Relationship between bank credit risk, profitability and liquidity: a comparative study of public banks, joint venture banks and private banks / Madan Dhungana 

Public ISBD 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.

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Relationship between capital, liquidity and risk in commercial banks of Nepal / Pranita Rai 

Public ISBD Title : Relationship between capital, liquidity and risk in commercial banks of Nepal Material Type: printed text Authors: Pranita Rai, Author Publication Date: 2018 Pagination: 87p. Size: GRP/Thesis Accompanying material: 11/B Languages : English Descriptors: Liquidity (Economics) Class number: 339.53 Abstract: Finance is the life blood of trade, commerce and industry. Nowadays, banking sector plays as a backbone of modern business. Development of the country may also depend upon the banking system. Commercial banks play an important role for economic development and foster economic growth by providing number of financial services. One of the important functions of the commercial banks is the financial intermediation functions and thus it transfers the fund from surplus units to the deficit units. 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. So, the liquidity of banks must be optimally maintained. Liquidity means a business ability to meet its payment obligations, in terms of possessing sufficient liquid assets. An act of exchange of a less liquid asset with a more liquid asset is called liquidation. In banking, liquidity is the ability to meet obligations when they come due without incurring unacceptable losses. Moleyneux and Thornton (1992) explained that a liquid bank is one that stores adequate liquid assets and cash together with the ability to raise funds quickly from other source in order to meet its payment obligation and financial commitment in a timely manner. Adequate capital in banking is a confidence booster. It provides the customer, public and the regulatory authority with confidence on the continued financial viability of the bank. Minimum capital requirements are one of the three pillars of macro prudential regulation. As a result of the financial crisis of 2008-2009, there have been proposals to increase the amount of capitals banks are required to hold. A capital structure that contains a substantial number of equity has a number of advantages. It reduces the banks vulnerability to market freezes; it reduces the risk of contagion to other financial institutions; it reduces the subsidy provided by deposit insurance; and, as we have recently seen, shareholders are less likely to be bailed out by government than debt holders. Risk means the possibility of losing the original investment and amount of interest accrued on it. Risk are of two types: risk that must be controlled and risk that must be minimized. The types of risk that must be controlled are credit risk, market risk and liquidity risk. Operational risk is the risk that needs to be minimized. viii The study examines the relationship between capital, liquidity and risk of Nepalese commercial banks. The capital, liquidity and risk are the dependent variables. Credit to deposit ratio, size, return on equity and non-performing loan are taken as the independent variables. This study is based on the secondary data of 14 commercial banks for the period of 2008/09 to 2015/16, leading to a total of 112 observations. The data are collected from the Banking and Financial Statistics, Bank Supervision Report, and Quarterly Economic Bulletin published by Nepal Rastra Bank and annual reports of the selected Nepalese commercial banks. The regression models are estimated to test the significance and importance of relationship between capital, liquidity and risk of the Nepalese commercial banks. The result shows that there is a positive relationship of credit to deposit ratio, size, non-performing loan and liquidity with capital. It indicates that an increase in credit to deposit ratio, size, return on equity, non-performing loan and liquidity leads to increase in the capital. Similarly, the study also reveals that size, return on equity and capital are positively related to liquidity. It indicates that an increase in size, return on equity and capital leads to increase in liquidity. Likewise, the result shows that size, return on equity and non-performing loan are positively related to risk. It indicates that increase in size, return on equity and non-performing loan leads to increase in risk of the Nepalese commercial banks. However, the study shows the negative relationship of risk with capital. It indicates that higher the capital, lower would be the risk. The regression results also show that beta coefficients are negative for credit to deposit ratio, non-performing loan and risk with liquidity. However, the