Title :	Relationship between bank credit risk, profitability and liquidity: a comparative study of public banks, joint venture banks and private banks
Material Type:	printed text
Authors:	Madan Dhungana, Author
Publication Date:	2017
Pagination:	117p.
Size:	GRP/Thesis
Accompanying material:	8/B
Languages :	English
Descriptors:	Liquidity (Economics)
Class number:	339.53
Abstract:	Financial institutions are very important in the economic growth of the economy as they help to make easy credit flow and enhance economic activity with increasing investment in productive sectors of the economy. The health of the financial system has important role in the country as its failure can disrupt economic development of the country(Das & Ghosh, 2007). Banks are exposed to different types of risks, which affect the performance and activity of these banks, since the primary goal of the banking management is to maximize the shareholders’ wealth, so in achieving this goal bank managers should assess the cash flows and the assumed risks as a result of directing its financial resources in different areas of utilization. Bank plays a vital role in the emerging economies where most borrowers have no access to capital markets. Thus bank is considered as an intermediary between the depositors and borrowers. It is evident that the efficient and effective performance of banking industry over time guarantees financial stability of any nation (Oke et al. 2012). One of the core business activities of bank is to provide loans. Inevitably, bank will be imposed to the uncertainty of loan borrowers’ ability to repay the loan or otherwise called credit risk. According to Basel Committee on Banking Supervision, credit risk is most simply defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms. Credit risk is the major risk that banks are exposed to during the normal course of lending and credit underwriting (Ahmad & Ahmad, 2004). Credit risk is a risk where the borrower may not be able or willing to repay the debt owed to the bank, or to honor other contractual commitments. The higher is the accumulation of unpaid loans implying that these loan losses have produced lower returns to many commercial banks. Coyle (2000) defined credit risk as losses from the refusal or inability of credit customers to pay what is owed in full and on time.The credit function of banks enhances the ability of investors to exploit desired profitable ventures. Credit creation is the main income generating activity of banks (Kolapo et al., 2012). However, it exposes the banks to credit risk. Credit risk is an internal determinant of bank performance. Higher the exposure of a bank to credit risk, higher the tendency of the banks to experience financial crisis and vice-versa. Among other risks faced by banks, credit risk plays an important role on banks’ profitability since a large chunk of banks’ revenue accrues from loans from which interest is derived. Miller & Noulas (1997)found a negative relationship between credit risk and profitability. Profitability is an indicator of the bank’s competitive position in the banking industry and of the quality of its management, ensuring the health of the banking system. Profitability is defined as a proxy of financial performance which is one of the major objectives of banking institutions (Burca and Batrinca, 2014). Aruwa & Musa (2012) revealed a strong relationship between risk components and the bank's financial performance. Boahene et al. (2012) examined the relationship between credit risk and banks profitability and found a positive relationship between credit risk and bank profitability. Kolapo et al. (2012) found that the effect of credit risk on bank performance measured by ROA was cross-sectional invariant, though the degree to which individual banks were affected was not captured by the method of analysis employed in the study. Aduda & Gitonga (2011) found that the credit risk affected the profitability at a reasonable level. This study aims at examining the relationship between bank credit risk, profitability and liquidity of the Nepalese commercial banks. The specific objectives of this study are To determine the structure and pattern of lesser prudence ratio, non performing loan ratio, capital adequacy ratio, net loans and leases to total deposits ratio, total debt to total equity ratio and gross domestic product in Nepalese public banks, joint venture banks and private banks, find out the relationship of allowance for loan loss to net loans ratio, non performing loan ratio, capital adequacy ratio, net loans and leases to total deposits ratio, total debt to total equity ratio and gross domestic product with the profitability and liquidity in Nepalese public banks, joint venture banks and private banks, investigate the impact of allowance for loan loss to net loans ratio, non performing loan ratio, capital adequacy ratio, net loans and leases to total deposits ratio, total debt to total equity ratio and gross domestic product with the profitability and liquidity in Nepalese public banks, joint venture banks and private banks and identify the most important credit risk variable affecting the financial performance and liquidity in Nepalese public