IMPACT OF CREDIT RISK ON PROFITABILITY OF COMMERCIAL BANKS IN NEPAL

Abstract

This study titled "Impact of Credit Risk on Profitability of Commercial Banks in Nepal" investigates the intricate relationships between profitability and various risk management metrics within Nepalese commercial banks from the fiscal years 2013/14 to 2022/23. The research employs a descriptive and causal-comparative design, analyzing data from a sample of five banks, representing 14.29% of the total population of commercial banks in Nepal. The study's objectives include assessing the profitability positions of these banks, evaluating key financial ratios such as capital adequacy ratio (CAR), non-performing loan ratio (NPLR), loan loss provision ratio (LLPR), and loan-to-deposit ratio (LTDR), and examining their impact on profitability measured by return on assets (ROA) and return on equity (ROE). The findings reveal a complex interplay between these financial ratios and profitability. Higher capital adequacy is associated with lower ROA but higher ROE, indicating a tradeoff between asset profitability and shareholder returns. Non-performing loans show a positive correlation with both ROA and ROE, suggesting effective management of nonperforming assets or compensatory operational efficiencies. The loan-to-deposit ratio negatively impacts profitability, highlighting the risks of excessive leverage. Adequate loan loss provisioning is crucial for maintaining asset quality and long-term stability, despite its short-term impact on profitability. The study underscores the importance of a balanced approach to risk management and profitability, suggesting that banks must strategically manage capitalization, nonperforming loans, leverage, and loan loss provisions. These findings have significant implications for policymakers, regulatory authorities, and bank management in Nepal, providing a roadmap for enhancing financial stability and performance in the banking sector through prudent risk management practices and strategic adjustments in financial metrics