CHAPTER I

INTRODUCTION

1.1 Background of the Study

Credit risk is by far the most significant risk faced by banks and the success of their
business depends on accurate measurement and efficient management of this risk to a
greater extent than any other risk. It is a risk of financial loss if a borrower or
counterparty fails to honor commitments under an agreement and any such failure has
an adverse effect on the financial performance of the bank.

Credit risk can be explained as losses from the refusal or inability of credit customers
to pay what is owed in full and on time. It arises mainly from direct lending and
certain off-balance sheet products such as guarantees, letters of credits, foreign
exchange, forward contracts & derivatives and also from the bank’s holding of assets
in the form of debt securities. It may take the form of delivery or settlement risk. It is
critical to bank survival or failure because banks traditionally earn their huge profits
from interest on their risk exposures. The management of credit risk is a critical
component of a comprehensive approach to risk management and is essential to the
long-term success of a commercial bank.

Granting credit is one of the main sources of income (interest income) in commercial
banks and also a source of credit risk. Therefore, the management of the risk related
to that credit affects the profitability of the banks. A bank exists not only to accept
deposits but also to grant credit facilities, therefore inevitably exposed to credit risk.
Credit risk is the degree of value fluctuations in debt instruments and derivatives due
to changes in the underlying credit quality of borrowers and counterparties. Credit
risk management maximizes bank’s risk adjusted rate of return by maintaining credit
risk exposure within acceptable limit in order to provide framework for understanding
the impact of credit risk management on banks profitability.

The main source of credit risk includes, limited institutional capacity, inappropriate
credit policies, volatile interest rates, poor management, inappropriate laws, low

1
capital and liquidity levels, direct lending, massive licensing of banks, poor loan
underwriting, laxity in credit assessment, poor lending practices, government
interference and inadequate supervision by the central bank. An increase in bank
credit risk gradually leads to liquidity and solvency problems.

A sound credit risk management framework is crucial for banks so as to enhance

profitability and guarantee survival. The key principles in credit risk management
process are sequenced as follows: establishment of a clear structure, allocation of
responsibility, processes have to be prioritized and disciplined, responsibilities should
be clearly communicated and accountability assigned. Effective quantitative models
make it possible to numerically establish the factors that are important in explaining
default risk, evaluating the relative degree of importance of the factors, improving the
pricing of default risk, screening out bad loan applicants and calculating any reserve
needed to meet expected future loan losses. Even though credit risk remains the
largest risk facing most commercial banks, the practice of applying modern portfolio
theory to credit risk has lagged.

The importance of credit risk management to commercial banks cannot be

overemphasized and it forms an integral part of the loan process. Loan and advances
provided to borrowers may be at the risk of default, whereas banks extend the credit
on the understanding that borrowers will repay their loans. Some borrowers usually
default, and as a result, the bank's income decreases due to the need to increase loan
loss provisions for such loans. Where commercial banks do not have an indication of
what proportion of their borrowers will default, earnings will vary thus exposing the
banks to an additional risk of variability of their profits. Effective management of
credit risk can enhance banks goodwill and depositor’s confidence. Thus, good credit
risk policy is an essential condition for banks' performance and capital adequacy
protection.

Commercial banks are exposed to high risk loans. The higher is the accumulation of
unpaid loans implying that these loan losses have produced lower returns to many
commercial banks. Basel Committee on Banking Supervision (1999) asserts that
loans are the largest and most obvious source of credit risk, while other are found on

2
the various activities that the bank involved itself with. The indicators to measure the
credit risk management: capital adequacy ratio (CAR) and non-performing loans ratio
(NPLR), which are the main indicators used to assess the soundness of the banking
system (Bhawani and Bhanumurthy, 2012). Likely, Kurawa and Garba (2014) have
pointed out the credit risk management (CRM) indicators such as: default rate (DR),
credit deposit ratio (BS), and capital adequacy ratio (CAR) which influence banks'
profitability (ROA). However, every bank needs to identify measure, monitor and
control credit risk and also determining how credit risks could be lowered. This
means that a bank should hold adequate capital, control the non-performing loan and
maintain the appropriate cost per loan assets.

1.2 Problem Statement

Credit risk is accessed through analyzing the financial performance of commercial
banks in an attempt to mitigate impacts arising from credit defaults. The financial
health of the commercial banks depends on the possession of good credit risk
management dynamics. Commercial banks may have a keen awareness of the need to
identify, measure, monitor and control credit risk as well as to determine that they
hold adequate capital against these risks and that they are adequately compensated for
risks incurred.

Nepalese commercial banks have faced difficulties over the years for a multitude of
reasons, the major cause of serious banking problems continues to be directly related
to the relaxed credit standards for borrowers and counterparties, poor portfolio risk
management whereby they fail to determine the best asset combination to invest in,
which should have a negative correlation or lack of attention to changes in economic
or other circumstances that can lead to a deterioration in the credit standing of a
bank's counterparties thus, making them default in honoring their obligations as
regards repayment of the loans. However, in recent years, some policies have been
reformed to improve banks performance and some measures have been taken to
minimize on the negative effects of lending. They have focused on mergers to
increase capital requirement and lessened the competition.

3
Most of the Nepalese commercial banks are found to approve the loans that are not
well examined. This may lead to increase the loan defaults and non-performing loans.
Thus, the existing procedures for credit risk management are not adequate to compete
with the existing financial and economic challenges in Nepal.

There is need to investigate whether this investment in credit risk management is

viable to the banks. This study therefore seeks to answer following research
questions:
a) What is the impact of credit risk on performance of bank?
b) What are the indicators of banks’ financial performance (profitability)?
c) What is the relationship between bank performance and credit risk indicators?

1.3 Purpose of the Study

a) To analyze the impact of credit risk in performance of bank.
b) To identify the credit risk indicators of banks’ financial performance
(profitability).
c) To identify whether the relationship between bank performance and credit risk
indicator is positive or negative.

1.4 Hypothesis
A hypothesis is a proposed explanation for a phenomenon in order to draw and test its
logical or empirical consequences. Hypothesis was made to test the relationship
between dependent and independent variables. The hypotheses proposed in the study
are listed as follows:
Following hypothesis have been defined in the study:

H 0: There does not exist significant relationship between independent variables and
Dependent variables, i.e.
H01: Profitability not affected by Default risk.
H02: Profitability is not affected by Capital adequacy.
H03: Profitability is not affected by Cash reserve ratio.
H04: Profitability is not affected by Bank size.

4
H 1: There exist a significant relationship between independent variables and
dependent variables. i.e.
H11: Profitability is affected by Default risk.
H12: Profitability is affected by Capital adequacy.
H13: Profitability is affected by Cash reserve ratio.
H04: Profitability is affected by Bank size.

1.5 Limitations
Despite of the sincere efforts made in arriving at conclusions from the study, some
limitations deserve consideration in order to obtain reliable interpretation of the
results. The major limitations of the study are as follows:
a) The study is confined with the information of Nabil Bank Limited and Everest
Bank Limited, not all 28 commercial banks (FY 2017) of Nepal.
b) The study is made within limited timeframe, limited data and with lack of
research experiments.
c) The study covers the data of only six fiscal years.
d) The study mainly concentrates on those factors related with credit and lending
activities.

1.6 Definition of Terms

Credit Risk
Credit risk refers to the risk that a borrower may not repay a loan and that the lender
may lose the principal of the loan or the interest associated with it. Credit risk arises
because borrowers expect to use future cash flows to pay current debts; it's almost
never possible to ensure that borrowers will definitely have the funds to repay their
debts. Interest payments from the borrower or issuer of a debt obligation are a lender's
or investor's reward for assuming credit risk.

5
Risk Management
A separate risk management sub-committee has been established to identify, monitor
and protect the bank from potential risks associated with different activities of the
bank. Policies and regulations have also been formed and implemented to manage the
numerous risks associated with banking activities as well as other potential risks. The
bank has taken the policy to make the internal control system more effective and
efficient by properly managing the bank’s loans, operations, market and other risks.
The bank has executive’s management that formulates required policies, regulations,
and documentation related to loan management, customer recognition, stress test and
daily transactions activities.

Credit Risk Management

Credit risk management in financial institutions has become crucial for the survival
and growth of these institutions (Afriyie &Akotey, 2012, p. 3). It is a structured
approach of uncertainty management through risk assessment, development of
strategies to manage it and mitigation of risk using managerial resources (Afriyie
&Akotey, 2012, p. 3). The strategies of credit risk management involve
transferringrisk to other parties, avoiding risks, reducing the negative influence of risk
and accepting some or all of the consequences of a particular risk (Afriyie &Akotey,
2012, p. 3).

Commercial Bank
A commercial bank is a type of financial institution that accepts deposits, offers
checking account services, makes business, personal and mortgage loans, and offers
basic financial products like certificates of deposit (CDs) and savings accounts to
individuals and small businesses. A commercial bank is where most people do their
banking, as opposed to an investment bank.

Nepal Rastra Bank

NRB, the central bank of Nepal, established in 1956 under the Nepal Rastra Bank Act
1955 is the monetary, regulatory and supervisory authority of banks and financial
institutions. The new Nepal Rastra Bank Act 2002 which replaces the erstwhile Act
has ensured operational autonomy and independence to the Bank. Key objectives of

6
the Bank are to achieve price and balance of payments stability, manage liquidity and
ensure financial stability, develop a sound payments system, and promote financial
services. TheBoard of Directors, chaired by the Governor, is the apex body of policy
making and the Governor also discharges his duty as the chief executive of the Bank.
Information about the NRB including its policies, functions and activities can be
accessed through the menu at the left.

Everest Bank Limited

Everest Bank Limited (EBL) was established in 1994 and started its operation with a
view and objective of extending professional ideas and efficient banking services to
various segments of the society. EBL joined hands with Punjab National Bank (PNB)
as its joint venture partner in 1997. PNB is the largest nationalized bank in India
having presence virtually in all important centers. PNB was awarded with “IDRBT
banking Technology Excellence Award” under customer management and
Intelligence Initiatives.

Nabil Bank Limited

Nabil Bank Limited is the nation’s first private sector bank, commencing its business
since July 1984. Nabil was incorporated with the objective of extending international
standard modern banking services to various sectors of the society. Pursuing its
objective, Nabil provides a full range of commercial banking services through its 62
points of representation. In addition to this, Nabil has presence through over 1500
Nabil Remit agents throughout the nation.

Profitability
Profitability ratios are a class of financial metrics that are used to assess a business's
ability to generate earnings compared to its expenses and other relevant costs incurred
during a specific period of time. For most of these ratios, having a higher value
relative to a competitor's ratio or relative to the same ratio from a previous period
indicates that the company is doing well.

7
Credit Risk Indicators
Credit risk indicators are used to indicate how risky an activity is. Credit risk
indicators are used by organizations to provide an early signal of increasing risk
exposures in various areas of the enterprise.

1.7 Organization of the Study

To make the study precise and attractive in presentation, this research work has been
divided into five chapters namely Introduction, Review of literature, Research
Methodology, Presentation and analysis of data, Summary, Conclusion and
Recommendation.

Chapter-I: Introduction
In the section, we have provided a brief introduction to our research topic. It includes
the problem background which introduces general knowledge according to our
research topic and previous research for a better understanding to the readers. We also
present our research question and purpose with the analysis of the contribution and
limitation. In the last is the reason for the choice of subject and chapter layout.

Chapter-II: Review of literature

The second chapter incorporates that the conceptual thoughts and related study
regarding the subject matter. This chapter assures readers that they are familiar with
important research that has been carried out in similar areas previously. It also
establishes that the study as a link in a chain of research that is developing and
emerging knowledge about concerned field. This section reviews the related
literatures and available studies, written by different writers, experts and researcher.

Chapter-III: Research Methodology

In this chapter, we present our practical research methodology in a statistical manner.
We discuss more information of the data, including the sample, population as well as
time horizon. Then we introduce detailed methods of data collection and explain the
hypothesis according to the research questions. Finally, we introduce the main
concepts of statistical tests such as variables, multivariate regression analysis, R
square, multicollinearity

8
Chapter-IV: Results & Discussion
This chapter shows the result from the last chapter from two perspectives. We firstly
present all descriptive statistics of variables and illustrate the distribution of sample
banks according to total assets and countries. Then we present the regression result of
all statistical tests and find the feature of these results.

Chapter-V: Conclusion and Implications

The last chapter named as “Summary, Conclusion and Recommendation” is followed
by the basic conclusion of the study based in the fourth chapter. On the basis of the
summary, conclusion is taken out and recommendation has also been presented for
consideration.

