Developing a model of determinants of financial distress of commercial banks in Bhutan

  • Purna Chhetri

    Student thesis: Professional Doctorate

    Abstract

    The general objective of the current study was to develop a model of financial distress of commercial banks in Bhutan. Specifically, the study sought to achieve the three objectives: first, to establish the extent to which bank-specific financial variables influence financial distress of commercial banks in Bhutan; second, to determine the relationship between bank-specific non-financial variables and financial distress; third, to examine the effect of macroeconomic determinants on the financial distress. The key theory utilized in the study was Wrecker’s theory of financial distress. Research done to financial distress of bank is limited in the Bhutanese context. Consequently, there is felt need for an early warning model to predict financial distress. To the author’s knowledge prior studies have not examined determinants of financial distress of commercial banks in Bhutan using a mixed-method approach. An exploratory sequential design was utilized. All the five commercial banks regulated by central bank over the period 2010-2019 were considered for the study. The qualitative semi-structured interviews data was obtained by interviewing several key management personnel to gain insights into people’s feelings and experiences and analysed using thematic analysis. The qualitative results based on the perceptions of key informants regarded as capital adequacy, liquidity, net profit margin, non-performing loans, credit risk, corporate governance, market competition and real GDP growth were significant determinants of financial distress of banks while financial leverage, bank size, ownership structure, bank age and inflation have no impact on financial distress. The quantitative data about bank-specific variables and macroeconomic variables were analysed using STATA-BE 17. The study used return on equity (ROE) as the proxy of financial distress of commercial banks in Bhutan. The empirical findings show that capital adequacy and non-performing loans have significant negative influence on ROE, while net profit margin has significant positive influence on ROE. Bank age has positive influence on ROE but not statistically significant. Real GDP growth has negative but has no significant influence on ROE. Additionally, quantitative results confirmed the results of qualitative such as capital adequacy, net profit margin, non-performing loans and bank age. Real GDP growth provided inconsistent results between qualitative and quantitative which was examined, explained, and reconciled. Therefore, this study recommends that banks and regulatory authorities to focus on the variables that appeared significant in the model and consider suitable strategies for financial stability.
    Date of Award2023
    Original languageEnglish
    SupervisorMilind Sathye (Supervisor), Angela Tan-Kantor (Supervisor) & Peter Graham (Supervisor)

    Cite this

    '