Risk Management and Financial Performance of Nepalese Commercial Banks

Abstract

Banks play an important role for economic development and foster economic growth by providing number of financial services. Risk is the probability of an outcome having a negative effect on people, systems or assets. Risk is typically depicted as being a function of the combined effects of hazards, the assets or people exposed to hazard and vulnerability of those exposed elements. Risk management is the identification, assessment and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor and control the probability or impact of unfortunate events. Risk management is the process of identifying, assessing and controlling financial, legal, strategic and security risks to an organization’s capital and earning. The purpose of risk management is to identify potential problems before they occur so that risk handling activities may be planned and invoked as needed across the life of the product or project to mitigate adverse impacts on achieving objectives. The study examines the risk management and financial performance of Nepalese commercial banks. The return of assets and earning per share are the dependent variables. Non-performing loan, liquidity ratio, capital adequacy ratio, debt to asset ratio, interest rate spread, cost to income ratio and bank size are the dependent variables. The study is based on secondary data of 3 commercial banks for the period of 2014/15 to 2021/22, leading to a total of 24 observations. The data are collected from the Banking and Financial Statistics and Bank Supervision Report published by Nepal Rastra Bank and annual reports of the selected Nepalese commercial banks. The regression model are estimated to test the significance and importance of the risk management and financial performance of Nepalese commercial banks.