Credit risk management & its impact on the profitability of commercial banks in Nepal

Abstract

This study explores the relationship between credit risk management and the profitability of Nepalese commercial banks. The dependent variable is decided to be the profitability of return on assets (ROA). We take the Capital Adequacy Ratio (CAR), Non-Performing Loan Ratio (NPLR), Credit to Deposit Ratio (CDR), and Management Quality Ratio (MQR) into account as independent variables. The data was taken from b Bank's annual reports from a few particular commercial banks. The survey's foundation is made up of 35 samples drawn from five Nepalese commercial banks. Some diagnostic tests utilizing descriptive statistics and correlation analysis were offered if the linear regression model assumption was made. Regression models are anticipated to be used to examine the significance and impact of credit risk management on profitability in Nepalese commercial banks. The outcome demonstrates that return on assets and return on assets are favorably correlated with capital adequacy ratio and management quality ratio. It suggests that the return on assets would be higher the higher the capital adequacy ratio. In a same vein, higher management quality ratios result in higher return on assets. The findings also showed a negative correlation between the non-performing loan ratio and return on assets, indicating that a rise in the non-performing loan ratio is associated with a fall in both return on equity and return on assets. The analysis revealed that the R-square value was 0.60, indicating that the influence of the independent variables was responsible for 60% of the overall variation in the value of ROA. The corrected R-square value was 0.590, indicating a 59 percent overall correlation between the independent variables and the dependent variable ROA. The beta coefficient is positive for the Capital Adequacy Ratio (CAR), Credit to Deposit Ratio (CDR), Management Quality Ratio (MQR), and Bank Profitability, but the beta coefficient is negative for the Non-Performing Loan Ratio (NPLR) and Bank Performance. At the 1% level of significance, the beta coefficient is significant for the Capital Adequacy Ratio (CAR), Non-Performing Loan Ratio (NPLR), and Management Quality Ratio (MQR). However, it has no bearing on the Credit to Deposit Ratio (CDR).