Determinants of Capital Adequacy Ratio (CAR) in Nepalese Cooperative Societies

Determinants of Capital Adequacy Ratio (CAR) in Nepalese Cooperative Societies

Gyanendra Prasad Paudel Managing Director

Nepal Merchant Cooperative Limited: Wotu Mahabouddha Kathmandu, Nepal; Email: [email protected]; Mobile No:

+977-9851202607

Suvash KhanalLecturer (Financial Institution and Market)

Kist College of Management, Kamalphokhari Kathmandu Nepal; Email: [email protected]; Mobile No. +977-9841559894.

mailto:[email protected]

mailto:[email protected]

Background of the study Objective of the Study Study Methodology Findings Limitations of the Study Conclusion of the Study Recommendations Acknowledgements

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Overview of The Study

Cooperative Societies in Nepal:

In Nepal, cooperative movement began with the objective of uplifting the socio

economic status of the underprivileged rural people. Around its 60 years of journey

more than 4.5 million peoples are collaborated in around 31thousand cooperative

societies of Nepal.

Background of the study


Cooperative Societies as like Depositary Institution in Nepal:

Though fundamental framework of cooperative differs from a depository

institution like commercial bank and other financial institutions, Nepalese

cooperative societies are doing fund intermediating business like Depositary

Institution. Now, Nepalese cooperative societies contribute more than 21 % of

total financial market of Nepal.

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Miami, 2016.

Background of the study…

Evaluation of Capital Adequacy Ratio (CAR) in Nepalese Cooperatives:

Capital adequacy ratio is a significant measure to evaluate efficiency and stability which affects the likelihood of

insolvency for those institutions. Nepalese banks and financial institutions are applying Basel framework in order to

maintaining a precise level capital standard. But, Nepalese cooperative societies are not regulated by the central bank,

and thus, are not subjected to follow the Basel. Nepalese cooperatives are regulated by department of cooperatives and it

should be taken the consideration for protecting any probable default of cooperative sectors.

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2016.

Background of the study…

The study aims to evaluate the financial leverage of the Nepalese Cooperative Societies especially Saving and Credit Cooperatives (SACs) and Multipurpose Cooperatives (MPCs) those are accepting deposits as well as providing loan to their members.

Objectives of the Study


Methodology Data: Nepal has different types of cooperative societies. For this study, we collected accounting data by selecting an unbalance panel sample of 126 co-operatives (i.e. 91 SAC and 35 MAC) from 2009 to 2013, all together 630 observations. Methods: Data analysis techniques applying in this study such as, Descriptive analysis Correlation analysis Regression analysis Functional Model:Leverage Risk= ƒ[Financial Performance, Efficiency, Organizational Attributes] 5th Economics and Finance Conference, Miami, 2016.

Variables:Dependent Variable:

Capital Adequacy Ratio (CAR) that measures the Leverage risk of financial firms.

Leverage Risk= Capital Adequacy Ratio (CAR)

Independent Variables for Each Model:

We made three Models as: Financial Performance Model, Efficiency Model, and

Organizational Attributes Model. The independent variables for Financial Model are:

Methodology…

Methodology…

Financial Performance

Efficiency Organizational Attributes

Net Profit Margin (NPM)

Net Interest Margin (NIM)

Return on Assets (ROA)

Return on Equity (ROE)

Assets Utilization Ratio (AU)

Credit to Deposit Ratio (CD)

Dividend Rate (Div.) Natural Logarithm of

Total Assets (InTA) Type (D1): D1=1 if type=SAC else 0


Financial Performance (Model A):CARit= α+β1 ROAit +β2 NPMit +β3 NIMit +β4 ROEit+ ei

Efficiency Model (Model B):CARit= α+β1 AUit+β2 CDit + ei

Organizational Attributes (Model C):CARit= α+β1 Divit +β2 InTAit +β3 D1it + ei


Methodology…

Findings

Total SAC MPCAvg (in %) 24.08 23.9 24.41Md (in %) 20.31 20.3 20.56SD(in %) 14.78 14.4 15.75Max(in %) 94.38 94.3 89.05Min(in %) -17.2 -2.7 -17.2N 612 441 171

Descriptive Statistics of CAR:


Descriptive Statistics:Drawn statistics of CAR suggest that long term or permanent capital of Nepalese cooperatives was 24.08 % of total

assets. Standard deviation shows an average deviation of CAR was 14.78% from the estimated value of mean. The

minimum CAR must be 10% for bank and financial institutions of Nepal those are subject to central bank regulation.

Moreover, average, minimum and maximum CAR rates of Nepalese commercial bank in 2014 were 9.024%, 2.02%, and

13% respectively (NRB, 2014, P.16-17). Though Nepalese cooperatives CAR seems to be greater than commercial

banks in average, the maximum and minimum scores show that the cooperatives CAR was fluctuated more than

commercial banks’ CAR. Nepalese Cooperatives are collecting and investing funds from their own members only. In

some case, regular deposit from members were considering as permanent source of capital. Due to this reason, the CAR

score was seemed to be up to 94.3%. Furthermore, the minimum CAR score of -17.2% suggests a poor level of

permanent capital.


