And Bank Performance in Nepal

Group Members:Anjana Joshi

Ashik Basel

Ashrit Maskey

Bandana Khadka

Bijay Pandey

Presentation OutlineIntroduction

Purpose of the study

Significance of the study

Methodology

Data Analysis Presentation

Conclusion and Finding

Limitations

Critical Appreciation

• Living legend in financial management and related disciplines.

• Ph. D. degree from Delhi University in 1986.

• Visiting Fulbright faculty to college of business, Florida State University from Aug 1992 to 1993.

• Received ‘Dirgha Sewa Padak’ 2061.

• Mahendra Vidya Bhushan A-Class medal from the Late King Birendra.

• Chairman of Finance Instruction Committee, Tribhuvan University.

About the Author

Prof. Dr. Radhe S. Pradhan

Corporate Governance

company’s management

Board Members

Shareholders

Other stakeholders

Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined."

What is CG?

• CG is the set of processes, customs, policies, laws, & institutions affecting the way a corporation (or company) is directed, administered or controlled.

• According to Cadbury Report 1992 define “corporate governance is system by which companies are directed and controlled”

• Ruin(2001) stated that corporate governance as a group of people getting together as one united body with task and responsibility to direct, control and rule with authority.

Introduction

Purpose of the study

• To investigate the relationship between corporate governance and bank performance in Nepal.

• To test the impact of board size, board composition, number of directors’ meetings, and leverage on bank performance.

• This study aims to improve standard in business and minimize corporate fraud.

• This study will help the banks to find out the appropriate measures of different corporate governance variable.

• To safeguard the interests of shareholders’.

• To ensure accountability of different individuals in organization.

• To encourage FDI.

• This study helps to ensure transparency which ensures strong and balanced economic development.

Significance of the study

Methodologies

• This study is based on the secondary data which were gathered for 23

banks in Nepal.

• This study is casual comparative type as it deals with relationship of

corporate governance and control variables with bank performance.

• The study examines the effect of board size , number of executives

directors in the board, number of board meetings held in the last fiscal year

at the time of gathering data and leverage.

S.No. Name of the commercial banks Study period Observations

1 Rastriya Banijya Bank 2006/07-2010/11 5

2 Nepal SBI Bank 2006/07-2010/11 5

3 Bank of Kathmandu 2006/07-2010/11 5

4 Citizens Bank International 2006/07-2010/11 5

5 Laxmi Bank 2006/07-2010/11 5

6 DCBL 2006/07-2010/11 5

7 Agricultural Development Bank 2006/07-2010/11 5

8 Bank of Asia 2006/07-2010/11 5

9 Nepal Investment Bank 2006/07-2010/11 5

10 Nepal Standard and Chartered Bank 2006/07-2010/11 5

11 Himalayan Bank 2006/07-2010/11 5

12 NMB Bank 2006/07-2010/11 5

13 Lumbini Bank 2006/07-2010/11 5

14 NABIL Bank 2006/07-2010/11 5

15 NIC Bank 2006/07-2010/11 5

16 Global Bank 2006/07-2010/11 5

17 Kumari Bank 2006/07-2010/11 5

18 Everest Bank 2006/07-2010/11 5

19 Machhapuchhre Bank 2006/07-2010/11 5

20 Prime Bank 2006/07-2010/11 5

21 Sidhartha Bank 2006/07-2010/11 5

22 Sunrise Bank 2006/07-2010/11 5

23 Nepal Bangladesh Bank 2006/07-2010/11 5

Total number of observations 115

• The model estimated in this study assumes that the bank performance depends on several corporate governance and control variables.

• Corporate governance variables considered are board size, number of executive directors, number of independent directors and number of board meetings.

• Bank Performance=f(CG variables, Control variables)More specifically, Bank Performance = β0 + β1 BS + β2 NED + β3 NID + β4NOM + β5 LEV + e 

• The bank performance is used as dependent variable and is measured in terms of: ROA, ROE and NPL

The Model

Contd…• The independent variable consists of corporate governance variables and control

variable as under:

Corporate governance variablesBS, NED, NID, NOM

Board of directorsH1: Board size is negatively related to bank performance

Board of independenceH2: Board independence is positively related to bank performance.H3: Board dependence on executive directors is negatively related to bank performance.

Number of board meetingsH4: Number of Board meetings is positively related to bank performance.

Control VariablesLeverage

H5: If leverage of a firm increases, it would improve the firm performance.

Therefore, the model assumes the following priori hypothesis for return onassets and return on equity models: β3, β4, β5>0 and β1, β2<0

The model assumes the following priori hypothesis for non- performing loans:β2 and β5 >0 and β1, β3 and β4 <0

Descriptive StatisticsRatio Minimum Maximum Mean Standard

deviationROE 0.000 0.931 0.158 0.198ROA 0.000 0.192 0.141 0.021NPL 0.000 0.102 0.0325 0.156BS 5.000 9.001 7.431 1.456LEV 0.651 0.924 0.824 0.105NED 0.000 8.150 6.235 1.251NID 0.000 2.000 1.0000 0.001NOM 2.000 26.000 12.975 2.356

