Domestic Private Banks Research Articles

Impact of Bank-specific and Macroeconomic Factors on Non-Performing Loans in the Banking Sector of Nepal

Non-performing loans (NPLs) in the banking sector serve as a crucial indicator for assessing the performance of banks, as the effective management of credit risk stands as a pivotal challenge for lending institutions. The study aimed to determine the significant determinants of bank-specific factors including bank types and macroeconomic factors that determine the magnitude of NPLs in the context of Nepal. The study has included 11 years of strongly balanced panel data of 16 commercial banks consisting of seven domestic private banks, six joint venture banks, and three government-owned banks and macroeconomic data for the period of 2011/12 to 2021/22. The study applied the Pool OLS regression model including bank-dummy variables to assess the impact of the bank-specific factors and macroeconomic factors. The results revealed that the non-performing loan is higher in government-owned banks with a high level of variability compared to domestic private banks and joint venture banks. The study concluded that capital adequacy (CAR), operating efficiency (OCR) and remittance (Remit) have a significant negative impact on NPLs whereas, credit mobilization (CDR) has a significant positive impact on NPLs. It also revealed that the presence of joint venture and domestic private sector banks significantly decreased the size of non-performing loans compared to the presence of government-owned banks in the banking industry. Moreover, ROA, the rate of inflation, and lending interest rates have a positive but insignificant effect on NPLs. Similarly, the GDP growth rate has a negative but insignificant effect on NPLs.

Bank efficiency and undesirable output: An analysis of non-performing loans in the Brazilian banking sector

This study aims to analyze the impact of non-performing loans (NPLs) on the technical efficiency of banks in the Brazilian banking sector and to identify determinants of bank efficiency. The Directional Distance Function (DDF) method is used to measure banks’ technical efficiency and identify the factors that affect it. The results show that NPLs negatively impact efficiency, compromising banking operations and reducing the ability to produce new loans, affecting profitability. From 2003 to 2019, foreign banks were, on average, more efficient than domestic public and private banks. During COVID-19 (2020–2022), federal public banks were the most efficient. The analysis also suggests that the low efficiency of domestic public banks is associated with the lower technical quality of state public banks. The practical implications of this study are that banks must manage their NPLs effectively to improve their efficiency and profitability. This study's originality lies in analyzing the determinants of bank efficiency in Brazil, which can help banks improve their efficiency and performance.

Do macroprudential policies affect bank efficiency? Evidence from emerging economies

This paper assesses the impact of macroprudential policies on the efficiency of banks. Using the data of more than 1,000 commercial banks in 36 emerging economies during the period of 2000–2016, we first estimate bank-level efficiency by using the stochastic frontier approach and then adopt the fixed effects estimator to examine the impact of macroprudential policies on bank efficiency. We present consistent evidence on following three main findings. First, bank efficiency increases significantly with more stringent macroprudential policies. Second, there are competing effects of the macroprudential instruments aimed to increase the banking sector’s resilience and those aimed to smooth the credit cycle. The latter is shown to have more favorable impact on bank efficiency. Third, conditional on bank characteristics, macroprudential policies exert distributional effects on bank efficiency--more conspicuously on banks with less capitalization and lower market power and more on domestic private banks than state-owned banks and foreign banks.

The liquidity paradox in Nepalese banks

This study analyzes the influence of bank-specific and macroeconomic variables on liquidity in commercial banks in Nepal. Using pooled cross - sectional data from ten sample banks for the period 2011/12 to 2016/17, with sixty observations, the study employs a causal-comparative and descriptive research design as its methodology. The study concludes that bank-specific and macroeconomic variables significantly affect the liquidity in Nepalese banks, with different effects observed for public sector banks, joint ventures, and domestic private banks. This study finds that the capital adequacy ratio, bank size, and return on assets are the key determinants of bank liquidity. The findings suggest that the capital adequacy ratio positively impacts the liquidity of all types of banks in Nepal. However, the liquidity of all banks is adversely affected by the return on assets. Additionally, bank size negatively affects the liquid assets to total assets ratios of all types of banks, indicating that larger banks have lower liquidity ratios. The liquid assets to deposits ratio has a positive impact on public banks' liquidity but a negative effect on joint venture and private banks' liquidity in Nepal. These findings have significant implications for policymakers, regulators, and bank managers in Nepal to ensure effective liquidity management.

