| Title : | Liquidity risk, regulation and bank performance: a case of Nepalese commercial bank | | Material Type: | printed text | | Authors: | Anita Bhandari, Author | | Publication Date: | 2017 | | Pagination: | 119p. | | Size: | GRP/Thesis | | Accompanying material: | 11/B | | Languages : | English | | Descriptors: | Liquidity (Economics)
| | Class number: | 658.152 | | Abstract: | Banks are financial institutions that play intermediary function in the economy through channeling financial resources from surplus units to deficit unit. Commercial banks are the most dominant financial institutions in Nepal. The main function of commercial banks is the availing of funds (monetary) to its customers. Thus, for a bank to be in a position to do so, it must be in a healthy liquidity position. Liquidity management means ensuring that the bank possesses sufficient cash to satisfy unexpected cash outlets. If the bank is unable to do this it is known as the liquidity risk. As this risk increases, the bank is considered unable to meet its obligations (such as deposits withdrawal, debt maturity and funds for loan portfolio and investment). A bank should acquire proper liquidities when needed immediately at a sensible cost. Though sustaining the optimal level of liquidity is a real art of bank’s management. The whole banking system is particularly reliant on the satisfactory degree of liquidity of a single bank because if single banks suffer the risk, other bank will have the contagion effect and may ultimately raise the level of systematic risk. With higher liquidity; banks will have remarkable performance encouraging public confidence and soundness among banks.
Stable banking systems are an important component of well-functioning financial systems. When banking system break down even temporarily or operate ineffectively, the ability of the firms to obtain funds necessary for continuing existing projects and establishing new is hindered. Thus, any disruption in the intermediation process can lead to financial crises and, in some cases, undo years of economic and social progress. In the context of Nepal, the shift of the commercial bank from the traditional activities to the non traditional activities is due to the regulated market and tighter restriction on financial institutions by the Nepal Rastra Bank. Commercial banking in virtually all countries has been subject to a great deal of regulations. In recent years, the importance of regulating policies has been realized for the sustainable economic growth in Nepal. Thus, central bank formulates various regulating policies every year to regulate the overall economy. In doing so it uses different instruments such as open market operation, cash reserve ratio, statutory liquidity ratio etc.
This study attempts to explore the effect of liquidity risk and regulation on performance 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 liquidity ratio, capital adequacy ratio, leverage, non-performing loan ratio, credit to deposit ratio, cash reserve ratio, bank size and inflation on performance of Nepalese commercial banks.
The result shows that average return on assets is highest for NBBL (5.62 percent) and lowest for SUNBL (0.88percent). The average earning per share is highest for NABIL (Rs. 83.21per share) and lowest for SUNBL (Rs. 10.73per share). The average liquidity ratio is highest for SCB (32.27 percent) and lowest for ADBL (8.21 percent).The average capital adequacy ratio is highest for ADBL (16.85percent) and lowest for NIBL (10.38percent). Similarly, average cash reserve ratio is highest for SUNBL (27.77 percent) and lowest for HBL (7.08percent). The average credit to deposit ratio is highest for ADBL (105.51 percent)and lowest for SCBL (50.86percent). The average non-performing loan ratio is highest for NBBL (9.47percent) and lowest for EBL (0.57percent) and average bank size is highest for NABIL (Rs. 86.22 billion) and lowest for NCC (Rs. 19.18 billion). The average leverage is highest for SBI (13.58 times) and lowest for ADBL (6.28 times).The averageinflation rateishighestin year 2008/09(12.60percent)and lowest inyear2007/08(6.70percentage).
The descriptive statistics for selected commercial bank shows that the average return on assets, earnings per share, liquidity ratio, capital adequacy ratio, leverage, non-performing loan ratio, credit to deposit ratio,cash reserve ratio, bank sizeandinflation are 1.89percent, Rs. 38.16 per share, 14.93percent, 12.21percent, 9.88times, 2.41percent, 78.58percent, 13.26percent,Rs. 43.79billionand9.18percent.
The correlation matrix of selected commercial banks shows that capital adequacy ratio is positively correlated with return on assets. Similarly, cash reserve ratio has positive relationship with return on assets. There is positive relationship of bank size with return on assets. Likewise, Inflation has positive relationship with return on assets. However, there is negative relationship of leverage ratio, credit to deposit ratio, liquidity ratio and non-performing loan ratio with return on assets. The result also shows that there is positive relationship of capital adequacy ratio;cash reserve ratio, bank size and inflation with earnings per share.Likewise,there is negative relationship of leverage, non-performing loan ratio, liquidity ratio and credit to deposit ratio with earnings per share.
The regression results indicate that capital adequacy ratio and bank size has positive impact on return on assets. Similarly, inflation has positive impact on return on assets. This study also reveals that liquidity ratio, leverage, non-performing loan ratio and credit to deposit ratio has negative impact on the return on assets. Likewise, results shows that the capital adequacy ratio and liquidity ratio has positive impact on earnings per share. Similarly, cash reserve ratio and bank size has positive impact on earnings per share. Inflation has positive impact on earnings per share. However, results shows that the leverage ratio, credit to deposit ratio and non-performing loan ratio has negative impact on earnings per share.
