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Relationship between capital, liquidity and portfolio risk in Nepalese commercial banks / Naresh Simkhada
Title : Relationship between capital, liquidity and portfolio risk in Nepalese commercial banks Material Type: printed text Authors: Naresh Simkhada, Author Publication Date: 2019 Pagination: 161p. Size: GRP/Thesis Accompanying material: 15th Languages : English Abstract: The capital, amount of liquid assets and portfolio risk have profound impact on the profitability of commercial banks in Asian developing economies. The main purpose of financial institutions is to maximize profit for which banks collect funds at a lower rate and lend at a greater rate of return (Rivai et al., 2007). The interrelationship between capital, portfolio risk and liquidity are of great importance for banking sector (Mahdi & Abbes, 2018).
The high level of bank capital boosts the confidence and trust of the public about the soundness of the bank. Capital helps the bank to cope more effectively with risk, but it also reduces the value of the deposit insurance put option (Merton, 1977). To ensure against liquidity risk arising from massive deposit out flows, banks can hold significant liquidity and capital buffers. Bank perform various functions out of them one of the main role of banks in the financial market is to create liquidity and transform risk (Berger & Bowman, 2009). Capital significantly affects the liquidity creation in the banking industry. According to Tan and Floros (2013), banks are forced by regulators to hold higher levels of capital when bank risk taking increases. On the other hand, the requirement to hold higher levels of capital from regulatory authorities can be responded by banks through increasing portfolio risk. An important factor contributing to a positive relationship between capital and portfolio risk relates to the actions of regulators and supervisors i.e. central bank (Altunbas et al., 2007). In addition, portfolio risk management has been an integral part of the diversified product and loan process in banking business.
The major objective of this study is to examine the relationship between capital, liquidity and portfolio risk in Nepalese commercial banks. Besides, following are the specific objective of the study are to analyze the structure and pattern of capital, liquidity and portfolio risk of Nepalese commercial banks, to examine the structure and pattern of selected banks specific variables (bank size, return on assets, loan loss provision, net interest margin and non-interest income) of Nepalese commercials banks, to identify the relationship between bank specific variables (control variables) and capital, liquidity and portfolio risk of Nepalese commercial banks and to examine the most essential variables affecting capital, liquidity and portfolio risk of Nepalese commercial banks.
The study is based on secondary data of 28 commercial banks with 196 observations for the period of 2011/12 to 2017/18. Data and information have been collected from the annual reports of selected commercial banks, banking and financial statistics and bank supervision report published by Nepal Rastra Bank. The data are collected for capital ratio, liquidity ratio, portfolio risk (HHI), bank size (total assets), return on assets, loan loss provision, net interest margin and non-interest income. The research design adopted in this study is descriptive and causal comparative research design.
The result shows that ADBL has highest average capital (17.54 percent) and RBB has lowest average capital (5.23 percent) among the Nepalese commercial banks over the study period. The results show the fluctuating of the average capital ratio. The structure and pattern of liquidity for Nepalese commercial bank showed that average liquidity is highest for ADBL (89.73 percent) and lowest for the SCBNL (57.43 percent). The increasing trend of average liquidity computed over the observation period. The average Herfindahl-Hirschman Index–HHI score is highest for ADBL (0.43) and lowest for the KBL (0.22) and has fluctuating trend during the study period. RBB has the highest average total assets (size) (Rs. 154.68 in billion) and lowest for the CIVIL (Rs. 30.53 in billion) having increasing trend during the study period. NBBL has the highest average return on assets (2.65 percent) and PRABHU has the lowest return on assets (0.48 percent) having increasing trend during the study period. The average loan loss provision is highest for PRABHU (4.086 percent) and lowest for EBL (0.294 percent). The average loan loss provision has decreasing trend during the study period. ADBL has the highest average net interest margin (5.52 %) and lowest for the CCBL (2.37 %) The results show the fluctuating but stagnant trend of net interest margin during the study periods. NBBL has the highest average non-interest income (36.15 %) and ADBL has the lowest non-interest income (13.67 %) having fluctuating but stagnant trend during the study period.
