Determinants of Financial Distress of Selected Financial Institution in Nepal

Abstract

ABSTRACT The purpose of this study was to investigate the factors that contribute to financial distress in Nepalese banks, focusing on key variables like liquidity, reserves, return on assets, solvency ratio, capital adequacy ratio, and leverage. The primary goal was to identify the factors that contribute to financial distress and their impact on the overall stability of selected financial institutions. The importance of this research stems from its potential to provide useful insights to the Nepalese banking sector. The study aimed to contribute to informed decision-making processes for banks and regulatory bodies by comprehensively analyzing the selected variables, enhancing their ability to proactively manage financial risks. A quantitative research methodology was used, with Altman's Z-score serving as the dependent variable and selected financial indicators serving as the independent variables. The study used a correlational research design to investigate the relationships between variables. Altman's Z-score was used to assess financial distress levels using historical data from eight Nepalese banks' financial reports. According to the study, liquidity management, reserve levels, and leverage are important factors influencing financial distress in Nepalese banks. The study provided empirical evidence on the impact of these variables, allowing financial institutions to make strategic decisions. Finally, this study shed light on the factors that contribute to financial distress in Nepalese banks, emphasizing the importance of prudent liquidity management, reserve levels, and leverage ratios. The findings have implications for banking strategic decision-making and policy formulation. The study's reliance on historical financial data, which may not capture real-time market dynamics, is one of its limitations. Furthermore, the scope was limited to specific banks, limiting the generalizability of the findings. Keywords: Altman's Z-score, capital adequacy ratio, financial distress, Nepalese banks, leverage, liquidity, reserve, return on assets, solvency ratio.