Credit Risk, Capital Adequacy and Banks Performance: An Empirical Evidence from Pakistan

Credit risk is one of the major risks in banking operations now-a-days. For sustainable financial performance, credit risk management is of crucial importance. Non-performing loans are the major element of credit risk that negatively affects the banking performance. To cater such risk, banks have to maintain certain percentage of capital as cushion with central bank as per BASEL requirements. Efficient credit risk management contributes positively towards banking profitability. This study aims to investigate, how credit risk and capital adequacy affects the performance of commercial banks in Pakistan. This study identifies the exposure of Pakistani commercial banks towards credit risk and impact of credit risk management practices for 6 years. The findings of this study help the risk managers to ensure prudent credit risk management practices that will help in reducing non-performing loans and improving banking performance.