| Title : | Effect of the capital adequacy requirements on liquidity of Nepalese commercial banks | | Material Type: | printed text | | Authors: | Anjana Kumari Chaudhary, Author | | Publication Date: | 2017 | | Pagination: | 101p. | | Size: | GRP/Thesis | | Accompanying material: | 11/B | | Languages : | English | | Descriptors: | Capital adequacy
| | Keywords: | capital adequacy bank capital financial performance' | | Class number: | 332.120 | | Abstract: | Commercial banking is one of the important factor of Nepalese economy. Commercial banks are the main pillar of the financial system in Nepal. It makes the flow of resources for the rest of the character of the economy. Finance is life blood of the trade, commerce and are the vanes in the circulation of the funds in economy. Growth of any country depends upon the strong banking and financial system. As most of the economic depression are the result of the banking system failure. The importance of the banking sectors is immense in the progress and richness of any state. The economic development and prosperity comes from the well-developed and perfect banking system. Strong banking system plays important role in efficient allocation and utilization of credit. Bank is a backbone of all the industries, because every transaction where money is involved, the bank is the main pillar of funding (Haque& Tariq, 2012).
Capital adequacy ratio is one of the most significant current issues in banking which evaluate the amount of a bank’s efficiency and stability. Capital adequacy generally affects all entities. But as a term, it is most often used in discussing the position of firms in the financial section of the economy, and precisely, whether firms have sufficient capital to cover the risks that they confront (Abba, 2013). Jinghan (2010) asserts that banks need a high degree of liquidity in their assets portfolio. The bank must hold a sufficient large proportion of its assets the form of cash and liquid assets for the purpose enhancing customers’ confidence and corporate performance (profitability). According to Christian et al. (2008), capital adequacy measures provide significant information regarding a firm's returns; while a few of the individual variables representing asset quality and earnings are informative. Size and growth and loan exposure measures do not appear to have any significant explanatory power when examining returns.
Higher capital improves banks’ ability to create liquidity. Liquidity creation exposes banks to risk, the more liquidity is created, the greater are the likelihood and severity of losses associated with having to dispose of illiquid assets to meet the liquidity demands of customers (Diamond and Dybvig 1983). Recent contributions suggest that bank capital may impede this liquidity creation process because bank capital diminishes the financial fragility that facilitates the liquidity creation process (Diamond and Rajan, 2000, 2001). According to the theory of financial intermediation, an important role of banks in the economy is to provide liquidity by funding long-term, illiquid assets with short-term, liquid liabilities. Through this function, banks create liquidity as they hold illiquid assets and provide cash and demand deposits to the rest of the economy.
This study attempts to explore the effect of capital adequacy requirements on liquidity of selected commercial banks in context of Nepal. This study is based on the secondary data for 16 commercial banks with 144 observations for the period of 2007/08 to 2015/16. The data and information are collected from various issues of Banking and Financial Statistics, Bank Supervision Report published by NRB and annual reports of the selected commercial banks. The research design adopted in this study is descriptive and causal comparative research design as this study examines the impact of capital adequacy ratio, leverage ratio, deposits, equity to total assets, bank size and total debt to total assets ratio on liquidity of Nepalese commercial banks.
The result shows that average loan to deposit ratio is highest for CBIL (2.90 percent) and lowest for SUBL (83.80 percent). The average liquid assets to total deposit ratio is highest for NMBBL (78.93 rupees) and lowest for HBL (9.74 rupees). The average capital adequacy ratio is highest for NMBBL (16.86 percent) and lowest for NIBL (10.38 percent). Similarly, leverage ratio is highest for EBL (13.75 percent) and lowest for NBBL (6.82 percent). The average deposits is highest for NABIL (Rs.63.77 billion) and lowest for CBILRs.16.75 billion). Likewise, average equity to total assets ratio is highest for SUBL (11.62 percent) and lowest forEBL (7.93 percent). The average bank size is highest for NIBL (RS.129.78 billion) and lowest for NCCBL (RS.30.23billion) and average total debt to total assets ratio is highest for EBL (92.52 percent) and lowest for NBBL (87.06 percent).
The descriptive statistics for selected commercial bank shows that the average loan to deposit ratio, liquid assets to total deposit ratio, capital adequacy ratio, leverage ratio, deposits, equity to total assets ratio, bank size and total debt to total assets are77.47 percent, 19.08 rupees, 12.10 percent, 10.21 percent, Rs.34.35 billion, 9.20 percent, Rs.39.59 billion and 90.59 percent.
The study shows that the capital adequacy and equity to total assets ratio are positively related to a loan to deposit ratio and liquid assets to total deposits ratio. It indicates that increase in capital adequacy and equity to total assets ratio leads to increase in loan to deposit ratio and liquid assets to total deposits ratio. However, the result shows that leverage, deposits ratio, size and total debt to total assets ratio have a negative relationship with loan to deposit ratio and liquid assets to total deposits ratio. This indicates that increase leverage, deposits ratio, size and total debt to total assets ratio leads to decrease in loan to deposit ratio and liquid assets to total deposits ratio. The regression results also show that beta coefficients are positive for capital adequacy and equity to total assets ratio for loan to deposit ratio and liquid assets to total deposits ratio whereas beta coefficients are negative for leverage, deposits ratio, size and total debt to total assets ratio. However, coefficients are significant only for leverage and deposits ratio at 5 percent level of significance.
