ASSESSMENT OF LOAN DEFAULTS AND ITS IMPACTS ON THE PROFITABILITY OF BANKS IN GALLE, SRI LANKA
Abstract
Purpose of the study: Assessment of loan defaults and its impacts on the profitability of banks in Galle, Sri Lanka. Default occurs when a borrower does not uphold their legal commitments by making the required payments on time or by breaking one of the conditions of the loan arrangement.
Methodology: The study was literature based. A literature-based study is a type of research that involves analyzing and synthesizing existing published literature on a specific topic. Instead of conducting new experiments or collecting primary data, researchers gather and evaluate relevant studies, books, articles, and other sources to gain a comprehensive understanding of the subject.
Findings: The study revealed that when borrowers default on their loans, banks are unable to collect the principal and interest payments that they expected, which can result in significant losses. Earnings of shareholders suffer as a result of loan defaults. Dividend payments are made in accordance with the bank's net profit performance. Loan defaults have a negative impact on financial institution profitability and the amount of dividend paid to shareholders is usually affected. Poor management is one of the major reasons of loan issues.
Conclusion: It is concluded that loan defaults have significant negative impacts on the profitability of banks. When borrowers default on their loans, banks are unable to collect the expected principal and interest payments, which can result in significant losses.
Recommendations: The study recommended that banks should develop and implement robust credit risk management processes to identify and mitigate potential credit risks. Banks should also diversify their loan portfolios to reduce concentration risk meaning that they should not lend to a limited number of borrowers or industries. Banks should regularly review their loan portfolios to identify potential NPAs and take necessary actions to mitigate them by restructuring loans, rescheduling repayments, and recovering overdue payments.
Keywords: Loan defaults, profitability, banks, Sri Lanka
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