CREDIT RISK MANAGEMENT AND ITS IMPACT ON PROFITABILITY OF NEPALESE COMMERCIAL BANKS

Abstract

This study aimed to investigate the impact of credit risk on profitability of commercial banks in Nepal for the period of 2012/13 to 2021/22. Panel data set collected from ten commercial banks has been used in this study. In this study, credit risk indicators are taken as NPL, CAR, CRR, BS and AGR. Similarly, the indicators for the profitability used for this study are ROA and ROE. This study employed descriptive summary, correlation and regression analysis tools to analyze the credit risk and profitability. The finding shows that the non-performing loan ratio and cash reserve ratio have significantly positive relation with profitability. Similarly, CAR has significant positive relation with ROA whereas the significant negative impact on ROE. In addition, AGR also has significant negative relation with ROE. Furthermore, AGR exhibits a significant negative relationship with ROE. Conversely, AGR and bank size have a negative but insignificant impact on ROA. Therefore, there is significant impact of credit risk on profitability of Nepalese commercial banks. The results of the study could help bankers and policy makers to take an effective action in order to improve the profitability. Hence, the study recommends in support of each variables for commercial banks of Nepal should enhance their capacity in credit analysis and loan administration as well as the different policies of NRB.