Title :	Problem loans and cost efficiency in Nepalese Commercial Banks
Material Type:	printed text
Authors:	Bidya Nanda Yadav, Author
Publication Date:	2016
Pagination:	104p.
Size:	GRP/Thesis
Accompanying material:	7/B
Languages :	English
Descriptors:	Bank and banking Bank loans
Class number:	332.12
Abstract:	Banks need to be efficient not only for economic growth but also for survival against its competitors. For financial institutions, efficiency implies improved profitability, greater amount of funds channeled in, better prices and services quality for consumers and greater safety in terms of improved capital buffer in absorbing risk (Berger et al. 1993). The identification of the key determinant of bank failures is a fundamental issue for the authorities in charge of supervising the banking industry, as the implications for economic policy strongly differ depending on its origin. Specifically, if non-performing loans influence cost efficiency, banking supervisors should limit banks’ risk exposures by restricting loan concentration and favoring diversification. In contrast, an influence of cost efficiency on risk-taking would suggest that non-performing loans are caused internally.Virtually, all studies on the causes of bank and thrift failures find that failing institutions have large proportions of problem loans prior to failure. These studies find that a bank incur higher costs and generates lower profits relative to those banks having lower problem loans and best practice of efficient cost management (Demirguc-Kunt, 1989). The main purpose of the study is to analyze the impact of problem loans on cost efficiency of Nepalese commercial banks. However, the specific objectives of the study are as follows: (a) To analyze the structure and pattern of problems loans variables and cost efficiencies of Nepalese commercial banks, (b) To examine relationship between problem loan and cost efficiency, (c) To determine the impact of non-performing loans, capital adequacy ratio, risk weighted assets, credit growth, and loan loss provision on the cost efficiency of the Nepalese commercial banks and (d) To identify the factors influencing cost efficiency in commercial banks of Nepal. This study is based on descriptive and causal-comparative research designs. The descriptive research design has been adopted to undertake fact-finding operation searching for adequate information about the impact of problem loans, particularly, loans loss provisions, non-performing loans to total loans, capital adequacy ratio, risk weighted assets and loan growth along with control variables, return on assets and bank size on the cost efficiency of Nepalese commercial banks. Moreover, this study also emphasizes on cause and effect relationship between problem loan variables and the cost efficiency of commercial banks in Nepalese context. This study is based on the cross sectional secondary data which are gathered from 18 commercial banks in Nepal. The total numbers of observations is 126. The main sources of data are supervision reports of NRB and various annual reports of different commercial banks along with the publications of the World Bank. These data are collected for the period 2008- 2014. The results reveal that problem loans variables like loan loss provision, non-performing loans to total loans, capital adequacy ratio, loan growth and risk weighted exposure are positively correlated with the costs of the banks. It indicates that higher the loan loss provision, nonperforming loan, capital adequacy ratio, loan growth and risk weighted assets, higher would be cost of the bank (operating expense and staff expense ratio) and accordingly lower would be the cost efficiency of the Nepalese commercial banks. The control variables like return on assets and total assets of the banks have negative relationship with the bank expenses which implies that higher the return on assets and bank size lower would be the banks’ cost while greater cost efficiency.The regression result of independent variables, with total operating costs to total assets and total staff expenses to total operating costs showed that beta coefficients are positive for loan loss provision, non-performing loans to total loans, risk weighted assets, capital adequacy ratio and credit growth. This indicates that loan loss provision and non-performing loans to total loans have negative impact on the cost of the banks. Similarly, increase in capital adequacy ratio and loan growth leads to increase in expenses of the banks. Likewise, higher the risk weighted assets, higher would be operating expenses and staff expenses. However, return on assets and size of the commercial banks is negatively related to both proxies of costs of the banks which implies that higher the return on assets and size, lower would be the total expenses of the banks. The major conclusion of the study is problem loans have crucial negative impact on the cost efficiency in the Nepalese commercial banks. As shown by the results, all the problem loans variables like loan loss provision, non-performing loans to total assets, capital adequacy ratio, risk weighted assets and loan growth have positive significant impact on the expenses of the banks that means negative impact on the cost efficiency of the banks. Moreover, along with the mentioned variables, return on assets and bank size are seen to have positive impact on cost efficiency of the Nepalese commercial banks

Problem loans and cost efficiency in Nepalese Commercial Banks [printed text] / Bidya Nanda Yadav, Author . - 2016 . - 104p. ; GRP/Thesis + 7/B.
