FINANCIAL PERFORMANCE MEASUREMENT THROUGH

CAMEL MODEL IN ADBL AND RBBL

A Thesis

By

Purnanand Joshi
Central Department of Management
Exam Roll No: 1207/17
Campus Roll No: 86/17
Registration No: 7-2-329-265-2010

Submitted in partial fulfillment of the requirements for the degree of

Master of Business Studies (MBS-Semester)

in the

Faculty of Management
Tribhuvan University

Kirtipur, Kathmandu
January, 2021
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CERTIFICATION OF AUTHORSHIP

I certify that the work in this thesis has not previously been submitted for a degree nor
has it been submitted as part of requirements for a degree except as fully
acknowledged within the text.
I also certify that the thesis has been written by me. Any help that I have received in
my research work and the preparation of the thesis itself has been acknowledged. In
addition, I certify that all information sources and literature used are indicated in the
reference section of the thesis.

___________________

Purnanand Joshi
Date: January, 2021
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Report of Research Committee

Ms./Mr. Purnanand Joshi has defended research proposal entitled "FINANCIAL

PERFORMANCE MEASUREMENT THROUGH CAMEL MODEL IN ADBL
AND RBBL" successfully. The research committee has registered the dissertation for
further progress. It is recommended to carry out the work as per suggestions and
guidance of supervisor Associate Professor Jagat Timilsina and submit the thesis for
evaluation and viva voce examination.

Dissertation Proposal Defended Date:

Name of Supervisor: Jagat Timilsina
Position: Associate Professor ……………………………

Signature:…………………..

Dissertation Submitted Date:

……………………………
Name of Supervisor: Jagat Timilsina
Signature:…………………..
Position: Associate Professor

Name of head of Research committee: Prof. Dr. Sanjay Kumar Shrestha

Signature:………………….. Dissertation Viva Voce Date:

……………………………
 iv

RECOMMENDATION LETTER

It is certified that thesis entitled "FINANCIAL PERFORMANCE

MEASUREMENT THROUGH CAMEL MODEL IN ADBL AND RBBL”
submitted by Purnanand Joshi is an original piece of research work carried out by the
candidate under my supervision. Literary presentation is satisfactory and the thesis is
in a form suitable for publication. Work evinces the capacity of the candidate for
critical examination and independent judgment. Candidate has put in at least 60 days
after registering the proposal. The thesis is forwarded for examination.

………………………………
Asso. Prof. Jagat Timilsina
Supervisor
Central Department of Management
Tribhuvan University,
Kirtipur Kathmandu, Nepal
 v

APPROVAL SHEET
We, the undersigned, have examined the thesis entitled "FINANCIAL
PERFORMANCE MEASUREMENT THROUGH CAMEL MODEL IN ADBL
AND RBBL” presented by Purnanand Joshi candidate for the degree of Master of
Business Studies (MBS) and conducted the viva voce examination of the candidate.
We hereby certify that the thesis is worthy of acceptance.

…………………….
Asso. Prof. Jagat Timilsina
Thesis Supervisor

…………………………
Dr. Bal Ram Duwal
Internal Examiner

…………………………
Asso. Prof. Bhumi Raj Acharya
External Examiner

…………………………………
Prof. Dr. Sanjay Kumar Shrestha
Chairperson, Research Committee

………………………….
Prof. Dr. Ramji Gautam
Head of Department
Central Department of Management,
Tribhuvan University
Date: January, 2021
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ACKNOWLEDGEMENTS

It is a pleasure to experience own creation that adds value to others. Actually this
thesis is the partial fulfillment of requirements for Master’s Degree of Business
Studies-MBS (Semester System) and I gained a lot of knowledge while doing it. This
thesis is, of course, the result of my self-endeavor and hard work but this would not
have been completed without helpful hand of intellectuals. The completion of the
present study is a result of help and support of several hands.

I wish to acknowledge my deep sense of gratitude to Office of Dean Faculty of

Management, Tribhuvan University and Central Department of Management for
giving me such a valuable opportunity to explore my abilities via the thesis. I would
like to express my sincere appreciation and gratitude towards our Head of Department
Prof. Dr. Ramji Gautam, Chairperson of Research Committee and my research
supervisor, Asso. Prof. Jagat Timilsina for the encouragement and support throughout
the process, and for offering me the cooperation to get to this point of completion.
Last but not least, I would like to express my sincere gratitude to all my family
members, relatives, and my friends who have assisted me and helped me directly or
indirectly to complete this study and encouraged me in every stage.

Purnanand Joshi
January, 2021
 vii

TABLE OF CONTENTS

CONTENTS PAGE NO:

Title page i
Certificate of authorship ii
Report of research committee iii
Recommendation letter iv
Approval sheet v
Acknowledgements vi
Table of contents vii
List of tables ix
List of figures x
Abbreviations xi
Abstracts xii
CHAPTER 1: INTRODUCTION 1-7
1.1 Background of the study 1
1.2 Statement of the problem 5
1.3 Objectives of the study 5
1.4 Significance of the study 6
1.5 Limitations of the study 6
1.6 Chapter plan 7

CHAPTER 2: LITERATURE REVIEW 8-23

2.1 Theoretical review 8
2.2 Review of related studies 15
2.2.1 Review of journal articles 15
2.2.2 Review of previous theses 20
2.3 Summary 22
2.4 Research gap 22
2.5 Conceptual Framework 22

CHAPTER 3: RESEARCH METHODOLOGY 24-30

3.1 Research design 24
3.2 Population and sample 24
3.3 Nature and Sources of data 24
 viii

3.4 Data collection procedures 25

3.5 Data processing 25
3.6 Data analysis tools 25

CHAPTER 4: RESULTS AND DISCUSSION 31-49

4.1 Capital Adequacy 31
4.2 Assets Quality 36
4.3 Management Efficiency 38
4.4 Earning Quality 41
4.5 Liquidity 45
4.6 Major findings 47
4.7 Discussion 48

CHAPTER 5: SUMMARY AND CONCLUSION 50-52

5.1 Summary 50
5.2 Conclusion 51
5.3 Implications 52

REFERENCES 53-55

APPENDICES 56-60
 ix

LIST OF TABLES
Title Page No.
4.1 Core capital adequacy ratio 32
4.2 Supplementary capital adequacy ratio 33
4.3 Capital adequacy ratio 35
4.4 Non- performing loan ratio 37
4.5 Interest income to loan and advances 39
4.6 Employee expenses to total operating expenses 40
4.7 Return on assets ratio 42
4.8 Return on equity 43
4.9 Earnings per share 44
4.10 Cash reserve ratio 46
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LIST OF FIGURES
Title Page No.
Figure 2.1: Conceptual Framework 23
Figure 4.1: Core capital adequacy ratio 33
Figure 4.2: Supplementary capital adequacy ratio 34
Figure 4.3: Capital adequacy ratio 36
Figure 4.4: Non-performing loan ratio 38
Figure 4.5: Interest income to loan and advances 40
Figure 4.6: Employee expenses to total operating expenses 41
Figure 4.7: Return on assets ratio 42
Figure 4.8: Return on equity 44
Figure 4.9: Earnings per share 45
Figure 4.10: Cash reserve ratio 47
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Abbreviations
ADBL = Agriculture Development Bank Limited
BAFIA = Banks and Financial Institutions Act
BCBS = BASEL committee on banking supervision
BFIs = Banks and Financial Institutions
CAMEL = Capital adequacy, asset quality, management, earning, liquidity
CAR = Capital Adequacy Ratio
CCAR = Core capital adequacy ratio
CRR = Cash reserve ratio
CV = Coefficient of Variation
EETOE = Employee expenses to total operating expenses
EPS = Earnings per share
IILA = Interest income to loan and advances
NPL = Non- Performing Loan
NRB = Nepal Rastra Bank
OCC = Office of the comptroller of the currency
RBBL = Rastriya Banijya Bank Limited
ROA = Return on Assets
ROE = Return on Equity
SCAR = Supplementary capital adequacy ratio
SD = Standard Deviation
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ABSTRACT

Sound financial health of a bank is the guarantee not only to its depositors but is
equally significant for the shareholders, employees and whole economy as well. As
sequel to this maxim, efforts have been made from time to time to measure the
financial position of each bank and manage it efficiently and effectively. The present
study is an attempt to evaluate and compare the financial performance of ADBL and
RBBL in Nepal for the period 2071/72-2075/76. One of the most effective supervisory
techniques, CAMEL rating system (basically a quantitative technique) has been used
to compare the banks based on their performances. In this study both are public
sector banks and have been chosen as a sample to meet the purpose of the study. The
study used the secondary data sourced from the annual reports of selected banks. i.e.
ADBL and RBBL. Data have also been obtained browsing the official website of NRB
and SEBON. Only descriptive tool has used to obtain the meaningful result of the
collected data and to meet the research objectives. Firstly, collected data are
tabulated under various heading and then tabulated data are analyzed using various
financial and statistical tools and compared these values with the help of different
figure. Results indicate that the selected banks had met the NRB standard of core
capital ratio. The decreasing trend of non-performing loan to asset ratio showed that
the assets quality was good during the period of study. Average ROA of ADBL was
higher than RBBL. It indicates the better productivity of ADBL. The ROE of both
banks was satisfactory. Liquidity ratio of ADBL and RBBL were good and meet the
standard level of NRB.
 CHAPTER-I

INTRODUCTION

1.1 Background of the study

Bank is very old institution that is contributing towards the development of any
economy and it is treated as an important service industry in modern world.
Nowadays the function of bank is not limited to within the same geographical limit of
any country. It is an important source of financing for most business (Nimalathasan,
2008). Also bank is a financial institution that require fund to carry out business. Fund
may come from deposit and non-deposit such as capital (AlMamun, 2013). Bank need
to find best way to manage resources and assess its activities decisions of
consumption of resources. A competitive banking system promotes the efficiency and
therefore important for growth, but market power is necessary for stability in the
banking system (Northcott, 2004)

Generally, financial performance of banks and other financial institution measured by

using combination of financial ratio analysis, benchmarking, measuring performance
against budget or mix of these methodologies (Avkiran, 1995). In simple accounting
terms, performance of banks refers to the capacity in generating sustainable
profitability (Rozzan & A. Rahman, 2013). Banks need a way to evaluate
performance and consider some important financial ratios and find the strength and
weaknesses.

In developing countries like Nepal, banks play a major role in financial development.
The stability of commercial banks as whole in the economy depends on better
financial performance. Better financial performance level has tendency to absorb risks
and shocks that commercial banks can face. There are different stakeholders that have
interest in evaluations of the performance of banks including depositors, investors,
bank managers and regulators (Ibrahim, 2014). For instance central banks and bank
regulators may need to identify and call attention to banks that are experiencing
chronic financial problems in order that they may fix them before they get out of
control.
 2

On the other hand, Shareholders need to assess which banks they can deem suitable
for financially invest in. The banks evaluate their performance over a given period so
that they may determine the efficacy and long term viability of management decisions
or goals so that they can alter the course and make changes whenever it is appropriate.

