Capital Adequacy in Nepalese Commercial Banks: The Role of Size, Profitability and Credit Risk

Abstract

Purpose: The research investigates the factors affecting Capital Adequacy Ratio (CAR) in Nepalese commercial banks through an analysis of bank size in addition to Return on Equity (ROE), Return on Assets (ROA), and Non-Performing Loans (NPLs). These factors show their impact on financial stability together with regulatory compliance according to the research findings.

Design/methodology/approach: The research used explanatory and descriptive statistics with quantitative approach. The research analyzed 19 Nepalese commercial banks through their data collected over ten years from 2015 to 2024. The research collected its secondary data through website examination of banks alongside their records at the Nepal Stock Exchange (NEPSE). This research utilized SPSS version 2026 to perform correlation and regression tests which evaluate the relationships between Capital Adequacy Ratio (CAR) and main financial determinants.

Findings: The research shows bank size and profitability acted as positive factors to boost companies' Capital Adequacy Ratios while these ratios depend on bank size and profitability levels. Direct correlations existed between increased non-performing loans and shareholder profit distributions and declining CAR since these factors increased risk exposure and negatively affected retained earnings.

Conclusion: The research demonstrates that profitable bank institutions with substantial size enhance capital adequacy ratios but credit risks and shareholder dividends negatively affect it. Regulatory institutions benefit from these findings to enhance bank’s capital protection and risk control processes.

Implication: The authorities should implement tougher capital adequacy rules while banking institutions must lower their delinquent loan levels and achieve a balance between profitability and capital retention to preserve financial stability.

Originality/value: The examination of this study provides financial institutions, researchers and policymakers an original empirical source about CAR in Nepalese banks which also guides policy decisions.