results show that beta coefficients are negative for credit to deposit ratio, capital and liquidity with risk of Nepalese commercial banks. Yet, the beta coefficients are significant only for return on equity at 5 percent level. Relationship between capital, liquidity and risk in commercial banks of Nepal [printed text] / Pranita Rai, Author . - 2018 . - 87p. ; GRP/Thesis + 11/B. Languages : English Descriptors: Liquidity (Economics) Class number: 339.53 Abstract: Finance is the life blood of trade, commerce and industry. Nowadays, banking sector plays as a backbone of modern business. Development of the country may also depend upon the banking system. Commercial banks play an important role for economic development and foster economic growth by providing number of financial services. One of the important functions of the commercial banks is the financial intermediation functions and thus it transfers the fund from surplus units to the deficit units. 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. So, the liquidity of banks must be optimally maintained. Liquidity means a business ability to meet its payment obligations, in terms of possessing sufficient liquid assets. An act of exchange of a less liquid asset with a more liquid asset is called liquidation. In banking, liquidity is the ability to meet obligations when they come due without incurring unacceptable losses. Moleyneux and Thornton (1992) explained that a liquid bank is one that stores adequate liquid assets and cash together with the ability to raise funds quickly from other source in order to meet its payment obligation and financial commitment in a timely manner. Adequate capital in banking is a confidence booster. It provides the customer, public and the regulatory authority with confidence on the continued financial viability of the bank. Minimum capital requirements are one of the three pillars of macro prudential regulation. As a result of the financial crisis of 2008-2009, there have been proposals to increase the amount of capitals banks are required to hold. A capital structure that contains a substantial number of equity has a number of advantages. It reduces the banks vulnerability to market freezes; it reduces the risk of contagion to other financial institutions; it reduces the subsidy provided by deposit insurance; and, as we have recently seen, shareholders are less likely to be bailed out by government than debt holders. Risk means the possibility of losing the original investment and amount of interest accrued on it. Risk are of two types: risk that must be controlled and risk that must be minimized. The types of risk that must be controlled are credit risk, market risk and liquidity risk. Operational risk is the risk that needs to be minimized. viii The study examines the relationship between capital, liquidity and risk of Nepalese commercial banks. The capital, liquidity and risk are the dependent variables. Credit to deposit ratio, size, return on equity and non-performing loan are taken as the independent variables. This study is based on the secondary data of 14 commercial banks for the period of 2008/09 to 2015/16, leading to a total of 112 observations. The data are collected from the Banking and Financial Statistics, Bank Supervision Report, and Quarterly Economic Bulletin published by Nepal Rastra Bank and annual reports of the selected Nepalese commercial banks. The regression models are estimated to test the significance and importance of relationship between capital, liquidity and risk of the Nepalese commercial banks. The result shows that there is a positive relationship of credit to deposit ratio, size, non-performing loan and liquidity with capital. It indicates that an increase in credit to deposit ratio, size, return on equity, non-performing loan and liquidity leads to increase in the capital. Similarly, the study also reveals that size, return on equity and capital are positively related to liquidity. It indicates that an increase in size, return on equity and capital leads to increase in liquidity. Likewise, the result shows that size, return on equity and non-performing loan are positively related to risk. It indicates that increase in size, return on equity and non-performing loan leads to increase in risk of the Nepalese commercial banks. However, the study shows the negative relationship of risk with capital. It indicates that higher the capital, lower would be the risk. The regression results also show that beta coefficients are negative for credit to deposit ratio, non-performing loan and risk with liquidity. However, the results show that beta coefficients are negative for credit to deposit ratio, capital and liquidity with risk of Nepalese commercial banks. Yet, the beta coefficients are significant only for return on equity at 5 percent level.

