Impact of credit risk management on profitability of Nepalese commercial banks

Abstract

Credit risk management in the banking sector is important not only because of the Global Financial Crisis (GFC) experienced in recent years but also due to its greater impact on bank's financial performance, growth and survival. 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. This study investigates the impact of credit risk management on the profitability of Nepalese commercial banks. Data from 28 commercial banks for the period 2011 to 2015 have been collected and analyzed using pooled regression analysis and panel data analysis. In the model specification, return on asset (ROA) and return on equity (ROE) were used as bank profitability indicators while capital adequacy ratio (CAR), liquidity ratio (LR), bank size (BS), asset quality (AQ), leverage ratio (LER), non-performing loan ratio (NPLR), cash reserve ratio (CRR), coverage ratio (CR), and the number of female board member (FBM) were used as indicators of credit risk management. The findings indicate that credit risk management has significant impact on the profitability of Nepalese commercial banks. Results show that coverage ratio, capital adequacy ratio, and bank size have a positive impact on bank performance. On the other hand, leverage ratio, non-performing loan ratio and female board member are found to have a negative impact on bank performance. However, liquidity ratio, asset quality, and cash reserve ratio turned out to be not significant variables in determining bank's 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, controls and monitors non-performing loan, enhances coverage ratio, balances leverage ratio, motivates female board members, and increases bank size to enhance financial performance.

Date of Award	2017
Original language	English