| Title : | Loan loss provisioning and relationship banking in Nepalese commercial banks | | Material Type: | printed text | | Authors: | Roshan Sedhain, Author | | Publication Date: | 2016 | | Pagination: | 104p. | | Size: | GRP/Thesis | | Accompanying material: | 8/B | | Languages : | English | | Descriptors: | Bank reserves
Loan loss provision
| | Class number: | 332.1095 | | Abstract: | The banking system is disposed to credit risk accompanying with the problem loans and complications in loan recoveries particularly during monetary and economic volatility. However, the instability of the financial institutions is suppressed by the loan loss provisions and stronger capital adequacy ratio. The loan loss provision is an instrument created in the banking system to evade the financial instability resulted from high non-performing loan ratio. In practice, the level of provisioning had a factually pro-cyclical bias, as it is basically linked to concurrent problem assets, so that provisions mainly rise during a financial depression, when credit risk has already materialized (Borio and Lowe, 2001; Naceur & Kandil, 2013; Bikker and Hu, 2002; Laeven and Majnoni, 2003).
In banking business, loan loss provision has a significant role to protect bank from unprecedented risks and failures. A loan loss provision is a charge to profit and loss statements, and it creates a reserve on the balance sheet. It can be viewed as a cushioning mechanism, which ensures commercial banks to avoid lose from the entire outstanding loan balance. Loan loss provisions are widely used by commercial bank managers when managing risk exposure in their lending activities. Loan loss provisions are expected when anticipated losses occur as a result of lending and financing activities (Anandarajan et al. 2007).
The major objective of this study is to examine the determinants of loan loss provisions of commercial banks in Nepal. The specific objectives are i) to determine the structure and pattern of capital adequacy ratio, non-performing loan, leverage ratio, loan loss provision and credit interest to credit facilities. ii) To find out the relation of capital adequacy ratio, bad loan secured loan and firm size with loan loss provision of Nepalese commercial banks. iii) To investigate the impact of loan to assets, earning before loan loss provision and tax, real GDP growth and inflation to loan loss provision of Nepalese commercial banks. iv) To identify the most important variable affecting loan loss provision of Nepalese commercial banks.
This study is based on descriptive and causal comparative research designs to deal with the various issues raised. The descriptive research design has been adopted for fact-finding and operation searching for adequate information of firm characteristics in Nepalese banks. Beside, an effort has also been made to describe the nature of panel data of the commercials banks by using descriptive statistics with respect to bank specific variables and macro-economic variables such as bad loans, capital adequacy ratios, loan to assets ratio, secured loan, earnings before tax and provision, GDP growth rate and inflation. The study examines the effect of bad loan, secured loan, ratio of loan to assets, capital adequacy ratio, earning before loan loss provision and tax, GDP growth and inflation with loan loss provision and ratio of non-performing loan to total loan.
This study has utilized secondary source of data. The main sources of data include Annual Reports of banks, Banking and Financial Statistics published by Nepal Rastra Bank. In addition to these, Annual Supervision Reports published by NRB have also been used to obtain the information regarding the bad loans, capital adequacy ratios, loan to assets ratio, earnings before tax and provision, secured loan and macro-economic variable like GDP growth rate and inflation.
The average loan loss provision is highest for ADBL and lowest for LBL. The average non-performing loan to total loan is highest for NBB and lowest for EBL. The average bad loan is highest for RBBL and lowest for SCB. The average capital adequacy ratio is highest for NMB and lowest for RBBL. The average secured loan is highest for ADBL and lowest for LBL. The average firm size is highest for RBBL and lowest for LBL. The average earning before tax and provision is highest for SCB and lowest for NBL. The average loan to assets ratio is highest for PBL and lowest for RBBL. The GDP is highest in 2008 whereas, inflation rate is highest in 2009.
The descriptive statistics for the variables used in this study. Clearly, the average loan loss provision loan loss provision of Rs. 786.95 Million. The average non-performing loan to total loans is noticed to be to 2.1 percent. The average bad loan of selected banks during the study period is noticed to be Rs. 728.88. The average capital adequacy ratio of selected banks is 10.63 percent. Firm size has the average of Rs. 42536.73 Million. The average secured loan is observed to be 24670.95.Earnings before tax and has an average of 2.39 percent. Similarly, the average loan to assets ratio of selected banks during the study period is noticed to be 60.88 percent. Likewise, the average inflation rate during the study period is 9.78 percent.
The study observed a positive relation of ratio of total loan to total assets, capital adequacy ratio, earnings before interest tax and LLP, inflation and bad loan with loan loss provision. Whereas, GDP, secured loan and firm size have a negative relationship with loan loss provision. Furthermore, capital adequacy ratio, ratio of total loan to total assets, secured loan firm size and inflation rate are negatively correlated to non-performing loan to total loans.
The regression results found negative and significant relationship between firm size and loan loss provision. On the other hand, the beta coefficient of bad loan, capital adequacy ratio, ratio of loan to assets, inflation and earning before loan loss provision are positive with loan loss provision. Similarly, positive beta coefficients of capital adequacy ratio indicate that higher the capital adequacy ratio, higher would be the loan loss provision. On the other hand, the regression shows that a beta coefficient is positive for bad loan with the ratio of non-performing loan to total loan. Whereas, the beta coefficients of ratio of loan to assets, firm size, and GDP growth are negative with ratio of non-performing loan to total loan. The beta coefficient of firm size is significant at 1 percent level of significant. Therefore, the study concluded that bank specific variables are the major affecting factors on loan loss provision and the ratio of non-performing loan to total loan. Moreover, this study reveals bad loan as the most dominant factors for loan loss provision in Nepalese commercial banks.
