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Role of Banking in Nepal's Economy

Q: How do commercial banks manage risk and ensure profitability through their loan advancement portfolios?

Commercial banks manage risk and ensure profitability through diversification of their loan portfolios. They spread loans across different sectors, industries, and geographical areas to mitigate risk. Key principles in loan management include safety, security, profitability, liquidity, and legal compliance. Diversification is crucial as it minimizes the variability of returns, allowing banks to compensate for defaults in one sector with profits from another, thus reducing potential losses and enhancing stability .

Q: Explain the significance of interest income derived from loans and advances in the overall income structure of banks. How does it vary among KBL, HBL, and BOK?

Interest income from loans and advances is pivotal in banks' overall income, representing the primary source of revenue through the interest charged on these loans. Among the sampled banks, KBL has the highest proportion of interest income to total interest income at 90.70%, indicating effective fund utilization in generating revenue. In contrast, HBL has a lower ratio at 82.19%, suggesting less reliance on loan interest for income. BOK falls in between at 83.85%. These differences reflect varying strategic focuses and efficiency in lending operations .

Q: What are the key factors banks must consider when managing their loan advancement portfolios, and how do these affect their decision-making?

Key factors in managing loan advancement portfolios include fund availability, liquidity requirements, compliance with central bank regulations, industry-specific risks, and expected returns. These factors influence bank decision-making, with availability and liquidity affecting lending capacity and regulatory compliance ensuring legal soundness. Industry risks and expected returns guide the allocation of funds to balance profitability and risk. Additionally, macroeconomic indicators like interest rates and inflation also impact decisions, as they affect loan viability and repayment abilities .

Q: Evaluate the effect of variability on loans and advances to total assets ratio on the banks' financial stability as observed in the sampled banks.

The variability in the 'Loans and Advances to Total Assets Ratio' significantly impacts financial stability. Higher variability indicates inconsistent lending practices, reflecting greater risk exposure. In the sampled banks, KBL shows the lowest coefficient of variation (CV) at 1.86%, implying stable and consistent lending strategies, enhancing financial stability. Conversely, BOK exhibits the highest CV at 4.05%, signaling less predictability in asset management, which could lead to financial instability. Banks with lower variability are generally seen as more resilient to economic fluctuations and better at managing risk .

Q: How do net profit to loans and advances ratios reflect the efficiency of banks' lending operations, and what do the trends suggest for KBL, HBL, and BOK?

The net profit to loans and advances ratio reflects the efficiency of lending operations by showing the profitability derived from these assets. A higher ratio indicates efficient use of loaned funds to generate profits. For the sampled banks, HBL has the highest mean ratio of 3.12%, suggesting superior lending performance. In contrast, KBL, with the lowest mean ratio of 1.90%, indicates inefficiencies in converting loans to profit. BOK's performance is moderate at 2.87%. These trends underscore differences in operational effectiveness among the banks during the study period .

Q: What do the 'Non-Performing Loans to Total Loans and Advances Ratio' suggest about the lending efficiency of KBL, HBL, and BOK?

The 'Non-Performing Loans to Total Loans and Advances Ratio' offers insight into the lending efficiency and risk management of the banks. HBL has the highest average ratio of 2.78%, indicating a higher level of non-performing loans and thus suggesting inefficiency in managing lending and recoveries. KBL has slightly better efficiency with a ratio of 2.23%, while BOK displays the most efficiency with the lowest ratio of 1.57%, reflecting better risk management practices and the ability to recover loans effectively .

Q: Discuss the importance of portfolio diversification in the banking sector and how it impacts risk and return. What theories support this practice?

Portfolio diversification is crucial in banking to minimize risk exposure and stabilize returns. By distributing loans and investments across various sectors and geographical areas, banks reduce the impact of sector-specific downturns. Portfolio theory supports this practice, asserting that diversification maximizes returns for a given level of risk through variance reduction. Banks following this strategy can offset losses in one segment with gains in another, maintaining financial stability and profitability. The foundational idea is that not 'putting all eggs in one basket' reduces variability and enables better risk-adjusted returns .

