IMPACT OF CREDIT RISK ON THE FINANCIAL PERFORMANCE OF NEPALESE COMMERCIAL BANKS

Abstract

This study investigates the credit risk factors influencing the profitability of commercial banks in Nepal and explores the relationships between these factors and bank profitability. The research design adopted includes descriptive and inferential approaches, with data analyzed using the Statistical Package for Social Sciences (SPSS). A sample of six commercial banks was selected using judgmental sampling from a total of 20 commercial banks, based on their publicly available annual data. The study focuses on secondary data sourced from annual reports of the selected banks. It identifies the impact of credit risk factors on the performance indicators of these banks. The independent variables studied include Capital Adequacy Ratio (CAR), Non-Performing Loan Ratio (NPLR), Loan Loss Provision Ratio (LAR), and Loan and Advance Ratio (LLPR). The dependent variables analyzed to measure profitability are Return on Assets (ROA) and Return on Equity (ROE). Statistical tools such as mean, correlation, regression, F-test, Durbin-Watson test, multicollinearity analysis, and t-test were employed to analyze and test the data. The study found that the variables CAR, NPLR, LAR, and LLPR exhibit no significant multicollinearity, as all variance inflation factors are below 10. The findings indicate that Loan Loss Provision, Capital Adequacy Ratio, and Loan and Advance Ratio positively correlate with Return on Assets, while Non-Performing Loan Ratio negatively correlates with Return on Assets. Non-Performing Loan Ratio, Capital Adequacy Ratio, and Loan and Advance Ratio were found to be statistically significant in relation to Return on Assets. Similarly, all independent variables (Non-Performing Loans, Capital Adequacy, Loans and Advances, and Loan Loss Provision) negatively correlate with Return on Equity. Non-Performing Loans were not found to have a significant relationship with Return on Equity, whereas all other factors were statistically significant.