| Title : | Determinants of loan loss provision in Nepalese commercial banks | | Material Type: | printed text | | Authors: | Deepa Bhusal, Author | | Publication Date: | 2018 | | Pagination: | 96p. | | Size: | GRP/Thesis | | Accompanying material: | 11/B | | Languages : | English | | Descriptors: | Bank loans
Loan loss provision
| | Keywords: | loans loan loss banks banking management financial institutions commercial banks' | | Class number: | 332.12 | | Abstract: | In today’s fast-moving business environment, banks are exposed to a large number of risks: credit risk, liquidity risk, market risk, operational risk, interest rate exchange risk, etc. Due to such exposure to various risks, efficient risk management is required. Managing risk is one of the basic tasks to be done, once it has been identified and known. Shafiq& Nasr (2010) argued that managing a risk in advance is far better than waiting for its occurrence. The focus of good risk management is the identification and treatment of risks. Its objective is to add maximum sustainable value to all the activities of the organization.
The loan loss provision increase with the riskiness that bank makes on the loan. A bank making a small number of risky loans will have a low loan loss provision compared to a bank taking higher risks. The high quality loan requires low loan loss provision, whereas bad loan requires high loan loss provision. A loan loss provision is considered as an adjustment of the bank value of a loan which regards future changes in the loan’s value due to default events (Hlawatch&Ostrowski, 2010).
Managerial discretion in the use of loan loss provision (LLP) has attracted considerable attention from both regulators and academics for a long time. Earlier studies focused on the use of LLP for capital management (Ahmed et al., 1999). More recently, the study focuses on the timeliness of LLP over the business cycle and the associated effects on banks' lending behavior and financial stability (Laeven&Majnoni, 2003; Bikker&Metzemakers, 2005 and Beatty & Liao, 2011). If banks account for the fact that the latent credit risk in their loan portfolios rises during upswings when competition between banks increases and monitoring efforts decrease, they should increase their provisioning level during upswings and lower it during downturns as losses occur, thus build and release provisions in a countercyclical fashion.
The major purpose of this study is to analyze the impact of bank specific and macroeconomic factors on loan loss provisions in Nepalese commercial banks. The specific objectives of this study are: a) To analyze the structure and pattern of dependent (LLP1 and LLP2) and independent variables (capital adequacy ratio, loan growth, bank size and non-performing loan), b) To examine the relationship between macroeconomic variable like GDP growth rate, inflation rate and interest rate with loan loss provision, c) To identify the effect of capital adequacy ratio, loan growth and bank size on loan loss provision, d) To examine the relationship between non-performing loan and loan loss provision of the bank.
The study is based on the secondary data which were gathered for a sample of 18 commercial banks of Nepal within the time period from 2008 to 2015, leading to the total of 144 observations. This study employs descriptive and causal comparative research design to deal with bank specific and macroeconomic determinants of loan loss provision of Nepalese commercial banks. More specifically, the study examines the effect of capital adequacy ratio, loan growth, bank size, non-performing loan, GDP growth rate, inflation rate and interest rate on loan loss provision. The main sources of data are various issues of banking and financial statistics, World Bank, bank supervision reports of NRB and various annual reports of selected commercial banks.
The average loan loss provision to total loan is highest for NBB (9.88 percent) and lowest for SCBL (1.34 percent).CZBL has the highest average loan loss provision to non-performing loan of 7.29 times and HBL has lowest of 1.25 times.The average capital adequacy ratio is highest for SCBL (15.18 percent) and lowest for SBL (10.76 percent).The analysis of loan growth indicates that average loan growth is highest for GBIME (38.33 percent) and lowest for SCBL (11.73 percent).The average bank size is highest for NABIL (83695.83 million) and lowest for NCC (22907.86 million).NBB has the highest average non-performing loan of 6.39 percent and EBL has lowest of 0.51 percent.
The descriptive statistics for the variables are used in this study. Clearly, The average loan loss provisions to total loan and loan loss provision to non-performing loan for 18 sample banks is 2.62 percent and 2.85 times respectively. Similarly, average capital adequacy ratio is 12.31 percent; loan growth is 23.71 percent. Similarly, the mean proportion of bank size is 45266.58 million, non-performing loan is 1.73 percent, GDP growth rate is 3.86 percent and inflation rate is 9.53 percent. Furthermore, the average interest rate is of 3.25 percent.
