Exploring Drivers of Lending Interest Rates of Nepalese Commercial Banks

Purna Man Shrestha, Pitambar Lamichhane

Abstract

One of the most significant functions of a commercial bank is lending, which contributes significantly to the bank’s income in the form of interest. The lending interest rate (LIR) is the interest rate that a bank charges customers when it extends a loan to them. Banks must be aware of the variables affecting their LIR. This study aims to identify the drivers of LIR at Nepalese commercial banks (NCB). The role of bank-specific and macroeconomic factors is analyzed. In this paper, CAR, ME, NPL, LR, DR, ROA, and liquidity are used as bank-specific factors, and INF, RGDP, MS, and DIR are used as macroeconomic factors. This paper is based on the annual panel data of 20 NCB from 2014 to 2023. The driver of LIR is identified by estimating the regression model. The appropriate regression among the pooled OLS, RE, and FE models was identified based on the results of the Breusch and Pagan Lagrangian multiplier tests and the Hausman test. The results of these tests demonstrate that the FE model is the most appropriate regression model. Thus, the LIR determinants were identified using the FE regression model. This paper verifies the influence of bank-specific and macroeconomic factors in determining the LIR of NCBs. Furthermore, this paper asserts the favorable role of NPL, DR, LIQ, ROA, INF, MS, and DIR and the adverse role of CAR, ME, LR, and RGDP in determining the LIR of NCB. The research findings are applicable for identifying the determination of lending interest rates for Nepalese banks, which will help to develop proper lending rate policies. This paper highlighted that the LIR of NCBs is significantly influenced by bank-specific as well as macroeconomic factors. NCBs with higher NPL, DR, LIQ, and ROA charge higher interest rates on loans, whereas they charge lower interest rates with lower CAR, ME, and LR. Likewise, the LIR of the NCB becomes higher with increasing inflation, money supply, and deposit interest rates and lowers with higher economic growth (RDGP).

 

Keywords: panel data, bank-specific factors, macroeconomic factors, lending interest rate.

 

DOI: https://doi.org/10.55463/hkjss.issn.1021-3619.63.2


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References


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