Impact of non-performing loan on profitability of Nepalese commercial bank: A comparative study of Nepal Investment Bank Ltd. and Everest Bank Ltd

Abstract

The study was conducted with the aim of studying Non-performing loan of commercial bank in Nepal with reference to Nepal Investment Bank ltd. and Everest Bank ltd. The main focus of study was to analyze the NPL ratio, Position analysis of NPL ratio, and to investigate the impact of NPL on profitability of commercial bank. NPL is major concern for the commercial bank because the default of loan and interest has resulted major threat to the income of the bank. If the NPL is not managed in timely, the commercial cannot escape from the vicious circle of NPL. Non-performing loan are those loan that has been default in the payment of interest and principle. Loan/advance, which payment of interest and principle is not made for more than 3 months is called non-performing loan. In specific contract the term may differ. The rate of NPL in Nepalese banking sector is increasing. Descriptive and Comparative research design has been used for the study. Everest Bank ltd. and Nepal Investment Bank ltd. were used as a sample. The secondary data has been used from the annual report of the both bank. The data analysis tool includes ratio analysis, position analysis, correlation, regression model, and P-value. The study showed that the NPL ratio was in fluctuating position. There was increase and downfall of the NPL ratio in this research period. There was positive and negative correlation between loan and NPL amount. Both are not moving in the same direction. The study showed that there was minimal influence of the NPL on the return on assets. The NPL ratio was insignificant in studying the impact on profitability.The ratio analysis of NPL ratio shows, there is fluctuation in the value of NPL. The reason behind the fluctuation in NPL ratio is increase in loan amount. The NPL ratio has decreased in the recent years. NPL and ROA are tested using the regression analysis. The positive value of coefficient indicates that both are moving in the same direction. There is significant relation between NPL and ROA.NPL and ROE are tested using the regression analysis. The negative value of coefficient indicates that both are moving in the opposite direction. There is insignificant relation between NPL and ROE.