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Loan loss provisioning and relationship banking in Nepalese commercial banks [printed text] / Roshan Sedhain, Author . - 2016 . - 104p. ; GRP/Thesis + 8/B. Languages : English | Descriptors: | Bank reserves
Loan loss provision
| | Class number: | 332.1095 | | Abstract: | The banking system is disposed to credit risk accompanying with the problem loans and complications in loan recoveries particularly during monetary and economic volatility. However, the instability of the financial institutions is suppressed by the loan loss provisions and stronger capital adequacy ratio. The loan loss provision is an instrument created in the banking system to evade the financial instability resulted from high non-performing loan ratio. In practice, the level of provisioning had a factually pro-cyclical bias, as it is basically linked to concurrent problem assets, so that provisions mainly rise during a financial depression, when credit risk has already materialized (Borio and Lowe, 2001; Naceur & Kandil, 2013; Bikker and Hu, 2002; Laeven and Majnoni, 2003).
In banking business, loan loss provision has a significant role to protect bank from unprecedented risks and failures. A loan loss provision is a charge to profit and loss statements, and it creates a reserve on the balance sheet. It can be viewed as a cushioning mechanism, which ensures commercial banks to avoid lose from the entire outstanding loan balance. Loan loss provisions are widely used by commercial bank managers when managing risk exposure in their lending activities. Loan loss provisions are expected when anticipated losses occur as a result of lending and financing activities (Anandarajan et al. 2007).
The major objective of this study is to examine the determinants of loan loss provisions of commercial banks in Nepal. The specific objectives are i) to determine the structure and pattern of capital adequacy ratio, non-performing loan, leverage ratio, loan loss provision and credit interest to credit facilities. ii) To find out the relation of capital adequacy ratio, bad loan secured loan and firm size with loan loss provision of Nepalese commercial banks. iii) To investigate the impact of loan to assets, earning before loan loss provision and tax, real GDP growth and inflation to loan loss provision of Nepalese commercial banks. iv) To identify the most important variable affecting loan loss provision of Nepalese commercial banks.
This study is based on descriptive and causal comparative research designs to deal with the various issues raised. The descriptive research design has been adopted for fact-finding and operation searching for adequate information of firm characteristics in Nepalese banks. Beside, an effort has also been made to describe the nature of panel data of the commercials banks by using descriptive statistics with respect to bank specific variables and macro-economic variables such as bad loans, capital adequacy ratios, loan to assets ratio, secured loan, earnings before tax and provision, GDP growth rate and inflation. The study examines the effect of bad loan, secured loan, ratio of loan to assets, capital adequacy ratio, earning before loan loss provision and tax, GDP growth and inflation with loan loss provision and ratio of non-performing loan to total loan.
This study has utilized secondary source of data. The main sources of data include Annual Reports of banks, Banking and Financial Statistics published by Nepal Rastra Bank. In addition to these, Annual Supervision Reports published by NRB have also been used to obtain the information regarding the bad loans, capital adequacy ratios, loan to assets ratio, earnings before tax and provision, secured loan and macro-economic variable like GDP growth rate and inflation.
The average loan loss provision is highest for ADBL and lowest for LBL. The average non-performing loan to total loan is highest for NBB and lowest for EBL. The average bad loan is highest for RBBL and lowest for SCB. The average capital adequacy ratio is highest for NMB and lowest for RBBL. The average secured loan is highest for ADBL and lowest for LBL. The average firm size is highest for RBBL and lowest for LBL. The average earning before tax and provision is highest for SCB and lowest for NBL. The average loan to assets ratio is highest for PBL and lowest for RBBL. The GDP is highest in 2008 whereas, inflation rate is highest in 2009.
The descriptive statistics for the variables used in this study. Clearly, the average loan loss provision loan loss provision of Rs. 786.95 Million. The average non-performing loan to total loans is noticed to be to 2.1 percent. The average bad loan of selected banks during the study period is noticed to be Rs. 728.88. The average capital adequacy ratio of selected banks is 10.63 percent. Firm size has the average of Rs. 42536.73 Million. The average secured loan is observed to be 24670.95.Earnings before tax and has an average of 2.39 percent. Similarly, the average loan to assets ratio of selected banks during the study period is noticed to be 60.88 percent. Likewise, the average inflation rate during the study period is 9.78 percent.
The study observed a positive relation of ratio of total loan to total assets, capital adequacy ratio, earnings before interest tax and LLP, inflation and bad loan with loan loss provision. Whereas, GDP, secured loan and firm size have a negative relationship with loan loss provision. Furthermore, capital adequacy ratio, ratio of total loan to total assets, secured loan firm size and inflation rate are negatively correlated to non-performing loan to total loans.
The regression results found negative and significant relationship between firm size and loan loss provision. On the other hand, the beta coefficient of bad loan, capital adequacy ratio, ratio of loan to assets, inflation and earning before loan loss provision are positive with loan loss provision. Similarly, positive beta coefficients of capital adequacy ratio indicate that higher the capital adequacy ratio, higher would be the loan loss provision. On the other hand, the regression shows that a beta coefficient is positive for bad loan with the ratio of non-performing loan to total loan. Whereas, the beta coefficients of ratio of loan to assets, firm size, and GDP growth are negative with ratio of non-performing loan to total loan. The beta coefficient of firm size is significant at 1 percent level of significant. Therefore, the study concluded that bank specific variables are the major affecting factors on loan loss provision and the ratio of non-performing loan to total loan. Moreover, this study reveals bad loan as the most dominant factors for loan loss provision in Nepalese commercial banks.
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