The study is motivated by the fact that, the measurement of financial performance of
the banking sector is important for several reasons. First, financial performance is a
vital factor for financial institutions wishing to carry out their business successfully,
given the increasing competition in the financial markets. Second, in a rapidly
changing and more globalized financial market place, governments, regulators,
managers and investors are concerned about how efficiently banks transform their
expensive inputs various financial products and services. Third, the financial
performance measures are critical aspects of banking sector that enable us to
distinguish banks that has the capability to survive and prosper from those that may
have problems with competitiveness. Performance evaluation is the most important
approach for enterprises to give incentive and restraint to their operators and it is an
important channel for enterprise stakeholders to get the performance information.

Banking institution are inevitable for the resources mobilization and the all-round
development of the country. They have resources for economic development and they
maintain economic confidence of various segments and extend credit to people. Then
the Nepal Rastra Bank (Central Bank of Nepal) in 2013 B.S. was a significant
dimension in the development of banking sector. The second commercial bank is
Rastriya Banijaya Bank Ltd., which was established in 2022 B.S., a fully owned
government bank. Then after other banks were established gradually.

The stage of development of the banking industry is a good reflection of the

development of the economy (Misra and Aspal, 2013). To sustain the development of
the economy, the performance and health of the banks has to be checked and
evaluated periodically. There are different approaches, used by different regulatory
bodies. Among those approaches, most preferred parameters used by the regulators
and different scholars are CAMEL (Capital adequacy, assets quality, management
 3

efficiency, earnings and liquidity) rating criterion to assess and evaluate the
performance and financial soundness of the activities of the bank. The CAMEL
supervisory criterion in banking sector is a significant and considerable improvement
over the earlier criterions in terms of frequency, check, spread over and concentration
(Misra and Aspal, 2013;Basel, 2011). Hence this study intends to analyze the
performance of both public sector banks in Nepal by using CAMEL approach.

1.1.1 An overview of rastriya banijya bank Ltd.

RBB Ltd. - established on January 23, 1966 (2022 Magh 10) - a synonymous of stable
and people’s bank in Nepal- is one of the pioneer bank in the country with the history
of more than half century. Earlier constituted under RBB act 2021 with the full
ownership of the government of Nepal, the bank has been running under Bank and
Financial Institute Act (BAFIA) and company act, 2063 at present. The bank licensed
by NRB as an‘A’ class commercial bank of the country, has grown up as an
indispensable component of the Nepalese economy.

RBBL which has made glorious history of contributing for the monetization of the
economy, eliminating dual currency in the market, initiating preliminary financial
literacy, and help flourish industrial, commercial and financial sector of the country
has now emerged as a modern and strong financial institute of the country. The bank
with more than 2100 hands has expanded its wings in the most part of the country
through multiple distribution outlets of 238 branches, 93 branch less banking (BLB)
and 204 ATMs. The bank with the highest public confidence – reflected in the highest
deposit base and growing demand for branch establishment in the various parts – has
stood as a pyramid in the financial arena of the country. The bank with as many as 1.7
million satisfied/direct customers ranging from poor to elite ones and millions of
indirect oneshas drawn important imprint in the picture of country’s economy through
its significant involvement in the best use of its resources to enhance the production,
income and employment opportunities. The bank is fully committed to contribute its
best for the socio-economic development of the country and people in the days to
come. (Official website of Rastriya Banijya Bank Ltd, www.rbb.com.np)

1.1.2 An overview of agriculture development bank Ltd.

With the main objective of providing institutional credit for enhancing the production
and productivity of the agricultural sector in the country, the Agricultural
 4

Development Bank, Nepal was established in 1968 under the ADBN Act 1967, as
successor to the cooperative Bank. The Land Reform savings corporation was merged
with ADBN in 1973. Subsequent amendments to the act empowered the bank to
extend credit to small farmers under group liability and expand the scope of financing
to promote cottage industries. The amendments also permitted the bank to engage in
commercial banking activities for the mobilization of domestic resources.

The bank worked as a premier rural credit institution since its establishment,
contributing substantial agricultural credit supply in the country. Rural finance has
been the principal operational area of ADBN in the past. However, the bank is also
involved in commercial banking operations since 1984, to provide commercial
banking services.

The bank has 51% share of Government of Nepal and 49% of general public. Most of
its shareholders are customers and employees.

The enactment of Banks and Financial Institutions Act (BAFIA) took all the banks
and financial institutions (BFIs) under its umbrella and abolished all the acts related to
the BFIs including the ADBN act, 1967. Since then, the bank has been working as a
public limited company registered under the company act, 2006 and is licensed as “A
class financial institution” by Nepal Rastra Bank from 2006.

Having glorious history of more than 52 years, the bank is one of the leading
commercial banks of the country. With its investment in agriculture, industry, trade,
commerce and households, the bank has above 1.2 million happily satisfied
customers. Just like its slogan “Sampurna Banking
SuvidhaSahitkoTapaiHamroGharAanganko Bank” (The bank with complete banking
solution at your own door step), it is spread all over the 7 provinces and 77 districts of
the nation with its 278 offices. While providing comprehensive services with
complete banking solution, the bank has main motto of promoting rural agriculture,
productive and deprived sectors. The bank is committed to provide best banking
services through its widespread network and help the government from its part, to
achieve the aim of “Prosperous Nepal, Happy Nepali”. (Official website of
Agricultural Development Bank Ltd, www.adbl.gov.np).
 5

1.2 Statement of the problem

Financial institution’s soundness is judged on the basis of capital adequacy, asset
quality, management efficiency, earning, and liquidity (CAMEL). Some financial
institution has very low capital adequacy ratio while some have piled of non-
performing assets. Similarly, it appears that financial institutions do not have proper
system managing the correctness of credit classification and provision of some
commercial banks. The profitability position of a firm is generally known through
financial statements but a major question emerges whether there are adequate to
reflect the overall performance of company. The fundamentals problem of this study
is to check up the financial health of Rastriya Banijya Bank Ltd & Agriculture
Development Bank Ltd in the framework of CAMEL. Based on the general problem
the following specific problems are set in this study.
i. What is the financial performance of ADBL and RBBL by applying CAMEL
Model?
ii. What is the relationship of component of CAMEL model and ROE and ROA
of ADBL and RBBL?
iii. What is the difference between financial performances of the ADBL and
RBBL by applying CAMEL Model?

1.3 Objectives of the study

The general objective of this study is to make comparative analysis of the financial
performance of Rastriya Banijya Bank Ltd and Agriculture Development Bank Ltd by
using CAMEL model and to give recommendations and suggestions for the
improvement of performance and financial position of these two banks. The study is
conducted to accomplish the following specific objectives:

i. To analyze the financial performance of ADBL and RBBL by applying

CAMEL Model.
ii. To examine the relationship of component of CAMEL model and ROA and
ROE of ADBL and RBBL.
iii. To compare the financial performance of ADBL and RBBL by applying
CAMEL Model.
 6

1.4 Significance of the study

Research itself has own importance because it aims to gain knowledge and to add the
new literature to the existing field. The significance of this study lies mainly in filling
a research gap on the study of comparative financial performance analysis of with
respect to Rastriya Banijya Bank Ltd and Agriculture Development Bank Ltd. This
study will contribute significantly to solve the problem existing in the financial
institution and to formulate the policy and strategies to maintain activities effectively.
The following points justify the study:
i. The study assist to specify the entire glory of these two banks by finding
strength and weakness and helps to overcome from weakness.
ii. The study assist to fill a research gap on the study of comparative financial
performance analysis of commercial banks under CAMEL rating.
iii. The study assist to show the financial position of the banks to the investors
and concerned management.
iv. The study assist to find out the comparative performance of commercial banks
in the economic growth of nation.
v. This study assist to solve the problem existing in the financial institution
especially for commercial banks and to formulate the policy and strategies to
maintain their activities effectively.
vi. The study is important for banks, Board of directors of respective banks,
researchers, scholars, investors, students, government, customers, policy
maker as well as many other parties.

1.5 Limitations of the study

The study has been carried out subject to the following limitations.

i. Limited to these two particular banks only. Hence, the results may be not
applicable to the entire banking sector.
ii. The study is based on secondary data which is collected from published annual
reports of banks and various relevant internet sources. The data obtained
through is subject to window dressing and may not show the actual position of
the banks.
iii. The study covers a period of only five years.
 7

1.6 Chapter plan

Chapter-I: Introduction
This chapter deals with the background of the study, statement of the problems,
purpose of the study, significance of the study, limitations of the study and chapter
plan.

Chapter-II: Literature review

This chapter reviews the previous published literature. It contains theoretical and
empirical literatures from Journal/article and thesis.

Chapter-III: Research methodology

This chapter deals with the methodology incorporated in the study. It contains
research design, sources of data, data analysis tools and techniques, etc.

Chapter-IV: Results and discussion

The fourth chapter includes the data analysis, interpretation of the result and
discussion.

Chapter-V: Summary and conclusion

The last chapter is related with summary, conclusion and implications for further
research.
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CHAPTER-II

LITERATURE REVIEW

The purpose of reviewing the literature is to develop some expertise in one’s area, to
see what new contribution can be made, and to receive some ideas for developing
research design. The review of literature includes the reviews of previous writing and
studies relevant to the problem being explored and with the frame work of theory
structure.

2.1 Theoretical review

2.1.1Financial performance analysis
Financial Performance Analysis is a process of synthesis and summarization of
financial and operative data to get an insight into the operative activities of a business
concern. It consists of comparisons for the same entity over periods of time or
comparisons of different entities either of same sector or different sectors. It may be
done for a variety of purposes, which may range from a simple analysis of the short
term liquidity position to a comprehensive assessment of the strengths and weakness
in various areas. It is helpful in assessing corporate excellence, operating efficiency,
judging credit worthiness, forecasting bond ratings, predicting bankruptcy and market
risk. There are numbers of tools and techniques available for the performance
evaluation of a bank like CAMEL model and ratio analysis etc. Financial analysis of a
bank is mainly done with the help of different ratios which enables the management of
banks to identify the causes or reasons for the changes in their advances, income,
deposits, expenditure and profitability over the period of time and thus help in
pinpointing the necessary direction of action required for increased deposits, income,
advances and reducing the expenditure and for altering the profitability prospects of
the banks in future. “Financial analysis is a process of identifying the financial
strengths and weaknesses of the firm by properly establishing relationship between
the item of balance sheet and the profit and loss account” (Pandey, 2000).
 9

2.1.2 CAMEL rating system

Federal Reserve Bank of New York (1997) has defined the component of CAMEL as
rating system which produces a composite rating of an institution overall condition
and performance by assessing five components: Capital Adequacy, Asset Quality,
Management Administration, Earning and Liquidity.

CAMEL was originally developed by the FDIC for the purpose of determining when
to schedule an on-site examination of bank. This system was designed by regulatory
authorities to quantify the performance and the financial condition of the Banks which
it regulates.

The CAMEL rating system is subjective. Benchmarks for each component are
provided, but they are guidelines only, and present essential foundations upon which
the composite rating is based. They do not eliminate consideration of other pertinent
factors by the examiner. The uniform rating system provides the groundwork for
necessary supervisors to be reasonably compared and helps institutions supervised by
all three US supervisors to be reasonably compared and evaluated. Ratings are
assigned for each component in addition to the overall rating of a financial institutions
financial condition. The ratings are assigned on a scale from 1 to5. The CAMEL
ratings are commonly viewed as summary measures of the private supervisory
information gathered by examiners regarding financial institutions overall financial
conditions, although they also reflect available public information.

