Determinants of Financial Performance of Nepalese Commercial Banks: Evidence from Panel Data Approach

The impact of bank specific factors on the financial performance of Nepalese commercial banks is analyzed in this paper. The financial performance is measured by using return on assets (ROA). Similarly, managerial efficiency (ME), liquidity (LIQ), credit risk (CR), assets quality (AQ) and operational efficiency (OE) is used as proxy of bank specific factors. This study used panel data of 17 commercial banks for the period of 2010/11 to 2017/18. Breusch and Pagan Lagrangian multiplier test showed that Pooled Regression model is not appropriate and Hausman test concluded that Fixed Effect model is appropriate rather than Random Effect model. Using the Fixed Effect model; this study concludes that bank specific factors have significant impact on financial performance of Nepalese commercial banks. Finally, this study reveals that ME, AQ and OE have significant positive impact, and CR has negative impact on the financial performance of Nepalese commercial banks.

Estimating Optimum Growth-Maximizing Public Debt Threshold for Nepal

One of the common agenda of underdeveloped economies is to achieve a high and sustainable level of economic growth in the long run. Domestic and external borrowings are playing a crucial role in fulfilling the resource gap in the context of Nepal for a long period. A growing number of recent studies support the idea of a debt threshold level (turning point) above which debt starts reducing economic growth. This paper empirically investigates the relationship between economic growth and several other factors (investment, trade openness, population growth, domestic savings, and government debt) in the context of Nepal. The debt-growth relationship has been estimated by regression analysis and further explored the non-linear relationship between public debt and economic growth using time series annual data for the period of 1976-2019. The ARDL bound technique has been applied to estimate the short-run and the long run impact of debt on economic growth. Moreover, a quadratic bivariate model based on ARDL coefficients has been estimated to identify the growth maximizing level of debt. The estimated parameters confirm the optimum public debt to GDP ratio in the context of Nepal is 33 per cent. The policy implication of this finding for the Government of Nepal (GoN) is to ensure public debt management in line with the growth maximizing debt threshold. Further, a high level of trade deficits and government effectiveness in public sector management squeezes the fiscal space in utilizing adequate public debt in Nepal.

Causality between Financial Development and Economic Growth in Nepal

This study examines the empirical relationship between financial development and economic growth in Nepal. Financial development has been measured by three key pillars of the financial system bank, capital market and insurance. Gross domestic product and gross fixed capital formation are considered for economic growth indicators. Using time series techniques, the stationary properties of the data sets are tested followed by Johansen co-integration test to observe long run equilibrium relationship between the two variables and Granger Causality test to identify the causal relationship among the variables. Also, Vector Error Correction Model (VECM) has been employed to analyze the short run dynamics of the system. The result of the study reveals that there is cointegrating relationship between market capitalization and economic development with short-run causality is running from market capitalization to GDP. In regard to insurance market, error correction term is negative and significance for both GDP and GCF indicating there is cointegrating relationship between insurance market and economic development. However, the result shows no evidence of causality between insurance premium and economic development in short-run. The negative relation between bank and GDP reinforces that there is a cointegrating relationship between banking sector development and economic development. The result also shows that lagged value of GDP is significant. It shows that short-run causality is running from GDP to banking sector development.Nepal

Financial Development and Economic Growth: Evidence from Nepal

This paper aims to examine the role of financial development and economic growth in Nepal employing Autoregressive distributed lag (ARDL) approach of cointegration using time series data for the period from 1965 to 2018. Nepal is a unique country with big markets in the neighbors-India and China but remains as one of the poor landlocked developing countries, even being the earlier entrant in liberalization and reform. Nepal recently went through a substantial political transition and now the stable government is seeking substantial amount of foreign direct investment. In this background, it will be better, for a good policy analysis, to know how the financial activities have played the role in highly intended economic growth. We develop a model with five proxies of financial development (broad money, domestic credit to private sector, total credit from banking sector, capital formation, and foreign direct investment); and econometrically test their contribution in economic growth. Overall, the results suggest that financial development causes to economic growth substantially, except in the case of foreign direct investment. This result warns the policy makers to be more serious making investment friendly economy to attract the expected foreign direct investment.

User Perception on Electronic Payment Services in Kathmandu Valley

There have been significant efforts in Nepal to increase the outreach of electronic payments services (EPS) in the last couple of years but the usage of these services has not seen significant progress. People are showing reluctance to accept the new form of payments as there are issues on users’ acceptance of this new mode. There is a need to understand users’ perception on EPS and act accordingly to improve the usage. This paper analyses users’ perception on EPS from four aspects - perceived ease of use, perceived usefulness, perceived security and perceived trust. Results of the survey show that there are low average mean scores for security and trust when compared to perceived usefulness and ease of use. Respondents have cited accessibility of EPS as one of the major issues behind such a low usage. Most of the responses are found to be independent by gender, age group, income level and other attributes. Further, perceived usefulness and ease of use have higher effect on willingness to adopt EPS in future when compared to perceived security and perceived trust.

