Impact of Credit Risk Management on Bank’s Profitability: A Study on State Owned Commercial Bank

Abstract

This report "Impact of Credit Risk Management on Bank’s Profitability: A Study on State Owned Commercial Banks" examines the relationship between credit risk management and

financial performance in state-owned banks of Bangladesh. The study evaluates key factors

such as non-performing loans, loan loss provisions, capital adequacy, and loan-to-deposit ratios to assess their impact on profitability. The analysis reveals that poor credit risk management significantly affects the financial stability of banks, leading to decreased returns on assets. State-owned banks face challenges such as high non-performing loans, ineffective loan recovery mechanisms, and weak enforcement of credit policies, which adversely impact their financial health. The study also highlights the role of Bangladesh Bank’s regulations in shaping credit risk policies, although their implementation remains inconsistent. Findings suggest that while some banks adopt rigorous credit risk management frameworks, inefficiencies persist due to political influence, inadequate risk assessment, and poor monitoring. Regression analysis confirms a strong correlation between credit risk indicators and profitability, demonstrating that better risk management leads to improved financial performance. The study concludes that strengthening internal controls, enhancing credit evaluation processes, and reducing non-performing loans are essential for sustaining profitability in state-owned banks. Key recommendations include stricter supervision, improved risk assessment models, enhanced training for banking professionals, and the adoption of digital credit monitoring tools. These measures can help banks mitigate credit risks effectively, ensuring long-term financial stability and growth. Ultimately, the report underscores the need for a proactive and structured approach to credit risk management to enhance the profitability and sustainability of state owned commercial banks in Bangladesh. To conclude the report, it is mandatory to say that default clients have been a major problem for the banking as well as for the whole financial system. Bank can increase its profits by efficient management of credit risk. From the results of regression analysis where the interactions of independent variables in relation with depended variable are presented, it can be stated that the regression model is statistically significant and null hypothesis is rejected thereby alternative hypothesis is accepted that is there exist relationship between CRM and banks profitability.