9
 CHAPTER TWO
RELATED LITERATURE AND CONCEPTUAL FRAME

Review of literature is an integral and mandatory process in any research work. It

means reviewing research studies or other relevant propositions in the related area of
the study so that all the past studies, their conclusions and deficiencies may be known
and further research can be conducted. The main reason for full review of research in
the past is to know the outcomes of successfully, and to avoid investigating problems.
In this process effort has been made to examine and review some of the related books,
articles published in different economic journals, bulletins, dissertation papers,
magazines, newspapers and websites.

2.1 Literature Review

Some of the recent studies related to the credit risk and commercial banks
profitability have been presented in the following table:

Table 1: Articles and their key findings.

Date Article Name Key Findings
2010 “Credit risk management and The bulk of the profits of commercial
profitability of commercial banks are not influenced by the
banks in Kenya.” – Anjela M. amount of credit and non-performing
Kithinji loans, therefore suggesting that other
variables other than credit and non-
performing loans impact on profits.
2011 “Impact of credit risk on the Credit risk management has a
profitability of Nigerian banks.” significant impact on profitability of
– Kargi Nigerian banks and concluded that
banks profitability is inversely
influenced by the levels of loans and
advances, non-performing loans and
deposits thereby exposing them to

10
 great risk of liquidity and distress.

2012 “Impact of credit risk Credit risk management is crucial on

management on financial the bank performance since it have a
performance of commercial significant relationship with bank
banks in Nepal.” -Ravi Prakash performance. In order to reduce risk on
Sharma Poudel loans and achieve maximum
performance the banks need to allocate
more funds to default rate management
and try to maintain just optimum level
of capital adequacy.
2013 “Credit risk and commercial It has been witnessed that the increase
banks performance in Tanzania: in credit risk tends to lower firm
A Panel data analysis.” - performance, both indicators have
IndiaelKaaya and Dickson produced the negative coefficients
Pastory which tends to lower profit level.
2014 “Bank Specific Determinants of The credit growth and bank size have
Credit Risk: Empirical negative and statistically significant
Evidence from Ethiopian impact on credit risk; however,
Banks.” - operating inefficiency and ownership
TilahunAemiroTehulu, have positive and statistically
DugasaRafisaOlana significant impact om credit risk.

11
2015 “Credit risk management in Banks profitability is inversely
commercial banks.” – Chinwe. influenced by the levels of loans and
L. Duaka advances, non-performing loans and
deposits. Improper credit risk
management reduce the bank
profitability, affects the quality of its
assets and increase loan losses and
non-performing loan which may
eventually lead to financial distress.
One direct way is to assess the degree
of credit crunch by isolating the
impact of supply side of loan from the
demand.
2015 “The effect of credit risk Credit risk management indicators
management on financial have a significant effect on financial
performance of the Jordanian performance of the Jordanian
commercial banks.” -Ali commercial banks.
Sulieman Alshatti
2016 “The impact of credit risk There is an inverse and statistically
management on the financial insignificant relationship between
performance of Ethiopian capital adequacy ratio and return on
commercial banks.” - equity. There exists an inverse and
ShoborGudetaRundassa, insignificant association between asset
Professor (Dr) [Link] quality and return on equity. There is
a positive and significant relationship
between management soundness and
log of return on equity. There is a
positive but insignificant relationship
between earnings and return on
equity. There is a negative but
significant relationship between
liquidity ratio andreturn on equity.

12
2016 “The relationship between The article investigates the relationship
credit risk and the performance between credit risk and the
of banks.” - Shamim performance of banks in Tehran Stock
Kabiriharzevili and Ebrahim Exchange. The results showed that
Chirani there is a significant negative
relationship between the ratio of
doubtful receivables in the banks and
total assets turnover
2016 “The effect of credit risk on the The results from the estimated
profitability of commercial regression models show that non-
banks.” – Yuga Raj Bhattarai performing loan ratio is significantly
positively associated with banks
profitability, capital adequacy ratio is
found significantly negatively
associated to profitability and cost per
loan assets seems minimal in
explaining the variation of
commercial banks profitability.
2016 “Relationship between Credit Portfolio at risk (non-performing loan
risk management and financial ratio) and loan loss provision coverage
performance: empirical ratio had a strong relationship with
evidence from microfinance both return on average assets and
banks in Kenya.” - Simeyo return on average equity performance
Otieno, Michael Nyagol, measures. Credit risk management
ArvinlucyOnditi impacts performance of microfinance
banks in Kenya.

Ahmed, Takeda and Shawn (1998) have found that loan loss provision has a
significant positive influence on non-performing loans. Therefore, an increase in loan
loss provision indicates an increase in credit risk and deterioration in the quality of
loans consequently affecting bank performance adversely.

13
Mekasha (2001) has investigated credit risk management and its impact performance
on Ethiopian Commercial Banks. The researcher used 10 years panel data from the
selected commercial banks for the study to examine the relationship between ROA
and loanprovision, non-performing loans and total assets. The study revealed that
there is a significant relationship between bank performance and credit risk
management.

Ahmad and Ariff (2007) have examined the key determinants of credit risk of
commercial banks on emerging economy banking systems compared with the
developed economies. The authors found that regulation is important for banking
systems that offer multiproduct and services; management quality is critical in the
cases of loan-dominant banks in emerging economies. An increase in loan loss
provision is also considered to be a significant determinant of potential credit risk.
The authors further asserted that credit risk in emerging economy banks is higher than
that in developed economies.

Ben-Naceur and Omran (2008) in an attempt to examine the influence of bank

regulations, concentration, financial and institutional development on commercial
banks‟ margin and profitability in Middle East and North Africa (MENA) countries
from 1989- 2005 have found that bank capitalization and credit risk have positive and
significant impact on banks net interest margin, cost efficiency and profitability.

Felix and Claudine (2008) have investigated the relationship between bank
performance and credit risk management. It could be inferred from their findings that
return on equity (ROE) and return on assets (ROA) both measuring profitability were
inversely related to the ratio of non-performing loan to total loan of financial
institutions thereby leading to a decline in profitability.

Al-Khouri (2011) has examined the impact of bank’s specific risk characteristics, and
the overall banking environment on the performance of 43 commercial banks
operating in 6 of the Gulf Cooperation Council (GCC) countries over the period
1998-2008. Using fixed effect regression analysis, results showed that credit risk,
liquidity risk and capital risk are the major factors that affect bank performance when

14
 profitability is measured by return on assets while the only risk that affects
profitability when measured by return on equity is liquidity risk.

Chen and Pan (2012) have examined the credit risk efficiency of 34 Taiwanese
commercial banks over the period 2005-2008. Their study used financial ratio to
assess the credit risk and was analyzed using Data Envelopment Analysis (DEA). The
credit risk parameters were credit risk technical efficiency (CR-TE), credit risk
allocative efficiency (CR-AE), and credit risk cost efficiency (CR-CE). The results
indicated that only one bank is efficient in all types of efficiencies over the evaluated
periods. Overall, the DEA results show relatively low average efficiency levels in
CR-TE, CR-AE and CR-CE in 2008.

Epure and Lafuente (2012) have assessed bank performance in the presence of risk
for Costa-Rican banking industry during 1998-2007. The results showed that
performance improvements follow regulatory changes and that risk explains
differences in banks and non-performing loans negatively affect efficiency and return
on assets while the capital adequacy ratio has a positive impact on the net interest
margin.

Fredrick (2012) has analyzed the impact of credit risk management on the financial
performance of commercial banks in Kenya. The study has used CAMEL model as a
proxy for credit risk management. The author found that the strong impact of
CAMEL (credit risk components) on the financial performance of commercial banks.
.
Kurawa and Garba (2014) have assessed the effect of credit risk management on the
profitability of Nigerian banks. The study covered the period from 2002 to
[Link] data of 6 commercial banks were used for the study. The findings of
the study reveal that non-performing loan ratio and cost per loan assets have
significant positive relationship with profitability (ROA).

Kodithuwakku (2015) has examined the impact of credit risk management on the
performance of the commercial banks in Sri Lanka using both primary and secondary
data. The return on assets (ROA) was used as performance indicator and loan

15
provision to total loan (LP/TL), loan provision to non-performing loans (LP/NPL),
loan provision to total assets (LP/TA) and non-performing loans/ total loans
(NPL/TL) were used as indicators of credit risk. The result concludes that
nonperforming loans and provisions have an adverse impact on the profitability.

Lalonhave (2015), has investigated about the CRM practice of banks. It describes
about the theoretical framework, importance, process, advantage and challenges of
CRM. It also describes the CRM practice and performance of BBL. Finally, it tries to
find if there is a relationship between CRM performance and banks profitability. All
these analysis is described on the perspective of BASIC Bank limited, Bangladesh.
Olamide, Uwalomwa and Ranti (2015) have investigated the impact of effective risk
management on bank’s financial performance using the data of 14 banks listed on the
floor of the Nigerian Stock Exchange over a period of 2006 to [Link] results of
their study show that there exists a negative non-significant relationship between risk
management proxies and bank’s performance as captured with return on equity. The
authors conclude that the increased drive for the management of risk poses a limit on
the earning capacity of Nigerian banks.

Abubakar, Shaba, Ezeji and Ahmad (2016) have examined the effect of credit risk
management on bank performance in Nigeria over the period 2000 through 2013
using a sample of 14 Deposit Money Banks quoted on the Nigerian Stock Exchange.
The study has adopted panel regression estimation technique to analyze the data. The
findings from the regression model show that credit risk management indicators
impact significantly on bank performance in Nigeria. The authors conclude that the
increase in loans and advances, equity capital and bank size positively contribute on
the performance of Deposit Money Banks in Nigeria.

2.2 Theoretical Review

Banks involve businesses of taking and managing risks. The management of banking
risks have become more important to financial stability and economic growth in
modern economies (Ferguson, 2003, p. 395). And under the condition that Latin-
American debt crisis has hit the economy heavily, the Basel Committee, backed by
the G10 Governors, “resolved to halt the erosion of capital standards in their banking

16
systems and to work towards greater convergence in the measurement of capital
adequacy. This resulted in a broad consensus on a weighted approach to the
measurement of risk, both on and off banks’ balance sheets” (BCBS, 2013, p.2).

Basel I: The Basel Capital Accord

On December 1987, a capital measurement system which referred to the Basel
Capital Accord (or the 1988 Accord) was approved by the G10 Governors and later
released to banks in July 1988 (BCBS, 2013, p. 2). The Accord has two fundamental
roles. The first one is the promotion of soundness and stability of the international
banking system by encouraging international banking organizations to improve their
capital positions. And the second one is to provide fairness for competitions among
banks (Patricia, 1999, p. 1). It was signed by all 12 members of Basel Committee and
paved the way for a significant increase in the resources banks devote to measure and
managing risks (Hull, 2012, p. 258).

The Accord required a minimum capital ratio of capital to risk-weighted assets of

8%to be implemented by the end of 1992 (Ferguson, 2003, p. 396). More specifically,
in order to determine the bank’s risk-weighted assets, different types of assets are
weighted according to the level of perceived risks that each type of asset presents, and
each off-balance-sheet exposure must be calculated to its equivalent amount of assets
and weighted as that type of asset must be weighted (Ferguson, 2003, p. 396). In this
Basel Accord, the risk-weighted-assets concern only with credit risk and addressed
other risks only implicitly (Ferguson, 2003, p. 396). Another important issue related
to the capital itself. The capital had two components, Tier 1 capital and Tier 2 capital.
The participants agreed to global capital standards: Tier 1 capital was to be applied to
all international banks equally and Tier 2 capital was to be tailored to each country’s
unique domestic banking system (Maurice, 2004, p. 22).

However, the Accord has been criticized by its simplicity and to some extent arbitrary
(Ferguson, 2003, p. 396). For example, it has only assigned four risk weights to
different asset categories. That is to say, loans that are assigned same risk weighted
could have different credit qualities (Ferguson, 2003, p. 396). For example, all loans
by a bank to a corporation have a risk weight of 100% and require the same amount

17
of capital. A loan to an AAA credit rating corporation should need the same amount
of regulatory capital as the loan to a BB credit rating corporation. This kind of limited
differentiation indicated that the calculated capital ratios could be uninformative and
may provide misleading information about bank’s true capital adequacy (Ferguson,
2003, p. 396). Moreover, the limited differentiation has created incentives for banks
to get into arbitrage activities and take advantage by selling, securitizing risky assets
(Ferguson, 2003, p. 396 & 397). Banks therefore can otherwise avoid exposures for
which required capital is higher than the market requires and pursues those for which
the capital requirement is lower than the market would apply to those assets
(Ferguson, 2003, p. 396 & 397). As a result, some banks can hold too little capital for
their risky assets even though they have met the 8% risk-weighted-assets requirement.