Q: How do banks contribute to consumption spending, and what new financial products have facilitated this in recent years?

Banks contribute to consumption spending by providing credit through various products, including consumer loans, credit cards, debit cards, and now advanced options like smart cards. These products enable consumers to finance purchases directly from bank credit, facilitating everyday spending and larger transactions alike. The ease and accessibility offered by these financial products encourage consumer spending, which in turn stimulates economic growth by boosting demand for goods and services .

Q: What trends are apparent in the 'Loans and Advances to Total Assets Ratio' among the sampled banks, and what do these imply about their financial management?

The 'Loans and Advances to Total Assets Ratio' among the sampled banks such as Kumari Bank Ltd. (KBL), Himalayan Bank Ltd. (HBL), and Bank of Kathmandu (BOK) indicates aggressive lending practices, with KBL showing the highest average ratio at 70.55%, suggesting successful fund mobilization but also higher risk. HBL, with the lowest average ratio of 64.78%, appears less aggressive in lending, reflecting a more conservative approach. The variability among these ratios highlights differences in risk management and asset distribution strategies .

Q: What role do commercial banks in Nepal play in the economy regarding capital distribution, and what services do they offer to facilitate economic activities?

Commercial banks in Nepal play a crucial role in the economy by providing capital necessary for the development of industries, trade, and businesses. They collect savings from the public as deposits and lend these in various forms, such as loans, to stimulate economic activities. Services offered by these banks include deposits, loans, letters of credit, guarantees, remittances, merchant banking, investment banking, foreign exchange, and agency services, which facilitate both economic and social life .

The document discusses the critical role of the financial sector in the economic development of Nepal, emphasizing the importance of capital formation and the mobilization of financial resources by banks. It outlines the evolution of banking in Nepal, starting from ancient banking practices to the establishment of modern banks, including the Nepal Rastra Bank as the central bank. Additionally, it highlights the significance of commercial banks in providing loans and advancing capital to various sectors, while also addressing the risks associated with loan portfolios and the necessity for diversification to mitigate those risks.

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26 views84 pages

Role of Banking in Nepal's Economy

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CHAPTER- I

INTRODUCTION

1.1 Background of the Study

Economic development of a country largely depends on the development of different sectors

of the economy like infrastructure, agriculture, industry, trade, tourism etc. and development
of these sectors need a regular supply of financial resources. In developing countries like
Nepal, there is always shortage of the capital for developing activities. It is not possible to
develop all the sectors by the government alone. So, contribution from the financial sector is
a most for economic growth of the country.

Even though the process of economic development depends upon various factors, however,
economists are now convinced that capital formation and its proper utilization play a
paramount role for rapid economic development and for maximum utilization of the available
resources. The capital formation leads to increase in the size of the national output, income
and employment, solving the problem of inflation and balance of payments, making the
economy free from the burden of foreign debt and utilizing the available domestic resources.
Domestic capital formation helps in making country self sustainable. Financial institutions
play a vital role in utilizing financial resources by mobilizing it to the deficit sectors of the
economy. The deficit sectors of the economy are businesses and government. They mobilize
unproductive and unutilized financial resources towards productive sectors and help in
expanding economic growth of a country. They help in capital formation through mobilizing
the savings. The financial sector encourages the mobilization of savings by providing diverse
instruments that match the differing preferences of savers. It collects scattered financial
resources from the mass and invests them to those engaged in commercial and economic
activities of the country. To develop well-established economic activities of any country can
hardly be carried forward without the assistance and support of financial institutions.

