Effect of Credit Risk on Financial Performance of Licensed Commercial Banks in Sri Lanka.

Abstract

The banking sector in Sri Lanka plays a significant role in the country's economy. The effective management of credit risk is a crucial factor that exerts a substantial impact on the banking sector's profitability. However, inadequate credit risk management of banks can result in a lack of liquidity. Therefore, it is imperative to analyze credit risk on financial performance. The extant research exhibits contradictory findings about the influence of credit risk on financial performance. Numerous research has been undertaken within the Sri Lanka setting to investigate the inverse correlation between credit risk and the financial performance of banks operating in Sri Lanka. However, it is worth noting that no studies have been undertaken in Sri Lanka that specifically examine the relationship between Gross Domestic Product (GDP) and ownership as controllable variables. Hence, the primary objective of the study is to fill the existing research puzzle by avoiding examining the influence of credit risk on financial performance. Descriptive and Multiple Regression analysis was used for analyzing data. The current study is based on an investigation of Licensed Commercial Banks (LCBs) in Sri Lanka, covering the period from 2013 to 2022. The study concluded that the necessity of having proper evaluation processes for granted loans and strong credit risk management strategies to encounter future financial instability since 2021 and 2022 years have represented a huge economic drop in GDP in Sri Lanka (CBSL, 2023).