EFFECTIVENESS OF CONVENTIONAL STRATEGIES TO MITIGATE THE LEVEL OF CREDIT RISK

Abstract

This research study provides a broad picture and it highlights the major factor to mitigate the level of credit risk in conventional banks. In the vicinity of financial institution credit risk is considered to be a hot cake for every human being in this world. Hurdles are created for the lender, if a borrower fails to fulfill his obligation on maturity date. For long term success in banking sector the conventional banks adopts various risk assessment and mitigating tool for effective and efficient credit risk management. This study derives that banks which were taken in to the consideration upon them stress testing, Basel accord 2 and different risk management techniques were test randomly in a normal and credit shock situation. It can interpret the effect of credit risk on financial condition of banks not only in terms of monetary value but also it can diagnoses the future financial standing and capital adequacy ratio. All the accounting standards of state bank of Pakistan were kept into the consideration while analyzing the impact of credit shocks on the portfolio of sample banks. Financial institutions around the world are becoming the victim of credit risk and analyst are proposing strategies in order to cope up with this risk but in Pakistan there is an inverse situation because top five sample banks are in a good financial condition as their CAR are up to the standard of SBP and Basel accord 2 to absorb adverse level of credit shocks without the closure of banks and there is a financial safety for their customers. The main objective of this study is to highlight that there is positive relationship between the variables i.e. Profitability and CAR which is an indicator that if (ROE or ROA) increases then CAR will increase in a same proportion or vice versa. When credit shock was applied on the portfolio of sample banks the percentage of revised CAR was up to the policy our SBP.