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Bank specific determinants of credit risk: a comparative study of Nepalese joint venture banks, private banks and public banks / Sushila Chaudhari
Title : Bank specific determinants of credit risk: a comparative study of Nepalese joint venture banks, private banks and public banks Material Type: printed text Authors: Sushila Chaudhari, Author Publication Date: 2017 Pagination: 112p. Size: GRP/Thesis Accompanying material: 8/B Languages : English Abstract: Banks are the financial intermediaries that provide variety of financial services to the
customers. The bank credit is considered as one of the major functions carried out by
the banks where it contributes to the provision of the necessary funding to the
households, businesses and government. By providing loans to borrowers, banks can
earn profit from charging interests and services fees. However, this service leads the
banks expose to credit risk when borrowers do not pay back the loan as promised.
Credit risk is the likelihood that a debtor or financial instrument issuer is unwilling or
unable to pay interest or repay the principle according to the terms specified in a
credit agreement. Credit risk is the main cause of bank failure, and most visible risk
facing by bank managers (Gup et al., 2007). Non-performing assets is a major
contributing factor to the credit risk of the banking system. There is high chance of a
large number of credit default when there is increase in non-performing assets of a
bank. Consequently, this have impact on the net-worth of the bank and also erodes the
value of the bank’s asset (Thiagarajan et al., 2011). Past evidence also suggested that
poor management of credit risk is the main cause of most bank failure (Levine et al.,
2000; Saurina and Jiminez, 2006).
Das and Ghosh (2007) revealed that bank size play an important role in influencing
credit risk. Ahmad and Ariff (2007) reported that loans to deposit is a significant
positive determinant of credit risk. Goldlewski (2005) found that the regulation of
capital and credit risk are negatively related in the context of emerging economies.
Return on assets is positively related to credit risk (Zribi and Boujelbene, 2011).
There is significant relationship between credit growth and credit risk (Ganic, 2014).
Tilahun and Dugasa (2014) concluded that operating inefficiency ratio has positive
and statistically significant impact on credit risk.
The major objective of this study is to analyze bank specific determinants of credit
risk and examining its impact on Nepalese joint venture banks, private banks and
public banks. The study is based on secondary data of 22 commercial banks with 144
observations for the period of 2005/06 to 2014/15. The major source of data include
various issues of Banking and Financial Statistics, Quarterly Economic Bulletin, Bank
Supervision Report published by Nepal Rastra Bank and Annual Reports of selected
commercial banks. The pooled cross sectional data analysis has been used in the
ix
study. The research design adopted in this study is descriptive and causal comparative
research design. The relationship between dependent and independent variables are
analyzed via simple and multiple regression analysis. The dependent variables used in
the study are non-performing loan ratio and risk weighted asset whereas the
independent variables are bank size, credit to deposit ratio, capital adequacy ratio,
return on assets, total loan and operating inefficiency ratio.
The result shows that ADBL has highest average non-performing loan ratio and risk
weighted asset among the selected commercial banks throughout the study period.
Similarly, the average bank size is highest for RBBL (Rs. 114.59 billion), average
credit to deposit ratio is highest for ADBL (105.45 percent), average capital adequacy
ratio is highest for LUMBL (20.61 percent), average return on assets is highest for
NBBL (3.37 percent), average total loan is highest for RBBL (Rs. 48.29 billion) and
average operating inefficiency ratio is highest for ADBL (4.38 percent).
The descriptive statistics for the joint venture banks reveals that the average nonperforming
loan ratio, risk weighted asset, bank size, credit to deposit ratio, capital
adequacy ratio, return on assets, total loan and operating inefficiency ratio is 2.04
percent, 74.22 percent, Rs. 54.09 billion, 67.37 percent, 11.84 percent, 2.23 percent,
Rs. 31.52 billion and 1.69 percent respectively. Likewise, the descriptive statistics for
the private bank reveals that the average non-performing loan ratio, risk weighted
asset, bank size, credit to deposit ratio, capital adequacy ratio, return on assets, total
loan and operating inefficiency ratio is 1.73 percent, 78.85 percent, Rs. 29.82 billion,
81.86 percent, 13.24 percent, 1.44 percent, Rs. 20.36 billion and 1.52 percent
respectively. Similarly, the descriptive statistics for the public banks reveals that the
average non-performing loan ratio, risk weighted asset, bank size, credit to deposit
ratio, capital adequacy ratio, return on assets, total loan and operating inefficiency
ratio is 11.00 percent, 79.10 percent, Rs. 68.98 billion, 64.22 percent, -7.58 percent,
2.06 percent, Rs. 34.17 billion and 3.71 percent respectively.