The Nepalese financial sector is composed of banking sector and non-banking sector.
Banking sector comprises of Nepal Rastra Bank and Commercial Banks. The non-banking
sector includes Development Banks, Micro-Credit Development Banks, Finance Companies,
Co-operative Financial Institutions and Other Financial Institutions such as Insurance

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Companies, Employee's Provident Fund, Mutual Fund, Citizen Investment Trust, Postal
Saving Offices and Nepal Stock Exchange.

Nepalese financial sector is largely dominated by banking sector. In modern days, banks are
considered not only as dealers in money but also as the leaders in development. Banks render
valuable services to trade and industry. Banks help in the uniform development of the
different regions in the country. The scope of banking sector is getting wider day by day. The
healthy development of any commercial bank largely depends upon investment and lending
policy. Thus, formation of sound investment policies, efficient lending, co-ordination and
planned effort accelerate the pace of economic growth.

Generally the term “Bank” refers to commercial bank. A bank can be defined as an institution
that deals with money. A bank performs several financial, monetary and economic activities,
which are initials for the economic development of a country. Banks play an important role in
the economic growth of country. Banking, when properly organized, aids and facilitates the
growth of trade and industry. Commercial banks provide the following major products and
services:

 Acceptance of deposits
 Granting of advances
 Remittance collection and distribution
 Cash management
 Issuance of letter of credit and guarantee
 Merchant banking business
 Credit cards
 Loan distribution
 Safe keeping services/Lockers
 Handling government business
 Automated teller machine
 Technology based services-Internet banking, SMS banking, Call banking etc.

1.1.1 Evolution of Banking in Nepal

The development of banking in Nepal is relatively recent. Like many other countries,
landlords, goldsmiths, merchants and money-lenders were the ancient bankers of Nepal.
Tejarath Adda, established in 1880, was the first step towards the institutional development

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of banking in Nepal. Some historians say that the Kausi Tosha Khana, established during the
time 1723-1755, is the first banking institution but there is very little literature about it.
Tejarath Adda didn’t collect deposits from the public but gave loans to public against the
collateral of bullions. Consequently, major parts of the country remain untouched from these
limited banking activities. The development of trade with India and other countries increased
necessity of the institutional bankers which could act more widely to enhance trade and
commerce and to touch the remote non-banking sector in economy. Reviewing this situation,
the 'Udgog Parishad' was constituted in 1936. One year after its formation, it formulated the
'Nepal Bank Act' in 1937.

Banking, in modern sense, started with the inception of Nepal Bank Limited (NBL) on 15 th
November, 1937 under Nepal Bank Act 1937 though, in Europe, modern banks were set up in
the 12th century itself. NBL was set up with cooperation of imperial Bank of India. Initially,
NBL had authorized and paid up capital of Rs. 10 million and Rs. 0.842 million respectively-
51% owned by the government and 49% owned by the private sector. NBL took over all the
assets and liabilities of Tejarath Adda. It accepted deposits, gave loans, rendered other
banking services to the public, acted as government's bank etc. NBL had to do some central
banking functions. The stand of NBL alone in the monetary and financial sector was
insufficient. The government's realization of need for expanding banking services to the nook
and corner of the country, ending dual currency system and stabilizing highly volatile
exchange rate gave birth to Nepal Rastra Bank (NRB) on 26 April 1956, under Nepal Rastra
Bank Act, 1955, as central bank. Since then, NRB has been working as central bank and has
contributed to the growth of various types of financial institutions across the country in
addition to stabilizing exchange rates and ensuring circulation of Nepalese currency
throughout the country. As the need of a development bank committed for industrial
development of the country was felt, the government converted Industrial Development
Centre, set up in 1957, to Nepal Industrial Development Corporation (NIDC) in 1959 at
initiative of NRB. Similarly, another commercial bank, named Rastriya Banijya Bank (RBB),
was set up on 23 January 1966 as a fully government owned commercial bank. Agriculture
Development Bank (ADB) was established in 1968 to provide finance for introducing
modern agricultural techniques so that agricultural productivity could be enhanced. Co-
Operative Bank, set up in 1963, was merged with it.
In 1980, the government has taken economic liberalization and reforms in financial sector
and this led to significant changes in the banking industry. This program gives the permission

