IMPACT OF CREDIT RISK MANAGEMENT ON FINANCIAL PERFORMANCE OF NEPALESE COMMERCIAL BANKS A

Abstract

Credit risk management is the banking sector is important not only because of the Global Financial Crisis (GFC) experienced in recent years but also due to its greater impact on banks financial performance, growth and survival. Credit loans is one of the key sources of income of commercial banks, therefore managing the risk related to credit greatly impacts the banks’ profitability. This study examines the impact of credit risk management on profitability of Nepalese Commercial Banks. Default rate, cost per loan assets and capital adequacy ratio are the independent variables used in this study. The dependent variables are return on assets (ROA) and return on equity (ROE). The secondary sources of data have been used from annual reports of selected commercials banks and supervision report of Nepal Rastra Bank. The regression models are estimated to test the significance and effect of credit risk management on profitability of Nepalese commercial banks. The capital adequacy ratio is positively related to ROA and ROE which indicates that higher the capital adequacy ratio, higher would be banks profitability. However, default rate and cost per loan assets ratio are negatively related with ROA and ROE which indicates higher the default rate and cost per loan assets ratio, lower would be banks profitability. The beta coefficient of default rate and cost per assets with profitability (ROA, ROE) has been found negative and statistically significant. The negative sign indicates that there is a negatively relationship between (default rate and cost per loan assets) with profitability. Likewise, the beta coefficient of capital adequacy ratio with ROA and ROE is found positive and statistically significant. The positive sign of beta coefficient indicates that there is statistically positive relationship between capital adequacy ratio and profitability. The study thus recommends an effective credit risk management for commercial banks of Nepal based that maintains an optimum level of capital adequacy ratio, controls and monitors cost per loan assets and balances default rate to enhance financial performance.