Commercial bank credit behaviour in Nepal

Abstract

This paper examines the major indicators of commercial bank credit in Nepal using panel data analysis of 104 observations from eight major commercial banks operated in Nepal for the period of 2002/03 to 2014/15. The total credit facility provided by the commercial banks is considered as the proxy of commercial bank credit. The analysis confirmed that bank size, liquidity ratio, deposit to capital ratio, cash reserve ratio and investment portfolio have the significant positive impact on commercial bank credit in Nepal. Contrarily, credit risk (the ratio of non-performing loan to total loan) has the significant negative impact on commercial bank credit. Regarding macroeconomic variables, rate of inflation has the significant positive impact whereas inter-bank interest rate has the significant negative impact on commercial bank credit in Nepal. Therefore, it is important to examine how far the bank credit behavior of the Nepali commercial bank is being affected by the different firm specific variables as well as the macroeconomic variables. Banks with high proportions of their deposits in time deposits have higher loan-deposit ratios than do banks with high proportions of demand deposits, due to the greater instability of the latter. Among them, eight banks were taken as sample by stratifying two government owned or its major holdings, three joint-venture with foreign banks and three banks fully operated by the private sectors. Contrarily, credit risk (the ratio of non-performing loan to total loan) has the significant negative impact on bank credit. Regarding macroeconomic variables, rate of inflation has the significant positive impact whereas inter-bank interest rate has the significant negative impact on commercial bank credit in Nepal.