase of
financial performance. NPA leads to a positive change of 2.270 (227%) change in the financial
performance (return on equity) SBI. This indicates that NPA has an influence on financial
performance (return on equity) of the SBI which means that NPA is a predictor of financial
performance of SBI. Observation of t-test for the independent variables CAR and CDR, the
probability of the t statistic (--1.074, -.735) for the b coefficient are .477 and .597 which are
more than the level of significance of 0.05 and statistically not significant. So, we accept the
null hypothesis and conclude that there is not a significant impact of independent variables
(CAR, CDR) on dependent variable (ROE). The result shows that for the independent variable
NPA, the probability of the t statistic (.571) for the b coefficient is 0.670 which is greater than
the level of significance of 0.05. We accept the null hypothesis and conclude that there is no a
significant impact of NPA on ROE.

Table 5.21
Summary result of Hypothesis 1

T
Performance (ROE) of PSBs in India
Ho Subset hypothesis Accepted Rejected
Ho There is no significant impact of CAR on ROE yes
Ho There is no significant impact of NPAR on ROE yes
Ho There is no significant impact of CDR on ROE yes

5.3.3 Test of Hypothesis 3

: There is no significant impact of credit risk Management on banks financial performance
(NPM) of the SBI.
Subset hypotheses:
: There is no significant impact of CAR on NPM
: There is no significant impact of NPAR on NPM
: There is no significant impact of CDR on NPM

53
 Table 5.22
Model Summary of the SBI (Dependent Variable: NPM)
Model Summary

Adjusted R Std. Error of

Model R R Square Square the Estimate
1 .999(a) .998 .991 .40516
a Predictors: (Constant), NPA, Credit-Deposit Ratio, Capital Adequacy Ratio

The Multiple R for the relationship between the set of independent variables and the dependent
variable is 0.999, which would be characterized as very strong using the rule of thumb that a
correlation less than or equal to 0.20 is characterized as very weak; greater than 0.20 and less
than or equal to 0.40 is weak; greater than 0.40 and less than or equal to 0.60 is moderate;
greater than 0.60 and less than or equal to 0.80 is strong; and greater than 0.80 is very strong.
Table 5.22 shows the output for model fitness. The R coefficient of 0.999 indicates that the
predictors of the model which are CAR, NPAR and CDR have a correlation of 99.9% with the
dependent variable of return on equity that means there is a very strong relationship between
the set of independent variables and dependent variable (NPM). The R square also called
coefficient of determination of 0.998 indicates that the model can explain 99.8% of the
variations in the return on equity of SBI and there are other factors which can only explain
0.2% of the variations in return on equity. This shows that the independent variables (CAR,
NPA and CDR) of this study are significant predictors of the performance (net profit margin)
of the SBI.

Table 5.23
Analysis of Variance – ANOVA of the SBI (Dependent
Variable: NPM)
ANOVA(b)
Sum of
Model Squares df Mean Square F Sig.
1 Regression 69.606 3 23.202 141.346 .062(a)
Residual .164 1 .164
Total 69.770 4
a Predictors: (Constant), NPA SBI, Credit-Deposit Ratio, Capital Adequacy Ratio
b Dependent Variable: Net Profit Margin

54
Table 5.23 shows that variations in the performance (Net Profit Margin) can be explained by
the model to the extent of 69.606 out of 69.770 or 99.76 % while other variables not captured
by this model can explain of the 0.24 % (0.164 out of 69.770) of the variations in financial
performance. The F value of the model produces a p-value of 0.062 which is not significantly
the same as zero. A p-value of 0.062 is more than the set level of significance of 0.05 for a
normally distributed data. This means that the model is no significant in explaining
performance (Net Profit Margin) of the SBI.

Table 5.24
Regression Coefficients of SBI (Dep. Variable: NPM)
Coefficients(a)
Unstandardized Standardized
Model Coefficients Coefficients
Std.
B Error Beta t Sig.
(Constant) 208.416 14.497 14.376 .044
Capital Adequacy
-12.630 1.160 -1.327 -10.888 .058
1 Ratio
Credit-Deposit
-.818 .046 -1.008 -17.954 .035
Ratio
NPA 5.527 .694 1.009 7.968 .079
a Dependent Variable: Net Profit Margin

The regression model arising from the above data is of the form;
The regression equation is
NPM = 208 - 12.6 CAR - 0.818 CDR + 5.53 NPA

From the above regression model, the beta coefficients to be used in this study are the
unstandardized coefficients. The results indicate that a unit change (1%) in the CAR causes a
decline of -12.630 (1263%) change in the Net Profit Margin of the SBI., so CAR leads to the
decrease of financial performance of SBI. A unit change (1%) in CDR leads to a decline of -
0.818 (81.8%) unit change in the Net Profit Margin of the SBI.so, this indicates that CDR has
no influence on financial performance (Net Profit Margin) of SBI which means that CDR is
not a predictor of financial performance of SBI. A unit change in NPA of SBI leads to the
increase of financial performance. NPA leads to a positive change of 5.527 (552.7%) change
in the financial performance (Net Profit Margin) of SBI. This indicates that NPA has an
influence on financial performance (Net Profit Margin) of the SBI which means that NPA is a

55
predictor of financial performance of SBI. Observation of t-test for the independent variables
CAR and CDR, the probability of the t statistic (-10.888, -17.954) for the b coefficient are .058
and .035 which are more than the level of significance of 0.05 and statistically not significant.
So, we accept the null hypothesis and conclude that there is not a significant impact of
independent variables (CAR, CDR and NPA) on dependent variable (Net Profit Margin). The
result shows that for the independent variable NPA, the probability of the t statistic (.571) for
the b coefficient is .079 which is greater than the level of significance of 0.05. We accept the
null hypothesis and conclude that there is no a significant impact of NPA on Net Profit Margin.

PUNJAB NATIONAL BANK

5.3.1 Test of Hypothesis 1

: There is no significant impact of credit risk Management on banks financial performance
(ROA) of the Punjab National Bank
Subset hypotheses:
: There is no significant impact of CAR on ROA
: There is no significant impact of NPAR on ROA
: There is no significant impact of CDR on ROA

The result of the regression analysis is presented in the table below:

Table 5.25
Model Summary

Adjusted R Std. Error of

Model R R Square Square the Estimate
1 .985(a) .971 .883 15.47856
a Predictors: (Constant), NPA PUNJB, Credit-Deposit Ratio, Capital Adequacy Ratio

56
The Multiple R for the relationship between the set of independent variables and the dependent
variable is 0.985, which would be characterized as very strong using the rule of thumb that a
correlation less than or equal to 0.20 is characterized as very weak; greater than 0.20 and less
than or equal to 0.40 is weak; greater than 0.40 and less than or equal to 0.60 is moderate;
greater than 0.60 and less than or equal to 0.80 is strong; and greater than 0.80 is very strong.
Table 5.25 shows the output for model fitness. The R coefficient of 0.985 indicates that the
predictors of the model which are CAR, NPAR and CDR have a correlation of 98.5% with the
dependent variable of return on assets that means there is a strong relationship between the set
of independent variables and dependent variable (ROA). The R square also called coefficient
of determination of 0.971 indicates that the model can explain 97.1% of the variations in the
return on assets of PNB and there are other factors which can only explain 2.9% of the
variations in return on assets. This shows that the independent variables (CAR, NPAR and
CDR) of this study are significant predictors of the (ROA) performance of the PNB.

Table 5.26
ANOVA(b)
Sum of
Model Squares df Mean Square F Sig.
1 Regression 7960.798 3 2653.599 11.076 .217(a)
Residual 239.586 1 239.586
Total 8200.384 4
a Predictors: (Constant), NPA PUNJB, Credit-Deposit Ratio, Capital Adequacy Ratio
b Dependent Variable: Return on assets of the PNB in India

Table 5.26 shows that variations in the performance (return on assets) can be explained by the
model to the extent of 7960.798 out of 8200.384 or 97.07 % while other variables not captured
by this model can explain of the 2.92 % (239.586 out of 8200.384) of the variations in financial
performance. The F value of the model produces a p-value of 0.217 which is not significantly
the same as zero. A p-value of 0.217 is more than the set level of significance of 0.05 for a
normally distributed data. This means that the model is no significant in explaining
performance (ROA) of the PNB.