The most important criteria for determining the appropriateness of FIs to act as
financial intermediary are its solvency, profitability and liquidity. In this respect, the
BCBS of the bank of international settlements (BIS), since 1988, has recommended
using capital adequacy, assets quality, management quality, earnings and liquidity
(CAMEL) as criteria for assessing FI.

During an on-site bank exam, supervisors gather private information, such as details
on problem loans with which to evaluate a bank's financial condition and to monitor
its compliance with laws and regulatory policies. A key product of such an exam is a
supervisory rating of the bank's overall condition, commonly referred to as a CAMEL
rating. CAMEL rating system is used by the three federal banking supervisors [the
Federal Reserve, the FDIC, and the office of the comptroller of the currency]
 10

and other financial supervisory agencies to provide a convenient summary of bank

conditions at the time of an exam. In Nepal, the NRB plays the supervisory role for
evaluating financial institution's financial condition through rating the financial
institution's in accordance to CAMEL is still in its initial phase.

Composite rating
The FFIEC press release, USA (1996) describes the composite rating and defines the
six components rating. According to the press release, composite ratings are based on
a careful evaluation of an institution managerial, operational, financial and
compliance performance. The six key components used to assess an institutions
financial condition and operations are: capital adequacy, asset quality, management
capability, earnings quality, the adequacy of liquidity and sensitivity to market risk.
The rating scale range from 1 to 5, with a rating of 1 indicating: the strongest
performance and risk management practices relative to the institutions size,
complexity, and risk profile and the level of performance inadequate risk and the
greatest supervisory concern. The composite ratings are defined in the FFIEC press
releases (1996) are as follows.

Composite 1: FIs in this group are in every respect and generally have components
rated 1 or 2. Any weaknesses are minor and can be handled in a routine manner by the
board of directors and management. These FIs are the most capable of withstanding
the vagaries of business condition and are resistant to outside influences such as
economic instability in their trade area. These FIs are in substantial compliance and
risk management practices relative to the institutions size, complexity, risk profile and
supervisory concern.

Composite 2: FIs in this group are fundamentally sound. For a FI to receive

thisrating, generally no component rating should be more severe than 3. Only
moderate weaknesses are present and are well within the board of directors and
managements capabilities and willingness to correct. These FIs are in substantial
compliance with laws and regulations. Overall risk management practices are
satisfactory relative to the institutions size, complexity and risk profile.
 11

Composite 3: FIs in this group exhibit some degree of supervisory concern in one
ormore of the component areas. These FIs exhibit a combination of weaknesses that
may range from moderate to severe: however, the magnitude of the deficiencies
generally will not cause a component to be rated more severely than 4. FIs in this
group generally are more vulnerable to outside influences than those institutions rated
a composite 1 or 2. Additionally, these FIs may be in significant noncompliance with
laws and regulations.

Composite 4: FIs in this group generally exhibit unsafe and unsound practices or
conditions. There are serious financial or managerial deficiencies that result in
unsatisfactory performance. The problems range from severe to critically deficient.
The weaknesses and problems are not being satisfactorily addressed or resolved by
the board of directors and management. FIs in this group generally are not capable of
withstanding business fluctuations. There may be significant noncompliance with
laws and regulations. Risk management practices are generally unacceptable relative
to the institutions size, complexity and risk profile. Close supervisory attention is
required, which means, in most cases, formal enforcement action is necessary to
address the problems. Institution in this group poses a risk to the deposit insurance
fund. Failure is a distinct possibility if the problems and weaknesses are not
satisfactorily addressed and resolved.

Composite 5: FIs in this group exhibit extremely unsafe and unsound practices
orconditions exhibit a critically deficient performance, often contain inadequate risk
management practices relative to the institutions size, complexity and risk profile are
of the greatest supervisory concern. The volume and severity of problems are beyond
management’s ability or willingness to control or correct. Immediate outside financial
or other assistance is needed in order for the FIs to be viable. Ongoing supervisory
attention is necessary. Institutions in this group pose a significant risk to the deposit
insurance fund and failure is highly probable.

Piyu (1992) notes “Currently, financial ratios are often used to measuring the overall
soundness of a bank and quality of its management. Bank regulators, for example, use
financial ratios to help evaluate a bank’s performance as part of the CAMEL system”.
The evaluation factors are as follows:
 12

Components of CAMEL rating system

1. Capital adequacy
The dimension of capital adequacy is an important factor to help the bank in
understanding the shock attractive capability during risk. In this study, capital
adequacy is measured by using the equity to total assets ratio (Vong& Chan,
2009). That means, capital adequacy enables a bank to meet any financial
unexpected condition due to credit risk, market risk, interest risk. Capital
adequacy protects the interest of depositors of a bank.

2. Assets quality
The dimension of asset quality is an important factor to help the bank in
understanding the risk on the exposure of the debtors. In this paper, this parameter
is measured by the provision for loan loss reserve to total assets ratio (Merchant,
2012). This ratio assures to cover the bad and doubtful loans of the bank. This
parameter will benefit the bank in understanding the amount of funds that have
been reserved by the banks in the event of bad investments.

3. Management quality
Management quality reflects the management soundness of a bank. The
management acts as a safeguard to operate the bank in a smooth and decent
manner and is called excellence management or skillful management, whenever it
controls its costs and increase productivity, ultimately achieving higher profits.
Here, this parameter is measured by total cost to total income ratio.

4. Earning quality
Earning is an important parameter to measure the financial performance of an
organization. Earning quality mainly measures the profitability and productivity
of the bank; explains the growth and sustainability of future earning capacity. In
the same way, banks depends on its earning to perform the activities like funding
dividends, maintaining adequate capital levels, providing for opportunities for
investment for bank to grow, strategies for engaging in new activities and
maintaining the competitive outlook. Here two ratios are used to determine the
profitability of banks i.e. ROA and ROE.
 13

5. Liquidity
Liquidity ratio in a bank measures the ability to pay its current obligations
(Hazzi&Kilani, 2013). For having sound banking operations it needs to have
liquidity solvency. If any bank faces liquidity crisis, bank can’t meet up its short-
term obligations. Liquidity crisis seems to be a curse to the image of banks. So, it
is a prime concern to banks. Cash and investments are the most liquid assets of a
bank. An adequate liquidity position means a situation, where institution can
obtain funds, either by rising liabilities or by converting its assets quickly at a
reasonable cost. Hence liquidity performance is measured by net investment to
total asset ratio. This ratio can be defined as the amounts of assets have been
engaged in investment.

2.1.3 BASEL capital accord

The BASEL committee on banking supervision (BCBS) is a committee of banking
supervisory authorities that was established by central bank governors of the group of
ten countries in 1975. It consists of senior representatives of bank supervisory
authorities and central banks from Belgium, Canada, France, Germany, Italy, Japan,
Luxembourg, the Netherlands, Spain, Sweden, Switzerland, the United Kingdom and
the United States. It usually meets at the bank for international Settlements (BIS) in
BASEL, where it’s permanent is located (BIS; 11-2005).

Starting with its publication of “International Convergence of Capital Measurement

and Capital Standards” in July 1988, popularly known as BASEL І “Capital Accord,
BCBS set out a minimum capital requirement of 8 percent for banks. Prior to that, the
committee introduced 25 core principles on effective banking supervision. In 1996,
the committee incorporated market risk in the 1988 capital accord. With a major
revision of the 1988 accord, there followed by the revised publication of the
committee’s first round of proposals for revising the capital adequacy framework in
June 1999 popularly known as BASEL ІІ capital Accord. Since then, it is revised in
January 2001, April 2003 and released its final revised framework updated in
November 2005. In this accord, the concept and rationale of the three pillars
(minimum capital requirements, supervisory review and market discipline) approach
was introduced, on which the revised framework is based. In the revised framework,
BCBS retains key elements of the 1988 capital adequacy framework, including the
general requirement for banks to hold total capital equivalent to at least 8 percent of
 14

their risk-weighted assets; the basic structure of the 1996 market risk amendment
regarding the treatment of market risk; and definition of eligible capital” (BIS; 11-
2005).

The new BASEL capital accord (BASEL ІІ), shall be applicable to internally active
banks all over the world with effect from end of 2006. Implementing the new accord
in Nepal has been a challenging task for the supervisors as well as FIs. Hence, certain
preparatory homework is needed to Nepalese financial system to implement BASEL
ІІ. NRB and FIs need to have coordinated effort efficiency in Nepalese banks and FIs
to establish certain baseline for the effective implementation of BASEL ІІ. In this
regard, second interaction program was held in Nepal with the banks executive to
make them aware of the new development. The commercial banks so far has shown
positive attitude towards the implementation of BASEL ІІ. “New capital accord
implementation preparatory core committee” was drafted “NRB’s concept paper on
new capital accord”. According to the program of new capital accord implementation,
concept paper was forwarded to all the commercial banks for comments and
recommendations. A form was also developed so that commercial banks classify their
exposures as per the new approach, which was reviewed by the “BASEL- ІІ
implementation working group”. NRB has adopted Basel core principles for effective
supervision as guideline for supervision of commercial banks. Core principle
methodology adopted by BCBS provides a uniform template for both self-assessment
and independent assessment. It involves four part qualitative assessment system:
compliant, largely compliant, materially non-compliant and non-compliant. For each
principle essential and additional criteria are defined. To achieve a “compliant”
assessment with a principle, all essential and additional criteria must be met without
any significant deficiencies. A “largely compliant” assessment is given if only minor
shortcomings are observed, and these are not seen as sufficient to raise serious doubts
about the authority’s ability to achieve the objective of that principle. A materially
non-compliant assessment is given when the shortcoming is sufficient to raise doubts
about the authority’s ability to achieve compliance, but substantial progress towards
compliance has been achieved.

There is no doubt that the new accord though complex carries a lot of virtues and will
be a milestone in improving banks internal mechanism and supervisory process and
beneficial to the commercials banks.
 15

2.2 Review of related studies

The research studies and work papers carried out by different scholars within various
geographical region including dissertations conducted by Nepalese scholars are
reviewed in this section, which are related with financial performance analysis of
commercial bank, Finance company and the other area of the study.

2.2.1 Review of journal articles

The trend of commercial banking is changing rapidly. Competition is getting stiffer
and, therefore, banks need to enhance their competitiveness and efficiency by
improving performance. Normally, the financial performance of commercial banks
and other financial institutions has been measured using a combination of financial
ratios analysis, benchmarking, measuring performance against budget or a mix of
these methodologies (Avkiran, 1995).

CAMEL stands for capital adequacy, assets quality, management efficiency, earnings
performance and liquidity. The capital adequacy ratio is a key measure to determine
the health of banks and financial institutions. Capital adequacy refers to the
sufficiency of the amount of equity to absorb any shocks that the bank may
experience (Kosmidou, 2008).

Nepalese commercial banks need to maintain at least 6% Tier-1 capital and 11% total
capital (Tier 1 and Tier 2), that is , core capital and supplementary capital
respectively. Tier 1 capital consists of paid up capital, share premium, non-
redeemable preference share, general reserve fund, accumulated profit, capital
redemption reserve, capital adjustment fund, and other free reserves. The Tier 2
capital comprises of capital comprises of general loan loss provision, assets
revaluation reserve, hybrid capital instruments, subordinated term loan, exchange
equalization reserve, excess loan loss provision, and investment adjustment reserve.

