Credit Risk Management of Commercial Banks in Nepal

Abstract

Credit risk management is crucial and it is instrumental in ensuring the success or failure of any credit institution. The main concern of the banks is credit risk and its management as credit or loans and advances are the main source of income for them. This study therefore aims to examine the impact of credit risk management on profitability of banks in Nepal. Secondary data was gathered from commercial banks of Nepal for ten year periods (2010/11-2019/20).This study used multiple regression analysis. The finding shows that all the sample banks have managed loans as well as the nonperforming loans. The correlation analysis shows that loan and advance (LA) has significant relation with non-performing loan (NPL) in 1 percent level of significance with correlation coefficients 0.466 which means that there is moderate degree of positive correlation between loan and advance and non-performing loan. At the same time, loan and advance (LA) has significant relation with loan loss provision (LLP) and net profit (NP) in 1 percent level of significance. However, there is insignificant positive correlation between non-performing loan and net profit. Moreover, the result found that there is significant impact of loan and advance, non-performing loan and loan loss provision on profitability of sample banks.This study recommends that Nepalese commercial banks should work in collaboration with credit reference bureau in the country to thoroughly investigate the past credit worthiness records of loan applicants so as to reduce the rate of default.