The Bank Lending Channel of Monetary Policy of Nepal: Evidence from Bank Level

This paper examines the bank lending channel of monetary policy transmission in Nepal using data during 2003-2012. Using the dynamic Arellano-Bond GMM estimation with annual data of 25 Nepalese commercial banks, this study tries to estimate the loan supply responses of the Nepalese Commercial banks, depending on their balance sheet characteristics. The main results suggest that banks play a role in Nepal's monetary transmission mechanism. The empirical result shows that the bank lending decreases after a monetary tightening. Bank size is found to have significant impact on loan supply in Nepal. Similarly, liquidity in the case of private sector banks is also playing significant role in the bank lending in response to the monetary policy changes. But, the capitalization is found to have no significant impact on the bank lending. The bank loan supply is also found to be significantly affected by the gross domestic product.