ROE ROA NPL BS LEV NED NID NOM0

5

10

15

20

25

30

MinimumMaximumMeanSd.dev

Ratios

ROE ROA NPL BS LEV NED NID NOM

ROE 1

ROA 0.281 1

NPL -0.183 -0.325 1

BS -0.056 -0.172 -0.361 1

LEV 0.101 0.095 0.412 0.213 1

NED -0.054 -0.142 0.235 0.432 0.201 1

NID 0.029 0.116 -0.258 0.423 0.092 -0.079 1

NOM 0.134 0.145 -0.015 0.067 0.087 0.047 0.068 1

Correlation matrix for the dependent and independent variables

Models Intercept Regression Coefficient of

Adj. R-bar2 SEE F

BS LEV NED NID NOM

1. 5.13(10.13)

-0.05(0.89) 0.18 10.12 15.12

2. 11.13(8.12)

1.69(2.45*) 0.23 9.89 14.32

3. 13.58(7.26)

-1.17(3.17*) 0.15 23.57 18.25

4. 8.39(4.29)

1.12(3.17*) 0.19 27.65 14.56

5. 21.13(3.56)

0.34(0.89) 0.13 16.65 19.19

6. 12.67(3.35)

-0.18(1.12)

1.52(3.58*) 0.28 32.59 25.68

7. 6.79(5.45)

-0.15(0.89)

0.68(3.12*) 0.37 45.26 36.49

8. 16.36(3.68)

-0.81(0.95)

1.24(2.82*)

0.69(2.25*)

0.69(2.25*) 0.46 56.38 43.36

9. 18.93(3.86)

-0.23(1.23)

1.19(2.51*)

0.21(2.37*) 0.21

(2.37*)1.05

(0.93) 0.54 53.28 53.23

Regression of corporate governance and control variables on return on equity

Models

Intercept

Regression Coefficient ofAdj. R-

bar2SEE F

BS LEV NED NID NOM

1. 2.02(5.32)

-0.25(1.43

)0.23 4.91 35.05

2. 21.05(4.35)

2.56(3.02*

)0.15 5.89 10.23

3. 4.43(3.27)

-4.08(2.23*

)0.31 7.45 19.32

4. 1.59(3.53)

0.38(2.23*

)0.28 8.32 26.54

5. 18.59(1.32)

1.27(1.59

) 0.32 6.67 21.58

6. 10.26(2.93)

-0.13(0.35)

3.37(4.02*) 0.34 10.34 35.61

7. 14.56(3.16)

-0.51(0.34)

1.77(2.58*)

-2.13(3.12*) 0.45 28.89 38.43

8. 11.36(2.15)

-0.23(1.12)

1.61(3.12*)

1.15(3.26*)

0.52 29.92 56.78

9. 23.16(2.08)

-0.31(0.83)

1.63(3.56*)

2.27(2.91*)

0.78(1.27)

0.60 34.51 86.76

Regression of corporate governance and control variables on return on assets

Models

Intercept

Regression Coefficient ofAdj. R-

bar2SEE F

BS LEV NED NID NOM

1. 12.36(5.68)

-1.15(1.12) 0.20 8.86 12.14

2. 9.78(3.45)

0.25(3.18*)

0.19 10.82 10.13

3. 13.15(6.38)

2.25(3.15*

)0.16 9.17 21.16

4. 10.15(7.68)

-0.79(2.57*

)0.26 15.16 27.68

5. 15.35(6.57)

-1.11(1.02

)0.09 12.14 21.19

6. 19.16(5.25)

-2.01(0.92)

0.26(0.92)

1.10(2.13*) 0.18 21.15 32.65

7. 12.37(5.36)

-0.56(1.16)

-0.56(1.16)

2.12(3.61*) 0.24 32.32 31.82

8. 6.79(4.47)

-1.16(1.12)

-1.61(1.12)

-1.16(3.10*)

-0.72(.89) 0.37 43.15 38.38

9. 12.13(5.52)

-0.72(0.86)

-0.72(0.86)

-2.21(3.12*)

-0.92(1.04) 0.43 36.12 36.56

Regression of corporate governance and control variables on return on Non-performing loan to total loans

• Administration system of the banks has been weakened these days.

• Need for sound corporate governance.

• There is a significant impact of corporate governance on ROA as well as ROE in the financial institutions mainly commercial banks.

• The impact of board size and total assets are positively significant with return on assets whereas the executive CEO has insignificant effect on return on assets.

• Board size and executive CEO have significant effect on ROE but total asset has insignificant effect on ROE.

• The results show that larger the number of executive directors, higher would be the non-performing loans to total loans and larger the number of independent directors, lower would be the non-performing loans.

Conclusion and Findings

• The study relies only on financial accounting reports which are subject to manipulation.

• The article contains the information only on 23 banks which does not cover the wider area.

• The study has been done on the basis of quantitative data ignoring qualitative perspectives.

• The articles have not considered all the possible independent variables.

Limitations

• The above limitations won’t compromise on the validity of the conclusion drawn based on the result.

• This study will put light on the major problems between the different stakeholders and enhancing for the better corporate governance system in upcoming days by minimizing the unethical and unfair practices.

• The article will serve as a base for further research and investigation on corporate governance to different institutions, graduates in the context of Nepal.

• It will also help the government in setting up various forth polices and regulation for good corporate governance.

Critical Appreciation/Future Scope

Thank You!