1996 Amendment
In order to address risks other than credit risk, which is the main focus of Basel I
(Basel Accord), the Basel committee issued a consultative document to amend the
Basel Accord. This became known as the “1996 Amendment”, which should be taken
effect at least at the end of 1997 (BCBS, 2013, p.2). The amendment involves
keeping capital for the market risks associated with trading activities including
foreign exchange, traded debt securities, equities, commodities and options (Hull,
2012, p.265). An important aspect of this amendment is that banks are allowed to use
internal value-at-risk models as a basis to calculate the capital they need to keep to
absorb losses resulted from market risks, subject to both strict quantitative and
qualitative standards (BCBS, 2013, p.3).

Basel II
There have been significant developments in the theory and practice of measuring and
managing risks since the implementation of Basel I. A lot of new financial
instruments, such as credit derivatives, have improved banks’ ability to control and
mitigate risks from trading activities (Lind, 2005, p. 23&24). Besides, there has been
a rapid development towards larger and more complex banking groups with broader
operations, from a global perspective (Lind, 2005, p. 23&24). Thus, a thoroughly
revised framework for capital requirements was necessary. A new framework for

18
bank capital was introduced in 2004 and should be implemented in 2007 and applied
to “internationally active” banks. The Basel II is built on three pillars:

1. Minimum Capital requirement

2. Supervisory Review
3. Market Discipline

Pillar 1 addresses the minimum capital requirement, that is, the rule which a bank
calculates its regulatory capital. The minimum required capital ratio (8%) remained
unchanged under Basel II while the way to calculate the risk-weighted-assets has
been changed. Specifically, Basel II made extensive changes to the treatment of credit
risk. It specified three approaches to measure the credit risk: the standardized
approach for banks that are not sophisticated which is similar to Basel 1 but
containing more risk weights, the internal ratings based (IRB) approach meaning the
risk weights and the capital requirements are partly based on the individual bank’s
internal estimates, the advanced IRB approach which an even larger part of the capital
requirements is influenced by the banks’ own calculations (Ferguson, 2003, p. 398;
Lind, 2005, p.27&28).

As to the Pillar 2 of Basel II, it concerns with the supervisory review process and has
been a supplement to the minimum capital requirement. Therefore, it requires a
regular interaction between banks and supervisors in the assessment and planning of
capital adequacy (Lind, 2005, p.30). The last pillar seeks to complement these
activities through a stronger market discipline by disclosure of bank’s key
information of risk assessment procedures and capital adequacy (Ferguson, 2003, p.
398). This, to some extent, could enable market participants to assess the bank’s risk
profile and level of capitalization.

Basel III
The lesson from the financial crisis which began in 2007 has reminded regulators of
the existence of moral hazard and forbearance in bank regulation (Feess& Hege,
2012, p.1043). Many banks failed during the crisis while many others, including some
of the largest banks in the world, only survived by the substantive government

19
“bailout” (Feess& Hege, 2012, p.1043). As a result, the Basel Committee realized
that the prudential regulation of banks has come under renewed scrutiny and a major
overhaul of Basel II was on the call. This led to the new Basel III Accord with
enormously stricter capital requirements and new rules. The Basel III framework
imposes tighter capital ratios and new criteria, but majorly follows the direction
adopted by the Basel II Accord. However, the capital requirements became more
accurate which subject to the true credit risk afforded by each individual bank asset
(Feess& Hege, 2012, p.1044). According to Hull (2012), the final version of Basel III
was published in 2009 and there are six parts in the regulations:

1. Capital definition and requirements

2. Capital conservation buffer
3. Countercyclical buffer
4. Leverage ratio
5. Liquidity ratio
6. Counterparty credit risk

The crisis demonstrated that credit losses and write-downs come out of retained
earnings, which is part of banks’ tangible common equity base (BCBS, 2011, p.2).
Besides, the inconsistency in the definition of capital across jurisdictions and the lack
of disclosure that could have enabled the market to fully assess and compare the
quality of capital between institutions are other aspects that need to be considered
during the crisis (BCBS, 2011, p.2). Therefore, the new Basel Accord requires that a
bank's total capital should consist of Tier 1 equity capital (at least 4.5% of risk-
weighted-assets at all times), additional Tier 1 capital and Tier 2 capital. Tier 1 capital
includes share capital and retained earnings but does not includes goodwill or
deferred tax assets (Hull, 2012, p. 290). The additional tier 1 capital then consists of
non-cumulative preferred stocks which are previously tier 1 capital but are not
common equity. Tier 2 capital includes debt that is subordinated to depositors with an
original maturity of five years (Hull, 2012, p. 290).

Capital conservation buffer is designed to ensure that banks build up capital buffers
outside periods of stress which can be used to absorb losses when things happen

20
(BCBS, 2011, p.54). Countercyclical buffer aims to ensure that banking sector capital
requirements take account of the macro-financial environment in which banks operate
(BCBS, 2011, p.57). In addition, Basel III requires a non-risk based leverage ratio
that is designed to act as a credible supplementary measure to the risk based capital
requirements (BCBS, 2011, p.61). Another major improvement of Basel III is that it
introduces a global liquidity standard including two liquidity ratios that are designed
to make sure banks can have sufficient high-quality liquid resources to survive under
acute stress scenarios. The two ratios are Liquidity Coverage Ratio (LCR) and Net
Stable Funding Ratio (NSFL) (BCBS, 2011, p.9). The last part of Basel III is the
CVA, which is the expected loss due to the possibility of a default by the
counterparty. Then the reported profit is reduced by the total of the CVAs for all
counterparties (Hull, 2012, p.295).

In the years before the Basle Accord, large banks in major countries seemed to hold
insufficient capital relative to the risks they were taking, especially in light of the
aggressive competition for market share in the international market (Federal Reserve
Release, 2002). According to the description of Basel Regulations, the development
has showed an important role of credit risk management in the banks’ operations. A
measure of credit risk in most banks that major in commercial lending and related
activities became the foundation of the Basle Accord. Therefore, capitals to absorb
risks are one of the most essential parts that banks need to consider. To harmonize the
different levels of approaches to capital among countries, capital ratios are introduced
to demonstrate the strength of the risk management. As a consequence, the inspiration
of the vital role of capital ratio has led us to use indicators to measure the strength of
credit risk management, which lays the foundation of our research.

2.3 Conceptual Framework

Conceptual framework is the inclusion of independent and dependent variables. It is
designed based on various studies.
The framework can be designed as follows:
Independent Variables Dependent Variable
a) Capital adequacy ratio Profitability
b) Non- performing loan ratio
a) ROA
c) Cash reserve ratio
b) ROE
d) Bank size
21
Dependent Variables

Profitability (PROF)
Profitability is an indicator of banks’ capacity to carry risk and/or increase their
capital. It indicates banks’ competitiveness and measures the quality of management
(Waifem, p. 16). Profitability is one of the key concepts in our research. This is due to
the topic of this research is about the relationship between the profitability and credit
risk management. Clear explanation to the profitability of commercial banks is crucial
for readers to understand the research procedure and meanings. In this section, we
will involve a specific discussion of profitability and two indicators (ROE and ROA)
of profitability in our research. The determinants of commercial banks' profitability
can be concluded into two categories, namely those that are management controllable
(internal determinants) and those are beyond the control of management (external
determinants) (Guru [Link], 1999, p.3; Kosmidou [Link], 2005, p.3). The internal
determinants reflect upon banks' management policy and decision concerning sources
and uses of funds management, capital and liquidity management and expenses
management (Guru [Link], 1999, p.3). This kind of profitability factors can be
examined by financial statements of commercial banks (Guru [Link], 1999, p.3). The
external factors are environment factors and firm-specific ones (Guru [Link], 1999,
p.4). This research mainly focuses on the analysis of internal determinants because
our purpose is to test the impact of credit risk management to firm’s profitability. The
determinants reflected upon credit risk management should be included into internal
policy and decisions which can be examined by financial statements. On the other
hand, bank’s decisions are also affected by external regulation, thus this research also
involves the consideration of external factors.

In addition, we use ratios as indicators to represent the profitability of banks. Guru et

al. (1999, p.7) indicate the advantages of using ratios. They mention that researchers
prefer to use ratios as measurement of profitability since they are inflation invariant
so that they will not be affected by changes in price level. Besides, banks are multi-
products firms and use ratio measures to eliminate problems associated with cross-
subsidization between products and services (Chirwa, 2003, p.567). However, it is
crucial to find the appropriate indicators to maintain the accuracy of our test. Due to

22
this problem, we consider DuPont system which has been widely recognized as an
efficient tool in the financial analysis literature. ROE is firstly decomposed into ROA
and equity multiplier (assets/equity). And ROA is decomposed into net profit margin
and total asset turnover. The profit margin allows the financial analysts to measure
the income statement. And total assets turnover provides financial analysts a measure
to evaluate the “assets” (left-hand side) of the balance sheet. And equity multiplier
presents the evaluation of the “liabilities and owners’ equity” (right hand side) of the
balance sheet (Alimazari, 2012, p. 89). Analysts can project the level of financial
structure of financial institutions based on this system (Alimazari, 2012, p. 88).
Therefore, DuPont system can provide financial analysts an efficient evaluation by
decomposing the most frequently used measure of profitability, ROE, to identify the
strengths and weaknesses of the banks’ performance (Saunders& Marcia, 2011, p23).
Based on the DuPont system, we prefer to choose ROE and ROA which are most
important as indicators of profitability.

ROE and ROA are commonly used as indicators of the profitability and financial
performance. Chirwa mentions that in the previous studies, various indicators are
used, including ROE, ROA and return on capital (ROC) (2003, p.567). Al- Khouri
(2011) assesses the risk and performance of Gulf Cooperation Council (GCG)
banking sector which involves ROA and ROE as dependent variables and credit risk,
liquidity risk, capital risk and bank size as the independent variables. This research
found a positive relationship between credit risk and ROA. And a significant
relationship between size of banks and ROA was also founded in the same study. Al
Khatib (2009) evaluated the financial performance of five Palestinian Commercial
Banks by using ROA, price-to book value of equity ratio and economic value added.
And his study found a positive correlation between ROA and the size of banks. In our
research, size of bank is not considered as the independent variable. But based on the
previous study, we consider it as control variable which we will discuss later in the
following chapters. Moreover, in the Tafri et al. (2009) test of financial risk’s
influence to the profitability of Malaysian commercial banks also uses ROA and ROE
as indicators of profitability. Ruziqa (2013) developed the similar topic to the
Indonesian Conventional Banks by still using ROA and ROE to represent the
financial performance. Among all the measurements, ROA and ROE are the major

23
ones (Ongore&Kusa, 2013, p. 239; Chirwa, 2003, p.567). As previous studies that we
list before, ROE and ROA are commonly used as the indicators of profitability.
Hence, in our research, we will use ROA and ROE as our profitability measures.

Independent Variables

Capital adequacy ratio (CAR)

Capital adequacy ratio (CAR) is defined as the ratio of capital to the risk-weighted
sum of bank’s assets. It measures the amount of a bank’s capital relative to the
amount of its risk weighted credit exposures. Capital-based regulation has become a
major issue in the banking industry after financial crisis in 2007 caused by subprime
mortgage problems. Losses on mortgages and other mortgage-related securities
significantly decrease the capital base of many banks. To keep the minimum capital
adequacy ratio and secure against underlying losses, capital-constrained banks began
to collect outstanding loans or became reluctant to grant new lending. The specific
calculation of capital adequacy ratio is estimated by dividing total capital by total
risk-weighted-assets.

Generally, two types of capital are measured for use in capital adequacy ratio. Tier 1
capital can absorb losses without a bank being required to cause trading such as
ordinary share capital. Tier 1 capital is essential because it safeguards the survival of
the bank and the stability of the financial system. Tier 2 capital absorbs losses in the
event of a winding-up and provides a lower level of protection to depositors. For
example, subordinated debt means that the subordinated debt holders will only be
repaid after all other creditors have been repaid. Capital adequacy ratios are critical to
make sure that banks have enough cushion to absorb a reasonable amount of losses
before they become insolvent and consequently lose depositors’ funds. Capital
adequacy ratios ensure the efficiency and stability of a nation’s financial system by
lowering the risk of banks becoming insolvent. If a bank is declared insolvent, this
shakes the confidence in the financial system and unsettles the entire financial market
system. During the process of winding-up, funds belonging to depositors are given a
higher priority than the bank’s capital, so depositors can only lose their savings if a
bank registers a loss exceeding the amount of capital it possesses. Thus, the higher the

24
bank’s capital adequacy ratio, the higher the degree of protection of depositor's
monies. Capital adequacy increases the strength of the bank which improves the
solvency of the bank and capacity to absorb the loan loss and protect bank from
bankruptcy.

