Impact of Non-Performing Assets on Profitability of Nepalese Commercial Banks

Abstract

This research seeks at investigating the impact of non-performing assets on profitability of Nepalese Commercial Banks during the time period (2012-2016). Profitability indicators return on assets and return on shareholders' equity are the dependent variables, while non-performing loan to total loans and advances ratio, non-performing loan to total assets ratio, loan loss provision to loans and advances ratio and loan loss provision to non-performing loan ratio are the independent variables representing NPA indicators. The data are collected from the annual reports of selected banks, report of NRB and official and non-official publications. Data are analyzed by using appropriate financial and statistical tools and the descriptive and analytical research designs are used. The multiple regression models are used to test the impact and relationship between the NPA indicators and profitability indicators and then testing hypothesis. The empirical results show that an increase in the NPLTLAR and LLPLAR lead to an increase in the profitability, while an increase in NPLTAR and LLPNPLR lead to decrease in the profitability of sampled Nepalese commercial banks as measured by ROA and ROE. This study shows that non-performing loans in ADBL and SBL is in increasing trend even though it has decreasing ratio of NPLTLAR. Similarly, the trend of NPL is in fluctuating trend in case of NIBL and in decreasing trend in case of Nabil, MBL and SCB. Thus, this study has concluded that non-performing loan is higher in government owned banks and lower in joint venture and private banks. Since, the NPL is declining, it has given positive indication that joint venture and private banks are able to mobilize their deposit in productive sector in the comparison to government owned banks. Hence, selection of right borrower, viable economic activity, adequate provisioning and timely disbursement, correct end use of funds and timely recovery of loans is absolutely necessary pre-conditions for preventing or minimizing the incidence of new NPAs.