International Journal of Research and Scientific Innovation (IJRSI) |Volume IX, Issue XI, November 2022|ISSN 2321-2705
Effectiveness of Credit Appraisal on management Non-Performing Loans in Kenyan Commercial Banks
Eunice Macrean Atieno, Caroline Ayuma, Christine Ngari
Business Management Department, School of Business and Management Science, University of Eldoret, Kenya
Abstract: The purpose of this study was to determine the effectiveness of credit appraisal on management of Non-Performing Loans in Kenyan Commercial Banks. The specific objectives were to determine the effect of borrower’s income, credit rating, credit history and collateral issued on the management of non-performing loans recorded in corporate, business and personal sections of Kenyan Commercial Banks. The study was guided by the Theory of Information Asymmetry and Credit Scorecard Theories. An explanatory research design was adopted, using simple random and stratified sampling techniques in the collection of data. Data was collected from a sample size of 222 credit officers working in 41 commercial Banks in Kenya by use of self-administered questionnaires. Cronbach alpha and factor analysis were applied to test the reliability and validity of the research instruments respectively. A multiple regression model using SPSS (version 23) was used to analyze the obtained data and test the hypotheses. The findings revealed that credit appraisal (ꞵ= .302) had a positive and significant effect on the management of Non-performing Loans. Based on the new findings, the management of commercial banks and policymakers should develop effective credit appraisal strategies, policies and techniques that make borrowing affordable hence attracting credit-worthy borrowers to the banks.
Keywords: Credit Appraisal, Borrower’s income, Credit rating, Credit history, Collateral, Non-Performing Loans
I. INTRODUCTION
The success of commercial banks largely depends on the effectiveness of their appraisal techniques in reducing NPLs and generating income from interest on loans extended to borrowers. In the recent past, there has been an upsurge in Non-Performing Loans (NPLs) in all the credit sections in commercial banks Ndero et al. (2019). In their quest to manage default rates and NPLs, commercial banks have developed credit appraisal policies that evaluate the borrower’s income, credit history and collateral offered before loans are issued to their customers (Njeru et al., 2017). According to (Githama and Gachanja, 2020), a Non-Performing Loan (NPL) is a loan that has been in default for a period of ninety days. Credit appraisal, therefore, is the assessment of the creditworthiness of a prospective borrower and his intention to repay the loan (Dudhe, 2017).
The origin of lending can be traced back to 3000 years ago during the historical period of the industrial revolution (Amery, 2018). During this time, production and commercial activities were hastened and were accompanied by the need for large capital outlays for various commercial activities and the use of payday loans by the then-farmers (Amery, 2018). Since the captains of these industries could not cope with the sudden