However, Poudel (2012) found significant negative association between capital

adequacy ratio and bank performance in Nepalese context. Likely, Djan, Stephen,
Bawuah, Halidu and Kuutol (2015) also found that capital adequacy ratio has an
inverse impact on banks performance. In this scenario, a negative relationship is
expected between capital adequacy ratio and bank profitability.

Non-performing loan ratio (NPLR)

An extraordinary meltdown of banking sector during 2007 led to many banks’ severe
loss on credit portfolios (Boudriga, 2009, p. 286). Many banks experienced failure
and global financial markets faced systemic crisis. The experience of crisis increases
further concerns on financial system stability and the need for better control and
supervision on lending activities and institutions, Diversified and periodical
assessments are made to timely predict undesirable exposure (Boudriga, 2009, p.
286). The aggregate rate of non-performing loans (NPLs) is commonly measured as a
soundness indicator (Boudriga, 2009, p. 286). A loan is normally defined as non-
performing when customer’s payments are arrears (Kauko, 2012, p.196). Generally,
default can be defined in the following ways:

1) Non-payment of interest 90 days after the interest due date,

2) Non-payment of a loan 90 days after the loan maturity date,
3) Restructuring of the borrower’s loans,
4) Filing for bankruptcy,
5) The appointment of administrators,
6) Liquidation, and so on.

Late payment is often characterized a non-performing loans (NPLs) rather than a

defaulted loan if the borrower is still undertaking business (Choudhry, 2011, p. 131).
Nevertheless, at some point, irrespective of the state of the borrower, an NPL will be
25
written off as a default loss (Choudhry, 2011, p. 131). The write-down which must be
funded out of the bank’s capital is often at 100% of outstanding notional value. The
bank might recover a percentage but at some later date (Choudhry, 2011, p. 131).
NPLR is a financial soundness indicator which demonstrates the quality of bank loans
(Park, 2012, p. 909). The quality of bank loans plays an essential role in the overall
43 bank soundness because one of the core activities of banking institutions is to
make loans even though its importance has been gradually decreasing over the past
decades (Park, 2012, p. 909). According to Yang, NPLRs can adversely influence the
efficiency of risk management and investment (2010, p. 2019). Commercial banks
expose themselves to the risk of default from loan borrowers. Quality credit risk
assessment, risk management and creation of adequate provisions for bad and
doubtful debts can reduce the banks credit risk (Kwambai&Wandera, 2013, p. 169).
When the level of non-performing assets is high, the assets provisions made are not
adequate protection against non-performing loan ratio (Kwambai&Wandera, 2013, p.
169).

The determinants factors of NPLs can be attributed to both macroeconomic

conditions and banks’ specific factors. Rinaldi and Sanchis-Arellano (2006) has
found that disposable income, unemployment and monetary conditions have strong
impacts on NPLs. And Berge and Boye found that problem loans are highly sensitive
to the real interest rates and unemployment in the Nordic banking system (2007,
p.65). Lawrence (1995) examines a model and introduces explicitly the probability of
default. This model indicates that borrowers with low income have higher rates of
defaults because of increased risk of facing unemployment and being unable to settle
their obligation. Rinaldl and Sanchis-Arellano extend the Lawrence’s model through
assuming that agents borrow in order to invest in real or financial assets (2006, p. 5).
And they argue that the probability of default depends on current income and the
unemployment rate which is linked to the uncertainty of future income and lending
rates. Klein also finds NPLs are sensitive to bank-level factors. Better level of the
bank’s management which is measured by the profitability in previous period
generates smaller NPLs (2013, p.20). Excessive risk taking valued by loans-to assets
ratio and growth rate of bank’s loans lead to higher NPLs in the subsequent periods.
And these bank-level effects are significant during both the pre-crisis and post-crisis

26
periods (Klein, 2013, p.20). Conclusively, the relationship between risk management
and profitability will be summarized in this paragraph. Profit is the ultimate goal of
commercial banks so that all strategies designed and activities performed are meant to
realize this grand objective (Ongore&Kusa, 2013, p. 239). Improving financial
performance requires improved functions and activities of commercial banks
(Nimalathasan, 2008, p. 141). However, when a bank increases and maximizes its
profit, it must either increase risk or lower its operating cost (Ruziqa, 2013, p. 94).
Koch and MacDonald (2000) argue that a bank’s profitability will generally vary
directly with the riskiness of its portfolio and operations. As a result, in order to
increase the return, banks need to know which risk factors have greater impact on
profitability which eventually leads to bank financial performance. And as we
mentioned in previous section, credit risk is the most significant factors for
commercial banks. This means the probability where the credit risk influences the
profitability is large. According to Tafri et al. (2009, p. 1),risk management is
important both for banks and policy makers because a strong banking system can
promote financial stability of a country and increase economy’s resilience in facing
economy crisis. Therefore, the study and measure of effect of risk management to
bank’s profitability are crucial for financial institutions.

Kurawa and Garba (2014), Alshatti (2015) have found significant positive
relationship between non-performing loan ratio and profitability. However, Poudel
(2012), Kaaya and Pastory (2013) and Djan, Stephen, Bawuah, Halidu and Kuutol
(2015) found significant negative association between non-performing loan (non-
performing loan ratio) and profitability of commercial banks. Likely, Kodithuwakku
(2015) has also asserted that nonperforming loans and provisions have an adverse
impact on the profitability. In line with majority of past empirical evidences, a
negative relationship is expected between non-performing loan ratio and bank
profitability

Cash reserve ratio (CRR)

Cash reserve ratio is one of the control variable used in analyzing effect of credit risk
on the performance of banks. Traditionally, cash reserve ratio (CRR) has been one of
the monetary tools in the hands of the central bank. Cash reserve ratio (CRR) is a

27
specified minimum fraction of the total deposits of customers which commercial
banks have to hold as reserves with the central bank. By changing CRR, the central
bank can control the amount of liquidity. If the reserve requirement is raised, banks
will have less money to loan out and this effectively reduces the amount of capital in
the economy, therefore lowering the money supply. It will mean less money for
investment and spending and would stunt the growth of the economy. It would also
mean that banks earn less interest and expect that their profitability may decline.
Moreover, cash reserve requirement does not earn any income for the commercial
banks and thus, may be viewed as a drain on the profitability of banks. The latest
monetary policy introduced by Nepal Rastra Bank (NRB) had slashed CRR to five
per cent for commercial banks, 4.5 per cent for development banks and four per cent
for finance companies to promote lending as on Mar 13, 2018 (Source:
ShareBazarNepal)

A number of empirical literatures have investigated the link between the changes in
cash reserve ratio (CRR) and bank profitability. ABID and LODHI (2015),
Maddaloni and Peydro (2011) and Yourougou (1990) have asserted that changes in
cash reserve ratio (CRR) have inverse impact banks profitability. However,
UREMADU (2012) has found a positive relationship between CRR and banks
profitability. Based on the theory and majority of the past empirical evidences, a
negative relationship is expected between cashreserve ratio (CRR) and banks
performance.

Bank Size (BS)

Bank size as measured by total assets is one of the control variables used in analyzing
performance of the bank system (Smirlock, 1985). Bank size is generally used to
capture potential economies or diseconomies of scale in the banking sector. This
variable controls for cost differences in product and risk diversification according to
the size of the financial institution. This is included to control for the possibility that
large banks are likely to have greater product and loan diversification. In most finance
literature, natural logarithm of total assets of the banks is used as a proxy for bank
size. The effect of bank size on profitability is generally expected to be positive
(Smirlock, 1985). Likely, a positive relationship between size and bank profitability

28
could be found if there are significant economies of scale (Akhavein et al. 1997;
Bourke 1989; Molyneux and Thornton 1992; Bikker and Hu 2002; Goddard et al.
2004). In view of theory and empirical evidences, a positive relationship is expected
between bank size and bank’s performance

2.4 Research Gap

The review of above literature has contributed to enhance the basic concept of credit
and commercial banks. Previous researches on credit risk management were limited
to the period until 2014/15. This research is extending the analysis up-to 2015/16.
Present study tries to define the credit management practice more elaborately. In this
research all ratios are categorized according to their area and nature. In this study
various financial tools and statistical tools are used for analyzing. The present study is
based on six years data of selected commercial banks, which tries to achieve its
objective by analyzing secondary sources of data. Thus, the earlier studies on these
issues need to be updated and validated because of many changes taking place in
Nepalese banking sector. The current study is a supplement to overcome the
weakness and limitation of previous studies.

29
 CHAPTER THREE
RESEARCH METHODS

This chapter deals with the research methodology employed in the entire aspect of the
study. Research methodology is the process of arriving at solution of the problem
through planned and systematic dealing with the collection, analysis and
interpretation of facts and figures. The research has been done on topic “Effects of
Credit Risk on Performance of Commercial Banks in Nepal (Everest Bank Limited
and Nabil Bank Limited)." In order to reach and accomplish the objectives of the
study, different activities will be carried out. In other words, research methodology
refers to the various methods of practices applied by the researcher in the entire
aspect of the study. This chapter includes the research design, population and sample,
nature and sources of data and analysis of data.

3.1 Research Design

A Research Design is the arrangement of condition for collection and analysis of data
in a manner that aims to combine relevance to the research purpose with economy in
procedure. Research design is the plan, structure and strategy of investigation
conceived to obtain answers to the research question and to control variances. To
achieve the objectives of the study, descriptive an analytical research design has been
used. Some statistical and financial tools have also been applied to examine facts and
descriptive techniques have been adapted. The study is based on secondary data. So,
the descriptive and analytical research designs have been used.

3.2 Population and Sample

The method of selecting for study of a small portion of the population to draw
conclusion about characteristics of the population is known as sampling. Here
“Purposive Sampling” method is applied for this research. A purposive sample is a
non-probability sample that is selected based on characteristics of a population and
the objective of the study. There are 28 commercial banks (FY ending 2017) which
are in operation in Nepal. Therefore, 28 commercial banks (FY ending 2017) are
taken as population and only two banks have been considered in this study.

30
 Sample Bank
• Everest Bank Limited
• Nabil Bank Limited
Total 28 commercial banks (FY ending 2017) are regarded as a population of the
study. It is not possible to cover the entire bank under the study. So, these two banks
are taken as sample. The reasons behind selecting these two banks as sample is, both
are very competitive in their capital, performance and profit. These two banks are
compared in market as per EPS, MPS and net worth as well. Other main reason is
available of data of these two commercial banks.

3.3 Sources of Data

The research is based on secondary source of data. All the adequate data are
collected from secondary sources. This refers to data that are already used and
gathered by others. Secondary data are mostly used for this research purpose.
Therefore, the major sources of secondary data are Annual Report of concern Bank,
internet, NRB directives, newspaper, journals, articles and various magazines.

3.4 Data Collecting Procedures

The annual reports of the concerned banks were obtained from their websites. The
main sources of data are annual report of concern financial institute. NRB
publications, such as banking and financial statistics, economic reports, annual
reports of NRB.

3.5 Tools and Techniques used

In this study, various financial and statistical tools have been used to achieve the
objective of the study. According to the pattern of data available, the analysis of data
will be done. The various tools applied in this study have been briefly presented as
under:
• Financial tools
• Statistical tools

31
3.5.1 Financial Tools
Financial analysis tools are one of the most efficient ways that can be used for
ensuring good profit from your investments. These financial analysis tools are highly
helpful in evaluating the market and investing in a way so as to maximize the profit
from the investments made. These financial analysis tools are useful for deciphering
both internal and external information related to a specific business organization.

a) Capital Adequacy Ratio (CAR)

The capital adequacy ratio (CAR) is a measure of a bank's capital. It is expressed as a
percentage of a bank's risk weighted credit exposures. Also known as capital-to-risk
weighted assets ratio (CRAR), it is used to protect depositors and promote the
stability and efficiency of financial systems around the world. Two types of capital
are measured: tier one capital, which can absorb losses without a bank being required
to cease trading, and tier two capital, which can absorb losses in the event of a
winding-up and so provides a lesser degree of protection to depositors.

