Factors Affecting the Profitability of Commercial Bank in Nepal

Abstract

Profitability of commercial banks is a central indicator of banking-sector health and strongly influences national economic development. In Nepal, commercial banks operate under Nepal Rastra Bank (NRB) oversight and are affected by both macroeconomic conditions and internal management practices. This study investigates the key internal (bank-specific) and external (macroeconomic and regulatory) determinants of profitability in Nepalese commercial banks. Using secondary data from NRB publications, banks’ annual reports, and relevant literature, the study applies a descriptive-analytical approach to examine relationships between profitability metrics (ROA, ROE) and explanatory variables. Internal variables include capital adequacy, asset quality (NPLs), credit-risk management, liquidity, operational efficiency (cost-to-income), and bank size. External variables include GDP growth, inflation, interest-rate spread, exchange-rate movements, and monetary-policy stance. Findings show that both internal and external factors influence bank profitability, with internal factors—particularly credit-risk (NPL) management and operational efficiency—exerting a stronger and more consistent effect on ROA and ROE. Adequate capital and prudent liquidity management support resilience and earnings capacity, while macroeconomic stability (moderate inflation, steady growth, predictable interest-rate environment) enhances income generation. Sustained profitability in Nepal’s commercial banks requires strengthened credit-risk frameworks, improved operational efficiency, prudent capital/liquidity strategies, and policies that foster macroeconomic stability.