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Relationship between liquidity risk and credit risk: a case of Nepalese commercial banks / Umesh Raj Pant 

Public ISBD Title : Relationship between liquidity risk and credit risk: a case of Nepalese commercial banks Material Type: printed text Authors: Umesh Raj Pant, Author Publication Date: 2017 Pagination: 110p. Size: GRP/Thesis Accompanying material: 8/B Languages : English Descriptors: Bank liquidity Class number: 339.53 Abstract: Liquidity risk and credit risk are perceived as the major factors that influence the overall performance of the bank and financial institutions. Credit risk is one of the major factor which impact the overall performance of the banks therefore it should be managed properly otherwise it would lead to the total collapse of banks. Liquidity risk is another type of risk which bank cannot neglect as the greater liquidity risk leads to poor day to day operational performance. Particularly, many researchers believe that there is connection between liquidity risk and credit risk of banks. Many studies published to investigate this relationship. In regards to the relationship between liquidity risk and credit risk, researcher found different results. Some of the scholars believed that, liquidity risk and credit risk has positive relationship, some believed that there is negative relationship whereas, some scholars believed that there is no connection between these two risk factors. This major objective of the study is to examine the relationship between liquidity risk and credit risk in case of Nepalese commercial banks. The study has employed descriptive and causal comparative research designs to deal with the major issues associated with relationship between liquidity risk and credit risk and factors influencing these parameters in the context of Nepal. The study is based on secondary data. The relationship between dependent and independent variables are analyzed in single step and multi-step regression analysis. The other variables used in the study are categorized into bank specific variables (bank size, assets quality i.e. loan loss provision to total loan, management inefficiency, capital adequacy ratio) and control variables (inflation rate and economic growth rate). The study covers the data from 2009/10 to 2014/15. It is observed that credit risk, asset quality, economic growth rate, inflation rate, management inefficiency and capital adequacy ratio has positive correlation between liquidity risk of selected commercial bank during the study period. Bank size is negatively correlated with liquidity risk whereas positively correlated with credit risk during the study period. Similarly, asset quality, economic growth rate, inflation rate and management inefficiency ratio is positively related with credit risk during the observation period. Moreover, it is also found that capital adequacy ratio has negative impact on credit risk of selected commercial banks during the study period. More specifically, this study reveals that liquidity risk and credit risk are positively related. Likewise, the study also shows that higher the bank size, lower would be the liquidity risk. However, asset quality i.e. loan loss provision to total loan has positive impact on liquidity risk.This shows that higher loan loss provision leads to high level of liquidity risk. Likewise, management inefficiency and asset quality is positively related to credit risk whereas, capital adequacy ratio is negatively related to credit risk. Finally, the study concludes that major determinant of liquidity risk and credit risk are assets quality i.e. loan loss provision to total loan and management inefficiency followed by capital adequacy ratio, bank size. However, the result shows that macroeconomic variables viz. inflation and economic growth rate has no any significant impact on liquidity risk and credit risk.The study found positive relationship between liquidity risk and credit risk. Hence, the banks should give due attention to manage both risks factors for the stability of the bank. Relationship between liquidity risk and credit risk: a case of Nepalese commercial banks [printed text] / Umesh Raj Pant, Author . - 2017 . - 110p. ; GRP/Thesis + 8/B. Languages : English Descriptors: Bank liquidity Class number: 339.53 Abstract: Liquidity risk and credit risk are perceived as the major factors that influence the overall performance of the bank and financial institutions. Credit risk is one of the major factor which impact the overall performance of the banks therefore it should be managed properly otherwise it would lead to the total collapse of banks. Liquidity risk is another type of risk which bank cannot neglect as the greater liquidity risk leads to poor day to day operational performance. Particularly, many researchers believe that there is connection between liquidity risk and credit risk of banks. Many studies published to investigate this relationship. In regards to the relationship between liquidity risk and credit risk, researcher found different results. Some of the scholars believed that, liquidity risk and credit risk has positive relationship, some believed that there is negative relationship whereas, some scholars believed that there is no connection between these two risk factors. This major objective of the study is to examine the relationship between liquidity risk and credit risk in case of Nepalese commercial banks. The study has employed descriptive and causal comparative research designs to deal with the major issues associated with relationship between liquidity risk and credit risk and factors influencing these parameters in the context of Nepal. The study is based on secondary data. The relationship between dependent and independent variables are analyzed in single step and multi-step regression analysis. The other variables used in the study are categorized into bank specific variables (bank size, assets quality i.e. loan loss provision to total loan, management inefficiency, capital adequacy ratio) and control variables (inflation rate and economic growth rate). The study covers the data from 2009/10 to 2014/15. It is observed that credit risk, asset quality, economic growth rate, inflation rate, management inefficiency and capital adequacy ratio has positive correlation between liquidity risk of selected commercial bank during the study period. Bank size is negatively correlated with liquidity risk whereas positively correlated with credit risk during the study period. Similarly, asset quality, economic growth rate, inflation rate and management inefficiency ratio is positively related with credit risk during the observation period. Moreover, it is also found that capital adequacy ratio has negative impact on credit risk of selected commercial banks during the study period. More specifically, this study reveals that liquidity risk and credit risk are positively related. Likewise, the study also shows that higher the bank size, lower would be the liquidity risk. However, asset quality i.e. loan loss provision to total loan has positive impact on liquidity risk.This shows that higher loan loss provision leads to high level of liquidity risk. Likewise, management inefficiency and asset quality is positively related to credit risk whereas, capital adequacy ratio is negatively related to credit risk. Finally, the study concludes that major determinant of liquidity risk and credit risk are assets quality i.e. loan loss provision to total loan and management inefficiency followed by capital adequacy ratio, bank size. However, the result shows that macroeconomic variables viz. inflation and economic growth rate has no any significant impact on liquidity risk and credit risk.The study found positive relationship between liquidity risk and credit risk. Hence, the banks should give due attention to manage both risks factors for the stability of the bank.

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Relationship of liquidity risk and credit risk with profitability: a case of Nepalese commercial banks / Kusum Kumari Sah 

Public ISBD 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. 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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Barcode	Call number	Media type	Location	Section	Status
245/d	339.53 SAH	Thesis/Dissertation	Uniglobe Library	Social Sciences	Available

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