CREDIT RISK MANAGEMENT PRACTICES AND BANKS’ PERFORMANCE IN PAKISTAN

The main objective of this study is to investigate whether the credit risk management of Pakistan's commercial banks listed on the Pakistan Stock Exchange is linked to financial performance. For this purpose, the researchers have attempted to analyze the data trends of five major banks of Pakistan as a proxy representation of the entire banking sector of Pakistan. Five (5) years of panel data collected from the State Bank of Pakistan Annual publication and annual reports of respective banks was used to conduct the research. The study found that underperforming Credit Risk Management (CRM) loans and Capital Adjustment Ratios (CDRs) have an impact on the financial achievement of Pakistani commercial banks as measured by return on equity (ROE) and return on assets. For panel data analysis, inferential statistics (regression models) were used in this study. After analyzing the data, the researcher found that CRM has a significant impact on the financial performance of Commercial Banks of Pakistan. Furthermore, the researcher encourages the Pakistani banks to grow their profitability in terms of better CRM. Pakistan's banking sector must develop suitable CRM strategies and policies through a sound credit appraisal before lending to consumers and banks; an appropriate CRM mechanism must be developed, and the credit awards system must be thoroughly reviewed, properly informed and used to repay loans. Pakistani Banks would develop and implement strategies to improve their performance & competitiveness as well as limit their lending risk exposure.


INTRODUCTION
Banks are exposed to various business risks by providing financial services and other related matters exposed to some financial risks including foreign exchange risk, volatility risk, operation risk, and credit risk, etc. (Alloyo, 2010). Commercial banks have encountered various problems and issues over some years, but the major reason and problem area were terms as serious financial regularities which affect standardized credit borrowings and poor monitoring of such borrowings. Non/poor monitoring and management of nonperforming loans are the major areas that needed to be controlled and to grow in the competitive market (State Bank of Pakistan, 2020).
A recent study by Sleimi (2020), emphasized that the components of risk management procedures had a good and significant influence on bank performance. These assertions have been extensively validated in the western contexts and emphasize the need for risk management in the diverse banking environment. According to Li & Zou 2014, banks face a variety of risks, all of which play a critical role in ensuring that their objectives of good banking management to earn maximum income for the benefit of shareholders and stakeholders are met. Banks' management manages their various cash measurement tools to meet their daily financial requirement. In this essence Yusuf (2003) suggested that banks and financial institutions are facing various risks. These risks include interest rate risk, foreign exchange, political risk, market risk, operation risk, and credit risk (Cooperman, Gardener & Mills 2000).
According to Harvett (2013), risk management is a continuous process that helps in minimizing the bad impact of unknown possible losses.
There are various processes of risk management which include measurement using better tools and control. Some researchers like Ngare (2008), Waweru and Kalani (2009), and Buchan (2011) explained various techniques which help managers to minimize risk management.
Every organization, particularly banks and financial institutions, have to achieve their objectives and risk management helps these issues to minimize foreign exchange losses, effective control of cash flow, and earnings from the business at the time of business uncertainties (Chapman and Ward 2010). Survivals of the banks and financial institutions are in continuous growth due to increase in their incomes. Banking business otherwise is very much sensitive as almost 85% of bank liabilities comprise on deposit (Husted 2005).
However, emphasizing on banks credit management, Mbole (2004) determined that commercial banks accept deposits and then provide them to needy borrowers to stimulate the economy and to get income in the shape of interest/profit.

