Impact of Credit Risk on Profitability of Nepalese Commercial Banks

Abstract

xii ABSTRACT This study investigates the impact of credit risk on profitability of commercial banks in Nepal. Secondary data was gathered from commercial banks of Nepal for ten year periods (2012/13-2021/22). This study used correlation and multiple regression analysis to analyze the data. This study shows that the credit risk position in terms of non-performing loan ratio of SBI performing best or maintaining their NPLs perfectly among them which shows SBI has lowest credit risk among them. Profitability position in terms of ROA, NABIL could manage their overall operations due to highest ratio among them. However, NABIL the best or most effective management in earning profit among them. Moreover, it can be said that NABIL is generating more income and making progressive performance among them due to the highest ROE. The correlation analysis reveals that cash reserve ratio (CRR) has insignificant negative relation with ROA and insignificant positive relation with ROE. Likewise, there is insignificant positive correlation between credit to deposit ratio (CDR) and ROA and significant positive relationship with ROE. However, non-performing loan ratio has insignificant negative relationship with ROA and ROE. Then, leverage ratio has insignificant negative relationship with ROA but significant positive relationship with ROE. Finally, bank size has insignificant negative relationship with ROA and significant negative relationship with ROE of the banks. The multiple regression analysis shows that cash reserve ratio has insignificant negative effect on profitability (ROA and ROE) of the banks. However, credit to deposit ratio has significant positive impact on profitability. At the same time, non-performing loan ratio and bank size have insignificant negative impact on profitability of the sample banks. Finally, leverage has significant negative impact on profitability (ROA and ROE) of the banks. Keywords: Return on assets, cash reserve ratio, credit to deposit ratio, non-performing loan ratio and bank size.