57
 Table 5.27
Coefficients(a)
Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) -294.462 637.205 -.462 .724
Capital Adequacy
38.678 20.154 1.276 1.919 .306
Ratio
Credit-Deposit Ratio -.803 5.412 -.073 -.148 .906
NPA 11.226 6.296 .655 1.783 .325
a Dependent Variable: Return on assets of the PSBs in India

The regression model arising from the above data is of the form;

The regression equation is,

ROA = - 294 + 38.7 CAR - 0.80 CDR + 11.2 NPAR

From the above regression model, the beta coefficients to be used in this study are the
unstandardized coefficients. The results indicate that a unit change (1%) in the CAR causes an
increase of 38.678 % change in the return on assets of the PNB. This indicates that CAR has
an influence on financial performance (return on assets) of the PNB which means that CAR is
a predictor of financial performance of PNB. A unit change (1%) in CDR leads to a decline of
-0.803% unit change in the return on assets of the PNB so, CDR leads to the decrease of
financial performance of PNB. A unit change in NPA leads to a positive change of 11.226%
change in the financial performance (return on assets) PNB. This indicates that NPA has an
influence on financial performance (return on assets) of the PNB which means that NPA is a
predictor of financial performance of PNB. Observation of t-test for the independent variables
CAR and CDR, the probability of the t statistic (1.919, -0.148) for the b coefficient are 0.890
and 0.568 which are more than the level of significance of 0.05 and statistically not significant.
So, we accept the null hypothesis and conclude that there is a significant impact of independent
variables (CAR, NPA) on dependent variable (ROA). The result shows that for the
independent variable CDR, the probability of the t statistic (-0.148) for the b coefficient is
0.906 which is greater than the level of significance of 0.05. We accept the null hypothesis and
conclude that there is no a significant impact of CDR on ROA.

58
5.3.2 Test of Hypothesis 2

: There is no significant impact of credit risk Management on banks financial performance

(ROE) of Punjab National Bank.

Subset hypotheses:
: There is no significant impact of CAR on ROE
: There is no significant impact of NPAR on ROE
: There is no significant impact of CDR on ROE

Table 5.28
Model Summary

Adjusted R Std. Error of

Model R R Square Square the Estimate
1 .988(a) .977 .908 5.30707
a Predictors: (Constant), NPAR, Credit-Deposit Ratio, Capital Adequacy Ratio

The Multiple R for the relationship between the set of independent variables and the dependent
variable is 0.988, which would be characterized as very strong using the rule of thumb that a
correlation less than or equal to 0.20 is characterized as very weak; greater than 0.20 and less
than or equal to 0.40 is weak; greater than 0.40 and less than or equal to 0.60 is moderate;
greater than 0.60 and less than or equal to 0.80 is strong; and greater than 0.80 is very strong.
Table 5.28 shows the output for model fitness. The R coefficient of 0.988 indicates that the
predictors of the model which are CAR, NPAR and CDR have a correlation of 98.8% with the
dependent variable of return on equity that means there is a strong relationship between the set
of independent variables and dependent variable (ROE). The R square also called coefficient
of determination of 0.977 indicates that the model can explain 97.7% of the variations in the
return on assets of PNB and there are other factors which can only explain 2.3% of the
variations in return on equity. This shows that the independent variables (CAR, NPAR and
CDR) of this study are significant predictors of the (ROE) performance of the PNB.

59
 Table 5.29
ANOVA(b)
Sum of
Model Squares df Mean Square F Sig.
1 Regression 1197.942 3 399.314 14.178 .192(a)
Residual 28.165 1 28.165
Total 1226.107 4
a Predictors: (Constant), NPAR, Credit-Deposit Ratio, Capital Adequacy Ratio
b Dependent Variable: Return on equity

Table 5.29 shows that variations in the performance (return on equity) can be explained by the
model to the extent of 1197.942 out of 1226.107 or 97.7% while other variables not captured
by this model can explain of the 2.3% (28.165 out of 1226.107) of the variations in financial
performance. The F value of the model produces a p-value of 0.192 which is not significantly
the same as zero. A p-value of 0.192 is greater than the set level of significance of 0.05 for a
normally distributed data. This means that the model is not significant in explaining
performance of the PNB.

Table 5.30
Coefficients(a)
Unstandardized Standardized
Model Coefficients Coefficients
Std.
B Error Beta t Sig.
(Constant) -394.959 218.476 -1.808 .322
1 Capital Adequacy
19.103 6.910 1.630 2.765 .221
Ratio
Credit-Deposit Ratio 2.229 1.855 .522 1.201 .442
NPAR 1.922 2.159 .290 .890 .537
a Dependent Variable: Return on equity

The regression model arising from the above data is of the form;

The regression equation is ,

ROE = - 395 + 19.1 CAR + 2.23 CDR + 1.92 NPAR

60
From the above regression model, the beta coefficients to be used in this study are the
unstandardized coefficients. The results indicate that a unit change (1%) in the CAR causes an
increase of 19.103-unit changes in the Return on Equity of PNB. This indicates that CAR has
an influence on financial performance (Return on Equity) of the PNB which means that CAR
is a predictor of financial performance of PNB. A unit change (1%) in NPAR causes an increase
of 1.922 unit change in the Return on Equity of PNB, NPAR leads to the increase of financial
performance of PNB. A unit change in CDR leads to a positive change of 2.229 changes in the
financial performance (Return on Equity) PNB. This indicates that CDR has an influence on
financial performance (Return on Equity) of the PNB which means that CAR is a predictor of
financial performance of PNB. Observation of t-test for the independent variables CAR and
CDR, the probability of the t statistic (2.765, 1.201) for the b coefficient are 0.221 and 0.442
which are more than the level of significance of 0.05 and statistically not significant. So, we
accept the null hypothesis and conclude that there is not a significant impact of independent
variables (CAR, CDR) on dependent variable (ROE) The result shows that for the independent
variable NPAR, the probability of the t statistic (0.890) for the b coefficient is 0.537 which is
greater than the level of significance of 0.05. We accept the null hypothesis that there is no a
significant impact of NPAR on NIM.

5.3.3 Test of Hypothesis 3

: There is no significant impact of credit risk Management on banks financial performance

(NPM) of the Punjab National Bank.
Subset hypotheses:
: There is no significant impact of CAR on NPM
: There is no significant impact of NPAR on NPM
: There is no significant impact of CDR on NPM.

61
 Table 5.31
Model Summary

Adjusted R Std. Error of

Model R R Square Square the Estimate
1 .990(a) .980 .919 3.94426
a Predictors: (Constant), NPA PUNJB, Credit-Deposit Ratio, Capital Adequacy Ratio

The Multiple R for the relationship between the set of independent variables and the dependent
variable is 0.990, which would be characterized as very strong using the rule of thumb that a
correlation less than or equal to 0.20 is characterized as very weak; greater than 0.20 and less
than or equal to 0.40 is weak; greater than 0.40 and less than or equal to 0.60 is moderate;
greater than 0.60 and less than or equal to 0.80 is strong; and greater than 0.80 is very strong.
Table 5.31 shows the output for model fitness. The R coefficient of 0.990 indicates that the
predictors of the model which are CAR, NPAR and CDR have a correlation of 99% with the
dependent variable of net profit margin that means there is a strong relationship between the
set of independent variables and dependent variable (NPM). The R square also called
coefficient of determination of 0.980 indicates that the model can explain 98% of the variations
in the return on assets of PNB and there are other factors which can only explain 2% of the
variations in return on equity. This shows that the independent variables (CAR, NPAR and
CDR) of this study are significant predictors of the (NPM) performance of the PNB.

Table 5.32

ANOVA(b)
Sum of
Model Squares df Mean Square F Sig.
1 Regression 751.761 3 250.587 16.107 .181(a)
Residual 15.557 1 15.557
Total 767.318 4
a Predictors: (Constant), NPA PUNJB, Credit-Deposit Ratio, Capital Adequacy Ratio
b Dependent Variable: Net Profit Margin

62
Table 5.32 shows that variations in the performance (Net Profit Margin) can be explained by
the model to the extent of 751.761 out of 767.318 or 97.97 % while other variables not captured
by this model can explain of the 2.03 % (15.557% out of 767.318) of the variations in financial
performance. The F value of the model produces a p-value of 0.181 which is not significantly
the same as zero. A p-value of 0.181 is more than the set level of significance of 0.05 for a
normally distributed data. This means that the model is no significant in explaining
performance (Net Profit Margin) of the PNB.