banks, joint venture banks and private banks. This study has used the secondary data of 23 commercial banks of Nepal for the period of 2009/10 to 2014/15 which has been collected from the annual reports of selected Nepalese commercial banks for study purpose, banking and financial statistics published by NRB, NRB bank supervision report and Central Bureau of Statistics. This study has used three proxies for profitability measures namely return on assets (ROA), return on equity (ROE) and net interest margin (NIM). And one for liquidity measure namely cash flow to total assets ratio. Similarly, the bank specific variables used in this study are lesser prudence ratio, nonperforming loan ratio, capital adequacy ratio, loan to deposit ratio, debt to equity ratio and gross domestic product growth rate. The pooled cross sectional data analysis has been employed in the study. The research design adopted in this study is descriptive and causal comparative research design as it deals with differences and determinants of profitability in context of public, private and joint venture banks of Nepal.The relationship between dependent and independent variables are analyzed using simple and multiple regression analysis. The study shows that lesser prudence ratio, capital adequacy ratio, loan to deposit ratio and debt to equity ratio has positive impact on the profitability measures (return on assets, return on equity and net interest margin) of public banks. Similarly, lesser prudence ratio, nonperforming loan ratio, loan to deposit ratio, debt to equity ratio and gross domestic product growth rate has negative impact on the liquidity of public banks. Likewise, the result shows that capital adequacy ratio, loan to deposit ratio and gross domestic product growth rate has positive impact on the profitability measures (return on assets, return on equity and net interest margin) of joint venture banks. The study also shows that debt to equity ratio has negative impact on the profitability variables. However lesser prudence ratio, capital adequacy ratio, loan to deposit ratio and debt to equity ratio has negative impact on the liquidity of joint venture banks. Similarly, the study shows that lesser prudence ratio has positive impact on the return on assets of private banks. The result shows that nonperforming loan ratio and capital adequacy ratio has negative impact on return on assets and return on equity of private banks. However, they have positive impact on net interest margin of private banks. Likewise, nonperforming loan ratio, loan to deposit ratio and debt to equity ratio has negative impact on liquidity of private banks.

Relationship between bank credit risk, profitability and liquidity: a comparative study of public banks, joint venture banks and private banks [printed text] / Madan Dhungana, Author . - 2017 . - 117p. ; GRP/Thesis + 8/B.
Languages : English

Descriptors:	Liquidity (Economics)
Class number:	339.53
Abstract:	Financial institutions are very important in the economic growth of the economy as they help to make easy credit flow and enhance economic activity with increasing investment in productive sectors of the economy. The health of the financial system has important role in the country as its failure can disrupt economic development of the country(Das & Ghosh, 2007). Banks are exposed to different types of risks, which affect the performance and activity of these banks, since the primary goal of the banking management is to maximize the shareholders’ wealth, so in achieving this goal bank managers should assess the cash flows and the assumed risks as a result of directing its financial resources in different areas of utilization. Bank plays a vital role in the emerging economies where most borrowers have no access to capital markets. Thus bank is considered as an intermediary between the depositors and borrowers. It is evident that the efficient and effective performance of banking industry over time guarantees financial stability of any nation (Oke et al. 2012). One of the core business activities of bank is to provide loans. Inevitably, bank will be imposed to the uncertainty of loan borrowers’ ability to repay the loan or otherwise called credit risk. According to Basel Committee on Banking Supervision, credit risk is most simply defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms. Credit risk is the major risk that banks are exposed to during the normal course of lending and credit underwriting (Ahmad & Ahmad, 2004). Credit risk is a risk where the borrower may not be able or willing to repay the debt owed to the bank, or to honor other contractual commitments. The higher is the accumulation of unpaid loans implying that these loan losses have produced lower returns to many commercial banks. Coyle (2000) defined credit risk as losses from the refusal or inability of credit customers to pay what is owed in full and on time.The credit function of banks enhances the ability of investors to exploit desired profitable ventures. Credit creation is the main income generating activity of banks (Kolapo et al., 2012). However, it exposes the banks to credit risk. Credit risk is an internal determinant of bank performance. Higher the