A Critiquing of Research Article

Credit Risk Management of Commercial Banks in Nepal

(Author: Shreya Pradhan, Ajay K. Shah)

Presented by:

Prizma Shrestha

1.Background
The author states that banking and financial institutions are exposed to various risks
that can impact their profitability and performance. Credit risk, which is the risk of
borrowers defaulting on loans, has a significant impact on the profitability of banks.
Banks rely on loan interest, non-interest income, and investment returns to generate
profits. Therefore, funding for small and large businesses is a more significant and
reliable investment of funds with a promise of higher returns. Efficiency of staff, bank
policies, asset quality evaluation, and assessment of borrowers are some factors that
determine the productivity of fund investments. Unproductive loans have a greater
impact on the commercial bank's performance and profitability. Credit risk
management is a crucial function of banks as they lend and borrow money mainly
belonging to shareholders and depositors. BFIs play a significant role in circulating
money in the economy through loans and funding business enterprises. It is essential
for financial institutes to control and maintain credit limits to minimize credit risk
mismanagement, which can have an inverse effect on the economy.

Research Gap
Author claim that all the respondents are from Kathmandu valley hence the study
does not incorporate wide geographic character of the respondents. So, the results
may differ if the study is conducted in other geographic area. The another gap
mentioned in this study is related to the sample size so, the future attempts are
required with large sample size to make difference or generalizations in results

Hypothesis

H1: There is no significant impact of credit risk management practice on loan

repayment.

H2: There is no significant impact of credit risk mitigation measure on loan

repayment.

H3: There is no significant impact of obstacles on loan repayment.

2. Conceptual Framework
Independent Variables Dependent Variables

Credit Risk
Mitigation Measures

Credit Risk
Loan Repayment
Management Practices

Obstacles

3.Research Methodology

The study used the sample responses of 127 staffs working at different level obtained
through structured questionnaire survey. The nature of research design used in the
study is quantitative and descriptive. This research design has been used as it
elaborates the association between obstacles faced in credit risk management of
banks, risk assessment measures, risk mitigation measures and credit repayment by
borrowers. Primary data analysis was carried out on the basis of responses derived
from structured questionnaire. The statistical tools used in the study are descriptive
statistics (percentage, mean score and standard deviation) and inferential statistical
tool of correlation analysis.

4.Results and Discussion

Table 1 shows the results of reliability test through Cronbach Alpha Reliability Test.
As the results indicate, Cronbach’s Alpha for each group is above 0.8 and hence the
items in shows the internal consistency of the data.

Table 2 shows the result of descriptive analysis by work experience and work level.
The study's sample size includes more experienced employees, with 52 percent
having more than seven years of experience. The sample includes 60 officers, 44
managers, 21 assistants, and two executives, with more officer-level employees
having over seven years of experience.

Table 3 shows the result of descriptive analysis for dependent and independent
variables. It indicates that commercial banks have an above-average level of credit
risk management practices and acceptable credit risk mitigation measures. There are
no significant obstacles for banks in managing credit risks. Borrowers also have a
positive response to timely loan repayment to the bank.

Table 8 shows the correlation between dependent and independent variables.The

correlation coefficients between the dependent variable of loan payment and
independent variables (Credit Risk Management Practices, and Credit Risk

Mitigation Measures) have been found statistically significant and positive at 5

percent level. Loan payment was found to be negatively associated with obstacles,
with statistical insignificance.

5. Conclusion

The finding demonstrated that credit risk mitigation measures and credit risk
management practices are positively associated with loan repayment in the banks,
while obstacles have no relation with the loan repayment.
The study also supports the result obtained from the respondents' mean scores that 
credit risk iteration and management practices have been effectively implemented in 
Nepali banks including complying with credit risk policy, defining roles and
responsibilities for credit risk department employees, and providing required skills
and knowledge. Banks should carefully monitor and analyse the loan decision-making
process to reduce credit risk and improve loan repayment.

Overall Observation
Strength: When we went through the paper, we found that the introduction chapter is
nicely organized. The variable is clearly explained and they are also linked with past
research. The finding is well discussed and interpreted.

Similar Research in Nepal

As I went through the literatures, I did not find the other similar research paper
conducted in Nepal.

Topic: The impact of credit risk management on financial performance of

commercial banks in Nepal.

Author: Ravi Prakash Sharma Poudel

Journal: International journal of arts and commerce.

Objective: To establish the impact of credit risk management on financial

performance of banks.

Independent Variables: Default rate, Capital adequacy ratio, Cost per loan assets.

Dependent Variable: Return on assets.

Finding: The study revealed that all the parameters have an inverse impact on banks’
financial performance, however, the default rate is the single most important predictor
of bank financial performance.

Further Research Agenda

The study has attempted only to explore the factors associated with investment
decisions and their relative importance with respect to the demographic character of
investors. So, there exists a scope for future study to incorporate the causal
comparative study design to analyze the effect size of investment decision variables
on investment behavior of individual investors in stock market of Nepal.

Another research topic can be ‘Investor Behavior towards Derivative Market in

Nepal”
Bibliography
Poudel, R. P. (2012). The impact of credit risk management on financial performance
of commercial banks. International Journal of Arts and Commerce, 1.

Shah, S. P. (2019). Credit risk management of commerical. Journal of Business and

Social Sciences Research,, 21-20.