CHAPTER - I

INTRODUCTION
1.1 Background of the Study
The modern complex economic system cannot function without bank. The banking
system has facilitated the personal transactions such as deposit and remittance of
money, and lending and borrowing of money. It has made easier to develop
agriculture, industry and trade. At the same time, it has helped to accelerate the pace
of economic development. The bank helps in mobilization and allocation of scarce
resources, which are essential for economic development.

Banks receive savings primarily from households and transform them into loans to
business firms and others in order to make investment in building factories, plants and
equipment. The bank collects idle money from people. This money is canalized by
banks to the individuals, business and government for productive investments. This
increases capital formation by increasing productive investment. This in turn, raises
the level of employment, income and standard of living.

The banks can contribute substantially in economic development. The rapid

industrialization in America, Japan Germany and France was made possible by banks.
The banks make available loans of different periods to agriculture, industry and trade.
They make direct investments in industrial sectors.

Likewise, since the bank earns profit by utilizing the deposits it is said,” It is
banker‟s brain and other people‟s money”. Lending is regarded as the heart of the
commercial banks in the sense that; it occupies large volume of transactions; it covers
the main part of investment; the most of the investment activities based on lending; it
is the main factor of the creating profitability; it is the main sources of creating
profitability; it determines the profitability.

Traditionally, commercial banks can grant only short-term credit. But in

present time, it also provides loan of medium and long-term nature to some
extent to even industry and agriculture. The bank charges interest on loans,

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which are usually higher than those, offered on the deposits. Since the banks
in Nepal are now free to fix interest rates, the rate of interest on both deposits
and loans varies from bank to bank. The lending function is considered by the
banking industry as the most important function for the utilization of funds. Since,
banks earn their highest gross profits from loans; the administration of loan portfolios
seriously affects the profitability. Indeed, the large number of non-performing loans is
the main cause of bank failure. With respect to performance, banks now use various
measures to assess bank efficiency and related functions in the bank lending process.

Without commercial banks, the international finance and import-export industry

would not exist. Commercial banks make possible the reliable transfer of funds and
translation of business practices between different countries and different customs all
over the world. The global nature of commercial banking also makes possible the
distribution of valuable economic and business information among customers and the
capital markets of all countries. Commercial banking also serves as a worldwide
barometer of economic health and business trends.

1.1.1 Commercial Banking Scenario in Nepal

Nepal has not long history of modern banking. Nepal Bank Limited, a commercial
bank started with major private share participation, is a pioneer financial institution in
Nepal. Initially, Nepal Bank Limited started the banking business with authorized
capital Rs. 1 crore and Rs. 8.42 lacs as its paid-up capital. In 1952 A.D., His Majesty's
Government increased its share ownership to the extent of 51 per cent of the total
share capital.

Realizing the growing needs of Central Bank, Nepal Rastra Bank was established in
14 Baishak, 2013 under Nepal Rastra Bank act 2012. Nepal Rastra Bank act 2012 is
abolished and Nepal Rastra Bank act 2058 is enacted. After the introduction of
commercial Bank act 1907, the government established another commercial bank,
Rastriya Banijya Bank in Public sector on 23 January, 1909 with the authorized
capital of Rs. 10 million and paid-up capital of Rs. 3 million. The purpose of the bank
has also been as mentioned in the preamble of the act is to provide facilities and help
economic welfare of the general public.
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In 2031 B.S., Banijya Bank act 2020 and Rastriya Banijya Bank act 2021 is abolished
and Banijya Bank (Commercial Bank) act 2031 is enacted. In 2041 B.S., observing
the requirement of foreign investment in banking sector, HMG/N has amended
commercial bank act 2031, then establishment of joint venture bank is allowed. Those
open the door for foreign investment banks in Nepal. When legal provision permitted
the establishment of foreign joint venture banks, in early 1980's three joint venture
banks (i.e. Arab Bank Ltd. (NABIL), Nepal Indo-Suez Bank Ltd. (Now Nepal
Investment Bank Ltd.), and Nepal Grindlays Bank Ltd. (Now Standard chartered
Bank Nepal), establishment by the end the first half of the 1980's. After restoration of
democracy, elected government adopted the liberalization and market-oriented policy.
As a result, numbers of joint venture bank are increased dramatically viz., Himalayan
Bank Ltd., Everest Bank Ltd, Nepal Bangladesh Bank Ltd., etc. List of the licensed
commercial banks in Nepal has been presented in table no. 1.1 as follows.
Table 1: List of Class „A‟ Licensed Commercial Banks in Nepal

S. Name of Banks Operation Head Office

N. Date ( In A.D)

1 Nepal Bank Ltd. 1937/11/15 Dharmapath, Kathmandu

2 Rastriya Banijya Bank Ltd. 1966/01/23 Singhadurbar, Kathmandu

3 Nabil Bank Ltd. 1984/07/12 Kantipath, Kathmandu

4 Nepal Investment Bank Ltd. 1986/03/09 Durbarmarg, Kathmandu

5 Standard Chartered Bank Nepal 1987/02/28 Newbaneshwor, Kathmandu

Ltd.

6 Himalayan Bank Ltd. 1993/01/18 Thamel, Kathmandu

7 Nepal SBI Bank Ltd. 1993/07/07 Hattisar, Kathmandu

8 Nepal Bangladesh Bank Ltd. 1994/06/06 Newbaneshwor, Kathmandu

9 Everest Bank Ltd. 1994/10/18 Lazimpat, Kathmandu

10 Bank of Kathmandu Ltd. 1995/03/12 Kamaldi, Kathmandu

11 Nepal Credit & Commerce Bank 1996/10/14 Siddharthanagar, Rupandehi

Ltd.

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12 Lumbini Bank Ltd. 1998/07/17 Narayangadh,Chitawan

13 NIC Asia Bank Limited 2013/06/30 Biaratnagar, Morang

14 Machhapuchhre Bank Ltd. 2000/10/03 Pokhara, Kaski

15 Kumari Bank Ltd. 2001/04/03 Durbarmarg, Kathmandu

16 Laxmi Bank Ltd. 2002/04/03 Adarsanagar, Birgunj, Parsa

17 Siddhartha Bank Ltd. 2002/12/24 Kamaladi, Kathmandu

18 Agriculture Development Bank 1968/01/21 Ramshahpath, Kathmandu

Ltd.

19 Global IME Bank Ltd. 2007/01/02 Birgunj, Parsa

20 Citizens Bank International Ltd. 2007/04/20 Kamaladi, Kathmandu

21 Prime Commercial Bank Ltd 2007/09/24 Newroad, Kathmandu

22 Sunrise Bank Ltd. 2007/10/12 Gairidhara, Kathmandu

23 Grand Bank Nepal Ltd. 2008/05/25 Kamaladi, Kathmandu

24 NMB Bank Ltd. 2008/06/02 Babarmahal, Kathmandu

25 Kist Bank Ltd. 2009/05/07 Anamnagar, Kathmandu

26 Janata Bank Nepal Ltd. 2010/04/05 Newbaneshwor, Kathmandu

27 Mega Bank Nepal Ltd. 2010/07/23 Kantipath, Kathmandu

28 Commerz & Trust Bank Nepal 2010/09/20 Kamaladi, Kathmandu

Ltd.

29 Civil Bank Ltd. 2012/13/26 Kamaladi, Kathmandu

30 Century Commercial Bank Ltd. 2011/03/10 Putalisadak, Kathmandu

31 Sanima Bank Ltd. 2012/02/15 Nagpokhari, Kathmandu

(Source: NRB Monthly Statistics, Mid-August 2013)

At present, there are 31 commercial banks, 87 development banks including

microfinance (Licensed by NRB), 79 finance companies, 21 saving and credit
cooperatives and 38 non-government organizations operating in Nepal.

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Above list clearly indicates that the increasing number of banks in Nepal can play an
effective role in mobilizing scattered household saving and putting them in to
productive channels. Many empirical analyses indicate that banks have been
involving in overall economic advancement of the country but the percentage covers
in lending loans from formal sector is only 30 per cent in total lending and
commercial banks are mainly focusing on short term financing in the city.

1.2 Introduction of Nabil Bank Limited

Nabil Bank Limited (Nabil) commenced its operation on 12 Jul, I984 as the first joint
venture bank in Nepal, Dubai Bank Limited. Dubai (Later acquired by Emirates Bank
International limited, Dubai) was the first joint venture partner of Nabil. Currently NB
(international) limited. Ireland is the foreign partner. Nabil Bank limited had the
official name Nepal Arab Bank Limited till 3lst December 2001. Nabil is the pioneer
in introducing maims innovative products and marketing concept in banking sector of
Nepal with 15 venture and private banks operating in Nepal. Success of Nabil is a
milestone in the banking history of Nepal as it paved the way for the establishment of
many commercial banks and financial institutions. Nabil provides a full range of
commercial banking services through its outlets spread across the nation and reputed
correspondent banks across the globe. Moreover, Nabil has a good name in the market
for its highly personalized services to the customers. Now, the Authorized capital of
the bank is Rs. 160 million while the issued and paid up capital is Rs. 1449,124000.

1.3 Statement of the Problem

Competition between banks and banks and non-bank financial institutions, such as
finance companies, insurance companies, and cooperative societies has increased in
terms of the services they offer. Customers of today can choose between different
financial institutions for financial services. However, this competitive pressure has
also encouraged banks to make further innovation in their services.

Now days due to competition among the banks, the interest rate charge for loan is in
decreasing trend. Due to unhealthy competition among the banks, the recovery of the
bank credit is going towards negative trends. On-performing credits of the banks are
increasing year by year. To control such type of problem, the regulatory body of the

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banks and financial institutions, NRB renewed its directives of the credit loss
provision.

The problem of the study lies on analyzing the strength and weakness of Nabil Bank
Limited. It also aimed in answering the following questions:
1. What is the impact of deposit and loan and advance in liquidity?
2. Is credit efficiency of Nabil Bank influences the profitability of it?
3. Is NABIL maintaining lending efficiency?
4. Is the bank loan, fund mobilizations and credit Management effective and
efficient?

1.4 Objectives of the Study

The primary objectives of the research entitled “A Study on Credit Management of
Nabil Bank Ltd.”, are:
1. To study the impact of deposit in liquidity position of Nabil bank
2. To examine and evaluate the various stages occurred in loan
management procedure of Nabil bank
3. To analyze the lending efficiency of the bank
4. To evaluate various financial ratios of the bank.

1.5 Research Questions

The research study entitled “A Study on Credit Management of Nabil Bank Ltd.”,
has attempted to find out the answer of following questions:
 Does credit efficiency of Nabil Bank influences the profitability?
 What is the impact of deposit and loan advance in liquidity position?
 What is the proportion of Non-performing Asset on Total Loans and
Advances of the bank?
 Is NABIL maintaining lending efficiency?
 Is bank‟s fund mobilization and credit Management effective and
efficient?
 What is the situation of Total Loans and Advances with Total Deposit
and its Net Profit?

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1.6 Significance of the Study
The needs of the study are:
1. The study will give a clear picture of existing credit management
position of the bank under study.
2. This study will provide information to those who are planning to invest
in Nabil Bank Limited.
3. Importance to "outsiders" which are mainly the customers, financing
agencies, stock exchanges etc.
4. This study will provide strengths and weakness regarding credit
management.
5. After the completion, this report will be kept in the library, which plays
the role of reference to the students making the similar study in future.

1.7 Limitations of the study

This study is conducted for the partial fulfillment for the requirement of Masters of
Business Studies (MBS), so it possess some limitations of its own kind. The
limitations of the study are follows:
1. The study mainly concentrates on those factors related with credit and
lending activities
2. The study is based only on secondary data so it may contain reporting
errors
3. The study is made within limited timeframe, limited data and with lack of
research experiment
4. Study is based on data of five years period from 2008 to 2012 AD only,
and hence, the conclusion drawn from this research confines only to the
above period only.
5. The study covers only credit management aspects of Nabil Bank Limited
so conclusion drawn from the study may or may not applicable to other
areas of operation of Nabil Bank Ltd., and other commercial banks in
Nepal.
6. This research used only the selective tools for analysis and interpretation
of data.

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1.8 Organization of the Study
The study has been divided into following five chapters:

Chapter – I: Introduction
This chapter explains background of the study, introduction of Nabil bank, statement
of the problems, objectives of the study, significance of the study and limitations of
the study. It is oriented for readers for reporting giving them the perspective they need
to understand the detailed information about coming chapter.
Chapter – II: Review of Literature
The second chapter of the study assures readers that they are familiar with important
research that has been carried out in similar areas. It also establishes that the study as
a link in a chain of research that is developing and emerging knowledge about
concerned field.

Chapter-III: Research Methodology

Research methodology refers to the various sequential steps to be adopted by a
researcher in studying a problem with certain objectives in view. It describes about
the various source of data related with study and various tools and techniques
employed for presenting the data.

Chapter – IV: Presentation and Analysis of Data

This chapter is the main part of the research. This chapter analyses the data related
with study and presents the finding of the study. Data processing, data analysis and
interpretation are given in this chapter.

Chapter – V: Summary, Conclusions and Recommendations

The last chapter contains the findings of whole study after which major conclusions
and recommendations are provided. It also gives important suggestions to the
concerned organization for the better improvement.

