Impact of liquidity on the financial performance of Nepalese development banks

Abstract

This study investigates the impact of capital adequacy ratio (CAR), credit deposit ratio (CDR), non-performing loan ratio (NPLR), and liquidity (cash reserve ratio, CRR) on the profitability of Nepalese development banks, measured through return on equity (ROE) and return on assets (ROA). The primary objectives include analyzing the patterns of these variables, examining their relationships with profitability, and assessing their impacts on bank performance. Using a descriptive and correlational research design, the study incorporates data from ten development banks with the highest market capitalization, covering the fiscal years 2013/14 to 2022/23. Data analysis employed descriptive statistics, correlation analysis, and multiple regression models. Findings reveal that CAR positively influences profitability, highlighting the critical role of capital adequacy in sustaining financial stability and performance. Conversely, NPLR exhibits a negative impact, indicating that poor asset quality and high levels of non-performing loans erode profitability. CDR demonstrates mixed impacts, emphasizing the importance of maintaining an optimal balance between loans and deposits. Liquidity, as measured by CRR, has a significant but varied relationship with profitability, underscoring the need for impassive liquidity management. The implications are threefold. Practically, banks should focus on enhancing their capital base, reducing non-performing loans, and optimizing liquidity management to sustain profitability. Theoretically, the study reinforces existing theories of financial stability, risk management, and their linkages with profitability in the banking sector. For future research, it opens avenues to explore additional determinants of profitability, comparative studies across banking systems, and the integration of macroeconomic factors and non-financial variables. This study contributes to understanding the dynamics of profitability in Nepalese development banks, providing insights for practitioners, policymakers, and researchers to enhance the banking sector’s resilience and efficiency in a competitive financial environment.