Table 5.33
Coefficients(a)
Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) -306.284 162.373 -1.886 .310
Capital Adequacy
15.040 5.136 1.622 2.929 .209
Ratio
Credit-Deposit Ratio 1.683 1.379 .498 1.220 .437
NPA 1.591 1.604 .304 .992 .503
a Dependent Variable: Net Profit Margin

The regression model arising from the above data is of the form;

The regression equation is,

NPM = - 306 + 15.0 CAR + 1.68 CDR + 1.59 NPA

From the above regression model, the beta coefficients to be used in this study are the
unstandardized coefficients. The results indicate that a unit change (1%) in the CAR causes an
increase of 15.040-unit changes in the Net Profit Margin of the PNB. This indicates that CAR
has an influence on financial performance (Net Profit Margin) of the PNB which means that
CAR is a predictor of financial performance of PNB. A unit change (1%) in NPAR causes an
increase of 1.591 unit change in the Net Profit Margin of the PNB so, NPAR leads to the
increase of financial performance of PNB. A unit change in CDR leads to a positive change of
1.683 changes in the financial performance (Net Profit Margin) PNB. This indicates that CDR
has an influence on financial performance (Net Profit Margin) of the PNB which means that

63
CAR is a predictor of financial performance of PNB. Observation of t-test for the independent
variables CAR and CDR, the probability of the t statistic (2.929, 1.220) for the b coefficient
are 0.209 and 0.437 which are more than the level of significance of 0.05 and statistically not
significant. So, we accept the null hypothesis and conclude that there is not significant impact
of independent variables (CAR, CDR) on dependent variable (NPM). The result shows that
for the independent variable NPAR, the probability of the t statistic (.992) for the b coefficient
is 0.503 which is greater than the level of significance of 0.05. We accept the null hypothesis
that there is no a significant impact of NPAR on NPM.

BANK OF BARODA
5.3.1 Test of Hypothesis 1
: There is no significant impact of credit risk Management on banks financial performance
(ROA) of the Bank of Baroda
Subset hypotheses:
: There is no significant impact of CAR on ROA
: There is no significant impact of NPAR on ROA
: There is no significant impact of CDR on ROA

The result of the regression analysis is presented in the table below:

Table 5.34
Model Summary

Adjusted R Std. Error of

Model R R Square Square the Estimate
1 .993(a) .987 .946 1.39085
a Predictors: (Constant), NPA BORO, Credit-Deposit Ratio, Capital Adequacy Ratio

The Multiple R for the relationship between the set of independent variables and the dependent
variable is 0.993, which would be characterized as very strong using the rule of thumb that a
correlation less than or equal to 0.20 is characterized as very weak; greater than 0.20 and less
than or equal to 0.40 is weak; greater than 0.40 and less than or equal to 0.60 is moderate;
greater than 0.60 and less than or equal to 0.80 is strong; and greater than 0.80 is very strong.
Table 5.34 shows the output for model fitness. The R coefficient of 0.993 indicates that the

64
predictors of the model which are CAR, NPAR and CDR have a correlation of 99.3% with the
dependent variable of return on assets that means there is a strong relationship between the set
of independent variables and dependent variable (ROA). The R square also called coefficient
of determination of 0.987 indicates that the model can explain 98.7% of the variations in the
return on assets of Bank of Baroda and there are other factors which can only explain 1.3% of
the variations in return on assets. This shows that the independent variables (CAR, NPAR and
CDR) of this study are significant predictors of the (ROA) performance of the Bank of Baroda.

Table 5.35
ANOVA(b)
Sum of
Model Squares df Mean Square F Sig.
1 Regression 142.110 3 47.370 24.488 .147(a)
Residual 1.934 1 1.934
Total 144.045 4
a Predictors: (Constant), NPA Credit-Deposit Ratio, Capital Adequacy Ratio
b Dependent Variable: Return on assets of the Bank of Baroda

Table 5.35 shows that variations in the performance (return on assets) can be explained by the
model to the extent of 142.110 out of 144.045 or 98.66 % while other variables not captured
by this model can explain of the 1.34 % (1.934 out of 144.045) of the variations in financial
performance. The F value of the model produces a p-value of 0.147 which is not significantly
the same as zero. A p-value of 0.217 is more than the set level of significance of 0.05 for a
normally distributed data. This means that the model is no significant in explaining
performance (ROA) of the Bank of Baroda.

Table 5.36
Coefficients(a)
Unstandardized Standardized
Coefficients Coefficients
Mode Std.
l B Error Beta t Sig.
1 (Constant) -964.754 174.370 -5.533 .114
Capital Adequacy
55.431 8.750 4.842 6.335 .100
Ratio
Credit-Deposit Ratio 4.504 .639 2.088 7.051 .090
NPA 18.710 3.373 4.116 5.547 .114
a Dependent Variable: Return on assets of the PSBs in India

The regression model arising from the above data is of the form;

65
The regression equation is,

ROA = - 965 + 55.4 CAR + 4.50 CDR + 18.7 NPA

From the above regression model, the beta coefficients to be used in this study are the
unstandardized coefficients. The results indicate that a unit change (1%) in the CAR causes an
increase of 55.431-unit changes in the Return on Assets of the Bank of Baroda. This indicates
that CAR has an influence on financial performance (Return on Assets) of the Bank of Baroda
which means that CAR is a predictor of financial performance of Bank of Baroda. A unit
change (1%) in NPAR causes an increase of 18.710 unit change in the Return on Assets of the
Bank of Baroda so, NPAR leads to the increase of financial performance of Bank of Baroda.
A unit change in CDR leads to a positive change of 4.504 changes in the financial performance
(Return on Assets) Bank of Baroda. This indicates that CDR has an influence on financial
performance (Return on Assets) of the Bank of Baroda which means that CAR is a predictor
of financial performance of Bank of Baroda. Observation of t-test for the independent variables
CAR and CDR, the probability of the t statistic (6.335, 7.051) for the b coefficient are 0.100
and 0.090 which are more than the level of significance of 0.05 and statistically not significant.
So, we accept the null hypothesis and conclude that there is not significant impact of
independent variables (CAR, CDR) on dependent variable (ROA). The result shows that for
the independent variable NPAR, the probability of the t statistic (5.547) for the b coefficient is
0.114 which is greater than the level of significance of 0.05. We accept the null hypothesis that
there is no a significant impact of NPAR on ROA.

5.3.2 Test of Hypothesis 2

: There is no significant impact of credit risk Management on banks financial performance

(ROE) of Bank of Baroda.
Subset hypotheses:
: There is no significant impact of CAR on ROE
: There is no significant impact of ALF on ROE
: There is no significant impact of CDR on ROE

66
 Table 5.37
Model Summary

Adjusted R Std. Error of

Model R R Square Square the Estimate
1 .705(a) .497 -1.013 12.06614
a Predictors: (Constant), NPA BORO, Credit-Deposit Ratio, Capital Adequacy Ratio

The Multiple R for the relationship between the set of independent variables and the dependent
variable is 0.705, which would be characterized as strong using the rule of thumb that a
correlation less than or equal to 0.20 is characterized as very weak; greater than 0.20 and less
than or equal to 0.40 is weak; greater than 0.40 and less than or equal to 0.60 is moderate;
greater than 0.60 and less than or equal to 0.80 is strong; and greater than 0.80 is very strong.
Table 5.37 shows the output for model fitness. The R coefficient of 0.705 indicates that the
predictors of the model which are CAR, NPAR and CDR have a correlation of 70.5% with the
dependent variable of return on equity that means there is a strong relationship between the set
of independent variables and dependent variable (ROE). The R square also called coefficient
of determination of 0.497 indicates that the model can explain 49.7% of the variations in the
return on assets of Bank of Baroda and there are other factors which can only explain 2.3% of
the variations in return on equity. This shows that the independent variables (CAR, NPAR and
CDR) of this study are significant predictors of the (ROE) performance of the Bank of Baroda.

