| Title : | Effect of interest rate on the performance of Nepalese commercial banks | | Material Type: | printed text | | Authors: | Sushmita Amatya, Author | | Publication Date: | 2016 | | Pagination: | 65p. | | Size: | GRP/Thesis | | Accompanying material: | 4/B | | General note: | Including bibilography | | Languages : | English | | Descriptors: | Bank and banking
Bank loans
Interest rate
| | Keywords: | 'interest rate deposit rate inflation rate return on assets return on equity' | | Class number: | 332.820 | | Abstract: | Banks specialize in assessing the credit worthiness of borrowers and providing an ongoing monitoring function to ensure borrowers meet their obligations. Business and other financial institutions are in the market to settle day-to-day transactions (Vohra and Sehgal 2012). By almost any measure, the commercial bank is the most important financial intermediary serving the public today. They offer more services than the majority of other financial Institutions, which include expanding the money supply by granting credits (loans) to borrowers. Interest rate directly affects the lending of the any financial institutions (Felicia, 2011). Lending behavior of the bank can be defined as the preferences and choices of bank while making loans and advances. Bank lending behavior is the selection of bank’s investment on loans and advances on the account of constraints given by regulators, opportunities or threats provided by macroeconomic, factors and the preferences of customers (Musleh, 2007).
Nepalese economy is under the crucial transformation through changes in bothintersectoral importance and linkages. The composition of GDP has changed with servicesector emerging as nearly the largest sector, trade-GDP ratio has increased, and foreignexchange regime has been liberalized. banking sector is facing with the danger of liquidity crisis, inflated interest rate, declining deposits and the problem of the liquidity started which has affected the inter banking interest rate (Shrestha, 2011). In spite of higher interest rate provided by commercial bank in the deposits, it still fails to attract the depositors. growing competition in the financial sector, recent increase in transaction of security and capital markets as well as the taxation laid on higher deposits in banks are, among others, the factors affecting bank's profitability. The impact of market interest rates on commercial bank revenues, costs, and profitability has increasingly concerned economists and policymakers as financial market conditions have become more volatile in recent years (Shahi, 2008).
This study has aimed to examine effect of interest rate on banking performance in Nepalese commercial banks. Specifically, it examines the effect on bank rate, deposit rate, loan rate, inflation rate and non performing loan to return on assets and return on equity of commercial banks of Nepal. This study has used secondary sources of data to analyze the impact of interest rate structure on bank performance. The secondary sources of data have been used to investigate the relationship of interest rate and banking performance. The secondary data for bank performance and interest rate have been taken from annual report of the commercial bank for the year2009/10 to 2013/14. Total of 21 sample banks have been taken with 105 observations from the five year period. This study has used descriptive statistics, and correlation analysis, stepwise regressions have been carried out to examine the secondary data.
This result has found that return on assets is positively related to loan rate, bank rate, capital adequacy, and non performing loan while negatively related to deposit rate and the inflation. ROE is positively related with loan rate, capital adequacy and the inflation rate. While negative relation is observed with bank rate, deposit rate and non performing loan.Beta coefficient is positive for loan rate with return on assets (ROA) which indicates that increase in loan rate increases the return on assets.The beta coefficient for capital adequacy is positive with ROA indicating banks with higher capital adequacy can increases its return on assets, but it is not significant at five percent level.
The results also revealed that beta coefficient for deposit rate is negative with return on assets and is significant at five percent. This indicates that increases in deposit rate leads to decrease in return on assets.Beta coefficient is negative for bank rate with return on assets indicating increased bank rate decreases the return on assets of the banks.Result also revealed that beta coefficient is negative for non performing loan with return on assets and is significant at one and five percent level. This result reveals that if bank became able to decreases its volume of nonperforming loan, can increase bank performance as measured by return on assets (ROA).
