The Effectiveness of Commercial Banks’ Credit Appraisal Techniques in Improving Asset Quality.

Abstract

Commercial banks have constantly reported deteriorating asset quality due to non-performing and defaulting loans.Losses turn from outright default due to inability or unwillingness of customers or counterparties to meet commitment in most banking institutions. The purpose of the study was to identify various causes and the debilitating repercussions of poor credit risk management, various credit appraisal techniques, and implementation of these techniques in Zimbabwean commercial banks.It also sought to identify causes of deteriorating asset quality as well as their effectiveness, paying particular attention to asset quality.The researchers employed an exploratory researchdesign. Results indicated that concentration risk was evenly spread across all sectors stipulated by the Reserve Bank of Zimbabwe hence the concentration risk of the banking institutions is fairly low. However, the concentration risk ratio in relation to public sector lending and private sector lending was concluded to be very high and most banks' loans are heavily weighted towards the public economic sector. Insider borrowing in commercial banks is relatively high as some banks are exposed to as much as 30% of their total loan book.In light of the findings, the following conclusions were made that, all commercial banks in Zimbabwe use credit appraisal techniques when establishing the credit worthiness of borrowers and there is a direct relationship between these techniques and asset quality. Most commercial banks worldwide employ a number of credit appraisal techniques when assessing the credit worthiness of a prospective borrower and this is meant to assist in improving loan quality. Research findings also indicated that, the internal rating system is one of the most common and effective credit appraisal technique employed by every commercial bank in Zimbabwe and is an important tool in credit risk management.