Impact of Non-Performing Assets on Profitability: A Panel Regression Analysis of Commercial Banks in Nepal

Abstract This study investigates the impact of non-performing assets (NPA) on the profitability of Nepalese commercial banks using a panel data approach. This study employs panel data from 21 currently functioning commercial banks from 2017/18 to 2021/22, which totals 105 years of observations, to examine the impact of non-performing assets (NPA) on the profitability of Nepalese commercial banks. To investigate the explanatory power of non-performing assets on banks' profitability, the commercial banks' Return on Equity (ROE) is used as the dependent variable, and non-performing assets (NPA), the Laon loss provision to loan and advances (LLP), loan and advances in relation to total deposits (LTDR), return on investment (ROI), and capital adequacy ratio (CAR) are used as the controlled variables. Results from panel regression, correlation analysis, data stationary, and descriptive statistics are also reported. As suggested by the Hausman test, the fixed effect (FE) regression model has been selected as the suitable model. The findings show a significant negative link between non-performing assets and bank profitability. Operational and policy considerations are significantly affected by this conclusion. In order to lessen the negative effects of an increase in non-performing loans and increases in the profitability of commercial banks in Nepal, it emphasises the use of thorough creditworthiness assessments, ongoing credit monitoring, and the establishment of appropriate loan policies in compliance with regulatory requirements.