Non-Performing Assets, Macro Variables and Bank Profitability: A study of Nepalese Commercial Bank

Abstract

The purpose of the study is to examine the effect of non-performing assets along with macro variables on the bank profitability of commercial banks in Nepal. This study has employed descriptive and causal research designs. Among the 20 commercial banks 15 banks were selected with purposive sampling technique with balance panel data set of comprising 120 bank-years observation from the period of 8 years (i.e. 2017-2024). The findings of the paper reveal that there is a significant negative effect of NPAs on bank profitability. In addition, the study identifies bank size, credit-to-deposit ratio, capital adequacy ratio also has inverse impact on bank profitability. Whereas, LQDT has positive but insignificant impact on the bank profitability. The study also concludes that macroeconomic variables such as GDP growth and ISR has positive and significant impact on bank profitability indicating higher economic growth positively influence financial performance and bank profitability. The study also highlights the need for proper credit risk management, strong regulatory and provisions, and effective loan recovery measures to offset the effects of NPAs. These findings are very useful to the policymakers, bank managers and regulatory bodies in order to design strategies to manage NPAs in commercial banks in Nepal.