IMPACT OF CREDIT RISK MANAGEMENT ON PROFITABILITY OF NEPALESE COMMERCIAL BANKS

Abstract

A credit risk is the risk of default on a debt that may arise from a borrower failing to make required payments. Credit risk is one of the most significant risks that banks face, considering that granting credit is one of the main sources of income in commercial banks. The overall objective of this research is to investigate how credit risk management has impact on the profitability of commercial banks of Nepal. The specific objective are; to analyze the indicators of credit risk management and profitability of Nepalese commercial banks, to assess the relationship between credit risk management and profitability of commercial banks in Nepal and to examine the impact of credit risk management on profitability of Nepalese commercial banks. To fulfil objective of the study, among the 20 commercial banks, only 3 (Siddhartha Bank Ltd., Laxmi Sunrise Bank Ltd and Sanima Bank Ltd.) commercial banks have been selected using convenience sampling method. The study is based on secondary sources of data from 2013/14 to 2022/23. It is concluded that total capital fund should not be less than the 11% of the total risk weighted exposure. Mean value of all sample banks have more than 11%. Therefore, the overall mean value of CAR is in satisfactory level. It implies that all banks have become successful to minimize its risk to maintain standard capital as adequate as required by regulations. The overall result shows that the credit risk management is an important predicator for the profitability of banks. Therefore, the success of the bank in term of profitability depends on its credit risk management. From the study finding independent variables CAR has significant relationship with ROE since its p-value is less than 0.01. Similarly, CRR has significant relationship with ROE since its p value is less than 0.05. However, other independent variables LLPR and NPLR do not have significant results since their p-value is greater than 0.01.