Impact of credit performance on the profitability of commercial banks in Nepal

Abstract

The main purpose of the study was to examine the impact of credit performance on the profitability of commercial banks in Nepal. The study variables were Credit deposit ratio, Non-performing loan and Credit adequacy as Independent variable and profitability indicators Return on equity (ROE) and Earning per share (EPS) as dependent variable. The study used quantitative research approach and secondary financial data for the period covering 2011/12-2020/21 since implementation of core banking system to examine the financial impact of nonperforming loan on bank’s performance. Descriptive and explanatory research design was employed and data were analyzed using descriptive statistics and multiple linear regression models by using SPSS software. . Credit loans is one of the key sources of income of commercial banks, therefore managing the risk related to credit greatly impacts the bank’s profitability. Based on the analysis result the Commercial Bank enhance current lending practice through hiring consultant who have special expertise on major priority areas like Agriculture, Manufacturing and able to provide expert advice before the bank is going to finance. And to protect the bank from financial risk also recommended credit management to continue strengthening its monitoring mechanisms through regular follow up strategies and commitment, CRM to provide advices, counselling to borrowers to protect customer from business failure and the management also to provide training to all credit performers to improve their business knowledge so that the bank will reduce the size of non-performing loan and in effect will improve its financial performance. The study thus recommends an effective credit risk management for commercial banks of Nepal based that maintains an optimum level of capital adequacy ratio KEYWORDS: Return on Assets, Earning per Share, Credit Deposit Ratio, Capital Adequacy Ratio, and Non-performance loan