IMPACT OF NON-PERFORMING ASSETS ON THE FINANCIAL PERFORMANCE OF THE NEPALESE COMMERCIAL BANKS

Abstract

This study aims to evaluate the profitability position of commercial banks in Nepal and analyze the relationship between profitability and non-performing assets (NPAs). Three commercial banks, NABIL SCBNL and RBB Nepal Limited, were selected as samples from a population of 20 commercial banks in Nepal. Correlation and regression analyses were conducted using Return on Assets (ROA) and Return on Equity (ROE) as dependent variables and Non-Performing Loan Ratio (NPLR), Interest Rate Spread (IRS), Loan and Advance Ratio (LAR), and Cash Reserve Ratio (CRR) as independent variables. The findings revealed a negative correlation between ROA and ROE, attributed to heavy accumulated profit and optimal capital among sample banks. Additionally, CRR exhibited a positive correlation with ROA, indicating effective asset management. However, there was a negative correlation between CRR and ROA. Regression analysis confirmed these relationships, with an increase in ROE leading to a decrease in the average influence on ROA. Conversely, an increase in CRR resulted in a higher average influence on ROA, with statistically significant findings. ANOVA further supported the negative correlation between ROA and ROE, and model summary results indicated no multicollinearity among independent variables. The study concludes by highlighting the importance of understanding these relationships for assessing bank performance in Nepal.