These minimum capital adequacy requirements are based on the risk-weighted

exposures of the banks (NRB, 2020). Credit risk is one of the factors that affect the
health of an individual bank while asset quality analysis involves taking account of
the likelihood of borrowers paying back loans. The extent of the credit risk depends
on the quality of assets held by an individual bank.
 16

The quality of assets held by a bank depends on exposure to specific risks, trends in
non-performing loans, and the health and profitability of bank borrowers (Baral,
2005). Poor asset quality and low levels of liquidity are the two major causes of bank
failures. Poor asset quality led to many bank failures in Kenya in the early1980s
(Olweny and Shipo, 2011).

NRB uses composition of assets, non-performing loan to total loan ratio, net non-
performing loan to total loan ratio as the indicators of the quality of assets of the
commercial banks (NRB, 2020). The maximum NPL allows for a healthy bank is 5%.
Management quality plays a big role in determining the future of the bank. The
management has an overview of a bank’s operations, manages the quality of loans and
has to ensure that the bank is profitable.

Elyor (2009) noted that interest expenses divided to total loans can be measured as the
bank management quality. Ability to support and future operations of a bank depends
on the quality of its earnings and profitability profile. NRB uses return on total assets
as an indicator of profitability of a commercial bank.

In addition, it uses the absolute measures such as interest income, net interest income,
non-interest income, net non-interest income, non-operating income, net non-
operating income and net profit, to evaluate the profitability of a commercial bank
(NRB, 2020). Liquidity management is one of the most important functions of a bank.
If funds tapped are not properly utilized, the institution will suffer loss (Sangmi and
Nazir, 2010).

Barr et al. (2002) viewed that-“CAMEL rating has become a concise and
indispensable tool for examiners and regulators”. This rating ensures a bank’s healthy
conditions by reviewing different aspects of a bank based on variety of information
sources such as a financial statement, funding sources, macroeconomic data, budget
and cash flow.

Ho and Zhu (2004) have reported that the evaluation of a company’s performance has
been focusing the operational effectiveness and efficiency, which might influence the
company’s survival directly.

Baral (2005) has conducted a research and published his paper in the journal of
Nepalese business studies. “On Health Check-up” published his paper abstract in the
 17

Journal of Nepalese Business Studies (December, 2005) of commercial bank in the

framework of CAMEL, a case study of joint venture Banks in Nepal. The paper
examined the financial health of joint venture Banks in the CAMEL framework for a
period ranging from fiscal year 2001 to 2004. Three joint venture Commercial Banks
of Nepal were randomly selected for the study. The study was based on historical data
disclosed by annual reports of Commercial Banks. It has covered four fiscal years
data for the purpose of study. The study was based totally on the CAMEL framework.

Cole and Gunther (2008) in their article, “A CAMEL Rating’s Shelf Life”, have stated
that under more stable financial conditions, CAMEL ratings typically remain accurate
for relatively long periods. Also, off-site monitoring systems depend on the integrity
of accounting data, which can be enhanced through regular periodic exams. Moreover,
the examination process and the CAMEL ratings it generates have numerous
important uses, many of which are quite distinct from the relatively narrow
application of off-site monitoring systems for the identification of bank failures. The
CAMEL ratings can change only when financial conditions change appreciably, as
was the case during the particularly volatile time period.

Generally speaking, CAMEL ratings are designed to reflect a bank’s financial

condition, its compliance with laws and regulatory policies, and the quality of its
management and systems of internal control. Only through comprehensive, on site
exams can regulators determine whether a bank’s management is operating the
institution in accordance with the laws and regulations designed to promote safety and
soundness. Moreover, the complex financial reviews that accompany an exam,
together with the associated dialog between examiners and bank management, are
necessary to assess accurately a bank’s credit quality and overall financial posture.
Given the multiple dimensions and uses of CAMEL ratings, it would be exceedingly
difficult to construct a single comprehensive metric of their information content.

Bakar and Tahir (2009) in their paper used multiple linear regression technique and
simulated neural network techniques for predicting bank performance. ROA was used
as dependent variable of bank performance seven variables including liquidity, credit
risk, cost to income ratio, size and concentration ratio, were used as independent
variables.
 18

They conclude that neural network method outperforms the multiple linear regression
method however it need clarification on the factor used and they noted that multiple
linear regressions, notwithstanding its limitations, can be used as a simple tool to
study the linear relationship between the dependent variable and independent
variables.

Md. Tofael Hossain Majumder and Mohammed Mizanur Rahman (2016) – in their
article, - “A CAMEL Model Analysis of Selected Banks in Bangladesh” examine
performance of fifteen selected banks in Bangladesh during 2009-13. This study
highlights ranking of fifteen banks for their performance with respect to CAMEL
ratios. Therefore, the policy maker of the related lowest ranking banks should take
necessary steps to improve their weaknesses from the findings under the study. The
present study is limited in scope as it relates to fifteen selected banks only. The study
findings can be helpful for management of the selected banks in Bangladesh to
improve their financial performance and formulate policies that will improve their
performance. The study also identified specific areas for bank to work on which can
ensure sustainable growth for these banks.

Poonam Rai, Prakash Ojha, Prerana Singh, Rachana Gyawali and Rajesh Gupta
(2018) – in their article, - “Determinants of financial performance in Nepalese
financial institutions”. This article is based on descriptive and causal comparative
design to examine the relation between financial performances of Nepalese financial
institutions. The study has been conducted to measure the impact of bank capital
adequacy, assets quality, liquidity management, gross domestic product and inflation
on return on assets, return on equity and net interest margin to make a comparative
performance analysis of banks. The study concludes that capital adequacy ratio, assets
quality and management efficiency are among the most dominant variables that affect
the return on assets, return on equity and net interest margin as the determinants of
financial performance in the context of Nepalese financial institutions.

Dr. S.U. Gawde, Prof. Alekha Chandra Panda and Prof. Devyani Ingale (2018) – in
their article, - “Study of camel rating system in banking supervision – A case study of
Nepal Bangladesh Bank Ltd.”. Capital adequacy ratio indicated that the financial
position of the bank was strong. The assets quality of NBBL seems to be performing
well. Management efficiency of Nepal Bangladesh Bank has excellent banking
 19

services and very good management as a whole. NBBL has more productive
employees and customers are found to be more satisfied with the services provided by
the NBBL. Return on Assets (ROA) Nepal Bangladesh Bank Ltd. was satisfactory in
terms of profitability as measured by return on assets. NBBL have maintained the
liquidity i.e., cash reserve ratio. NBBL has increased its investment in government
securities. In short, CAMELS rules are the true measurement of financial performance
of any bank. If a bank fails to obey CAMELS norms in true spirit and letter, it can be
construed as a failed bank.

Muhammed Nowfal S and Badusha Muhammed (2019) – in their article, -

“Comparison of operational efficiency of listed banks from Kerala – A study based on
camel model”. This article talks about the importance of banks is growing every day
because banking system is the back born of our financial system and economic
development. The study is conducted with a view to understand the operational
efficiency of listed banks from the state of Kerala using camel model. The study
covers three listed private banks namely South Indian bank, Federal and
Dhanalakshmi bank. The ratings of the selected banks during the period from 2013-14
to 2017-18 provide the correct scenario of each of the selected banks. Based on the
study, Federal bank has a strong base and they are in the top among three listed banks
in all parameters of camel. Dhanalakshmi bank lacks must initiate corrective actions
to survive in the highly competitive industry. The findings of the study will benefit all
the people those are using the services of the banks and those who are willing to
invest in shares of these banks.

Dr. R. Mayakkannan, C. Jayasankar (2020) – in their article, - “A study on

performance evaluation of selected public and private sector banks through camel
model in India”. In this article, Different banks have obtained different performances
with respect of CAMEL ratios. The public and private banks stood at top position in
tems of capital adequacy. In terms of asset quality, the public sector bank was at top
most position. In context of management quality, private sector banks positioned at
first. In terms of earnings quality, public sector banks obtained the top position. The
private sector bank was ranked top in liquidity criteria.
 20

2.2.2 Review of previous theses

Hirtle and Lopez (1999) examine the usefulness of past CAMEL ratings in assessing
bank’s current conditions. They find that, conditional on current public information,
the private supervisory information contained in past CAMEL ratings provides further
insight in to bank current conditions, as summarized by current CAMEL ratings. The
authors find that, over the period from 1989 to 1995, the private supervisory
information gathered during the last on-site exam remains useful with respect to the
current condition of a bank for up to 6 to 12 quarters (or 1.5 to 3 years). The overall
conclusion drawn from academic is that private supervisory information, as
summarized by CAMELS ratings, is clearly useful in the supervisory monitoring of
bank conditions.

Verma (2006) had studied the performance of the public sector banks based on
CAMEL model to judge its financial and operational conditions. However, the study
composite ratings are based on careful and compliance performance.

Said and Saucier (2003) examined the liquidity, solvency and efficiency of Japanese
Banks using CAMEL rating methodology, for a representative sample of Japanese
banks for the period 1993-1999, they evaluated capital adequacy, assets and
management quality, earnings ability and liquidity position.

Jaffar and Manarvi (2011) assessed the performance of Islamic and Conventional
banks through CAMEL test during the period of 2005 to 2009. The sample of their
research was five Islamic and five conventional banks. They found that Islamic banks
performed better and had high liquidity than conventional banks, besides it is
understood that conventional banks have pioneered in the management and having a
good earning ability.

Siva and Natarajan (2011) tested the applicability of CAMEL norms and its
consequential impact on the performance of SBI Groups. The study concluded that
annual CAMEL scanning helps the commercial bank to diagnose its financial health
and alert the bank to take preventive steps for its sustainability.

Chaudhary and Singh (2012) analyzed the impact of the financial reforms on the
soundness of Indian Banking through its impact on the asset quality. The study
 21

identified the key players as risk management, NPA Levels, effective cost
management and financial inclusion.

Jha and Hui (2012) tried to find out the factors affecting the performance of Nepalese
Commercial Banks by using various CAMEL ratios such as return on asset (ROA),
return on equity (ROE), capital adequacy ratio (CAR) etc. As Public sector banks
have higher total assets compared to joint venture or domestic private banks, thus
ROA was found higher whereas overall performance of public sector was unsound
because ROE and CAR of joint venture and private banks was found superior. The
financial performance of public sector banks is being eroded by other factors such as
poor management, high overhead cost, political intervention, low quality of collateral
etc.

Voon (2013) researched on the financial performance of seven local banks and three
foreign banks in Malaysia for the years 2007-2011 adopting CAMEL approach and
concluded on the basis of results that foreign banks performed better than local banks.

Roman and Sarju (2013) concluded a study on 15 selected banks in Romania for the
period 2004-2011 to assess their financial performance. The CAMEL method was
adopted and the results underscored the strengths and vulnerability of the selected
banks, highlighting the need to improve bank’s financial soundness.

Mohiuddin (2014) looked at the financial performance of two major banks in

Bangladesh using CAMEL parameters. It was concluded that the Capital adequacy,
asset quality, management capability and liquidity were found satisfactory.

Ahsan (2016) analyzed the financial performance of three selected Islamic Banks in
Bangladesh for a period of eight years 2007-2014, using CAMEL model. Results
indicate that all the selected banks were in strong position on their composite rating
system.