The study concludes that bank can increase its profitability if bank can manage its interest rates. If bankisable to increase loan rate, bank can improve bank performance in the coming year. This study also concludes that non performing loan is also positively related to interest rate or loan rate in the bank. Nonperforming loan is also positively related to interest rate, higher interest rates may reduce the tendency to repay the loan because of the higher cost of loan, banks can reduce the interest amount from the customer so that they would be willing to repay the loan in time. This study suggests that banks willing to increase bank performance should properly assess the cause of decrease in return on assets, and should have remedies as earlier as possible. |
Effect of interest rate on the performance of Nepalese commercial banks [printed text] / Sushmita Amatya, Author . - 2016 . - 65p. ; GRP/Thesis + 4/B. Including bibilography Languages : English | Descriptors: | Bank and banking
Bank loans
Interest rate
| | Keywords: | 'interest rate deposit rate inflation rate return on assets return on equity' | | Class number: | 332.820 | | Abstract: | Banks specialize in assessing the credit worthiness of borrowers and providing an ongoing monitoring function to ensure borrowers meet their obligations. Business and other financial institutions are in the market to settle day-to-day transactions (Vohra and Sehgal 2012). By almost any measure, the commercial bank is the most important financial intermediary serving the public today. They offer more services than the majority of other financial Institutions, which include expanding the money supply by granting credits (loans) to borrowers. Interest rate directly affects the lending of the any financial institutions (Felicia, 2011). Lending behavior of the bank can be defined as the preferences and choices of bank while making loans and advances. Bank lending behavior is the selection of bank’s investment on loans and advances on the account of constraints given by regulators, opportunities or threats provided by macroeconomic, factors and the preferences of customers (Musleh, 2007).
Nepalese economy is under the crucial transformation through changes in bothintersectoral importance and linkages. The composition of GDP has changed with servicesector emerging as nearly the largest sector, trade-GDP ratio has increased, and foreignexchange regime has been liberalized. banking sector is facing with the danger of liquidity crisis, inflated interest rate, declining deposits and the problem of the liquidity started which has affected the inter banking interest rate (Shrestha, 2011). In spite of higher interest rate provided by commercial bank in the deposits, it still fails to attract the depositors. growing competition in the financial sector, recent increase in transaction of security and capital markets as well as the taxation laid on higher deposits in banks are, among others, the factors affecting bank's profitability. The impact of market interest rates on commercial bank revenues, costs, and profitability has increasingly concerned economists and policymakers as financial market conditions have become more volatile in recent years (Shahi, 2008).
This study has aimed to examine effect of interest rate on banking performance in Nepalese commercial banks. Specifically, it examines the effect on bank rate, deposit rate, loan rate, inflation rate and non performing loan to return on assets and return on equity of commercial banks of Nepal. This study has used secondary sources of data to analyze the impact of interest rate structure on bank performance. The secondary sources of data have been used to investigate the relationship of interest rate and banking performance. The secondary data for bank performance and interest rate have been taken from annual report of the commercial bank for the year2009/10 to 2013/14. Total of 21 sample banks have been taken with 105 observations from the five year period. This study has used descriptive statistics, and correlation analysis, stepwise regressions have been carried out to examine the secondary data.
This result has found that return on assets is positively related to loan rate, bank rate, capital adequacy, and non performing loan while negatively related to deposit rate and the inflation. ROE is positively related with loan rate, capital adequacy and the inflation rate. While negative relation is observed with bank rate, deposit rate and non performing loan.Beta coefficient is positive for loan rate with return on assets (ROA) which indicates that increase in loan rate increases the return on assets.The beta coefficient for capital adequacy is positive with ROA indicating banks with higher capital adequacy can increases its return on assets, but it is not significant at five percent level.
The results also revealed that beta coefficient for deposit rate is negative with return on assets and is significant at five percent. This indicates that increases in deposit rate leads to decrease in return on assets.Beta coefficient is negative for bank rate with return on assets indicating increased bank rate decreases the return on assets of the banks.Result also revealed that beta coefficient is negative for non performing loan with return on assets and is significant at one and five percent level. This result reveals that if bank became able to decreases its volume of nonperforming loan, can increase bank performance as measured by return on assets (ROA).
The study concludes that bank can increase its profitability if bank can manage its interest rates. If bankisable to increase loan rate, bank can improve bank performance in the coming year. This study also concludes that non performing loan is also positively related to interest rate or loan rate in the bank. Nonperforming loan is also positively related to interest rate, higher interest rates may reduce the tendency to repay the loan because of the higher cost of loan, banks can reduce the interest amount from the customer so that they would be willing to repay the loan in time. This study suggests that banks willing to increase bank performance should properly assess the cause of decrease in return on assets, and should have remedies as earlier as possible. |
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