CREDIT RISK MANAGEMENT AND PROFITABILITY OF

COMMERCIALS BANKS IN NEPAL

(A Comparative Study on Nepal Bank Limited and Nic Asia Bank Limited)

By
Uma Devi Pandey
Roll. No: 27010/20
TU Registration No.: 7-20-50-1390-2020

A Summer Project Report Submitted to

Faculty of Management, Tribhuvan University
In partial fulfillment of the requirements for the degree of
Bachelor of Business Administration (BBA)

At the
Butwal Multiple Campus
Tribhuvan University

Rupandehi
December, 2024
 Student Declaration

This is to certify that I have completed the Summer Project entitled “Credit Risk
Management and Profitability of Commercial Banks in Nepal” (A Comparative
Study on Nepal Bank Limited and Global IME Bank) under the guidance of “Durga
Prasad Panta” in partial fulfillment of the requirements for the degree of Bachelor of
Business Administration at Faculty of Management, Tribhuvan University. This is my
original work and I have not submitted it earlier elsewhere.

Signature: …....................................
Name: Uma Devi Pandey
Date: December, 2024

ii
 Certificate from the Supervisor

This is to certify that the summer project entitled “Credit Risk Management and
Profitability of Commercial Banks in Nepal” (A Comparative Study on Nepal Bank
Limited and Nic Asia Bank Limited) is an academic work done by "Uma Devi Pandey”
submitted in the partial fulfillment of the requirements for the degree of Bachelor of
Business Administration at the Faculty of Management, Tribhuvan University under my
guidance and supervision. To the best of my knowledge, the information presented by
her in the summer project report has not been submitted earlier.

______________________
Signature of the Supervisor
Name: Durga Prasad Panta
Designation: Lecturer
Date: December, 2024

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 Acknowledgement
In the accomplishment of this project successfully, many people have best owned upon
me their blessings and the heart pledged support, this time I am utilizing to thank all the
people who have been concerned with this project.

Primarily, I would thank God for being able to complete this project with success. Then,
I would like to express my deep gratitude to Butwal Multiple Campus, Rupandehi for
allowing carrying out the project work on "Credit Risk Management and Performance of
Commercial Banks in Nepal (A Comparative Study on Nepal Bank Limited and NIC
Asia Bank Limited) in partial fulfillment of the requirement for Bachelor of Business
Administration.

I am extremely grateful and indebted to my respected project work supervisor Mr.

DURGA PRASAD PANTA, who despite his busy schedule spared his valuable moments
to provide me with guidance, inspiration, support, and constant encouragement to
complete this project work. I express my sincere thanks to Dr. Om Prakash Aryal, BBA
Coordinator; BMC for his time and advice in managing the content of the project work.

I am grateful to my friends who contributed ideas and perspectives that enriched the
project. Thank you everyone for shaping this project and enhancing my learning
experience.

I would be obliged to any suggestions and comments from the readers that will assist in
further improvement of this project work

Uma Devi Pandey

December, 2024

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 Contents
Student Declaration.........................................................................................................ii
Certificate from the Supervisor......................................................................................iii
Acknowledgement..........................................................................................................iv
List of Tables..................................................................................................................vi
List of Figures...............................................................................................................vii
List of Abbreviations...................................................................................................viii
Executive Summary.......................................................................................................ix
Chapter 1: Introduction...................................................................................................1
Context Information........................................................................................................1
Purpose of the Study.......................................................................................................4
Significance of the Study................................................................................................4
Literature Survey.............................................................................................................4
Research Methodology..................................................................................................11
Chapter II: Data Presentation and Analysis................................................................16
Organization profile......................................................................................................16
Correlation analysis.......................................................................................................19
Findings.........................................................................................................................21
Discussions....................................................................................................................22
Chapter III: Conclusion And Action Implications......................................................24
Conclusion.....................................................................................................................24
Action Implications.......................................................................................................25
References.....................................................................................................................26

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 List of Tables
Table 1: Sample of Nepal Bank Limited…………………………………………..12

Table 2: Sample of NIC Asia Bank Limited……………………………………….12

Table 3: Descriptive Statistics of Nepal Bank Limited…………………………….17

Table 4: Descriptive Statistics of NIC Asia Bank Limited…………………………18

Table 5: Correlation Analysis of Nepal Bank Limited……………………………..20

Table 6: Correlation Analysis of NIC Asia Bank Limited…………………………. 20

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 List of Figures
Figure 1: Research Framework………………………………………………….. 7

vii
 List of Abbreviations
CAR = Capital Adequacy Ratio
GDP = Gross Domestic Product
INF = Inflation
i.e. = that is
LDR = Loan-to-Deposit Ratio
Max. = Maximum
Min. = Minimum
NPLR = Non-Performing Loan Ratio
ROA = Return on Assets
ROE = Return on Equity
S.D. = Standard Deviation
SPSS = Statistical Package for the Social Science

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 Executive Summary
The main objective of this research is to find out the credit risk management and
performance of commercial banks. Two banks which are Nepal Bank Limited and NIC
Asia Bank Limited have been selected for the study out of the 20 class “A” graded listed
commercial banks of Nepal that were available in the date 2075/2076 fiscal year and the
data obtained for this study was from the period 2075/2076 to 2079/2080 fiscal year.

In this study, a descriptive research design has been used, and this study. This research
used secondary data and it is collected from each bank’s annual report and GDP and
Inflation taken from the Website (Macro-trend). The study used ROA and ROE as a
dependent variable and CAR, LDR, NPLR, GDP, and INF as independent variables.
Financial tools such as return on equity, return on assets, capital adequacy ratio, loan to
deposit ratio, non-performing Loan Ratio, GDP rate, inflation rate, and statistical tools
such as mean, standard deviation, maximum, minimum, and correlation have been used
to meet the objective of the study. The study examines how different financial factors
impact the performance of Nepal Bank Limited and NIC Asia Bank Limited. In the study
of Nepal Bank Limited, CAR was found to be a negative correlation with ROA and also
a negative correlation with ROE. LDR was found to be a negative correlation with ROA
and also negative correlation with ROE. NPLR was found to be positive correlation with
ROA and also a positive correlation with ROE. INF found to be positive correlation with
both ROA, and ROE. GDP was positive correlated with both ROA and ROE. In the
study of NIC Asia Bank, CAR was found to be a positive correlation with ROA and also
positive correlation with ROE. LDR was found to be negative correlation with ROA and
also negative correlation with ROE. NPLR was negative correlation with ROA, and was
also negative with ROE. INF was negative correlated with ROA and also negatively
correlated with ROE. GDP was found to have a very weakly positive correlation with
ROA and also a positive correlation with ROE.