Relating Determinants of Profitability of Commercial Banks in India with Selected Financial Variables: a Dynamic Panel Data Analysis

This article analyses the elements that determined the success of India's commercial banks between 1992 and 2016. Arellano and Bond's Dynamic Panel Data is used for the unbalanced panel data of 80 banks in India during the reform period, broken down into three ownership groups: Public Sector Banks, Domestic Private Banks, and Foreign Banks. The research also considers the NIM and ROA as supplementary measures of bank profitability. The Return on Assets (ROA) compares the profitability of a bank to its total asset base, while the Net Interest Margin (NIM) measures the profitability of the bank's interest-bearing activities. Explanatory variables include bank-specific (BS), industry-structural (IS), macroeconomic (ME), and other-specified (OS) factors. The empirical results demonstrate that industry-specific and macroeconomic factors, in addition to the banks' inherent features, impact profitability. Profitability of Indian banks is found to be heavily influenced by political and ownership issues. However, the profit-influencing factors differed widely among the groupings.

Monetary Policy Pass-through, Ownership and Crisis: How Robust is the Indian Evidence?

Employing disaggregated data for 2001–2016, this study investigates the lending and loan pricing behaviour of state-owned and domestic private banks in response to monetary policy. Three major findings emerge. First, although both the interest rate and the bank lending channels are relevant for monetary pass-through, there is a trade-off: the impact of the former is much higher than the latter, although it occurs with a significant lag. Second, domestic private banks have a far greater response to a monetary policy shock under the interest rate channel, whereas state-owned banks display a greater response under the bank-lending channel. And finally, state-owned banks cut back lending during periods of crises, although no such response is manifest in domestic private banks. JEL Codes: C23, D4, E43, E52, G21, L10

Post-Neoliberalism and External Financial Liberalization: Comparing Left-Wing and Right-Wing Populism

AbstractThis article aims to discuss to what extent populist parties with opposite ideological backgrounds have differed in their policies towards inherited external financial liberalization (EFL). Building upon a comparative case study centred on Argentina under Kirchnerism (2003–15) and Hungary under Viktor Orbán (since 2010), I conclude that both experiences led to a partial EFL reversal. However, reflecting their opposite ideological underpinnings, each subtype of populism opted to restrict a different dimension of EFL. Argentina's left-wing populism re-regulated cross-border capital flows, harming financial operators, foreign investors and primary exporters through capital controls and export surrenders. These interventionist capital account regulations were needed to shield expansionary macroeconomic policies that attended the interests of subordinate socioeconomic strata, fuelling the tension with financial markets and domestic economic elites. Conversely, Hungary's right-wing populism focused on the ownership structure of the banking sector, aiming to redistribute assets from foreign to domestic private banks and improve the credit conditions for native capitalists. In this case, even when resorting to macroeconomic heterodoxy, the maintenance of fiscal balance and price stability retained support from both foreign investors and domestic business groups, mitigating tensions derived from financial nationalism.

Loan loss provisions and income smoothing – Do shareholders matter?

In this paper, we aim to analyse the role of shareholders in the creation of discretionary loan loss provisions (LLP) and the use of LLP in income smoothing. Using a sample of over 200 Central European banks, we demonstrate that LLP and income smoothing of foreign-owned banks and state-owned banks differ from those of domestic private banks. Foreign and state banks create higher discretionary LLP than private domestic banks. Foreign banks use these LLP to perform discretionary income smoothing, while state banks, in general, do not smooth income. Higher LLP of foreign banks are observed in banks with low asset quality and high profitability. Foreign banks with low profitability that operate in volatile economic environments do not create higher discretionary LLP than domestic private banks. This implies that their risk is not lower than that of locally owned banks, at least on the credit side. In the aftermath of the financial crisis, both foreign and state banks have become more prudent than domestic private banks, and their discretionary LLP are higher. Overall, we provide evidence that foreign and government ownership affect LLP policy in banks. This complements existing results on the differences in loan cyclicality and default risk between foreign, state and domestic private banks.

Are Banks in India Diversified Enough, Geographically, Across States and Economic Sectors?

This article, the first of its kind for the Indian economy, constructs lending environment portfolios of economic activities that banks in India have been faced with, for four Indian banking groups based on the extent of their operations in terms of their deposit shares in each state and the lending-portfolio mix of economic activities in those states. For empirical analysis, data on seven components of gross domestic product and state gross domestic product for 29 states from 1980–1981 to 2016–2017 were taken. The results reveal that the portfolio variances (risk) of the bank groups have declined in the last three decades. Compared to domestic private banks, the State Bank of India group and nationalised banks seem to have significantly reduced their environmental portfolio variability. Simulations to grasp the reasons for this geographic risk reduction show that structural economic reforms introduced in the early 1990s seem to have contributed more than changes in the banking structure in reducing the portfolio risk of banks.

