| Title : | Relationship between capital, liquidity and risk in commercial banks of Nepal | | Material Type: | printed text | | Authors: | Pranita Rai, Author | | Publication Date: | 2018 | | Pagination: | 87p. | | Size: | GRP/Thesis | | Accompanying material: | 11/B | | Languages : | English | | Descriptors: | Liquidity (Economics)
| | Class number: | 339.53 | | Abstract: | Finance is the life blood of trade, commerce and industry. Nowadays, banking sector plays as a backbone of modern business. Development of the country may also depend upon the banking system. Commercial banks play an important role for economic development and foster economic growth by providing number of financial services. One of the important functions of the commercial banks is the financial intermediation functions and thus it transfers the fund from surplus units to the deficit units. It accepts deposits and provides loan and advances to the needed people, institutions and investors. It also invests in several short term and long-term projects. So, the liquidity of banks must be optimally maintained. Liquidity means a business ability to meet its payment obligations, in terms of possessing sufficient liquid assets. An act of exchange of a less liquid asset with a more liquid asset is called liquidation. In banking, liquidity is the ability to meet obligations when they come due without incurring unacceptable losses.
Moleyneux and Thornton (1992) explained that a liquid bank is one that stores adequate liquid assets and cash together with the ability to raise funds quickly from other source in order to meet its payment obligation and financial commitment in a timely manner. Adequate capital in banking is a confidence booster. It provides the customer, public and the regulatory authority with confidence on the continued financial viability of the bank. Minimum capital requirements are one of the three pillars of macro prudential regulation. As a result of the financial crisis of 2008-2009, there have been proposals to increase the amount of capitals banks are required to hold. A capital structure that contains a substantial number of equity has a number of advantages. It reduces the banks vulnerability to market freezes; it reduces the risk of contagion to other financial institutions; it reduces the subsidy provided by deposit insurance; and, as we have recently seen, shareholders are less likely to be bailed out by government than debt holders.
Risk means the possibility of losing the original investment and amount of interest accrued on it. Risk are of two types: risk that must be controlled and risk that must be minimized. The types of risk that must be controlled are credit risk, market risk and liquidity risk. Operational risk is the risk that needs to be minimized.
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The study examines the relationship between capital, liquidity and risk of Nepalese commercial banks. The capital, liquidity and risk are the dependent variables. Credit to deposit ratio, size, return on equity and non-performing loan are taken as the independent variables. This study is based on the secondary data of 14 commercial banks for the period of 2008/09 to 2015/16, leading to a total of 112 observations. The data are collected from the Banking and Financial Statistics, Bank Supervision Report, and Quarterly Economic Bulletin published by Nepal Rastra Bank and annual reports of the selected Nepalese commercial banks. The regression models are estimated to test the significance and importance of relationship between capital, liquidity and risk of the Nepalese commercial banks.
The result shows that there is a positive relationship of credit to deposit ratio, size, non-performing loan and liquidity with capital. It indicates that an increase in credit to deposit ratio, size, return on equity, non-performing loan and liquidity leads to increase in the capital. Similarly, the study also reveals that size, return on equity and capital are positively related to liquidity. It indicates that an increase in size, return on equity and capital leads to increase in liquidity. Likewise, the result shows that size, return on equity and non-performing loan are positively related to risk. It indicates that increase in size, return on equity and non-performing loan leads to increase in risk of the Nepalese commercial banks. However, the study shows the negative relationship of risk with capital. It indicates that higher the capital, lower would be the risk. The regression results also show that beta coefficients are negative for credit to deposit ratio, non-performing loan and risk with liquidity. However, the results show that beta coefficients are negative for credit to deposit ratio, capital and liquidity with risk of Nepalese commercial banks. Yet, the beta coefficients are significant only for return on equity at 5 percent level. |
Relationship between capital, liquidity and risk in commercial banks of Nepal [printed text] / Pranita Rai, Author . - 2018 . - 87p. ; GRP/Thesis + 11/B. Languages : English | Descriptors: | Liquidity (Economics)
| | Class number: | 339.53 | | Abstract: | Finance is the life blood of trade, commerce and industry. Nowadays, banking sector plays as a backbone of modern business. Development of the country may also depend upon the banking system. Commercial banks play an important role for economic development and foster economic growth by providing number of financial services. One of the important functions of the commercial banks is the financial intermediation functions and thus it transfers the fund from surplus units to the deficit units. It accepts deposits and provides loan and advances to the needed people, institutions and investors. It also invests in several short term and long-term projects. So, the liquidity of banks must be optimally maintained. Liquidity means a business ability to meet its payment obligations, in terms of possessing sufficient liquid assets. An act of exchange of a less liquid asset with a more liquid asset is called liquidation. In banking, liquidity is the ability to meet obligations when they come due without incurring unacceptable losses.
Moleyneux and Thornton (1992) explained that a liquid bank is one that stores adequate liquid assets and cash together with the ability to raise funds quickly from other source in order to meet its payment obligation and financial commitment in a timely manner. Adequate capital in banking is a confidence booster. It provides the customer, public and the regulatory authority with confidence on the continued financial viability of the bank. Minimum capital requirements are one of the three pillars of macro prudential regulation. As a result of the financial crisis of 2008-2009, there have been proposals to increase the amount of capitals banks are required to hold. A capital structure that contains a substantial number of equity has a number of advantages. It reduces the banks vulnerability to market freezes; it reduces the risk of contagion to other financial institutions; it reduces the subsidy provided by deposit insurance; and, as we have recently seen, shareholders are less likely to be bailed out by government than debt holders.
Risk means the possibility of losing the original investment and amount of interest accrued on it. Risk are of two types: risk that must be controlled and risk that must be minimized. The types of risk that must be controlled are credit risk, market risk and liquidity risk. Operational risk is the risk that needs to be minimized.
viii
The study examines the relationship between capital, liquidity and risk of Nepalese commercial banks. The capital, liquidity and risk are the dependent variables. Credit to deposit ratio, size, return on equity and non-performing loan are taken as the independent variables. This study is based on the secondary data of 14 commercial banks for the period of 2008/09 to 2015/16, leading to a total of 112 observations. The data are collected from the Banking and Financial Statistics, Bank Supervision Report, and Quarterly Economic Bulletin published by Nepal Rastra Bank and annual reports of the selected Nepalese commercial banks. The regression models are estimated to test the significance and importance of relationship between capital, liquidity and risk of the Nepalese commercial banks.
The result shows that there is a positive relationship of credit to deposit ratio, size, non-performing loan and liquidity with capital. It indicates that an increase in credit to deposit ratio, size, return on equity, non-performing loan and liquidity leads to increase in the capital. Similarly, the study also reveals that size, return on equity and capital are positively related to liquidity. It indicates that an increase in size, return on equity and capital leads to increase in liquidity. Likewise, the result shows that size, return on equity and non-performing loan are positively related to risk. It indicates that increase in size, return on equity and non-performing loan leads to increase in risk of the Nepalese commercial banks. However, the study shows the negative relationship of risk with capital. It indicates that higher the capital, lower would be the risk. The regression results also show that beta coefficients are negative for credit to deposit ratio, non-performing loan and risk with liquidity. However, the results show that beta coefficients are negative for credit to deposit ratio, capital and liquidity with risk of Nepalese commercial banks. Yet, the beta coefficients are significant only for return on equity at 5 percent level. |
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