Impact of non-performing assets (Npas) on profitability of commercial banks in Nepal

Abstract

Since the banking industry plays a vital role in the Nepalese economy, improving the quality of assetsin bank is most for the upliftment of banking sector and the national economy as a whole. In the recient period, the quality of asset in banks, primarily the commercial banks is constantly declining and hence resulting insufferable stress to the banking sector, regulators, and Nepaleseeconomy. The objective of the present study is to analyze theNon-performing Assets (NPA) and how it influencesthe profitability of the banks. For this purpose, the study considered NPA of 10 commercial banksfrom 2011 to 2020 and used econometric method regression model for the analysis of collected balanced pannel data. The study identified that there is fluctuation in NPA ofcommercial banks during the period. The study used ROA and ROE as dependent variables where as NPA as independent variables along with it’s controlling variables i.e. LQDT, CAR and IRS and found that there is a significant positive relationship between NPA of commercial banksand return on assets (ROA). The study also found a significant negative relationship between NPA with Returnon equity (ROE) of commercial banks. Thus, this study concludes that profitability of Nepalese commercial banks is influenced by nonperforming assets and other controlling variables like: liquidity ratio, capital adequacy ratio and interest rate spread. So the study recommends to the regulators and respectivebank officials to take the necessary steps to reduce the NPA and improve the recovery mechanism.

Keywords: Non-Performing Assets, Return on Assets, Return on Equity, Capital and Econometric regression model.