OPERATIONAL RISK MANAGEMENT ANALYSIS OF NEPALESE COMMERCIAL BANKS

Abstract

Operational risk management is essential for maintaining the financial stability and performance of commercial banks, particularly in Nepal, where the banking sector faces complex operational challenges. The Basel II Accord underscores the significance of managing operational risks, defined as losses due to inadequate or failed internal processes, people, and systems, or from external events. This study focuses on the commercial banks of Nepal, aiming to understand the current state of operational risk management and its impact on financial performance, especially in a competitive and regulatory environment. The study examines three commercial banks in Nepal—Nepal Investment Mega Bank Limited, Kumari Bank Limited, and NMB Bank Limited—over a ten-year period from 2013/14 to 2022/23. Employing a descriptive and causal comparative research design, the analysis utilizes secondary data from annual reports and financial statements, supplemented by NRB's banking and financial statistics. The methodology includes descriptive statistics to summarize data, correlation analysis to explore relationships between variables, and regression analysis to determine the impact of operational risk management on financial performance indicators such as Return on Assets (ROA) and Return on Equity (ROE). Findings reveal a significant impact of operational risk management on the financial performance of Nepalese commercial banks. Non-Performing Loans (NPL) positively correlate with ROA, suggesting that higher NPLs might be offset by higher interest earnings. Capital Adequacy Ratio (CAR) positively influences ROA, indicating that well-capitalized banks can generate better returns on assets. Conversely, the Liquidity Ratio (LR) has a slight negative impact on ROA, emphasizing the need for prudent loan portfolio management. The Cost-Income Ratio (CIR) and Bank Size (BS) show no significant impact on ROA, highlighting the importance of efficient cost management and optimal bank sizing. Overall, the study emphasizes the necessity for robust operational risk management practices and regulatory compliance to enhance the financial stability and performance of Nepalese commercial banks.