Effect of Base Rate and Spread Rate on Profitability of Nepalese Commercial Banks

Abstract

This study examines the effect of interest rate spread on profitability of Nepalese commercial banks. Return on assets and Earning per Share are the selected dependent variables. The selected independent variables are capital adequacy ratio, non-performing loan, base rate, spread rate, credit to deposit ratio and inflation. The study is based on secondary data of 19 commercial banks with 209 observations for the study period from 2012/13 to 2022/23. The data were collected from Bank Supervision Report published by Nepal Rastra Bank (NRB) and annual reports of the selected commercial banks. The correlation coefficients and regression models are estimated to test the significance and importance of interest rate spread on profitability of Nepalese commercial banks. The study showed that capital adequacy ratio has a positive impact on return on assets and earnings per share. It indicates that increase in capital adequacy ratio leads to increase in return on assets and earnings per share. However, non-performing loan has a negative impact on return on assets and earnings per share. It indicates that increase in non-performing loan leads to decrease in return on assets and earnings per share. In contrast, base rate has a positive impact on return on assets and earnings per share. It indicates that higher the base rate, higher would be the return on assets and earnings per share. Likewise, spread rate has a positive impact on return on assets and earnings per share. It indicates that increase in spread rate leads to increase in return on assets and earnings per share. Further, credit to deposit ratio has a positive impact on return on assets and earnings per share. It indicates that increase in credit to deposit ratio leads to increase in return on assets and earnings per share. In contrast, inflation has a negative impact on return on assets and earnings per share. It indicates that higher the inflation rate, lower would be the return on assets and earnings per share.