RELATIONSHIP BETWEEN LIQUIDITY AND PROFITABILITY OF NATIONAL LEVEL DEVELOPMENT BANKS IN NEPAL

Abstract

This study aimed to analyze the effect of liquidity on profitability of development banks in Nepal. The study is conducted using panel data of three development banks of Nepal with 30 observations for the period 2012/13 to 2021/22. Descriptive analysis, correlation analysis and ordinary least square regression model are used as a major tool of analysis in this study. It was found that there is strong liquidity position of development banks in form of cash reserve ratio, liquid assets ratio and loan to deposit ratio. The correlation analysis shows that cash reserve ratio has significant positive correlation with ROA and ROE. Similarly, liquid assets to total assets ratio has significant positive correlation with ROA. The correlation analysis also shows that there is significant positive relationship between ROA and loan to deposit ratio (LDR). At the same time, capital adequacy ratio (CAR) has significant negative relation with ROE. Moreover, correlation of bank size has also significant negative relationship with ROA. The multiple regression analyses revealed that cash reserve ratio has significant positive impact on profitability (ROA and ROE) of the banks. At the meantime, liquid assets to total assets ratio has insignificant positive impact on ROA and insignificant negative impact on ROE. However, loan to deposit ratio has significant positive impact on ROA. Moreover, capital adequacy ratio has significant negative impact on ROE of the development banks. Moreover, bank size has insignificant negative impact on profitability of the development banks. Keywords: Profitability, Cash Reserve Ratio, Liquid Assets to Total Assets, Loan to Deposit Ratio and Capital Adequacy Ratio.