The effect of credit risk management on profitability of finance companies in Nepal: A comparative study of Manjushree Finance Limited, Pokhara Finance Limited and Goodwill Finance Company Limited

Abstract

The study aims to examine the impact of credit risk management on the profitability position of the finance company in Nepal. In this research study, several quantitative statistical tools and techniques such as descriptive, correlation and regression analysis were used to predict the effect of profitability position. For this purpose, secondary data was collected and analyzed in systematic way to derive the findings and analyzed using mean, standard deviation, correlation and regression. The data analysis showed PFL have better profitability position as it has maintained higher (ROA) and MFIL has maintained better position on credit deposit ratio, loan loss provision as compared to PFL and GFCL. The correlation analysis revealed that credit risk management have statistically significant relationship with the profitability position of the finance companies. And the regression model shows that credit risk management significantly impact the profitability position of the finance company. This study found that finance companies used credit to total deposit ratio, non-performing loan ratio, capital adequacy ratio, loans and advances to risky weighted assets ratio, loans and advances to total assets ratio, interest coverage ratio and loan loss provision ratio to monitor the credit risk. Result obtained from data analysis for interest coverage ratio and loan loss provision have statistically significant impact on the profitability of the finance company whereas credit to total deposit ratio, non-performing loan ratio, capital adequacy ratio, loans and advances to risky weighted assets ratio, loans and advances to total assets ratio have statistically insignificant impact on the profitability position of the finance company. Therefore, it can be concluded that only two variable loan loss provision ratio and interest coverage ratio significantly impact significant impact on ROA of the finance company. This indicates that increase in this ratio increases the profitability position of the finance company. PFL has better profitability position than other two finance company i.e. GFCL and MFIL as of PFL ROA is better in comparative to GFCL and MFIL.