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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 signiñcant positive effect only on shareholders' return (ROE). Thus, this study concludes that profitability of Nepalese commercial banks is influenced by nonperforming loan ratio and other covariates like: bank size, cost per loan assets and gross domestic product growth rat.
Keywords: Non-performing loans, Regression Model, Profitability, Commercial Banks, Nepal
INTRODUCTION
Non-performing loans has been an immense issue among banking organizations and academicians because it can affect the profitability of commercial banks. Nonperforming loans ratio (NPLR) indicates how banks manage their credit risk because it defines the proportion of loan losses amount in relation to total loan amount. At the most general level, a non-performing loan (NPL) is a loan where a borrower is not making repayments in accordance with contractual obligations. In many jurisdictions and for many firms, an NPL is defined as a sum of borrowed money upon which the debtor has not made his or her scheduled payments for at least 90 days (Bholat, et.al., 2016).
NPLs are important because they affect the financial intermediation role of commercial banks which constitutes the banks' main source of their income, and ultimately, the financial stability of an economy (Klein, 2013). The immediate consequence of large amount of NPLs in the banking system is bank failure as well as economic slowdown. The causes of nonperforming loans are usually attributed to the lack of effective monitoring and supervision on the part of banks, lack of effective lenders' recourse, weaknesses of legal infrastructure, and lack of effective debt recovery strategies (Adhikari, 2007).
NPLs involve a lot of time and efforts of bank management. This is an indirect cost which the bank has to bear due to poor asset quality....