Table 5.38
ANOVA(b)
Sum of Mean
Model Squares df Square F Sig.
1 Regression 143.783 3 47.928 .329 .820(a)
Residual 145.592 1 145.592
Total 289.375 4
a Predictors: (Constant), NPA, Credit-Deposit Ratio, Capital Adequacy Ratio
b Dependent Variable: Return on equity

Table 5.38 shows that variations in the performance (return on equity) can be explained by the
model to the extent of 143.783 out of 289.375 or 49.69 % while other variables not captured
by this model can explain of the 50.31% (28.165 out of 289.375) of the variations in financial

67
 performance. The F value of the model produces a p-value of 0.820 which is not significantly
the same as zero. A p-value of 0.820 is greater than the set level of significance of 0.05 for a
normally distributed data. This means that the model is not significant in explaining
performance of the Bank of Baroda.

Table 5.39

Coefficients(a)
Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) -1314.637 1512.730 -.869 .545
Capital Adequacy
61.966 75.912 3.819 .816 .564
Ratio
Credit-Deposit Ratio 5.391 5.542 1.763 .973 .509
NPA 23.658 29.263 3.672 .808 .567
a Dependent Variable: Return on equity

The regression model arising from the above data is of the form;

The regression equation is,

ROE = - 1315 + 62.0 CAR + 5.39 CDR + 23.7 NPA

From the above regression model, the beta coefficients to be used in this study are the
unstandardized coefficients. The results indicate that a unit change (1%) in the CAR causes an
increase of 61.996-unit changes in the Return on Equity of the Bank of Baroda. This indicates
that CAR has an influence on financial performance (Return on Equity) of the Bank of Baroda
which means that CAR is a predictor of financial performance of Bank of Baroda. A unit
change (1%) in NPAR causes an increase of 23.658 unit change in the Return on Equity of the
Bank of Baroda so, NPAR leads to the increase of financial performance of Bank of Baroda.
A unit change in CDR leads to a positive change of 5.391 changes in the financial performance
(Return on Equity) Bank of Baroda. This indicates that CDR has an influence on financial
performance (Return on Assets) of the Bank of Baroda which means that CAR is a predictor
of financial performance of Bank of Baroda. Observation of t-test for the independent variables

68
CAR and CDR, the probability of the t statistic (0.816, 0.973) for the b coefficient are 0.564
and 0.509 which are more than the level of significance of 0.05 and statistically not significant.
So, we accept the null hypothesis and conclude that there is not significant impact of
independent variables (CAR, CDR) on dependent variable (ROE). The result shows that for
the independent variable NPAR, the probability of the t statistic (0.808) for the b coefficient is
0.567 which is greater than the level of significance of 0.05. We accept the null hypothesis that
there is no a significant impact of NPAR on ROE.

5.3.3 Test of Hypothesis 3

: There is no significant impact of credit risk Management on banks financial performance

(NPM) of the Bank of Baroda.
Subset hypotheses:
: There is no significant impact of CAR on NPM
: There is no significant impact of NPAR on NPM
: There is no significant impact of CDR on NPM

Table 5.40
Model Summary
Adjusted R Std. Error of
Model R R Square Square the Estimate
1 .716(a) .513 -.949 10.99599
a Predictors: (Constant), NPAR, Credit-Deposit Ratio, Capital Adequacy Ratio

The Multiple R for the relationship between the set of independent variables and the dependent
variable is 0.716, which would be characterized as strong using the rule of thumb that a
correlation less than or equal to 0.20 is characterized as very weak; greater than 0.20 and less
than or equal to 0.40 is weak; greater than 0.40 and less than or equal to 0.60 is moderate;
greater than 0.60 and less than or equal to 0.80 is strong; and greater than 0.80 is very strong.
Table 5.40 shows the output for model fitness. The R coefficient of 0.716 indicates that the
predictors of the model which are CAR, NPAR and CDR have a correlation of 71.6% with the
dependent variable of net profit margin that means there is a strong relationship between the
set of independent variables and dependent variable (NPM). The R square also called
coefficient of determination of 0.513 indicates that the model can explain 51.3% of the
variations in the return on assets of Bank of Baroda and there are other factors which can only
explain 48.7% of the variations in return on equity. This shows that the independent variables

69
 (CAR, NPAR and CDR) of this study are significant predictors of the (NPM) performance of
the Bank of Baroda.

Table 5.41
ANOVA(b)
Sum of
Model Squares df Mean Square F Sig.
1 Regression 127.273 3 42.424 .351 .810(a)
Residual 120.912 1 120.912
Total 248.185 4
a Predictors: (Constant), NPA, Credit-Deposit Ratio, Capital Adequacy Ratio
b Dependent Variable: Net Profit Margin

Table 5.41 shows that variations in the performance (Net Profit Margin) can be explained by
the model to the extent of 127.273 out of 248.185or 51.28 % while other variables not captured
by this model can explain of the 48.71 % (120.912 out of 248.185) of the variations in financial
performance. The F value of the model produces a p-value of 0.810 which is not significantly
the same as zero. A p-value of 0.810 is more than the set level of significance of 0.05 for a
normally distributed data. This means that the model is no significant in explaining
performance (Net Profit Margin) of the Bank of Baroda.
Table 5.42

Coefficients(a)
Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) -1245.802 1378.565 -.904 .532
Capital Adequacy
58.894 69.179 3.919 .851 .551
Ratio
Credit-Deposit Ratio 5.082 5.050 1.794 1.006 .498
NPAR 22.363 26.668 3.748 .839 .556
a Dependent Variable: Net Profit Margin

The regression model arising from the above data is of the form;

The regression equation is ,

NPM = - 1246 + 58.9 CAR + 5.08 CDR + 22.4 NPAR

70
From the above regression model, the beta coefficients to be used in this study are the
unstandardized coefficients. The results indicate that a unit change (1%) in the CAR causes an
increase of 58.894-unit changes in the Net Profit Margin of the Bank of Baroda. This indicates
that CAR has an influence on financial performance (Net Profit Margin) of the Bank of Baroda
which means that CAR is a predictor of financial performance of Bank of Baroda. A unit
change (1%) in NPAR causes an increase of 22.363 unit change in the Net Profit Margin of the
Bank of Baroda so, NPAR leads to the increase of financial performance of Bank of Baroda.
A unit change in CDR leads to a positive change of 5.082 changes in the financial performance
(Net Profit Margin) Bank of Baroda. This indicates that CDR has an influence on financial
performance (Net Profit Margin) of the Bank of Baroda which means that CAR is a predictor
of financial performance of Bank of Baroda. Observation of t-test for the independent variables
CAR and CDR, the probability of the t statistic (.851, 1.006) for the b coefficient are .551 and
.498 which are more than the level of significance of 0.05 and statistically not significant. So,
we accept the null hypothesis and conclude that there is not significant impact of independent
variables (CAR, CDR) on dependent variable (NPM). The result shows that for the
independent variable NPAR, the probability of the t statistic (0. .839) for the b coefficient is
0.556 which is greater than the level of significance of 0.05. We accept the null hypothesis that
there is no a significant impact of NPAR on NPM.

UNION BANK OF INDIA

5.3.1 Test of Hypothesis 1

: There is no significant impact of credit risk Management on banks financial performance
(ROA) of the Union bank of India
Subset hypotheses:
: There is no significant impact of CAR on ROA
: There is no significant impact of NPAR on ROA
: There is no significant impact of CDR on ROA

The result of the regression analysis is presented in the table below:

71
 Table 5.43
Model Summary
Adjusted R Std. Error of
Model R R Square Square the Estimate
1 .958(a) .918 .671 45.85073
a Predictors: (Constant), NPAR, Capital Adequacy Ratio, Credit-Deposit Ratio

The Multiple R for the relationship between the set of independent variables and the dependent
variable is 0.958, which would be characterized as very strong using the rule of thumb that a
correlation less than or equal to 0.20 is characterized as very weak; greater than 0.20 and less
than or equal to 0.40 is weak; greater than 0.40 and less than or equal to 0.60 is moderate;
greater than 0.60 and less than or equal to 0.80 is strong; and greater than 0.80 is very strong.
Table 5.43 shows the output for model fitness. The R coefficient of 0.958 indicates that the
predictors of the model which are CAR, NPAR and CDR have a correlation of 95.8% with the
dependent variable of return on assets that means there is a strong relationship between the set
of independent variables and dependent variable (ROA). The R square also called coefficient
of determination of 0.918 indicates that the model can explain 91.8% of the variations in the
return on assets of Union bank of India and there are other factors which can only explain 8.2%
of the variations in return on assets. This shows that the independent variables (CAR, NPAR
and CDR) of this study are significant predictors of the (ROA) performance of the Union bank
of India.

