Indicators of Banking and Financial Institutions Failures in Nepal

  • Rabindra Joshi Liberty College, Pokhara University, Kathmandu, Nepal
Keywords: Banking and financial institutions (BFIs), CAMEL variables, failures, bankruptcy, multivariate discriminant model, logistic regression model

Abstract

Identification of the companies prone to various risks is important to regulators, investors, analysts and practitioners. It is imperative to know the early warnings of impending financial problems and subsequent failures of these companies. This study focuses on analyzing the causes and problems associated with the failure of Banking and Financial Institutions (BFIs) in Nepal. The main objective of this study is to examine the predictive power of CAMEL ratios to develop a Multivariate Discriminant Model (MDA) and Logistic Regression Model (LRA) in the context of Nepalese BFIs. The research applies to secondary data to predict the predictive failure of the Nepalese BFIs with the support of MDA  and LRA. Some of the failed BFIs in Nepal were liquidated while a few of them were either acquired by other companies or merged with others. The study examines the causes of failure and subsequently predicts the genuine failure of the Nepalese BFIs. Further efforts are made to test the hypothesis through CAMEL variables to distinguish these companies based on their financial strength. The research findings demonstrate that the selected seven CAMEL financial ratios of these companies varied in their mean ratios three year prior to their actual failure. The ratios of non-failed BFIs were relatively stable throughout the three years, contrary to the failed BFIs under study. Finally, the relative contribution of return on assets and non-performing loans to total loans has been found to be a more reliable and predictable ratio with regard to banking failures for both MDA and LRA.

Published
2012-12-10
How to Cite
Joshi, R. (2012). Indicators of Banking and Financial Institutions Failures in Nepal. The Journal of University Grants Commission, 1(1), 106-128. Retrieved from http://jugc.edu.np/index.php/JUGC/article/view/115