Impact of Credit Risk Management on Profitability of C-class Financial Institution of Nepal

Abstract

The main purpose of this study is to examine the impact of non-performing loan ratio, credit deposit ratio, capital adequacy ratio and liquidity ratio on profitability of development banks performance. It also aims to analyze the relationship between return on assets, return on equity, non-performing loan ratio, capital adequacy ratio, credit deposit ratio and liquidity ratio with Nepalese C-class financial institutions’ performance. The secondary data was collected from sample banks and examined by applying standard financial analysis and statistical tools. It used the multiple regression analysis to examine the effect of credit risk management on profitability of finance company in Nepal. From the regression outcomes the result found that the result shows that these independent variables have significant relationship with profitability and credit risk management significantly impact the profitability of the selected three finance companies. It is therefore suggested that to enhance financial performance and minimize the risk of non-performing loans in the future, banks must watch very carefully the loans’ performance and analyze thoroughly the clients’ credit history and ability to pay back their debts prior to any approval of loan applications. Furthermore, banks should continuously improve their assets utilization, liquidity, and techniques of managing operating costs, improve the impact of capital adequacy, and the use of deposits for lending activities from a weak positive impact to a significant positive impact on their profitability. The researchers recommend that future studies on credit risk management influence on banks’ financial performance should consider more independent variables and longer periods of study such as fifteen to twenty years to have more accuracy and generalized results.