CREDIT RISK AND PROFITABILITY OF NEPALESE MICROFINANCE COMPANIES

Abstract

The major objectives of the study was to examine the effect of credit risk on profitability of the First Microfinance Laghubitta, Sana Kisan Bikas Laghubitta and RSDC Laghubitta. The study uses the secondary data to fulfill its objectives. Secondary data are those data that are collected by someone else or used already and made available to other in the form of published statistics such as annual reports, periodicals, newspapers, magazines etc. While evaluating the performance of the sample MFIs and comprehending the influence of independent variables on dependent variables, namely Return on Assets (ROA) and Return on Equity (ROE), several notable observations emerge. The analysis reveals a nuanced relationship between independent variables and the financial performance of the sample MFIs. Non-Performing Loan Ratio (NLPR) exhibits a positive correlation with ROA, suggesting that higher Non-Performing Loan Ratios might be linked to increased Return on Assets, indicating a potential trade-off between risk and return in Credit Risk Management. However, this relationship lacks significance in predicting Return on Equity. Cash Reserve Ratio (CRR) displays a negative correlation with both ROA and ROE, implying that higher cash reserves may be associated with diminished profitability. This observation aligns with the concept that maintaining greater liquidity, while enhancing stability, may come at the cost of returns. Capital Adequacy Ratio (CAR) showcases a negative correlation with both ROA and ROE, implying that higher capital adequacy could be linked to reduced returns. The statistically significant negative coefficients underscore the notion that conservative capital structures might negatively affect profitability, highlighting the delicate balance between risk and capitalization. In the context of Credit Risk Management, these findings underscore the critical importance of maintaining a delicate balance between risk and capitalization. While conservative measures such as higher capital adequacy and increased liquidity contribute to stability, they may concurrently limit returns.