Capital Adequacy Ratio (CAR) = (Tier 1 capital + Tier 2 capital)/ Risk weighted
assets
Where,
Tier 1 capital generally comprises:

1) The ordinary share capital (or equity) of the bank

2) Audited revenue reserve
3) Current year’s losses
4) Future tax benefits Intangible assets

Tier 2 capital generally comprises:

1) Upper Tier 2 ratio

2) Unaudited retained earnings
3) Revaluation reserves

32
4) General provisions for bad debts Perpetual cumulative preference shares (i.e.
preference share with no maturity date whose dividends accrue for future payment
even if the bank’s financial condition does not support immediate payment)
5) Perpetual subordinated debt Perpetual subordinated debt (i.e. debt with no
maturity date which ranks in priority behind all creditors 41 except shareholders)
6) Lower Tier 2 ratio Subordinated debt with a term of at least 5 years

Total RWA = credit risk RWA+ market risk RWA+ operational risk RWA
Where:
Credit risk RWA= 12.5* credit risk capital requirement
Market risk RWA =12.5* market risk capital requirement
Operational risk RWA =12.5* operational risk capital requirement

b) Non-performing loan ratio

NPLR is the ratio of non-performing loans to total loans. The equation can be defined
as:
NPLR == NPLs / Total loan
Where:
NPLR= Non-Performing Loan Ratio
NPLs= Non-Performing Loans.

c) Bank size (BS)

Bank size has been measured on many different grounds and it is said that it does not
matter which measure of firm size is used. One common measure that is proven the
most interchangeable to use as a measure for firm size is the natural log of total
assets.
BS = Bank size (natural logarithm of total assets) of ith bank in year t.
Where,
Natural logarithm: The natural logarithm of a number is its logarithm to the base of
the mathematical constant e, where e is an irrational and transcendental number
approximately equal to 2.718281828459. The natural logarithm of x is generally
written as ln x, loge x, or sometimes, if the base e is implicit, simply log x.

33
d) Return on Asset
ROA, which is the ratio of net income to total assets, measure how profitable and
efficient a bank' management is, based on the total assets (Guru [Link], 1999, p.7). As
mentioned in the equation of ROE, in the next step, ROA can be disintegrated into the
following equation
ROA = (Net profit ÷Total Operating Income) X (Total Operating Income ÷ Total
Assets)
Or, ROA = PM x AU

Where:
PM= Net income generated per rupees of total operating income.
AU= Amount of interest and noninterest income generated per rupees of total assets.
TA= Average total assets.

Therefore, higher value of PM and AU ratios generate higher ROA and ROE. PM
measures the capacity of bank on the expense controlling and expense control and
bank’s profit have positive relationship. AU values the bank’s capacity to generate
income from assets but high PM and AU value also demonstrate the potential risks.
For example, PM will have an improvement when a bank reduces its expense of
salaries and profits. While if the reduction of expense is due to the loss of high skilled
employees, the raise of PM and ROA might exist an underlying “labor quality”
problem (Saunders & Marcia, 2011, p. 25).

Therefore, higher value of PM and AU ratios generate higher ROA. PM measures the
capacity of bank on the expense controlling and expense control and bank’s profit
have positive relationship. AU values the bank’s capacity to generate income from
assets. But high PM and AU value also demonstrate the potential risks. For example,
PM will have an improvement when a bank reduces its expense of salaries and
profits. While if the reduction of expense is due to the loss of high skilled employees,
the raise of PM and ROA might exist an underlying “labor quality” problem
(Saunders & Marcia, 2011, p. 25).

34
e) Return on Equity
Return on equity (ROE) value the overall profitability of the fixed income per dollar
of equity (Saunders& Marcia, 2011, p. 23). It is defined as
ROE = Net profit / Shareholder's Equity
This measures the amount of net income after taxes earned for each dollar of equity
capital contributed by the bank’s shareholders. In general, stockholders of bank prefer
higher ROE. However, the increasing of ROE demonstrates the increasing risk. For
example, as the defined equation indicates if total equity capital decreases relative to
net income, ROE will have an increase under the constant of net income. A large drop
in equity capital may results in a violation of minimum regulatory capital standards
and increases the risk of insolvency for the banks (Saunders& Marcia, 2011, p. 24). In
order to identify potential problems, ROE can be decomposed into two component
parts,
ROE = (𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 ÷ 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡) 𝑋 (𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡 ÷ 𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦 𝐶𝑎𝑝𝑖𝑡𝑎𝑙)
or, ROE = ROA x EM
Where: ROA= Return on assets (a measure of profitability linked to the asset size of
bank)
EM= Equity multiplier (a measure of leverage)
*Net income is the profit after tax

3.5.2 Statistical Tools

Statistical methods involved in carrying out a study include planning, designing,
collecting data, analyzing, drawing meaningful interpretation and reporting of the
research findings. The statistical analysis gives meaning to the meaningless numbers,
thereby breathing life into a lifeless data. The results and inferences are precise only
if proper statistical tests are used.

a) Arithmetic Mean or Average(X̅)

An average is a single value that represents a group of value. It depicts the
characteristics of whole group. It is the representative of the entire mass of
homogeneous data, its value lies somewhere in between the two extremes, i.e. the

35
largest and smallest items. It is obtained by dividing the sum of the quantities by the
number of items. Thus,
∑X̅
Mean (X̅) = N

b) Standard Deviation (σ)

Standard deviation is the positive square root of the arithmetic average of the squares
of all the deviation measured from the arithmetic average of the series. It is
independent of the position of the origin.

∑(X−X̅)²
Standard Deviation (σ) =√ 𝑁

Where,
N= number of items in the series
X̅= mean
X= variable
c) Coefficient of Variation (C.V.)
The series (or group) for which the coefficient of variation is greater is said to be
more or conversely less consistent, less uniform, less stable and less homogeneous.
It is denoted by C.V. and is obtained by dividing arithmetic mean to standard
deviation. Thus,
σ x 100
Coefficient of Variation (C.V) = X̅

Where,
σ = Standard Deviation
X̅ = Mean

d) Multicollinearity
Considering CAR, NPLR and CRR are indicators of credit risk management, there is
a risk of multicollinearity. Multicollinearity happens when one or more explanatory
variables are highly linearly related to each other. Perfect multicollinearity means one
explanatory variable is a perfect linear function of any other explanatory variables,
which is fairly easy to avoid. Imperfect multicollinearity is defined as "a linear
functional relationship between two or more independent variables that is so strong
that it can significantly affect the estimation of the coefficients of the variables."

36
Multicollinearity will cause the variances and standard errors of the estimates to
increase and the t-scores to decrease. However, it will not bias the estimate and the
overall fit of the equation. In our research, we therefore will test the multicollinearity
of CAR, NPLR and CRR. If the r is high in absolute value, then the two variables are
quite correlated and multicollinearity is a potential problem. Some researchers pick an
absolute value of 0.80, and concern about multicollinearity when the correlation
coefficient exceeds 0.80.

e) Coefficient of correlation (r)

The coefficient of correlation is a number, which indicates to what extent the two
things (variables) are related to what extent variations in one go with the variations in
the other.
It is defined by Karl Pearson as:
N∑XY− ∑X∑Y
Coefficient of Correlation (r) =
√N∑X2 −(∑X)2√N∑Y2 −(∑Y)2

The value of r is such that -1 <r< +1. The + and – signs are used for positive
correlations and negative correlations, respectively.

Positive correlation: If X and Y have a strong positive correlation, r is close to +1. An

r value of exactly +1 indicates a perfect positive fit. A positive value indicates a
relationship between X and Y variables such that as value for X increases, value for Y
also increases. If r = +1, the slope of this line is positive.

Negative correlation: If X and Y have a strong negative correlation, r is close to -1.

An r value of exactly -1 indicates a perfect negative fit. A negative value indicates a
relationship between X and Y such that as value for X increases, values for Y
decreases. If r = -1, the slope of this line is negative.

No correlation: If there is no correlation or a weak correlation, r is close to 0. A value

near zero means that there is a random, nonlinear relationship between the two
variables. A correlation greater than 0.8 is generally described as strong, whereas a
correlation less than 0.5 is generally described as weak.

37
f) Coefficient of Determination (R2)
Coefficient of Determination measures only the strength of a linear relationship
between two variables. It refers to a measure of the total variance in a dependent
variable that is explained by its linear relationship to an independent variable. The R2
is defined as the ratio of explained variance to the total variance. Thus,
Explained Variance
Coefficient of Determination (R²) = Total Variance

g) Probable Error (P.E.) of Correlation Coefficient

The probable is the measurement of ascertaining the reliability of the value of
correlation of coefficient. It is used to test whether the calculated value of sample
correlation coefficient is significant or not. Probable error of correlation of coefficient
can be calculated by following formula:
1− r2
Probable Error (P.E) = 0.6745 x
√n

Where,
r = correlation coefficient
n = number of pairs of observation
If |r|>6P.E, then coefficient of correlation(r) is taken to be significant.
If |r|<P.E, then coefficient of correlation(r) is taken to be insignificant. This means
that there is no evidence of the existence of correlation on both the series.

h) Regression Analysis
Pooled data regression model has been used in the analysis. The technique of pooled
data estimation takes care of the problem of heterogeneity in the 2 banks selected for
the study. The econometric model employed in the study is given as:

Y = β0 + β Xit +εit

Where: Y is the dependent variable; β0 is constant; β is the coefficient of explanatory

variables; Xit is the vector of explanatory variables; and εit is the error term (assumed
to have zero mean and independent across the time period). By adopting the
prescribed econometric model, particularly to this study, the impact of credit risk

38
(controlling the effect of cash reserve requirement and bank size) on the performance
of the commercial banks has been estimated with the following regression equation:

ROAit = β0 + β1 CARit + β2 DRit + β3 CRR +eit

ROEit = β0 + β1 CARit + β2 DRit + β3 CRR +eit

Where:
ROAit =Return on assets of ithbank in year t
ROEit = Return on equity of ith bank in year t
CARit = Capital adequacy ratio of ith bank in year t
DRit= Default Risk of ith bank in year t
CRRit = Cash reserve ratio of ith bank in year t
Β0 = The intercept (constant)
β1, β2, β3= The slope which represents the degree with which bank performance
changes as the independent variable changes by one-unit variable.
eit = error component

According to Studenmud (2011, p.94), there are 7 assumptions to make for OLS
estimators to be best available:

1. The regression model is linear, is correctly specified, and has an additive error
term.
2. The error term has a zero population mean.
3. All explanatory variables are uncorrelated with the error term.
4. Observations of the error term are uncorrelated with each other (No serial
correlation).
5. The error term has a constant variance.
6. No explanatory variable is perfect linear function of any other explanatory
variables (No perfect multicollinearity).
7. The error term is normally distributed. (Optional)

39
i) Histogram
A bar chart or bar graph is a chart or graph that presents categorical data with
rectangular bars with heights or lengths proportional to the values that they represent.
The bars can be plotted vertically or horizontally. A vertical bar chart is sometimes
called a line graph.

A bar graph shows comparisons among discrete categories. One axis of the chart
shows the specific categories being compared, and the other axis represents a
measured value. Some bar graphs present bars clustered in groups of more than one,
showing the values of more than one measured variable.

40
 Chapter IV
Results and Discussion
4.1 Introduction
This chapter deals with the presentation, analysis and interpretation of relevant data
of Everest Bank Limited and Nabil Bank Limited in order to fulfill the objectives of
this study. To obtain best result, the data have been analyzed according to the
research methodology as mentioned in third chapter. The purpose of this chapter is to
introduce the data analysis and interpretation. With the help of this analysis, efforts
have been made to highlight the credit risk management of finance company as well
as other cases or problems of Everest Bank Limited and Nabil Bank Limited can be
visualized. For analysis, different types of analytical methods and tools such as
financial analysis and statistical analysis are used.

4.2 Descriptive analysis

The summary of the descriptive statistics for all variables used in the study is
presented in Table 2 for EBL and Table 3 for NABIL.