Journal of Entrepreneurship, Management, and Innovation
Volume 4, Issue 1, January 2022 [138] In essence, the loan portfolio of the banks is very much important as unprofessional decisions may result in default risk which has a very much impact on the financial stability of banks and imprudent credit may result in losses which may also result in bankruptcy. Even in developing countries like Kenya, banking plays a critical role in economic development. Richard (2006) highlighted that the business community of Kenya is demanding various credits from banks and financial institutions but to meet the unforeseen default risk. The banking industry gathers useful information from its borrowers and creditors. Then each commercial bank has a capable risk management system to evaluate these demands. Kimondo, Serakwane, and Davel (2012) concluded that the banking industry is very cautious to reduce their expected losses in the shape of defaults. All the commercial banks are properly and effectively monitoring the risk management system to provide credit with minimum risk.
CRM is also critical because banks are responsible for depositing depositors' funds. These funds are received on one end of the bank and are shared on the other end as a credit to the business community as well as other sectors to earn interest for the earnings of the banks. The fund-based business interest/markup on credit has major shares which are reflected in these banks' balance sheets. Thus, according to Shaikh et al. (2017), there is a need for better credit risk management in banks.
The primary purpose of this study is to see how much CRM is used for various types of risks by banks in Pakistan. This research also investigates the impact on the profitability of banks in Pakistan of current CRM practices.

STATEMENT OF THE PROBLEM
Banks are exposed to various business risks by providing financial services and other related matters exposed to some financial risks including foreign exchange risk, volatility risk, operation risk, and credit risk, etc. (Alloyo, 2010). Commercial banks have encountered various problems and issues over some years, but the major reason and problem area were terms as serious financial regularities which affect standardized credit borrowings and poor monitoring of such borrowings. Non/poor monitoring and management of nonperforming loans are the major areas that needed to be controlled and to grow in the competitive market (State Bank of Pakistan, 2020). Therefore, the researchers in this study aim to know that up to what extent practicing credit risk management tools can affect the level of profitability of the concerned banks listed at PSE -100 Index.

RESEARCH OBJECTIVES
Following are the main objectives of the study.

SIGNIFICANCE OF THE STUDY
The theme of this research helps the bank management to perform reasonable risk management and this study also establishes a relation of credit risk to banks income generation as with the establishment of prudent risk management. Banks working in Pakistan try their best to control nonperforming loans, credits and subsequently result in the achievement of income goals.
This research can also be used as a guide for other scholars who want to complete their RM (risk Management) research and its effect on bank credit efficiency, especially in commercial banks in Pakistan.

LITERATURE REVIEW
Credit risk management is critical to the success of a financial institution's operations. Good and efficient credit management needs the presence of a suitable credit risk environment that specifies operations by adopting efficient loan processing. To maintain reasonable credit administration requires search, analyzing, and improving the stages of a good control environment to minimize credit risk. Ali et al. (2020) stated that banks have numerous drawbacks, the most prominent of which are small sample size and a cross-sectional study, both of which restrict the generalizability of the findings. The fact that there are so few banks in Azad Kashmir is the source of the small sample size. Furthermore, according to this study, bankers should concentrate on risk management techniques as well as managing experience to enhance bank performance and achieve a competitive edge through the use of managerial skills.
According to Sathyamoorthi (2020), the loan deposit ratio has a negative and significant impact on return on assets and return on equity. The findings suggest that banks should strike a healthy balance between financial risk management methods and financial performance by utilizing proper market, credit, and liquidity risk management procedures that will preserve their banks' safety while also delivering positive profits. risk management and deposit bank profitability in Turkey from 2005 to 2017. As a result, banks should place a higher focus on credit risk management, particularly the control and monitoring of non-performing loans. New credit risk management methods should also be given more consideration by managers.
According to Rehman (2019), corporate governance has the greatest impact on credit risk management (CRM), followed by diversification, hedging, and, finally, the bank's Capital Adequacy Ratio. The relevance of these four risk management approaches for commercial banks in addressing credit risk is emphasized in this study.
Credit risk management indicators have a significant influence on the financial performance of selected public sector banks in India, according to a study conducted by Ali and Dhiman (2019). According to the empirical data, ROA (profitability) is positively associated with CAR, management quality, and earnings ability, but negatively associated with AQ and liquidity.
Increased competition, according to Bülbül et al. (2019), is forcing banks to use advanced risk management strategies. Sector specialization in the loan market helps credit portfolio modeling, but credit risk transfer is hindered. Chukwunulu et al. (2019) discovered a negative and significant relationship between risk management and bank performance when it comes to credit risk.
Strong credit evaluation builds the framework for effective credit risk management and provides firms with a competitive advantage in the marketplace Catherine, 2019. As a result, credit assessment is important to the survival and profitability of a bank. The value of adjusted R Square at a 95% confidence interval was 0.978, suggesting that the bank's performance varied by 97.8 percent due to changes in client appraisal, credit risk control, and risk diversification.
Only a few commercial institutions, according to Wachira (2017) is to guide banks on how to develop and implement solutions that will not only minimize their credit risk exposure but also increase their profitability and competitiveness.
Parrenas (2005)  Better credit risk management tools, which the bank used to implement unsecured credits, are highlighted by Gakure, Nagugi, Ndwiga, and Waithaka (2012). Their study looked into a variety of financial risks that limit banks' ability to make pre-lending decisions to meet their business objectives. Kolapo, Ayeni, and Oke (2012)

