Loan management of microfinance companies

Abstract

The main objective of this study is to examining the loan management and profitability of microfinance company in Nepal. The descriptive and causal research design has been adopted for the study. The study used secondary data of five microfinance companies in Nepal of ten years i.e. 2070/2071 to 2079/2080 data has been analyzing by using different statistical tools. Data is received from the annual report of selected microfinance company’s website. ROA and ROE are taken as indicator of profitability of microfinance companies whereas, loan to deposit ratio, debt equity ratio, debt ratio and interest coverage ratio are the key factors of debt management. The collected information and the numerical data have been analyzed by using excel software and historical trend, descriptive statistics, correlation, ANOVA and regression tools are used and tables, graphs are used to show the data and results clearly. The results of the correlation analysis reveal certain relationships within the study. Firstly, there is a positive relationship of loan to deposit ratio with ROA and ROE. There is a positive correlation of the debt equity ratio, debt ratio and interest coverage ratio with return on assets and return on equity, while company size shows a negative association with return on assets and return on equity. These positive correlations indicate favourable conditions, suggesting that an increase in loan-to-deposit ratio, debt-equity ratio, debt ratio, or interest coverage ratio is associated with higher returns on assets and return on equity. However, an increase in company size is linked to a decrease in the performance of retail microfinance companies, as reflected in lower returns on assets and equity. From the regression analysis, the loan-to-deposit ratio has a negative but not statistically significant impact on return on assets and a positive and insignificant impact on return on equity. The debt-equity ratio has a negative and insignificant impact on the return on assets but a positive and insignificant impact on the return on equity. The return on assets is positively and insignificantly influenced but the return on equity is positively and insignificantly influenced by the debt ratio. Interest coverage ratio has a positive and insignificant effect on profitability i.e. return on assets and returns on equity.

Keywords: Loan to Deposit Ratio, debt-equity ratio, debt ratio, interest coverage ratio, profitability, microfinance