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 Chapter 1: Introduction

Context Information
As a financial institutions, the primary function of a commercial bank is to collect the
public deposits and invest them into most profitable sectors. Such public deposits results
in the form of creative deposits by the means of credit creation to generate income as
interest. The main goal of every banking institutions is to operate profitably to maintain
stability and sustainable growth. The overall process is an important asset of commercial
banks that only multiplies the income of the individual banks, but also contributes to the
growth of the economy. However in certain circumstances, such assets may not perform
in generating income and repay in due time as expected, known as credit risk (Poudel,
2018).Simply, Credit risk is the chance that a borrower won’t pay back loan as promised.
The health of the financial system has important role in the country as its failure can
disrupt economic development of the country (Das & Ghosh, 2007). Commercial banks
provide loans to the individuals and businesses, trusting that they will repay the
borrowed amount along with interest. However, there’s always a chance that borrowers
may face financial difficulties, economic downturn, or other unforeseen circumstances
that make it challenging for them to honor their repayment obligations. When borrowers
default on their loans, it leads to credit risk for the banks. Credit risk is the big deal for
the banks because if too many borrowers default on their loans, it can harm the bank’s
profit. As citied in Kasana and Naveed (2016) argued that if the assets do not generate
any income, the bank’s ability would be in question and in the case of assets of banks
become weak and these types of banks normally lose their faith and confidence of the
customers. Among the various risks faced by the banks, credit risk plays an important
role on banks’ revenue accrues from loans, from which interest is derived.

Credit risk plays a crucial role on the bank’s revenue accrues from loan and advances
from which revenue is generated (Bhattrai, 2016). It’s like a big deal for them because it
directly impacts their financial well-being. Banks make money by lending out the funds,
and if borrowers don’t repay those loans, it can seriously affect the banks’ profit and
stability. Managing credit risk effectively is the key for the banks to protect themselves
from potential losses and maintain their profitability in the long run. It’s important to
look at the things like the borrower’s past payment history and their financial situation to
understand how risky is it to lend money to them. Risk management issues in the
banking sector do not only have greater impact on the bank performance but also on
national economic growth and general business development.

The relationship between national economic growth and credit risk is quite significant, as
they influence each other in various ways. When a country’s is growing, it typically
leads to higher income levels, increased employment, and improved business
profitability. The positive economic environment often results in lower credit risk for
borrowers, as they are more likely to meet their debt obligations. Lenders may feel more
confident in extending credit during periods of economic expansion, which can further
stimulate growth. Whereas, when economic growth slows, credit risk tends to increase.
Borrowers may struggle to generate sufficient income to repay loans, leading to higher
default rates. Lenders may respond by tightening credit conditions, making it more
difficult for businesses and consumers to access financing. This can create negative
feedback loop, where reduced lending further hampers economic growth.

Likewise, the relationship between general business development and credit risk is
closely intertwined, as the health of businesses directly impacts their creditworthiness
and the overall lending landscape. When businesses are developing well, they typically
experience growth in revenues and profits, which enhances their ability to repay debts.
This positive performance reduces credit risk for the lenders, as financially healthy
businesses are less likely to default on loans. As a result, lenders may be more willing to
extend credit, which can further support business expansion and development. On the
other hand, if businesses are struggling or facing challenges such as declining sales,
increased competition, or economic downturns, their credit risk increases. A higher
livelihood of default can lead to tighter lending conditions, as lenders become more
cautious about extending credit to businesses perceived as risky. This can create a cycle
where limited access to financing hampers business development, leading to further
deterioration in credit risk.

Nepalese banks are indeed facing challenges with credit risk management. Firstly, the
economic environment in Nepal can be volatile, with fluctuations in growth rates and
external factors such as natural disasters impacting the economy. When the economy is
unstable, borrowers may struggle to meet their financial obligations, leading to higher
default rates and increased credit risk for banks. Secondly, the banking sector in Nepal
has seen rapid growth, which can sometimes lead to lax lending practices. In an effort to

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expand their portfolios, bank may lower their credit standards, resulting in loans being
extended to borrowers with weaker credit profiles. This can increase the likelihood of
defaults and create significant credit risk. Additionally, the lack of comprehensive credit
information and data analytics in Nepal can hinder effective credit risk assessment.
Without accurate and reliable credit histories, banks may find it challenging to evaluate
the creditworthiness of potential borrowers, leading to higher risks in lending decisions.
There are several other aspects of credit risk management challenges faced by Nepalese
banks:

 Regulatory framework: The regulatory environment in Nepal is evolving, and

banks must adapt to new regulations related to credit risk management.
Compliance with these regulations can be demanding, especially for smaller
banks that may lack the resources to implement robust risk management.
 Sectoral concentration: Many banks in Nepal have significant exposure to
specific sectors, such as real estate or agriculture. If these sectors experience
downturns, it can lead to higher default rates among borrowers, increasing the
overall credit risk for banks. Diversifying their loan portfolios is essential for
mitigating this risk.
 Risk assessment practices: Many Nepalese banks still rely on traditional methods
for assessing credit risk, which may not adequately capture the complexities of
borrowers’ financial situations. Incorporating advanced analytics and risk
assessment tools can help banks better evaluate creditworthiness and make
informed lending decisions.
 Economic factors: The broader economic landscape, including inflation rates,
interest rates, and employment levels, also plays a crucial role in credit risk.
Economic downturns can lead to increased unemployment and reduced consumer
spending, impacting borrower’s ability to repay loans.

Credit risk can impact a country in a several ways. It can affect financial stability by
increasing loan defaults, which can destabilize banks. It can deter investments if credit
risk is high, limiting access to credit for businesses and consumers, which in turn can
slow economic growth. Additionally, it may lead to stricter government regulations on
lending and erode consumer confidence in the financial system. Overall, managing credit
is essential for maintaining a healthy economy.

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Purpose of the Study
1. To learn how good credit risk management can help banks make more money and
stay stable.
2. To analyse the relationship of profitability and CAR, LDR, NPLR, GDP and INF.
3. To analyse the obstacles faced by the banks with loan repayment behavior of clients.