Table 2: Descriptive statistics of variables of EBL(n=6)

Std.
Variable Scale Mean CV Min Max
Deviation

ROA Percent 2.092 0.196 9.369 1.85 2.39

ROE Percent 24.49 3.814 15.574 20.58 31.53

CAR Percent 11.697 0.997 8.523 10.43 13.33

NPLR Percent 0.577 0.171 29.64 0.34 0.84

CRR Percent 16.625 13.851 83.314 9.55 24.27

Natural
BS 24.99 0.3114 1.246 24.56 25.48
logarithm

Source: Annual report of EBL from FY 2010/11 to 2015/16

41
Table 3: Descriptive statistics of variables of NABIL (n=6)
Std.
Variable Scale Mean CV Min Max
Deviation
ROA Percent 2.625 0.396 15.086 2.06 3.25
ROE Percent 28.057 3.231 11.516 22.71 32.78
CAR Percent 11.287 0.397 3.517 10.58 11.73
NPLR Percent 1.9 0.397 20.89 1.14 2.33
CRR Percent 9.177 2.993 32.614 4.9 14.15
Natural
BS 25.15 0.292 1.161 24.79 25.57
logarithm
Source: Annual report of NABIL from FY 2010/11 to 2015/16

Fig 1: Comparison of ROA between EBL and NABIL

In the case of ROA, EBL has the highest ratio in FY 2012/13 i.e. 2.39% and lowest
ratio in FY 2015/16 i.e. 1.85%. NABIL has the highest ratio in FY 2012/13 with
3.25% and lowest ratio in FY 2014/15 with 2.06%. Also, the coefficient of variation
of EBL and NABIL is 9.369% and 15.086% respectively with standard deviation of
0.196% and 0.396% respectively. From mean point of view, NABIL has maintained
higher ROA than EBL. In this way, it shows that NABIL is more profitable in
relation to its total assets compared to EBL.

42
Fig 2: Comparison of ROE between EBL and NABIL

In the case of ROE, EBL has the highest ratio in FY 2010/11 i.e. 31.53% and lowest
ratio in FY 2014/15 i.e. 20.58%. NABIL has the highest ratio in FY 2012/13 with
32.78% and lowest ratio in FY 2014/15 with 22.71%. Also, the coefficient of
variation of EBL and NABIL is 15.574% and 11.516% respectively with standard
deviation of 3.814% and 3.231% respectively. From mean point of view, NABIL has
maintained higher ROE than EBL. In this way, it shows that NABIL has generated
more profit with the money shareholders have invested compared to EBL.

Fig 3: Comparison of CAR between EBL and NABIL

43
In the case of CAR, EBL has the highest ratio in FY 2014/15 i.e. 13.33% and lowest
ratio in FY 2010/11 i.e. 10.43%. NABIL has the highest ratio in FY 2015/16 with
11.73% and lowest ratio in FY 2010/11 with 10.58%. Also, the coefficient of
variation of EBL and NABIL is 8.523% and 3.517% respectively with standard
deviation of 0.997% and 0.397% respectively. From mean point of view, EBL has
maintained higher CAR than NABIL. In this way, it shows that EBL has held more
amount of capital compared to NABIL as require by its financial regulator (NRB).

Fig 4: Comparison of NPLR between EBL and NABIL

In the case of NPLR, EBL has the highest ratio in FY 2011/12 i.e. 0.84% and lowest
ratio in FY 2010/11 i.e. 0.34%. NABIL has the highest ratio in FY 2011/12 with
2.33% and lowest ratio in FY 2015/16 with 1.14%. Also, the coefficient of variation
of EBL and NABIL is 29.64% and 20.89% respectively with standard deviation of
0.171% and 0.397% respectively. From mean point of view, NABIL has maintained
higher NPLR than EBL. In this way, it shows that EBL has more efficiency of the
loan portfolio management compared to EBL.

44
Fig 5: Comparison of CRR between EBL and NABIL

In the case of CRR, EBL has the highest ratio in FY 2014/15 i.e. 24.27% and lowest
ratio in FY 2010/11 i.e. 9.55%. NABIL has the highest ratio in FY 2014/15 with
14.15% and lowest ratio in FY 2010/11 with 4.9%. Also, the coefficient of variation
of EBL and NABIL is 83.314% and 32.614% respectively with standard deviation of
13.851% and 2.993% respectively. From mean point of view, EBL has maintained
higher CRR than NABIL. In this way, it shows that EBL seems to be able to maintain
higher level of certain percentage of total deposit in the form of cash reserve with the
central bank than NABIL.

Fig 6: Comparison of BS between EBL and NABIL

Bank Size
30
24.99 25.15
25

20

15 EBL
NABIL
10

5
1.246 1.161
0.3114 0.292
0
Mean Std. Dev CV

45
In the case of BS, EBL has the highest ratio in FY 2015/16 i.e. 25.458% and lowest
ratio in FY 2010/11 i.e. 24.557%. NABIL has the highest ratio in FY 2015/16 with
25.57% and lowest ratio in FY 2010/11 with 24.79%. Also, the coefficient of
variation of EBL and NABIL is 1.246% and 1.161% respectively with standard
deviation of 0.3114% and 0.292% respectively. From mean point of view, NABIL
has maintained higher BS than EBL. In this way, it shows that NABIL seems to be
able to have better performance compared to EBL.

4.3 Correlation analysis

In an effort to analyze the nature of the correlation between the dependent and the
independent variables and also ascertain whether or not multicollinearity exists as a
result of the correlation among variables, Pearson correlation analysis have been
computed.
Table 4: Correlation Matrix for the regression EBL (ROA)
Variables ROA CAR NPLR CRR BS
ROA 1
CAR -0.654 1
NPLR 0.249 0.039 1
CRR -0.449 0.817 0.5498 1
BS -0.618 0.922 -0.095 0.69 1
Source: Annual report of EBL from FY 2010/11 to 2015/16

The correlation matrix that is shown in Table 8 provides some insights into the
independent variables that are significantly correlated to the dependent variables
ROA and ROE of EBL. It indicates that ROA is significantly negative correlated with
CAR (-0.654) which indicates that if ROA increases CAR will decrease. Whereas,
ROA is significantly positive but weakly correlated with NPLR (0.249), CRR (-
0.449) and BS (-0618) are negatively correlated with ROA.

46
Table 5: Correlation Matrix for the regression EBL (ROE)
Variables ROE CAR NPLR CRR BS
ROE 1
CAR -0.801 1
NPLR -0.399 0.039 1
CRR -0.849 0.817 0.5498 1
BS -0.832 0.922 -0.095 0.69 1
Source: Annual report of EBL from FY 2010/11 to 2015/16

In terms of ROE, CAR is significantly negatively correlated with dependent variables

ROE (-0.802). Similarly, ROE and NPLR also have negative correlation (-0.399)
between them. Relationship between ROE and CRR is also negative (-0.8496).
Similarly, relation BS and ROE is also negative (-0.8316).
Researchers always prefer an absolute value larger than 0.8 to be enough to cause
multicollinearity (Studenmund, 2011, p. 258). Considering that there is presence of
multicollinearity between independent variable CAR-CRR (817), and CAR-BS
(0.922).
Table 6: Correlation Matrix for the regression NABIL (ROA)
Variables ROA CAR NPLR CLA BS
ROA 1
CAR -0.0303 1
NPLR 0.644 -0.3508 1
CRR -0.0963 0.486 0.3474 1
BS -0.5266 0.817 -0.6265 0.457 1
Source: Annual report NABIL from FY 2010/11 to 2015/16

The correlation matrix that is shown in Table 10 provides some insights into the
independent variables that are significantly correlated to the dependent variables
ROA and ROE of NABIL. It indicates that ROA is significantly negatively correlated
with CAR (0.0303). Similarly, ROA is significantly positive but moderately
correlated with NPLR (0.644) whereas ROA is significantly negatively correlated

47
with CRR (-0.0963) and ROA is significantly negatively correlated with BS (-
0.5266).

Table 7: Correlation Matrix for the regression NABIL (ROE)

Variables ROE CAR NPLR CLA BS
ROE 1
CAR -0.318 1
NPLR 0.5403 -0.3508 1
CRR -0.4411 0.486 0.3474 1
BS -0.7739 0.817 -0.6265 0.457 1
Source: Annual report of NABIL from FY 2010/11 to 2015/16
In terms of ROE, it is also significantly negatively correlated with independent
variables (0.318), whereas ROE and NPLR have positive and moderate relationship
(0.5403) between them. Similarly, ROE and BS have negative relation (-0.7739)
between them. Whereas relationship between ROE and CRR is also negative (-
0.4411).
There is presence of multicollinearity among the independent variables CAR and BS
(0.817).

4.4 Regression results

ROAEBL = a + b1 CAREBL +b2 NPLREBL + b3 CRREBL+ b4 BS
Table 8: Result of regression 1 (ROAEBL)
95% Confidence
Std. interval of the
Coefficients t Sig
Error difference
Lower Upper
CAR -0.02025 0.336633 -0.06014 0.957513 -1.46866 1.428171
NPLR 0.872254 1.187005 0.734836 0.538921 -4.23502 5.979527
CRR -0.0407 0.08326 -0.48885 0.673296 -0.39894 0.317535
BS 0.100108 0.129088 0.775501 0.519184 -0.45531 0.655529
R² = 0.99807 Adj.R² = 0.99614
Source: Annual report of EBL from FY 2010/11 to 2015/16

48
The table 8 presents the regression results of effect of credit risk on bank performance
(ROA). The value of R² are 0.99807 and Adj. R² 0.99614 respectively. This indicates
that 99.807% of the variation in bank performance can be explained by the variation
in the explanatory variables. The result indicates that, capital adequacy ratio is
negative but statically insignificant. The sign of the coefficient is unusual because
theoretically capital adequacy ratio was expected to have positive relationship with
bank’s performance (ROA). However, the finding of this study does not support the
hypothesis that capital adequacy ratio has aninsignificant effect on bank performance
(ROA). The result of NPLR is also not as we expected because it is positive and
statistically insignificant. Cash reserve ratio has been used as control variable in the
estimated regression model assuming that changes in cash reserve ratio (CRR) have
inverse impact in banks profitability (ROA). The result indicated that the coefficient
of cash reserve ratio is negative and statistically insignificant. The result of this study
reveals that cash reserve ratio does not significantly affect the performance (ROA) of
commercial banks in Nepal. Bank size have positive and statistically insignificant
result which as we expected.

ROEEBL = a + b1 CAREBL + b2NPLREBL + b3 CRREBL+ b4 BS

Table 9: Result of regression 2 (ROEEBL)
95% Confidence
Std. interval of the
Coefficients t Sig difference
Error
Lower Upper
CAR -2.57348 5.291709 -0.48632 0.674808 -25.3419 20.19491

NPLR -3.50576 18.65914 -0.18788 0.868303 -83.7896 76.77806

CRR -0.30448 1.3088 -0.23264 0.837679 -5.93579 5.326832

BS 2.467174 2.029202 1.215834 0.348081 -6.26378 11.19813

R² = 0.99315 Adj. R² = 0.4829

Source: Annual report of EBL from FY 2010/11 to 2015/16

49
The table presents the regression results of effect of credit risk on bank performance
(ROE). The value of R² are 0.99315 and 0.4829 respectively. This indicates that
99.31% of the variation in bank performance (ROE) can be explained by the variation
in the explanatory variables. The result indicates that, capital adequacy ratio is
negative and statically insignificant. However, the finding of this study does not
support the hypothesis that capital adequacy ratio has a significant effect on bank
performance (ROE). The result of NPLR is negative and but statistically insignificant.
The result indicated that the coefficient of cash reserve ratio is negative and
statistically insignificant. The result of this study reveals that cash reserve ratio does
not significantly affect the performance (ROE) of commercial banks in Nepal. The
coefficient of bank size is as expected. Bank size has positive correlation but is
statistically insignificant.
ROANABIL = a + b1 CARNABIL + b2NPLRNABIL + b3 CRRNABIL+b4 BS
Table 10: Result of regression 3 (ROANABIL)
95% Confidence
Std. interval of the
Coefficients t Sig
Error difference
Lower Upper
CAR 0.976187 0.349043 2.796754 0.107603 -0.52562 2.477996
NPLR 1.096996 0.244285 4.490641 0.046181 0.045923 2.148068
CRR -0.10958 0.036843 -2.97427 0.096892 -0.26811 0.048942
BS -0.3767 0.158111 -2.38253 0.14008 -1.057 0.303591
R² = 0.9979 Adj. R² = 0.49482
Source: Annual report NABIL from FY 2010/11 to 2015/16

The table 10 presents the regression results of effect of credit risk on bank
performance (ROA). The value of R² are 0.9979 and Adj. R² 0.49482 respectively.
This indicates that 99.79% of the variation in bank performance (ROA) can be
explained by the variation in the explanatory variables. The result indicates that,
capital adequacy ratio is positive but statically insignificant. The sign of the
coefficient is as usual because theoretically capital adequacy ratio was expected to
have positive relationship with bank’s performance (ROA). However, the finding of
this study does not support the hypothesis that capital adequacy ratio has a significant

50
effect on bank performance (ROA). The result of NPRL is also not as we expected
because it is positive and statistically significant, which means NPLR has effect on
bank performance (ROA). Cash reserve ratio and Bank size has been used as control
variable in the estimated regression model assuming that changes in cash reserve ratio
(CRR) have inverse impact in banks profitability. The result indicated that the
coefficient of cash reserve ratio is negative and statistically insignificant similarly the
correlation between bank size (BS) and ROA is negative and insignificant. The result
of this study reveals that cash reserve ratio and bank size does not significantly affect
the performance (ROA) of commercial banks in Nepal.

