CAPITAL ADEQUACY AND ITS IMPACT ON PROFITABILITY OF COMMERCIAL BANKS IN NEPAL

Abstract

This study aims to assess the effects of capital adequacy on commercial banks in Nepal, employing a descriptive research design. Secondary data from four commercial banks spanning the period from 2013 to 2022 were analyzed using various financial ratios and statistical tools. Data was sourced from the annual reports of banks and the annual supervision report of Nepal Rastra Bank. Profitability is measured through ROA and ROE, while determinants of profitability include the capital adequacy ratio, debt-to-equity ratio, loan and advance ratio, government security to total investment ratio, and nonperforming loan ratio. The comprehensive criteria for evaluating banking profitability extend beyond the favorable aspects of risk and consider the impact of the capital adequacy ratio, assessing banking profitability in terms of risk-weighted assets as a whole. The dependent and independent variables might have positive as well as negative influences, according to the correlation coefficient. In particular, there is a positive link with ROA based on the correlation coefficient between CAR and NPLR. Conversely, the correlation coefficients for DER, LAR, and GSTIR suggest a negative correlation with ROA. Similarly, the correlation coefficients for CAR, LAR, and GSTIR indicate a negative correlation with ROE. In contrast, the correlation between DER and NPLR suggests a positive correlation with ROE. In light of the findings, it is advisable for banks to prioritize secure investments guided by the capital adequacy ratio, achieve optimal levels of capital adequacy, enhance the quality of investments, and manage liquidity effectively to mitigate risks. This approach is crucial for the sustained vitality of institutions in the future. Additionally, there should be a concerted effort to maintain high asset quality to ensure long-term viability. The liquidity position of sampled banks must align with both current and potential obligations. Keywords: Capital adequacy ratio, debt-to-equity ratio, loans and advances ratio, nonPerforming Loans Ratio, and Profitability