Significance of the Study

The significance of the study of this research is listed below:

It helps in maintaining the stability of financial institutions by minimizing the risk of

defaults and ensuring that they can withstand economic downturns.

The study provides insights that lead to better lending practices, allowing institutions to
make data-driven decisions and reduce the likelihood of losses.

It ensures that financial institutions adhere to regulatory requirements, which is essential

for maintaining trust and integrity in the financial system.

By effectively managing credit risk, banks can provide more loans to creditworthy
borrowers, stimulating economic growth and development.

Effective credit risk management builds confidence among investors and stakeholders in
the financial market.

Literature Survey

The purpose of reviewing the literature is to develop some expertise in one’s area, to see
what new contribution can be made, and to receive some ideas for developing research
design. The review of literature includes the review of previous writing and studies
relevant to the problem being explored and with the framework of theory structure.

Conceptual review

Concept of Credit Risk Management

Credit risk management is a crucial process used by financial institution and investors to
identify, assess, and mitigate the risk of loss due to a borrower’s failure to repay a loan or
meet contractual obligations. Credit risk management is indeed a very difficult and
complex task in the financial industry because of the unpredictable nature of the

4
macroeconomics factors coupled with the various microeconomic variables which are
peculiar to the banking industry or specific to a particular bank (Chettri, 2021). Financial
performance of commercial banks is the measure of the level commercial banks profit or
loses within a specified time period. Various measures have been used to measure the
financial performance of commercial banks. Credit risk management is one of the most
essential functions of the bank in the modern banking system. The risk inherent in all
aspect of banking business operations. Credit business is a one of the major parts of the
bank (Kattel, 2016). Credit risk plays a crucial role on the bank’s profitability as the
large portion of the bank’s revenue accrues from loan and advances from which interest
is earned (Bhattarai, 2016).

Credit risk management is very important because effective credit risk management
helps institutions maintain financial stability, minimizes losses, enhance profitability. It
also plays a significant role in regulatory compliance and maintaining investor
confidence. It helps institutions adhere to standards, assess risk accurately, meet
reporting requirements, mitigate systematic risk, and implement strong internal controls.
This ensures they avoid penalties and contribute to financial stability.

Overall, credit risk management is vital for financial institutions as it not only minimizes
potential losses from defaults but also enhances profitability and ensures compliance
with regulatory standards. By effectively assessing and managing credit risk, institutions
can maintain financial stability, build investor confidence, and improve their overall
decision-making processes. A robust credit risk management framework ultimately
supports the health of the financial system as a whole.

Concept of Bank Profitability

Profitability is a relative measure which refers to the ability of an entity to earn profit
(Tulsian, 2014). The profitability of such entity is the final result of numerous policies,
along with many decisions made by that entity itself. The profitability is well considered
as the primary measurement which reflects the overall success of a business and shows
how effectively the business had used its resources. The term “profitability” is a
compound word, composed from the two words: “profit” and “ability”. Each word has its
own meaning which contributes to the main one. The word “ability” refers to the earning
power, or in other circumstances, the operating performance of the concerned

5
investment. The definition of profitability can be extracted from the meaning of the
composing words, which is defined as the ability of a gaining the return from a given
investment. In other words, the profitability can also be defined as the capability of the
entity to generate revenues that excess the costs. Thus, the increase in profit does not
necessarily conclude that the profitability of the certain entity will increase.

Every business firm has different types of goal. Profit maximization is the goal of
business. Profit is very important for business firm. It is equally important as water
important for us. To cover cost of staying in business such as replacement of machines,
furniture, obsolescence of machines, market or technical risks etc. Profit is essential in
the sense to the self-financing principal. It provides structure and helps to minimize the
cost of capital. Profit of business is attraction for investors. So investors would invest
their money where there is adequate profit. Hence profit is required to ensure and satisfy
the entire expectation of management, shareholders, investors, employees and nation as
whole (Dangol, 1999).

Ambition of profit to commercial banks seem reasonable as the bank has to cover all the
expenses as interest to the depositors and other administrative costs, they should make
payment in the form of dividend to the shareholder who contributed to build up the
bank’s capital and keep aside for the provisions and reserve. For this the bank calculates
the cost of fund and likely return, if the spread is enough irrespective of risk involved
and absorbs its liquidity obligation, it will go ahead for the investment (Robinson, 1951).

The measure of profitability used is the rate of return on equity (ROE) for companies in
general and return on assets (ROA) in the banking industry. Return on Asset (ROA)
focuses on the company’s ability to obtain earnings in the company’s operations, while
Return on Equity (ROE) only measures the return obtained from the company’s owner’s
investment in the business (Siamat, 2002). So that in this study, ROA is used as a
measure of banking performance. The reason for choosing Return on Asset (ROA) as a
measure of performance is because ROA is used to measure the effectiveness of a
company in generating profits by utilizing its assets.

Conceptual framework and definition of variables

A conceptual framework refers to a system of ideas and principles that provides a

structured approach to understanding a particular subject or field. It outlines the key

6
concepts, relationships, and theories that help to explain how different elements interact
within that domain. It presents the relationship between dependent and independent
variables.

Independent variables Dependent variables

CAR

LDR
Bank profitability

NPLR (ROA and ROE)

GDP

INF

Figure 1: Research framework

Return on Assets (ROA)

Return on Assets is a financial metric used to evaluate a company’s profitability relative

to its total assets. It shows how effectively a company is using its assets to generate
earnings. A higher ROA indicates that the company is more efficient at converting its
investment in assets into profits. It’s an important measure for financial institutions and
investors to assess operational efficiency and asset management. If ROA increases, it
means that the company’s profitability increases, so the final impact is an increase in
profitability enjoyed by shareholders (Husnan, 1998). The ROA gives analysts an idea of
how efficient the management is at spending its assets to harvest earnings. The ratio is
displayed as a percentage and calculated by dividing the annual earnings or, in another
word, net income by the total assets. The banking invested in the assets which will
generate revenues from it to measure how much the bank is earning from such assets we
use Return on Assets (ROA) as the popular measure of profitability. Paul et al. (2013)
stated that the Return that comes from investing in firms assets is considered as the
profits after any Taxes and costs. Also, it is a measure of managerial performance
(Mahfudz, A.A, 2006). As stated by Islam et al. (2009), the most stringent and excessive
test of return to shareholders. The formula for ROA is as below:

7
ROA = (Net Income/ Total Assets) × 100

Return on Equity (ROE)

