CREDIT RISK MANAGEMENT AND PROFITABILITY OF NEPALESE COMMERCIAL BANKS

Abstract

This study explores the credit risk management practices of commercial banks in Nepal, specifically focusing on loan loss provisions and non-performing loans (NPLs). Commercial banks in Nepal, buoyed by substantial deposits, extend loans and advances to a wide customer base, strategically attracting deposits to generate profits. However, the effectiveness of loan loss provisions appears to be declining gradually across all joint venture banks, indicative of the challenging economic conditions. This situation has resulted in borrowers facing difficulties in generating adequate returns on investments, thereby delaying loan repayments. The study employs a combination of historical, descriptive, and analytical research methodologies. Descriptive techniques are used to evaluate the credit risk management strategies adopted by commercial banks, employing a quantitative approach. The sample comprises financial data from three commercial banks over a decade, selected from the 20 banks established under the oversight of the central bank in Nepal. Annual reports from these banks and publications from the Nepal Rastra Bank (NRB) provide the primary data sources, which are meticulously tabulated and analyzed using Excel. The research underscores the importance of using appropriate data collection instruments to enhance the credibility and robustness of the findings. In Nepal, the liberalization policy has significantly increased the monetarist environment, with a surge in deposits facilitated by substantial remittances. However, security concerns have led to the withdrawal of several projects, impacting economic stability. This study sheds light on the evolving landscape of credit risk management within Nepal's commercial banking sector, emphasizing the challenges posed by economic conditions and the necessity for effective risk mitigation strategies.