CREDIT RISK MANAGEMENT AND PERFORMANCE OF COMMERCIAL BANKS
Date
2024
Authors
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Journal ISSN
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Publisher
Shanker Dev Campus
Abstract
Credit risk management plays a crucial role in ensuring the profitability and stability of
commercial banks by mitigating potential financial losses arising from defaults and poor
credit practices. This study focuses on examining the relationship between credit risk
management practices and the profitability of Nepalese commercial banks. Specifically, it
explores the impact of non-performing loan ratios (NPL), credit-to-deposit ratios (CDR),
interest spread rates (IRS), and credit risk indicators on key profitability measures such as
Return on Assets (ROA) and Return on Equity (ROE).
A descriptive and causal-comparative research design was adopted for this study, utilizing
secondary data sourced from the annual reports of the selected banks over a ten-year
period. Statistical tools such as regression analysis, standard deviation, coefficient of
variation, and comparative ratio analysis were employed to analyze the data and evaluate
the relationships between credit risk management indicators and profitability measures.
The findings reveal that effective credit risk management significantly enhances
profitability, as evidenced by the lower NPL ratios and higher ROA and ROE of banks
like NSBL. Conversely, banks with higher NPL ratios, such as HBL during specific
periods, faced reduced profitability due to increased provisioning requirements and
reduced income from interest-earning assets. Balanced CDRs and favorable interest
spread rates were also found to positively influence profitability. The study concludes that
sound credit risk management practices are pivotal for sustaining profitability and
stability in the Nepalese banking sector, offering valuable insights for managers,
policymakers, and future researchers.