Table 5.44
ANOVA(b)
Sum of
Model Squares df Mean Square F Sig.
1 Regression 23438.037 3 7812.679 3.716 .360(a)
Residual 2102.289 1 2102.289
Total 25540.326 4
a Predictors: (Constant), NPAR, Capital Adequacy Ratio, Credit-Deposit Ratio
b Dependent Variable: Return on assets of the Union bank of India

72
Table 5.44 shows that variations in the performance (return on assets) can be explained by the
model to the extent of 23438.037 out of 25540.326 or 91.77 % while other variables not
captured by this model can explain of the 8.23 % (2102.289 out of 25540.326) of the variations
in financial performance. The F value of the model produces a p-value of 0.3.716 which is not
significantly the same as zero. A p-value of 0.360 is more than the set level of significance of
0.05 for a normally distributed data. This means that the model is no significant in explaining
performance (ROA) of the Union bank of India.
Table 5.45
Coefficients(a)
Standardize
d
Model Unstandardized Coefficients Coefficients
B Std. Error Beta t Sig.
1 (Constant) 4613.851 1511.603 3.052 .202
Capital Adequacy
194.159 88.236 1.777 2.200 .272
Ratio
Credit-Deposit
-92.686 31.119 -4.207 -2.978 .206
Ratio
NPAR 82.941 39.211 2.075 2.115 .281
a Dependent Variable: Return on assets of the Union bank of India

The regression model arising from the above data is of the form;

The regression equation is,

ROA = 4614 + 194 CAR - 92.7 CDR + 82.9 NPAR

From the above regression model, the beta coefficients to be used in this study are the
unstandardized coefficients. The results indicate that a unit change (1%) in the CAR causes an
increase of 194.159-unit changes in the Return on Assets of the Union bank of India. This
indicates that CAR has an influence on financial performance (Return on Assets) of the Union
bank of India which means that CAR is a predictor of financial performance of Union bank of
India. A unit change (1%) in NPAR causes an increase of 82.941 unit change in the Return on
Assets of the Union bank of India so, NPAR leads to the increase of financial performance of
Union bank of India. A unit change in CDR leads to a negative change of 92.686 changes in
the financial performance (Return on Assets) Union bank of India. This indicates that CDR
lead to the decrease of financial performance of the Union bank of India. Observation of t-test
for the independent variables CAR and CDR, the probability of the t statistic 2.2, -2.978) for

73
the b coefficient are .272 and .206 which are more than the level of significance of 0.05 and
statistically not significant. So, we accept the null hypothesis and conclude that there is not
significant impact of independent variables (CAR, CDR) on dependent variable (ROA). The
result shows that for the independent variable NPAR, the probability of the t statistic (2.115)
for the b coefficient is 0.281 which is greater than the level of significance of 0.05. We accept
the null hypothesis that there is no a significant impact of NPAR on ROA.
NPAR lead to the decrease of financial performance.

5.3.2 Test of Hypothesis 2

: There is no significant impact of credit risk Management on banks financial performance

(ROE) of Union bank of India.
Subset hypotheses:
: There is no significant impact of CAR on ROE
: There is no significant impact of ALF on ROE
: There is no significant impact of CDR on ROE

Table 5.46
Model Summary
Adjusted R Std. Error of
Model R R Square Square the Estimate
1 .995(a) .990 .958 2.67316
a Predictors: (Constant), NPA UNIO, Capital Adequacy Ratio, Credit-Deposit Ratio

The Multiple R for the relationship between the set of independent variables and the dependent
variable is 0.995, which would be characterized as very strong using the rule of thumb that a
correlation less than or equal to 0.20 is characterized as very weak; greater than 0.20 and less
than or equal to 0.40 is weak; greater than 0.40 and less than or equal to 0.60 is moderate;
greater than 0.60 and less than or equal to 0.80 is strong; and greater than 0.80 is very strong.
Table 5.46 shows the output for model fitness. The R coefficient of 0.995 indicates that the
predictors of the model which are CAR, NPAR and CDR have a correlation of 99.5% with the
dependent variable of return on equity that means there is a strong relationship between the set
of independent variables and dependent variable (ROE). The R square also called coefficient
of determination of 0.990 indicates that the model can explain 99% of the variations in the
return on assets of Union bank of India and there are other factors which can only explain 1%

74
of the variations in return on equity. This shows that the independent variables (CAR, NPAR
and CDR) of this study are significant predictors of the (ROE) performance of the Union bank
of India.

Table 5.47
ANOVA(b)
Sum of
Model Squares df Mean Square F Sig.
1 Regression 679.539 3 226.513 31.699 .130(a)
Residual 7.146 1 7.146
Total 686.685 4
a Predictors: (Constant), NPAR, Capital Adequacy Ratio, Credit-Deposit Ratio
b Dependent Variable: Return on equity

Table 5.47 shows that variations in the performance (return on equity) can be explained by the
model to the extent of 679.539 out of 686.685or 98.95 % while other variables not captured by
this model can explain of the 1.04% (7.146 out of 686.685) of the variations in financial
performance. The F value of the model produces a p-value of 0.130 which is not significantly
the same as zero. A p-value of 0.130 is greater than the set level of significance of 0.05 for a
normally distributed data. This means that the model is not significant in explaining
performance of the Union bank of India.
Table 5.48
Coefficients(a)
Unstandardized Standardized
Model Coefficients Coefficients
B Std. Error Beta t Sig.
1 (Constant) 362.206 88.129 4.110 .152
Capital Adequacy
20.672 5.144 1.154 4.019 .155
Ratio
Credit-Deposit Ratio -7.993 1.814 -2.212 -4.405 .142
NPAR 1.662 2.286 .254 .727 .600
a Dependent Variable: Return on equity

The regression model arising from the above data is of the form;

The regression equation is,

ROE = 362 + 20.7 CAR - 7.99 CDR + 1.66 NPAR

From the above regression model, the beta coefficients to be used in this study are the
unstandardized coefficients. The results indicate that a unit change (1%) in the CAR causes an

75
increase of 20.672-unit changes in the Return on Equity of the Union bank of India. This
indicates that CAR has an influence on financial performance (Return on Equity) of the Union
bank of India which means that CAR is a predictor of financial performance of Union bank of
India. A unit change (1%) in NPAR causes an increase of 1.662 unit change in the Return on
Equity of the Union bank of India so, NPAR leads to the increase of financial performance of
Union bank of India. A unit change in CDR leads to a negative change of -7.993 changes in
the financial performance (Return on Assets) Union bank of India. This indicates that CDR
lead to the decrease of financial performance of Union bank of India. Observation of t-test for
the independent variables CAR and CDR, the probability of the t statistic (4.019, -4.405) for
the b coefficient are .155 and .142 which are more than the level of significance of 0.05 and
statistically not significant. So, we accept the null hypothesis and conclude that there is not
significant impact of independent variables (CAR, CDR) on dependent variable (ROE). The
result shows that for the independent variable NPAR, the probability of the t statistic (0.727)
for the b coefficient is 0.6 which is greater than the level of significance of 0.05. We accept the
null hypothesis that there is no a significant impact of NPAR on ROE.

5.3.3 Test of Hypothesis 3

: There is no significant impact of credit risk Management on banks financial performance

(NPM) of the Union bank of India
Subset hypotheses:
: There is no significant impact of CAR on NPM
: There is no significant impact of NPAR on NPM
: There is no significant impact of CDR on NPM

Table 5.49
Model Summary

Adjusted R Std. Error of

Model R R Square Square the Estimate
1 .990(a) .981 .923 2.58913
a Predictors: (Constant), NPA UNIO, Capital Adequacy Ratio, Credit-Deposit Ratio

The Multiple R for the relationship between the set of independent variables and the dependent
variable is 0.990, which would be characterized as very strong using the rule of thumb that a
correlation less than or equal to 0.20 is characterized as very weak; greater than 0.20 and less

76
 than or equal to 0.40 is weak; greater than 0.40 and less than or equal to 0.60 is moderate;
greater than 0.60 and less than or equal to 0.80 is strong; and greater than 0.80 is very strong.
Table 5.49 shows the output for model fitness. The R coefficient of 0.990 indicates that the
predictors of the model which are CAR, NPAR and CDR have a correlation of 99% with the
dependent variable of net profit margin that means there is a strong relationship between the
set of independent variables and dependent variable (NPM). The R square also called
coefficient of determination of 0.981 indicates that the model can explain 98.1% of the
variations in the return on assets of Union Bank of India and there are other factors which can
only explain 1.9% of the variations in return on equity. This shows that the independent
variables (CAR, NPAR and CDR) of this study are significant predictors of the (NPM)
performance of the Union Bank of India.

