IMPACT OF INTEREST RATES ON FINANCIAL ASSETS

Abstract

This research investigates the effect of interest rates on the financial assets of commercial banks in Nepal, considering Lending Interest Rate (LIR), Deposit Interest Rate (DIR) and Interest Spread Rate (ISR) as independent variables while Return on Assets (ROA) and Loans and Advances (LnLA) serve as dependent variables. The study employs a descriptive and causal-comparative design, analyzing data from five major banks: Himalayan Bank Ltd., Nepal SBI Bank Ltd., Everest Bank Ltd., NIC Asia Bank Ltd., and Prabhu Bank Ltd., over the period 2013/14 to 2022/23. Secondary data sources include annual reports, publications by Nepal Rastra Bank, and other financial documents. Descriptive statistics and inferential methods, such as correlation and regression analysis via SPSS Version 29, were utilized to examine the relationships between variables. The correlation analysis reveals that LIR and DIR have weak negative correlations with ROA, suggesting that an increase in these rates slightly reduces profitability, though the results are not statistically significant. ISR demonstrates a weak positive correlation with ROA, which is also not statistically significant. For LnLA, DIR exhibits a strong positive and statistically significant correlation, indicating that higher deposit interest rates are associated with increased loan growth, whereas LIR and ISR show weak and insignificant correlations with loan growth. Regression Model 1 indicates that LIR negatively affects ROA, while DIR and ISR show no significant influence. This model explains only a small fraction of the variation in ROA. Regression Model 2 reveals that LIR negatively affects loan growth, while DIR positively impacts loan growth, with ISR showing no significant effect. This model accounts for a larger proportion of the variation in loan growth, emphasizing a stronger relationship between interest rates and lending activities.