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 CHAPTER – II
REVIEW OF LITERATURE

The purpose of reviewing the literature is to find out what research studies have been
conducted in one chooser field of study and what remains to be done. It provides the
foundation for developing a comprehensive theoretical framework from which
hypothesis can be developed for testing. The literature survey also minimizes the risk
of pursuing the dead ends in research. The review of literature basically highlights the
existing literature and research work related to the present research being conducted
with the view of finding out what had been already explained by the authors and
researchers and how the current research adds further benefits to the field of research.

According to Shekher & Shekher, the primary purpose of literature is to learn and it
helps researcher to find out what research studies have been conducted in one‟s
chosen field of study, and what remains to be done. In order to conduct this study
various relevant sources of literature have been considered such as books, journals,
annual report, unpublished dissertations.
We study the review of literature in two headings:
 Conceptual Review
 Review of related Studies

2.1 Conceptual Review

A review that aims to synthesize areas of conceptual knowledge that can contribute to
a better understanding of these issues. The objectives of these syntheses are to provide
an overview of the literature in a given field, including the main ideas, models and
debates. The purpose of the conceptual review is to place your research question in
the context of the existing scientific literature. The conceptual review will help to
develop an overall conceptual framework to allow to sort through the mass of
published material in a focused way. The conceptual review differs from the
individual article review in that it is guided by understanding of the basic issues rather
than by knowledge of research methodology. The conceptual review of the study has
been further classified into following headings:

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2.1.1 NRB Rules, Directives Regarding Fund Mobilization of Commercial Bank
To mobilize bank's deposit in different sectors of the different parts of the nation to
prevent them from the financial problems, central bank (NRB) any establish a legal
framework by formulating various rules and regulations (prudential norms). The
directives must have direct or indirect impact while making decision to discuss those
rules and regulation, which are formulated by NRB in terms of investment and credit
to priority sector, deprived sector, other institution, single borrower limit, CRR, loan
loss provision, capital adequacy ratio, interest spread, productive sector investment. A
commercial bank is directly related to the fact how much fund must be collected as
paid up capital, while being established at a certain place of the nation? How much
fund is needed to expand the branch and counters? How much flexible and helpful the
NRB rules are also important? But we discuss only those, which are related to
investment function of commercial banks. The main provisions, established by NRB
in the form of prudential norms in above relevant area are briefly discussed here
under.

2.1.2 Concept of Bank

Simply, Bank is financial institutions that accepts deposits and invest the amount in
the leading activities and also commercial service provide. In ancient, the words Bank
was emerge from Latin words Bancus, French words Banque and Italian words
Banca, which means a Bench where sitting over there invest, exchange and keep
record of money and cash. These all functional activity are formed as current banking
activities.

According to S. and S.‟s definition of bank, a banker or bank is a person or company

carrying on the business of receiving money collecting drafts, for customers subject to
the obligation of honoring cheques drawn upon them from time to time by the
customers to the extent to the amount available on their customer (Shekher &
Shekher, 2001).

Paget state that no one can be a banker who does not take deposit accounts, take
current accounts, issues and pay cheques of crossed and uncrossed, for his customers.

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He further adds that if the banking business carried on by any person is subsidiary to
some other business he cannot be regarded as a banker (Paget, 2001).

The words Bank refer as Central bank, Commercial bank, Development bank,
Exchange bank, Saving bank, Cooperative bank, Merchant bank, Housing bank,
Equipment bank, Infrastructure bank and Mutual fund etc. they provide financial as
well as non-financial services. It is a financial intermediary between depositors or
lender and withdrawal or loaner. Bank plays a great role that it helps investors to
invest in different sector by giving a loan and providing other consultancy and agency
services. Thus the words bank its self-provided huge sense of banking activity.

2.1.2.1 Concept of Commercial Bank

Commercial bank is a corporate business venture which have certain paid up capital
and provide loan, accept deposit, exchange money and other consultancy, agency,
guarantee etc. services are perform. Commerce is the financial transactions related to
selling and buying activities of goods and services. Therefore commercial banks are
those banks, which work from commercial viewpoint. They perform all kinds of
banking functions as accepting deposits, advancing credits, credit creation and agency
functions. They provide short-term credit, medium term credits and long terms credit
as well as issuing guarantee, bonds, letter of credit, etc. to trade and industry.

“A commercial bank is the bank which exchanges money, accepts deposit transfers
loans and performs banking functions ” (Commercial Bank Act, 2031 B.S.).

“Principally commercial bank accepts deposits and provides loans, primarily to

business firms there by facilitating the transfer of fund in economy” (Rose, 2001).

“The commercial bank has its own role and contribution in the economic
development. It is a resource for the economic development, it maintain economic
confluence of various segments and extends credit to people” (Ronald, 2001)

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“A Bank is a business organization that‟s receives and holds deposits and funds from
others, makes loans and extend credits and transfer funds by written order of
depositors” (Grolier incorporation, 2001).

Commercial Banks function as an intermediary; accepting deposits and providing

credits to the needy area. The primary source of funds for commercial bank are capital
(shareholder equity) reserve (retain earning) and other main source of the commercial
bank is current deposit issue of commercial paper bond etc. Commercial banks are
restricted to invest their funds in corporate securities. They invest their funds in long
term as well as short-term needs of any trade and industry. They grant credits in the
form of cash credits and overdraft.

Banks undertaking business with the objective of earning profits are commercial
banks. Commercial banks pool scattered fund and channels it to productive use.
Commercial Banks Apart from financing, they also render a variety of service like
collection of bills and cheques, safe keeping of valuables, financial advising, agencies
functions, keeping of guarantee etc. to their value customers.

2.1.2.2 Joint Venture Banks in Nepal

Join stock venture means two or more than two enterpriser, persons or countries
mutually performing some specific venture in any area for common objective. . When
two or more independent firm mutually decides to participate in a business venture,
contribute to the total equity or more or less capital and establish a new organization,
it is known as a joint venture. When two commercial bank from different countries
join hand to form an independent enterprise it is said as joint venture commercial
bank. Joint venture banks are the mode of trading to achieve mutual exchange of
goods and services for sharing competitive advantages by performing joint investment
schemes between Nepalese investors, financial and non- financial institution as well
as private investors and their parents banks each supplying certain percent of
investment.

Liberalization and globalization started after 70s. Many countries applied this policy.
The government of Nepal also realized and starts to apply the policy with greater
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responsibility in fulfilling national goal and objectives. With this realization, the
government mushroomed into a number of establishments like agriculture, industry,
commerce, public works, transport etc. In this context, banking was seen as a major
industry to uplift the economic condition of public and country as well. There for the
government was forced to adopt a liberal economic policy regarding operations of
banks. About the financial liberalization process it was said that “the interest rate
deregulation, curtailment or elimination of directed credits, lifting entry and exit
barriers for financial intermediaries, restructuring of banking system and institution
for regulatory and supervisory mechanism is some of the key components of such
liberalization” (Shrestha, 2001).

Liberal economic policy and Restoration of democracy and policy of the government
led the opening of various joint ventures in Nepal. Nepal Arab Bank Limited (Nabil)
was the first joint venture bank which was established in 2041 B.S. Its joint venture
partner was Emirates Bank international Limited, (Dubai Bank). Similarly Nepal Indo
Swiss bank ltd, Nepal Greenland bank ltd, Himalayan bank, Nepal Bangladesh bank
ltd, SBI bank ltd etc. accordingly. Establishing the join stock commercial bank makes
tough competition to domestic bank and compels improvement in their services and
technology. All the Nepalese joint venture banks established and operated under the
rules and regulation and guidance under Nepal Rastra Bank (NRB).

2.1.3 Functions of Commercial Banks

The business of commercial bank is primarily to hold deposits and make credits and
investments with the object of securing profits for its shareholders. Its primary motive
is profit; other considerations are secondary. The major functions of commercial
banks are as follows:

Accepting Deposit, Advancing credits, Agency Services, Credit Creation, Financing

of Foreign Trade, and safekeeping of valuables, Making Venture Capital Credits,
Financial Advising and Offers Security Brokerage Services. They also function as
issue of commercial paper, bond and debenture, invest in government security as well
as underwriting function under rules and regulation of their Central Bank.

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i) Assist in foreign Trade:
The bank assist the traders engaged in foreign trade of the country. He discounts the
bills of exchange drawn by exporters on the foreign importers and enables the
exporters to receive money in the home currency. Similarly, he also accepts the bills
drawn by foreign exports.
ii) Offers Investment Banking and Merchant Banking Services:
Banks today are following in the footsteps of leading financial institutions all over the
globe in offering investment banking and merchant banking services to corporations.
These services include identifying possible merger targets, financing acquisitions of
other companies, dealing in security underwriting, providing strategies marketing
advice and offering hedging services to protect their customers against risk from
fluctuating world currency prices and changing interest rate. In this way they support
the overall economic development of the country by various modes of financing.

2.1.4 Concept of Credit

Credit is the sum amount of money lent by the creditor (Bank) to the borrower
(Customers) either on the basis of security or without security. Sum of the money lent
by a bank, is known as credit (Oxford Advanced Learners Dictionary, 2001) 3. Credit
and advances is an important item on the asset side of the balance sheet of a
commercial bank. Bank earns interest on credits and advances, which is one of the
major sources of income for banks. Bank prepares credit portfolio, otherwise it will
not only add bad debts but also affect profitability adversely (Varshney and Swaroop,
2001).

Credit is financial assets resulting from the delivery of cash or other assets by a lender
to a borrower in return for an obligation of repay on specified on demand. Banks
generally grants credit on four ways (Chhabra and Taneja, 2001).
1. Overdraft
2. Cash Credit
3. Direct Credit
4. Discounting of Bills

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2.1.4.1 Types of Credit
Overdrafts:
It denotes the excess amount withdrawn over their deposits. In other words bank
provide sum limit of money to their value customer according to their believe ness
and level of transaction.

Cash Credit:
The credit is not given directly in cash but deposit account is being opened on the
name of credit taker and the amount credited to that account. In this way, every credit
creates deposit.

Term Credit:
It refers to money lent in lump sum to the borrowers. It is principle form of medium
term debt financing having maturities of 1 to 8 years.

Barely and Myers urge that bank credits with maturities exceeding 1 years are called
term credits. The firm agrees to pay interest based on the bank‟s prime rate and to
repay principle in the regular installments. Special patterns of principle payments over
time can be negotiated to meet the firm‟s special needs (Richard, 2001).

Discounting of Bills:
Banks provide loans by discounting bills such as the bill of exchange. In modern days,
transactions are made with help of credit. The seller draws bill of exchange making
borrower to pay after some fixed date.

2.1.4.2 Priority or Deprived sector Credit

Commercial banks are required to extend advances to the priority and deprived sector
12% of the total Credit must be toward priority sector including deprived sector. Rs.2
million for agriculture cum service sector and Rs.2.5 million for single borrowers are
limit sanctioned to priority sector. Institutional support to „Agriculture Development
bank‟ and „Rural Development Bank‟ are also considered under this category.
Deprived sector lending includes:

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  Advances to poor/downtrodden/weak/deprived people up to Rs 30,000
for generating income or employment.
 Institutional Credit to Rural Development Bank.
 Credits to NGOs those are permitted to carryout banking transactions for
lending up to Rs.30, 000.

2.1.4.3 Hire Purchase Financing (Installment Credit)

Hire-Purchase credits are characterized by periodic repayment of principle and
interest over the maturity of the credit. Hirer agrees to take the goods on hire at a
stated rental including their repayment of principle as well as interest with an option
to purchase. A recent survey of commercial banks indicates those banks are planning
to offer installment credits on a variable rate basis. It can be secured and unsecured as
well as direct and indirect installment credits on a variable rate basis. It can be secured
and unsecured as well as direct and indirect installment credit.

2.1.4.4 Housing Credit (Real Estate Credit)

Financial institutions also extend credit to their customers. It is different types, such
as residential building, commercial complex, construction of warehouse etc. It is
given to those who have regular income or can earn revenue from housing project
itself.

2.1.4.5 Project Credit

Project credit is granted to the customers as per project viability. The borrowers have
to invest certain proportion to the project from their equity and the rest will be
financed as project credit. Construction credit is short-term credits made to developers
for the purpose of completing proposed projects. Maturities on developers for
completing proposed projects. Maturities on construction credits range from 12
months to as long as 4 to 5 years, depending on the construction credits range from 12
months to as long as 4 to 5 years, depending on the size of the specific project . The
basic guideline principle involved in disbursement policy is to advance funds
corresponding to the completion policy is to advance funds corresponding to the

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completion stage of the project. Term of credit needed for project fall under it
(Johnson, 1940:83).

2.1.4.6 Consortium Credit

No single financial institution grant credit to the project due to single borrower limit
reason and two or more such institutions may consent to grant credit facility to the
project of or other which is baptized as consortium credit. It reduces the risk of project
among them. Financials bank equal (or likely) charge on the project‟s assets.

2.1.4.7 Credit Cards and Revolving Lines of Credit

Banks are increasingly utilizing cards and revolving lines of credit to make unsecured
consumer credit. Revolving credit line lowers the cost of making credit since
operating and processing cost are reduced. Due to standardization, centralized
department processes revolving credits resulting reduction on administration cost.
Continued borrowing arrangement enhances cost advantages. Once the credit line is
established, the customer can borrow and repay according to his needs and the bank
can provide the fund to the customer at lower cost.

