The Relationship Between Credit Risk Analysis and the Level of Non-performing Loans

Abstract

Studies done indicate that credit is the single major cause of risk to commercial banks. Credit risk is mainly a factor of the analysis done before granting credit. This study set out to evaluate credit risk analysis by Kenyan commercial banks and to establish the relationship, if any, between credit risk analysis and the level of non-performing loans. Using a census of the 43 commercial banks in Kenya as at December 31st 2001, the researcher personally administered a questionnaire to the person in charge of credit risk management in each of the commercial banks. The level of nonperforming loans (NPL) was determined using secondary data. From the analysis of the responses received, it was evident that all the commercial banks have in place measures for mitigating against risk arising from -credit poor analysis, Analysis of credit risk involved various levels of officers and committees with varying experience. Either a single officer or a combination of officers and committees with varying credit limits approve credit. Various attributes were identified as a consideration in rating of clients for credit risk analysis. Cash and semi-cash assets were highlighted the most suitable form of collateral for credit. The frequency of review of the credit policies as reported by the respondents ranged from quarterly to annually. Different officers or committees were said to review internal credit ratings at varied time intervals. The majority of the commercial banks that took part in this study indicated that they do not have credit limits as a measure of mitigating against credit risk Use of some forms of credit limits and an increase 1 the attributes that are considered in analyzing clients for credit risk decreases the level of nonperforming loans.