Bank ownership and lending dynamics: Evidence from Turkish banking sector

The principal aim of this paper is to examine whether the bank ownership structure leads to differences in the lending dynamics of banks during the various phases of the business cycle. To elaborate on this question we make use of a bank-level panel data set which comprises of the monthly financial statements of public banks, domestically owned private and foreign-owned banks for the period between 2005 and 2019 operating in a large emerging market, Turkey. We exploited panel fixed effects methodology with a large set of macroeconomic and bank-level controls in various specifications. The results of our analyses demonstrate that public banks are less pro-cyclical in lending credits compared to private and foreign-owned banks by smoothing credit cycles during the upturns and downturns in the business cycle. This behavior strengthens during the recessions and financial distress periods as public banks lend significantly higher than domestic private and foreign-owned banks. Furthermore, the impact of bank ownership on credit allocation differentiates by the type of financial distress. If the source of the distress is global, foreign banks do not behave significantly differently from domestic private banks and during the local distress, foreign banks cut lending significantly more than domestic private and public banks. Overall, our findings suggest that while domestic private and foreign banks’ lending behavior is pro-cyclical with economic activity; public banks play a stabilizing role when financial conditions tighten or the economy overheats.

The finance-growth nexus: The role of banks

We contribute to the finance-growth nexus literature by showing that credit origin, bank ownership, type of credit, and bank type matter in economic growth. We use a unique dataset covering 5555 cities in Brazil, with granular information on credit characteristics. We find that non-earmarked credit to the corporate sector is associated with municipal economic growth more strongly than earmarked credit, despite the increase in the relevance of the latter after the global financial crisis. We also find that the type of credit—whether the loans are general purpose or for a specific purpose—is associated with economic growth in different ways. Overall, credit provided to the corporate sector by domestic private banks is correlated with higher economic growth rates. In contrast, the relationship between credit from state-owned banks and economic growth becomes statistically significant only after the crisis. Although we follow the finance-growth literature in our empirical exercises using internal instruments in generalized method of moments (GMM) estimations, we also conduct robustness tests using two additional external instruments: the number of complaints filed against each bank and local credit accessibility. Our findings with external instruments are the same with respect to the use of traditional internal instruments in GMM estimations.

Financial deregulation, competition and cost efficiency of Indian commercial banks: is there any convergence?

This paper investigates the convergence in cost efficiency among the Indian commercial banks during 1998–2015. We follow a two-step approach: We first employ the double bootstrap procedure of Simar and Wilson (J Econom 136:31–64, 2007) for estimating the bias-corrected cost efficiency scores. Using a dynamic panel framework, we then apply the concepts of β-convergence and σ-convergence from the growth convergence literature to evaluate the convergence process in the banking industry. Our results indicate large difference in mean efficiency among banks across various ownership categories. Further, we observe strong evidence favouring convergence in cost efficiency, driven by both “catching-up” and “lagging-behind” phenomena. The speed of convergence was found highest in state-owned banks, followed by foreign-owned and domestic private banks.

Credit decomposition and economic activity in Turkey: A wavelet-based approach

This paper aims to investigate the co-movement between the credit growth and gross domestic product (GDP) growth in Turkey over the period January 2004–October 2019. By taking into account alternative credit decomposition and the variations over time and across frequencies using the wavelet analysis, the results show that: i) GDP growth highly synchronizes with credit growth compared to other financial variables such as stock exchange, bonds, and exchange rate. ii) There is a high correlation between commercial loan growth and capital formation and a relatively weak one with consumer loans and consumption. iii) Co-movement stemming from Turkish Lira (TL) credits to GDP growth is stronger than foreign exchange (FX) credits where the latter is significant until 2015. iv) Public and domestic private banks are the main drivers of economic activity while the foreign banks are following them. By showing the differential effects of different types of credit on GDP growth, we specify that shocks to different credit types are crucial to analyze business cycles. For policymakers, this result implies that the dynamics of different credit types are crucial to analyze the impacts of credit cycles on economic activity.

Why Did Public Banks Lend More During the Global Financial Crisis?

During the Global Financial Crisis (GFC), state-owned or public banks lent relatively more than domestic private banks in many countries. However, data limitations have hindered a thorough assessment of what led public banks to better maintain lending during the GFC. Using a novel bank-level dataset covering 25 emerging market economies, we show that public banks lent relatively more during the GFC because they pursued an objective of helping to stabilize the economy, rather than because they had superior fundamentals or access to public or depositors’ funding. Nonetheless, their countercyclical behavior seems unique to the GFC rather than a regular characteristic of public banks before and after the GFC.

Why Did Public Banks Lend More During the Global Financial Crisis?