2.1.4.8 Off-Balance Sheet Transaction

In fact, bank guarantee and letter of credit refer to off balance sheet transactions of
financial institution. It is also known as contingent liability. Contingent liability
pinpoints the liability, which may or may not arise during the happening of certain
event. Footnotes are kept as references to them instead of recording in the books of
accounts. It is non-funded based remunerative facilities but more risky than the
funded until adequate collateral are not taken. Let‟s its two varieties be described
separately.

1. Bank Guarantee
It used for the sake of the customers in favor of the other party (beneficiary) up to the
approved limit. Generally, a certain percent amount is taken as margin from the
customer and the customer‟s margin account is credited.

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2. Letter of Credit (L/C)
It is issued on behalf of the customer (buyer/importer) in favor of the exporter (seller)
for the import of goods and services stating to pay certain sum of money on the
submission of certain documents complying the stipulated terms and conditions as per
the agreement of L/C. It is also known as importers letter of credit since the bank of
importer do not open separate L/C for the trade of same commodities (Jhonson,
2001).

2.1.4.9 Objectives of the Sound Credit Policy

The purposes of a written credit policy are:
1. To assure compliance by lending personnel with the bank‟s polices and
objectives regarding the portfolio of credits
2. To provide personnel with a framework of standards within which they
can operate.

2.1.5 Lending Criteria

While screening a credit application, 5-cs to be first considered supported by
documents.
i) Character
Character is the analysis of the applicant as to his ability to meet the obligations put
forth by the lending institution. For this analysis, generally the following documents
are needed.
 Memorandum and Article of Association
 Registration certification
 Tax registration certificate (Renewed)
 Resolution to borrow
 Authorization-person authorizing to deal with the bank.
 Reference of other lenders with whom the applicant has dealt in the past of
bank A/C statement of the customer.

ii) Capacity
It‟s describes the customer‟s ability to pay. It is measured by applicants past
performance records and followed by physical observation. For this, an interview with
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applicant‟s customers/suppliers/ will further clarify the situation. Documents relating
to this area were:
 Certified balance sheet and profit and loss account for at least past 3 years.
 References or other lenders with whom the applicant has dealt in the past or
bank A/C.

iii) Capital
This indicates applicant‟s capacity to inject his own money. By capacity analysis, it
can be concluded that whether borrower is trying to play with lender‟s money only or
is also injecting his own fund to the project. For capital analysis, financial statements,
like certified balance sheet, profit and loss account is the only tools.
iv) Collateral
Collateral is the security proposed by the borrower. Collateral may be of either nature
moveable or immovable. Moveable collateral comprises right from stock, inventories
to playing vehicles. In case of immovable it may be land with or without building or
fixture, plant machineries attached to it.

v) Conditions
Once the funding company is satisfied with the character, capacity, capital and
collateral then a credit agreement (sanction letter) is issued in favor of the borrower
stating conditions of the credit to which borrower‟s acceptance is accepted.

2.1.6 Principle of Credit Policy

Good credit policy is essential to carry out the business of lending more effectively.
Some policies are as follows:

i) Principle of Safety Fund

Banks should look the fact that is there any unproductive or speculative venture or
dishonest behavior of the borrower.

19
ii) Principle of Liquidity
Liquidity refers to pay on hands on cash when it needed without having to sell long-
term assets at loss in unfavorable market. A banker has to ensure that money will
come in as on demand or as per agreed terms of repayment.

iii) Principle of Security

It acts as cushion to grant advances and credits. Adequate values of collaterals ensure
the recovery of credit correctly at the right time. Accepted security should be readily
marketable, handy and free from encumbrances.

iv) Principle of Credit Purpose

Generally, credit request would be accepted for productive sector only. Bank should
be rejected credit request for speculation, social functions, pleasures trips, ceremonies
and repayment of prior credit as they are unproductive.
v) Principle of Profitability
Profitability denotes the value created by the use of resource is more than the total of
the input resources. Bank should provide to such project that can provide optimum
amount of return. For such purpose, bank should take a little bit risk by providing to
venturous project.

vi) Principle of Spread

Portfolio of credit advances is to be spread not only among many borrowers of same
industry. It across the industries in order to minimize the risk of lending by keeping
“Do not put your all eggs in the same basket” in mind.

vii) Principle of National Interest

In lending and granting advances, interest of nation should not be distorted (if
undermined). Priority and deprived sector of economy and other alarming sector
should be given proper emphasis while extending advances.

Every Bank should always follow the rule “Do not put your all eggs in the same
basket”. So every bank makes appropriate portfolio in their investment the credit
management would be excellent.
20
2.1.7 Lending / Credit Process
Commercial bank follows several steps to disburse loan to the borrowers. The lending
policies might be different form one bank to another. In general, these steps can be
pointed out of follows.

Application: the needy are required to submit an application to the bank along with
required documents. The documents required for credit proposal appraisal and
processing by banks are as follows:
- Loan application
- Citizenship certificate of applicant
- Firm/ company registration certificate (if self-employed)
- Income tax registration certificate (if self-employed)
- Authenticated partnership deed in case of partnership firm, and memorandum
and article of association in case of company
- Attested copy of board resolution in case of company resolved to avail loan
and banking facilities form bank against the pledge, hypothecation, and
mortgage of fixed property owned by company or property of third party
named.
- Letter of authority authorizing to sign loan deed and other relevant document
paper which are deemed necessary while dealing with bank on behalf of
firm/company.
- Feasibility report/scheme ( for new project)

2.1.8 Lending Appraisal and Possessing

Basically, appraisal of loan proposal is processing for the analysis of the variability of
the scheme proposed. It also helps to assets the actual financial assistance needed to
operate the scheme.

Commercial bank carries out loan appraisal on the basis of past performance, future
forecast and information available from the documents submitted by aspirant
borrowers.
The bank tries to ascertain the following during loan processing:

21
 The cost of estimate us examined so that the appropriate estimate can be accepted.
Under and over estimates are rejected. Similarly, the specification of machinery
should be proper.
 Working capital projection has to be reasonable as compared to past performance
and on the basis of target for future expansion.
 The return rates should be adequate like return on investment (ROI), internal rate
of return (IRR) and debt service coverage ratio (DSCR).
 The capacity, competency, integrity and commitment of promoters/ partners/
proprietors/ directors/ personnel should be intact.
 SWOT (strength, weakness, opportunity and threat) analysis of the proposed
project must give reasonable assurance.

2.1.9 Project Appraisal

Before providing credit to the customer, bank makes analysis of project from various
aspects and angles. It will help the bank to see whether project is really suitable to
invest. The purpose of project appraisal is to achieve the guarantee of reasonable
return from the project. Project appraisal answers the following questions:
 Is the project technically sound?
 Will the project provide a reasonable return?
 Is the project in line with the overall economic objectives of the country?
Generally, the project appraisal involves the investigation from the following aspects
(Gautam, 2004).
1. Financial aspect
2. Economic aspect
3. Management /organizational aspect
4. Legal aspect

Directives issued by NRB for the commercial Bank: (related to credit aspect only):
Credit classification and provisioning
Classification Provision
1. Pass Credit 1%
2. Sub Standard Credit 25%

22
 3. Doubtful Credit 50%
4. Bad Credit 100%

Those credits that have not crossed the time schedule of repayment and are within
three months delay of maturity date fall under the classification topic „pass credit‟. It
is also known as performing credit.

Likewise, within 6-12 months from the time to be recovered are classified as doubtful
credit. Those credits, which are not recovered yet after 1 year from maturity date, are
known as bad credit. All the above 3 types of credits are classified as non-performing
credit also. The credit loss provision for performing credit is termed as general credit
loss provision whereas the credit loss provision for non- performing credit is termed
as specific credit loss provision.

2.1.10 Limit of Credit and Advances in a Particular Sector

Following are the credit limit:
 Fund based credit and advances can be issued up to 25% (upper limit) of core
capital to a single customer, firm, company and a group of related customer.
 Non-fund based (off-balance items) can be issued up to 50% of core capital to
a single customer, firm, company and group of related customer.

Note: The core capital includes {paid up capital + share premium + non-redeemable
preference share + general fund + accumulated profit (loss) –goodwill (if any
included)}.
Group of related customer:
 If a company takes 25% or more share of another company.
 Member of board of directors of company shareholders of private limited
company and such members and shareholders with others in a single house, even
if husband, wife, son, daughter, daughter in law, unmarried daughter, adopted son,
adopted unmarried daughter, father, mother, stepmother, brothers and sisters
whom be should look after..
 Firm, company and members as a related group.

23
 Members of board of directors, shareholders and other relatives as stated in serial
number „b‟ takes less than 25% of board of directors of the company solely or
combined but have control on the other company by the following ways:
 Being president of board of directors of the company.
 Being executive directors of the company.
 Nominating more than 25% of members of board of directors of the company.
 If cross guarantee is given by one company to another company.

2.2 Review of Related Studies

2.2.1 Review of Related Articles
Mr. Ramesh Lal Shrestha in his article "A study on Deposits and Credits of
Commercial Banks in Nepal" concluded that the credit deposits ratio would be 51.3%,
other things remaining the same in 04 A.D. which was the lowest under the period of
review. So he had strongly recommended that the commercial should try to give more
credit entering new field as far as possible otherwise they might not be able to absorb
even its total expenses. (Shrestha, 2001)

The article by Mr. Sunil Chopra concluded that Joint venture banks are already
playing an increasing dynamic and vital role in the economic development of the
country. This will undoubtedly increase with time. (Chopra, 2001)

Likewise another article of Mr. Gilles Serra concluded that the five commercial banks
were improving their services, due to the pressure of competition for the public
benefit.

The article published in Annual Bank supervision Report NRB (2006/07), Bank
supervision Department; conclude that the loan and advances extended by banking
industry. The loans and advances of the public banks (excluding ADB) have remained
more or less the same for the last three years, while the private banks have enhanced
their portfolio by more them Rs. 20.50 billion resulting in the dilution of the
concentration of public banks. However, the three public banks are still the three
largest individual banks in Nepal, in respect of the size of their loans portfolio.

24
The Nepalese banking system is riddled with a significant amount of non-performing
assets (NPA). It is clearly evident from the following picture that the volume of non-
performing assets is on the decline while total loans are continuously increasing thus
resulting in a favorable proportion of Non-performing assets. The NPA ratio, however
is still a long way from being at satisfactory level with regard to quality of the loan
portfolio of the individual banks, RBB was the worst closely followed by Nepal
Bangladesh Bank, Lumbini Bank and NCC Bank Ltd. Along the private banks, it was
Nepal Bangladesh bank, Lumbini Bank and NCC who had the largest proportion of
NPA in their portfolio, while the lowest and the best NPA ratio belonged to
Machhapuchhre Bank Ltd. RBB has 60% of Bad debts and according to FY 2063/064
NPA of RBB has 26%. In FY 2063/064 Bad debt principle is Rs 40 million. The large
volume NPA has traditionally been a problem in public banks and three private banks.
After a reform program was initiated in the public banks, the volume of NPA, both
gross as well as net has come down, significantly. The fact is also reflected in the
following chart, where a wide gap between NPA and provision can be observed.

N. Crosby, N. French and M. Oughton (2007:66-83), in their article “Banking lending

valuations on commercial property” elaborates that the banking community are trying
to identify the value on which they can apply a loan value ratio and thus protect their
loan in the future should the borrower default loan.

Values can only be snapshots in time. They do not have a shelf life. For this reason
EMLV is conceptually and practically redundant in real estate markets. It appears on
the surface to be a solution to the banks‟ requirement for the reduced risk property
lending. In reality, it may indeed transfer that risk by demanding a level of protection
to the bank that the valuation cannot give. But if values agree to it, it could open the
way to successful negligence claims in the aftermath of poor lending decisions. This
is because the concepts appears the determinants of the virtually certain level of value
below which the value will not fall for an indeterminate time into the future. Values
are vulnerable to claims that their valuation was too high, should values fall below
that level at any time during the loan. Sustainable value is predicated on having a
shelf life but the application believes this fundamental requirement. Values must have
a time point. The concept is redundant, the target unidentifiable and the definition
25
ambiguous. It is little wonder that the application appears mechanistic. Market value
is an obtainable and useful piece of information to the lender. Worth in the market
sets this in context and gives the lender a view of whether market prices are at current
sustainable levels. In obtaining worth, the value is obliged to carry out both
quantitative and qualitative investigation into the future and this generates other
analyses at different time points during the course of the loan.

EMLV appears to be another blind alley which will divert the appraisal profession
from its more important task of improving pricing estimates, and thereby influencing
market prices, and providing all clients, whatever the valuation purpose, with the
information in reports which puts the limitations of valuation figure into perspective.

Sujit Mundul, (2008:36), Understanding of credit derivative Business Age

September” emphases Credit derivative enable financial institution and companies to
transfer credit risk to a third party and thymus reduce their exposure to the risk of an
obligor‟s default. Credit enhancement technique, which helps reduce the credit risk of
an obligation, play a key role in encouraging loans and investment in debts. In legal
term credit derivative are privately negotiated bilateral contract to transfer credit risk
from one party to another guarantee, letter of credit or insurance product. However
such mechanism works best during economic upturns. As an alternative to
commercial risk mechanism, various financial mechanisms have been developed over
the past few decades. Such credit risks instruments are normally refer to as credit
derivatives. Credit derivative helps to transfer credit risk away from the lender to
some other party.

