Abstract:
Lending is one of the main incomes generating activity in commercial banks.
Credit risk occurs in connection with lending. Among the different risks facing
by banks risks, credit risk is considered as one of the major determinant of
bank profitability because of the number and diversity of stakeholders
affected. The objective of the study is to assess the impact of credit risk on
profitability of licensed commercial banks in Sri Lanka for the period 2011 to
2015. Fifteen commercial banks were selected for the study and data was
collected through published annual reports and using Eview Statistic Software
& SPSS Software was performed Descriptive analysis, Correlation and
Regression analysis. This study found that non-performing loan (NPL) ratio
has a significant impact on Return on Assets (ROA) ratio, while total loan to
total deposit (TLTD) ratio has no significant impact on Return on Assets
(ROA) ratio. Furthermore, non-performing loan (NPL) ratio has significant
positive impact on Return on Equity (ROE) ratio, while total loan to total
deposit (TLTD) ratio has significant negative impact on Return on Equity
(ROE) ratio.
Findings of this study contribute to formulate efficient and effective credit risk
management control policies for licensed commercial banks in Sri Lanka.