Table 5.50
ANOVA(b)
Mode Sum of Mean
l Squares df Square F Sig.
1 Regression 340.914 3 113.638 16.952 .176(a)
Residual 6.704 1 6.704
Total 347.618 4
a Predictors: (Constant), NPA UNIO, Capital Adequacy Ratio, Credit-Deposit Ratio
b Dependent Variable: Net Profit Margin

Table 5.50 shows that variations in the performance (Net Profit Margin) can be explained by
the model to the extent of 340.914 out of 248.185or 98.07 % while other variables not captured
by this model can explain of the 1.93 % (6.704 out of 347.618) of the variations in financial
performance. The F value of the model produces a p-value of 0.176 which is not significantly
the same as zero. A p-value of 0.176 is more than the set level of significance of 0.05 for a
normally distributed data. This means that the model is no significant in explaining
performance (Net Profit Margin) of the Union Bank of India
Table 5.51
Coefficients(a)
Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) 256.279 85.358 3.002 .205
Capital Adequacy
16.338 4.983 1.282 3.279 .188
Ratio
Credit-Deposit Ratio -5.916 1.757 -2.301 -3.366 .184
NPAR 1.180 2.214 .253 .533 .688
a Dependent Variable: Net Profit Margin

77
The regression model arising from the above data is of the form;

The regression equation is,

NPM = 256 + 16.3 CAR - 5.92 CDR + 1.18 NPAR

From the above regression model, the beta coefficients to be used in this study are the
unstandardized coefficients. The results indicate that a unit change (1%) in the CAR causes an
increase of 16.338-unit changes in the Net Profit Margin of the Union bank of India. This
indicates that CAR has an influence on financial performance (Net Profit Margin) of the Union
bank of India which means that CAR is a predictor of financial performance of Union bank of
India. A unit change (1%) in NPAR causes an increase of 1.180 unit change in the Net Profit
Margin of the Union bank of India so, NPAR leads to the increase of financial performance of
Union bank of India. A unit change in CDR leads to a negative change of -5.916 changes in
the financial performance Net Profit Margin) Union bank of India. This indicates that CDR
lead to the decrease of financial performance of Union bank of India. Observation of t-test for
the independent variables CAR and CDR, the probability of the t statistic (3.279, -3.366) for
the b coefficient are .188 and .184 which are more than the level of significance of 0.05 and
statistically not significant. So, we accept the null hypothesis and conclude that there is not
significant impact of independent variables (CAR, CDR) on dependent variable (NPM). The
result shows that for the independent variable NPAR, the probability of the t statistic (0.533)
for the b coefficient is 0.688 which is greater than the level of significance of 0.05. We accept
the null hypothesis that there is no a significant impact of NPAR on NPM.

CANARA BANK
5.3.1 Test of Hypothesis 1
: There is no significant impact of credit risk Management on banks financial performance
(ROA) of the Canara Bank
Subset hypotheses:
: There is no significant impact of CAR on ROA
: There is no significant impact of NPAR on ROA
: There is no significant impact of CDR on ROA

78
The result of the regression analysis is presented in the table below:
Table 5.52
Model Summary
Adjusted R Std. Error of
Model R R Square Square the Estimate
1 .952(a) .906 .625 41.41919
a Predictors: (Constant), NPA CANN, Capital Adequacy Ratio, Credit-Deposit Ratio

The Multiple R for the relationship between the set of independent variables and the dependent
variable is 0.952, which would be characterized as very strong using the rule of thumb that a
correlation less than or equal to 0.20 is characterized as very weak; greater than 0.20 and less
than or equal to 0.40 is weak; greater than 0.40 and less than or equal to 0.60 is moderate;
greater than 0.60 and less than or equal to 0.80 is strong; and greater than 0.80 is very strong.
Table 5.52 shows the output for model fitness. The R coefficient of 0.952 indicates that the
predictors of the model which are CAR, NPAR and CDR have a correlation of 95.2% with the
dependent variable of return on assets that means there is a strong relationship between the set
of independent variables and dependent variable (ROA). The R square also called coefficient
of determination of 0.906 indicates that the model can explain 90.6% of the variations in the
return on assets of Canara Bank and there are other factors which can only explain 9.4% of the
variations in return on assets. This shows that the independent variables (CAR, NPAR and
CDR) of this study are significant predictors of the (ROA) performance of the Canara Bank.
Table 5.53
ANOVA(b)
Sum of
Model Squares Df Mean Square F Sig.
1 Regression 16585.594 3 5528.531 3.223 .384(a)
Residual 1715.549 1 1715.549
Total 18301.143 4
a Predictors: (Constant), NPA CANN, Capital Adequacy Ratio, Credit-Deposit Ratio
b Dependent Variable: Return on assets of the Canara Bank
Table 5.53 shows that variations in the performance (return on assets) can be explained by the
model to the extent of 16585.594 out of 18301.143or 90.63 % while other variables not
captured by this model can explain of the 9.37 % (1.934 out of 18301.143) of the variations in
financial performance. The F value of the model produces a p-value of 0.384 which is not
significantly the same as zero. A p-value of 0.384 is more than the set level of significance of

79
 0.05 for a normally distributed data. This means that the model is no significant in explaining
performance (ROA) of the Canara Bank.

Table 5.54
Coefficients(a)
Unstandardized Standardized
Model Coefficients Coefficients t Sig.
B Std. Error Beta
(Constant) 10985.459 5146.677 2.134 .279
1 Capital Adequacy
-163.167 75.825 -2.732 -2.152 .277
Ratio
Credit-Deposit Ratio -119.936 60.793 -2.758 -1.973 .299
NPA -29.441 20.943 -.810 -1.406 .394
a Dependent Variable: Return on assets of the PSBs in India

The regression model arising from the above data is of the form;

The regression equation is,

ROA = 10985 - 163 CAR - 120 CDR - 29.4 NPA

From the above regression model, the beta coefficients to be used in this study are the
unstandardized coefficients. The results indicate that a unit change (1%) in the CAR causes a
decrease of -163.167-unit changes in the Return on Assets of the Canara Bank. This indicates
that CAR lead to the decrease of financial performance of (Return on Assets) Canara Bank. A
unit change (1%) in NPAR causes a decrease of -29.441 unit change in the Return on Assets
of the Canara Bank so, this indicates that NPAR lead to the decrease of financial performance
of (Return on Assets) Canara Bank. A unit change in CDR leads to a negative change of -
119.936 changes in the financial performance (Return on Assets) Canara Bank. This indicates
that CDR lead to the decrease of financial performance of Canara Bank. Observation of t-test
for the independent variables CAR and CDR, the probability of the t statistic (-2.152, -1.973)
for the b coefficient are 0.277and 299 which are more than the level of significance of 0.05 and
statistically not significant. So, we accept the null hypothesis and conclude that there is not
significant impact of independent variables (CAR, CDR) on dependent variable (ROA). The
result shows that for the independent variable NPAR, the probability of the t statistic (-2.238)

80
for the b coefficient is 0.252 which is greater than the level of significance of 0.05. We accept
the null hypothesis that there is no a significant impact of NPAR on ROA.