THEORETICAL FRAMEWORK
This research is being carried out to see how credit risk management impacts a bank's earnings.
Below is a model showing dependent and independent variables.

RESEARCH HYPOTHESES
Based on the literature review, following hypotheses are developed.

RESEARCH METHODOLOGY
This section contains field-tested study concepts and techniques. The study's design, target population, sample size, sampling procedure, data collecting, and analysis are all discussed in detail. The theoretical backdrop for investigating the relationship between credit risk management activities and commercial bank performance is as follows:

Pit (ROA, ROE) = β0 + β1NPLit + β2CARit +eit
Here Pit stands as a test of profitability for financial performance by trustworthy variables (ROA, ROE). 1NPLRit is the first independent bank I loan risk management variable at times t and 2CARit is the second independent bank I loan risk management variable at times t. 0 is a permanent representational variable.

Nature of the Study
It has a descriptive as well as a co-relational nature. Secondary data will be gathered from respective banks' annual reports, as well as the State Bank of Pakistan's (SBP) publication "Financial Statement Analysis of Financial Institutions 2013-2017" for the study's years.

Target Population and Sample Size
Presently, thirty-one (31)

Data Collection
The data were collected from SBP (State Bank of Pakistan) publications (Financial Statement Analysis) of the financial sector in Pakistan from the period of 2016-2020; annual reports and balance sheets of respective commercial banks were available on their websites.

Inferential Statistics
HA1: There is a significant effect of the Capital Adequacy ratio on the profitability of listed banks at PSE. The regression model output shows that there is a significant effect of CAR on the profitability of listed banks at PSE (P = .000 <.05). HA2: There is a significant effect of non-performing loans on the profitability of listed banks at PSE. The regression model output indicates that there is a significant effect of non-performing on the profitability of listed banks at PSE (P = .000 <.05). Table 1 shows the effect of independent variables on the dependent variable that R 2 = .435 which designates that the non-performing factor explains 43% variance in Profitability. The table further portrays the B value indicates that one unit increase in non-performing then 0.53 SD unit will increase in Profitability. The F-value is also signifying the sig-value (F = 472 > 4). Therefore, we can say that there is a significant effect of non-performing on the profitability of listed banks at PSE, so the researcher falls in the exceptions of a null hypothesis.

CONCLUSION AND DISCUSSION
Banks are seen as the backbone for the acceleration of economic activity in our fast-paced world since they play such an important role. However, banks must deal with a variety of dangers because the risk is inherent in banking operations, the most serious of which is credit risk. For that purpose, the researcher concluded that CRM has a positive impact on commercial banks' financial performance, according to the findings of this study. This study included two variables as determinants of CRM: NPLR and CAR. The findings show that better CRM improves financial performance (ROA & ROE). According to the study's regression results, effective CRM can boost overall financial performance based on the study's independent variables (NPLR & CAR). Because CRM is so important, it is recommended that a strict CRM system be implemented. Because credit risk management has such a large impact, it is recommended that managers follow a strict CRM system and spread their bank's earning activities.
Commercial banks' low financial performance in Pakistan has been attributed to poor credit valuation and weak risk management policies, a substandard loan portfolio, and bank registration with insufficient resources. Long-term liabilities are extensively used by Pakistani commercial banks, resulting in high borrowing costs and the possibility of a bank collapse.