Imapact of Credit Risk Management on Profitability of Nepalese Commercial Banks

Abstract

Credit is one of the largest risks in any bank, whereas, many enterprises complain of lack of excessive high criteria which set by financial institutions such as commercial banks, resulting in huge losses due to bad loans. The study therefore seeks to assess effect of management of credit risk on performance of the Nepalese commercial banks. Both primary and secondary data were used in the study. Primary data on credit risk management practices was collected using a questionnaire while secondary data on the banks performance in financial perspective was obtained from various bank's published financial statements for 5 years from 2014-2018. The study is based on descriptive, casual comparative research design. This study used quantitative method for data collection for the purpose of analysis. Mainly structured questionnaire survey was used to generate responses based on which statistical analysis is done. The sampling technique for the study followed non probabilistic sampling technique, i.e. convenience sampling. The census of 28 Nepalese banks was undertaken however; only data from 5 commercial banks was obtained. In the model specification, return on asset (ROA) and return on equity (ROE) were used as bank profitability indicators while capital adequacy ratio (CAR), non-performing loan ratio (NPLR), cash reserve ratio (CRR), coverage ratio (CR), and interest spread rate (ISR) were used as indicators of credit risk management. These indicators relation was tested by using correlation matrix and its impact on profitability were tested using regression analysis. The findings indicate that credit risk management has significant impact on the profitability of Nepalese commercial banks. Collected data was summarized by descriptive statistics like the standard deviation and mean and then analyzed using regression analysis and correlation. The study found a significant positive relationship between credit risk identification and credit risk monitoring and the perceived performance. The study found a positive insignificant relationship between credit risk appraisal and perceived performance and also found a negative insignificant relationship between credit risk control and perceived performances of commercial banks in Nepal. All the results was generated from SPSS and analyzed accordingly.