Credit derivative not only helps corporation and financial institution to manage to
their credit risk but also enabled a new set of individual retail client to invest in bonds
and stocks previously unaffordable. Through credit derivative individual investor ca
invest indirectly in foreign bonds at a lower price. Credit derivative helps investor
isolated credit, and transfer it to other investor who are better suited to managing it or
who finds the investment opportunity more interesting. There are many credit
instruments in the market they are
- Total return swap (TRS)
26
 Credit default swaps (CDS)
- Credit linked notes (CLN)
- Credit spread option (CSO)
According to the behavior of the asset or deal above credit instrument can be used and
minimizing the risk. In this way credit derivative provide protection against credit
peril and risk.

2.2.2 Review of Thesis

This dissertation has been written after studying various books journals article website
and previous thesis. I here comprise the some previous thesis review, which are
mainly concerned about financial performance and fund mobilization policy, lending
practices and investment policy, credit management and loan management of
commercial bank.

Regmi, P. (2004) submitted thesis entitled “Credit Management of Commercial

Banks with Reference to Nepal Bangladesh Bank and Bank of Kathmandu” states that
commercial banks are those banks, which works from commercial view point. They
perform all kinds of banking functions such as, accepting deposits, advancing credits,
credit creation and management of credit and advance.

On average 5 years of research period, cash and bank balance to total deposits of ratio
of NB bank and BOK is 12.75% and 14.12% respectively. Likewise NB bank and
cash and bank balance 1.584 times of current deposits and BOK has cash and bank
balance 1.14 times of current assets. NB bank: most of the credit and advances almost
70% is provided an assets guarantee. The assets guarantee credit is increasing period
by period. After assets guarantee bank has provided credit based on bills guarantee
credit is 3421.3millions (76.1% of total credit) and in the last period it is
3347.99millions (58.2%of total credit).

The main statement of the problem of his research is the Nepal is a small country with
small market. Economic condition of the country is degrading. Nepal being an
agriculture country needs more investment in this sector. Nevertheless, commercial
banks are rather concerned in industrial and foreign projects. As a result, the credit
27
extended to this sector is unsatisfactory. Besides, they are not even fulfilling the
NRB‟s, regulation of 12% investment of their total loans to priority sectors like
agriculture, cottage and small industries and services. Similarly, the banks are not
following the diversification principle i.e. they are not considering the investment
portfolio position. A good portfolio theory indicates diversification of invest able
funds to reduce risks. Hence, the principle “do not put all the eggs in basket” really
does not apply in context of Nepalese commercial banks. As a result, many banks
today could not recover their loan because, in the past, a major portion of their
investment were made in garment, carpets and hotel sectors that now come to the
brick of extinction. The objectives of this research are to analyze the functions,
objectives, activities, credits and advances procedure and recovery status of the NB
bank and BOK.

Karki, B. R. (2004) submitted thesis entitled “A Comparative Study on Financial

Performance of NABIL Bank and Standard Chartered Bank Limited” dissertation
found that the development of any country largely depend upon its economic
development capital formation is the prerequisite in setting the overall pace of the
economic development of a country. Well-organized financial system contributes to
the process of capital formation by converting scattered saving into meaningful
capital investment in order to aid industry, trade, commerce and agriculture for the
economic development of the nation. The financial institution play dominant role in
the process of economic development. Banks are indispensable elements in these
systems. Commercial banks furnish necessary capital needed for trade and commerce
for mobilizing the dispersed saving of the individuals and institutions. They provide
the bank of the money supply as well as the primary means of facilitating the flow of
credit.

The main statement of the problem of his research is various financial institutions
have been established to assist the process of economic development of Nepal.
Delivering efficient services to the common people by enhancing efficiency of the
commercial banks and improving their management style pose a challenge to the
banks and financial institutions. The existing condition of the liquidity of the banking
and financial institutions needs to be reduced through an appropriate investment
28
policies. Equally important is the challenge to minimizing their intermediation cost. In
order to help realize the goal of poverty alleviation, access to increased flow of credit
and investment in the economic activities of direct benefit to the maximum number of
low-income people through micro and medium sizes loan needs serious attention in
the days to come. It is also necessary to identify the activities that ensure quick return
of investment. Thus, the present study seems to explore the efficiency and weakness
of NABIL and SCBNL.

The main objectives of his research are to compare analyze the liquidity, profitability,
operating efficiency, capital structure, capital adequacy leverage and operation,
overall performance, analyze the relationship between DPS and EPS of NABIL and
SCBNL bank. Here various financial accounting and statistical tools have been used
to achieve the objective of the study.

Shrestha, S. (2005) in his dissertation “Credit management with special reference to

Nepal SBI Bank ltd” illustrates that lending is one of the most important parts of
function of a commercial bank and composition of loan and advances directly affects
the performance and profitability of the bank. There is intense competition in banking
business with limited market and less investment opportunities available. Every bank
is facing the problem of default loan and there is always possibility of a certain
portion of the loan and advances, profitability deposits position of Nepal SBI Bank
Limited is analyzed and its contribution in total profitability has been measured.

The main statement of the problem of his study is the credit management is the
essence of commercial banking. Consequently, the formulation and implementation of
sound Credit policies are among the most important responsibilities of bank directors
and management. Well-conceived credit policies and credit careful credit practice are
essential if a bank is to perform its credit creating function effectively and minimize
the risk inherent in any extension of credit-credit management effects on the
company‟s profitability and liquidity so it is one of the crucial decisions for the
commercial banks. Measuring the credit performance in quality, efficiency and
contribution of profitability, liquidity position and its effect on credit performance and

29
measure the growth rate and propensity of growth based on trend analysis are the
main objective of his dissertation.

Subedi, K.P. (2005) conducted a research entitled “Financial Performance of NABIL

Bank Limited” states that deposit is the part of balance sheet which always remains
the biggest in amount. It is the sensitive liability among all items. As like total
liabilities and capital deposit also increase until 2057/58 and starts to fall down. The
increment rate is satisfactory in first and second changing years, and then it has
changed by negative digits therefore in two subsequent year‟s. The business in peak
where the value was Rs.15839.0077millions. The proportion of debt over the total
liabilities and capital is 83.35% in average. Fixed deposit is taken as a long-term debt
in the banking business; it is key department factor to capital structure. The bank
could collect the deposit is Rs.7667.8459millions. In two subsequent years, it
decreases and becomes Rs. 2252.5464millions in the final study years. This items
changes by in highly decreasing trend. The average change rate is 5.89%. The
proportion over total liabilities and capital is 26.32% in average. The composition of
paid up capital, reserve and surplus other reserves and undistributed profit is known as
shareholders equity. Unlike other items mentioned above, shareholders equity is
regularly increasing. The yearly change rate is in fluctuating trend varied from 8.97%
to 24.63%.

The main statement of his research is the banking industry is one of the fast growing
businesses in Nepal. After the liberalization policy was adopted by government this
sector has been dramatically. Now, more than one and half dozen banks are in
operation. Now too, new banks are being set up. Due to security, problem and
political instability government could not be able to pay sufficient attention to
business and industry sector. Regulation and monitoring by government has been
weekend in the banking sector as like others free and fair competition is decreasing.
Customers and stakeholders are too much sad to hear the news that banks have tried
to cartel in taking treasury bills before some months other type non-business practices
might have been occurred in this industry. Surely such types of practices will hamper
the whole sector. Ultimately, the capital structure will be affected. We have been
watching the type scenario where the capital structure is not so stagnant and continues
30
progress. The main objectives of his research are to be familiar and analyze the
composition of the capital, examine the existing financial position, profitability and
overall trend analysis of NABIL bank. It‟s also provide the recommendation,
suggestion for the development of an appropriate capital structure concern NABIL
Bank limited.

Gurung, A. K. (2006) explored in his research entitled “Lending policy and recovery
management of Standard Chartered Bank Nepal ltd and NABIL Bank Limited” has
found out that the deposit collection by the banks shows that increasing but in a
fluctuating trend. The trend analysis of deposit collection the increase in deposit
collection in the forthcoming years will continue. Out of different types of deposit
collection account, higher account has been collected in saving deposit account. Out
of the total deposit collection, SCBNL has disbursed 36% of average as a loan and
Nabil has disbursed 52% of its deposit collection as a loan disbursement to deposit
collection ratio of commercial banks, it is around 60%. Thus this ratio is quite low
incasing of sample bank especially of SCBNL. It is further proved by the calculation
of correlation coefficient, which is 0.75 and 0.23 of SCBNL and Nabil respectively.

In order to analyze the recovery management of these banks, their loan loss provision
and NPL were analyzed. While looking at the loan loss provision of SCBNL it is in
decreasing trend from 2002. The correlation coefficient of loan loss provision and
loan disbursement of SCBNL is 0.36. While looking at the future trend of loan loss
provision its shows the increasing trend in case of SCBNL and the trend of Loan loss
provision is decreasing every year in case of Nabil, which is proved by the trend
analysis. The correlation of loan loss provision and loan disbursement of Nabil is
negative.

The main statement of his problem is there many banks are mushrooming although
banks are not interested to expand their branch in remote rural area. There are
difficulty and length formality of procedure for long term and medium term as well as
short-term loan, Low deposit habit of Nepalese people and lack of strong recovery act
of lending and bad debt. The main objectives of the dissertation are loan and advance

31
providing procedure of bank, lending and investment sector of bank, recovery
condition of both SCBNL and NABIL bank.

Paudel, H. (2006) in his dissertation entitled “A Comparative Study on Nepal

Siddhartha Bank Limited and Himalayan Bank Limited” states that interest income
from loan and advances are the main sources of income, which will increases profit of
commercial bank. The main ratio of interest income to total income of SBL is higher
than that HBI. NRB has restricted the gap between the interest taken in loan and
advances and interest offered in deposit. HBL have higher mean ratio of interest
income to interest expenses and total income to expenses ratio than that of SBL. HBL
has maintained high return in every-reflect than that of SBL. Among the various
measurement of profitability ratios return to equity and earning per share, reflects the
relative measure of profitability. The performance of NBL is higher than that of SBL.
Coefficient of correlation between deposit and loan and advances total income and
loan and advances of both bank have positive value there is significant relationship
between deposit and loan and advances total income and loan and advances.
Coefficient of correlation between net profit and loan and advances of both bank have
positive relationship. But the number of HBI is greater than number of SBL. There is
no significant relationship between net profit and loan and advances of both banks.
They are greater than number of both banks.

The main statement of the problem of his research is the present banking system is the
result of liberalization of economy requirement and globalization in 1990s. The
development of banking in both quality and quantity was satisfactory. However,
subsequent development of commercial banks in quality has not been satisfactory;
commercial bank in Nepal has been facing several challengers. The main objectives
of the study are to know contribution made by both banks in lending determine the
impact of deposit in liquidity and in effect on lending policy, analysis the portfolio
lending, ratio and volume of loans and advances made in different sector and
documentation, legal procedure and practice loan of SBL and HBL.

Sedai, P. (2007) in his dissertation entitled “An analysis on lending policy and
strength of Nepal Investment Bank Ltd” highlighted that aggregate performance of
32
NIBL is satisfactory and pushing upward. Lending strength of NIBL in term of
exposure of loan and advances is good and appreciable. The contribution made by
bank in industrial as well as agriculture sector of the economy is highly appreciable
and its bust up towards national prosperity. The ratio of loan and advances to total
asset, loan and advance to shareholder„s equity indicate a good performance of NIBL
in its lending activities.

Looking at the asset management ratio the performance of NIBL seems good in the
area of lending, productivity and impact on national economy. The activity ratio also
reflects to the soaring performance of NIBL. The decreasing loss loan provision ratio
indicate that bank is good enough to judgment in their value customer. The better
activity ratio of this bank been a major contributor in managing the lending portfolio
according to the demand of the profit oriented business. The high volume of lending
activity of NIBL has put this bank in the top position in absolute term. Thus looking
at the various summaries and findings, we can conclude that the bank has accelerated
its performance in the year 2002/3 and has continued till 2004/5 and the bank has the
potentiality to become a leading bank in Nepal.

The recommendations are forwarded according to finding and conclusion. It is

recommended that extend their credit and branch in rural area, continue to maintain or
further increase the performance, decrease the NPL and make proper loss loan
provision, required proper market analysis, diversify the investment sector etc. finally
however, performance of NIBL seems to be good till the date. There are still many
opportunities for further growth of the bank. NIBL is suggested to further improve
current position of lending portfolio. The bank should concentrate on financial
strength, pe5rsonal integrity and credibility of the borrower of loan disbursement. It
should maintain high level of monitoring and control system over the disbursed loan
and advances. To create opportunity of business news and attractive lending scheme
would be launched to the customer.

The main objective and target of this study is to observe the loan disbursement of
Nepal Investment Bank Ltd. its shows the actual lending position, strength and
weakness. The specific purpose are study of loan and advances provided to customer,
33
amount loan investing in industrial sector, trend of loan disbursement , process are
according to NRB rules & regulation and position of bank and its profitability.

Misra, S. (2008) submitted the dissertation entitled “Credit management of Everest

Bank Limited” illustrate that liquidity position, cash reserve ratio shows the more
liquidity position. Cash and bank balance to interest sensitive ratio shows the bank is
able to maintain good financial condition. Cash and bank balance to current assets
ratio shows that the bank‟s sound ability to meet the daily cash requirement of their
customers deposit. That is why liquidity position of the bank is the better.

In the aspect of profitability position, interest income to interest expenses ratio shows
the more profitable salivation. In addition, total income to total expenses ratio shows
the overall predominance of the bank is satisfactory operating income. Return on loan
advances are showing position that is more profitable on of the EBL. Analysis of the
assets management ratio, loan advances to total assets ratio shows the better
performance but loan and advances to total deposit position in minimum than the
averages. Whereas investment in loan and advances is safely and not taking more risk.
That‟s why assets management position of the bank shows better performance in the
latest year.

