Credit Risk Management of Loan Portfolios by Indian Banks: Some Empirical Evidence

Jayanta Kishore Nandi and Navin Kumar Choudhary

The IUP Journal of Bank Management, 2011, vol. X, issue 2, 32-42

Abstract: The basic functions of most of the banks are the acceptance of deposits from public and lending funds to public, corporate, etc. This business of lending has brought trouble to individual banks as well as to the entire banking system, thus giving rise to credit risk, which is the risk of default. The present paper is designed to develop an internal credit rating model for banks which improves their current predictive power of financial risk factors. It also studies how banks assess the creditworthiness of their borrowers and how can they identify the potential defaulters so as to improve their credit evaluation. To achieve the above-mentioned objective, a research has been conducted considering the data for the last six years. Altman Z-Score model is used to arrive at an equation of the Z-Score, which helps the banks to predict future defaulters and take necessary action accordingly. The model, which has been developed, is an application of multivariate discriminant analysis in credit risk modeling.

Date: 2011
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