Iheanyi and Sotonye (2017) assessed the performance of banks in Nigeria using
CAMEL rating. The data that was used for a period covering 19 years and analysis
was done through ordinary least squares. Their findings suggested that management
efficiency, earnings and liquidity have no significant impact on the profitability of
banks. The researchers also found that assets quality has a negative impact on the
profit of the banks.
 22

Zedan and Daas (2017) evaluated the performance and financial soundness of
Palestinian commercial banks for the year 2015 using CAMEL rating model. Results
were used to rank the selected banks and Bank of Palestine was ranked at the top with
total components score of 16.

2.3 Summary
To sum up, the review of literature indicates mixed results on the impact of CAMEL
elements on the performance of banks. While some studies indicate positive impact on
performance of banks, there are also cases where negative effects on financial
performance have been reported. The banks financial soundness is judged being based
on some factors such as capital adequacy, asset quality, management efficiency,
earning quality, liquidity position. The study is based on secondary data and the data
obtained were analyzed by using various financial and statistical tools.

2.4 Research gap

There are number of studies have been conducted on financial performance and its
evaluation of commercial banks in Nepal, performance comparison between joint
ventures and private sector banks and other financial institutions. The previous
researchers have only explained the trend that has been established between the
CAMEL it has become incomplete to explain the impact over the operational
efficiency and the specific problem faced by the banks especially in commercial
banks.
Therefore, in this research capital adequacy, assets quality, management efficiency,
earning quality and liquidity are set as independent variable and ROA and ROE set as
dependent variable in the context of two public sector bank i.e., ADBL and RBBL.
So, the previous researchers have not taken these variables in the context of ADBL
and RBBL. So, this is the research gap of study.

2.5 Conceptual framework

Different independent variables are responsible to lead the dependent variable to the
betterment or worsen direction. The independent variables are gathered from the
different research papers, books, dissertation, journals, articles, web sites, experts
view, and practical life. Literature review of previous researches helped very much to
set independent variables. Theoretical Framework is crucial in research study because
it describes why the research problem under study exists. The following theoretical
 23

framework is developed on the basis of comparative study of financial performance of

ADBL and RBBL in Nepal.

The dependent and independent variable are as follows: -

i. Dependent variable is Financial Performance i.e., ROA and ROE.

ii. Independent variables are Capital Adequacy, Asset quality, Management
efficiency, Earning Quality and Liquidity.

Figure 2.1: Conceptual framework

Bank Specific Variables

 Capital Adequacy
Financial
 Assets Quality Performance
ROA
 Management Efficiency
ROE
 Earning Capacity

 Liquidity Management

Dependent
Independent Variables Variables

Source: Jha and Hui (2012)

 24

CHAPTER - III

RESEARCH METHODOLOGY

This chapter provides the overall framework or plan for the collection, analysis and
presentation of data required to fulfill the objective of the study. The main objective
of the study is to analyze and evaluate comparative financial performance of Rastriya
Banijya Bank Ltd and Agriculture Development Bank Ltd. To meet the objective,
following methodology is applied in the study, which is described as below.

3.1 Research design

This study is a descriptive research study based on convenience sampling design by
using secondary data with the aim of comparative study of financial performance of
selected banks in Nepal by applying CAMEL model. The data were collected from the
annual reports of RBBL and ADBL. CAMEL Model is used to evaluate the
performance of selected banks. The study was completed after the analysis of
collected data to meet the study objectives followed by drawing some findings,
conclusion and recommendation. Thus, descriptive research design has been used for
the study purpose.

3.2 Population and sample

At present, there are 27 commercial banks which are operating in Nepal. Due to time
and resource factors, it is not possible to study all of them regarding the study topic.
So, all the commercial banks that are operating in Nepal are considered as the
population by using convenient sampling method. Among them public sector bank
i.e., Rastriya Banijya Bank Ltd and Agriculture Development Bank Ltd are taken as a
sample for study which is based on convenience sampling method. RBBL and ADBL
are one of the pioneer banks in the country with the history of above half century with
the highest public confidence. So, these two banks will be considered as a sample for
comparison of financial performance in this study. In this study five years period was
taken for the purpose of the study and analysis.

3.3 Nature and sources of data

The study is based on secondary data. For the purpose of the study, the annual reports
of the RBBL and ADBL are used as the major source of data. Besides the annual
 25

reports of those banks required data and information is collected from NRB reports
and bulletins and its website, various publications dealing in the subject matters of
study, articles published in journals, research report and previous dissertations.

3.4 Data collection procedures

As stated earlier, the study is mainly based on secondary data. The annual reports and
other information have been obtained from sample banks. NRB directives, banking
and financial statistics and other publications are collected from the website of NRB.
Some supplementary data and information, literature review is collected from the
Central Library, T.U. Kirtipur, NRB publication, different journals, magazines and
other published and unpublished reports documented by the concern authorities.

3.5 Data processing

First of all, necessary data are collected from the published documents and then
audited financial statements recorded in master sheet manually. Then, data are entered
into the table to work out CAMEL financial ratio and prepare the necessary figures.
Finally, different financial tools under CAMEL are worked out with the help of
Microsoft Excel.

3.6 Data analysis tools

Various financial and statistical tools have been used to measure the comparative
financial analysis and to draw inferences on the study area. Graphs and tables as
appropriate have also been used to analyze the data. The collected data have been
organized, tabulated, processed and analyzed by using various statistical and financial
tools which are described as follows:

3.6.1 Financial tools

This study is based on following financial tools and techniques.
The tools are based on CAMEL model analysis.

1. Capital adequacy
a) Core capital adequacy ratio
Core capital adequacy ratio shows the relationship between the total core capital or
internal sources and total risk adjusted assets. It is used to measure the adequacy of
core capital and financial soundness from very close angle. It is calculated by using
following model.
 26

Core Capital × 100

CCAR=
Total Risk Adjusted Assets

Where,

CCAR=Core Capital Adequacy Ratio

Core Capital = paid-up capital + share premium + non-redeemable
Preference share + general reserve + cumulative profit –goodwill if any

b) Supplementary capital adequacy ratio

Supplementary capital adequacy ratio is the expression of numerical relationship
between supplementary capital and total risk adjusted assets. It measures the
proportion of supplementary capital in total risk adjusted assets. Furthermore, it
shows the absolute contribution of supplementary capital in capital adequacy. The
ratio is used to analyze the supplementary capital adequacy and determined by using
the following model.

Supplementary Capital
SCAR= '×100
Risk Weighted Assets

Where,

SCAR=Supplementary Capital Adequacy Ratio

Supplementary Capital=Loan loss provision + exchange equalization
reserve + assets revaluation reserve + hybrid capital instrument +
Unsecured subordinate term debt + interest rate fluctuation fund +other free
reserves

c) Total Capital Adequacy Ratio

Capital adequacy ratio is the numerical relationship between total fund and risk
adjusted assets. It measures the adequacy of capital and financial soundness of finance
company. Capital adequacy ratio is used to measure of capital in the finance
company. It is worked by using the following model.
 27

Total Capital Fund

CAR= ×100
Total Risk Adjusted Assets

Where,

CAR=Capital Adequacy Ratio

Total capital fund= Core capital + Supplementary capital

Total Risk Adjusted Assets= On-balance sheet risk adjusted assets + off

Balance sheet risk adjusted assets

2. Assets quality
a) Non-performing loan ratio
The non-performing loan ratio indicates the relationship between non-performing loan
and total loan. It measures the proportion of non-performing loan in total loan and
advances. The ratio is used to analyze the asset quality and determined by using the
given model.
Nonperforming assets
Non-performing Loan Ratio = ×100
Total loan and advance

Where,

Non-performing loan= loan not recovered within the given time

Frame either in the form of interest receiving or principal repayment.

3. Management quality
a) Interest Income to loan and advances
Some banks and financial institutions adopted their accounting policies as to suspend
the recognition of interest income on loans and advances which are due for more than
180 days whereas others for more than 365days. Interest income is the amount paid to
an entity for lending its money or letting another entity use its funds. On a larger
scale, interest income is the amount earned by an investor's money that he places in an
investment or project. A very simple and basic way of computing it is by multiplying
the principal amount by the interest rate applied, considering the number of months or
years the money is lent.
 28

b) Employee expenses to total operating expenses

An operating expense is an expense a business incurs through its normal business
operations. Often abbreviated as OPEX, operating expenses include rent, equipment,
inventory costs, marketing, payroll, insurance, step costs and funds allocated for
research and development. One of the typical responsibilities that management must
contend with is determining how to reduce operating expenses without significantly
affecting a firm’s ability to compete with its competitors.

4. Earning quality
a) Return on assets (ROA)
Return on assets is the numerical relationship between net incomes after taxes to total
assets of a company. It is primarily an indicator of managerial efficiency; it indicates
how capably the management of the company has been converting the institution’s
assets into net earnings. It is calculated by using the following model.
Net Income After tax
Return on Assets = × 100
Total Assets

b) Return on equity (ROE)

Return on equity is another indicator of profitability. This measures per unit reward
for equity capital of different banks. Higher return on equity is supposed to be better
for any institution. This ratio is directly or indirectly affecting the price of shares of
any specific institutions. Higher Return on equity pays more in the market. The
following equation is used to calculate ROE of any institution.
Net Income After tax
Return on Equity = × 100
Equity
ℎ ′

c) Earnings per share (EPS)

Earnings per share provide a direct measure of the returns flowing to the company’s
owners-its stockholders- measured relative to the members of shares to the public. It
gives the strength of the share in the market. Following is the expression of earnings
per share.
 29

Earnings per share = Net Income to Shareholder

Number of Share

5. Liquidity position
a) Cash reserve ratio
Cash reserve ratio is the portion of deposit kept into central bank i.e., NRB in Nepal
by the banks as prescribed by NRB as a provision for the probable liquidity crunch of
banks. It shows whether the bank is holding the balance as required by NRB. Now
this ratio is 6 % for commercial banks as prescribed by NRB.

3.6.2 Statistical tools

1. Average
A simple arithmetic average is used to summarize the data as a representation of mean
data. A simple arithmetic average is a value obtained by dividing the sum of the
values by their numbers. Thus, the average is expressed as:
∑𝑋
(X)=
𝑵
Where,

X = Mean of the values

N= Number of pairs of observation

During the analysis of data, mean is calculated by using the statistical formulas
average on excel data sheet on computer.

2. Standard deviation
Standard deviation is the absolute measure of dispersion of the values and shows the
deviation or dispersion in absolute term. It is said that higher the value of standard
deviation the higher the variability and vice versa. Karl Pearson introduced the
concept of standard deviation in 1983. Here, the standard deviation is used to find out
the deviation in absolute term. Standard deviation is determined in following way.
 30

x2  x  2
S.D.  =  
n  n 

Here,

n= no. of observation

x=individual value

During the analysis of data, standard deviation is calculated by using the statistical
formulas on excel data sheet on computer.

3. Coefficient of variation
Coefficient of variation is the relative measure of dispersion based on the standard
deviation. It is most commonly used to measure the variation of data and more useful
for the comparative study of variability in two or more series or graph or distribution.
Symbolically, the coefficient of variation is calculated as:

CV=

X

Here,

 =standard deviation
X = mean
CV= Coefficient of variation
 31

CHAPTER-4

RESULTS AND DISCUSSION

This section presents the comparative analysis of CAMEL model of RBBL and
ADBL from 2071/72 to 2075/76 in order to achieve the objectives of the study. The
data was analyzed by using descriptive statistics.