The study show that the operating inefficiency ratio has positive relationship with
non-performing loan ratio and risk weighted asset for joint venture banks and private
banks. The results also show that capital adequacy ratio has negative relationship with
non-performing loan ratio and risk weighted asset for joint venture banks and private
banks. Similarly, bank size is negatively related to the non-performing loan ratio and
x
risk weighted asset for joint venture banks and public banks. However, results show
that bank size is positively related to the non-performing loan ratio and risk weighted
asset in the case of private banks. The study also show that credit to deposit ratio and
return on assets are positively related to the non-performing loan ratio and risk
weighted asset of joint venture banks.
The regression results reveals that the capital adequacy ratio has negative relationship
with credit risk of public banks, joint venture banks and private banks of Nepal, where
beta coefficient is significant for joint venture banks and private banks at 5 percent
level of significance. Similarly, bank size has negative and significant relationship
with the credit risk for public banks at 1 percent level of significance. However,
coefficient is negative and insignificant for joint venture banks and positive for
private banks. The study also concludes that operating inefficiency ratio has positive
impact on non-performing loan ratio and risk weighted asset for joint venture banks,
private banks and public banks of Nepal, where beta coefficient is significant only for
joint venture banks at 1 percent level of significance. Similarly, the study also
concludes that return on assets and credit to deposit ratio has positive and significant
impact on the risk weighted asset for both private and joint venture banks. Thus,
capital adequacy ratio is the major factor affecting the credit risk of Nepalese
commercial banks followed by bank size, operating inefficiency ratio, credit to
deposit ratio and return on assets.Bank specific determinants of credit risk: a comparative study of Nepalese joint venture banks, private banks and public banks [printed text] / Sushila Chaudhari, Author . - 2017 . - 112p. ; GRP/Thesis + 8/B.
Languages : English
Abstract: Banks are the financial intermediaries that provide variety of financial services to the
customers. The bank credit is considered as one of the major functions carried out by
the banks where it contributes to the provision of the necessary funding to the
households, businesses and government. By providing loans to borrowers, banks can
earn profit from charging interests and services fees. However, this service leads the
banks expose to credit risk when borrowers do not pay back the loan as promised.
Credit risk is the likelihood that a debtor or financial instrument issuer is unwilling or
unable to pay interest or repay the principle according to the terms specified in a
credit agreement. Credit risk is the main cause of bank failure, and most visible risk
facing by bank managers (Gup et al., 2007). Non-performing assets is a major
contributing factor to the credit risk of the banking system. There is high chance of a
large number of credit default when there is increase in non-performing assets of a
bank. Consequently, this have impact on the net-worth of the bank and also erodes the
value of the bank’s asset (Thiagarajan et al., 2011). Past evidence also suggested that
poor management of credit risk is the main cause of most bank failure (Levine et al.,
2000; Saurina and Jiminez, 2006).
Das and Ghosh (2007) revealed that bank size play an important role in influencing
credit risk. Ahmad and Ariff (2007) reported that loans to deposit is a significant
positive determinant of credit risk. Goldlewski (2005) found that the regulation of
capital and credit risk are negatively related in the context of emerging economies.
Return on assets is positively related to credit risk (Zribi and Boujelbene, 2011).
There is significant relationship between credit growth and credit risk (Ganic, 2014).
Tilahun and Dugasa (2014) concluded that operating inefficiency ratio has positive
and statistically significant impact on credit risk.
