Credit Risk Management and Financial Performance of Commercial Banks in Nepal

Abstract

Credit risk management in Nepalese commercial bank has become more important not only because of the financial crisis that the Nepal is experiencing currently, but also as a crucial concept which determines banks’ survival, growth and profitability. This study examines the impact of credit risk management on the profitability of Nepalese commercial banks. The financial statements of four commercial banks from the period of 2010 to 2017 for analysis. The regression, return on equity (ROE) and Return on Asset (ROA) were used as profitability indicator while non-performing loans Ratio and credit risk management on the profitability of Nepalese commercial banks. The financial statements of four commercial banks from the period of 2010 to 2017 for analysis. The regression, return on equity (ROE) and Return on Asset (ROA) were used as profitability indicator while non-performing loans Ratio (NPLR) and Capital Adequacy Ratio (CAR) as credit risk management indicators. The findings indicate a significant positive relationship between non-performing loans and commercial banks’ profitability revealing that, there are higher loan losses but banks still earn profit. Higher interest margin charged on loan by banks due to weak credit risk management practices prevent small enterprises from accessing loans. In terms of policy directions, the commercial banks of Nepal have controlled unnecessary expenses areas.