4.1 Capital adequacy

Capital adequacy is one of the eminent indexes that reflect the inner strength of a
bank. CAR is also known as Capital-to risk weighted assets ratio (CRAR). This ratio
is used to protect depositors from potential losses and promote the stability and
efficiency of financial systems around the world. It measures the percentage of the
bank’s capital to risk-weighted credit exposures. For computation of the capital
adequacy ratio, capital is classified as Tier-1 and Tier-2 capitals. The higher the
capital adequacy ratio, the stronger the bank although a very high CAR indicates that
the bank is conservative and has not utilized the full potential of its capital.

4.1.1 Core capital adequacy ratio

Capital adequacy ratio is the measure of financial strength of a commercial bank.
Specifically, the core capital adequacy ratio measures the adequacy of primary capital
for smooth operation of a bank. A bank should maintain adequate capital ratio as set
by NRB. NRB fixed a minimum standard of core capital adequacy ratio 6 percent. It
is measured as the ratio of core capital fund to total risk adjusted assets of the bank.
 32

Table 4.1
Core Capital Adequacy Ratio

Year ADBL's CCAR(%) RBBL’s CCAR(%) NRB std.(%)

2071/72 15.17 10.16 6

2072/73 15.19 9.31 6
2073/74 18.61 9.15 6
2074/75 19.28 9.98 6
2075/76 19.27 12.31 6

Mean 17.50 10.18 6

S.D 2.13 1.26 0

C.V 12.21% 12.41% 0

Source: Annual Reports of ADBL and RBBL

The table 4.1 and figure 4.1 shows CCAR of ADBL and RBBL for the study period as
15.17, 15.19, 18.61, 19.28, 19.27 and 10.16, 9.31, 9.15, 9.98 and 12.31 respectively.
Similarly, the table also shows the NRB standards required to be maintained by the
commercial banks as 6 percent in the fiscal year 2071/72, 2072/73, 2073/74, 2074/75
and 2075/76. From the table it can be seen that the CCAR maintained by the ADBL is
more than the standards set by the NRB for the study period and RBBL is also more
than the standards set by the NRB for the study period. The table reveals an average
CCAR of ADBL and RBBL is 17.50 and 10.18 respectively. Based on this, we can
say that ADBL’s capital base is stronger than RBBL. The table also gives standard
deviation of the sample commercial banks on core capital adequacy ratio. The
standard deviation for the banks is 2.13 and 1.26 respectively. As the standard
deviation of ADBL is more than that of RBBL there is a more variability in the capital
base of ADBL than RBBL. The coefficient of variation of RBBL is comparatively
higher than that of ADBL i.e. 12.41 and 12.21. ADBL and RBBL has maintained
sufficient amount of capital to meet the probable risk arising from market, operation
and credit expansion.
 33

Figure 4.1
Core Capital adequacy ratio
25

20

15
ADBL's CCAR(%)
10 RBBL's CCAR(%)
NRB std.(%)
5

4.1.2 Supplementary Capital Adequacy Ratio

Supplementary capital is the amount of capital that is transferred in reserve and
collected using the hybrid capital instruments. It includes loan loss provision,
exchange equalization reserve, assets revaluation reserve, hybrid capital instruments,
unsecured sub-ordinate term debt, interest rate fluctuation fund and other free
reserves. NRB has set a standard of supplementary capital to be maintained by the
commercial banks as not more than the core capital of the bank.

Table 4.2
Supplementary Capital Adequacy Ratio

Year ADBL's SCAR(%) RBBL's SCAR(%)

2071/72 1.99 -
2072/73 1.99 1.14
2073/74 1.80 1.24
2074/75 1.05 1.48
2075/76 1.10 1.08
Mean 1.59 1.24
S.D 0.47 0.18
C.V 29.84% 14.26%
Source: Annual Reports of ADBL and RBBL
 34

The given table 4.2 and figure 4.2 illustrates the SCAR of ADBL and RBBL available
during the period of 2071/72 to 2075/76 is 1.99, 1.99, 1.80, 1.05 and 1.10. Similarly,
for the RBBL is -, 1.14, 1.24, 1.48 and 1.08. According to NRB directives, up to 100
percent of the SCAR maintained by the concerned banks for a particular year is the
standard SCAR. Similarly, it discloses the standard deviation of both the banks as
0.47 and 0.18 respectively. Based on the average SCAR, ADBL’s capital base is
stronger than that of RBBL i.e 1.59 and 1.24. Since standard deviation of SCAR of
RBBL is lower than that of ADBL, the variability in its SCAR is lower than that of
ADBL. Its meaning is that ADBL is riskier than RBBL in terms of SCAR.

Figure 4.2
Supplementary Capital Adequacy Ratio
ADBL's SCAR(%) RBBL's SCAR(%)

35

30

25

20

15

10

0
2071/72 2072/73 2073/74 2074/75 2075/76 Mean S.D. C.V.

4.1.3 Total capital adequacy ratio

It has been already mentioned that the capital of the banks is categorized into 2 parts,
Core Capital and Supplementary Capital. Here, the total capital ratio can be calculated
by dividing total capital fund by the total risk weighted assets. As the NRB has made
it mandatory to publish these ratios for the banks, these ratios can be found in their
periodic reports.
 35

Table 4.3
Capital adequacy ratio

Year ADBL's CAR(%) RBBL's CAR(%) NRB std.(%)

2071/72 17.16 10.16 10
2072/73 17.18 10.46 10
2073/74 20.41 10.39 10
2074/75 20.33 11.47 10
2075/76 20.37 13.39 10
Mean 19.09 11.17 10
S.D 1.75 1.34 0
C.V 9.18% 11.97% 0
Source: Annual Reports of ADBL and RBBL

The given table 4.3 and figure 4.3 represent the Total Capital Adequacy Ratio of
ADBL and RBBL for the study period. The ratio of ADBL and RBBL is 17.16, 17.18,
20.41, 20.33, 20.37 likewise 10.16, 10.46, 10.39, 11.47 and 13.39 respectively. The
NRB standard on the Total Capital Adequacy for the commercial banks is 10 as per
NRB capital adequacy framework for the study period. The data reveals that the ratio
maintained by ADBL and RBBL are more than the NRB standards during the period.
The table also illustrates mean CAR of ADBL and RBBL as 19.09 and 11.17
respectively. It also discloses S.D. of both the banks as 1.75 and 1.34 respectively.
Based on mean CAR, we can say that the capital base of ADBL is stronger than
RBBL.
 36

Figure 4.3

Capital adequacy ratio

25

20

15
ADBL's CAR(%)
10 RBBL's CAR(%)
NRB std.(%)
5

4.2 Assets quality

The quality of assets is an important parameter to measure the strength and financial
health of the bank assets. The poor quality of assets can force the bank to fail. Assets
quality indicates the types of the debtors the bank is having. So it should be
undertaken to find out as to why Non- performing assets and getting created and Non-
performing asset classification of 90 days, 180 days and so on to be strictly followed.
If a bank has lent high amounts of credit to such sectors it is bound to have the
problem of bad loans. According to Bock (2012) economic activity slows down due
to increase in non-performing loans or credit contracts. Asset quality greatly depends
on the borrower’s ability to repay the loan in due time.

4.2.1 Non-performing loan to total loan and advances

When performing or good loan becomes non-performing, it affects on performance of
bank. Non-performing loan is a loan that is in default or close in being in default.
Many loans become non-performing after being in default for 90 days, but it can
depend on the contract terms, behavior of borrower, banks policy etc. Non-performing
loan directly decreases net profit due to provision for it. Non-Performing Loan to
Total Loan and Advances measure how much loan became default as compared to
total loan disbursed. Lower ratio is better for company.
 37

Table 4.4
Non-performing loan ratio
Year ADBL's NPL (%) RBBL's NPL (%)
2071/72 5.35 5.35
2072/73 4.36 4.25
2073/74 4.60 3.77
2074/75 3.50 4.75
2075/76 3.29 4.79
Mean 4.22 4.58
S.D 0.84 0.60
C.V 19.91% 13.05%
Source: Annual Reports of ADBL and RBBL

The table 4.4 and figure 4.4 gives the information about the NPL ratios of ADBL for
the study periods are 5.35, 4.36, 4.60, 3.50, and 3.29. Similarly, same ratio of RBBL
for the study period is 5.35, 4.25, 3.77, 4.75, and 4.79. The NPL ratio of ADBL is in
decreasing trend from initial to last year of study period. Similarly, the NPL ratio of
RBBL is also in decreasing trend for the first three fiscal year and in last two fiscal
year it is in increasing trend. The table also reveals mean NPL of ADBL and RBBL as
4.22 and 4.58 respectively. The table also reveals SD of both the banks as 0.84 and
0.60 respectively. The table also shows CV of ADBL and RBBL is 19.91 and 13.05
respectively. From the mean NPL; we can say that the asset quality of RBBL is sound.
Similarly, from the CV of NPL, we can say that the loan and advances of RBBL is
less risky. Therefore, we can conclude that the loan and advances of RBBL is sound
compare to ADBL.
 38

Figure 4.4
Non-performing loan ratio

25

20

15

ADBL NPL(%)
10
RBBL NPL(%)

4.3 Management efficiency

The management efficiency is calculated as the ability of bank’s top management to
take right decisions. It is used to evaluate better management quality and discount
poorly managed ones and also helps a bank in achieving sustainable growth. It sets
vision and goals for the organization and sees that it achieves them. The ratio in this
element involves subjective analysis to measure the efficiency and effectiveness of
management.

4.3.1 Interest income to loan and advances

Some banks and financial institutions adopted their accounting policies as to suspend
the recognition of interest income on loans and advances which are due for more than
180 days whereas others for more than 365days. Interest income is the amount paid to
an entity for lending its money or letting another entity use its funds. On a larger
scale, interest income is the amount earned by an investor's money that he places in an
investment or project. A very simple and basic way of computing it is by multiplying
the principal amount by the interest rate applied, considering the number of months or
years the money is lent.
 39

Table 4.5
Interest income to loan and advances
Year ADBL's IILA (%) RBBL's IILA (%)
2071/72 12.72 8.23
2072/73 12.09 8.32
2073/74 12.55 7.78
2074/75 13.93 9.20
2075/76 13.85 8.97
Mean 13.02 8.5

S.D 0.82 0.57

C.V 6.29% 6.79%

Source: Annual Reports of ADBL and RBBL

The table 4.5 and figure 4.5 represents the percentage on Interest Income to Loan and
Advances of ADBL and RBBL as 12.72, 12.09, 12.55, 13.93&13.85 likewise 8.23,
8.32, 7.78, 9.20 and 8.97 respectively for the study period. The data reveals that IILA
percentage of ADBL is more than RBBL. The table reveals mean interest income to
Loan and Advances of ADBL and RBBL is 13.02 and 8.5 respectively. The SD of
ADBL and RBBL is 0.82 and 0.57 respectively. Similarly, the CV of ADBL and
RBBL is 6.29 and 6.79 respectively. The mean interest income to loan and advances
of ADBL is greater than that of RBBL. Similarly the SD of ADBL is greater than that
of RBBL which indicates ADBL is more risky than that of RBBL. Similarly, the CV
of RBBL is greater than ADBL meaning that lower variability in its percentage.
 40

Figure 4.5
Interest income to loan and advances
16
14
12
10
8
ADBL's IILA(%)
6
RBBL's IILA(%)
4
2
0

4.3.2Employee expenses to total operating expenses

An operating expense is an expense a business incurs through its normal business
operations. Often abbreviated as OPEX, operating expenses include rent, equipment,
inventory costs, marketing, payroll, insurance, step costs and funds allocated for
research and development. One of the typical responsibilities that management must
contend with is determining how to reduce operating expenses without significantly
affecting a firm’s ability to compete with its competitors.

