Over the last decade, the role of credit risk management practices in the overall risk management in the commercial banks was well accepted and banks have established a set of these practices, collectively known as Credit Risk Management (CRM) framework. The present paper evaluates the strength of CRM framework in the Indian banking industry, and makes a quantitative assessment of the overall CRM framework and each of its three major elements, namely, CRM organization, CRM policy and strategy, and CRM operations and systems. The CRM operations and systems are closely studied at transaction and portfolio levels. The paper statistically arrives at two potential areas of improvement that bank management should focus on in the near future, namely, credit risk monitoring at transaction level and credit portfolio risk analysis. The study provides new insights into CRM process and CRM framework in commercial banks.

Managing credit risk is a critical component of a comprehensive approach to risk management in commercial banks. A well-established Credit Risk Management (CRM) framework ensures that the credit risks are consciously taken, with full knowledge and clarity of purpose, so that it can be measured, appropriately treated and managed. A number of factors have made CRM an important dimension in bank management’s objective of profitability improvement. The growing complexity of banking business, the imposition of prudential norms requirements as market safeguards, deregulation of interest rates, introduction of prime lending rate, movement towards global integration, and Basel Committee guidelines have increased the interest in carefully drawing up CRM framework for the lending activities of banks. RBI and government have taken several measures to help bank management in establishing and strengthening CRM framework. Notable among them were, setting up of debt recovery tribunals, lok adalats, asset reconstruction companies, corporate debt restructuring mechanism in 2001, enacting Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) in April 2002 and Guidance Note issued by RBI on CRM in 2002. These developments gave operational flexibility and functional autonomy to public sector banks. New private banks and foreign banks also increased their share in the financial system and through their technology and risk management practices have provided a demonstration effect on public sector banks. Thus, sophisticated CRM framework has assumed a much greater role in 21^st century banking than it did in the previous century. So, there lies a strong case for evaluating CRM framework installed by the commercial banks in India. In today’s liberalized economy, highly sensitive to policies and performance of the banking sector, it is all the more important to make such evaluation in quantitative terms. Subjective/qualitative assessments may be ignored, but clear objective assessment of current strength of CRM framework of Indian commercial banks shall go a long way in enhancing the understanding of the subject. This study attempts to make a quantitative assessment of the overall CRM framework in the Indian banking sector and examines in depth each of the major elements of CRM framework.