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Effect of the capital adequacy requirements on liquidity of Nepalese commercial banks [printed text] / Anjana Kumari Chaudhary, Author . - 2017 . - 101p. ; GRP/Thesis + 11/B. Languages : English | Descriptors: | Capital adequacy
| | Keywords: | capital adequacy bank capital financial performance' | | Class number: | 332.120 | | Abstract: | Commercial banking is one of the important factor of Nepalese economy. Commercial banks are the main pillar of the financial system in Nepal. It makes the flow of resources for the rest of the character of the economy. Finance is life blood of the trade, commerce and are the vanes in the circulation of the funds in economy. Growth of any country depends upon the strong banking and financial system. As most of the economic depression are the result of the banking system failure. The importance of the banking sectors is immense in the progress and richness of any state. The economic development and prosperity comes from the well-developed and perfect banking system. Strong banking system plays important role in efficient allocation and utilization of credit. Bank is a backbone of all the industries, because every transaction where money is involved, the bank is the main pillar of funding (Haque& Tariq, 2012).
Capital adequacy ratio is one of the most significant current issues in banking which evaluate the amount of a bank’s efficiency and stability. Capital adequacy generally affects all entities. But as a term, it is most often used in discussing the position of firms in the financial section of the economy, and precisely, whether firms have sufficient capital to cover the risks that they confront (Abba, 2013). Jinghan (2010) asserts that banks need a high degree of liquidity in their assets portfolio. The bank must hold a sufficient large proportion of its assets the form of cash and liquid assets for the purpose enhancing customers’ confidence and corporate performance (profitability). According to Christian et al. (2008), capital adequacy measures provide significant information regarding a firm's returns; while a few of the individual variables representing asset quality and earnings are informative. Size and growth and loan exposure measures do not appear to have any significant explanatory power when examining returns.
Higher capital improves banks’ ability to create liquidity. Liquidity creation exposes banks to risk, the more liquidity is created, the greater are the likelihood and severity of losses associated with having to dispose of illiquid assets to meet the liquidity demands of customers (Diamond and Dybvig 1983). Recent contributions suggest that bank capital may impede this liquidity creation process because bank capital diminishes the financial fragility that facilitates the liquidity creation process (Diamond and Rajan, 2000, 2001). According to the theory of financial intermediation, an important role of banks in the economy is to provide liquidity by funding long-term, illiquid assets with short-term, liquid liabilities. Through this function, banks create liquidity as they hold illiquid assets and provide cash and demand deposits to the rest of the economy.
This study attempts to explore the effect of capital adequacy requirements on liquidity of selected commercial banks in context of Nepal. This study is based on the secondary data for 16 commercial banks with 144 observations for the period of 2007/08 to 2015/16. The data and information are collected from various issues of Banking and Financial Statistics, Bank Supervision Report published by NRB and annual reports of the selected commercial banks. The research design adopted in this study is descriptive and causal comparative research design as this study examines the impact of capital adequacy ratio, leverage ratio, deposits, equity to total assets, bank size and total debt to total assets ratio on liquidity of Nepalese commercial banks.
The result shows that average loan to deposit ratio is highest for CBIL (2.90 percent) and lowest for SUBL (83.80 percent). The average liquid assets to total deposit ratio is highest for NMBBL (78.93 rupees) and lowest for HBL (9.74 rupees). The average capital adequacy ratio is highest for NMBBL (16.86 percent) and lowest for NIBL (10.38 percent). Similarly, leverage ratio is highest for EBL (13.75 percent) and lowest for NBBL (6.82 percent). The average deposits is highest for NABIL (Rs.63.77 billion) and lowest for CBILRs.16.75 billion). Likewise, average equity to total assets ratio is highest for SUBL (11.62 percent) and lowest forEBL (7.93 percent). The average bank size is highest for NIBL (RS.129.78 billion) and lowest for NCCBL (RS.30.23billion) and average total debt to total assets ratio is highest for EBL (92.52 percent) and lowest for NBBL (87.06 percent).
The descriptive statistics for selected commercial bank shows that the average loan to deposit ratio, liquid assets to total deposit ratio, capital adequacy ratio, leverage ratio, deposits, equity to total assets ratio, bank size and total debt to total assets are77.47 percent, 19.08 rupees, 12.10 percent, 10.21 percent, Rs.34.35 billion, 9.20 percent, Rs.39.59 billion and 90.59 percent.
The study shows that the capital adequacy and equity to total assets ratio are positively related to a loan to deposit ratio and liquid assets to total deposits ratio. It indicates that increase in capital adequacy and equity to total assets ratio leads to increase in loan to deposit ratio and liquid assets to total deposits ratio. However, the result shows that leverage, deposits ratio, size and total debt to total assets ratio have a negative relationship with loan to deposit ratio and liquid assets to total deposits ratio. This indicates that increase leverage, deposits ratio, size and total debt to total assets ratio leads to decrease in loan to deposit ratio and liquid assets to total deposits ratio. The regression results also show that beta coefficients are positive for capital adequacy and equity to total assets ratio for loan to deposit ratio and liquid assets to total deposits ratio whereas beta coefficients are negative for leverage, deposits ratio, size and total debt to total assets ratio. However, coefficients are significant only for leverage and deposits ratio at 5 percent level of significance.
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