The Effect of Financial Distress on Performance of Nepalese Commercial Banks

Abstract

The research looks at how financial crisis affects the performance of Nepalese commercial banks. The dependent variables are return on assets and Z-score. Liquidity ratio, leverage ratio, capital adequacy ratio, spread rate, credit risk, credit to deposit ratio,
and loan loss provision are the independent variables chosen. The study is based on secondary data from 27 commercial banks, totaling 216 observations from 2012/13 to 2019/20.The information was gathered from the Nepal Rastra Bank’s Banking and Financial Statistics, the Ministry of Finance’s (MoF) publications and webpages, and the annual reports of the selected commercial banks. To examine the relevance and importance of financial hardship on the performance of Nepalese commercial banks, correlation coefficients and regression models are estimated. According to the findings, spread rate has a beneficial influence on return on assets and Z-score. It implies that an increase in the spread rate leads to an increase in the return on assets and the Z-score. Furthermore, the study found that loan loss provision had a negative influence on return on assets and the Z-score. It  follows that the bigger the loan loss provision, the lower the return on assets and Z-score. Credit risk, on the other hand, has a negative influence on return on assets and Z-score. This indicates that the bigger the credit risk, the lower the return on assets and Z-score. Similarly, the leverage ratio has a negative influence on the return on assets and the Z-score. It follows that the larger the leverage ratio, the worse the return on assets and Z-score. Furthermore, the liquidity ratio influences the return on assets
and the Z-score. It denotes that the higher the liquidity ratio, the better the return on assets and Z-score. Similarly, capital adequacy ratio influences return on assets and Z-score. It denotes that the greater the capital adequacy ratio, the higher the return on assets and Z-score. Similarly, the credit to deposit ratio influences return on assets and Z-score.