exposure of a bank to credit risk, higher the tendency of the banks to experience financial crisis and vice-versa. Among other risks faced by banks, credit risk plays an important role on banks’ profitability since a large chunk of banks’ revenue accrues from loans from which interest is derived. Miller & Noulas (1997)found a negative relationship between credit risk and profitability. Profitability is an indicator of the bank’s competitive position in the banking industry and of the quality of its management, ensuring the health of the banking system. Profitability is defined as a proxy of financial performance which is one of the major objectives of banking institutions (Burca and Batrinca, 2014). Aruwa & Musa (2012) revealed a strong relationship between risk components and the bank's financial performance. Boahene et al. (2012) examined the relationship between credit risk and banks profitability and found a positive relationship between credit risk and bank profitability. Kolapo et al. (2012) found that the effect of credit risk on bank performance measured by ROA was cross-sectional invariant, though the degree to which individual banks were affected was not captured by the method of analysis employed in the study. Aduda & Gitonga (2011) found that the credit risk affected the profitability at a reasonable level. This study aims at examining the relationship between bank credit risk, profitability and liquidity of the Nepalese commercial banks. The specific objectives of this study are To determine the structure and pattern of lesser prudence ratio, non performing loan ratio, capital adequacy ratio, net loans and leases to total deposits ratio, total debt to total equity ratio and gross domestic product in Nepalese public banks, joint venture banks and private banks, find out the relationship of allowance for loan loss to net loans ratio, non performing loan ratio, capital adequacy ratio, net loans and leases to total deposits ratio, total debt to total equity ratio and gross domestic product with the profitability and liquidity in Nepalese public banks, joint venture banks and private banks, investigate the impact of allowance for loan loss to net loans ratio, non performing loan ratio, capital adequacy ratio, net loans and leases to total deposits ratio, total debt to total equity ratio and gross domestic product with the profitability and liquidity in Nepalese public banks, joint venture banks and private banks and identify the most important credit risk variable affecting the financial performance and liquidity in Nepalese public banks, joint venture banks and private banks. This study has used the secondary data of 23 commercial banks of Nepal for the period of 2009/10 to 2014/15 which has been collected from the annual reports of selected Nepalese commercial banks for study purpose, banking and financial statistics published by NRB, NRB bank supervision report and Central Bureau of Statistics. This study has used three proxies for profitability measures namely return on assets (ROA), return on equity (ROE) and net interest margin (NIM). And one for liquidity measure namely cash flow to total assets ratio. Similarly, the bank specific variables used in this study are lesser prudence ratio, nonperforming loan ratio, capital adequacy ratio, loan to deposit ratio, debt to equity ratio and gross domestic product growth rate. The pooled cross sectional data analysis has been employed in the study. The research design adopted in this study is descriptive and causal comparative research design as it deals with differences and determinants of profitability in context of public, private and joint venture banks of Nepal.The relationship between dependent and independent variables are analyzed using simple and multiple regression analysis. The study shows that lesser prudence ratio, capital adequacy ratio, loan to deposit ratio and debt to equity ratio has positive impact on the profitability measures (return on assets, return on equity and net interest margin) of public banks. Similarly, lesser prudence ratio, nonperforming loan ratio, loan to deposit ratio, debt to equity ratio and gross domestic product growth rate has negative impact on the liquidity of public banks. Likewise, the result shows that capital adequacy ratio, loan to deposit ratio and gross domestic product growth rate has positive impact on the profitability measures (return on assets, return on equity and net interest margin) of joint venture banks. The study also shows that debt to equity ratio has negative impact on the profitability variables. However lesser prudence ratio, capital adequacy ratio, loan to deposit ratio and debt to equity ratio has negative impact on the liquidity of joint venture banks. Similarly, the study shows that lesser prudence ratio has positive impact on the return on assets of private banks. The result shows that nonperforming loan ratio and capital adequacy ratio has negative impact on return on assets and return on equity of private banks. However, they have positive impact on net interest margin of private banks. Likewise, nonperforming loan ratio, loan to deposit ratio and debt to equity ratio has negative impact on liquidity of private banks.