| Title : | Risk management practices and financial performance in Nepalese commercial banks | | Material Type: | printed text | | Authors: | Sunil Chaudhary, Author | | Publication Date: | 2016 | | Pagination: | 112p. | | Size: | GRP/Thesis | | Accompanying material: | 9/B | | Languages : | English | | Descriptors: | Risk management
| | Class number: | 332.106 | | Abstract: | Commercial banks play an important role for economic development and foster economic growth by providing number of financial services. 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. Thus, it is constantly facing different types of risk. The risky lending increases the profitability in one hand while on the other hand, it can lead to the bank failure too if cannot be managed properly. In such circumstances, credit character, credit monitoring, repayment capacity of borrower, liquidity, bank size, interest rate spread, non-performing loan ratio, capital adequacy ratio and the concept of prudent lending plays a great role for analyzing the impact of risk management on the financial performance in the context of commercial banks of Nepal. The survival and success of a financial organization depends critically on the efficiency of managing these risks (Khan and Ahmed, 2001).
Kithinji (2010) showed that there is an indirect relationship between non-performing loans, an indicator of credit risk with profitability. Demirguc-Kunt and Huizinga (2001) found a significant negative relationship between liquidity and profitability. Dietrich and Wanzenried (2011) revealed a positive relationship between bank size and bank profitability.Gaur and Gupta (2011) supported the positive relationship arguing that experience through age helps the business to perform better. Khan (2014) found that there is strong and positive correlation between interest rate and commercial banks profitability. Ongore and Kusa (2013) showed that capital adequacy, non-performing loan ratio significantly affect the performance of commercial banks.
The major objective of the study is to assess the relationship between risk management practices and financial performance in Nepalese commercial banks. The study is based on secondary data of 20 commercial banks with 120 observations for the period of 2009/10 to 2014/15. The main source of data include various issues of Banking and Financial Statistics, Quarterly Economic Bulletin, Bank Supervision Report published by Nepal Rastra Bank and Annual Reports of selected commercial banks. The pooled cross sectional data analysis has been undertaken in the study. The research design adopted in this study is descriptive and causal comparative research design as it deals with the relationship between risk management practices and financial performance of Nepalese commercial banks.
The result shows that NBBL has highest average ROA, NABIL has the highest average ROE and ADBL has the highest NIM among the selected commercial banks throughout the study period. Similarly, the average non-performing loan ratio is highest for ADBL (6.41 percent),average liquidity ratio is highest for NSBI (50.64 percent, average size is largest for NABIL (Rs.74998.93 millions), average interest rate spread is highest for ADBL (6.11 percent) , average capital adequacy ratio is highest for JBL (27.99 percent) and average bank age is highest for ADBL (45.50years).The descriptive statistics for the selected commercial banks reveals that the average return on assets, return on equity, net interest margin, non-performing loan ratio, liquidity ratio, bank size, interest rate spread, capital adequacy ratio and bank age is 1.66 percent, 17.00 percent, 3.41 percent, 2.05 percent, 26.48 percent, Rs. 40111.36 millions, 4.21 percent, 13.59 percent and 16.85 years respectively.
The study found that the non-performing loan ratio, liquidity ratio has negative relationship with financial performance of the banks. This indicates that an increase in non-performing loan ratio, liquidity ratio leads to decrease in return on assets, return on equity and net interest margin. Likewise, result shows that capital adequacy ratio has negative relationship with return on equity. However, result shows that capital adequacy ratio has positive relationship with return on assets and net interest margin. Similarly, the study reveals that bank’s size, interest rate spread and bank’s age are positively related to financial performance of Nepalese commercial banks.
The results of the regression analysis show that non-performing loan ratio has negative relationship with return on assets whereas it has negative and significant relationship with return on equity and net interest margin. Likewise, liquidity ratio has negative relationship with return on assets and return on equity whereas it has negative and significant relationship with net interest margin. The result also concludes that capital adequacy ratio has positive relationship with return on assets and net interest margin. However, it has negative and significant relationship with return on equity. Similarly, the study reveals that bank’s size, interest rate spread and bank’s age have positive and significant relationship with return on assets, return on equity and net interest margin. The beta coefficient for non-performing loan ratio with return on equity is significant at 5 percent level of significance. Thus, bank size, interest rate spread and bank ages are the major factors affecting the profitability of Nepalese commercial banks.
