Evaluating the Effectiveness of Credit Risk Management Practices in the Commercial Banks of Paro Dzongkhag

Abstract

Credit Risk Management (CRM) is essential for the stability and profitability of commercial banking institutions. This study evaluates the effectiveness of CRM practices implemented in commercial banks in Paro Dzongkhag, Bhutan. The information was collected through structured questionnaires distributed to all the relevant employees of five commercial banks located in Paro Dzongkhag. Results indicate that overall, respondents regard the CRM practices of the banks as effective; high scores were given to practices like collateral enforcement, credit limit setting and monitoring, systematic loan evaluation, and compliance with well-defined credit policies, hence showing strong pre- and post-loan supervising practices. The basic appraisal processes, such as creditworthiness assessment and regular credit scoring, were also rated positively, indicating a well-developed assessment system. On the other hand, lower ratings were observed in the areas of early warning systems aimed at detecting potential defaults, integration between credit officers and risk management units, and staff training on credit risk policies. These findings indicate that, although the institutions have strong policy underpinnings, much more remains to be done to improve proactive risk identification, interdepartmental cooperation, and continuous employee growth. In general, the paper finds that CRM practices among Paro Dzongkhag commercial banks are highly successful; however, the mitigation of the risks by the banks could be enhanced by enriching them with early warning systems, coordination procedures, and training systems, which can serve as practical recommendations to the decision makers of the commercial banks in Bhutan.