CAPITAL STRUCTURE AND PROFITABILITY OF DEVELOPMENT BANKS IN NEPAL

Abstract

This dissertation investigates the impact of capital structure on the profitability of selected development banks in Nepal over a decade. The study focuses on analyzing key financial ratios debt ratio, debt-equity ratio, loan to deposit ratio, credit deposit ratio, and nonperforming loan ratio across five development banks from 2013/14 to 2022/23. Return on assets (ROA) and return on equity (ROE) serve as dependent variables, while the identified ratios act as independent variables. Statistical methods including correlation coefficients and regression models are employed to explore the relationships and impacts. The findings reveal that higher debt ratios generally correlate with reduced profitability, emphasizing the importance of prudent leverage management in bank operations. Nonperforming loan ratios consistently show negative correlations with both ROA and ROE, highlighting the detrimental impact of deteriorating credit quality on financial performance. However, relationships with ratios like loan to deposit and credit deposit exhibit varying impacts that are not always statistically significant, indicating nuanced influences on profitability metrics. In conclusion, this study underscores the pivotal role of capital structure in shaping the financial performance of development banks in Nepal. It underscores the necessity for development banks to adopt optimal debt-to-equity ratios and robust credit risk management practices to enhance profitability and mitigate financial risks effectively. Tailored financial strategies aligned with specific bank characteristics and market dynamics are essential for achieving sustainable growth and resilience in Nepal's evolving economic landscape.