THE RELATIONSHIP BETWEEN LIQUIDITY AND PROFITABILITY ANALYSIS OF “C CLASS” BANKS IN NEPAL

Abstract

This study analyses the relationship between liquidity and profitability of C Class Banks in Nepal for the period from 2014 to 2023. The study covers 5 C Class Banks out of the 17 C Class Banks operated in Nepal. The study used secondary data. The study aims to provide a comprehensive understanding of how liquidity management impacts profitability and to offer strategic recommendations for improving financial performance in the banking sector. Key metrics such as the Current Ratio (CR), Working Capital to Total Assets Ratio (WCTA), Return on Equity (ROE), and Return on Assets (ROA) were analyzed to evaluate the financial health and operational efficiency of the banks. The results reveal that ICFC consistently demonstrates stable and efficient liquidity management, coupled with strong profitability and operational efficiency. In contrast, PROFL exhibits significant financial distress, characterized by poor liquidity and profitability metrics. The analysis has done using statistical package for social science SPSS software version 25. Correlation analysis indicates that while there is a strong positive correlation between CR and WCTA, the relationships between liquidity measures (CR and WCTA) and profitability measures (ROE and ROA) are generally weak and not statistically significant. This underscores the inherent trade-off between maintaining liquidity and maximizing profitability, a persistent challenge for bank managers. The findings align with existing literature, reinforcing the liquidity-profitability trade-off theory. This study contributes to the body of knowledge by highlighting the specific dynamics within the Nepali banking context, providing valuable insights for policymakers, financial managers, and researchers. The recommendations emphasize the need for balanced liquidity management strategies to ensure financial stability and profitability in C Class Banks. In conclusion, while effective liquidity management is crucial for ensuring the operational continuity and financial health of banks, it must be carefully balanced with profitability goals to avoid financial insolvency and promote sustainable growth. The implications of this research suggest targeted strategies for enhancing liquidity and profitability, thereby strengthening the overall financial performance of C class bank in Nepal.