Effect of Non-Performing Loan on the Profitability of Commercial Banks in Nepal

Abstract

This study has examined the effect of non-performing loan on the profitability of Nepalese commercial banks using pooled data of fourteen commercial banks with 77 observations during the period of 2010 to 2015.The estimated regression results reveal that non-performing loan ratio has negative effect on overall bank profitability (ROA) whereas non-performing loan ratio has positive effect on shareholders' return (ROE). Moreover, the results show that bank size has significant positive effect on bank profitability (ROA, ROE).However, cost per loan has significant positive association only with overall bank profitability (ROA). Unlikely, gross domestic product growth rate has significant positive effect only on shareholders' return (ROE).Thus, this study concludes that profitability of Nepalese commercial is influenced by non-performing loan ratio and other covariates like: bank size, cost per loan assets and gross domestic product growth rate.