ROENABIL = a + b1 CARNABIL + b2NPLRNABIL + b3 CRRNABIL+ b4 BS

Table 11: Result of regression 4 (ROANABIL)

Std. 95% Confidence interval

Coefficients t Sig of the difference
Error
Lower Upper
CAR 6.046309 1.8982 3.185294 0.08603 -2.12096 14.21358
NPLR 8.797395 1.3285 6.622093 0.02205 3.081357 14.51343
CRR -1.1888 0.2004 -5.93318 0.02725 -2.0509 -0.3267
BS -1.82971 0.8599 -2.12794 0.16715 -5.52935 1.869927
R² = 0.99946 Adj. R² = 0.49865
Source: Annual report of NABIL from FY 2010/11 to 2015/16

The table 11 presents the regression results of effect of credit risk on bank
performance. The value of R² are 0.99946 and Adj. R² 0.49865 respectively. This
indicates that 99.94% of the variation in bank performance can be explained by the
variation in the explanatory variables. The result indicates that, capital adequacy ratio
is positive but statically insignificant. However, the finding of this study does not
support the hypothesis that capital adequacy ratio has a significant effect on bank
performance (ROE). The result of NPLR is also not as we expected because it is
positive and statistically significant, which means NPLR has effect on bank
performance (ROE). The result indicated that the coefficient of cash reserve ratio
(CRR) is negative and statistically significant. The result of this study reveals that
cash reserve ratio significantly affect the performance (ROE) of commercial banks in

51
Nepal. Whereas, the coefficient of bank size (BS) is also negative but statistically
insignificant.

4.5 Major Findings

The finding is based on the secondary data collected through annual report of chosen
banks. The major findings are as follows:
1. NABIL has maintained higher ROA than EBL (2.625 > 2.092). It shows that
NABIL is more profitable in relation to its total assets compared to EBL.
2. NABIL has maintained higher ROE than EBL (28.057 > 24.49). It shows that
NABIL has generated more profit with the money shareholders have invested
compared to EBL.
3. EBL has maintained higher CAR than NABIL (11.697 > 11.287). It shows that
EBL has held more amount of capital compared to NABIL as require by its
financial regulator (NRB).
4. NABIL has maintained higher NPLR than EBL (1.9 > 0.577). It shows that EBL
has more efficiency of the loan portfolio management compared to EBL.
5. EBL has maintained higher CRR than NABIL (16.625 > 9.177). It shows that
EBL seems to be able to maintain higher level of certain percentage of total
deposit in the form of cash reserve with the central bank than NABIL.
6. Nabil has greater BS compared to EBL because greater bank size means greater
assets which positively affects the bank performance.
7. There is multicollinearity between independent variables CAR-CRR and CAR-BS
in EBL case and there is multicollinearity between independent variable CAR-BS
in terms of NABIL.
8. The table below summarizes and compares relationship between expected sign
and actual sign with significant level of variables.
Table 12: Relationship between expected sign and actual sign with significant level
(ROAEBL)
Independent Expected Actual Level of
Variables Sign Sign significant
CAR + - Not Significant
NPLR - + Not Significant
CRR - - Not Significant

52
BS + + Not Significant

The result of regression model reveals that the coefficient of CAR CRR and BS is
similar to that of expected signs. However, the coefficient of non-performing loan
ratio is positive which is contrary to priori expectation. The possible cause of such
result is that there is timely repayment of loan. The coefficient of CAR is
insignificant meaning that it cannot explain the variation of dependent variable
(ROA). Likely, the coefficient of non-performing loan and cash reserve ratio is also
not significant which indicates that bank performance (ROA) is not significantly
influenced by them.

Table 13: Relationship between expected sign and actual sign with significant level
(ROEEBL)
Independent
Expected Sign Actual Sign Level of significant
Variables
CAR + - Not Significant
NPLR - - Not Significant
CRR - - Not Significant
BS + + Not Significant

The result of regression model reveals that the coefficient of NPLR, CRR and BSare
similar to that of expected signs. However, the coefficient of CAR is negative which
is contrary to priori expectation. The possible cause of such result is bank has not
been able to absorb possible loan losses. The coefficient of CAR is insignificant
meaning that it cannot explain the variation of dependent variable (ROE). Likely, the
coefficient of non-performing loan, cash reserve ratio and bank sizeare also not
significant which indicates that bank performance (ROE) is not significantly
influenced by them.

53
Table 14: Relationship between expected sign and actual sign with significant level
(ROANABIL)
Independent
Expected Sign Actual Sign Level of significant
Variables
CAR + + Not Significant
NPLR - + Significant
CRR - - Not Significant
BS + - Not Significant

The result of regression model reveals that the coefficient of CAR and CRR is similar
to that of expected signs. However, the coefficient of non-performing loan ratio is
positive which is contrary to priori expectation. The possible cause of such result is
that there is timely repayment of loan. Similarly, the coefficient of bank size is also
not as expected. The coefficient of bank size is negative which can be due to
improper utilization of assets. The coefficient of CAR is insignificant meaning that it
cannot explain the variation of dependent variable (ROA). Likely, the coefficient cash
reserve ratio and bank size are also not significant which indicates that bank
performance(ROA) is not significantly influenced by cash reserve ratio and bank size.
However, the coefficient non-performing loan ratio is significant which indicates that
bank performance (ROA) is significantly influenced by non-performing loan ratio.

Table 15: Relationship between expected sign and actual sign with significant level
(ROENABIL)
Independent
Expected Sign Actual Sign Level of significant
Variables
CAR + + Not Significant
NPLR - + Significant
CRR - - Significant
BS + - Not Significant

The result of regression model reveals that the coefficient of CAR and CRR is similar
to that of expected signs. However, the coefficient of non-performing loan ratio is

54
positive which is contrary to priori expectation. The possible cause of such result is
that there is timely repayment of loan. The coefficient of CAR is insignificant
meaning that it cannot explain the variation of dependent variable (ROA). The
correlation of bank size is negative and not significant which means bank size does
effect performance of the bank. Likely, the coefficient of non-performing loan and
cash reserve ratio is significant which indicates that bank performance (ROE) is
significantly influenced by them.

55
 CHAPTER V
CONCLUSION AND IMPLICATIONS

This chapter is the concluding part of this study. The chapter is divided into two
segments. First section provides the conclusion of the study and finally implication is
drawn in the second section.

5.1 Conclusion
In the beginning of our research we have explained that our purpose is to investigate
the relationship between credit risk management and profitability of commercial
banks in Nepal. This was done by collecting data from the 2 commercial banks’
annual reports from FY 2010/11 to 2015/16. In order to test the relationship for two
abstract concepts, we used proxies for them. We have chosen the ROE and ROA as
the proxies for profitability, and CAR, NPLR, CCR and BS as proxies for credit risk
management. After we have finished the data collection, we used statistic program
MS-Excel to test for our research question. We hence made four hypotheses and four
regression tests for the four independent variables, ROE and ROA, based on the 6-
years data. The second part of our test is concerned with the stability of such
relationship. Therefore, we use 6 sub-periods to make more regressions to investigate
if the correlation coefficients have large fluctuations

The research question “What is the relationship between the credit risk management
and bank performance?” should be answered after we have made a series of
regression analyses. With the statistical evidence, we are able to conclude that there
exists a relationship between credit risk management and profitability.

Firstly, our empirical findings show that the relationship between CAR-ROE and
CAR-ROA is not significant. This could have happened due to the controversy
theoretical prediction of the relationship between CAR and banks’ profitability. The
imperfection of our model modification could be another reason for the lack of
significant relationships. In addition, the impact of systematic risks during the
financial crisis should not be neglected.

56
One thing which is interesting from our result is that, although the relationship is not
significant, the correlation coefficient of CAR for both ROE and ROA is negative.
That is to say, the CAR could negatively affect the banks’ profitability. From the
theoretical framework we know that CAR is total capital to the risk-weighted sum of
bank’s assets (Hyun & Rhee, 2011, p. 325). Therefore, the negative number could
mean that in order to keep a higher CAR, banks will restrict their activities which
could be negatively associated with bank development, adversely affecting banks’
expansion and growth. In addition, this kind of regulation on banks’ activities may
increase banks net interest margins or overhead costs (Samy& Magda, 2009, p. 72).
The blocked development, the increased overhead cost or net interest margin could
lead to the adverse effect of profitability of commercial banks. In this way, the CAR
could negatively affect the profitability of commercial banks.

Secondly, we found that there is a negative relationship between NPLR and ROA in
EBL but positive relationship between NPLR and ROE is negative in EBL. Whereas,
there is positive relationship between NPLR and both ROA and ROE in NABIL. This
result is on contrary to what is expected of NPL ratio to have a negative effect on
bank’s performance. The empirical results show a positive effect of non-performing
loans on banks profitability. This result reveals that, in spite of a large number of
unpaid loans, NPL ratio has a positive effect on profitability. This means that, NABIL
bank need to establish efficient arrangement to deal with credit risk management. Li
and Zou (2014) and Alshatti (2015) also found the positive effect of non-performing
loan ratio on the performance of the banks in their research.

In addition, we also found out that cash reserve ratio has negative relationship with
bank performance (ROA & ROE). But it does have significant effect on bank
performance except for ROE in Nabil bank limited. Whereas bank size has positive
relation on EBL’s performance but negative relation on NABIL’s performance. We
also found out bank size does not significant effect on bank performance.

In our research, the main concepts are credit risk management and profitability. We
use NPLR and CAR to reflect the credit risk management and use ROE and ROA to
measure profitability. In banking industry, Basel II has built linkage between

57
minimum regulatory capital and underlying credit risk exposure of banks. And
Brewer et al. (2006, p.1045) indicates that lower NPLR may be symbolic of a
stronger economic environment and more efficient credit risk management. So that
both CAR and NPLR can be considered to correctly reflect the credit risk
management. According to Kuan (2008), ROE can be used to measure the efficiency
of future profits for banks. And Goddard, Molyneux& Wilson (2004) use ROE and
ROA as profitability measure to study the determinants of banks’ profitability in
Europe. Therefore, ROE and ROA are valid as profitability measures.

Besides, the causal relationship in this study is to find out whether the independent
variables, CAR and NPLR, have any impact on the dependent variables, ROE or
ROA. To ensure the relationship is authentic, we perform the statistical tests to
measure multicollinearity. The results from statistical tests show that our data have
problem of multicollinearity. Moreover, there might have other factors which may
affect the relationship and cause bias so that we also include control variables. We
choose size of firms as control variable according to Halsem (1968). And specifically,
as Shalit&Sankar (1977) indicates, we use natural log of total assets as the measure of
bank’s size.

5.2 Implications
Banks need to place and devise strategies that will not only limit the banks exposition
to credit risk but will develop performance and competitiveness of the banks, and
banks should establish a proper credit risk management strategy by conducting sound
credit evaluation before granting loans to customers. It is recommended that bank's
credit-granting activities conform to the established strategy that written procedures
should be developed and implemented, and that loan approval and review
responsibilities are clearly and properly assigned. Senior management must also
ensure that there is a periodic independent internal assessment of the bank credit-
granting and management functions. The result in this study therefore, suggested the
need for strong credit risk and loan service process management must be adopted to
keep the level of NPL as low as possible which will enable to maintain the high
performance (profitability) of commercial banks in Nepal.

58
One of the recommendations that can be done to the research model is to include
more companies for this research. In our research, we involve 2 commercial banks in
which we believe are the most representative. If the time and resources are available,
it could be more convincing to involve more samples in the study. However, many
commercial banks are too small to publish their annual reports or key figures. Some
of them only have influence to their local market but hard to represent the whole
Nepal. To collect more data, the connection with the banks or authorities might be
necessary.

Except the indicators we involved in the research, other measures can also indicate
the profitability and credit risk management. Therefore, if could be more interesting
to include more indicators to test the relationship. Meanwhile, it can help researchers
to enhance the accuracy of the research model with the most suitable variables.

We focus on credit risk management and profitability of commercial banks. Further

research suggestion could be move the core of credit risk management to other risks
management. For the banking industry’s development, diversified types of banks
have built to satisfy the demand of innovation in financial markets. Further research
can focus on the risk management measurement of the investment banks. Except the
credit risk management, liquidity risk, market risk, operational risk or reputational
risk can also be taken into consideration. In addition, profitability is only one aspect
of banks’ financial performance. Exploring the other aspects of financial performance
is also an interesting expansion for this research.

