Impact of Non-Performing Loans on Profitability of Bank: The Case of Bank of Bhutan Limited

Abstract

Non-performing loan (NPL) or non-performing asset (NPA) is one of the indicators of the quality of the loan book managed by banks.  Magnitude of NPL reflect health of a bank.  Growing NPLs is a serious problem for banks in any economy.  For a developing economy, such as Bhutan, it can pose a threat to its economic development.  As the banking industry is one of the major contributors to the economic growth of a nation.  NPL affects the profitability as well as capital of the lending institutions (RMA, 2015).  An analysis of Bank of Bhutan Limited (BoBL), the oldest and largest bank of Bhutan, is presented in this paper.  Gross and Net NPLs over a period of six years, from year 2013 to 2018, has been analyzed and its impact on bank's profitability, measured in terms of return on assets (ROA), return on equity (ROE) and net interest margin (NIM), has been studied.  Regression analysis has been used to test hypothesis.  It was found that both gross and net NPLs impact profitability of BoBL.