Role of CAMEL Indicators on Profitability of Nepalese Commercial Banks

Abstract

This study examines the role of CAMEL indicators on profitability of Nepalese commercial banks. Return on assets and return on equity are the selected dependent variables. The selected independent variables are capital adequacy ratio, assets quality, management efficiency, earning quality, liquidity ratio and net interest income. The study is based on secondary data of 13 commercial banks with 117 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 CAMEL indicators on profitability of Nepalese commercial banks. The study showed that capital adequacy ratio has a positive impact on return on assets and return on equity. It indicates that increase in capital adequacy ratio leads to increase in return on assets and return on equity. Similarly, assets quality has a positive impact on return on assets and return on equity. It indicates that better the assets quality, higher would be the return on assets and return on equity. Likewise, management efficiency has a positive impact on return on assets and return on equity. It indicates that increase in management efficiency leads to increase in return on assets and return on equity. Further, earning quality has a positive impact on return on assets and return on equity. It indicates that increase in earning quality leads to increase in return on assets and return on equity. In addition, liquidity ratio has a positive impact on return on assets and return on equity. It indicates that increase in liquidity ratio leads to increase in return on assets and return on equity. Moreover, net interest income has a positive impact on return on assets and return on equity. It indicates that increase in net interest income leads to increase in return on assets and return on equity.