After analyzing the lending efficiency of the bank, the loan loss provision to loan
advances indicator shows the better performance in the latest year. The interest
expenses to total deposit ratios shows the improving efficiency of the bank. EBL bank
has sufficient liquidity. It shows that bank has not got investment sectors to utilize
their liquid money.

This is to recommend that Cash and bank balance of EBL bank is high. Banks
efficiency should be increased to satisfy the demand of depositor at low level of cash
and bank balance does not provide return to the bank. Therefore some percentage of
the cash and bank balance should be invested in profitable sectors. Bank should open
their branches in the remote area with the objective to provide the banking services
and minimum deposit amounts should be reduced. The main objective of this study is
to evaluate the credit management of Everest Bank Limited. Besides, there may be
34
other objectives as well like to examine the impact of deposit in liquidity, loan
management procedure, assets management and lending efficiency of the Everest
Bank Limited.

Paudel, P. (2009) submitted the thesis entitled “A study on lending practices of joint
venture commercial banks with reference to Nepal Bangladesh Bank Ltd (NBBL) and
Himalayan Bank Ltd. (HBL)” has made comparative study of these two banks in
different lending aspects and strategies.

As per the findings, the liquidity position of NBBL is comparatively better than HBL.
The liquidity ratio of HBL is more stable and consistent than NBBL that indicates the
stable policy of HBL. NBBL is found slightly better to be maintaining between assets
and liabilities. NBBL has high loan and advances to total assets ratio, loan and
advances to total deposit ratio, but HBL has high investment to total loans and
advances and investment and total investment to total deposit ratio. He has concluded
that NBBL is able to manage its assets to complete in this competitive banking
business than HBL. As per his findings the liquidity position of NBBL is better and
hence HBL is recommended to increase its liquidity position. He has suggested both
banks to strictly follow the NRB directives, which will help them to reduce credit risk
arising from borrower‟s defaulter, lake of proper credit appraisal, defaulter by
blacklisted borrowers and professional defaulter. Loan loss provision of both banks is
in fluctuating trend.

Main objective of his Thesis lending practices of joint venture commercial banks with
reference to NBBL and HBL is investment criteria and sector, loan distribution and
advance practice of joint venture bank. The limitation of the thesis was based on
secondary data given by responded, five year‟s data and non-ending year‟s data.

Ojha, L. P. (2010) in his dissertation entitled “Lending Practices” has written that the
commercial banks have to expand their credit in the area if rural economy so as to
compromise between the liquidity and credit need such economy. This helps in
minimizing the idle find in business and at the same time contribute to the national
economy. The banks should also increase the volume of credit in the sector of
35
agriculture as the ratio of contribution made by the banks in this priority sector is
decreasing. He has found out that following the normal guidance of Nepal Rastra
Bank and acting upon reduces many on the credit risk arising from borrower‟s
defaulter, lack of proper credit appraisal, defaulter by blacklisted borrowers, and
professional defaulter. The over confidence of commercial banks regarding credit
appraisal efficiency and negligence taking information from Credit Information
Bureau has caused many of the bad debts in these banks. He thinks that these banks
have to follow the directives of NRB strictly and be more cautious and realistic while
granting loans and advances.

Ojha has found that the high volume of liquidity reveals that a degree of lending
strength has been prevailing in all of the commercial banks. The lack of reliable
lending opportunities and fear of losing the principal in rural sector has been keeping
these banks less oriented towards the lending function. Hence, the government should
take appropriate action to initiate these banks to attract to flow credit in rural
economy. Posing the compulsions by directives does not create long-term healthy
lending practices unless the commercial banks are not self-motivated to flow credit in
this sector.

Joshi, S. (2012) submitted the thesis entitled “A Comparative Study on Financial

Performance of Standard Chartered Bank Nepal Limited and Everest Bank Ltd” states
that the mean current ratio of EBL is slightly higher than that of the SCBNL and the
variability of ratio of EBL is more consistence than SCBNL in comparison. The mean
ratio of cash and bank balance to total deposit of SCBNL is lower in comparison to
EBL. SCBNL has better liquidity position than EBL because of the high volume of
liquidity indicated the inability of the bank to mobilize its current assets. Moreover
SCBNL‟s ratios are homogeneous than EBL. The mean ratio of cash and bank
balance to current assets of SCBNL is lower in comparison to EBL. Similarly,
SCBNL‟s ratios of the study period are more consistent than EBL. The mean ratio of
loan and advances to total deposit of EBL is higher than SCBNL. It can be said that
EBL used to provide greater loan and advance in comparison to its total deposit than
SCBNL. Likewise, SCBNL‟s ratio seems to be variable them EBL. The mean ratio of
investment on government securities to total working fund of SCBNL is higher than
36
EBL. Consequently, it has consistency in maintaining the ratio than EBL. The mean
ratio of return on loan and advances of SCBNL has found to be significantly greater
than EBL with more consistency than that of EBL. The mean ratio of credit risk of
SCBNL is lower than that of EBL‟s ratios are more consistent than that of SCBNL.
Growth ratio of deposit are more consistent than that of SCBNL is lower i.e. 19.28%
in comparison to EBL i.e. 76.46%.

The main statement of the problem of his research is the investment decision is the
major tool of financial institution. There are many finance companies and commercial
banks operating in Nepal. The fast growth of such organizations has made pro-rata
increment of in collecting deposits and their investment. They collected adequate
amount from the mass, however they could not find or locate new investment sectors
required to mobilizes their fund on the changing context of Nepal. Many banks or
companies succumbed to liquidation although they had sustainable investment
capacity. The increasing rate of liquidity has caused a downward trend in investment
sectors. It has ensured bad impact on interest rate to the depositors, lower market
value of shares etc. for the assessment of such adverse impact, this study has shown to
contrast and analyses the investment policy of joint venture banks. Joint venture
banks viz. standard chartered bank Nepal Ltd and Everest bank limited. The main
objectives are compare investment policy of concern banks, find out the empirical
relationship among total investment, deposit, deposit utilization loan and advance, net
profit and outside asset and compare of SCBNL and EBL.

Parajuli, S. (2012) in his dissertation entitled “Credit management of joint venture

banks” states that concept of financial reform emerged with economic liberalization.
Nepal Government and NRB published the economic and monitory policy to support
such reform. As the result of these policies various jointed venture bank established in
the private sector.

Under the structural adjustment program of the IME the financial sector was further
liberalized in 1987. The focus of NRB was placed on indirect monitory control. The
agricultural development bank of Nepal and Nepal industrial development corporation
were allowed to issue debentures to increase their financial resources. NRB
37
strengthened its regulation and supervision of banking and financial institution and
the commercial banks were granted virtually freedom to fix their interest rates on
deposit in July 1989 except for the priority sector credit. The credit information
Bureau was established in 1989. NRB started to control the financial institutions with
strengthening to supervision and monitoring system. It has also pointed out the need
of having deposit taking institutions act which it‟s on umbrella act of all deposit
taking institution. Some of the main elements of financial sector reform strategy
published by NG in year such as restructuring the government owned banks
strengthening the commercial banks regulation accounting and auditing system
improving the regulation and supervision on non-banking deposit institutions.

The main statement of the problem of the study is government owned banks are in
critical condition they are unable to recover the credit. Financial sector reform
programs are not being able to achieve the expected target. Performance on the credit
is poor in the government banks. Amount of non - performing assets is increasing.
Generally, it is accepted If bank maintain low ratio, bank may not able to make the
payment of against cheque that disadvantage sector in the economy such as the farmer
and the small business have been neglected by the banking industry. In other words
such sectors in the economy are not receiving the financial supports as commercial
banks hesitate to be involved in these sectors where they do not see adequate profit.
The main objectives of his research are: procedures of granting loans, examine the
level of non-performing loan, relevancy of the financial sectors reform program,
measure the comparative output of credit management in joint venture bank and
government.

2.3 Research Gap

The review of above relevant literature has contributed to enhance the fundamental
understanding and knowledge, which is required to make this study meaningful and
purposeful. There are various researchers conduct on lending practice, credit policy,
financial performance and credit management of various commercial banks. Some of
the researchers have done the financial performance, credit policy between two or
three different commercial bank. In order to perform those analysis researchers have
38
used various ratio analysis. The past researches in measuring credit management of
bank have focused on the limit ratios which are incapable of solving the problems.
Actually credit management is determined by various factors. In this research various
ratio are systematically analyzed and generalized. Past Researchers are not properly
analyzed about lending and its impact on the profitability. The ratios are not
categorized according to nature. Here in this research all ratios are categorized
according to their area and nature.

In this study, the credit management of Nabil bank is measured by various ratios,
trend analysis and various statistical tools as well and financial tools are used for
analyzing survey data. Since the researcher have used data only five fiscal year but all
the data are current and fact. Clearly these are the issue in Nepalese commercial bank
the previous scholar could not the present facts. Thesis of Sunita Misara, (2007)
“Credit management of Everest Bank Limited” and Pradip Sadai, (2007) “An analysis
on lending policy and strength of Nepal Investment Bank Ltd” has not use correlation,
probable error and trend analysis. This study tries to define credit management by
applying and analyzing various financial tools like liquidity ratio, leverage ratio,
profitability ratio and lending efficiency ratio as well as different statistical tools like
coefficient of correlation and trend analysis. Probably this will be the appropriate
research in the area of credit management of Bank and financial institutions.

39
 CHAPTER - III
RESEARCH METHODOLOGY
3.1 Introduction
The research methodology is the process of arriving to the solution of the problems
through planned and systematic dealing with the collection, analysis and
interpretation of facts and figures. In other word, Research is a systematic inquiry
seeking facts through objectives verifiable methods in order to discover the
relationship among them and to deduce from them broad principles or laws This
research methodology has primary sought the evaluation of the credit practices of the
targeted joint venture bank i.e. Nabil bank Ltd. The research methodology adopted in
this chapter follows some limited but crucial steps aimed to achieve the objective of
the research. Research methodology refer to the various sequential steps (along with a
rationale of each such steps) to be adopted by researcher in studying a problem with
certain objective in view.

3.2 Research Design

A well-set research design is necessary for every research work. Research design
refers to the conceptual structure, which constitutes the blue print of collection,
measurement and analysis of data. It is a plan, structure and strategy of investigation
conceived to obtain answer to research questions and to control variables. Thus, a
research design is a blueprint (or detailed) plan for how a research study is to be
completed (Bhandari 2004; 39). There are many methods of research design and this
study is based on recent historical data. Only secondary data and information are
collected, evaluated, verified and synthesized to reach a valid conclusion. The study
aims to analyse and interpret for the purpose of credit management of Nabil Bank
Limited. So, for attaining the goal of the study descriptive data and analytical research
design are used. The descriptive research design has been adopted for fact-finding and
searching adequate information about factors affecting credit management of Nabil
Bank Ltd., during fiscal year 2008 to 2012 AD.

40
3.3 Population and Sample
Thirty one commercial banks are currently operating in Nepal out of which seven are
joint venture commercial banks. Nepal Rastra Bank being the central bank of Nepal
recommends, directs, and controls the establishment, operations and dissolutions of
all the commercial banks in Nepal. The population for this study comprises all the
joint venture banks. All seven joint venture banks perform the banking function of
commercial banks under rules, regulating and directives of Nepal Rastra Bank. In this
study, among seven joint venture banks under the banking industry Nabil Bank
Limited is selected for the study.

3.4 Sources of Data

This research is only based on secondary sources.
Secondary Source:
This refers to data that are already used and gathered by others. So the major sources
of secondary data are as follows
 Annual Reports of NABIL Bank Ltd.
 Website, Internet and E-mails
 Previous studies and reports
 Newspaper, journals, books, booklets, periodicals, articles, magazines and
newspaper and various other published and unpublished documents
 Annual reports and various reports published by Nepal Rastra Bank

3.5 Method of Data Analysis Technique

For the purpose of the study all collected primary as well as secondary data are
arranged, tabulated under various heads and them after disunities and statistical
analysis have been carried out to enlighten the study.
1. Financial tools.
2. Statistical tools

3.5.1 Financial Tool

Financial tools are used to examine the strength and weakness of banks. In this study
financial tools like ratio analysis and financial statement analysis have been used.

41
a) Ratio Analysis
Financial ratio analysis is used as a technique to quantify the relationship between two
accounting figures. It provides the information about strengths and weakness of a
financial data in relation to other. A ratio is calculated by dividing one item of
relationship with the other. A ratio can be expressed in term of percentage, proportion,
and as a coefficient.

