Influence of Bank-Specific and Macroeconomic Variables on Credit Risk: A Case of Nepalese Commercial Banks

Abstract

Commercial banks are the major sources of credit for business firms and households in many countries. Better performance of these financial institutions play a significant role for the economic prosperity of any country and poor performance of these institutions result the slowdown of economic growth and affects badly to the region of the world. The main objective of this study is to examine the influence of bank-specific and macroeconomic variables on credit risk in context of Nepalese commercial banks. The study is based on panel data analysis of the secondary data of 15 commercial banks with 150 observations for the period 2004 to 2013. As a first approximation to the theory, this study hypothesizes that the credit risk of the banks depends on several bank specific and macroeconomic variables such as bank size, credit to deposit ratio, capital adequacy ratio, gross domestic product growth rate, unemployment rate and inflation rate. The study revealed that average nonperforming loan total loan was 7.38 percent while provision for loan loss to total loan was 2.04 percent. The beta coefficient for capital adequacy, unemployment and inflation rate are negatively significant with nonperforming loan. Similarly, bank size, capital adequacy ratio and gross domestic product growth rate are negatively significant with provision for loan loss to total loan. However, the coefficient for credit to deposit is positively significant with provision for loan loss to total loan. Thus, this study concludes that capital adequacy ratio is major determinant of credit risk in context of Nepalese commercial banks.