Table 4.6
Employee expenses to total operating expenses
Year ADBL’s EETOE RBBL’s EETOE
2071/72 42.28 50.95
2072/73 42.47 52.88
2073/74 39.53 46.96
2074/75 28.88 31.48
2075/76 24.72 30.57
Mean 35.57 42.56
S.D 8.22 10.75
C.V 23.12% 25.26%
Source: Annual Reports of ADBL and RBBL
 41

The table 4.6 and figure 4.6 describes the percentage of Employee expenses to total
operating expenses of ADBL and RBBL as 42.28, 42.47, 39.53, 28.88, 24.72 similarly
50.95, 52.88, 46.96, 31.48 and 30.57 respectively for the study period. The mean data
is 35.57 and 42.56 of ADBL and RBBL respectively. Similarly, the SD of ADBL and
RBBL is 8.22 and 10.75 respectively. Likewise, the CV of ADBL and RBBL is 23.12
and 25.26 respectively.

Figure 4.6

Employee expenses to total operating expenses

60

50

40

30
ADBL's EETOE(%)
20 RBBL's EETOE(%)

10

4.4 Earning quality

The earning quality determines the ability of a bank to earn consistently, going into
the future. This parameter explains the sustainability and growth in earnings in future
and how a bank earns its profits. Bank can increase earning capacity and productivity
by increasing earning capacity.

4.4.1 Return on assets (ROA)

Return on assets explains the contribution of assets to generate net profit. ROA is a
measure of efficiency. It conveys information on how well the institutions resources
are being used in order to generate income. Return on total assets is calculated by
dividing net profit after tax by total assets of the company. Higher return on total
assets indicates the higher efficiency in the utilization of total assets and vice-versa.
 42

Table 4.7
Return on assets ratio
Year ADBL's ROA RBBL's ROA
2071/72 3.12 3.32
2072/73 2.32 1.42
2073/74 2.15 1.60
2074/75 2.71 1.85
2075/76 2.77 2.23
Mean 2.61 2.08
S.D 0.38 0.75
C.V 14.71% 36.22%
Source: Annual Reports of ADBL and RBBL

The table 4.7 and figure 4.7 depicts the mean ROA ratio of ADBL and RBBL is 2.61
and 2.08 respectively. The table also shows S.D. of ROA ratio of ADBL and RBBL is
0.38 and 0.75 respectively. The mean value of ROA ratio reveals that the return on
assets of ADBL is better than that of RBBL. Similarly, the value on CV reveals that
less variability in the return on assets of ADBL compare to RBBL. Therefore, ADBL
seems to be less risky than RBBL. As a whole, financial performance of ADBL was
better than RBBL in terms of ROA.

Figure 4.7
Return on assets ratio

40
35
30
25
20
ADBL's ROA(%)
15
RBBL's ROA(%)
10
5
0
 43

4.4.2 Return on equity

Return on equity is another indicator of profitability. This measures per unit reward
for equity capital of different banks. Higher return on equity is supposed to be better
for any institution. This ratio is directly or indirectly affecting the price of shares of
any specific institutions. Higher Return on equity pays more in the market.

Table 4.8
Return on equity
Year ADBL's ROE RBBL's ROE
2071/72 36.82 69.46
2072/73 21.08 27.41
2073/74 12.60 26.53
2074/75 16.47 19.19
2075/76 17.11 23.39
Mean 20.82 33.20
S.D 9.44 20.53
C.V 45.34% 61.83%

Source: Annual Reports of ADBL and RBBL

The table 4.8 and figure 4.8 illustrates the comparative tabular presentation of ADBL
and RBBL for the fiscal year 2071/72 to 2075/76. The rate of ROE for ADBL was
36.82 for the first fiscal year 2071/72 and 21.08, 12.60, 16.47 and 17.11 % in fiscal
year 2072/73, 2073/74, 2074/75 and 2075/76 respectively with the overall average for
the last 5 fiscal year was 20.82%. Similarly for RBBL the ratio was 69.46 % in the
first fiscal year 2071/72 and was 27.41, 26.53, 19.19 and 23.39% in fiscal year
2072/73, 2073/74, 2074/75 and 2075/76 respectively with the overall average for the
last 5 fiscal year was 33.20%. RBBL has higher ROE in comparison to ADBL. It
means the bank is able to manage the actives perfectly than ADBL. The risk indicator
coefficient of variation of RBBL was higher than that of ADBL. Higher portion of
ROE is good for any bank for their goodwill and share value in the market.
 44

Figure 4.8
Return on equity

80
70
60
50
40
ADBL's ROE(%)
30
RBBL's ROE(%)
20
10
0

4.4.3Earning per share (EPS)

The earnings per share show the profitability of the bank on per share basis. It shows
the earning available to each shareholder out of the total earning. It also affects the
Market Price Share of banks. The Earning per share is calculated by dividing the
profit after tax by total number of common share outstanding.

Table 4.9
Earnings per share (Rs.)
ADBL's
Year EPS RBBL's EPS
2071/72 78.83 57.07
2072/73 52.79 27.42
2073/74 31.59 32.32
2074/75 36.91 30.26
2075/76 42.88 56.04
Mean 48.6 40.62
S.D 18.64 14.65
C.V 38.36% 36.07%

Source: Annual Reports of ADBL and RBBL

 45

The table 4.9 and figure 4.9 illustrates EPS of ADBL and RBBL for the fiscal year
2071/72 to 2075/76 as 78.83, 52.79, 31.59, 36.91 and 42.88. Similarly, 57.07, 27.42,
32.32, 30.26, and 56.04 for RBBL. The EPS of ADBL is continuously decreasing
from the fiscal year 2071/72 to 2073/74 and 2074/75, 2075/76 it is in gradually
increasing. The table shows that the EPS of RBBL is fluctuating trend sometimes it is
in decreasing or sometimes it is in increasing order. This decrease in EPS is due to the
decrease in the bank’s net profit over the study period.

Furthermore, the table illustrates mean EPS of ADBL and RBBL as 48.6 and 40.62
respectively. It also shows the CV of the banks as 38.36 and 36.07 respectively. ADBL’s
higher mean value on EPS compare to RBBL indicates that its earnings performance is
better than RBBL. The CV of ADBL indicates greater variability in its EPS than RBBL’s.
With this we can say that there is more risk in ADBL than in RBBL.

Figure 4.9
Earnings per share

90
80
70
60
50
40 ADBL's EPS(Rs.)
30 RBBL's EPS(Rs.)
20
10
0

4.5 Liquidity
Liquidity is an important aspect of any organization dealing in money which
measures the capacity of banks to meet its financial obligations. Among assets, cash
and investments are the most liquid of the bank assets. If liquidity is too much low,
then banks are not in a position to meet its current financial liabilities. On the other
hand, if liquidity is too much high, then banks are not utilizing their cash properly.
Thus a proper balance is necessary for liquidity so that banks can generate high profit
while at the same time provide liquidity to the depositors.
 46

4.5.1 Cash Reserve Ratio

Cash reserve ratio is the portion of deposit kept into central bank i.e. NRB in Nepal
by the banks as prescribed by NRB as a provision for the probable liquidity crunch of
banks. Now this ratio is 6 % for commercial banks as prescribed by NRB. This ratio
should be maintained in weekly basis.

Table 4.10
Cash reserve ratio
Year ADBL’sCRR (%) RBBL’sCRR (%)
2071/72 28.74 14.48
2072/73 23.33 14.09
2073/74 31.18 9.60
2074/75 29.15 5.29
2075/76 27.20 6.44
Mean 27.92 9.98
S.D 2.93 4.24
C.V 10.50% 42.46%
Source: Annual Reports of ADBL and RBBL

The table 4.10 and figure 4.10 illustrates the CRR of ADBL and RBBL as 28.74%,
23.33%, 31.18%, 29.15% and 27.20%. Similarly, 14.48%, 14.09%, 9.60%, 5.29% and
6.44% for RBBL in the fiscal year 2071/72 to 2075/76. The sample banks were able
to meet the standard level of CRR of NRB in all fiscal year. The average CRR of
ADBL was higher than that of RBBL. Sampled bank’s CRR was fluctuated in
different fiscal year due to change in the standard level of NRB. NRB asked to
maintain 6% level of CRR. Both the banks have maintained the cash reserve ratio
above the NRB standard over the study period.
 47

Figure 4.10
Cash reserve ratio
45
40
35
30
25
20 ADBL's CRR(%)
15 RBBL's CRR(%)
10
5
0

4.6 Major findings

This section lists major findings obtained from the analysis of the data presented for
the study purpose. Conclusion drawn from the study are presented in the next chapter
entitled “Summary, Conclusion and Implications”.

i. The mean CCAR of ADBL is found 17.50 whereas the same for RBBL is 10.18.
Standard deviation of CCAR of ADBL and RBBL is found 2.14 and 1.26
respectively. The mean SCAR of ADBL is found to be 1.59 whereas the same found
to 1.24 for RBBL. The standard deviation of SCAR of ADBL and RBBL found to be
0.47 and 0.18respectively. The mean CAR of ADBL is found19.09 whereas the same
found 11.17 for RBBL. The standard deviation of CAR of ADBL and RBBL found to
be 1.75and 1.34 respectively.
ii. Mean NPL of ADBL and RBBL is found 4.22 and 4.58 respectively. SD of ADBL
and RBBL is found to be 0.84 and 0.60 respectively. Coefficient of variation of NPL
of ADBL and RBBL is found 19.91 and 13.05 respectively.
iii. Mean IILA of ADBL and RBBL is found to be 13.02 and 8.5 respectively. SD of
ADBL and RBBL is found to be 0.82 and 0.57 respectively. Coefficient of variation
of ADBL and RBBL is found to be 6.29 and 6.79 respectively. Mean EETOE for
ADBL and RBBL is found 35.57 and 42.56 respectively. Standard deviation of
EETOE of ADBL and RBBL is found to be 8.22 and 10.75 respectively. The CV of
EETOE of ADBL and RBBL is found to be 23.12 and 25.26 respectively.
 48

iv. Mean ROA ratio of ADBL and RBBL is found to be 2.61 and 2.08 respectively. SD
of ROA of ADBL and RBBL is found to be 0.38 and 0.75 respectively. CV of ROA
of ADBL and RBBL is found to be 14.71 and 36.22. Mean of ROE ratio of ADBL
and RBBL is found to be 20.82 and 33.20 respectively. Standard deviation of ROE of
ADBL and RBBL is found to be 9.44 and 20.53 respectively. Coefficient of variation
of ROE of ADBL and RBBL is found to be 45.34 and 61.83. The mean EPS of 48.6
and 40.62 is found for ADBL and RBBL respectively. Similarly, SD of ADBL and
RBBL is found to be 18.64 and 14.65respectively and the CV of ADBL and RBBL is
found to be 38.36 and 36.07 respectively.
v. Mean ratio of cash reserve ratio of ADBL and RBBL is found to be 27.92 and 9.98.
Furthermore, SD of ADBL and RBBL is found to be 2.93 and 4.24 respectively and
the CV of ADBL and RBBL is found to be 10.50 and 42.46 respectively.
vi. The study reveals a comparative study on financial performance of ADBL and RBBL
with “CAMEL Model”. This study was based on secondary data by covering the
period of five years from fiscal year 2071/72 to 2075/76 which was analyzed by
calculating ratios related to CAMEL model. Financial tools and statistical tools were
used for the evaluation and comparison of the financial performance of these two
banks.
vii. The conclusion of this interpretation is that it would be important for the central bank
to strengthen further its prudential oversight of weak commercial banks and to take
prompt corrective measure to encourage banks to redress identified weaknesses.
Nevertheless, poorly rated banks appear to be providing financial services that are
otherwise lacking in the system and therefore central bank interventions must be
weighed against possible adverse impacts on the availability of bank credit.

