Impact of Financial Distress on the Financial Sustainability of Nepalese Commercial Banks

Abstract

This study examines the impact of financial distress on the financial sustainability of Nepalese commercial banks. Return on assets, return on equity, and bank stability as the dependent variables. The selected independent variables were liquidity ratio, non-performing loan ratio, capital adequacy ratio, efficiency, gross domestic product and inflation as the independent variables. This study is based on secondary data of 27 commercial banks with 216 observations for the period from 2011/12 to 2018/19. The data were collected from the Banking and Financial Statistics, Quarterly Economic Bulletin published by Nepal Rastra Bank, and annual reports of the selected commercial banks. The regression models are estimated to test the impact of financial distress on the financial sustainability of Nepalese commercial banks. The study showed that gross domestic product has a positive impact on return on assets. It indicates that an increase in gross domestic product leads to an increase in return on assets. The study also showed that the capital adequacy ratio has a positive impact on return on assets. It reveals that higher the capital adequacy ratio, the higher the return on assets. Likewise, the inflation rate has a negative impact on return on assets. It indicates that higher the inflation rate, lower would be the return on assets. However, efficiency ratio has a negative impact on return on assets. It reveals that increase in cost to income ratio leads to decrease in return on assets. Likewise, non-performing loan has a negative impact on return on assets. It means that increase in non-performing loans leads to decrease in return on assets. In contrast, efficiency ratio has a negative impact on return on equity and bank stability. It reveals that an increase in the cost-to-income ratio leads to a decrease in return on equity and bank stability. Moreover, the liquidity ratio has a negative impact on return on equity. It means that the higher the liquidity ratio, the lower the return on equity. Likewise, non-performing loans have a negative impact on return on equity and bank stability. It means that an increase in non-performing loans leads to a decrease in return on equity and bank stability. Moreover, gross domestic product has a positive impact on return on equity and bank stability. It indicates that an increase in gross domestic product leads to an increase in return on equity and bank stability.