Impact of Credit Management on the Financial Performance of Banks: A Case Study of Canadian Banks

Credit is of a sensitive disposition not to be treated with utmost vigilance in any organization especially in banks which the circumstance is more significant. The aim of this study is to investigate the impact of credit management on the financial performance of banks. Panel data analysis was used to analyze the secondary data collected for 8 Canadian banks over the period of 16 years (2000-2015). In this study, return on assets (ROA) and return on equity (ROE) are used as a measure of banks‟ financial performance whereas non-performing loan ratio (NPLR), loan loss provision ratio (LLPR), loans to deposit ratio (LTDR), loans to asset ratio (LTAR), cost per loan asset ratio (CLAR) and total debt to total asset ratio (TDTAR) were used as proxies for credit risk. It was found that NPLR, LLPR, LTDR and CLAR were all statistically significant and inversely related to banks‟ financial performance (ROA) whereas LTAR was statistically significant and positively related to ROA. On the other hand, NPLR and LLPR were statistically significant and inversely related to ROE, while LTAR was positively related but LTDR, CLAR and TDTAR were all statistically insignificant. On the basis of the findings, it shows credit risk has a negative influence on financial performance of banks thereby saying good credit management is of utmost importance to banks. Therefore, banks need credit to survive and hence adequate attention needs to be paid to credit administration in banks.