Factor Affecting Liquidity in Nepalese Development Banks

Abstract

ABSTRACT This study examines the determinants of liquidity of development banks in Nepal. The study has applied ordinary least square (OLS) regression models to a panel data of development banks for the period from 2012/13 to 2021/22. This study shows that development banks have kept significant cash holdings relative to their overall assets, and their efficient risk management suggests that they have an adequate amount of liquidity. The correlation study reveals an insignificant positive association between non-performing loans, the capital adequacy ratio, and liquid assets as a proportion of total assets (LATA). Liquidity (LATA) was then significantly positively correlated with both the rates of inflation and return on assets. Furthermore, there is a significant negative correlation between bank size and LATA. The multiple regression analysis revels that there is significant positive impact of capital adequacy ratio on liquidity of the development banks while non-performing loan and inflation rate have insignificant negative impact on liquidity. Besides these, return on assets had insignificant positive impact on liquidity (liquid assets to total assets) of the development banks. Moreover, bank size had significant negative impact on liquidity. Hence, this study concluded that capital adequacy ratio and bank size are the key factors of liquidity in Nepalese development banks. Keywords: Liquid assets to total assets ratio, capital adequacy ratio, non-performing loan ratio, profitability and inflation rate.