Non-performing Loan and Profitability of Nepalese Commercial Banks

Abstract

The main purpose of the study is to examine the effect of non-performing loan on financial performance of the Laxmi Sunrise Bank Limited, Siddartha Bank Limited, Kumari Bank Limited, Nepal Bank Limited, and Prime Commercial Bank Limited. The benefits and limitations are the two faces of a same coin. Each and every research work has more or less limitations. The analysis focused on assessing the effect of nonperforming loans (NPL) on bank profitability in Nepal, utilizing regression models with Return on Assets (ROA) and Return on Equity (ROE) as the dependent variables. Several financial metrics, including the Capital Adequacy Ratio (CAR), Cash Reserve Ratio (CRR), Non-Performing Loans Ratio (NPLR), and bank size (BS), were examined as independent variables to understand their impact on bank profitability. The correlation analysis revealed noteworthy relationships among the variables. In particular, NPLR exhibited positive correlations with ROA and ROE, indicating that higher levels of non-performing loans are associated with lower profitability. Additionally, CAR showed positive correlations with both ROA and ROE, suggesting that stronger capital adequacy tends to be associated with higher returns on assets and equity. Further analysis through ANOVA and regression models provided deeper insights into the relationships between the variables. The ANOVA results indicated that the regression models for both ROA and ROE were statistically significant, implying that at least one independent variable significantly contributes to explaining the variation in bank profitability. In the regression models, the coefficients for the independent variables shed light on their individual impacts on ROA and ROE. Notably, NPLR demonstrated a substantial positive impact on ROA and ROE, indicating that higher levels of non-performing loans are associated with reduced profitability. Conversely, variables such as CAR showed positive effects on profitability, suggesting that stronger capital adequacy positively influences bank profitability. In conclusion, while non-performing loans pose significant challenges to bank profitability in Nepal, they also present opportunities for improvement and growth. By implementing robust risk management practices and adopting proactive strategies to address non-performing loans, banks can enhance their profitability and contribute to the broader economic development of Nepal. Keywords: Return on Assets, Return on Equity, Capital Adequacy Ratio, Cash Reserve Ratio, Non-Performing Loans Ratio, Bank Size