Predicting Financial Institution Failure in Nepal

The main objective of this study is to assess financial ratios and their predictive classification ability to classify financially troubled and sound banking and finance companies of Nepal. On the basis of twenty sample banking and finance institutions (ten financially distressed and ten sound financial institutions during 2003-2012, this study concluded that ratios of total debts to total assets (TD/TA), cash flow to risk weighted assets (CF/RWA), market value to book value (MV/BV), price earning (P/E), non-performing assets to total loan (NPA/TL), return on assets (ROA), return on shareholders' equity (ROSE), other ratios are found insignificant between financially distressed and sound financial institutions. Using multivariate discriminant analysis (MDA) and logistic regression analysis, this study concluded that only two ratios: cash flow to risk weighted assets (CF/RWA) and market value to book value are most significant in prediction of financial institutions failure. It also concludes that the classes of financial institutions: bank or finance company is insignificant in financial institution failure