Credit Risk and Commercial Banks’ Profitability in Nepal: A Panel Approach

Yuga Raj Bhattarai

Abstract


This study has investigated the effect of credit risk on the profitability of commercial banks in Nepal over the period of 8 years (2009 to 2016). Panel data of six commercial banks were analyzed using pooled OLS model, fixed effects model and random effect model. The results from the estimated regression models show that default risk is significantly positively associated with banks’ profitability. However, capital adequacy ratio is found significantly negatively associated to profitability. The effect of cost per loan assets seems minimal in explaining the variation of commercial banks’ profitability. Thus, this study concludes that credit risk indicators like: default risk and capital adequacy ratio have significant impact on the profitability of commercial banks in Nepal.

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