Return on Equity is a financial metric that measures a company’s profitability in relation

to shareholder’s equity. Essentially, it shows how effectively a company is using the
money invested by its shareholders to generate profits. ROE indicates how much
profitability shareholders can earn it from their shares. A higher ROE indicates that the
company is more efficient at generating profits from its equity financing. It’s an
important indicator for investors to assess how well their investment is being managed.
Islam et al. (2009) and Mahfudz, A. A. (2006) stated that the efficiency of a firm in
generating profits from every unit shareholder’s equity can be measured by return on
equity. It is calculated as follows:

ROE = (Net Income/ Total Equity) × 100

Capital Adequacy Ratio (CAR)

Capital Adequacy Ratio (CAR) is the financial metric used to assess a bank’s financial
strength and stability. It measures a bank’s capital in relation to its risk-weighted assets,
ensuring that the bank can absorb a reasonable amount of loss and complies with
statutory capital requirements. It is decided by central banks and regulators to prevent
commercial banks from taking excess leverage and becoming insolvent in the process. It
is mandatory that each bank preserve the standard CAR ratio (Basel Accord). A bank
with a high capital adequacy ratio is considered safe and likely to meet its financial
obligations. When the ratio is low, a bank is at a higher risk of failure, and so may be
required by the regulatory authorities to add more capital (Berger & Yong, 1997). The
capital adequacy ratio (CAR) can be defined as the ratio used to measure capital and
reserves for write-offs in covering credit, especially

the risks that occur because interest fails to be collected. CAR =

Total Risk Weighted Assets
× 100
Total Capita Fund

Loan- to-Deposit Ratio (LDR)

Loan-to-Deposit ratio is a financial metric that measures the relationship between a

bank’s total loans and its total deposits. It helps assess a bank’s liquidity and how well it
is using its deposits to generate loans. A higher LDR indicates that a bank is lending
more of its deposits, which can lead to higher profits but also increases risk if the bank

8
does not maintain sufficient liquidity. The ratio of loans to deposits ratio is calculated by
dividing the total loan amount to the total deposits. According to Pandia (2012), the
Loan-to-Deposit Ratio states how far a bank has used depositors money to provide loans
to its customers.

Total Loan
LDR = × 100
Total Deposit

Non-Performing Loan Ratio (NPLR)

Non-Performing Loan Ratio is a financial metric used to assess the quality of a bank’s
loan portfolio. It measures the proportion of the loans that are in default or close to being
in default compared to the total loans issued by the bank. NPL is typically defined as a
loan not being repaid as agreed, meaning the borrower has missed payments for a certain
period, often 90 days or more. NPL is not more than 5% of total credit and the settlement
is complex. High NPLs will result in lower profits earned by the company. It is
calculated as follows:

Non−Performing Loan
NPLR = × 100
Total Loan

GDP

GDP stands for Gross Domestic Product. It’s a monetary measure that represents the
market value of all final goods and services produced in a country during a specific
period, usually a year or quarter. GDP is used to gauge the health of a country’s
economy and to compare the economic performance of different countries.

Inflation Rate (INF)

The inflation rate is the percentage is the price level of goods and services in an economy
over a specific period, usually measured annually. In economic development, low
inflation indicates a positive sign for economic growth. Low inflation contributes
towards economic stability – which encourages saving, investment, economic growth,
and helps maintain international competitiveness. A high rate of inflation reduces the
borrower’s ability to service debt by reducing their real income, thereby increasing NPL
(Rinaldi & Arellano, 2006).

Review of empirical studies

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A through review of literature has been carried out to examine the impact of risk
management on financial performance in several dimensions. As this study is focused on
credit risk management in banking, the review mainly concentrated on the studies related
to the analyses of the impact of credit risk management on bank’s performance in the
context of various countries.

Abdelrahim (2013) finds that liquidity has a significant strong impact on the
effectiveness of credit risk management of Saudi Banks, whereas, bank size has a
negative impact on the effectiveness of credit risk management of Saudi Banks. On the
other hand, the other variables like capital adequacy, assets quality, management
soundness and earning were found to have an insignificant impact on the effectiveness of
credit risk management of Saudi Arabian Banks.

Adeusi et al. (2014) concluded that there is a significant relationship between bank’s
performance and risk management. The authors recommend that the credit risk indicators
identified which included cost of bad and doubt loans, debt-equity ratio, ans managed in
a better way to achieve better banks’ financial performance.

Aduda and Gitonga (2011) investigated the relationship between credit risk management
and profitability of commercial banks in Kenya. The study concludes that credit risk
management has an effect on profitability at a reasonable level in the sample commercial
banks of Kenya.

Afriyie and Akotey (2012) finds that the existence of a significant positive relationship
between non-performing loans and bank profitability meaning that even though there is
huge loan default, non-performing loans are increasing proportionately to profitability.
The authors have found the reason for ineffective credit risk management practice among
the rural community banks of Ghana and reported that banks shift the cost of loan default
to other customers with higher interest on loans. Due to this practice community banks
remained profitable.

Bhattarai (2014) finds that the commercial banks under consideration has been practicing
poor credit risk management. This was further evidenced by the negative effect of non-
performing loan ratio on bank performance and the positive effect of cost per loan assets
on bank performance. In contrast to other studies, the author found that capital adequacy
ratio and cash reserve have no influence on bank performance. Since there is a
significant relationship between credit risk and bank performance, that author suggests

10
that the banks establish proper credit risk management strategies by conducting sound
credit evaluation procedure before granting loans to customers.

Poudel (2012) from this findings, the author recommends for Nepalese commercial
banks to emphasize more on risk management as risk management, in general, has a
significant contribution to bank performance. Further, the author recommends that in
order to reduce risk on loans and achieve maximum performance, the banks need to
allocate more fund to default rate management and try to maintain an optimum level of
capital adequacy.

Research Methodology
Research methodology refers to the systematic approach and strategies that researchers
use to collect, analyze, and interpret data in order to answer a specific research question
or hypothesis. It encompasses the overall framework that guides the research process. A
well-defined research methodology is crucial as it ensures the validity and reliability of
the research findings. It is very important to have a well-designed research methodology
as it helps to improve the degree of accuracy and significant contribution of the research
and secondary data is used in this research. It includes the research design, population
and sample, source of data, data collection procedure, and data analysis tools and
techniques.

