Determinants of Capital Structure of Nepalese Development Banks

Abstract

ABSTRACT Profitability plays a crucial role in influencing the growth and sustainability of banks, and effectively managing the trade-off between liquidity and profitability is a significant concern. This study focuses on evaluating the impact of capital structure on the profitability of Nepalese development banks, examining their liquidity positions, and investigating the correlation between liquidity and profitability. Employing a descriptive research approach, the study utilizes secondary data extracted from the annual reports of development banks in Nepal and the Nepal Rastra Bank. The analysis incorporates correlation and regression techniques, using Return on Assets (ROA) and Return on Equity (ROE) to assess profitability. Additionally, Cash in Hand to Total Deposit Ratio (CHTDR), Loan and Advance to Total Deposit Ratio (LATDR), NRB Balance to Total Deposit Ratio (NRBTDR), Liquid Assets to Current Liability Ratio (LACLR), and Current Assets to Total Assets Ratio (CATAR) are employed to evaluate liquidity and profitability positions. The study covers a decade, spanning from the fiscal year 2012/13 to 2021/22, and involves five Nepalese development banks (MNBBL, GBBL, MBBL, JBBL, and KSBBL). The results reveal that LATDR shows a negative and insignificant correlation with ROE, while displaying an insignificant relationship with ROA. Conversely, CHTDR, NRBTDR, and CATAR exhibit significant relationships with ROA, whereas CHTDR and NRBTDR demonstrate significance with ROE, and LATDR is found to be insignificant with both ROA and ROE. The findings suggest a positive and significant relationship between liquidity, deposits, loans and advances, and profitability across Nepalese development banks during the study period. It is important to note that these results are derived from a study of selected banks, and their generalizability to the broader banking sector should be considered. Keywords: Financial Institution, Profitability, Equity, Capital Structure and Liquidity.