The Pearson’s correlation coefficients matrix of the Nepalese commercial banks shows that liquidity, return on assets and net interest margin has positive and significant relationship with bank capital. Similarly, HHI, bank size and non-interest margin has positive relationship with bank capital whereas loan loss provision has negative relationship with bank capital. The study finds that there exits HHI and loan loss provision has negative and significant relationship with liquidity. Likewise, the result shows that bank size and non-interest income has negative relationship with liquidity whereas return on assets and net interest margin has positive relationship with liquidity. Furthermore, the study also shows that loan loss provision and net interest margin has positive and significant relationship with HHI. However, bank size, return on assets and non-interest income are negatively correlated to HHI.
The regression result shows that the liquidity (loan to deposit) and return on assets are positive and statistically significant (at 1 % level of significance) factors that affect capital of commercial banks in Nepal. It indicates that the loan to deposit ratio and return on assets has positive impact on bank capital. Similarly, the study also shows that HHI and bank size has positive impact on bank capital. However, loan loss provision has negative impact on bank capital indicating that higher the loan loss provision, lower would be the bank capital. The regression result also shows that bank capital has positive and significant (at 1 % level of significance) impact on liquidity (loan to deposit). However, the beta coefficients for HHI are negative with liquidity and it is significant at 5 % level of significance. Likewise, bank size has negative impact on the liquidity. However, return on assets and net interest margin have positive impact on the liquidity indicating that increase in profitability of the banks leads to increase the loan disbursement. The regression result of the study also concludes that bank capital has positive impact on HHI. However, the beta coefficients for liquidity and non-interest income are negative with HHI and it is significant at 5 % level of significance. Likewise, bank size has negative impact on the HHI. However, loan loss provision has positive and significant (at 1 % level of significance) impact on the HHI.
Finally, the study concludes that there is a significant relationship between capital, liquidity and portfolio risk. The study also concludes that liquidity and return on assets are the most influencing factor that explains the changes in the bank capital. Similarly, the most dominant factor that determine the portfolio risk is loan loss provision followed by non-interest income and liquidity. Likewise, the most dominant factor that determine the liquidity is bank capital followed by portfolio risk.
Relationship between capital, liquidity and portfolio risk in Nepalese commercial banks [printed text] / Naresh Simkhada, Author . - 2019 . - 161p. ; GRP/Thesis + 15th.
Languages : English
Abstract: The capital, amount of liquid assets and portfolio risk have profound impact on the profitability of commercial banks in Asian developing economies. The main purpose of financial institutions is to maximize profit for which banks collect funds at a lower rate and lend at a greater rate of return (Rivai et al., 2007). The interrelationship between capital, portfolio risk and liquidity are of great importance for banking sector (Mahdi & Abbes, 2018).
The high level of bank capital boosts the confidence and trust of the public about the soundness of the bank. Capital helps the bank to cope more effectively with risk, but it also reduces the value of the deposit insurance put option (Merton, 1977). To ensure against liquidity risk arising from massive deposit out flows, banks can hold significant liquidity and capital buffers. Bank perform various functions out of them one of the main role of banks in the financial market is to create liquidity and transform risk (Berger & Bowman, 2009). Capital significantly affects the liquidity creation in the banking industry. According to Tan and Floros (2013), banks are forced by regulators to hold higher levels of capital when bank risk taking increases. On the other hand, the requirement to hold higher levels of capital from regulatory authorities can be responded by banks through increasing portfolio risk. An important factor contributing to a positive relationship between capital and portfolio risk relates to the actions of regulators and supervisors i.e. central bank (Altunbas et al., 2007). In addition, portfolio risk management has been an integral part of the diversified product and loan process in banking business.
The major objective of this study is to examine the relationship between capital, liquidity and portfolio risk in Nepalese commercial banks. Besides, following are the specific objective of the study are to analyze the structure and pattern of capital, liquidity and portfolio risk of Nepalese commercial banks, to examine the structure and pattern of selected banks specific variables (bank size, return on assets, loan loss provision, net interest margin and non-interest income) of Nepalese commercials banks, to identify the relationship between bank specific variables (control variables) and capital, liquidity and portfolio risk of Nepalese commercial banks and to examine the most essential variables affecting capital, liquidity and portfolio risk of Nepalese commercial banks.
