CREDIT MANAGEMENT AND

COMMERCIAL BANK
PERFORMANCE IN NEPAL

A GRADUATE RESEARCH PROJECT

Presented by:
Rajan Khadka
Roll No.: 14220163
PU Regd. No: 2014-2-22-0134
Introduction
• The credit function of banks enhances the ability of investors to exploit desired
profitable ventures. Credit creation is the main income generating activity of
banks (Funso, Kolade, & Ojo, 2012). However, it exposes the banks to credit risk.
• Credit management plays an important role on banks’ profitability since a large
chunk of bank’s revenue accrues from performing loans.
• The effective management of credit risk exposure, banks not only support the
viability and profitability of their own business, they also contribute to systemic
stability and to an efficient allocation of capital in the economy (Psillaki, Tsolas, &
Margaritis, 2010).
Statement of Problem

• What are the most influencing factors that affect credit management in
Nepalese Commercial bank?

• Is there any relationship between credit management predictors and

bank performance measured by profitability in Nepalese Commercial
Bank?
Objectives of Study

• To identify the factors affecting the Credit Management in commercial

banks of Nepal.

• To analyze the effect of Credit Management variables on bank’s

performance in terms of ROA and ROE.

• To analyze the extent to which bank’s performance is affected by

credit management predictors.
Hypothesis Testing on ROA
• H01: There is no significant relationship between Non-Performing Assets (NPL)
and Return on Equity (ROA)
• H02: There is no significant relationship between total loan loss provision to total
non-performing loan (LLP/NPL) and Return on Assets (ROA).
• H03: There is no significant relationship between the Capital Adequacy Ratio
(CAR) and Return on Assets (ROA).
• H04: There is no significant relationship between the Credit to Deposit Ratio (CD)
and Return on Assets (ROA).
• H05: There is no significant relationship between the interest spread (IS) and
Return on Assets (ROA).
• H06: There is no significant relationship between the net interest income to total
operating income (NII/TOI) and Return on Assets (ROA).
Hypothesis Testing on ROE
• H07: There is no significant relationship between the volume of total loan
occupied by Non-Performing Assets (NPL) and Return on Assets (ROE).
• H08: There is no significant relationship between the total loan loss provision to
total non-performing loan (LLP/NPL) and Return on Equity (ROE).
• H09: There is no significant relationship between the Capital Adequacy Ratio
(CAR) and Return on Equity (ROE).
• H010:There is no significant relationship between the Credit to Deposit Ratio (CD)
and Return on Equity (ROE).
• H011:There is no significant relationship between the interest spread (IS) and
Return on Equity (ROE).
• H012:There is no significant relationship between the net interest income to total
operating income (NI/TOI) and Return on Equity (ROE).
Theoretical Framework
Independent Variables
(Parameters)

Capital adequacy ratio (CAR)

Dependent Variables
Credit deposit ratio (CD)

Interest spread (IS) Return on Assets

(ROA)
Non-performing loan to Total (Financial
loan (NPL) Performance)
Credit Management
Loan loss provision to Total Return on Equity
nonperforming loan (ROE)
(LLP/NPA)

Net interest income to total

operating income (NII/TOI)
Research Methodology

• Research Design: Quantitative Research Design

• Source of Data : Secondary

• No. of Observation :110 (10 yrs. Data of 11 Commercial Banks)

• Sampling Technique : Stratified Sampling Technique

• Technique of Analysis : SPSS 16.0 and MS Excel

• Validity and Reliability of data: VIF Test (value less than 10)
Analysis
Descriptive Statistics
N Minimum Maximum Mean Std. Deviation

CAR 110 10.40 28.41 12.7639 2.55607

CD Ratio 110 39.27 101.25 76.9388 10.82055

Interest Spread 110 2.49 7.09 4.1243 .73787

NPL (NPL/TL) 110 0.00 4.94 1.2986 1.12816

LLP/NPL 110 0.00 22587.93 709.7154 2534.54179

NII/TOI 110 63.10 89.91 75.0072 5.30935

ROA 110 -0.50 3.25 1.6557 .61589

ROE 110 -0.02 33.93 19.0039 7.93177

Correlation Analysis
Correlation with Sig Correlation with Sig
ROA (2-tailed) ROE (2-Tailed)
CAR -.128 0.183 -.370** 0.000

CD Ratio -.467** 0.000 -.539** 0.000

Interest Spread .464** 0.000 .392** 0.000

NPL (NPL/TL) -.132 0.170 -.157** 0.002

LLP/NPL .003 0.972 -.142 0.048
NII/TOI -.227 0.688 -.262 0.573
**. Correlation is significant at the 0.01 level
*. Correlation is significant at the 0.05 level
Regression Analysis (dependent variable ROA)
B Sig. VIF F Value Sig.
(Constant) 2.885 .000 11.76 0.00
CAR -.033 .149 1.617
CD Ratio -.023 .000 2.028
Interest Spread .324 .000 1.369
NPL (NPL/TL) -.051 .251 1.169
LLP/NPL 4.451E-005 .060 1.665
NII/TOI -.005 .688 1.687

Adjusted R square 0.373

Durbin Watson 0.702
Regression Analysis (dependent variable ROE)
B Sig. VIF F Value Sig.

(Constant) 47.777 .000 18.458 0.00

CD Ratio -.362 .000 2.028
Interest Spread 2.759 .001 1.369

CAR -1.337 .000 1.617

NPL (NPL/TL) -1.397 .008 1.169

LLP/NPL .001 .048 1.665

NII/TOI .082 .537 1.687
Adjusted R square 0.490
Durbin Watson 0.651
Hypothesis Testing
Hypothesis Statements Remarks

H01 There is no significant relationship between NPL and Return on Assets Accept
(ROA)

H02 There is no significant relationship between the total loan loss provision Accept
to total non-performing loan (LLP/NPL) and Return on Assets (ROA)

H03 There is no significant relationship between CAR and Return on Assets Accept
(ROA)

H04 There is no significant relationship between the Credit to Deposit Ratio Reject
(CD) and Return on Assets (ROA)

H05 There is no significant relationship between the interest spread (IS) and Reject
Return on Assets (ROA)

H06 There is no significant relationship between the net interest income to Accept
total operating income (NII/TOI) and Return on Assets (ROA)
Hypothesis Testing (Cont.)
Hypothesis Statements Remarks
H07 There is no significant relationship between (NPL) and Return on Reject
Equity (ROE)
H08 There is no significant relationship between the total loan loss provision Reject
to total non-performing loan (LLP/NPL) and Return on Equity (ROE)

H09 There is no significant relationship between the Capital Adequacy Ratio Reject
(CAR) and Return on Equity (ROE)

H10 There is no significant relationship between the Credit to Deposit Ratio Reject
(CD) and Return on Equity (ROE)

H11 There is no significant relationship between the interest spread (IS) and Reject
Return on Equity (ROE)

H12 There is no significant relationship between the net interest income to Accept
total operating income (NII/TOI) and Return on Equity (ROE)
Conclusion and Recommendation
• Interest spread has a positive and significant relationship with return on assets and return
on equity. Profitability of Banks are directly related with interest spread thus maintaining
appropriate interest margin should be main objective of banks.

• Banks with good capital adequacy ratio can be a good cushion for risk and profitability,
however our result indicates negative relationship with ROE and ROA.

• Result shows negative relationship of CD ratio with banks performance. This is observed
due to unhealthy competition in deposit collection to maintain CD ratio ceiling
determined by NRB leading to high cost of fund and low return.
Thank you
Any Queries