EVALUATING THE EFFECT OF CAPITAL STRUCTURE ON THE PERFORMANCE OF COMMERCIAL BANKS IN NEPAL

The findings indicate that capital structure has a significant relationship with ROA. Total equity has a positive and statistically significant effect on ROA, suggesting that a stronger equity base is associated with improved asset profitability. In contrast, total assets and long-term debt have significant negative effects on ROA, indicating that increases in bank size and reliance on long-term debt may be associated with lower profitability. Total debt also shows a negative relationship with ROA, although its effect is statistically insignificant. These findings suggest that the composition and level of financing are important considerations in determining the profitability of Nepalese commercial banks. For ROE, the estimated capital structure variables do not exhibit statistically significant effects. This difference between the ROA and ROE results suggests that the relationship between capital structure and financial performance may vary depending on the performance measure used. While capital structure appears to be an important determinant of profitability when measured through asset returns, its effect is less evident when performance is evaluated from the shareholders' perspective. The findings have implications for bank managers, investors, and regulators. Bank managers should maintain an appropriate balance between equity and debt financing and carefully evaluate the cost and repayment obligations associated with long-term debt. The positive and significant effect of total equity on ROA suggests that strengthening the equity base through retained earnings and appropriate capital enhancement strategies may support profitability. At the same time, banks should avoid excessive reliance on long-term debt that could increase financing costs and place pressure on profitability. The findings also provide useful implications for Nepal Rastra Bank and other regulatory authorities in formulating policies concerning bank capitalization, leverage, and financial stability. For investors, the findings highlight the importance of considering banks' capital structure alongside profitability when evaluating investment decisions.

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