EFFECT OF NON-PERFORMING LOANS ON THE FINANCIAL PERFORMANCE OF NEPALESE COMMERCIAL BANKS

Abstract

This research has been conducted to show the effects of non-performing loans on the financial performance of commercial banks in Nepal. Both the macroeconomic variables and bank-specific variables are used in the study. Descriptive and analytical research design has been used to analyze and interpret the results. Secondary data has been collected from the annual reports of banks for bank-specific variables and macro-economic variables are collected from the economic survey. Five-year data was collected from the twenty commercial banks from 2015/16 to 2019/20. Banks are selected using the convenient sampling technique. Data are interpreted and analyzed using inferential (Correlation and Multiple Regression) statistics. The study takes two dependent variables (ROA and ROE) and five independent variables (CAR, CRR, Size, GDP, and Inflation). The findings show that there are statistically positive and significant effects of size and inflation on ROA and similar effects of cash reserve ratio and inflation on ROE. The result also shows that CRR and CAR have a negative but statistically significant effect on ROA and ROE. Other independent variables GDP and CAR have nominal effects on the financial performance of commercial banks in Nepal.

Key Words: Capital adequacy, Cash reserve, financial performance, ROA, ROE.