Research Design

Research design refers to the overall strategy or blueprint that outlines how a research
study will be conducted. It includes the framework for collecting and analyzing data,
ensuring that the research question is addressed effectively. If research design is good, it
ensures that the information obtained is relevant to the research questions and collected
by objective and economic procedures. In this research paper, it used quantitative
research as it presents the numerical data to conduct the study. Here to achieve the
specific objective of the study, descriptive research design has been carried out in terms
of credit risk management on profitability of Nepal Bank Limited and NIC Asia Limited.

Population and sample

Nepal Bank Limited and NIC Asia Bank Limited has been selected for the study out of
20 class “A” graded listed commercial banks of Nepal that were available in the date
2075/2076 fiscal year and the data obtained for this study was for period of 2076/2077 to
2079/2080 fiscal year. As it is impracticable to study the whole population, two

11
commercial banks listed at the Nepal Stock Exchange (NEPSE) have been taken as a
sample. This study is based on the convenience sampling method. Convenience sampling
is the non-profitability sampling method and this sampling method provides the
available, nearby, and willing to anticipate on the subject matter for data collection.

Table 1
Sample of Nepal Bank Limited

Year ROA ROE CAR NPLR LDR GDP INF

2075/207
6 1.51 8.86 16.8 2.64 78.14 6.66 5.57
2076/207
7 1.22 7.76 17.01 2.47 72.25 -2.37 5.05
2077/207
8 1.33 8.91 16.8 2.05 82.76 4.84 4.09
2078/207
8.24
9 1.12 15.05 1.83 86.97 5.61 7.65
2079/208
0 1.81 9.41 13.74 2.85 72.65 4.4 7.5
Source: Annual report of Nepal Bank Limited but INF and GDP are taken from website
(Macro-trends).

Table 1 shows the data of the Nepal Bank Limited from the fiscal year of 2075/2076 to
2079/2080. This shows the data of Capital Adequacy Ratio(CAR), Non-Performing Loan
Ratio(NPLR), Loan-to-Deposit Ratio(LDR), Gross Domestic Product Growth
Rate(GDP), Inflation Rate(INF) as an independent variables. Similarly, Return on
Assets(ROA) and Return on Equity(ROE) are taken as dependent variables. Here, CAR,
NPLR, LDR, ROA and ROE are taken from the annual report of Nepal Bank Limited.
Similarly, GDP and INF are taken from the website (Macro-trends).

Table 2
Sample of NIC Asia Bank Limited
YEAR ROA ROE CAR NPLR LDR GDP INF
2075/207
6 1.56 22.73 13.32 0.46 84.55 6.66 5.57
2076/207
7 1.32 19.26 13.5 0.75 85.75 -2.37 5.05
2077/207 1.09 17.09 12.47 0.5 87.58 4.84 4.09

12
 8
2078/207
9 1.2 18.43 13.38 0.53 89.85 5.61 7.65
2079/208
0 1.23 16.39 13.36 0.88 86.17 4.4 7.5
Source: Annual report of NIC Asia Bank Limited but GDP and INF are taken from
website (Macro-trends).
Table 2 shows the data of NIC Asia Bank Limited from Fiscal year 2075/2076 to
2079/2080. This data shows the Capital Adequacy Ratio(CAR), Non-Performing Loan
Ratio(NPLR), Loan-to-Deposit Ratio(LDR), Gross Domestic Product Growth
Rate(GDP), Inflation(INF) as an independent variables. Similarly, Return on
Assets(ROA) and Return on Equity(ROE) as an dependent variables. Here, CAR, NPLR,
LDR, ROA and ROE are taken from the annual report of NIC Asia Bank Limited.
Similarly, GDP and INF are taken from the website(Macro-trends).

Sources of data

To conduct this study, secondary data are taken from annual reports of sample banks and
their websites. So, the major sources and types of data include published sources, like
financial statement of Nepal Bank Limited and NIC Asia Bank Limited.

Data presentation and analysis tools

Various financial, accounting and statistical tools are used to make the analysis more
effective, convenience, reliable and authentic. The analysis of data is done according to
the pattern of data is available because of limited time and resources. SPSS and EXCEL
are used in this study. Similarly, statistical tools such as mean, maximum, minimum,
standard deviation and correlation, as well as financial tools have been used in this study.
The various tools applied in this study have been briefly presented as under:

Financial tools

As this study is related to financial performance analysis financial tools are more useful.
They help to identify the financial strengths and weaknesses of the firm. Despite various
financial tools available the research has primarily stressed ratio analysis assuming it is
the most suitable tool.

Ratio analysis

Ratio analysis is the relationship between two accounting figures expressed

mathematically. It is computed by dividing one item of relationship with the other.

13
Management itself can use these parameters to improve the organization’s performance.
The knowledge regarding strengths and weaknesses is necessary for exploiting
maximum benefits and to repair the weaknesses to meet the challenges. The financial
ratios, which are calculated and analyzed in this study, are as follows:

Capital adequacy ratio(CAR)

CAR is the ratio of total risk weighted assets to the total capital fund. A bank with a high
capital adequacy ratio is considered safe and likely to meet its financial obligations.

Total Risk Weighted Assets

CAR= × 100
Total Capital Fund

14
Loan to deposit ratio (LDR)

Loan to deposit ratio is a ratio between the bank total loan and total deposits. The ratio is
generally expressed in percentage terms. If the ratio is lower than one, the bank relied on
its own deposits to make loans to its customers, without any outsides borrowing .It can
be calculated as:

Total Loan
LDR= × 100
Total Deposit

Non- performing loan ratio(NPLR)

Non-performing loans are defined as loans that the debtor cannot pay or fulfill
obligations according to a credit agreement for ninety days or more at maturity.
Nonperforming loans can be calculated by using the ratio of non-performing loans to the
total loan:

Non−performing Loan
NPLR= × 100
Total Loan

Inflation rate(INF)

Inflation rate measures the percentage increase in the general price level of goods and
services over a specific period, can significantly impact a bank's profitability.

GDP growth rate

Gross Domestic Product(GDP) is typically defined as the monetary value of all finished
goods and services produced within a country's borders in a specific time period. It's a
crucial indicator of a country's economic health and productivity. However, in the
context of a bank's profitability, GDP serves as a macroeconomic indicator rather than a
direct determinant.

