Macroeconomic, macro-prudential, and bank-specific determinants of loan growth in Nepalese commercial banks

Abstract

This study empirically examines the macroeconomic, macro-prudential and bank-specific determinants of loan growth in Nepalese commercial banks using a balanced panel of 18 commercial banks covering the period from 2013 to 2023. The analysis incorporates macroeconomic indicators (GDP growth, inflation), macro-prudential (policy rate, loan-to-value caps and the cash reserve ratio), and bank balance-sheet variables (size, loan-to-deposit ratio, non-performing loans, capital adequacy, and profitability). A two-way fixed-effects model is employed as the preferred specification to control for unobserved bank heterogeneity and common time effects, with identification based on within-bank variation over time, while pooled OLS, random-effects, bank fixed-effects, and dynamic GMM estimations are reported as benchmarks and robustness checks. The preferred two-way fixed effects result show that bank size and the loan-to-deposit ratio are positively associated with loan growth, whereas non-performing loans are negatively associated with loan growth. Capital adequacy and profitability are not statistically significant in the preferred specification. In specifications that exclude year fixed effects, GDP growth is positively associated with loan growth and the policy rate is negatively associated with loan growth. However, these macroeconomic and policy coefficients are interpreted cautiously as they are not separately identified in the two-way fixed effects model. The positive relationship between the CRR and loan growth is interpreted as reflecting countercyclical policy timing rather than a structural stimulative effect.