5.3.2 Test of Hypothesis 2

: There is no significant impact of credit risk Management on banks financial performance

(ROE) of Canara Bank.
Subset hypotheses:
: There is no significant impact of CAR on ROE
: There is no significant impact of ALF on ROE
: There is no significant impact of CDR on ROE

Table 5.55
Model Summary

Adjusted R Std. Error of

Model R R Square Square the Estimate
1 .938(a) .879 .516 7.19229
a Predictors: (Constant), NPAR, Capital Adequacy Ratio, Credit-Deposit Ratio

The Multiple R for the relationship between the set of independent variables and the dependent
variable is 0.938, which would be characterized as very strong using the rule of thumb that a
correlation less than or equal to 0.20 is characterized as very weak; greater than 0.20 and less
than or equal to 0.40 is weak; greater than 0.40 and less than or equal to 0.60 is moderate;
greater than 0.60 and less than or equal to 0.80 is strong; and greater than 0.80 is very strong.
Table 5.55 shows the output for model fitness. The R coefficient of 0.938 indicates that the
predictors of the model which are CAR, NPAR and CDR have a correlation of 93.8% with the
dependent variable of return on equity that means there is a strong relationship between the set
of independent variables and dependent variable (ROE). The R square also called coefficient
of determination of 0.879 indicates that the model can explain 87.9% of the variations in the
return on assets of Canara Bank of India and there are other factors which can only explain
2.1% of the variations in return on equity. This shows that the independent variables (CAR,
NPAR and CDR) of this study are significant predictors of the (ROE) performance of the
Canara Bank.

81
 Table 5.56

ANOVA(b)
Mode Sum of Mean
l Squares Df Square F Sig.
1 Regression 375.924 3 125.308 2.422 .434(a)
Residual 51.729 1 51.729
Total 427.653 4
a Predictors: (Constant), NPAR, Capital Adequacy Ratio, Credit-Deposit Ratio
b Dependent Variable: Return on equity

Table 5.56 shows that variations in the performance (return on equity) can be explained by the
model to the extent of 375.924 out of 427.653 or 87.9 % while other variables not captured by
this model can explain of the 12.01% (51.729 out of 427.653) of the variations in financial
performance. The F value of the model produces a p-value of 0.434 which is not significantly
the same as zero. A p-value of 0.434 is greater than the set level of significance of 0.05 for a
normally distributed data. This means that the model is not significant in explaining
performance of the Canara Bank.

Table 5.57
Coefficients(a)
Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) 1082.604 893.701 1.211 .439
Capital Adequacy
-9.792 13.167 -1.072 -.744 .593
Ratio
Credit-Deposit Ratio -13.089 10.556 -1.969 -1.240 .432
NPAR -8.685 3.637 -1.563 -2.388 .252
a Dependent Variable: Return on equity

The regression model arising from the above data is of the form;

The regression equation is,

ROE = 1083 - 9.8 CAR - 13.1 CDR - 8.69 NPAR

From the above regression model, the beta coefficients to be used in this study are the
unstandardized coefficients. The results indicate that a unit change (1%) in the CAR causes a

82
decrease of --.792-unit changes in the Return on Equity of the Canara Bank. This indicates that
CAR lead to the decrease of financial performance of (Return on Equity) Canara Bank. A unit
change (1%) in NPAR causes a decrease of -8.685 unit change in the Return on Equity of the
Canara Bank so, this indicates that NPAR lead to the decrease of financial performance of
(Return on Equity) Canara Bank. A unit change in CDR leads to a negative change of -13.089
changes in the financial performance (Return on Equity) Canara Bank. This indicates that CDR
lead to the decrease of financial performance of Canara Bank. Observation of t-test for the
independent variables CAR and CDR, the probability of the t statistic (-0.744, -1.124) for the
b coefficient are .593 and .432 which are more than the level of significance of 0.05 and
statistically not significant. So, we accept the null hypothesis and conclude that there is not
significant impact of independent variables (CAR, CDR) on dependent variable (ROE). The
result shows that for the independent variable NPAR, the probability of the t statistic (-2.238)
for the b coefficient is 0.252 which is greater than the level of significance of 0.05. We accept
the null hypothesis that there is no significant impact of NPAR on ROE.

5.3.3 Test of Hypothesis 3

: There is no significant impact of credit risk Management on banks financial performance

(NPM) of the Canara Bank
Subset hypotheses:
: There is no significant impact of CAR on NPM
: There is no significant impact of NPAR on NPM
: There is no significant impact of CDR on NPM

Table 5.58
Model Summary

Adjusted R Std. Error of

Model R R Square Square the Estimate
1 .921(a) .847 .389 5.26406
a Predictors: (Constant), NPA CANN, Capital Adequacy Ratio, Credit-Deposit Ratio

83
The Multiple R for the relationship between the set of independent variables and the dependent
variable is 0.921, which would be characterized as very strong using the rule of thumb that a
correlation less than or equal to 0.20 is characterized as very weak; greater than 0.20 and less
than or equal to 0.40 is weak; greater than 0.40 and less than or equal to 0.60 is moderate;
greater than 0.60 and less than or equal to 0.80 is strong; and greater than 0.80 is very strong.
Table 5.58 shows the output for model fitness. The R coefficient of 0.921 indicates that the
predictors of the model which are CAR, NPAR and CDR have a correlation of 92.1% with the
dependent variable of net profit margin that means there is a strong relationship between the
set of independent variables and dependent variable (NPM). The R square also called
coefficient of determination of 0.847 indicates that the model can explain 84.7% of the
variations in the return on assets of Union Bank of India and there are other factors which can
only explain 15.3% of the variations in return on equity. This shows that the independent
variables (CAR, NPAR and CDR) of this study are significant predictors of the (NPM)
performance of the Canara Bank.

Table 5.59
ANOVA(b)
Mode Sum of Mean
l Squares Df Square F Sig.
1 Regression 153.836 3 51.279 1.851 .484(a)
Residual 27.710 1 27.710
Total 181.546 4
a Predictors: (Constant), NPAR, Capital Adequacy Ratio, Credit-Deposit Ratio
b Dependent Variable: Net Profit Margin

Table 5.59 shows that variations in the performance (Net Profit Margin) can be explained by
the model to the extent of 153.836 out of 181.546 or 84.73 % while other variables not captured
by this model can explain of the 15.27 % (27.710 out of 181.546) of the variations in financial
performance. The F value of the model produces a p-value of 0.484 which is not significantly
the same as zero. A p-value of 0.484 is more than the set level of significance of 0.05 for a
normally distributed data. This means that the model is no significant in explaining
performance (Net Profit Margin) of the Canara Bank.

84
 Table 5.60
Coefficients(a)
Unstandardized Standardized
Mode Coefficients Coefficients
l B Std. Error Beta t Sig.
1 (Constant) 758.099 654.102 1.159 .453
Capital Adequacy
-7.636 9.637 -1.283 -.792 .573
Ratio
Credit-Deposit Ratio -9.090 7.726 -2.099 -1.177 .448
NPAR -5.388 2.662 -1.489 -2.024 .292
a Dependent Variable: Net Profit Margin

The regression model arising from the above data is of the form;

The regression equation is ,

NPM = 758 - 7.64 CAR - 9.09 CDR - 5.39 NPA

From the above regression model, the beta coefficients to be used in this study are the
unstandardized coefficients. The results indicate that a unit change (1%) in the CAR causes a
decrease of -7.636-unit changes in the Net Profit Margin of the Canara Bank. This indicates
that CAR lead to the decrease of financial performance of (Net Profit Margin) Canara Bank. A
unit change (1%) in NPAR causes a decrease of -5.388 unit change in the Net Profit Margin of
the Canara Bank so, this indicates that NPAR lead to the decrease of financial performance of
(Net Profit Margin) Canara Bank. A unit change in CDR leads to a negative change of -9.090
changes in the financial performance (Net Profit Margin) Canara Bank. This indicates that
CDR lead to the decrease of financial performance of Canara Bank. Observation of t-test for
the independent variables CAR and CDR, the probability of the t statistic (-0.792, -1.177) for
the b coefficient are .573 and .448 which are more than the level of significance of 0.05 and
statistically not significant. So, we accept the null hypothesis and conclude that there is not
significant impact of independent variables (CAR, CDR) on dependent variable (NPM). The
result shows that for the independent variable NPAR, the probability of the t statistic (-2.024)
for the b coefficient is 0.292 which is greater than the level of significance of 0.05. We accept
the null hypothesis that there is no significant impact of NPAR on NPM.