Profitability Analysis

Profit is the difference between revenues and expenses over a period of time. A
company should earn profit to survive and grow over a long period of time. Therefore,
the financial manager should continuously evaluate the efficiency of its company in
terms of profits. The profitability ratios are calculated to measure the operating
efficiency of a company. It is the indicator of the financial performance of any
institution. This implies that higher the profitability ratio, better the financial

15
performance of the bank and vice versa. The following ratios are taken into account
under this heading:

Return on Assets(ROA)

Return in assets is an indicator of how profitable a company is relative to its total assets.
ROA gives an idea as to how efficient management is at using its assets to generate
earnings. This is also referred to as “return on investment”. It can be calculated as:

Net Income
ROA = × 100
Total Assets

Return on equity (ROE)

Return on equity is the amount of net income returned as a percentage of shareholder’s

equity. Return on equity measures a company’s profitability by revealing how much
profit a company generates with money shareholders have invested. It can be calculated
as:

Net Income
ROE = × 100
Total Equity

Statistical Tools

These different statistical tools can be used to find out the various statistical results. Few
relevant statistical tools are used in this study are mean, standard deviation and
correlation.

SPSS (Statistical Package for the Social Science)

Also known as IBM SPSS statistics, is a software package used for the analysis of
statistical data. Although the name of SPSS reflects its original use in the field of social
statistics, its use has since expanded into other data markets. SPSS provides data analysis
for descriptive and bivariate statistics, numeral outcome predictions and predictions for
identifying groups.

16
 Chapter II: Data Presentation and Analysis

Organization profile
Nepal Bank Limited

Nepal Bank Limited the first bank of Nepal proudly holds the glory of marking the
formal beginning of banking system in Nepal. Nepal Bank Limited, the first bank of
Nepal was established in November 15, 1937 A.D (Kartik 30, 1994 B.S) under the Nepal
Bank Act 1937. It was formed under the principle of Joint venture (Joint venture between
government and general public). The bank was established with an authorized capital of
Rs. 10 million, issued capital of Rs.2.5 million and paid up capital of Rs.0.842 million.
The share held by government and private sector was 60% and 40% respectively. This
marked the beginning of an era of formal banking in Nepal. Until then all monetary
transactions were carried out by private dealers and trading center. The bank has been
providing banking through its branch offices in the different geographical locations of
the country. The vision of this organization is to be the most preferred bank of the Nation
with complete banking solutions. The mission statement of this organization to be ethical
in product offering, responsive in operation, and trustworthy in ensuring security to
protect its own and consumers’ interest. The goal of this organization is to achieve
secured and sustainable business growth to attain larger market share through enhancing
Operational Efficiency and Customer service, Increasing HR Productivity, Risk
Management System.

NIC Asia Bank Limited

NIC Asia Bank was founded as Nepal Industrial and Commercial Bank on 21 July 1998.
It was renamed NIC Asia Bank on 30 June 2013 after it merged with Bank of Asia. The
merger was the first between of two commercial banks in the Nepalese Banking history.
After the merger, NIC Asia was recognized as “Bank of the Year 2013-Nepal” by The
Banker, Financial Times, UK. This is the second time that the bank was recognized with
this prestigious award, the previous occasion being in 2007. The organization has
currently the following wholly owned subsidiaries: NIC Asia Capital Limited and NIC
Asia Laghubittiya Sanstha Limited. The bank, with its 360 branches, 671 ATMs, 118
extension counters and 51 branchless banking service is the largest bank in terms of
footprint expansion, customer base including balance sheet size. Currently bank is

17
providing services to more than 3 million customers (2022, April). Today, NIC ASIA
bank has established itself as one of the most successful commercial banks in Nepal.

Descriptive statistics

Descriptive statistics are brief descriptive coefficients that summarize a given data set
this can be either a representation of the entire or a sample of a population. This study
used mean, standard deviation, maximum and minimum in the study. Mean measure
average of individual variable and standard deviation measure variation over the time
period. The study also gives minimum and maximum value of variable over the study
period. The descriptive statistics are summarized on table 3.

Table 3 summarizes the descriptive statistics- mean values and standard deviation of
different variables used in the study of Nepal Bank Limited during the period 2075/2076
through 2079/2080. ROA and ROE are the variables used to measure the financial
performance of commercial bank. The dependent variables used in the study are: ROA is
Return on assets, ROE is return on equity, and the independent variables that are used in
the study are: Capital Adequacy Ratio(CAR), Loan To Deposit Ratio(LDR), Non-
Performing Loan Ratio(NPLR), Inflation Rate(INF) and Gross Domestic Product
Growth Rate(GDP).

Table 3
Descriptive Statistics of Nepal Bank Limited
Variables Min. Max. Mean Std.
Deviation
ROA 1.12 1.81 1.398 0.27197

ROE 7.76 9.41 8.636 0.64197

CAR 13.74 17.01 15.88 1.43511
NPLR 1.83 2.85 2.368 0.4205
LDR 72.25 86.97 80.576 5.60534
GDP -2.37 6.66 3.828 3.56939
INF 4.09 7.65 5.972 1.55757

Source: SPSS

18
Table 3 shows that the average return on assets (ROA) is 1.398% with a minimum
value of 1.12 and the maximum value of 1.81% with standard deviation of 0.27197.
Return on Equity (ROE) ranges from minimum value of 7.76% to a maximum value of
9.41% leading to the average of 8.636% and a standard deviation of 0.64197. Similarly,
the descriptive statistics for the independent variable shows that Capital Adequacy
Ratio has minimum value of 13.74% and maximum value of 17.01% leading to the
mean 15.88 and standard deviation is 1.43511. Loan to deposit ratio ranges from
minimum value of 72.25% to maximum value of 86.97% with an average of 80.576 and
standard deviation is 5.60534. Non-Performing loan ratio ranges from minimum value
of 1.83% to maximum value of 2.85% with an average of 2.368, and standard deviation
of 0.4205. The average of Inflation is noticed to be 5.972 with a minimum value of
4.09% and maximum value of 7.65%, also it has standard deviation of 1.55757.
Similarly, GDP ratio ranges from minimum value of -2.37% to maximum value of
6.66% with an average of 3.828, and standard deviation of 3.56939.
Table 4
Descriptive Statistics NIC Asia Bank Limited
Std.
Variables N Min. Max. Mean Deviation
ROA 5 1.09 1.56 1.2800 0.17678
ROE 5 16.39 22.73 18.7800 2.47607
CAR 5 12.47 13.50 13.2060 0.41687
NPLR 5 0.46 0.88 0.6240 0.18202
LDR 5 84.55 89.85 86.7800 2.02921
GDP 5 -2.37 6.66 3.8280 3.56939
INF 5 4.09 7.65 5.9720 1.55757