1. Activity Ratio (Assets management ratio):

Activity ratio is here used to indicate how efficiently the selected banks have arranged
and invested their limited resources. Following are the various assets management
ratio, which measures the lending strength and effective use of assets.

i. Credits Advances to Fixed Deposit Ratio:

Credits and advances are the major sources of investment to generate the income by
the commercial banks. This ratio measures how many times the amount is used in
credits and advances in comparison to fixed deposit for the income generating
purpose. The following formula is used to obtain this ratio.
Credits and Advances
Credits and Advances to Fixed Deposit Ratio = Fixed Deposits

ii. Credits Advances to Total Deposits Ratio:

This ratio is calculated to find out how successfully the selected banks and finance
companies are utilizing their total collections/deposits on credit and advances for the
purpose of earning profit.
Credit and Advances
Credits and Advances to Total Deposits Ratio: = Total Deposits

iii. Credit and Advances to Total Assets Ratios:

It measures the ability in mobilizing total assets into credits and advances for profit
generating income. A higher ratio is considered as an adequate symbol for effective
utilization of total assets of bank into credit and advances which creates opportunity
to earn more and more. It is calculated as:
Credits and Advances
Credit and Advances to Total Assets Ratio = Total Assets
42
iv. Non-Performing Assets to Total Assets Ratio:
This ratio shows the relationship of Non-Performing assets and total assets and is to
determine how efficiently management has used the total asset. Higher ratio shows
the low efficient operating of the credit management and lower ratio shows the more
efficient operating of credit management.
Non-performing assets
Non-performing assets to total assets ratio=
Total assets

2. Debt Ratio
i. Total Debt to Equity Ratio:
Debt equity ratio measures the relative claims of creditors and owners against the
assets of the bank. This ratios indicates the relationship between debt and equity i.e.
outsiders funds and shareholders‟ funds which are sometimes called as external and
internal equities. It is calculated to measure the extent of debt financing used in the
business.
The formula used to determine the ratio is:
Total Debt = long term Debt + current liability
Total Debt
Total Debt to Equity Ratio = Equity ×100%

ii. Total Debt to Total Assets Ratio:

Total debt to total assets ratio shows the relative extent to which the firm is using
borrowed money. A lower ratio is preferable since it reduces the distress of the
creditors by using more amount of equity on total assets. Total debt includes both
current liabilities and long term debt. Creditors prefer low debt ratios because the
lower the ratio, the greater the cushion against creditors losses in the event of
liquidation.
It is computed as:
Total Debt
Total Debt to Total Assets Ratio = Total Assets × 100%

43
iii. Total Assets to Net worth Ratio:
The ratio is calculated to find out the proportion of owner's fund to finance for the
total assets. Total Assets comprises of the total value of the assets side of balance
sheet whereas net worth is the sum of the share capital plus reverses and retained of
the bank. It is calculated to see the amount of assets financed by net worth.
Total Assets
Total Assets to Net Worth Ratio = Net Worth × 100%

3. Profitability Ratio
Profit is the difference between revenues and expenses over a period of time.
Profitability ratios are used to measure the management ability regarding how well
they have utilized their funds. Management of the business, creditors and owners are
interested in the profitability of the firm. Profitability ratios are designed to highlight
the end-result of business activities which in the imperfect world of ours, is the sole
creation of overall efficiency of business unit. Following ratios are computed to find
the probability ratios of NBL

i. Interest Income to Total Income Ratio

The ratio measures the volume of interest income to total income. The high ratio
indicated the banks performance on other fee-based activities. The high ratio indicates
the high contribution made by lending and investing activities.
Interest income
Interest income to total income ratio =
Total income

ii. Operating Profit to Loan and Advances Ratio

Operating profit to loan and advances ratio measure the earning capacity of
commercial bank. Operating profit to loan and advances ratio is calculated by
dividing operating profit by loan and advances.
Operating profit
Operating profit to loan and advances ratio =
Loan and advances

44
iii. Return on Loan and Advances Ratio
Return on loan and advances ratio shows how efficiency of the Banks and finance
companies have utilized their resources to earn good return from provided loan and
advances. This ratio is computed to divide net profit/loss by the total amount of loan
and advances. It can be mentioned as;
Net Profit or Loss
Return on Loan & Advances Ratio =
Total Loan & Advances

4. Lending Efficiency Ratio

This ratio is concerned with measuring the efficiency of bank. This ratio also shows
the utility of available fund. One following is the various types of lending efficiency
ratio.

i) Loan Loss Provision to Total Loan and Advances ratio

It measures the percentage of credit loss provision on credit and advances. Credit loss
provision on credit is given to reduce risk of non-payment of released credit. Increase
in loan loss provision decreases in profit result to decreases in dividends but its
positive impact is that strengthens financial conditions of the bank by controlling the
credit risk and reduced the risks related deposits.
The low ratio indicates the good quality of assets in total volume of loan and
advances. High ratio indicates more risky assets in total volume of loan advances.
Loan loss provision
Loan loss provision to total loan and advances =
Total loan and advances

ii. Non-performing loan to total loan and advances

This ratio shows the relationship of Non-Performing loan and total loan and advances
and is to determine how efficiently the total loan and advances have been used by
management. Higher ratio shows the low efficient operating of the management and
lower ratio shows the more efficient operating of credit management.
Non-performing loan
Non-performing loan to total loan and advances =
Total Loan and advances

45
iii. Interest Expenses to Total Deposit Ratio
This ratio measures the percentage of total interest paid against total deposit. A high
ratio indicates higher interest expenses on total deposit. Commercial banks are
dependent upon its ability to generate cheaper fund. The cheaper fund has more the
probability of generating loans, advances, and vice versa.
Interest Expenses
Interest Expenses to Total Deposit Ratio 
Total Deposit Ratio

3.5.2 Statistical Tools

Following are the statistical tools used in the study:
1. Arithmetic Means (Average):
Arithmetic Mean is statistical constants which enables us to comprehend in a single
effort of the whole. Arithmetic mean represents the entire data by a single value. It
provides the gist and gives the birds‟ eye view of the huge mass of a widely numerical
data. It is calculated as:
1 n
X   Xi
n i 1
Where:
X = mean value or arithmetic mean
n

X i 1
i = sum of the observation

N = number of observation

2. Correlation Coefficient (r):

Correlation may be defined as the degree of linear relationship existing between two
or more variables. These variables are said to be correlated when the change in the
value of one results change in another variable. Its values lie somewhere ranging
between - 1 to +1. If the both variables are constantly changing in the similar
direction, the value of coefficient will be –1, two variables take place in opposite
defection. The correlation is said to be perfect negative.
Formula
NΣX1X2 - (Σ X1)(Σ X2)
rx1x2 =
[NΣX1 - (ΣX1) 2] [NΣ X22 - (Σ X2) 2]
2

46
 Whereas,

rx1x2 = Correlation between X1 and X2

X1 = values of credit and advances.

X2 = values of total assets.

NΣ X1X2 = No. of Product observation and Sum of product X1and X2

Σ X1Σ X2 = Sum of Product X1and sum of Product X2

3. Probable Error:
Probable error of correlation coefficient tests the reliability of an observed value of
correlation coefficient. It shows the extent to which correlation coefficient is
dependable as it depends upon the condition of random sampling. The probable error
of the coefficient of correlation is obtained as follows:
1 - r2
P.E. = 0.6745
N
Here, r = Correlation coefficient
N = Number of pairs of observations
P.E. is used in interpretation whether the calculated value of r is significant or not.
i) If r < P. E. it is insignificant, i.e. there is no evidence of correlation.
ii) If r > 6P.E. it is significant.
iii) If PE < r < 6P.E nothing can be concluded.

47
 CHAPTER - IV

DATA PRESENTATION AND ANALYSIS

4.1 Introduction
In this chapter data collected are analyzed and interpreted as per the stated
methodology in the previous chapter. The main sources of data are secondary data.
During analysis data gathered from various sources have been inserted in tabular
form. Using financial and statistical tools the various related data have been analyzed.

4.2 Financial Statement Analysis

Financial analysis means the process of extracting and studying information in
financial statements for use in management decision making. So, financial analysis is
the act of identifying the financial strength and weakness of the organization
presenting the relationship between the items of balance sheet. The ratios are designed
and calculated to highlight the relationship between financial items and figures.

4.2.1 Assets Management Ratio

This ratio measures the efficiency of commercial bank generate sales in the fund
mobilization. A commercial bank must be able to manage its assets properly to earn
high profit maintaining the appropriate level of liquidity. Assets management ratio
measures the efficiency of the bank.

By the help of the following ratios, asset management of Nabil bank limited has been
analyzed.
i) Credit and Advances to Fixed Deposit Ratio
This ratio measures how many times the amount is used in credits and advances in
comparison to fixed deposit for the income generating purpose. The following
formula is used to obtain this ratio.
Credits and Advances
Credits and Advances to Fixed Deposit Ratio = Fixed Deposits

48
 Table No. 4.1: Credit and Advances to Fixed Deposit Ratio

(Amount in million)

Credit and
Year Fixed deposit Ratio(Times)
advances
2008 13279 3449 3.85
2009 15903 5435 2.93
2010 21759 8464 2.57
2011 27999 8310 3.37
2012 33030 14711 2.25
Mean 2.994
(Source: Annual report of Nabil Bank, FY 2008-2012)
Above Table shows that Loan and advances to fixed deposits ratio are in increasing
and decreasing trend in overall. The ratio of Nabil bank in 2008 was 3.85 and ratios
are decreasing i.e. 2.93 and 2.57 and increase in year 2011 up to 3.37 times. The mean
average of Nabil is 2.994 times at research period.

The Credit and advance to fixed deposit ratio is presented in figure as below:
Figure No. 4.1: Credit and Advances to Fixed Deposit Ratio

4
ratio in times

3
Ratio in times
2

1
2008 2009 2010 2011 2012
Year

ii) Credit and Advances to Total Deposit Ratio:

This ratio is calculated to find out how successfully the selected banks and finance
companies are utilizing their total collections/deposits on credit and advances for the
purpose of earning profit. A high ratio indicates better mobilization of collected

49
deposit and vice-versa. However, it should be noted that too high ratio might not be
better from liquidity point of view.
Credit and Advances
Credits and Advances to Total Deposits Ratio: = Total Deposits
Table No. 4.2: Credit and Advances to Total Deposit Ratio

(Amount in million)

Year Credit and advances Total deposit Ratio(Times)

2008 13279 19347 0.69

2009 15903 23342 0.68

2010 21759 31915 0.68

2011 27999 37348 0.75

2012 33030 46410 0.71

Mean 0.702
(Source: Annual report of Nabil Bank, FY 2008-2012)
Above Table shows that the total loan advances to total deposit ratio of NABIL is in
fluctuating trend. The ratio indicated the proportion of total deposits invested in loans
and advances. The highest ratio is 0.75 times in year 2011 and lowest ratio 0.68 times
in year 2009 and 2010. The average mean ratio of NABIL is 0.702 times in the study
period. This means the bank is able to proper mobilization of collected deposit.
According to NRB directives above 70% to 90% of loan and advances to total deposit
ratio is able to better mobilization of collected deposit. So all of the year the bank has
tries to meet the NRB requirement or it has utilized its deposit to provide loan. In the
year 2011, the bank has the good ratio of 75% which shows that the bank is successful
in utilizing its deposit on loan and advances. This means that credit management is in
good position of the bank.

50
The Credit and advance to total deposit ratio is presented in figure as below:
Figure No. 4.2: Credit and Advances to Fixed Deposit Ratio
0.76

0.74
Ratio in Times

0.72

0.7
Ratio in times
0.68

0.66

0.64
2008 2009 2010 2011 2012
Year

iii. Credit and Advances to Total Assets Ratio

It measures the ability in mobilizing total assets into credits and advances for profit
generating income. A higher ratio is considered as an adequate symbol for effective
utilization of total assets of bank into credit and advances which creates opportunity
to earn more and more. It is calculated as:
Credits and Advances
Credit and Advances to Total Assets Ratio = Total Assets
Table No. 4.3: Credit and Advances to Total Assets

(Amount in million)

Year Credit and advances Total assets Ratio(Times) Ratio (%)

2008 13279 22330 0.59 59%
2009 15903 27253 0.58 58%
2010 21759 37133 0.59 59%
2011 27999 43867 0.64 64%
2012 33030 52079 0.63 63%
Mean 0.61 61%
(Source: Annual report of Nabil Bank, FY 2008-2012)
Above table shows the Nabil bank has generally mixed or fluctuating trends of Credit
and Advances to Total Assets ratio under the study period. The ratios are 59%, 58%,
59%, 64% and 63% in their respective year. The highest ratio is 64% in the year 2011
51
and the lowest ratio is 58 % year 2009. The average mean ratio is 61%. It shows that
bank has capability in utilizing total assets in the form of credit and advances and
advance is satisfactory because the fluctuation of the ratio is minimum.
The Loan and advances to total assets ratio is represented in figure as below.
Figure No. 4.3: Credit and Advances to Total Assets
66%
Ratio in percentage

64%
62%
60%
58% Ratio in Percentage
56%
54%
2008 2009 2010 2011 2012
year

iv) Non-Performing Assets to Total Assets Ratio

This ratio shows the relationship of Non-Performing assets and total assets and is to
determine how efficiently management has used the total asset. Higher ratio shows
the low efficient operating of the credit management and lower ratio shows the more
efficient operating of credit management.
Table No. 4. 4: Non-Performing Assets to Total Assets Ratio
(Amount in million)

Year Non-performing Assets Total Assets Ratio (%)

2008 268 22330 1.20

2009 265 27253 0.97

2010 172 37133 0.46

2011 224 43867 0.51

2012 486 52079 0.93

Mean 0.81
(Source: Annual report of Nabil Bank, FY 2008-2012)
Above table no. 4.4 shows that the total non-performing assets to total assets ratio of
NABIL is in fluctuating trend. The highest ratio is 1.20 % in year 2008 and lowest

