THE RELATIONSHIP BETWEEN NON-PERFORMING LOAN, LOAN LOSS PROVISION AND PROFITABILITY IN NEPALESE DEVELOPMENT BANKS

Abstract

The main objective of this study is to examine the relationship between non-performing loans, and loan loss provisions on the profitability of development banks and to assess the impact of non-performing loans, and loan loss provisions on the profitability of development banks. The descriptive and causal research design was employed in this study. This study covers ten years of data starting from 2013/2014 to 2022/2023. This study used secondary data from the annual reports of respective banks. The collected data has been analyzed using statistical tools such as descriptive statistics, correlation analysis, ANOVA and multiple linear regression analysis. return on assets and return on equity are the indicator of the profitability of development banks. Whereas non-performing loan-to-total loan ratio, loan loss provision, total loan-to-total deposit ratio, and bank size are the independent variables. The collected information and the numerical data have been analyzed by using the SPSS 27.0 version to show the data and results clearly. From the regression analysis, the value of the R square of return on assets is 0.738 which indicates that 73.8% of the systematic variation in return on assets can be explained by independent variables such as non-performing loan to total loan ratio, loan loss provision, total loan to total deposit ratio and bank size. The remaining percentage is due to the effect of other factors. The value of the R square of return on equity is 0.281 which indicates that 28.1% of the systematic variation in return on equity can be explained by independent variables such as non-performing loan-to-total loan ratio, loan loss provision, total loan-to-total deposit ratio and bank size. The remaining percentage is due to the effect of other factors. The return on assets and return on equity are negatively and statistically significantly influenced by the non-performing loan to total loan ratio. The loan loss provision has a positive and statistically significant impact on the return on assets but an insignificant impact on the return on equity. The total loan to total deposit ratio has a negative but not statistically significant impact on the performance of development banks. The bank size has a positive and significant impact on the performance of development banks represented by return on assets. However, the bank size has a negative and insignificant impact on the performance of development banks represented by return on equity