From the analysis, non-performing loan, inflation rate and interest rate are positively correlated with loan loss provision to total loan. This study reveals that capital adequacy ratio, loan growth, bank size and GDP growth rate are negatively correlated with loan loss provision to total loan. It indicates that higher the capital adequacy ratio, loan growth, bank size and GDP growth rate, lower would be loan loss provision to total loan. The result also shows that loan growth, inflation rate and interest rate are positively correlated to loan loss provision to non-performing loan. Also, this study reveals that capital adequacy ratio, non-performing loan, bank size and GDP growth rate are negatively correlated to loan loss provision to non-performing loan.
The regression result found beta coefficient of capital adequacy ratio is negative with loan loss provision to total loan and loan loss provision to non-performing loan which indicates that banks having higher capital adequacy ratio have lower loan loss provision to total loan and loan loss provision to non-performing loan. The beta coefficient is significant at 1 percent level of significance for loan loss provision to total loan and significant at 5 percent level of significance for loan loss provision to non-performing loan. The beta coefficient for loan growth is negative for loan loss provision to total loan and positive for loan loss provision to non-performing loan. The beta coefficient for loan growth is insignificant for both loan loss provision to total loan and loan loss provision to non-performing loan. The result found negative beta coefficient for the bank size with loan loss provision to total loan and loan loss provision to non-performing loan. The coefficient is significant at 5 percent level of significance for bank size with loan loss provision to total loan.
The result shows positive beta coefficient for non-performing loan with loan loss provision to total loan. However, beta coefficient for non-performing loan is negative with loan loss provision to non-performing loan. The beta coefficient for non-performing loan is significant at 1 percent level of significance. The beta coefficient for GDP growth rate is negative and insignificant for all proxy of loan loss provision i.e. loan loss provision to total loan and loan loss provision to non-performing loan which means that with an increase in GDP growth rate leads to decrease in loan loss provision. The positive beta coefficient is observed for inflation rate with loan loss provision to total loan and loan loss provision to non-performing loan which indicates that higher the inflation rate; higher would be loan loss provision to total loan and loan loss provision to non-performing loan. The beta coefficient is insignificant for inflation rate. The result found positive beta coefficient for the interest rate with loan loss provision to total loan and loan loss provision to non-performing loan. The coefficient is significant at 1 percent level of significance for interest rate with loan loss provision to non-performing loan and insignificant for loan loss provision to total loan.
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Determinants of loan loss provision in Nepalese commercial banks [printed text] / Deepa Bhusal, Author . - 2018 . - 96p. ; GRP/Thesis + 11/B. Languages : English | Descriptors: | Bank loans
Loan loss provision
| | Keywords: | loans loan loss banks banking management financial institutions commercial banks' | | Class number: | 332.12 | | Abstract: | In today’s fast-moving business environment, banks are exposed to a large number of risks: credit risk, liquidity risk, market risk, operational risk, interest rate exchange risk, etc. Due to such exposure to various risks, efficient risk management is required. Managing risk is one of the basic tasks to be done, once it has been identified and known. Shafiq& Nasr (2010) argued that managing a risk in advance is far better than waiting for its occurrence. The focus of good risk management is the identification and treatment of risks. Its objective is to add maximum sustainable value to all the activities of the organization.
The loan loss provision increase with the riskiness that bank makes on the loan. A bank making a small number of risky loans will have a low loan loss provision compared to a bank taking higher risks. The high quality loan requires low loan loss provision, whereas bad loan requires high loan loss provision. A loan loss provision is considered as an adjustment of the bank value of a loan which regards future changes in the loan’s value due to default events (Hlawatch&Ostrowski, 2010).
Managerial discretion in the use of loan loss provision (LLP) has attracted considerable attention from both regulators and academics for a long time. Earlier studies focused on the use of LLP for capital management (Ahmed et al., 1999). More recently, the study focuses on the timeliness of LLP over the business cycle and the associated effects on banks' lending behavior and financial stability (Laeven&Majnoni, 2003; Bikker&Metzemakers, 2005 and Beatty & Liao, 2011). If banks account for the fact that the latent credit risk in their loan portfolios rises during upswings when competition between banks increases and monitoring efforts decrease, they should increase their provisioning level during upswings and lower it during downturns as losses occur, thus build and release provisions in a countercyclical fashion.