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for the establishment of private and joint venture banks with up to maximum of 50% equity
participations that paved the way for establishment of many new banks and non-bank
financial institutions in the country. Nepal Arab Bank Ltd. (renamed as Nabil Bank Ltd. on
1st January 2002) established on 12 July, 1984 is the first foreign joint venture bank of Nepal.
As of mid-April 2015, total number of BFIs stood at 199 including30 commercial banks (“A”
Class), 81 development banks (“B” Class), 52 finance companies (“C” Class) and 36
microfinance development banks (“D” Class) rendering banking and financial services in
Nepalese financial market.
Table: 1.1
List of Class ‘A’ Licensed Financial Institutions (Commercial Banks)
Mid-April, 2015
Name Operation Date Head Office
1 Nepal Bank Ltd. 1937/11/15 Dharmapath, Kathmandu
2 RastriyaBanijya Bank Ltd. 1966/01/23 Singhdarbarplaza, Kathmandu
3 NABIL Bank Ltd. 1984/07/16 BeenaMarg, Kathmandu
4 Nepal Investment Bank Ltd. 1986/02/27 Durbarmarg, Kathmandu
5 Standard Chartered Bank Nepal Ltd. 1987/01/03 Nayabaneshwor, Kathmandu
6 Himalayan Bank Ltd. 1993/01/18 Kamaladi, Kathmandu
7 Nepal SBI Bank Ltd. 1993/07/07 Hattisar, Kathmandu
8 Nepal Bangladesh Bank Ltd. 1993/06/05 Nayabaneshwor, Kathmandu
9 Everest Bank Ltd. 1994/10/18 Lazimpat, Kathmandu
10 Bank of Kathmandu Ltd. 1995/03/12 Kamaladi, Kathmandu
11 Nepal Credit and Commerce Bank Ltd. 1996/10/14 Siddharthanagar, Rupandehi
12 Lumbini Bank Ltd. 1998/07/17 Narayangadh, Chitawan
13 NIC Asia Bank Ltd. 1998/07/21 Biaratnagar, Morang
14 Machhapuchhre Bank Ltd. 2000/10/03 Prithwichowk, Pokhara
15 Kumari Bank Ltd. 2001/04/03 Durbarmarg, Kathmandu
16 Laxmi Bank Ltd. 2002/04/03 Adarshanagar, Birgunj
17 Siddhartha Bank Ltd. 2002/12/24 Kamaladi, Kathmandu
18 Agriculture Development Bank Ltd. 2006/03/16 Ramshahapath, Kathmandu
19 Global IME Bank Ltd. 2007/01/02 Birgunj, Parsa
20 Citizens Bank International Ltd. 2007/06/21 Kamaladi, Kathmandu
21 Prime Commercial Bank Ltd. 2007/09/24 Newroad, Kathmandu
22 Sunrise Bank Ltd. 2007/10/12 Gairidhara, Kathmandu
23 Grand Bank Ltd. 2008/05/25 Kamaladi, Kathmandu
24 NMB Bank Ltd. 2008/06/02 Babarmahal, Kathmandu
25 Prabhu Bank Ltd. 2009/05/07 Anamnagar, Kathmandu
26 Janata BankNepal Ltd. 2010/04/05 NayaBaneshwor, Kathmandu
27 Mega Bank Nepal Ltd. 2010/07/23 Kantipath, Kathmandu
28 Civil Bank Ltd. 2010/11/26 Kamaladi, Kathmandu
29 Century Commercial Bank Ltd. 2011/03/10 Putalisadak, Kathmandu
30 Sanima Bank Ltd. 2012/02/15 Nagpokhari, Kathmandu
(Source: [Link])

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Commercial Bank is one of the most dominant financial institutions in the economy of Nepal.
A commercial bank is a business organization which deals in money; it borrows and lends
money.