59
References
1) ABID, S.F. and S. LODHI. 2015. "Impact of Changes in Reserve Requirement on
Banks Profitability: A Case of Commercial Banks in Pakistan." European Journal
of Business and Management, 7(31): 1-6.
2) Abiola, I. and A. S. Olausi. 2014. "The Impact of Credit Risk Management on the
Commercial Banks Performance in Nigeria." International Journal of
Management and Sustainability, 3(5): 295-306.
3) Achou, F. T. and N. C. Tegnuh. 2008. “Bank Performance and Credit Risk
Management”, Master Degree Project School of Technology and Society,
University of Skovde Press.
4) Admati, A.R., DeMarzo, P.M., Hellwig, M.F., Martin, F. and P. Pfleiderer. 2010.
"Fallacies, Irrelevant Facts and Myths in the Discussion of Capital Regulation:
Why Bank Equity is Not Expensive." Stanford GSB Research Paper, No.2063, 1-
56, Stanford University.
5) Ahmad, N. H. and M. Ariff. 2007. "Multi-country study of bank credit risk
determinants." International Journal of Banking and Finance, 5(1): 135-152.
6) Ahmed, A.S., Takeda, C. and T. Shawn. 1998. "Bank Loan Loss Provision: A
Reexamination of Capital Management and Signaling Effects." Working Paper,
Department of Accounting, Syracuse University, 1-37.
7) Akhavein, J., Berger, A. N., and D. B. Humphrey.1997. "The effects of
megamergers on efficiency and prices: Evidence from a bank profit function."
Review of Industrial Organization 12(1): 95-139.
8) Alkassim, F. A. 2005. "The profitability of Islamic and conventional banking in
the GCC countries: A comparative study." (Unpublished master‟s thesis).
9) Al-Khouri, R. 2011. "Assessing the risk and performance of the GCC banking
sector." International Research Journal of Finance and Economics, 65: 72-78.
10) Alshatti, A. S. 2015. "The effect of credit risk management on financial
performance of the Jordanian commercial banks." Investment Management and
Financial Innovations, 12(1): 338-345.
11) Appa, R. 1996. The monetary and financial system (3rd ed.), London: Bonkers
Books Ltd.

60
12) Aruwa, S.A. and O. A. Musa. 2014. "Risk components and the financial
performance of deposit money in Nigeria." International Journal of Social
Sciences and Entrepreneurship, 1(11): 1-8.
13) Ashcraft, A.B. 2001. "New Evidence on the Lending Channel." Federal Reserve
Bank of New York: Staff Reports, No. 136
14) Basel committee on banking supervision. 1988. A new capital adequacy,
Framework.
15) Basel committee on banking supervision. 1999. A new capital adequacy,
Framework.
16) Ben-Naceur, S. and M. Omran. 2008. "The effects of bank regulations,
competition, and financial reforms on MENA banks‟ profitability." Economic
Research Forum Working Paper No. 44.
17) Bhawani, T. A. and N. R. Bhanumurthy. 2012. Financial Access in Post-reform
India, New Delhi: Oxford University Press.
18) Bikker, J.A. and H. Hu. 2002. "Cyclical Patterns in Profits, Provisioning and
Lending of Banks and Procyclicality of the New Basle Capital Requirements."
BNL Quarterly Review, 221: 143-175.
19) Bourke, P. 1989. "Concentration and other determinants of bank profitability in
Europe, North America and Australia." Journal of Banking and Finance, 13: 65-
79.
20) Brownbridge, M. 1998. "The Causes of Financial Distress in Local Banks in
Africa and Implications for Prudential Policy." UNCTAD/OSG/Discussion Paper,
No 132
21) Chen, K. and C. Pan. 2012. "An empirical study of credit risk efficiency of
banking industry in Taiwan." Web Journal of Chinese Management Review,
15(1): 1-16.
22) Coyle, B. 2000. Framework for Credit Risk Management, United Kingdom:
Chartered Institute of Bankers.
23) Demirguc-Kunt, A. and H. Huzinga. 1999. "Determinants of Commercial Bank
Interest Margins and Profitability: Some International Evidence." The World
Bank Economic Review, 13(2): 379-440.
24) Epure, M. and I. Lafuente. 2012. "Monitoring Bank Performance in the
Presence of Risk. "Barcelona GSE Working Paper Series No.61.

61
25) Ezike, J.E. and M. D. Oke. 2013. "Capital adequacy standards, Basel accord and
bank performance: the Nigerian experience (A case study of selected banks in
Nigeria)." Asian Econ. Finance Rev., 3(2): 146-159.
26) Felix, A.T and T. N. Claudine. 2008. Bank Performance and Credit Risk
Management: Unpublished Masters Dissertation in Finance, Skovde: University
of Skovde.
27) Fredrick, O. 2012. "The Impact of Credit Risk Management on Financial
Performance of Commercial Banks in Kenya." DBA Africa Management Review,
3(1): 22-37.
28) Gieseche, K. 2004. "Credit Risk Modeling and Valuation: An Introduction."
Credit Risk: Models and Management, 2: 1-40.
29) Gizaw, M., Kebede, M. and S. Selvaraj. 2015. "The impact of credit risk on
profitability performance of commercial banks in Ethiopia." African Journal of
Business Management, 9(2): 59-66.
30) Goddard, J., Molyneux, P. and J. O. S. Wilson. 2004. "Dynamics of Growth and
Profitability in Banking." Journal of Money, Credit and Banking, 36: 1069-1090.
31) Gujarati, D. N. 2004. Basic Econometrics (4th ed.), New Delhi: Tata McGraw-
Hill Publishing Company Limited.
32) Gul, S., Irshad, F. and K. Zaman. 2011. Factors Affecting Bank Profitability in
Pakistan. The Romanian Economic Journal, XIV(39): 61-87.
33) Hair J. F., Anderson, R. E., Tatham. R. L. and W. C. Black. 2006. Multivariate
Data Analysis (Fifth Edition), Delhi: Dorling Kindersely India Pvt. Ltd. licensees
of Pearson Education in South Asia.
34) Hosna, A., Bakaeva, M. and S. Juanjuan. 2009. Credit Risk Management and
Profitability in Commercial Banks: Master Degree Project No. 2009:36,
Gothenburg: School of Business, Economics and Law, University of Gothenburg.
35) Jha, S. and X. Hui. 2012. "A comparison of financial performance of commercial
banks: A case study of Nepal." African Journal of Business Management, 6(25):
7601-7611.
36) Kargi, H. S. 2011. Credit risk and the performance of Nigerian banks, Zaria:
Department of accounting, Faculty of Administration, Ahmadu Bello University.
37) Kithinji, A. M. 2010. Credit Risk Management and Profitability of Commercial
Banks in Kenya, Nairobi: School of Business, University of Nairobi.

62
38) Kodithuwakku, S. 2015. "Impact of Credit Risk Management on the Performance
of Commercial Banks in Sri Lanka." International Journal of Scientific Research
and Innovative Technology, 2(7): 1-6.
39) Kolapo, T. F., Ayeni, R. K. and M. O. Oke. 2012. "Credit risk and commercial
banks‟ performance in Nigeria: A panel model approach." Australian Journal of
Business and Management Research, 2(2): 31-38.
40) Kurawa, J.M. and S. Garba. 2014. "An Evaluation of the Effect of Credit Risk
Management (CRM) on the Profitability of Nigerian Banks." Journal of Modern
Accounting and Auditing, 10(1): 104-115.
41) Li, F. and Y. Zou. 2014. The Impact of credit risk management on profitability of
commercial banks: A study of Europe, Umea School of Business and Economics.
42) Lindergren, H. 1987. Banks, Investment Company, Banking Firms, Stockholm
Enskilda Bank (1924-1945), Stockholm: Institute for Research in Economic
History, Stockholm School of Economics.
43) Maddaloni, A. and J. L. Peydro. 2011. “The Low Monetary Rates Paradox,
Banking Stability and Credit: Evidence from the Euro Area.” 12th Jacques Polak
Annual Research Conference Hosted by the International Monetary Fund
Washington, DC –November 10–11, 2011
44) Margrabe, K. 2007. "The incidence of secured debt: evidence from the small
business community." Journal of Financial and Quantitative Analysis, 24: 379-
394.
45) Mekasha, G. 2001. Credit risk management and its impact on performance on
Ethiopian commercial Banks, Addis Ababa University.
46) Molyneux, P. and J. Thorton. 1992. "Determinants of European Bank
Profitability: A Note." Journal of Banking and Finance, 16(6): 1173-1178.
47) Naceur, S. B. 2003. The Determinants of the Tunisian Banking Industry
Profitability: Panel Evidence, Universite Libre de Tunis Working Papers.
48) Onyiriuba, L. 2009. Analyzing and Managing Risk of Banks lending, Lagos,
Nigeria: Mathouse Press Ltd.
49) Paudel, R. P. S. 2012. "The impact of credit risk management on financial
performance of commercial banks in Nepal.” International Journal of Arts and
Commerce, 1(5): 9-15.
50) Sinkey, Jr. and F. Joseph. 1992."Commercial Bank Financial Management, In the
Financial-Service Industry, (4thEd.)" Macmillan Publishing Company, Ontario.
63
51) Smirlock, M. 1985. "Evidence of non-relationship between concentration and
profitability in Banking." Journal of Money, Credit and Banking, 17: 69-83.
52) Ugoani, J. N. N. 2015. "Poor Credit Risk Management and Bank Failures in
Nigeria."International Journal of Economics and Business Administration, 1(1):
17-24.
53) UREMADU, S. 2012. "Bank Capital Structure, Liquidity and Profitability
Evidence from the Nigerian Banking System." International Journal of Academic
Research in Accounting, Finance and Management Sciences, 20(1)
54) Yourougou, P. 1990. “Interest Rate and the Pricing of Depository Financial
Intermediary Common Stock: Empirical Evidence.” Journal of Banking and
Finance, 14: 803-820.

64
Websites
1) [Link]
2) [Link]
3) [Link]
4) [Link]
5) [Link]
6) [Link]
7) [Link]
8) [Link]

65
Appendix 1
Data of the banks selected for the study
1) Return on Asset of EBL and NABIL
ROA (%) EBL ROA (%) NABIL

2010/11 2.10 2.43

2011/12 2.11 2.80

2012/13 2.39 3.25

2013/14 2.25 2.89

2014/15 1.85 2.06

2015/16 1.85 2.32

Source: Annual report of EBL and NABIL from FY 2010/11 to 2015/16

2) Return on Equity of EBL and NABIL

ROE (%) EBL ROE (%) NABIL

2010/11 31.53 29.02

2011/12 22.84 30.25

2012/13 26.63 32.78

2013/14 24.75 27.97

2014/15 20.58 22.71

2015/16 20.61 25.61

Source: Annual report of EBL and NABIL from FY 2010/11 to 2015/16

66
3) Capital Adequacy Ratio of EBL and NABIL
CAR (%) EBL CAR (%) NABIL

2010/11 10.43 10.58

2011/12 11.02 11.01

2012/13 11.59 11.59

2013/14 11.15 11.24

2014/15 13.33 11.57

2015/16 12.66 11.73

Source: Annual report of EBL and NABIL from FY 2010/11 to 2015/16

4) Non-Performing Loan Ratio of EBL and NABIL

NPLR (%) EBL NPLR (%) NABIL

2010/11 0.34 1.77

2011/12 0.84 2.33

2012/13 0.62 2.13

2013/14 0.62 2.23

2014/15 0.66 1.82

2015/16 0.38 1.14

Source: Annual report of EBL and NABIL from FY 2010/11 to 2015/16

67
5) Cash Reserve Ratio of EBL and NABIL
CRR (%) EBL CRR (%) NABIL

2010/11 9.55 4.90

2011/12 17.22 8.60

2012/13 15.19 9.32

2013/14 16.91 11.32

2014/15 24.27 14.15

2015/16 16.61 6.77

Source: Annual report of EBL and NABIL from FY 2010/11 to 2015/16

6) Bank Size of EBL and NABIL

BS(EBL) BS(NABIL)

2010/11 24.557 24.79

2011/12 24.745 24.87

2012/13 24.909 25.017

2013/14 24.978 25.19

2014/15 25.320 25.48

2015/16 25.458 25.57

Source: Annual report of EBL and NABIL from FY 2010/11 to 2015/16

68