Findings…

Findings… Correlation Statistics of CAR with independent

variables:ROE NPM ROA NIM AU CD Div InTA

CAR r -0.092* -0.044 0.005 0.497** 0.162** 0.699** -0.033 -0.319**N 538 538 538 539 539 605 265 612

** Significant at the 0.01 level (2-tailed); *Significant at the 0.05 level

Correlation Analysis:Correlation Statistics of CAR with independent variables in the tables, the variables in blue colors are significantly correlated with the CAR.


Findings… Regression Statistics of CAR with independent

variables: Financial Performance (Model A) Statistics:

ModelUn-standardized Coefficients

Standardized Coefficients

t SigB SE BetaA Con. 18.174 0.718 25.324 0

ROA 0.332 0.374 0.047 0.886 0.376NPM -0.035 0.028 -0.070 -1.237 0.217NIM 1.258 0.090 0.520 13.928 0ROE -0.094 0.029 -0.144 -3.301 0.001

Models SummaryR2=0.28 SE=12.2 F-score=50.694 Sig of F-score=0.0


Regression Statistics of CAR with independent variables: Financial Performance (Model A) Analysis:The table represents the statistics and model summary of financial performance model. The R2 indicates how much the CAR can be explained by the financial performance variables such as ROE, NIM, ROA, and NPM. Though, leverage risk of cooperatives is affected by profitability variables, only NIM and ROE are significant enough to predict the CAR, since P values of t scores of ROA and NPM are higher than 0.05. CAR is significantly influenced by NIM in positive direction, but it is significantly influenced by ROE in negative direction. Though higher CAR reduces the return of firm, a cooperative has to optimize trade-off between CAR and ROE to maintain strong long term insolvency position.


Findings…

Findings… Regression Statistics of CAR with independent

variables: Efficiency (Model B) Statistics:

Model

Un-standardized Coefficients


t SigB SE BetaB Con. -15.414 2.19 -7.038 0

AU 0.013 0.121 0.003 0.107 0.915CD 0.395 0.017 0.715 23.296 0

Models SummaryR2=0.513 SE=9.52 F-score=278.63 Sig of F-score=0.0


Regression Statistics of CAR Efficiency (Model B) Analysis:

The table shows the regression statistics and summary of efficiency model B. The R2 0.513

suggests the 51.3% rate of combine explaining capacity by AU and CE regressed in the

model for predicting CAR. The coefficients of predicting variables show that only a

coefficient of CD variable is significant enough to predict the CAR. Result suggests that a

cooperative having higher CD ratio also had sufficient permanent capital.

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Findings…

Findings… Regression Statistics of CAR with

independent variables: Organizational Attributes (Model C) Statistics:

Model

Un-standardized Coefficients


t SigB SE BetaC Const. 83.105 10.221 8.13 0

Div -0.055 0.199 -0.016 -0.274 0.784InTA -3.355 0.554 -0.351 -6.055 0

D1 2.207 1.614 0.079 1.367 0.173Models Summary

R2=0.129 SE=11.91 F-score=12.85 Sig of F-score=0.0


Regression Statistics of CAR Organization Attributes (Model C) Analysis:

The organizational attributes model statistics and summary are presented in the table. The F score

12.85 is significant at 0% indicating in overall model is significant to predict CAR. But not all variables

used in model, coefficient of constant and InTA are only significant enough for predicting CAR. It

implies the big sized cooperatives did not have adequate long term capital, and they are in higher

degree of solvency risk exposures. A big sized cooperative pools the large amount of public fund.

Thus, regulatory bodies have to keep eyes on this node to regulate capital structure of the

cooperatives for protecting public funds.

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Finance Conference,2016.

Findings…

Limitations Sample Size:The sample size of the study is small, we have taken only 126 cooperatives out of around 31 thousand cooperatives of Nepal. But we have tried to make various types of cooperatives while designing the sample frame. Proxy Variable of CAR:The record keeping system of the cooperative is not viable with calculating true CAR, so we calculated CAR as permanent capital to total assets ratio. Reliability of Accounting Data:The findings of the study are based on reliability of accounting data supplied by the respective cooperative societies.


Conclusion


Though, the big sized cooperatives have poor strategic capital, the resulted mean and standard deviation suggest cooperatives’ capital adequacy ratio is higher but inconsistent than commercial banks.

The core determinants of capital adequacy ratio for the Nepalese cooperatives are credit to deposit ratio, net interest margin and their types in positive direction, whereas assets utilization ratio, size and return on equity in negative direction.

Recommendation


Regarding the level of risk on the large amount of public fund collected by big sized cooperatives, regulatory bodies have to regulate capital structure of the cooperatives promptly for protecting the public funds.

Acknowledgement The significant portion of this article has abstracted from my

PhD thesis entitled “Credit Risk Management in Nepalese

Cooperative Societies” submitted to the School of Humanities and Education, Singhania University, India. I granted the authorship to the second author because of his significant contributions to prepare this article. I would like to acknowledge and thank to the thesis supervisor Dr. Bharat P Bhatta and two anonymous reviewers of IISES for their valuable comments and suggestions.


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Determinants of Capital Adequacy Ratio (CAR) in Nepalese Cooperative Societies