Effect of Non- Performing Loan on Profitability of Nepalese Commercial Banks

Abstract

This research aims to investigating the effect of NPL on profitability of Nepalese commercial banks by selecting three commercial banks Agricultural Development bank ltd, Nepal investment bank ltd, Global IME bank ltd. The study considers both annual and quarterly reports for statistical analysis. Descriptive analysis has conducted by collecting data from the annual report and inferential analysis including correlation, multiple regression model for hypothesis testing has been done by using quarterly data for the reliable results exerts from quarterly reports from related websites of the concerned banks, NRB websites and publications as well. The study has considers annual data of (2067-2074) whereas due to unavailability of data of year 2067, quarterly data has been used only of (2068-2074). In this study return on equity, return on assets and profit margin ratio are used as profitability indicators representing dependent variables and non-performing loan to total loan ratio also known as NPL ratio, provision for loan loss coverage ratio, total loan to total assets ratio are used as a non- performing loan indicators representing independent variables. Data are analyzed by appropriate statistical and financial tools. Mean, standard deviation, correlations multiple regression model and hypothesis testing are used as statistical tool and various profitability ratios and other banking ratios are as calculated as financial tools. Both SPSS and excel are used to analyze those variables. The empirical results show that though ADBL has high NLTTLR, there is no impact on profitability indicators. PLLCR has positive significant effect on PMR of NIBL and TLTTAR has negative significant effect on ROE of GIBL. Thus it has found that there is different predictor variables have different impacts on different commercial bank’s various profitability indicators. From the decision drawn by hypothesis testing from regression model, it has been concluded that there is no relationship of ROA with NLTTLR, PLLCR and TLTTAR. There is no statistically significant relationship of ROE with PLLCR and negative significant relationship with NLLTLR and TLTTAR and there is statistically significant positive relationship of TLTTAR with PMR. It can be analyze that though total loan portfolio increases , The risk associated with the loan or credit comes as NPL might leads to decrease in return on shareholder’s equity. So banks should considers shareholders maximization goal to maximize ROE and should be aware of reducing NPL and risk through making adequate provisioning, fastening recovery of loan by recovery agency, proper risk assessment and collateral management mechanisms.