Role of Credit Risk in Performance difference between A and B Class Banks in Nepal

This paper explains the performance differences between A and B class financial institutions arising from credit risk. The dynamic panel data from 2008 to 2019 has been considered from all 28 commercial banks and 11 national level development banks for analysis. Arellano Bond method has been performed to control the unobserved heterogeneity and to reduce biasness in the parameter estimation as they have both cross sectional and time dimensions. The results have shown clear differences in credit risk status between A class and B class bank with all the parameters except for Return on Assets (ROA). The results show that the A class commercial banks are less vulnerable than the B class bank as measured by Standard deviation of ROA (standard deviation of return on equity (SDROE) both, yet offer substantially higher ROE and fairly higher NIM. Findings suggest that the past performance BFIs, regardless their classes, are capable enough to predict their future performance as all lag variables are significant. Development banks are advised to focus on maintaining appropriate credit to deposit ratio (CDR) as it has been affecting most of the performance indicators whereas, commercial banks are advised to monitor their loan loss provision to total loans and advances (LLPTLA) for better performance. The control variables have been found to have negligible effect on performance of banks yet higher inflation deteriorates the performance even at a small amount. Further, contradictory findings on influence of real gross domestic product (GDP) growth with the performance demands a need of further research. To recapitulate, the credit risk plays a vital role in performance of banks in Nepal and A class banks safer with returns.

Malmquist Productivity Index Approach in Assessing Performance of Commercial Banks: Evidence from Nepal

Using the DEA-based Malmquist total factor productivity index, this article measures the total factor productivity of Nepalese commercial banks during the period 2010-2011 to 2016-2017. It also examines whether the ownership structure and size of banks affect their efficiency. An input-oriented DEA model is used with aggregate panel data covering all the 28 commercial banks that are currently operating in Nepal. This article adopts constant returns to scale approach to measure and compare the efficiency and productivity of banks and to establish a benchmark for their performance. Interest expense, operating non-interest expense, deposits and labor are used as inputs variables and interest income, operating non-interest income and loan and advances as outputs variables. These data are extracted from the annual reports of the respective commercial banks. The mean efficiency score measured in terms of total factor productivity change resulted 1.008, which indicates that the efficiency level of Nepalese commercial banks has been increasing very slowly at the rate of 0.8% annually. Ownership structure of the banks influences marginally on the efficiency level of banks. The domestic private banks are relatively more efficient than the joint venture banks and the latter are comparatively more efficient than the public banks. The size of banks makes no significant difference in the efficiency level of banks.

Price Elasticity of Sectoral Lending in Nepal

During 2015 to 2019, there was a significant upsurge observed in the lending rate in Nepalese credit market. Interestingly, the lending amount also went up significantly in this period showing an anomalous relationship between lending and lending rate. This paper is an attempt to analyse this observed anomaly. We have estimated and examined the degree of elasticity of sectoral lending with lending rate in Nepalese context undertaking panel regression analysis covering all 28 commercial banks in operation in Nepal till mid-July 2019.The results show a positive and inelastic relationship to exist between sectoral lending and lending rate during the study period despite decreasing Herfindahl-Hirschman index in the same period, which means that level of competition is increasing in Nepalese banking industry. Our scenario analysis indicates syphoning of funds, and the changed role of bankers as major causes for this anomalous relationship.

Macroeconomic Influence on the Nepalese Stock Market

This study examines the dynamic relationship among the stock market and macroeconomic factors such as nominal domestic variables (inflation, money supply, and interest rate), real economic activity (gross domestic product) and foreign variable (exchange rate and foreign direct investment) of Nepal. It has used Johansen and Juselius (1990) method of multivariate cointegration for the period Mid-July 1994 to Mid-July 2015. The finding of this study shows that the stock prices are positively and significantly related to money supply. Real economic activity and interest rate have insignificant and negative relationship with the stock prices. Similarly, foreign direct investment, inflation (CPI) and exchange rate with US dollar have a positive and insignificant relationship with the Nepalese stock market. Accordingly, the VEC estimates suggest that there is no significant effect of macroeconomic variables to the Nepalese stock price in the short run. In general, the presence of cointegration and causality suggest that Nepalese stock market is not efficient in both the short run and the long run.

Asymmetric Impact of Oil Price on Inflation: Evidence from Nepal

This paper investigates asymmetric oil price pass through on inflation in Nepal using time series data of 331 months from April 1987 to February 2018. The paper applies Nonlinear Autoregressive Distributed Lag (NARDL) model to estimate long run and short run asymmetric adjustment of refined petroleum products on Consumer Price Index (CPI). Finding shows presence of long run asymmetric adjustment between price of all petroleum products and CPI. However, when the model is controlled for monetary impact and price level of India, only the price of diesel is found to have long run asymmetric pass through into inflation. The long run cointegrating equation shows unit rise in price of diesel is accompanied by small contraction in CPI in long run by -0.048 units. Meanwhile unit fall in price of diesel is shown to have positive long run pass through in CPI by 0.431 units. This apparent anomaly could be attributed to fact that with rise in price of diesel, demand for cheaper adulterant like kerosene increases thus resulting in fall in CPI Similarly, fall in unit price of diesel could have overall increased industrial demand and other resources which in turn led to significant increase in CPI. Meanwhile, study didn’t find any significant asymmetry in short run between CPI and petroleum products. However, in short run a significant impact on the CPI by actual size of increased price of Petrol and Diesel has been found. Hence, in short run, it shows that it is the size of price increase in Petrol and Diesel; not the price itself that has significant effect on the CPI. Since petroleum products in Nepal are not priced by market, these findings can provide guidelines for future oil pricing in reducing the spillover impact on general price level.