Impact of liquidity on profitability of Commercial Banks in Nepal

Abstract

This study examines the impact of liquidity on the profitability of commercial banks in Nepal, aiming to investigate the liquidity position, profitability status, and the relationship between liquidity and profitability. It adopts a descriptive and analytical research design, primarily relying on secondary data extracted from annual reports of Nepalese commercial banks. Correlation and regression analyses are utilized to assess the impact and relationship between liquidity and profitability. Profitability is evaluated through return on assets (ROA) and return on equity (ROE), while liquidity position is gauged using indicators such as capital adequacy ratio (CAR), credit to deposit ratio (CDR), cash to total assets (CTA), non-performing loans (NPL), and bank size. The study encompasses ten commercial banks in Nepal over the past decade (from fiscal years 2012/13 to 2021/22), including Agricultural Development Bank Limited, Everest Bank Limited, Global IME Bank Limited, Himalayan Bank Limited, Nabil Bank Limited, Nepal Investment Mega Bank Limited, Nepal SBI Bank Limited, NIC Asia Bank Limited, Sanima Bank Limited, and Standard Chartered Bank Limited. The findings reveal a negative significant relationship between CDR and SIZE with ROA, whereas CAR, CTA, and NPL exhibit a positive significant relation. Similarly, CTA demonstrates a positive significant relationship with ROE, while CAR, CDR, NPL, and SIZE display a negative significant relationship.

Key words: Return on assets, return on equity, capital adequacy ratio, credit to deposit ratio, cash to total assets, non-performing loan, size of the bank, commercial banks