Determinants of Loan Loss Provisions of Commercial Banks in Nepal

Abstract

This study aims to derive determinants of loan loss provisions (LLPs) of commercial banks in Nepal using pooled data of ten commercial banks with the 50 observations over the period of 2012/13 to 2016/17. The descriptive and causal comparative research designs have been adopted for the study. The need for this research is due to failures in the loan loss provisioning practices which resulted in loan loss provisions (LLP) not reflecting on collectability of the defaulted loans. As a consequence, the banks do not capture their loss expectations and do not continuously reassess their loss expectations as the conditions affecting their borrowers may change. The study has been used loan loss provision on total assets as dependent variables and natural logarithm of total assets, total loan to total assets ratio, nonperforming loan to total assets ratio, earnings before taxes and provisions to total assets, capital adequacy ratio, loan to deposit ratio taken as independent variables. The estimated regression model reveals that nonperforming loan ratio (NPL) and loan to deposit ratio are significant positive impact of loan loss provisions. This study concluded that nonperforming loan ratio (NPL) and loan to deposit ratio are the mainly determinants of loan loss provisions of commercial banks in Nepal.

Keywords: Capital Adequacy Ratio, Earnings Before Taxes, Loan Loss Provisions, Loan to Deposit Ratio, Nonperforming Loan, Provisions, Total Assets


Article Review Status: Published

Pages: 23-37 (Download PDF)

Creative Commons Licence
This work by European American Journals is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License