Determinants of Bank Lending Behavior in Nepal

Abstract

Extension of credit is one of the major functions of banking institution. The study attempts to capture the effectiveness of determinants of lending behavior of commercial banks in the Nepalese context. If banks are not efficient in their lending behavior, it may not contribute to economic growth. On the other hand, their inefficient and imprudent behavior may lead to riskier financial and macroeconomic instability. The main objective of the study is to test the effectiveness of the determinants of commercial banks lending behavior in Nepal. In the study, panel data of 24 commercial banks during the period of 1996 to 2015 were collected and analyzed using descriptive statistics, correlation and regression analysis. The model used is estimated using bank lending as dependent variable and other variables such as stipulated cash reserve ratio, open market operations, bank rate, assets, capital and liquidity as independent variable for the period; 1996– 2015. The result found that Assets, liquidity, OMOs, and CRR are the major determinants to affect bank lending. OMOs and CRR tend to influence the bank lending in negative manner. However, bank rate has positive impact on lending. Hence the central bank, should focus more on OMOs and CRR as monetary instrument. As study found that assets, capital and liquidity have positive impact on bank lending, central bank is recommended to focus more on effective and realistic liquidity monitoring and forecasting. Banks willing to lend more are recommended to increase their assets, capital as well as liquidity position that cushion them at the time of liquidity crisis.