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Risk management practices and financial performance in Nepalese commercial banks [printed text] / Sunil Chaudhary, Author . - 2016 . - 112p. ; GRP/Thesis + 9/B. Languages : English | Descriptors: | Risk management
| | Class number: | 332.106 | | Abstract: | Commercial banks play an important role for economic development and foster economic growth by providing number of financial services. 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. Thus, it is constantly facing different types of risk. The risky lending increases the profitability in one hand while on the other hand, it can lead to the bank failure too if cannot be managed properly. In such circumstances, credit character, credit monitoring, repayment capacity of borrower, liquidity, bank size, interest rate spread, non-performing loan ratio, capital adequacy ratio and the concept of prudent lending plays a great role for analyzing the impact of risk management on the financial performance in the context of commercial banks of Nepal. The survival and success of a financial organization depends critically on the efficiency of managing these risks (Khan and Ahmed, 2001).
Kithinji (2010) showed that there is an indirect relationship between non-performing loans, an indicator of credit risk with profitability. Demirguc-Kunt and Huizinga (2001) found a significant negative relationship between liquidity and profitability. Dietrich and Wanzenried (2011) revealed a positive relationship between bank size and bank profitability.Gaur and Gupta (2011) supported the positive relationship arguing that experience through age helps the business to perform better. Khan (2014) found that there is strong and positive correlation between interest rate and commercial banks profitability. Ongore and Kusa (2013) showed that capital adequacy, non-performing loan ratio significantly affect the performance of commercial banks.
The major objective of the study is to assess the relationship between risk management practices and financial performance in Nepalese commercial banks. The study is based on secondary data of 20 commercial banks with 120 observations for the period of 2009/10 to 2014/15. The main source of data include various issues of Banking and Financial Statistics, Quarterly Economic Bulletin, Bank Supervision Report published by Nepal Rastra Bank and Annual Reports of selected commercial banks. The pooled cross sectional data analysis has been undertaken in the study. The research design adopted in this study is descriptive and causal comparative research design as it deals with the relationship between risk management practices and financial performance of Nepalese commercial banks.
The result shows that NBBL has highest average ROA, NABIL has the highest average ROE and ADBL has the highest NIM among the selected commercial banks throughout the study period. Similarly, the average non-performing loan ratio is highest for ADBL (6.41 percent),average liquidity ratio is highest for NSBI (50.64 percent, average size is largest for NABIL (Rs.74998.93 millions), average interest rate spread is highest for ADBL (6.11 percent) , average capital adequacy ratio is highest for JBL (27.99 percent) and average bank age is highest for ADBL (45.50years).The descriptive statistics for the selected commercial banks reveals that the average return on assets, return on equity, net interest margin, non-performing loan ratio, liquidity ratio, bank size, interest rate spread, capital adequacy ratio and bank age is 1.66 percent, 17.00 percent, 3.41 percent, 2.05 percent, 26.48 percent, Rs. 40111.36 millions, 4.21 percent, 13.59 percent and 16.85 years respectively.
The study found that the non-performing loan ratio, liquidity ratio has negative relationship with financial performance of the banks. This indicates that an increase in non-performing loan ratio, liquidity ratio leads to decrease in return on assets, return on equity and net interest margin. Likewise, result shows that capital adequacy ratio has negative relationship with return on equity. However, result shows that capital adequacy ratio has positive relationship with return on assets and net interest margin. Similarly, the study reveals that bank’s size, interest rate spread and bank’s age are positively related to financial performance of Nepalese commercial banks.
The results of the regression analysis show that non-performing loan ratio has negative relationship with return on assets whereas it has negative and significant relationship with return on equity and net interest margin. Likewise, liquidity ratio has negative relationship with return on assets and return on equity whereas it has negative and significant relationship with net interest margin. The result also concludes that capital adequacy ratio has positive relationship with return on assets and net interest margin. However, it has negative and significant relationship with return on equity. Similarly, the study reveals that bank’s size, interest rate spread and bank’s age have positive and significant relationship with return on assets, return on equity and net interest margin. The beta coefficient for non-performing loan ratio with return on equity is significant at 5 percent level of significance. Thus, bank size, interest rate spread and bank ages are the major factors affecting the profitability of Nepalese commercial banks.
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