52
ratio 0.46% in year 2010. The mean ratio is 0.81%. The bank is able to obtain higher
lending opportunity. The decreasing trends of Ratios are 1.20%, 0.97% 0.46%, 0.51%
and 0.93% in year 2008, 2009, 2010, 2011 and 2012, which indicates more efficient
operating of the credit management. According to the direction of NRB to the
commercial banks, the ratio of non-performing assets to total assets should be about
5%. However, referring to this table, Nabil bank is able to keep the level of non-
performing assets at an average level.
The Non-Performing Assets to Total Assets Ratio is presented in the following figure
as below:
Figure No. 4. 4: Non-Performing Assets to Total Assets Ratio

1.4

1.2
Ratio in percentage

0.8
Ratio in Percent
0.6

0.4

0.2

0
2008 2009 2010 2011 2012
Year

4.2.2 Leverage Ratio

These ratios indicate mix of funds provided by owners and lenders. To judge the long-
term financial position of the firm, leverage ratios are calculated. Following ratios are
included under leverage ratios

i) Total Debt to Equity Ratio:

Total debt to equity ratio measures the relative proportion of outsiders and owner's
funds employed in the total capitalization. Here, total debt includes total deposits,
bills payable and other liabilities of the bank and equity includes paid up capital,
retained earning and reserves. The formula used to determine the ratio is:
Total Debt = long term Debt + current liability

53
 Total Debt
Total Debt to Equity Ratio = Equity ×100%
Table No. 4. 5: Total Debt to Equity Ratio

(Amount in million)

Year Total Debt Total Equity Ratio (Times)

2008 20455 1875 10.91
2009 25196 2057 12.25
2010 34696 2437 14.25
2011 40736 3130 13.01
2012 48244 3834 12.58
Mean 12.6
(Source: Annual report of Nabil Bank, FY 2008-2012)
Above table 4.5 shows Debt to total equity ratio is in fluctuating trend. The ratio is
10.91 times in the first year 2008, 12.25 times in the second year2009, 14.25 times in
the third year 2010, 13.01 times in the fourth year 2011 and 12.58 times in the fifth
year 2012 of the research period. The average mean ratio is 12.6 times. Excess
amount of debt capital structure results heavy burden in payment of interest. Risk of
liquidation increase if the debt cannot be repay in the time.
The trend line of ratio of total debt to equity is presented in figure as follow.
Figure No. 4. 5: Total Debt to Equity Ratio

15
Ratio in Times

10
Ratio in Times
5

0
2008 2009 2010 2011 2012
Year

ii) Total Debt to Total Assets

Total debt to total assets ratio shows the relative extent to which the firm is using
borrowed money. A lower ratio is preferable since it reduces the distress of the
creditors by using more amount of equity on total assets.

54
 TotalDebt
Total debt to Total Asset =
Total Asset
Table No. 4. 6: Total Debt to Total Assets
(Amount in million)

Year Total Debt Total assets Ratio (Times)

2008 20455 22330 0.91
2009 25196 27253 0.92
2010 34696 37133 0.93
2011 40736 43867 0.93
2012 48244 52079 0.93
Mean 0.92
(Source: Annual report of Nabil Bank, FY 2008-2012)
Above table 4.6 shows that total debt to total assets ratio of Nabil bank is in
fluctuating trend. The ratios are 0.91, 0.92, 0.93, 0.93, 0.93 times in 2008, 2009, 2010,
2011, and 2012 respectively. The average mean ratio in 5 years research period is 92
times. It means almost 92% of total assets is financed by the outsider's' funds. It is
seen that there is not much deviation in the ratio for the five years study period. It
means no change in the policy on this ratio for the five years. The below figure is the
graphical presentation of Total debt to total assets ratio:
Figure No. 4. 6: Total Debt to Total Assets Ratio

0.935
0.93
Ratio in Times

0.925
0.92
0.915
0.91 Ratio in Times
0.905
0.9
2008 2009 2010 2011
Year

iii. Total Assets to total Book Net worth Ratio:

The ratio is calculated to find out the proportion of owner's fund to finance for the
total assets. Total Assets comprises of the total value of the assets side of balance

55
sheet whereas net worth is the sum of the share capital plus reverses and retained of
the bank. It is calculated to see the amount of assets financed by net worth.
Total Assets
Total Assets to Net Worth Ratio = Net Worth × 100%

Table No. 4. 7: Total Assets to Net Worth

(Amount in million)

Year Total assets Net Worth Ratio(Times)

2008 22330 1875 11.91

2009 27253 2057 13.25

2010 37133 2437 15.24

2011 43867 3130 14.02

2012 52079 3834 13.58

Mean 13.60
(Source: Annual report of Nabil Bank, FY 2008-2012)
Above table 4.7 shows Total assets to net worth ratio of the bank is in fluctuating
trend. It is lowest 11.91 times in the year 2008 and highest in 15.24 times in year
2010. In over all the study period the average ratio is 13.60 times. The ratios are
11.91, 13.25, 15.24, 14.02 and 13.58 in consecutive year 2008, 2009, 2010, 2011 and
2012 respectively. It represents good condition of Total assets to net worth ratio. Here
above table we see that total assets and net worth are increasing year by year on the
study period.
The below trend line clearly shows the Total assets to net worth ratio of the bank.
Figure No. 4. 7: Total Assets to Net Worth
20

15
Ratio in Times

10
Ratio in Times
5

0
2008 2009 2010 201 2012
Year

56
4.2.3 Profitability Ratio
Profitability ratios are used to measure the management ability regarding how well
they have utilized their funds. Management of the business, creditors and owners are
interested in the profitability of the firm. Profitability ratios are designed to highlight
the end-result of business activities which in the imperfect world of ours, is the sole
creation of overall efficiency of business unit. The following ratios are calculated:

i) Interest Income to Total Income Ratio

This ratio measures the volume of interest income to total income. The high ratio
indicates the banks performance on other free base activities. The high ratio indicates
the high contribution made by lending and investing activities.
Table No. 4. 8: Interest Income to Total Income Ratio
(Amount in million)

Years Interest income Total income Ratio(Times)

2008 1310 1360 0.96
2009 1588 1480 1.07
2010 1979 1670 1.19
2011 2798 2220 1.26
2012 4047 2764 1.46
Mean 1.19
(Source: Annual report of Nabil Bank, FY 2008-2012)
Table no 4.8 shows that the total interest income to total income ratio of NABIL is in
increasing trend. The ratios are 0.96 times, 1.07 times, 1.19 times, 1.26 times and 1.46
times in fiscal year 2008, 2009, 2010, 2011 and 2012 respectively. The highest ratio is
1.46 times in year 2012 and lowest ratio 0.96 times in year 2008. The mean ratio is
1.19 times in the study period. The ratio indicates the high contribution made by
lending and investing activities. The total interest income to total income is
continuously increasing trend. Therefore, credit management is in a good position of
the bank. Interest income and total income are presented in figure as below:

57
 Figure No. 4. 8: Interest Income to Total Income Ratio
1.6
1.4
1.2
Ratio in Times
1
0.8
0.6 Ratio in Times
0.4
0.2
0
2008 2009 2010 2011 2012
Year

ii) Operating Profit to Loan and Advances Ratio

Operating profit to loan advances ratio measures the earning capacity of commercial
bank.
Operasting Pr ofit
Operating profit to loan and advance ratio =
Loan and Advance

Table No. 4. 9: Operating Profit to Loan and Advances Ratio

(Amount in million)

Years Operating profit Credit and advances Ratio (%)

2008 953 13279 7.18
2009 1038 15903 6.53
2010 1123 21759 5.16
2011 1570 27999 5.61
2012 1706 33030 5.16
Mean 5.93
(Source: Annual report of Nabil Bank, FY 2008-2012)
Table no 4.9 shows that the operating profit to loan and advances ratio of NABIL is in
decreasing trend till the third year and again increasing in fourth year and decreasing.
The highest ratio is 7.18% in the year 2008 and lowest ratio 5.16% in the year 2010
and 2012.The average mean ratio over the period is 5.93%. This shows the high
profitability in 2008 and low profitability in 2009 and 2010 through loan and advance
of the bank. Ratios are 7.18%, 6.53%, 5.16%, 5.61% and 5.16% in year 2008, 2009,
2010, 2011 and 2012 respectively. These show the fine profitability position of

58
commercial bank, But there is a declining in operating profit to loan and advance
ratio. Anyway credit management is in good position of the bank. The ratio of
Operating profit to loan and advances are presented in the figure 4.9 as below:
Figure No. 4. 9: Operating Profit to Loan and Advances Ratio
8
Ratio in percent

4
Ratio in percent
2

0
2008 2009 2010 2011 2012
Year

iii) Return on Loan and Advances Ratio

This ratio measures the earning capacity of commercial banks through its fund
mobilization as loan advances and vice-versa.
Table No. 4. 10: Return on Loan and Advances
(Amount in million)

Years Net profit Credit and advances Ratio (%)

2008 635 13279 4.78

2009 674 15903 4.24

2010 747 21759 3.43

2011 1031 27999 3.68

2012 1138 33030 3.45

Mean 3.92

(Source: Annual report of Nabil Bank, FY 2008-2012)

Table no 4.10 shows that return on loan and advances ratio of NABIL is in fluctuating
trend. The highest ratio is 4.78% in the year 2008 and lowest ratio 3.43% in the year
2010. The average mean ratio is 3.92%. The Ratios are 4.78%, 4.24%, 3.43%, 3.68%
and 3.45% in years 2008, 2009, 2010, 2011 and 2012 respectively. These show the
59
highest earning in 2008 and lowest earning capacity in 2010 from loan and advances.
These show the little high earning capacity of Nabil Bank through loan and advances.
Thus, credit management is in good position. Net profit and loan advances are
represented in the figure as below.
Figure No. 4. 10: Return on Loan and Advance
6
5
Ratio in percent

4
3
2 Ratio in percent

1
0
2008 2009 2010 2011 2012
Year

4.2.4 Lending Efficiency Ratio

This ratio is concerned with measuring the efficiency of bank. This ratio also shows
the utility to available fund. The following are the various type of lending efficiency
ratio:

i) Total Loan Loss Provision to Total Loan and Advances Ratio

The provision for loan loss reflects the increasing probability of non-performing loan.
Increase in loan loss provision decreases in profit result to decreases in dividends but
its positive impact is that strengthens financial conditions of the bank by controlling
the credit risk and reduced the risks related deposits. So, it can said that loan suffer it
only for short term while the good financial conditions and safety of loans will make
banks prosperity regulating increasing profits.

The low ratio indicates the good quality of assets in total volume of loan and
advances. High ratio indicates more risky assets in total volume of loan advances.
Loan loss provision
Loan loss provision to total loan and advances =
Total loan and advances

60
 Table No. 4. 11: Loan Loss Provision to Total Loan and Advances
(Amount in million)

Years Loan loss provision credit and advances Ratio (%)

2008 356 13279 2.7

2009 357 15903 2.2
2010 394 21759 1.8
2011 409 27999 1.5
2012 762 33030 2.3
Mean 2.1
(Source: Annual report of Nabil Bank, FY 2008-2012)
Above table 4.11 shows that loan loss provision to total loan and advances ratio of
NABIL is in fluctuating trend. The highest ratio is 2.7% in year 2008 and lowest ratio
1.5% in year 2010. The mean ratio of the study period is 2.1%. This shows that good
quality of assets in total volume of loan and advances. Ratios are 2.7% 2.2%, 1.8%,
1.5% and 2.3% in the year2008, 2009, 2010, 2011 and 2012 respectively. These
indicate the good quality of advances. Thus, credit management is in a satisfactory
position.
Loan loss provision and total loan and advances are represented in the following
diagram clearly.
Figure No. 4. 11: Loan Loss Provision to Total Loan and Advances
3
2.5
Ratio in percent

2
1.5
1 Ratio in percent
0.5
0
2008 2009 2010 2011 2012
Year

61
ii) Non-Performing Loan to Total Loan and Advances Ratio
This ratio shows the relationship of Non-performing loan and total loan and advance.
It is determine how efficiently the total loan and advance have been used by the
management.
Table No. 4. 12: Non-Performing Loan to Total Credit and Advances
(Amounts in million)

Years Non-performing loan Credit and advances Ratio (%)

2008 183 13279 1.38

2009 178 15903 1.12

2010 161 21759 0.74

2011 224 27999 0.8

2012 486 33030 1.47

Mean 1.102
(Source: Annual report of Nabil Bank, FY 2008-2012)
Above table 4.12 shows that Non-performing loan to total loan and advance of
NABIL is in fluctuating trend. The ratios are 1.38%, 1.12%, 0.74%, 0.8% and 1.47 in
consecutive year 2008, 09, 10, 11 and 12 respectively. The highest ratio is 1.47 % in
the year 2010 and lowest ratio is 0.74% in the year 2008. The average non-performing
loan to total loan and advances ratio of NABIL is 1.102% during the study period.
The ratios are decreasing but except in 2012, which indicates low efficient operating
of the management. Ratios are decreasing trends it indicate the bank is increasing the
non-performing loan from total loan. Therefore, credit management is in a good
position recently. Non-performing loan to total credit and advances ratio presented
clearly in following figure.

