An Empirical Analysis of the Impact of Non-Performing Loan Ratios on the Profitability of Commercial Banks in Nepal

Abstract

This study is aimed at empirically analyzing the effect of non-performing loan (NPL) ratios on the profitability of commercial banks. The non-performing loans are highly considered to be an important causal factor in credit risk and a major menace to the financial stability. The data were gathered with the help of a quantitative research design by analyzing the published annual reports that included ten commercial banks in Nepal during a three-year period (2023-2025). Profitability was calculated through the use of the return on assets (ROA), whereas NPLs ratios became the key independent variable. The data were analyzed using descriptive statistics, Pearson correlation analysis, and the multiple linear regression in order to define the level and direction of relationship between NPLs and profitability. Both results show a strong negative relationship between NPL ratios and ROA, thus, the increase in the levels of non-performing loans is connected with the decrease in the bank profitability. Regression analysis also affirmed that NPL ratios are a statistically significant predictor of ROA (p < 0.05), which is why we can conclude that effective management of credit risks is an important factor in maintaining the performance of banks. The findings point to the fact that the quality of loans and low default rates will always result in higher and better indicators of profitability in banks. This research adds to the literature by giving empirical data of the commercial banking industry in Nepal and the significance of active credit monitoring, increasing underwriting criteria, and developing of effective recovery systems. The implications of the findings are significant to the bank managers and policymakers who want to improve the financial stability and sustain profitability.