| Title : | Relationship of liquidity risk and credit risk with profitability: a case of Nepalese commercial banks | | Material Type: | printed text | | Authors: | Kusum Kumari Sah, Author | | Publication Date: | 2016 | | Pagination: | 86P. | | Size: | GRP/Thesis | | Accompanying material: | 7/B | | Languages : | English | | Descriptors: | Bank liquidity
| | Class number: | 339.53 | | Abstract: | In today’s context of globalization, the strength of banking system becomes vital for ensuring favorable economic stability and growth. Banks are the main part of financial sector in each economy by enhancing flow of funds and providing liquidity (Diamond &Rajan, 2001). Moreover, banks stimulate the smoothness in goods and services markets and increase possibility to make productive investments. In this manner banks stimulate innovation and help to develop new industries that lead to improved employment rate and overall stability of the economy (Arif&Nauman, 2012).
Credit risk measures the likelihood of a loss arising from the default of another organization or a failure to pay. It represents the interrelationship of several related types of risk that arise from an organization’s dealings with other organizations. Through effective management of credit risk exposure, banks not only support the viability and profitability of their own business but also contribute to systemic stability and an efficient allocation of capital in the economy (Psillaki, Tsolas and Margaritis, 2010). Muninarayanappa&Nirmala (2004) outlined the concept of credit risk management in banks. They highlighted the objectives and factors that determine the direction of bank’s policies on credit risk management. They concluded that success of credit risk management require maintenance of proper credit risk environment, credit strategy and policies. Thus the ultimate aim should be to protect and improve the loan quality.
The major purpose of this study is to assess the relationship of bank credit risk and liquidity with profitability in Nepalese commercial banks. The specific objectives of the study are: (i) to determine the structure and pattern of dependent (ROA, ROE and NIM) and independent variables (loan to deposit, total debt to equity, provision for loan losses, nonperforming loan to gross loans, inflation and GDP). (ii) to analyze the relationship of loan loss provision, liquidity, nonperforming loan and total debt to equity with firm performance (ROA, ROE and NIM). (iii) to examine the effect of inflation, GDP, total loan to debt and total debt to equity on bank’s profitability. (iv) to identify the major factors affecting financial performance of Nepalese commercial banks.
The study is based on secondary data which were collected for 16 commercial banks from 2008/09 to year 2013/14. The data for return on equity return on assets, net interest margin, and loan to deposit, total debt to equity, nonperforming loan to total loan, provision for loan losses and inflation are collected from the Bank Supervision Report published by NRB and annual reports of the sampled commercial banks. The data for annual real GDP growth rate has been retrieved from the “World Bank Indicators” available on the World Bank website.
The result shows that loan to deposit and loan loss provision are negatively related to bank performance (ROA, ROE and NIM) indicating that higher the loan to deposit and loan loss provision, lower would be bank performance. Debt to equity, GDP and inflation are positively related to bank performance. It indicates that higher the debt to equity, GDP and inflation, higher would be bank performance. Nonperforming loan is negatively related to ROE indicating that higher the NPL, lower would be return on equity. The results for return on equity indicate that coefficients for loan to deposit, nonperforming loan to total loan and provision for loan losses are negative. The results for return on assets indicate that coefficients for loan to deposit, total debt to equity, provision for loan losses and gross domestic product are negative. However, the total debt to equity, NPL and inflation has positive impact on ROA. The beta coefficient for NPL is significant at 5 percent level of significance. The results for net interest margin indicate that coefficients for gross domestic product and inflation are negative. However, loan to deposit and total debt to equity ratio have positive impact on NIM. The beta coefficients for loan to deposit and loan loss provision are significant at 5 percent level of significance.
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Relationship of liquidity risk and credit risk with profitability: a case of Nepalese commercial banks [printed text] / Kusum Kumari Sah, Author . - 2016 . - 86P. ; GRP/Thesis + 7/B. Languages : English | Descriptors: | Bank liquidity
| | Class number: | 339.53 | | Abstract: | In today’s context of globalization, the strength of banking system becomes vital for ensuring favorable economic stability and growth. Banks are the main part of financial sector in each economy by enhancing flow of funds and providing liquidity (Diamond &Rajan, 2001). Moreover, banks stimulate the smoothness in goods and services markets and increase possibility to make productive investments. In this manner banks stimulate innovation and help to develop new industries that lead to improved employment rate and overall stability of the economy (Arif&Nauman, 2012).
Credit risk measures the likelihood of a loss arising from the default of another organization or a failure to pay. It represents the interrelationship of several related types of risk that arise from an organization’s dealings with other organizations. Through effective management of credit risk exposure, banks not only support the viability and profitability of their own business but also contribute to systemic stability and an efficient allocation of capital in the economy (Psillaki, Tsolas and Margaritis, 2010). Muninarayanappa&Nirmala (2004) outlined the concept of credit risk management in banks. They highlighted the objectives and factors that determine the direction of bank’s policies on credit risk management. They concluded that success of credit risk management require maintenance of proper credit risk environment, credit strategy and policies. Thus the ultimate aim should be to protect and improve the loan quality.
The major purpose of this study is to assess the relationship of bank credit risk and liquidity with profitability in Nepalese commercial banks. The specific objectives of the study are: (i) to determine the structure and pattern of dependent (ROA, ROE and NIM) and independent variables (loan to deposit, total debt to equity, provision for loan losses, nonperforming loan to gross loans, inflation and GDP). (ii) to analyze the relationship of loan loss provision, liquidity, nonperforming loan and total debt to equity with firm performance (ROA, ROE and NIM). (iii) to examine the effect of inflation, GDP, total loan to debt and total debt to equity on bank’s profitability. (iv) to identify the major factors affecting financial performance of Nepalese commercial banks.
The study is based on secondary data which were collected for 16 commercial banks from 2008/09 to year 2013/14. The data for return on equity return on assets, net interest margin, and loan to deposit, total debt to equity, nonperforming loan to total loan, provision for loan losses and inflation are collected from the Bank Supervision Report published by NRB and annual reports of the sampled commercial banks. The data for annual real GDP growth rate has been retrieved from the “World Bank Indicators” available on the World Bank website.
The result shows that loan to deposit and loan loss provision are negatively related to bank performance (ROA, ROE and NIM) indicating that higher the loan to deposit and loan loss provision, lower would be bank performance. Debt to equity, GDP and inflation are positively related to bank performance. It indicates that higher the debt to equity, GDP and inflation, higher would be bank performance. Nonperforming loan is negatively related to ROE indicating that higher the NPL, lower would be return on equity. The results for return on equity indicate that coefficients for loan to deposit, nonperforming loan to total loan and provision for loan losses are negative. The results for return on assets indicate that coefficients for loan to deposit, total debt to equity, provision for loan losses and gross domestic product are negative. However, the total debt to equity, NPL and inflation has positive impact on ROA. The beta coefficient for NPL is significant at 5 percent level of significance. The results for net interest margin indicate that coefficients for gross domestic product and inflation are negative. However, loan to deposit and total debt to equity ratio have positive impact on NIM. The beta coefficients for loan to deposit and loan loss provision are significant at 5 percent level of significance.
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