The study is based on secondary data of 28 commercial banks with 196 observations for the period of 2011/12 to 2017/18. Data and information have been collected from the annual reports of selected commercial banks, banking and financial statistics and bank supervision report published by Nepal Rastra Bank. The data are collected for capital ratio, liquidity ratio, portfolio risk (HHI), bank size (total assets), return on assets, loan loss provision, net interest margin and non-interest income. The research design adopted in this study is descriptive and causal comparative research design.
The result shows that ADBL has highest average capital (17.54 percent) and RBB has lowest average capital (5.23 percent) among the Nepalese commercial banks over the study period. The results show the fluctuating of the average capital ratio. The structure and pattern of liquidity for Nepalese commercial bank showed that average liquidity is highest for ADBL (89.73 percent) and lowest for the SCBNL (57.43 percent). The increasing trend of average liquidity computed over the observation period. The average Herfindahl-Hirschman Index–HHI score is highest for ADBL (0.43) and lowest for the KBL (0.22) and has fluctuating trend during the study period. RBB has the highest average total assets (size) (Rs. 154.68 in billion) and lowest for the CIVIL (Rs. 30.53 in billion) having increasing trend during the study period. NBBL has the highest average return on assets (2.65 percent) and PRABHU has the lowest return on assets (0.48 percent) having increasing trend during the study period. The average loan loss provision is highest for PRABHU (4.086 percent) and lowest for EBL (0.294 percent). The average loan loss provision has decreasing trend during the study period. ADBL has the highest average net interest margin (5.52 %) and lowest for the CCBL (2.37 %) The results show the fluctuating but stagnant trend of net interest margin during the study periods. NBBL has the highest average non-interest income (36.15 %) and ADBL has the lowest non-interest income (13.67 %) having fluctuating but stagnant trend during the study period.
The Pearson’s correlation coefficients matrix of the Nepalese commercial banks shows that liquidity, return on assets and net interest margin has positive and significant relationship with bank capital. Similarly, HHI, bank size and non-interest margin has positive relationship with bank capital whereas loan loss provision has negative relationship with bank capital. The study finds that there exits HHI and loan loss provision has negative and significant relationship with liquidity. Likewise, the result shows that bank size and non-interest income has negative relationship with liquidity whereas return on assets and net interest margin has positive relationship with liquidity. Furthermore, the study also shows that loan loss provision and net interest margin has positive and significant relationship with HHI. However, bank size, return on assets and non-interest income are negatively correlated to HHI.
The regression result shows that the liquidity (loan to deposit) and return on assets are positive and statistically significant (at 1 % level of significance) factors that affect capital of commercial banks in Nepal. It indicates that the loan to deposit ratio and return on assets has positive impact on bank capital. Similarly, the study also shows that HHI and bank size has positive impact on bank capital. However, loan loss provision has negative impact on bank capital indicating that higher the loan loss provision, lower would be the bank capital. The regression result also shows that bank capital has positive and significant (at 1 % level of significance) impact on liquidity (loan to deposit). However, the beta coefficients for HHI are negative with liquidity and it is significant at 5 % level of significance. Likewise, bank size has negative impact on the liquidity. However, return on assets and net interest margin have positive impact on the liquidity indicating that increase in profitability of the banks leads to increase the loan disbursement. The regression result of the study also concludes that bank capital has positive impact on HHI. However, the beta coefficients for liquidity and non-interest income are negative with HHI and it is significant at 5 % level of significance. Likewise, bank size has negative impact on the HHI. However, loan loss provision has positive and significant (at 1 % level of significance) impact on the HHI.
Finally, the study concludes that there is a significant relationship between capital, liquidity and portfolio risk. The study also concludes that liquidity and return on assets are the most influencing factor that explains the changes in the bank capital. Similarly, the most dominant factor that determine the portfolio risk is loan loss provision followed by non-interest income and liquidity. Likewise, the most dominant factor that determine the liquidity is bank capital followed by portfolio risk.
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Barcode Call number Media type Location Section Status 652/D NAR Thesis/Dissertation Uniglobe Library Philosophy & Psychology Available