The present study attempts to investigate the impact of bank ownership on Credit Risk Management (CRM) strategic decisions in Indian banking sector by using primary data regarding CRM strategic decisions of 24 public sector banks and 11 Indian private sector banks. The study observes that CRM strategic decisions are not significantly influenced by bank ownership, except with regard to the decision regarding the unit responsible for framing CRM policy. Apparent variations in strategic decisions are observed between public sector and private sector banks with regard to some issues. The study concludes that public sector banks prefer centralization of authority in strategic decision making. It also identifies the relatively weak areas that the sample banks should focus upon to strengthen their CRM framework. Thus, the findings of the study make important contribution to the ongoing debate on the impact of bank ownership on risk management practices.

Of the different banking risks, credit risk has been identified as a major cause of bank failure by Basel Committee. It also has potential ‘social’ impact because of the number and diversity of stakeholders affected. In order to effectively manage the credit risk exposure in lending activities, each bank takes various strategic decisions and decisions regarding specific tools/ techniques to be implemented in support of the strategic decisions. The strategic decisions in Credit Risk Management (CRM) processes give the bank an edge over its competitors who are also exposed to the same level of credit risk by determining the extent to which the credit risks in lending activities are understood with full knowledge of implications of underlying risks and clear purpose. Strategic decisions, in other words, encompass decisions at the top level of bank management aimed at preventing unacceptable loss, erosion of capital, or material damage in its competitive position. Thus, these CRM strategic decisions taken at enterprise/ bank level indicate their risk-taking behavior and exert influence on bank or enterprisewide functioning. It may be noted that too little bank risk-taking may hinder economic growth, whereas too much bank risk threatens economic stability. It will be interesting to examine ownership effects on strategic decisions.

Strategic decisions encompass decisions relating to organizational structure, responsibility for framing policy, authority for defining and monitoring exposure norms, loan review mechanism, loan pricing decisions, specification of basis of delegation of authority, targeted parameters, etc. Various subsequent tactical decisions at operational level are taken later within the guidelines defined in these strategic decisions. Both finance and management literature offer evidence to suggest that ownership is related to many corporate decisions (Rozeff, 1982; and Kim and Sorensen, 1986). Similarly, CRM strategic decisions in a bank may be also influenced by its ownership status. The CRM strategic decision making at public sector banks with direct political control may be constrained in decision-making process since they are more likely to be managed with a view to meeting political and social goals. On the other hand, private sector banks are expected to take a more pragmatic CRM strategic decision because of limited political intervention, emphasis on commercial goals and incentives for managerial efficiencies. Thus, there lies a strong case for examining effects of ownership on each CRM strategic decision in commercial banks.

Financial Risk Management Journal, Ownership Effects, Credit Risk Management, Strategic Decisions, Indian Banking Sector, Credit Risk Management (CRM), Basel Committee on Banking Supervision (BCBS), Principles for Management of Credit Risk.