Table 4 shows that the average return on assets (ROA) is 1.2800 with the minimum
value of 1.09% and maximum value of 1.56% with a standard deviation of 0.17678.
Return on equity (ROE) ranges from minimum value of 16.39% to a maximum value of
22.73% leading to the average of 18.7800 and a standard deviation of 2.47607.
Similarly, the descriptive statistics for the independent variable show that the Capital
Adequacy Ratio has a minimum value of 12.47% and a maximum value of 13.50%
leading to a mean of 13.2060 and a standard deviation is 0.41687. Loan to deposit ratio

19
ranges from a minimum value of 84.55% to a maximum value of 89.85% with an
average of 86.7800 and a standard deviation of 2.02921. The non-performing loan ratio
ranges from a minimum value of 0.46% to a maximum value of 0.88% with an average
of 0.6240, and a standard deviation of 0.18202. The average of Inflation is noticed to be
5.9720 with a minimum value of 4.09% and maximum value of 7.65%, also it has a
standard deviation of 1.55757. Similarly, the GDP ratio ranges from a minimum value of
-2.37% to maximum value of 6.66% with an average of 3.8280 and standard deviation of
3.56939.

Correlation analysis
The correlation matrix table describes the correlation coefficients between dependent and
independent variables. The correlation coefficient was used to explain the relationship
between the dependent and independent variables. The correlation coefficient's value
ranges from -1 to +1. The variables are said to have a complete negative correlation if the
correlation coefficient is exactly -1. The variables are said to have a perfect positive
correlation if the correlation coefficient is exactly +1.If the correlation of coefficient is
greater than 1.0 or less than -1.0 then the measurement is incorrect. A correlation of -1.0
shows a perfect negative correlation and vice versa but a correlation of 0.0 shows no
relation between two variables. Bivariate Pearson correlation coefficient analysis has
been attempted to find the correlations between dependent and independent variables.

Bivariate Pearson correlation coefficients for ROA and ROE

This table reveals the Bivariate Pearson correlation coefficients of Return on

Assets(ROA) and Return on Equity(ROE) as dependent variables. The independent
variables are: Capital Adequacy Ratio(CAR), Loan-To-Deposit Ratio(LDR), Non-
Performing Loan Ratio(NPLR), Inflation Rate(INF), and Gross Domestic Product
Growth Rate(GDP).

20
Table 5
Pearson Correlation between ROA, ROE, CAR, NPLR, LDR, GDP and INF
Pearson Correlation
Variables ROA ROE CAR NPLR LDR GDP INF
ROA 1
ROE 0.847 1
CAR -0.520 -0.505 1
NPLR 0.835 0.436 -0.212 1
LDR -0.573 -0.080 0.055 -0.881* 1
GDP 0.281 0.663 -0.301 -0.144 0.590 1
INF 0.242 0.180 -0.873 0.087 0.079 0.294 1
* Correlation is significant at the 0.05 level (2-tailed).

In the study of Nepal Bank Limited, CAR was found to be a negative correlation with
ROA i.e. -0.520 and also a negative correlation with ROE i.e. -0.505. LDR was found to
be a negative correlation with ROA i.e. -0.573 and also negative correlation with ROE
i.e. -0.080. NPLR was found to be positive correlation with ROA i.e. 0.835 and also a
positive correlation with ROE i.e. 0.436. INF found to be positive correlation with both
ROA i.e. 0.242, and ROE i.e. 0.180. GDP was positive correlated with both ROA
i.e.0.281 and ROE i.e. 0.663.

Table 6
Pearson Correlation between ROA, ROE, CAR, NPLR, LDR, GDP and INF
Pearson Correlation
Variable ROA ROE CAR NPLR LDR GDP INF
ROA 1
ROE 0.910* 1
CAR 0.549 0.341 1
NPLR -0.176 -0.531 0.437 1
LDR -0.72 -0.511 -0.209 -0.208 1
GDP 0.072 0.128 -0.31 -0.536 0.207 1
INF -0.002 -0.2 0.614 0.367 0.361 0.294 1
* Correlation is significant at the 0.05 level (2-tailed).

Note: *sign indicates that correlation is significant at 5 percentage level

21
In the study of NIC Asia Bank, CAR was found to be a positive correlation with ROA
i.e. 0.549 and also positive correlation with ROE 0.341. LDR was found to be negative
correlation with ROA i.e. -0.72 and also negative correlation with ROE i.e. -0.511.
NPLR was negative correlation with ROA i.e. – 0.176, and was also negative with ROE
i.e. -0.531. INF was negative correlated with ROA i.e. -0.002 and also negatively
correlated with ROE i.e. -0.2. GDP was found to have a very weakly positive correlation
with ROA i.e. 0.072 and also a positive correlation with ROE i.e. 0.128.

Findings

Here, Nepal Bank Limited had an average ROA of 1.398% with a minimum of 1.12%
and a maximum of 1.81% and a standard deviation of 0.27197. Similarly, NIC Asia
Bank Limited had an average ROA of 1.2800% with a minimum of 1.09% and a
maximum of 1.56%, and a standard deviation of 0.17678. Nepal Bank Limited exhibited
a higher average ROA with higher variability compared to NIC Asia Bank Limited.

For ROE, Nepal Bank had an average ROE of 8.636 with a minimum of 7.76% and a
maximum of and 9.41% a standard deviation of 0.64196. Similarly, NIC Asia Bank had
an average ROE of 18.7800 with a minimum of 16.39% and a maximum of 22.73% and
a standard deviation of 2.47607. NIC Asia Bank Limited showed a slightly higher
average ROE with lower variability compared to Nepal Bank Limited.

Nepal Bank Limited had a mean CAR of 15.88 with a minimum of 13.74% and a
maximum of 17.01% and a standard deviation of 1.43511. NIC Asia Bank had a mean
CAR of 13.2060 with a minimum of 12.47% and a maximum of 13.50% and a standard
deviation of 0.41687. NIC Asia Bank has lower mean CAR compared with the mean of
Nepal Bank Limited.