The major objective of this study is to analyze bank specific determinants of credit
risk and examining its impact on Nepalese joint venture banks, private banks and
public banks. The study is based on secondary data of 22 commercial banks with 144
observations for the period of 2005/06 to 2014/15. The major source of data include
various issues of Banking and Financial Statistics, Quarterly Economic Bulletin, Bank
Supervision Report published by Nepal Rastra Bank and Annual Reports of selected
commercial banks. The pooled cross sectional data analysis has been used in the
ix
study. The research design adopted in this study is descriptive and causal comparative
research design. The relationship between dependent and independent variables are
analyzed via simple and multiple regression analysis. The dependent variables used in
the study are non-performing loan ratio and risk weighted asset whereas the
independent variables are bank size, credit to deposit ratio, capital adequacy ratio,
return on assets, total loan and operating inefficiency ratio.
The result shows that ADBL has highest average non-performing loan ratio and risk
weighted asset among the selected commercial banks throughout the study period.
Similarly, the average bank size is highest for RBBL (Rs. 114.59 billion), average
credit to deposit ratio is highest for ADBL (105.45 percent), average capital adequacy
ratio is highest for LUMBL (20.61 percent), average return on assets is highest for
NBBL (3.37 percent), average total loan is highest for RBBL (Rs. 48.29 billion) and
average operating inefficiency ratio is highest for ADBL (4.38 percent).
The descriptive statistics for the joint venture banks reveals that the average nonperforming
loan ratio, risk weighted asset, bank size, credit to deposit ratio, capital
adequacy ratio, return on assets, total loan and operating inefficiency ratio is 2.04
percent, 74.22 percent, Rs. 54.09 billion, 67.37 percent, 11.84 percent, 2.23 percent,
Rs. 31.52 billion and 1.69 percent respectively. Likewise, the descriptive statistics for
the private bank reveals that the average non-performing loan ratio, risk weighted
asset, bank size, credit to deposit ratio, capital adequacy ratio, return on assets, total
loan and operating inefficiency ratio is 1.73 percent, 78.85 percent, Rs. 29.82 billion,
81.86 percent, 13.24 percent, 1.44 percent, Rs. 20.36 billion and 1.52 percent
respectively. Similarly, the descriptive statistics for the public banks reveals that the
average non-performing loan ratio, risk weighted asset, bank size, credit to deposit
ratio, capital adequacy ratio, return on assets, total loan and operating inefficiency
ratio is 11.00 percent, 79.10 percent, Rs. 68.98 billion, 64.22 percent, -7.58 percent,
2.06 percent, Rs. 34.17 billion and 3.71 percent respectively.
The study show that the operating inefficiency ratio has positive relationship with
non-performing loan ratio and risk weighted asset for joint venture banks and private
banks. The results also show that capital adequacy ratio has negative relationship with
non-performing loan ratio and risk weighted asset for joint venture banks and private
banks. Similarly, bank size is negatively related to the non-performing loan ratio and
x
risk weighted asset for joint venture banks and public banks. However, results show
that bank size is positively related to the non-performing loan ratio and risk weighted
asset in the case of private banks. The study also show that credit to deposit ratio and
return on assets are positively related to the non-performing loan ratio and risk
weighted asset of joint venture banks.
The regression results reveals that the capital adequacy ratio has negative relationship
with credit risk of public banks, joint venture banks and private banks of Nepal, where
beta coefficient is significant for joint venture banks and private banks at 5 percent
level of significance. Similarly, bank size has negative and significant relationship
with the credit risk for public banks at 1 percent level of significance. However,
coefficient is negative and insignificant for joint venture banks and positive for
private banks. The study also concludes that operating inefficiency ratio has positive
impact on non-performing loan ratio and risk weighted asset for joint venture banks,
private banks and public banks of Nepal, where beta coefficient is significant only for
joint venture banks at 1 percent level of significance. Similarly, the study also
concludes that return on assets and credit to deposit ratio has positive and significant
impact on the risk weighted asset for both private and joint venture banks. Thus,
capital adequacy ratio is the major factor affecting the credit risk of Nepalese
commercial banks followed by bank size, operating inefficiency ratio, credit to
deposit ratio and return on assets.Hold
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Barcode Call number Media type Location Section Status 274/D CHA Thesis/Dissertation Uniglobe Library Social Sciences Available