A Critiquing of Research Article

Determinants of Bank Lending in Nepal

(Author: Neelam Timsina)

Presented by Group B

Prizma Shrestha

Sapana Yadav

Rajat Shrestha

Amrit Nepaune

1. Background the purpose of study

The author states that the role of credit is considered to be the key to economic growth and
financial stability of the economy. Commercial banks perform the role of financial
intermediation that collect money from the surplus sector in the form of deposits and lend it to
various sectors of the economy. Lending behavior of bank generally depends on the credit
guidelines issued from time to time by the regulatory authority and internal policies of the banks
as well as other non-economic factors. As credit constitutes a major chunk of bank's assets, the
study of the determinants of lending behavior becomes necessary because commercial banks in
Nepal need to understand how to manage these huge assets in terms of their loans and advances.
the author has also stated that monetary policy have also influence the bank performance
especially in lending. Central banks operate Cash Reserve Ratio (CRR), bank rate, as well as
Open Market Operations (OMOs) to affect banks' lending capacity. Therefore, central banker as
well as policy makers should have adequate and deep understanding about banks' lending
behavior and its determinants.

This study's underlying assumption is that any efforts to improve banks' lending behavior,
whether they come from central banks, governments, or banks themselves, must first evaluate the
effectiveness of the common factors that determine that conduct. This type of study has not been
carried out before by any researcher and academic institute of Nepal and thus expected to be the
milestone in Nepalese banking academic work

Objective of the study

The main objective of the study is to test and confirm the effectiveness of the determinants of
commercial bank lending in Nepal.

Research Gap

The bank lending depends on the other determinants such as regulations of government and
central banks in general and credit to deposit ratio, capital adequacy ratio, single obligor limit,
loan to value ratio, level of nonperforming loan etc in particular they are not included in this
study due to the lack of time series data.

Hypothesis

 H1: There is positive and significant relationship between GDP and private sector credit
of commercial banks
 H2: There is positive and significant relationship between volume of deposits and private
sector credit
 H3: There is negative and significant relationship between Interest rate and private sector
credit
 H4: There is negative and significant relationship between CRR and private sector credit

 H5: There is negative and significant relationship between Liquidity Ratio and private
sector credit
 H6: There is negative and significant relationship between Inflation and private sector
credit
 H7: There is positive and significant relationship between annual average exchange rate
and private sector credit
 2. Conceptual Framework

Bank lending in Nepal depends upon seven determinants. Economic growth has great
implication on monetary policy actions and bank lending behavior. As economic growth
increases in the country remarkably, investment in industry, agriculture and service sector
increases which leads to an increase in private sector credit. Inflation is an increase in the general
price level which is typically expressed as an annual percentage rate of change behavior.
Increase in exchange rate means depreciation of Nepalese currency and exchange rate
depreciation makes export demand higher and thereby production in the country. On the other
hand, remittance inflows increase which results in increase in bank deposit and lending also.
Liquidity is the base of confidence in the banking business and it has great implication on
analyzing bank lending behavior towards monetary policy action. Cash reserve ratio is a
monetary policy instrument which is fixed by the central bank to affect the loanable reserves of
commercial banks and there by their lending behavior. Interest rate was determined by the
central bank before the financial liberalization. Commercial banks has no autonomy to decide the
interest rate at that period. After the financial liberalization commercial banks were given
autonomy in this regard. Deposit is the foundation of the private sector credit.
3.Methodology

This research period extended from 1975-2014. The author collected the data are from various
sources such as Banking and Financial Statistics of NRB, Economic Survey (Ministry of
Finance), Quarterly Economic Bulletin (NRB), Commercial Banks' individual website, Annual
Bank Supervision Report (NRB), Quarterly Financial Indicators (NRB). The author tests the
stationarity of the variables using Augmented Dickey Fuller test, the Co-integration of the
variables using Johansen Co-integration test and Granger Causality test to examine the causal
relationship between the variables.

4.Result and Discussion

Table 1 shows the results of unit root test using the ADF.It was found that all the variable was
stationary at the first difference. So the author has used the Johansen co-integration test to
identify whether there exists a co-integration relationship.

Table 2 shows the results of Johansen's co-integration. The results show conflicting results with
trace test and maximum eigenvalues test. The trace test indicates a 3 cointegration relation,
however, eigenvalue shows only one. Hence it is desired to run OLS at first difference.

Annex 2 show the results of ordinary least square where GDP, exchange rate, volume of deposit
shows the positive but insignificant relation with the private sector bank lending. Whereas
inflation, interest rate, CRR shows negative insignificant relationship. Durbin Watson is 1.77
which is considered quite good in the test. R square is 0.30 is not so high in this model. The
dominance of informal sector credit even up to now, low banking practices in rural agricultural
areas, interest insensitive investment pattern in Nepal, political instability, lack of investment
friendly environment and various other non-economic factors may play role for this low R
squared ratio.

Results of Granger Causality Test

The Granger Causality Test shows the evidence of unidirectional causal relationship from GDP
to private sector credit but bi-directional causal relationship between private sector credit and
liquidity
5. Conclusion

According to a study, the gross domestic product of the nation and the commercial banks'
requirement to maintain a certain liquidity ratio are the key determinants of lending by
commercial banks. Commercial banks should consider the broader macroeconomic environment,
variables impacting the GDP in general, and their liquidity ratio in particular when making
lending decisions because there is a strong positive association between GDP and private sector
credit of commercial banks. A favorable and supportive macroeconomic environment will
improve banks performance and ensure responsible lending.

Overall Observation

Strength: When we went through the paper, we found that the introduction chapter is nicely
organized. The variable are clearly explained and they are also linked with past research. The
finding are well discussed and interpreted.

Similar reseach in Nepal

 Topic: BANK LENDING DETERMINANTS: EVIDENCE FROM NEPALESE

COMMERCIAL BANKS

 Author: Bishnu Prasad Bhattarai, PhD

 Journal: International Journal of Management (IJM)

 Objective: The main purpose of the study was to determine the lending behavior of
commercial banks in Nepal.

The loan and advance taken as dependent variables whereas liquidity, investment portfolio,
cash reserve ratio, bank size, gross domestic products growth rate and inflation rate were
independent variables. The descriptive, correlational and casual comparative research design
has been employed in this study.

Findings: The result shows that investment portfolio, cash reserve ratio and bank size have
positive and significant effects on loan and advance. Liquidity has negative and statically
 significant with loan and advance. GDP and inflation has not played an effective role in
determining the loan and advance

Further Research Agenda

As this article has covered the lending determinants of the commercial private sector bank
taking the commercial private sector bank as its dependents variable. So the another research
topic can be lending determinates of the development bank in Nepal. Moreover, the
interesting research topic can be’ Determinants of bank deposit of Nepalese commercial
banks.’

Bibliography
B, C. (1994). Finance for Farming: A Guide to the Lending Banker; Lagos. Institute of Banker,
NIgeria.

Bhattarai, B. P. (2020). BANK LENDING DETERMINANTS: EVIDENCE . International

Journal of Management, 1-10.

Timsina, N. (2017). Determinats of bank lending in Nepal. Nepal Rastra Bank, 35.