4.7 Discussion
The study was conducted with objective to analyze the comparative financial performance of
selected commercial banks in Nepal i.e., ADBL and RBBL with CAMEL framework. Five-
year data from fiscal year 2071/72 to 2075/76 are covered in the study. The study is based on
secondary data and the data obtained were analyzed by using various financial tools. Overall,
the ADBL and RBBL performed well in terms of the components of CAMEL model. ROA,
ROE and CRR ratio of ADBL are better than RBBL. From this study, some of the ratio of
RBBL are better and some of the ratio of ADBL are better. But as a whole from major
findings ADBL is better commercial bank than RBBL. This study supports previous research
 49

works because in previous theses and research the major findings are similar. In previous
research also financial ratios analysis compares the financial performance among commercial
banks the same bank had different ranks under the different financial ratios.
 50

CHAPTER-5

SUMMARY AND CONCLUSION

5.1 Summary
The study was conducted with objective to analyze the comparative financial
performance of selected commercial banks in Nepal i.e., ADBL and RBBL with
CAMEL framework. Five-year data from fiscal year 2071/72 to 2075/76 are covered
in the study. The study is based on secondary data and the data obtained were
analyzed by using various financial tools. CAMEL is a technique of health checking
of financial institutions. The banks financial soundness is judged being based on some
factors such as capital adequacy, asset quality, management efficiency, earning
quality, liquidity position. So, I have taken ADBL and RBBL to judge financial
performance comparatively.

FIs are introducing complex and innovative products, they are exposed to many risks
and therefore more amplified as well as diversified the functions performed by the FI
supervision department. A key product of supervision is a rating of the FIs overall
condition, commonly related to as a CAMEL rating. CAMEL rating system is used by
the three federal banking supervisors [The Federal Reserve, FDIC and Office of the
controller of the Currency (OCC)] and other financial supervisory agencies to provide
a convenient summary of FI conditions at the time of exam. Various studies have been
conducted in the past on the financial analysis of commercial banks in the US and
other regions were found done. In context of Nepalese banking environment, there are
only few researchers conducted in the framework of CAMEL. The study analyzes the
comparative analysis of capital adequacy, non-performing loans, management quality
ratios, earning capacity and liquidity position components of the ADBL and RBBL
during of 5 years period FY 2071/72 to FY 2075/76. During the research the areas that
formed part of the research review were outline of sample banks concept of financial
performance analysis, concept of CAMEL rating system and component evaluation
system, Basel capital accord. Besides these, review of research paper, dissertations
and related reports were reviewed.

The research was conducted within the framework of descriptive and analytical
research design. For the study purpose, ADBL and RBBL was chosen as a sample by
applying convenience sampling as technique out of 27 commercial banks. The
 51

required data and information were collected from secondary sources. Financial ratios,
simple financial and statistical tools have applied by using Microsoft Excel to get the
meaningful result of the collected data in this research work.

The analysis of data and results are presented clearly and simultaneously by using
suitable tables and graphs.

5.2 Conclusion
The aim of the study is to make comparative analysis of the financial performance of
ADBL and RBBL by using CAMEL model for the period 2071/72 to 2075/76. The
specific objectives were to analyze the financial performance of selected banks by
applying CAMEL model, to examine the relationship of component of CAMEL rating
and ROE and ROA, and to compare the financial performance of selected banks by
applying CAMEL model.

To assess the performance of the bank is necessary to prepare the financial reports
usually consists of a balance sheet, income statement, cash flow statement, statement
of changes in equity and notes to the financial statement. Some ratios can show
organization situation in society and industry. There are some rating system to
demonstrate position and some special point to managers and all stakeholders.
CAMEL rating model is a model to confess that an organization where can be
successful and where has weaknesses.

In this study CAMEL rating method is used to choose important and effective
indicators in each category and then calculated ratios are compared with NRB
standard. “CAMEL” model can help managers to control and analyze financial data
and organizational position in banking industry.

Banks can use this method to calculate and discuss ratios and focus on some crisis and
find best solution when there is competitive problem and try to challenge and get a
new and better position between the others. In fact, the important aspect of CAMEL is
to compare the organization with the others in internal and external industry.

In conclusion, the finding of the study will be helpful to the management of selected
banks in making appropriate managerial decisions. The results of the study will also
assist both investors and shareholders to make informed decisions on their investment
in banks in Nepal.
 52

5.3 Implications
The following implications are made based on the following conclusions to overcome
the weakness as regard to financial performance of ADBL and RBBL.

i. This study shows that ADBL and RBBL have maintained sufficient amount of
capital to meet the probable risk arising from market, operation and credit
expansion.
ii. Overall, the ADBL and RBBL performed well in terms of the components of
CAMEL model.
iii. The study will be helpful to the management of selected banks in making
appropriate managerial decisions. The results of the study will also assist both
investors and shareholders to make informed decisions on their investment in
banks.
iv. The study faced constraints in term of getting data on other variables prescribed
in the CAMEL model such as number of employees, return on equity which was
not readily available from company website.
v. Further, the study focused only on both public sector banks by using convenient
sampling method. So, the results may not be applicable to all the commercial
banks. The researcher can increase the number of sample banks to get more
accurate results.
vi. A study in future with much larger sample of commercial banks in Nepal with
inclusion of all CAMEL ratios will provide a better picture on the performance of
commercial banks in Nepal.
vii. From the study, it was found that despite the limitations it provides an in depth
understanding of the financial performance of selected listed commercial banks
in Nepal of five years period. But the future researcher can increase the number
of fiscal years from five years to ten years to get the overall results by including
merger and acquisition.
viii. NRB being regulator of the commercial banks has a pivotal role in bank’s
performance, protection of shareholders interest and general public’s deposits.
Therefore, the NRB is advised to be effective in monitoring of the commercial
banks so that protection of shareholder and public interest is ensured. Both the
banks have maintained the cash reserve ratio above the NRB standard over the
study period. The NRB is advised to be effective in monitoring this requirement.
 53

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 56

Appendix
Table 4.1

Core Capital Adequacy Ratio

Year ADBL's CCAR (%) RBBL’s CCAR (%) NRB std. (%)

2071/72 15.17 10.16 6

2072/73 15.19 9.31 6
2073/74 18.61 9.15 6
2074/75 19.28 9.98 6
2075/76 19.27 12.31 6

Mean 17.50 10.18 6

S.D 2.13 1.26 0

C.V 12.21% 12.41% 0

Source: Annual Reports of ADBL and RBBL

Table 4.2
Supplementary Capital Adequacy Ratio

Year ADBL's SCAR (%) RBBL's SCAR (%)

2071/72 1.99 -
2072/73 1.99 1.14
2073/74 1.80 1.24
2074/75 1.05 1.48
2075/76 1.10 1.08
Mean 1.59 1.24
S.D 0.47 0.18
C.V 29.84% 14.26%
Source: Annual Reports of ADBL and RBBL
 57

Table 4.3
Capital adequacy ratio

Year ADBL's CAR (%) RBBL's CAR (%) NRB std. (%)
2071/72 17.16 10.16 10
2072/73 17.18 10.46 10
2073/74 20.41 10.39 10
2074/75 20.33 11.47 10
2075/76 20.37 13.39 10
Mean 19.09 11.17 10
S.D 1.75 1.34 0
C.V 9.18% 11.97% 0
Source: Annual Reports of ADBL and RBBL

Table 4.4
Non-performing loan ratio
Year ADBL's NPL (%) RBBL's NPL (%)
2071/72 5.35 5.35
2072/73 4.36 4.25
2073/74 4.60 3.77
2074/75 3.50 4.75
2075/76 3.29 4.79
Mean 4.22 4.58
S.D 0.84 0.60
C.V 19.91% 13.05%
Source: Annual Reports of ADBL and RBBL
 58

Table 4.5
Interest income to loan and advances
Year ADBL's IILA (%) RBBL's IILA (%)
2071/72 12.72 8.23
2072/73 12.09 8.32
2073/74 12.55 7.78
2074/75 13.93 9.20
2075/76 13.85 8.97
Mean 13.02 8.5

S.D 0.82 0.57

C.V 6.29% 6.79%

Source: Annual Reports of ADBL and RBBL

Table 4.6
Employee expenses to total operating expenses
Year ADBL’s EETOE RBBL’s EETOE
2071/72 42.28 50.95
2072/73 42.47 52.88
2073/74 39.53 46.96
2074/75 28.88 31.48
2075/76 24.72 30.57
Mean 35.57 42.56
S.D 8.22 10.75
C.V 23.12% 25.26%
Source: Annual Reports of ADBL and RBBL
 59

Table 4.7
Return on assets ratio
Year ADBL's ROA RBBL's ROA
2071/72 3.12 3.32
2072/73 2.32 1.42
2073/74 2.15 1.60
2074/75 2.71 1.85
2075/76 2.77 2.23
Mean 2.61 2.08
S.D 0.38 0.75
C.V 14.71% 36.22%
Source: Annual Reports of ADBL and RBBL

Table 4.8
Return on equity
Year ADBL's ROE RBBL's ROE
2071/72 36.82 69.46
2072/73 21.08 27.41
2073/74 12.60 26.53
2074/75 16.47 19.19
2075/76 17.11 23.39
Mean 20.82 33.20
S.D 9.44 20.53
C.V 45.34% 61.83%

Source: Annual Reports of ADBL and RBBL

 60

Table 4.9
Earnings per share (Rs.)
ADBL's
Year EPS RBBL's EPS
2071/72 78.83 57.07
2072/73 52.79 27.42
2073/74 31.59 32.32
2074/75 36.91 30.26
2075/76 42.88 56.04
Mean 48.6 40.62
S.D 18.64 14.65
C.V 38.36% 36.07%

Source: Annual Reports of ADBL and RBBL

Table 4.10
Cash reserve ratio
Year ADBL’s CRR (%) RBBL’s CRR (%)
2071/72 28.74 14.48
2072/73 23.33 14.09
2073/74 31.18 9.60
2074/75 29.15 5.29
2075/76 27.20 6.44
Mean 27.92 9.98
S.D 2.93 4.24
C.V 10.50% 42.46%
Source: Annual Reports of ADBL and RBBL