Languages : English

Descriptors:	Bank and banking Bank loans
Class number:	332.12
Abstract:	Banks need to be efficient not only for economic growth but also for survival against its competitors. For financial institutions, efficiency implies improved profitability, greater amount of funds channeled in, better prices and services quality for consumers and greater safety in terms of improved capital buffer in absorbing risk (Berger et al. 1993). The identification of the key determinant of bank failures is a fundamental issue for the authorities in charge of supervising the banking industry, as the implications for economic policy strongly differ depending on its origin. Specifically, if non-performing loans influence cost efficiency, banking supervisors should limit banks’ risk exposures by restricting loan concentration and favoring diversification. In contrast, an influence of cost efficiency on risk-taking would suggest that non-performing loans are caused internally.Virtually, all studies on the causes of bank and thrift failures find that failing institutions have large proportions of problem loans prior to failure. These studies find that a bank incur higher costs and generates lower profits relative to those banks having lower problem loans and best practice of efficient cost management (Demirguc-Kunt, 1989). The main purpose of the study is to analyze the impact of problem loans on cost efficiency of Nepalese commercial banks. However, the specific objectives of the study are as follows: (a) To analyze the structure and pattern of problems loans variables and cost efficiencies of Nepalese commercial banks, (b) To examine relationship between problem loan and cost efficiency, (c) To determine the impact of non-performing loans, capital adequacy ratio, risk weighted assets, credit growth, and loan loss provision on the cost efficiency of the Nepalese commercial banks and (d) To identify the factors influencing cost efficiency in commercial banks of Nepal. This study is based on descriptive and causal-comparative research designs. The descriptive research design has been adopted to undertake fact-finding operation searching for adequate information about the impact of problem loans, particularly, loans loss provisions, non-performing loans to total loans, capital adequacy ratio, risk weighted assets and loan growth along with control variables, return on assets and bank size on the cost efficiency of Nepalese commercial banks. Moreover, this study also emphasizes on cause and effect relationship between problem loan variables and the cost efficiency of commercial banks in Nepalese context. This study is based on the cross sectional secondary data which are gathered from 18 commercial banks in Nepal. The total numbers of observations is 126. The main sources of data are supervision reports of NRB and various annual reports of different commercial banks along with the publications of the World Bank. These data are collected for the period 2008- 2014. The results reveal that problem loans variables like loan loss provision, non-performing loans to total loans, capital adequacy ratio, loan growth and risk weighted exposure are positively correlated with the costs of the banks. It indicates that higher the loan loss provision, nonperforming loan, capital adequacy ratio, loan growth and risk weighted assets, higher would be cost of the bank (operating expense and staff expense ratio) and accordingly lower would be the cost efficiency of the Nepalese commercial banks. The control variables like return on assets and total assets of the banks have negative relationship with the bank expenses which implies that higher the return on assets and bank size lower would be the banks’ cost while greater cost efficiency.The regression result of independent variables, with total operating costs to total assets and total staff expenses to total operating costs showed that beta coefficients are positive for loan loss provision, non-performing loans to total loans, risk weighted assets, capital adequacy ratio and credit growth. This indicates that loan loss provision and non-performing loans to total loans have negative impact on the cost of the banks. Similarly, increase in capital adequacy ratio and loan growth leads to increase in expenses of the banks. Likewise, higher the risk weighted assets, higher would be operating expenses and staff expenses. However, return on assets and size of the commercial banks is negatively related to both proxies of costs of the banks which implies that higher the return on assets and size, lower would be the total expenses of the banks. The major conclusion of the study is problem loans have crucial negative impact on the cost efficiency in the Nepalese commercial banks. As shown by the results, all the problem loans variables like loan loss provision, non-performing loans to total assets, capital adequacy ratio, risk weighted assets and loan growth have positive significant impact on the expenses of the banks that means negative impact on the cost efficiency of the banks. Moreover, along with the mentioned variables, return on assets and bank size are seen to have positive impact on cost efficiency of the Nepalese commercial banks