The Impact of Credit Risk Management on Profitability: Evidence from Nepalese Commercial Banks.

Abstract

This study examines the impact of credit risk management on profitability of Nepalese commercial banks. The profitability in terms of return on assets and return on equity are selected as dependent variables. Capital adequacy ratio, non-performing loan ratio, cost per loan assets, cash reserve ratio, assets growth ratio and leverage ratio are taken as independent variables. The data are collected from bank supervision reports published by Nepal Rastra Bank and annual reports of selected commercial banks. The survey is based on 126 observations from 18 commercial banks in Nepal. In case, descriptive statistics, correlation analysis some diagnostic tests for the linear regression model assumption was presented. The regression models are estimated to test the significance and importance of credit risk management on profitability in Nepalese commercial banks. The result shows that capital adequacy ratio, cost per loan assets and assets growth ratio are positively related with return on assets and return on equity. It indicates that higher the capital adequacy ratio, higher would be the return on assets and return on equity. Similarly, increase in cost per loan assets leads to an increase in return on assets and return on equity. Likewise, higher the assets growth ratio, higher would be the return on assets and return on equity. The results also shows that non-performing loan ratio, cash reserve ratio and leverage ratio are negatively related with return on assets and return on equity which reveals that increase in non-performing loan ratio leads to decrease in return on assets and return on equity. Similarly, higher the cash reserve ratio, lower would be the return on assets and return on equity. Likewise, increase in leverage ratio leads to a decrease in return on assets and return on equity. The beta coefficient is positive for capital adequacy ratio, cost per loan assets and assets growth ratio and bank performance whereas the beta coefficient is negative for non-performing loan ratio, cash reserve ratio and leverage ratio and bank performance. The beta coefficient is significant for capital adequacy ratio, non-performing loan ratio, assets growth ratio and leverage ratio at 5 percent level of significance.