IMPACT OF CREDIT RISK ON PROFITABILITY OF COMMERCIAL BANKS IN NEPAL

Abstract

Finding out how credit risk management affects Nepali commercial banks is the study's primary goal. Three commercial banks, out of which twenty were active in the Nepali economy, are used as the sample for the study. The World Bank's database on macroeconomic indicators for the years 2013/14 to 2021/22 and Nepal Rastra Bank's database on bank-specific variables provided all of the study's data. The impact of credit risk on Nepalese commercial banks' performance has been investigated in this study. For this study, the descriptive and causal comparative research designs have been used. The regression model has been used to analyse the combined data from three commercial banks. The findings of the regression analysis showed that while "cost per loan assets" has a favourable impact on bank performance, "non-performing loan ratio" has a negative impact. Bank performance is positively impacted by bank size in addition to credit risk indicators. Cash reserves and the capital adequacy ratio are not thought to have an impact on a bank's performance. The study's findings indicate a strong correlation between credit risk indicators and bank performance. Similar to this, in order to detect credit risk in Nepali commercial banks, the impacts of macroeconomic factors including GDP growth, the rate of inflation, and the interbank interest rate were also looked at in addition to bank-specific data. According to the study, liquidity significantly reduces credit risk in Nepali commercial banks. On the other hand, interest spread and the capital adequacy ratio significantly lower credit risk. Key Words: Credit Risk, Liquidity, NPL, ROA, ROE, CAR, LLP, LOD