62
 Figure No. 4. 12: Non-Performing Loan to Total Credit and Advances
1.6
1.4
Ratio in percent 1.2
1
0.8
0.6 Ratio in percent
0.4
0.2
0
2008 2009 2010 2011 2012
Year

iii) Interest Expenses to Total Deposit Ratio

The ratio measures the percentage of total interest against total deposit. Commercial
banks are dependent upon its ability to generate cheaper fund. A high ratio indicates
higher interest expenses on total deposit.
Table No. 4. 13: Interest Expense to Total Deposit Ratio
(Amounts in million)

Years Interest expenses Total deposit Ratio (%)

2008 357 19347 1.85
2009 556 23342 2.38
2010 758 31915 2.37
2011 1153 37348 3.08
2012 1960 46410 4.22
Mean 2.78
(Source: Annual report of Nabil Bank, FY 2008-2012)
Above table no. 4.13 shows that interest expenses to total deposit ratio of NABIL is in
fluctuating trend. The highest ratio is 4.22% in the year 2010 and lowest ratio is
1.85% in the year 2008. The average mean point of interest expenses to total deposit
ratio is 2.78% during the study period. Ratios are 1.85%, 2.38%, 2.37%, 3.08%, and
4.22% in respective year 2008, 2009, 2010, 2011 and 2012. That this ratio does not
indicate higher interest expenses on total deposit. Commercial banks are dependent

63
upon its ability to generate cheaper fund. Interest expenses to total deposit ratio is
represented in figure as below.
Figure No. 4. 13: Interest Expense to Total Deposit Ratio
4.5
4
Ratio in percent

3.5
3
2.5
2
1.5 Ratio in Percent
1
0.5
0
2008 2009 2010 2011 2012
Year

4.3 Statistical Analysis:

Correlation Coefficient:

Correlation may be defined as the degree of linear relationship existing between two
or more variables. These variables are said to be correlated when the change in the
value of one results change in another variable. Its values lie somewhere ranging
between - 1 to +1. Coefficient of correlation has been studied to find out whether the
two available variables are inter-correlated or not. If the result falls within the
correlated point, the two variables are inter-correlated otherwise not. Now to find out
the correlation coefficient between total lending and total assets, the widely used
method of Karl Pearson's Coefficient of Correlation has been adopted.
N  xy - ( X)( Y)
Coefficient of Correlation (r) 
N  X  ( X ) 2 N  Y 2  ( Y ) 2
2

Here,
N = Number of pairs of x and y observed.
x = values of credit and advances.
y = values of total assets.
r = Karl Pearson's Coefficient of Correlation.

64
Probable Error

The probable error of the coefficient of correlations helps in interpreting the value and
measuring the reliability of the coefficient of correlation. Probable error of correlation
coefficient usually denoted by P.E (r). The probable error of the coefficient of
correlation is obtained as follows:
1 - r2
P.E. = 0.6745
N
Here, r = Correlation coefficient
N = Number of pairs of observations
P.E. is used in interpretation whether the calculated value of r is significant or not.
i) If r < P> E., it is insignificant, i.e. .there is no evidence of correlation.
ii) If r > 6P.E, it is significant.
iii) If PE < r <6PE nothing can be concluded.
In this course of study, correlation coefficient and probable error is used to measure
sample the relationship between.
 Total credit and Total assets
 Loan and advance and Total deposit

4.3.1 Correlation between Total Credit and total assets

Table No. 4. 14: Correlation coefficient between Total Credit and Total Assets

Particulars NABIL

r (Coefficient correlation ) 0.997

1 r2
P.E = 0.6745 × 0.0018
n

6.P.E 0.0108
(In Appendix-I)
From the table No. 4.13 coefficient of correlation between total credit and total assets
is 99.7%, which shows the much more high positive correlation between total credit
and total assets. Since „r‟ is more than 6x P.E the coefficient of correlation is
considered as significant. In other words, the total credit and advances are

65
significantly correlated to the total assets of Nabil Bank Limited in the study period of
2008 to 2012.

4.3.2 Correlation between Loan and advance (Total credit) to Total Deposit
Table No. 4. 15: Correlation coefficient between Loan & Advances to Total
Deposits

Particulars NABIL

r (Coefficient correlation ) 0.995

1 r2 0.003
P.E = 0.6745 ×
n

6.P.E 0.018
(In Appendix- II)

From the table No. 4.15 the correlation coefficient between loan and advance to total
deposit is 99.5%. Since, 'r' is more than 6× P.E. the coefficient of correlation is
considered as significant. There is high degree of positive correlation between loan &
advances to total deposits. It seems increasing amount in deposit will helps to increase
loan and advances and vice-versa.

4.4 Major Finding of the Study

4.4.1 Assets Management Ratio

 Average loan and advances to fixed deposits ratio is 2.994 times in the study
period. Similarly mean ratio of credit and advances to total deposit ratio of Nabil
is 0.702 times in the study period. The ratio indicates that it has used its deposit in
loan and advance in proper way. In the year 2011, the bank has the good ratio of
0.75% which shows that the bank is successful in utilizing its deposit on loan and
advances.

 Non-performing assets to total assets ratio of Nabil is in decreasing trend, which

indicates more efficient operating of the credit management. The mean ratio is
0.84 %. According to the direction of NRB to the commercial banks, the ratio of
non-performing assets to total assets should be less than 5%. So the Nabil is
66
 successful to keep the level of non-performing assets as an adequate position. The
bank is able to obtain higher lending opportunity.

4.4.2 Leverage ratio

 The Debt to equity ratio of NABIL is in fluctuating trend during the study period
but it has decreasing trend in 2012 .This indicate that the bank is decreasing the
utilization of loan and going toward utilization of its own utility. The average
mean ratio is 12.6 times. Excess amount of debt capital structure results heavy
burden in payment of interest. Risk of liquidation increase if the debt cannot be
repaid in time. The analysis indicates that the bank is highly leveraged because the
claim of the outsiders exceeds than those of the owners over the bank assets.

 The average total debt to total assets ratio of Nabil bank is 0.92 times. It means
almost 92% of total assets is financed by the outsider's' funds. It is seen that there
is not much deviation in the ratio for the five years study period. The average
mean ratio of total asset to net worth is 13.60 times at the study period. It shows
good financial position of the company.

4.4.3 Profitability Ratios

 Total interest income to total income ratio of NABIL is in increasing trend. The
highest ratio is 1.46 times in year 2012. The mean ratio is 1.19 times in the study.
The ratio indicates the high contribution made by lending and investing activities.
Therefore, credit management is in a good position of the bank

 The average operating profit to loan and advances ratio of NABIL is 5.93%. This
shows the better profitability position of the bank. The highest ratio is 7.18% in
the year 2008 which indicate high profitability through loan and advance of the
bank.

 Return on loan advances ratio of NABIL is also in fluctuating trend and stepping
downward in ending study period. It indicates contribution in return is decreasing

67
 by loan and advance. The mean ratio is 3.92 times. This shows the normal earning
capacity of NABIL in loan and advances.

4.4.4 Lending Efficiency Ratio

 Loan loss provision to total loan advances ratio of NABIL is in decreasing trend
but stepping upward in ending period. The mean ratio of the study period is 2.1%.
This shows that good quality of assets in total volume of loan and advances. It
indicates aggregate loan of bank are safe. Thus, credit management is in good
position. So, the bank has met and maintained the NRB requirement in all year.

 Non-performing loan to total loan advances ratio is also in decreasing trend but
except in 2012, which indicates low efficient operating of the management. From
mean point of view, the highest ratio is 1.47 % in the year 2012 and lowest ratio is
0.74% in the year 2010. Non-performing loan to total loan advances ratio of Nabil
is during the study period is 1.102%. Decreasing ratio indicates the bank is
decreasing the non-performing loan from total loan

 Interest expenses to total deposit ratio of NABIL is in fluctuating trend. The

highest ratio is 4.22% in the year 2012 and lowest ratio is 1.85% in the year 2008.
The average mean point of interest expenses to total deposit ratio is 2.78% during
the study period. That this ratio does not indicate higher interest expenses on total
deposit. Commercial banks are dependent upon its ability to generate cheaper
fund.

4.4.5 Statistical tools

 In statistical analysis, correlation analysis has been calculated. Correlation

coefficient between total credit and total assets is 0.997, which shows high degree
of positive correlation. It can be concluded that total assets and total credit are
increasing and can be said that increasing assets will have positive impact to total
credit. Correlation coefficient between total deposit and loan & advances has high
degree of positive correlation i.e. 0.995. It is concluded that increasing total
deposit will have positive impact on loan & advances.

68
 CHAPTER - V

SUMMARY CONCLUSION AND RECOMMENDATIONS

5.1 Summary
A bank is an institution which deals in money. Making loan is the principal economic
function of banks. The majority of banks, loans represent fifty percent or more of their
total assets and about half to two thirds of their revenues. It draws surplus money
from the people who save and lend them to the people who want to use it for
productive purpose. In this process the bank earns commission. The rate of interest
paid to the depositors is generally lower than the rate charged to the borrowers. The
difference between these two rates of interest is the profit of the bank.

In bank, lending is the most risky business among all. There is no risk in collection of
deposits. But only small careless or mistake in the loan portfolio and procedure can
shock the bank profitability and survival, when bank is unable to recover the loans
with interest. So there should be well managed regulations lending aspects of a bank.
Such regulations should be strictly followed while evaluating the loan proposal and
providing loans.

The present study has been undertaken to examine and evaluate the Credit
management of NABIL. The study is based on secondary data from the fiscal year
2008 to 2012. The study has resorted mainly to secondary data that has been first
processed and analyzed comparatively.

For the fulfillments of the objectives of the study many analyses have been done.
Both financial as well as statistical tools have been used to analyze and interpret the
facts and information. Under financial tools, various financial ratios related to the
investment function of commercial banks i.e. assets management ratio, profitability
ratio, leverage ratio, and lending efficiency ratio have been studied and interpreted.
Under statistical analysis, some relevant statistical tools, i.e. correlation co-efficient
have been studied. This analysis gives clear picture of the credit management of the

69
bank. Financial & statistical tools are used and secondary data were compiled,
processed, tabulated and graphed for better presentation.

NABIL was established in 12th July 1984, which was the first joint venture bank in
Nepal. Among many joint venture banks, it is a leading one, which is always running
in profit due to its proper management and good policies. Data presented is all from
the secondary sources, which are in the annual reports or other printed matters.

5.2 Conclusion
The study is conducted on credit management of Nabil Bank, which is one of the
leading banks in Nepal. Success of Nabil is milestone in the banking history of Nepal
as it has been successful in maintaining a steady growth rate over this period. A
notable strength of the bank‟s achievement is Nabil registered Operating profit NPR
1706 million. This is 8.66% growth compared to last year the highest in the banking
industry% to reach NPR 33030 million in the year. This shows there has been
improvement in yield on loan. Deposit growth record 24.26% reaching NPR 46410
million this compared to growth of 11.94% in the market. Likewise loans and advance
grew by 17.97%.

NABIL has earned a net profit of Rs 1138 million for the fiscal year 2011/12 and this
comes to be 10.38% more as compared to the same period in the previous fiscal year.
The bank is successful in credit management in last five year due to its proper
management and good policies.

5.3 Recommendations

 There is highly positive correlation between credit and advances to total deposit
of Nabil bank. So it is recommended to increase their deposit to make more
credit and advances.

 Interest income to total income ratio of NABIL is higher which is good from
view point of bank in short run but in long run it is not good. Bank should
generate its income from extra sources (like exchange gain, commission and
discount, remittance service) other than interest for the survival in long run.
70
 Bank should also pay attention towards the priority sector and industrial sector
for lending loans to develop the economic condition of the country.

 Banking has become more and more competitive in the present days. Nabil
needs to find sources of income apart from the traditional interest income to stay
competitive providing many other services to its customer.

 The majority of Nepalese people living in villages are highly exploited by

manipulating principle amount. The overall economic development of the
country is almost impossible until and unless the programs are matched with
those people requirement. Therefore it is suggested to NABIL to expand its
branches in rural areas for economic up-liftmen of poor people who lives in
village.

71
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:Butherworths Publication,(7):18
Thesis

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Nepal Limited and Everest Bank Ltd.An Unpublished Master’s Degree thesis, Faculty
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Websites
www.bbamba.info.com
www.bhandarisantos.blogspot.com
www.kishakisi.blogspot
www.nabilbank.com
 APPENDIX –I
Correlation coefficient between Total Credit and Advances and Total Assets

Credit
Total and
X2 Y2 XY
assets (X) advances
(Y)
22330 13279 498628900 176331841 296520070
27253 15903 742726009 252905409 433404459
37133 21759 1378859689 473454081 807976947
43867 27999 1924313689 783944001 1228232133
52079 33030 2712222241 1090980900 1720169370
∑ 1826 ∑ 1119 ∑ 7256750 ∑ 2777616 ∑ 4486302
62 70 528 232 979
We know,
N  xy - ( X)( Y)
Coefficient of Correlation (r) 
N  X  ( X ) 2 N  Y 2  ( Y ) 2
2

√ √

= 0.997
 APPENDIX –II
Correlation coefficient between Loan & Advances to Total Deposits

Loan and
Total
Advances X2 Y2 XY
Deposit (X)
(Y)
19347 13279 374306409 176331841 256908813
23342 15903 544848964 252905409 371207826
31915 21759 1018567225 473454081 694438485
37348 27999 1394873104 783944001 1045706652
46410 33030 2153888100 1090980900 1532922300
∑ 158362 ∑ 111970 ∑ 5486483802 ∑ 2777616232 ∑ 3901184076

We know,
N  xy - ( X)( Y)
Coefficient of Correlation (r) 
N  X 2  ( X ) 2 N  Y 2  ( Y ) 2

√ √

= 0.995