Effects of Non-Performing Loan on Profitability of Commercial Banks in Nepal

Abstract

Non-performing loan (NPL) is major problem in banking industry. It has play major role for making profit and bank success or failure. The study has examine the effects of non-performing loan on profitability of commercial banks in Nepal with panel data collected from twelve commercial banks of five years from 2013-2014 to 2017-2018 period with the total observations sixty. The multiple regression model has been used to analysis of the data. The Pooled ordinary least square model, fixed effect model and random effect model has been employed to analyzed profitability. The profitability measure by return on equity (ROE) taken as dependent variable whereas non-performing loan (NPL), capital adequacy ratio (CAR), liquidity (LIQ), size of banks (SIZE) and inflation (INF) were independent variables. The result of three different model revealed that the NPL, CAR, LIQ have significant and negatively associated with ROE. Similarly, the SIZE has significant and positive associate with ROE. The INF has positive but insignificant result with ROE. The study concluded that among study variable NPL, CAR, LIQ and SIZE have major role to determine profitability. The INF has does not significantly effect on Profitability. However, the effect of nonperforming loan on profitability very strong. The bankers have sincerely take for the over 90 day's dues. It has rational effect of national economy also.