Effect of Capital Adequacy Ratio, Non-Performing Loan, Base Rate, Spread Rate and Loan to Deposit Ratio on Profitability of Nepalese Commercial Banks

Abstract

This study examines the effect of capital adequacy ratio, non-performing loan, base rate, spread rate and loan to deposit ratio on the 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, non- performing loan, base rate, spread rate, loan to deposit ratio and loan loss provision. 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 Banking and Financial Statistics published by Nepal Rastra Bank, the annual report of respective banks and audited financial statement of the selected commercial banks. The correlation coefficients and regression models are estimated to test the significance and importance of capital adequacy, profitability, non-performing loan, base rate, spread rate, and loan to deposit ratio on the profitability of Nepalese commercial banks. The study showed that capital adequacy ratio has a positive effect on return on assets and return on equity. It means that increase in capital adequacy ratio leads to increase in return on assets and return on equity. In addition, non-performing loan has a negative effect on return on assets and return on equity. It means that increase in non-performing loan leads to decrease in return on assets and return on equity. Likewise, base rate has a negative effect on return on assets and return on equity. It shows that higher the base rate, lower would be the return on assets and return on equity. However, spread rate has a positive effect on return on assets. It indicates that increase in spread rate leads to increase in return on assets. In addition, loan to deposit ratio has a positive effect on return on equity. It indicates that increase in loan to deposit ratio leads to increase in return on equity. Similarly, loan loss provision has a negative effect on return on assets and return on equity. It means that higher the loan loss provision, lower would be the return on assets and return on equity.