Assessment of liquidity in Nepali commercial Banks

The main objective of the study is to examine the indicators of liquidity position in Nepali commercial banks using pooled ordinary least square (OLS) model of 195 observations from 15 commercial banks operated in Nepal for the period of 2002/03 to 2014/15. Liquid asset to deposit plus short term borrowing ratio is considered as the proxy of liquidity of commercial banks. All the data for the study were obtained from the database of Nepal Rastra Bank for bank specific variables and database of world bank for macroeconomic variables. The results confirmed that capital adequacy ratio, bank size and interest spread have the significant positive impact on commercial bank liquidity as expected. In contrast, interbank interest rate has the significant negative impact on liquidity. Surprisingly, credit risk has the significant positive impact on liquidity as opposed to the expectation. The analysis further confirmed that return on equity and rate of inflation have insignificant negative whereas, GDP growth has insignificant positive impact on liquidity position of Nepali commercial banks. As compared to other business organizations, the liquidity risk is much more sensitive in commercial banking industries. Therefore, the central bank can play directive and regulatory roles to minimize such risks. Moreover, due to investors perception on too big to fail hypothesis larger banks have better access to liabilities to meet liquidity needs so larger banks should not need to rely on liquid assets to meet liquidity needs as small banks.