Credit Risk Assessment in Commercial Banks: An Empirical Study of Assessment Tools, Institutional Practices, and Determinants of Non-Performing Assets

Abstract

Credit risk remains the single largest source of financial vulnerability for commercial banks, directly influencing profitability, capital adequacy, and systemic stability. This study examines the credit risk assessment practices adopted by commercial banks, with specific attention to the tools used to evaluate borrower creditworthiness, the institutional and regulatory factors shaping these practices, and the relationship between assessment rigor and the level of Non-Performing Assets (NPAs). The research is descriptive-cum-analytical in design and combines a review of secondary data on NPA trends across public sector, private sector, and foreign banks with an illustrative primary survey of bank credit officers regarding the relative importance they assign to different risk assessment tools, including credit scoring, financial ratio analysis, collateral valuation, internal credit rating, cash flow analysis, and sector-risk evaluation. Descriptive statistics, correlation analysis, and trend analysis were used to interpret the data. The findings indicate that banks employing a multi-parameter, technology-enabled credit appraisal framework report comparatively lower NPA ratios, that public sector banks continue to exhibit higher NPA levels than private and foreign banks despite regulatory convergence under Basel norms, and that qualitative judgment continues to play a significant role alongside quantitative scoring models. The study concludes that an integrated credit risk framework combining statistical models, sectoral analysis, and continuous post-sanction monitoring is essential to minimizing default risk. Practical recommendations are offered for strengthening early-warning systems, credit officer training, and risk-based pricing. The study contributes to the growing literature on bank risk management in emerging market economies and offers a methodological template for future empirical work.