CREDIT RISK MANAGEMENT IN INDIAN BANKING: A COMPARATIVE ANALYSIS OF PUBLIC SECTOR AND SMALL FINANCE BANKS

Credit risk, defined as the likelihood of borrowers failing to meet repayment obligations, remains one of the most critical challenges confronting financial institutions worldwide. In India, the persistence of non-performing assets (NPAs), coupled with structural and regulatory pressures, has heightened the urgency of effective risk management frameworks. This chapter undertakes a comparative analysis of credit risk management practices in Public Sector Banks (PSBs) and Small Finance Banks (SFBs), drawing upon both secondary data and primary insights derived from institutional reports, Reserve Bank of India (RBI) guidelines, and banking professionals’ perspectives. While PSBs benefit from government support and extensive outreach, their credit appraisal processes are often constrained by bureaucratic rigidity, political influence, and legacy issues. Conversely, SFBs demonstrate agility and innovation, leveraging digital technologies, alternative data, and localized approaches to extend credit to underserved communities, yet face vulnerabilities from capital limitations and higher exposure to unsecured loans. By adopting a descriptive framework, this study highlights variations in loan appraisal methods, monitoring mechanisms, recovery practices, and the role of technology in risk mitigation. The findings underscore the need for integrated models that balance prudence with inclusion. Policy recommendations stress the importance of capacity building, technological investment, and collaborative regulation to enhance credit risk resilience across India’s banking sector. Keywords: Credit Risk Management, Public Sector Banks (PSBs), Small Finance Banks (SFBs), Non-Performing Assets (NPAs), Financial Inclusion, Indian Banking Sector