The major purpose of this study is to analyze the impact of bank specific and macroeconomic factors on loan loss provisions in Nepalese commercial banks. The specific objectives of this study are: a) To analyze the structure and pattern of dependent (LLP1 and LLP2) and independent variables (capital adequacy ratio, loan growth, bank size and non-performing loan), b) To examine the relationship between macroeconomic variable like GDP growth rate, inflation rate and interest rate with loan loss provision, c) To identify the effect of capital adequacy ratio, loan growth and bank size on loan loss provision, d) To examine the relationship between non-performing loan and loan loss provision of the bank.
The study is based on the secondary data which were gathered for a sample of 18 commercial banks of Nepal within the time period from 2008 to 2015, leading to the total of 144 observations. This study employs descriptive and causal comparative research design to deal with bank specific and macroeconomic determinants of loan loss provision of Nepalese commercial banks. More specifically, the study examines the effect of capital adequacy ratio, loan growth, bank size, non-performing loan, GDP growth rate, inflation rate and interest rate on loan loss provision. The main sources of data are various issues of banking and financial statistics, World Bank, bank supervision reports of NRB and various annual reports of selected commercial banks.
The average loan loss provision to total loan is highest for NBB (9.88 percent) and lowest for SCBL (1.34 percent).CZBL has the highest average loan loss provision to non-performing loan of 7.29 times and HBL has lowest of 1.25 times.The average capital adequacy ratio is highest for SCBL (15.18 percent) and lowest for SBL (10.76 percent).The analysis of loan growth indicates that average loan growth is highest for GBIME (38.33 percent) and lowest for SCBL (11.73 percent).The average bank size is highest for NABIL (83695.83 million) and lowest for NCC (22907.86 million).NBB has the highest average non-performing loan of 6.39 percent and EBL has lowest of 0.51 percent.
The descriptive statistics for the variables are used in this study. Clearly, The average loan loss provisions to total loan and loan loss provision to non-performing loan for 18 sample banks is 2.62 percent and 2.85 times respectively. Similarly, average capital adequacy ratio is 12.31 percent; loan growth is 23.71 percent. Similarly, the mean proportion of bank size is 45266.58 million, non-performing loan is 1.73 percent, GDP growth rate is 3.86 percent and inflation rate is 9.53 percent. Furthermore, the average interest rate is of 3.25 percent.
From the analysis, non-performing loan, inflation rate and interest rate are positively correlated with loan loss provision to total loan. This study reveals that capital adequacy ratio, loan growth, bank size and GDP growth rate are negatively correlated with loan loss provision to total loan. It indicates that higher the capital adequacy ratio, loan growth, bank size and GDP growth rate, lower would be loan loss provision to total loan. The result also shows that loan growth, inflation rate and interest rate are positively correlated to loan loss provision to non-performing loan. Also, this study reveals that capital adequacy ratio, non-performing loan, bank size and GDP growth rate are negatively correlated to loan loss provision to non-performing loan.
The regression result found beta coefficient of capital adequacy ratio is negative with loan loss provision to total loan and loan loss provision to non-performing loan which indicates that banks having higher capital adequacy ratio have lower loan loss provision to total loan and loan loss provision to non-performing loan. The beta coefficient is significant at 1 percent level of significance for loan loss provision to total loan and significant at 5 percent level of significance for loan loss provision to non-performing loan. The beta coefficient for loan growth is negative for loan loss provision to total loan and positive for loan loss provision to non-performing loan. The beta coefficient for loan growth is insignificant for both loan loss provision to total loan and loan loss provision to non-performing loan. The result found negative beta coefficient for the bank size with loan loss provision to total loan and loan loss provision to non-performing loan. The coefficient is significant at 5 percent level of significance for bank size with loan loss provision to total loan.
The result shows positive beta coefficient for non-performing loan with loan loss provision to total loan. However, beta coefficient for non-performing loan is negative with loan loss provision to non-performing loan. The beta coefficient for non-performing loan is significant at 1 percent level of significance. The beta coefficient for GDP growth rate is negative and insignificant for all proxy of loan loss provision i.e. loan loss provision to total loan and loan loss provision to non-performing loan which means that with an increase in GDP growth rate leads to decrease in loan loss provision. The positive beta coefficient is observed for inflation rate with loan loss provision to total loan and loan loss provision to non-performing loan which indicates that higher the inflation rate; higher would be loan loss provision to total loan and loan loss provision to non-performing loan. The beta coefficient is insignificant for inflation rate. The result found positive beta coefficient for the interest rate with loan loss provision to total loan and loan loss provision to non-performing loan. The coefficient is significant at 1 percent level of significance for interest rate with loan loss provision to non-performing loan and insignificant for loan loss provision to total loan.
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