Credit Risk Management Practices and Its Impact on Rural Bank’s Financial Performance

Registration ID: IJNRD_198587

Published ID: IJNRD2306278

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Christine Cayanan

Credit Risk Management, Financial Performance

Credit risk management in banks has become a critical concept that determines banks' survival, growth, and profitability, not only as a result of the industry's current financial crisis. The BSP requires that financial institutions under its supervision have credit risk management systems that are effective and appropriate for their credit risk-taking activities. The goal of this research is to find out how credit risk management affects rural bank profitability in Central Luzon. From 2016 to 2020, the researcher examined the annual financial statements of eighteen rural banks (five years). The linear regression model was employed in the estimation process. The model used profitability indicators such as Return on Equity (ROE) and Return on Asset (ROA), as well as a credit risk management indicator known as Capital Adequacy Ratio (CAR). Board of Directors, Internal Auditors/Compliance Officers, Managers, and Loan Officers were among those who responded to the survey. Out of the sixty-four member banks of the Confederation of Central Luzon Rural Bankers, eighteen (18) rural banks were chosen as a sample. Questionnaires for the survey were distributed via Google Forms, email, and Facebook Messenger. This is a quantitative descriptive research that utilized the correlation approach to describe the impact of the credit risk management practices on the financial performance of the rural banks in Central Luzon. The statistical tool that was used in this study was linear correlation. This statistical tool analyzed how Credit Risk Management practices correlates to the financial performance of rural banks in Central Luzon. The bank’s financial performance was measured by the Return on Asset (ROA) and Return on Equity (ROE), wherein: ROA = Annual Net Income/Total Assets; ROE = Annual Net Income/Shareholders’ Equity and the bank’s Capital Adequacy Ratio (CAR). Secondary Data was acquired in the Bangko Sentral ng Pilipinas Data Center. The study revealed that Credit Risk Management Practices have no significant impact on the rural bank’s financial performance. Credit Risk Management Practices have insignificant impact on CAR, ROE and ROA. Previous research findings show that the relationship between CAR, ROA, and ROE is not significant. The following recommendations are hereby offered out of the result of the aforesaid findings and conclusions: Banks should consider the indicators of non-performing loans/Gross loans portfolio. It is also recommended that Non-Performing Loans (NPLs) will be used as one of the credit risk indicators. The study sought to find the impact of credit risk management practices on the financial performance of rural banks in Central Luzon and recommend that similar research should be done but with a specific focus on Non-Performing Loan/Total Loan Portfolio as one of the variables of Credit Risk Management. Further, this study will help Rural banks improved its operation by minimizing the credit risk aspect. This will minimize the number of banks placed under the Prompt Corrective Action (PCA) through proper credit risk management that will reduce the Past Due ratio or its Non-Perfroming Loan. Early supervisory interventions prompt banks to address their weaknesses in a timely manner. The purpose is either to put banks back on a sound footing or to mitigate the consequences of a failure.. The researcher came up of developing a Credit Risk Management Assessment Plan that can be used by the Internal Auditors and Compliance Officers of the member rural banks of Central Luzon.

Published Paper   E-Certificate

Christine Cayanan (June-2023). Credit Risk Management Practices and Its Impact on Rural Bank’s Financial Performance. INTERNATIONAL JOURNAL OF NOVEL RESEARCH AND DEVELOPMENT, 8(6), c699-c709. https://ijnrd.org/papers/IJNRD2306278.pdf

Volume 8 Issue 6, June-2023

Pages : c699-c709

Paper Reg. ID: IJNRD_198587

Published Paper Id: IJNRD2306278

Research Area: Management

Author Type: Foreign Author

Country: Mexico, PAMPANGA, Philippines

Published Paper PDF: https://ijnrd.org/papers/IJNRD2306278.pdf

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