Bank Specific and Macroeconomic Variables Affecting Non-Performing Loans of Nepalese Commercial Banks

Abstract

This study examines the effect of firm specific and macroeconomic variables on non-performing loans of Nepalese commercial banks. The study is based on the panel data analysis of 21 Nepalese commercial banks with 147 observations for the period of 2008 to 2014. As a first approximation to the theory, this study hypothesizes that the non-performing loans depend on several bank-specific and microeconomic variables such as return on asset, return on equity, loans to total deposit, capital adequacy ratio, inflation, gross domestic product and annual money supply growth. The multiple regression models are estimated to test the significance of non-performing loans in Nepalese commercial banks.The result shows that return on asset has a positive and significant relationship with non-performing loans. It implies that increase in return on assets, increases the non-performing loans. Similarly, loans to total deposit ratio also has a positive and significant impact on non-performing loans which means that increase in loans to total deposit would increase the non-performing loans. Likewise, return on equity has negatively significant influence on non-performing loans. Thus, the result indicates that lower the non-performing loans, higher would be the return on equity. Hence, the overall study concludes that return on asset, return on equity and loans to total deposit ratio are major determinants of non-performing loans in Nepalese commercial banks.