Nepal Bank Limited had an average LDR of 80.576 with a minimum of 72.25% and a
maximum of 86.97% and a standard deviation of 5.60534. NIC Asia Bank had an
average LDR of 86.7800 with a minimum of 84.55% and a maximum of 89.85% and a
standard deviation of 2.02921. Nepal Bank Limited has lower mean LDR than the mean
LDR of NIC Asia Bank Limited.

Nepal Bank Limited had an average NPL ratio of 2.368 with a minimum of 1.83% and a
maximum of 2.85% and a standard deviation of 0.4205.NIC Asia Bank had an average
NPL ratio of 0.6240 with a minimum of 0.46% and a maximum of 0.88% and a standard

22
deviation of 0.18202. NIC Asia Bank maintained a significantly lower NPL ratio with
lower variability compared to Nepal Bank Limited.

Here, both Nepal Bank Limited and NIC Asia Bank Limited had a mean INF of 5.9720
with a minimum of 4.09% and a maximum of 7.65% and a standard deviation of
1.55757. Here, both Nepal Bank Limited and NIC Asia Bank Limited had a mean GDP
of 3.8280 with a minimum of -2.37% and a maximum of 6.66% and a standard deviation
of 3.56939.

In the study of Nepal Bank Limited, CAR was found to be a negative correlation with
ROA i.e. -0.520 and also a negative correlation with ROE i.e. -0.505. Similarly, in the
study of NIC Asia Bank, CAR was found to be a positive correlation with ROA i.e.
0.549 and also positive correlation with ROE 0.341. In the study of Nepal Bank Limited,
LDR was found to be a negative correlation with ROA i.e. -0.573 and also negative
correlation with ROE i.e. -0.080. Similarly, in the study of NIC Asia Bank, LDR was
found to be negative correlation with ROA i.e. -0.72 and also negative correlation with
ROE i.e. -0.511. In the study of Nepal Bank Limited, NPLR was found to be positive
correlation with ROA i.e. 0.835 and also a positive correlation with ROE i.e. 0.436.
Similarly, in the study of NIC Asia Bank, NPLR was negative correlation with ROA i.e.
– 0.176, and was also negative with ROE i.e. -0.531. In the study of Nepal Bank Limited,
INF found to be positive correlation with both ROA i.e. 0.242, and ROE i.e. 0.180.
Similarly, in the study of NIC Asia Bank, INF was negative correlated with ROA i.e. -
0.002 and also negatively correlated with ROE i.e. -0.2. In the study of Nepal Bank
Limited, GDP was positive correlated with both ROA i.e.0.281 and ROE i.e. 0.663.
Similarly, in the study of NIC Asia Bank, GDP was found to have a very weakly positive
correlation with ROA i.e. 0.072 and also a positive correlation with ROE i.e. 0.128.

Discussions
Dr. Guna Raj Chhetri (2021) stated that non-performing loan (NPLR) has negative and
statistically significant impact on financial performance return on assets (ROA). Capital
adequacy ratio (CAR). Loan-to-deposit (LDR) has positive but no significant
relationship with the financial performance (ROA).

In the study of Nepal Bank Limited, CAR was found to be a negative correlation with
ROA and also a negative correlation with ROE. LDR was found to be a negative
correlation with ROA and also negative correlation with ROE. NPLR was found to be

23
positive correlation with ROA and also a positive correlation with ROE. INF found to be
positive correlation with both ROA, and ROE. GDP was positive correlated with both
ROA and ROE. In the study of NIC Asia Bank, CAR was found to be a positive
correlation with ROA and also positive correlation with ROE. LDR was found to be
negative correlation with ROA and also negative correlation with ROE. NPLR was
negative correlation with ROA, and was also negative with ROE. INF was negative
correlated with ROA and also negatively correlated with ROE. GDP was found to have a
very weakly positive correlation with ROA and also a positive correlation with ROE.

24
 Chapter III: Conclusion And Action Implications

Conclusion
Credit Risk Management should be at the center of banks operations in order to maintain
financial stability. Credit risk management includes the system process and control
which a company has in place to ensure the efficient collection of customer payment and
the risk of no-payment.

The main purpose of this study is to know the impact of credit risk on the financial
performance of commercial banks in Nepal. The financial performance in terms of return
on assets and return on equity selected as dependent variables. The capital adequacy
ratio, non-performing loan ratio, loan-to-deposit ratio, GDP and INF are taken as
independent variables. The balance panel data of two commercial banks for the period of
fiscal year 2075/76 to 2079/80 have been used for the analysis. The result in this study
therefore, suggested the need for strong credit risk and loan service process management
must be adopted to keep the level of NPL as low as possible which will enable to
maintain the high performance (profitability) of commercial banks in Nepal. The study
recommends that it is fundamental for Nepalese commercial banks to practice scientific
credit risk management, Nepal should enhance their capacity in credit analysis and loan
administration while the regulatory authority should pay more attention to banks
compliance to relevant directives and prevailing rules and regulations. Banks need to
place and devise strategies that will not only limit the banks exposition to credit risk but
will develop performance and competitiveness of the banks, and banks should establish a
proper credit risk management strategies by conducting sound credit evaluation before
granting loans to customers, improve their efficacy in credit analysis and loan
management to secure as much as possible their assets, and minimize the high incidence
of non-performing loans and their negative effects on financial performance. It is
recommended that bank’s credit- granting activities conform to the established strategy
that written procedures should be developed and implemented, and that loan approval
and review responsibilities are clearly and properly assigned. Senior management must
also ensure that there is a periodic independent internal assessment of the bank credit-
granting and management functions.

25
Action Implications
Banks should enhance their credit risk assessment processes to better evaluate borrowers'
creditworthiness. This can involve adopting more sophisticated credit scoring models
and incorporating macroeconomic indicators. Regular training programs for staff on the
latest credit risk management practices and regulatory requirements can improve
decision-making and reduce errors in lending. Encouraging banks to diversify their loan
portfolios can mitigate risks associated with economic downturns in specific sectors.
This can help maintain stability in the bank's performance. Banks should conduct regular
stress tests to evaluate how various economic scenarios could impact their credit risk
exposure. This can help in formulating strategies to cushion against potential losses.
Strengthening compliance with existing regulations and adopting best practices from
international standards can improve the overall health of the banking sector.
Implementing advanced data analytics and technology solutions can enhance credit risk
monitoring and reporting, allowing banks to respond more quickly to emerging risks. I
think, by focusing on these action implications, commercial banks in Nepal can improve
their credit risk management practices and enhance their overall performance.

26
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