Credit Management Practices and its Impact on Financial Performance of Commercial Banks in Nepal

Abstract

This study try to explore various parameters pertinent to credit management as it affect banks’ financial performance. Such parameters covered in the study were; default rate, cost per loan assets and capital adequacy ratio. Financial report of banks were used to analyze for five years (2013-2018) comparing the profitability ratio to default rate, cost of per loan assets and capital adequacy ratio which was presented in descriptive, correlation and regression was used to analyze the data. The study revealed that all these data have an inverse impact on banks’ financial performance; however, the default rate is the most predictor of bank financial performance. The recommendation is to advice banks to design and formulate strategies that will not only minimize the exposure of the banks to risk but will enhance profitability.

The current ratio of SCBNL is computed as 0.98 times which is slightly higher than that of NBL 0.91 times and MBL 0.88 times. On average of 5 years of review period, cash and bank balance to total deposit ratio of NBL, MBL and SCBNL are 5.85%, 10.44% and 6.82% respectively. The mean ratio of cash and bank balance to current asset ratio of NBL is 6.03% which is the lowest among the three banks. The mean ratio of loan and advances to current asset of MBL is 72.5% followed by NBL with 62.25% and then by SCBL with 34.46% which is the lowest among the three banks.

The mean ratio of loan and advances to total deposit of NBL, MBL and SCBNL are 60.06%, 66.94% and 35.07% respectively. The mean ratio of Total Investment to total deposit of NBL, MBL and SCBNL are 40.05%, 31.18% and 54.66% respectively. The mean ratio of return on Total Working Fund of NBL, MBL and SCBNL are computed as 2.52%, 1.33% and 2.46% respectively. NBL seems to have highest return from total working fund among the three banks, followed by SCBNL and then MBL. On average only SCBNL has been able to meet the standard set by the NRB, even it has maintained the standard as set by NRB in each of the review year.

There is a positive correlation between the net income and loan and advances of NBL, MBL and SCBNL. The relationship between the interest earned and loan and advances is significant in case of NBL and MBL but insignificant in case of SCBNL.