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Liquidity risk, regulation and bank performance: a case of Nepalese commercial bank [printed text] / Anita Bhandari, Author . - 2017 . - 119p. ; GRP/Thesis + 11/B. Languages : English | Descriptors: | Liquidity (Economics)
| | Class number: | 658.152 | | Abstract: | Banks are financial institutions that play intermediary function in the economy through channeling financial resources from surplus units to deficit unit. Commercial banks are the most dominant financial institutions in Nepal. The main function of commercial banks is the availing of funds (monetary) to its customers. Thus, for a bank to be in a position to do so, it must be in a healthy liquidity position. Liquidity management means ensuring that the bank possesses sufficient cash to satisfy unexpected cash outlets. If the bank is unable to do this it is known as the liquidity risk. As this risk increases, the bank is considered unable to meet its obligations (such as deposits withdrawal, debt maturity and funds for loan portfolio and investment). A bank should acquire proper liquidities when needed immediately at a sensible cost. Though sustaining the optimal level of liquidity is a real art of bank’s management. The whole banking system is particularly reliant on the satisfactory degree of liquidity of a single bank because if single banks suffer the risk, other bank will have the contagion effect and may ultimately raise the level of systematic risk. With higher liquidity; banks will have remarkable performance encouraging public confidence and soundness among banks.
Stable banking systems are an important component of well-functioning financial systems. When banking system break down even temporarily or operate ineffectively, the ability of the firms to obtain funds necessary for continuing existing projects and establishing new is hindered. Thus, any disruption in the intermediation process can lead to financial crises and, in some cases, undo years of economic and social progress. In the context of Nepal, the shift of the commercial bank from the traditional activities to the non traditional activities is due to the regulated market and tighter restriction on financial institutions by the Nepal Rastra Bank. Commercial banking in virtually all countries has been subject to a great deal of regulations. In recent years, the importance of regulating policies has been realized for the sustainable economic growth in Nepal. Thus, central bank formulates various regulating policies every year to regulate the overall economy. In doing so it uses different instruments such as open market operation, cash reserve ratio, statutory liquidity ratio etc.
This study attempts to explore the effect of liquidity risk and regulation on performance 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 liquidity ratio, capital adequacy ratio, leverage, non-performing loan ratio, credit to deposit ratio, cash reserve ratio, bank size and inflation on performance of Nepalese commercial banks.
The result shows that average return on assets is highest for NBBL (5.62 percent) and lowest for SUNBL (0.88percent). The average earning per share is highest for NABIL (Rs. 83.21per share) and lowest for SUNBL (Rs. 10.73per share). The average liquidity ratio is highest for SCB (32.27 percent) and lowest for ADBL (8.21 percent).The average capital adequacy ratio is highest for ADBL (16.85percent) and lowest for NIBL (10.38percent). Similarly, average cash reserve ratio is highest for SUNBL (27.77 percent) and lowest for HBL (7.08percent). The average credit to deposit ratio is highest for ADBL (105.51 percent)and lowest for SCBL (50.86percent). The average non-performing loan ratio is highest for NBBL (9.47percent) and lowest for EBL (0.57percent) and average bank size is highest for NABIL (Rs. 86.22 billion) and lowest for NCC (Rs. 19.18 billion). The average leverage is highest for SBI (13.58 times) and lowest for ADBL (6.28 times).The averageinflation rateishighestin year 2008/09(12.60percent)and lowest inyear2007/08(6.70percentage).
The descriptive statistics for selected commercial bank shows that the average return on assets, earnings per share, liquidity ratio, capital adequacy ratio, leverage, non-performing loan ratio, credit to deposit ratio,cash reserve ratio, bank sizeandinflation are 1.89percent, Rs. 38.16 per share, 14.93percent, 12.21percent, 9.88times, 2.41percent, 78.58percent, 13.26percent,Rs. 43.79billionand9.18percent.
The correlation matrix of selected commercial banks shows that capital adequacy ratio is positively correlated with return on assets. Similarly, cash reserve ratio has positive relationship with return on assets. There is positive relationship of bank size with return on assets. Likewise, Inflation has positive relationship with return on assets. However, there is negative relationship of leverage ratio, credit to deposit ratio, liquidity ratio and non-performing loan ratio with return on assets. The result also shows that there is positive relationship of capital adequacy ratio;cash reserve ratio, bank size and inflation with earnings per share.Likewise,there is negative relationship of leverage, non-performing loan ratio, liquidity ratio and credit to deposit ratio with earnings per share.
The regression results indicate that capital adequacy ratio and bank size has positive impact on return on assets. Similarly, inflation has positive impact on return on assets. This study also reveals that liquidity ratio, leverage, non-performing loan ratio and credit to deposit ratio has negative impact on the return on assets. Likewise, results shows that the capital adequacy ratio and liquidity ratio has positive impact on earnings per share. Similarly, cash reserve ratio and bank size has positive impact on earnings per share. Inflation has positive impact on earnings per share. However, results shows that the leverage ratio, credit to deposit ratio and non-performing loan ratio has negative impact on earnings per share.
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