Non-performing Loan and Profitability of Nepalese Commercial Banks
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Faculty of Management
Abstract
The main purpose of the study is to examine the effect of non-performing loan on
financial performance of the Laxmi Sunrise Bank Limited, Siddartha Bank Limited,
Kumari Bank Limited, Nepal Bank Limited, and Prime Commercial Bank Limited.
The benefits and limitations are the two faces of a same coin. Each and every research
work has more or less limitations. The analysis focused on assessing the effect of nonperforming
loans (NPL) on bank profitability in Nepal, utilizing regression models
with Return on Assets (ROA) and Return on Equity (ROE) as the dependent
variables. Several financial metrics, including the Capital Adequacy Ratio (CAR),
Cash Reserve Ratio (CRR), Non-Performing Loans Ratio (NPLR), and bank size
(BS), were examined as independent variables to understand their impact on bank
profitability. The correlation analysis revealed noteworthy relationships among the
variables. In particular, NPLR exhibited positive correlations with ROA and ROE,
indicating that higher levels of non-performing loans are associated with lower
profitability. Additionally, CAR showed positive correlations with both ROA and
ROE, suggesting that stronger capital adequacy tends to be associated with higher
returns on assets and equity. Further analysis through ANOVA and regression models
provided deeper insights into the relationships between the variables. The ANOVA
results indicated that the regression models for both ROA and ROE were statistically
significant, implying that at least one independent variable significantly contributes to
explaining the variation in bank profitability. In the regression models, the
coefficients for the independent variables shed light on their individual impacts on
ROA and ROE. Notably, NPLR demonstrated a substantial positive impact on ROA
and ROE, indicating that higher levels of non-performing loans are associated with
reduced profitability. Conversely, variables such as CAR showed positive effects on
profitability, suggesting that stronger capital adequacy positively influences bank
profitability. In conclusion, while non-performing loans pose significant challenges to
bank profitability in Nepal, they also present opportunities for improvement and
growth. By implementing robust risk management practices and adopting proactive
strategies to address non-performing loans, banks can enhance their profitability and
contribute to the broader economic development of Nepal.
Keywords: Return on Assets, Return on Equity, Capital Adequacy Ratio, Cash
Reserve Ratio, Non-Performing Loans Ratio, Bank Size