During the Global Financial Crisis (GFC), state-owned or public banks lent relativelymore than domestic private banks in many countries. However, data limitations havehindered a thorough assessment of what led public banks to better maintain lendingduring the GFC. Using a novel bank-level dataset covering 25 emerging marketeconomies, we show that public banks lent relatively more during the GFC becausethey pursued an objective of helping to stabilize the economy, rather than because theyhad superior fundamentals or access to public or depositors' funding. Nonetheless,their countercyclical behavior seems unique to the GFC rather than a regularcharacteristic of public banks before and after the GFC.

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.

Non-core deposit of Indonesian banking

PurposeThis paper aims to examine non-core deposit (NCD), or the fraction of deposit most likely to be withdrawn, based on bank liquidity behavior. NCD is an analytical component of bank deposit; hence, its withdrawal rate is crucial.Design/methodology/approachThe paper categorizes all 114 commercial banks in Indonesia using K-Median clustering and produces NCD coefficients for each cluster. Clustering result resembles the bank ownership-based grouping.FindingsGenerally, state-owned banks and private-domestic banks have smaller NCD coefficients compared to foreign-owned, joint-venture and regional government-owned banks. The NCD coefficient then can form thresholds for an event of extreme deposit withdrawal for macroprudential surveillance.Originality/valueNCD is an analytical indicator that can be useful to manage the liquidity risk of banks; however, this indicator is rarely found in the literatures, hence not many know how to estimate the indicator.

The Relative Efficiency of Commercial Banks in Pakistan with Respect to Size and Ownership Structure During and After Global Financial Crisis

Purpose: This study has been carried out to find out the relative efficiency of the commercial banks in Pakistan over a five- year period from 2006 to year 2010 using Frontier Approach of efficiency. The commercial banks included in this research paper are public sector banks, privatized banks, domestic private banks, and foreign banks. In addition to overall efficiency comparison of the commercial banks, this study has also tested the effect of size and ownership structure of the commercial banks in Pakistan on their efficiency. 
 Data/Design/Methodology/Approach: Out of 44 banks, 21 commercial banks have been chosen, which, in terms of deposits, account for about 94 percent of total deposits of the banking sector (Rs.5,124,308 million) as on December, 2010. Secondary data of the banking firms have been gathered from their audited financial statements. Intermediation approach has been used by employing Data Envelopment Analysis. The relative efficiency of the commercial banks has been investigated in context of intermediation approach which transforms labor and capital into advances/loans and investments.
 Findings: Over all a very few commercial banks have achieved 100% efficiency. It is, however found that privatized and domestic private banks have shown better efficiency in terms of financial intermediation as compared to public sector and foreign banks. The size of the banks has a very slight effect on the relative efficiency of the banks. The global financial crisis has affected the efficiency of some of the commercial banks but for a small period of time.
 Originality: This paper is an attempt to find out the relative efficiency of the commercial banks during the mentioned period which lies during the Global Financial Crisis. Its findings would be of great value for every stratum of society including bankers, business community, academicians, and government and of course, the investors.

The politics of bank ownership and currency policies in Central and Eastern Europe

ABSTRACTThis paper argues that state-owned, private domestic, and foreign banks have different preferences for exchange rate policies. More specifically, I posit that governments will be less willing and able to maintain fixed exchange rate arrangements in closed banking systems dominated by government-owned banks than in globalized banking systems with a large presence of foreign banks. The article’s principal claim rests on the notion that ownership structure of the banking system empowers different types of banks, affects their interests, and shapes the responsiveness of government politicians to bank demands. The bank ownership types further influence the stability of the domestic monetary system and financial regulation that are of paramount importance in the determination of exchange rate regimes. An empirical investigation of data on exchange rate regimes for 25 Central and Eastern European countries provides strong support for the theory. The results are robust to alternative estimation techniques, instrumental variable analysis, and the inclusion of several economic and political variables.

Cyclicality of lending in Africa: The influence of bank ownership

Ownership structure of banks has dramatically changed over the past two decades in African countries with privatization and foreign bank entry, including the expansion of Pan-African banks. The objective of this paper is to investigate how bank ownership influences cyclicality of lending in Africa. We are then able to assess how changes in bank ownership influence the economy. To this end, we measure the sensitivity of bank loan growth to GDP per capita growth of the host country with dynamic GMM estimations. We use panel data from 190 commercial banks covering 20 African countries spanning the period from 2002 to 2015. We find that lending of African banks is procyclical for all types of banks. However, we observe that Pan-African banks are the least procyclical banks, while no significant difference in procyclicality is observed between state-owned banks, domestic private banks, and other foreign banks. In addition, we find evidence that foreign banks are influenced by GDP per capita growth of their home country. Therefore, our findings support the view that the expansion of Pan-African banks contributes to reduce cyclicality of lending. However, foreign bank entry can enhance the transmission of external shocks.