85
 CHAPTER 6
FINDINGS

1. Canara Bank has the highest Return on Asset Ratio (394.68%) among the banks taken
for the study during 2018-2019.
2. State Bank of India has the highest Return on Equity Ratio (38.33%) among the banks
taken for the study during 2018-2019.
3. Union Bank of India has the highest Net Interest Margin (6.96%) annualized in the
Financial Year March 2018-19.
4. The State Bank of India has the highest Net Profit Margin of 0.9% annualized in the
Financial Year 2018-19.
5. Bank of Baroda has the highest Capital Adequacy ratio (13.42%) annualized in the
Financial Year March 2018-19.
6. Union Bank of India has the highest a Non-performing Asset ratio (6.85%) annualized
in the Financial Year March 2018-19.
7. State Bank of India has the highest credit-deposit ratio (3.95%) annualized in the
Financial Year 2019.
8. State Bank of India has the highest ALF ratio (69.1%) annualized in the Financial Year
2019.
9. NPAR is negatively correlated with ROE, NIMR, NPM and ALFR while CAR and
CDR are positively correlated.
10. NPAR is negatively correlated with ROA, ROE, NIMR, NPM, CAR and ALFR. CAR
and CDR are also negatively correlated while CDR and NPAR are positively correlated.
11. NPAR is negatively correlated with ROA, ROE, NIMR, NPM, CAR and ALFR.
12. NPAR is negatively correlated with ROA, ROE, NIMR, NPM and ALFR while CDR
and CAR and NPAR are positively correlated.
13. NPAR is negatively correlated with ROA, ROE, NIMR, NPM, CAR and ALFR while
CDR is positively correlated with NPAR.

86
 SBI
14. The independent variables (CAR, NPAR and CDR) of this study are significant
predictors of the (ROA) performance of the SBI.
15. There is no a significant impact of NPA on ROA of SBI.
16. The independent variables (CAR, NPAR and CDR) of this study are significant
predictors of the performance (return on equity) of the SBI.
17. There is no a significant impact of NPA on ROE of SBI.
18. The independent variables (CAR, NPA and CDR) of this study are significant
predictors of the performance (net profit margin) of the SBI.
19. There is no a significant impact of NPA on Net Profit Margin of SBI.
PUNJAB NATIONAL BANK
20. The independent variables (CAR, NPAR and CDR) of this study are significant
predictors of the (ROA) performance of the PNB.
21. There is no a significant impact of CDR on ROA.
22. The independent variables (CAR, NPAR and CDR) of this study are significant
predictors of the (ROE) performance of the PNB.
23. There is no a significant impact of NPAR on NIM.
24. The independent variables (CAR, NPAR and CDR) of this study are significant
predictors of the (NPM) performance of the PNB.
25. There is no a significant impact of NPAR on NPM.
BANK OF BARODA
26. The independent variables (CAR, NPAR and CDR) of this study are significant
predictors of the (ROA) performance of the Bank of Baroda.
27. There is no a significant impact of NPAR on ROA.
28. The independent variables (CAR, NPAR and CDR) of this study are significant
predictors of the (ROE) performance of the Bank of Baroda.
29. There is no a significant impact of NPAR on ROE.
30. The independent variables (CAR, NPAR and CDR) of this study are significant
predictors of the (NPM) performance of the Bank of Baroda.
31. There is no a significant impact of NPAR on NPM.
UNION BANK OF INDIA
32. The independent variables (CAR, NPAR and CDR) of this study are significant
predictors of the (ROA) performance of the Union bank of India.
33. There is no a significant impact of NPAR on ROA.

87
34. The independent variables (CAR, NPAR and CDR) of this study are significant
predictors of the (ROE) performance of the Union bank of India.
35. There is no a significant impact of NPAR on ROE.
36. The independent variables (CAR, NPAR and CDR) of this study are significant
predictors of the (NPM) performance of the Union Bank of India.
37. There is no a significant impact of NPAR on NPM.
CANARA BANK
38. The independent variables (CAR, NPAR and CDR) of this study are significant
predictors of the (ROA) performance of the Canara Bank.
39. There is no a significant impact of NPAR on ROA.
40. The independent variables (CAR, NPAR and CDR) of this study are significant
predictors of the (ROE) performance of the Canara Bank.
41. There is no significant impact of NPAR on ROE.
42. The independent variables (CAR, NPAR and CDR) of this study are significant
predictors of the (NPM) performance of the Canara Bank.
43. There is no significant impact of NPAR on NPM.

88
 CHAPTER 7
RECOMMENDATIONS

1. The NPA ratio is one of the most important ratios in the banking sector. Higher ratio
reflects a rising bad quality of loans. It helps recognise the quality of assets that a bank
holds. Banks need to bring down fresh additions to NPAs to improve the quality of their
asset portfolio. When the level of NPAs is high with all banks and the banks would be
expected to bring down their NPA then this can be achieved by upright credit appraisal
procedures, active internal control systems along with their struggles to mend asset
quality in their balance sheets.
2. Public sector banks should be allowed to come up with their own measures to address
the problem of NPAs. This may include renouncing and reducing the principal and
interest on such loans, or spreading the loans, or resolving the loan accounts. They
should be completely authorized and they should be able to smear all the preferential
policies allowed to the asset management companies.
3. Public sector banks should also check their credit policy and practices. By this, they
would reduce loss on non performing assets which raise their expenses and consequent
reduction in financial performance. From the findings, there seems to be uniformity in
the manner in which commercial banks handle credit risk. However to enhance the
quality of the loans advances and reduce the level of nonperforming Assets there is a
need to put in place guidelines that compel banks to share information about their
borrowers. This would ensure that loans are granted to the honest borrowers.
4. Bank managers could pay more attention to improving banks’ performance by
managing the credit risk banks face. Banks thus can well arrange and allot their resource
concerning the position of credit risks.
5. Banks should ensure the credibility of the borrower.
6. All banks should have established Credit Policies (“Lending Guidelines”) that clearly
outline the senior managements’ view of business development priorities and the terms
and conditions that should be adhered to in order for loans to be approved. The Lending
Guidelines should be updated at least yearly to redirect changes in the economic outlook

89
 and the progress of the banks’ loan portfolio, and be dispersed to all lending/marketing
officers.
7. The credit-deposit ratio for the public sector banks sector is over 70 per cent.(over 75%
for last 3 years). A high credit-deposit ratio specifies that greater portion of deposits is
put to use to produce maximum interests. So it is required to more attention on CD ratio
to mobilize the fund smoothly for better performance of public sector banks.
8. CD ratio reveals the efficiency with which the commercial banks are able to mobilise
the deposits received. The public sector banks in India have to maintain a certain portion
of deposits as reserves with RBI through the Cash Reserve Ratio (CRR) and Statutory
Liquidity Ratio (SLR) window. Only after that banks have available funds to mobilise
for loans to various sectors.
9. Banks should obey the RBI norms and provide facilities as per the norms, which are
not being followed by the banks. While the customer must be given prompt services
and the bank officer should not have any fear on the mind to provide the facilities as
per RBI norms to the units going sick.
10. Indian PSBs to achieve enhanced and sustained profitability through interest income,
from loans and advances, appropriate credit risk strategies to be instituted. Banks,
therefore, need adequate and accurate information from both internal and external
sources in order to access the multiplicity of credit risks they face when presented with
a loan proposal.

90
 CHAPTER 8

CONCLUSIONS

The main objective of this research is to investigate whether there is an impact credit risk
management and financial performance of selected public sector banks in India. The sample in
this research is the four state-owned banks in India which is considered to be the most
influenced bank for India’s economy. The research used secondary data which is obtained from
the publicly annual report of each bank within 5 years period (2015 to 2019). The study
revealed that there is significant positive relationship between NPAR, CAR and CDR , whereas
ROA, ROE, ALFR, NIM and NPA have significant negative relationship. The independent
variables (Credit Risk Variable) are significant predictors of dependent variables (financial
performance) i.e., ROA, ROE and NPM. It also indicates that there is no significant impact of
independent variables (credit risk management; CAR, CDR and NPAR) on dependent variables
(financial performance; ROA, ROE, NIM and NPM) of the banks. Among the credit risk
management indicators, NPAR is the single most important predictor of the bank profitability,
whereas CAR and CDR are not significant predictors of bank profitability. Hence, the banks
are advised to put more emphasis on credit risk management to reduce credit risk as non-
performing loans attain maximum profitability.

91
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