Abstract:
The purpose of this investigation is to extend earlier research on the impact of credit
risk on financial performance. The study confines only nine listed commercial banks in
Sri Lanka through the purposive sampling due to the minimize of missing data and links
secondary data derived from the annual financial reports of commercial banks using
the CSE’s database. The analyzed credit risk indicators include non-performing loan
ratio and capital adequacy ratio while financial performance indicator incudes return
on Equity (ROE). Regression and Correlation analysis have been employed for the
study to investigate the effects of credit risk indicators on Return on Equity. The results
of the analysis has revealed that both credit risk attributes including Non-Performing
Loan ratio and Capital Adequacy ratio have a negative and significant impact on Return
on Equity. The prominent finding of the research utterly reveals that, Credit Risk
significantly influences the financial performance of listed commercial banks in Sri
Lanka with the negative relationship. Based on the Finding, researcher recommends
banks to devise new strategies and implement effective policies relating with credit risk
management to improve their financial viability as credit risk is one of the significant
factors that determine the financial performance which this study concluded. Thus, this
study will be useful for the management personnel of banks to create the ideas for
protect banks from crisis and enhance the performance of banks. The study suggests
that the growing banks need to refocus on the effective management of its financial risk
and devise new strategies like minimizing the lending rates and fee charges and
critically assessing the customers who demand the extension of credit or loan before
granting such, to reduce credit risk will make an improvement in the financial
Performance.
