Effect of Capital Adequacy Ratio, Non-Performing Loan, Operation Efficiency and Bank Size on Profitability of Nepalese Commercial Banks

Abstract

This study examines the effect of capital adequacy ratio, non-performing loan, operation efficiency and bank size on the profitability of Nepalese commercial banks. Return on assets (ROA) and return on equity (ROE) are the selected dependent variables. The selected independent variables are bank size, operating efficiency, net interest margin, non-performing loan, capital adequacy ratio, and loan-to-deposit ratio. The study is based on secondary data of 12 commercial banks with 108 observations for the study period from 2014/15 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 capital adequacy ratio, non-performing loan, operation efficiency and bank size on the profitability of Nepalese commercial banks. The study showed that non-performing loan has a negative impact on return on assets. It indicates that higher the non-performing loans, lower would be the return on assets. In contrast, non-performing loan has a positive impact on return on equity. It indicates that increase in non-performing loan leads to increase in return on equity. Similarly, capital adequacy ratio has a positive impact on return on assets. It indicates that higher the capital adequacy ratio, higher would be the return on assets. However, capital adequacy ratio has a negative impact on return on equity. It indicates that higher the capital adequacy ratio, lower would be the return on equity. Further, net interest margin has a positive impact on return on assets and return on equity. It indicates that increase in net interest margin leads to increase in return on assets and return on equity. In addition, loan to deposit ratio has a negative impact on return on assets and return on equity. It indicates that higher the loan to deposit ratio, lower would be the return on assets and return on equity. Similarly, operating efficiency has a negative impact on return on assets. It indicates that higher the operating efficiency, lower would be the return on assets. In contrast, operating efficiency has a positive impact on return on equity. It indicates that increase in operating efficiency leads to increase in return on equity. In addition, bank size has a negative impact on return on assets and return on equity. It indicates that larger the bank size, lower would be the return on assets and return on equity.