Commercial Banks of Nepal have made significant contribution to the economy as they
provide capital for the development of industries, trade and business by investing the saving
collected as deposits from public. All the economic activities of a nation are greatly
influenced by the commercial banking business of the country. Commercial Banks render
various services to their customers facilitating their economic and social life. The major
products offered by the Nepalese Commercial Banks include various types of deposits, loans,
letter of credit, guarantee, remittance, merchant banking, retirement fund management,
investment banking, foreign exchange and agency services. It is, however, true that all the
Commercial Banks are not selling all the products mentioned here due to low level of product
sophistication.

One of the main functions of Commercial Banks is to create credit from their borrowed fund.
Loans and Advances are the assets coming from such activities. Loan and Advances
dominate the asset side of the balance sheet of any bank and also constitute the primary
sources of income to the bank. Banks can earn maximum income by lending the available
funds for traders, business people, investors etc.

1.1.2 Loan Advancement Portfolio

A loan consists of credit of funds in return for a promise of future payment. In most of the
cases, a loan is simply the lending of money in return for a specific cost of interest for the
borrower. There are various ways in which banks can advance loans such as term loan,
overdraft loan, working capital loan, cash credit, hypothecation loan, hire purchase loan, auto
loan, personal overdraft loan, personal term loan, margin lending loan, loan against
deposits,small and medium enterprises loan, discounting bills etc. Similarly, banks also
provide non-funded facilities like guarantees, letter of credit etc. Historically, Commercial
Banks have preferred to make short term loans to business, however, long term loans to
business firms have been supplanted to some extent in recent years. Commercial Banks are
found to be providing loan to various sectors of economy such as agriculture, mining,
transportation, communication, production, construction and many more. Nowadays, banks
provide credit to meet almost everything of the public needs. Banks have also initiated on

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attempt to meet the credit needs of the students. They are termed as 'Education Loans'.
Nowadays, banks have also been started providing the credit in consumption spending
through number of electronic cards such as credit cards, debit cards, smart carts etc.

Bank lending is very important to the economy, for it makes possible the financing of the
agricultural, commercial and industrial activities of the nation. Loans represent the most
important part of total bank assets, and income from loan is the greatest contributor to bank
profits. The major types of incomes that can be generated from granting loans are interest
income, loan servicing fees, loan renewal fees, agency fees etc. Earning from loans and
advances occupy major space in income statement of the bank. However, it is very important
to be remained that most of the bank in the world has failed due to shrinkage in the value of
the loan and advance. Hence, loan is known as risky assets. Risk of non-payment of loan is
regarded as credit risk. Advancing loans and advances always carry a certain degree of risk.
A Commercial Bank is a profit-making business corporation and loan is most profitable
assets for the bank. But, performing loan only can add the profit of bank and can move the
bank towards the way of success. Non-performing loans move the bank towards the way of
failure. A well known saying prevails in banking sector that "A bad loan can wipe out the
profit from hundred good loans." Therefore, the management should be very careful while
granting loan. Every Banks should adopt sound and viable policies regarding loans to earn
maximum profit by minimizing the risk. There are many sound and viable policies regarding
loans such as safety and security, profitability, liquidity, diversification of portfolio and
legality etc. Diversification of portfolio is the most important policy among them which helps
to minimize the risk. A successful banker is one who manages his risk. One of the tools of
management of risks is to spread his loan portfolio not only among many borrowers but also
to diversify lending to different types of sectors, products securities and industries and to
different geographical areas. Banks must able to maintain optimal portfolio of their loan that
helps to diverse the risk accordingly.

A portfolio is usually defined as a combination of assets. It is a collection of many securities.

The basic assumption of portfolio theory is that an investor always wantsto maximize the
returns from his/her investments for a given level of risk. It also assumes that investors are
basically risk averse, meaning that, given a choice between two assets equal rates of return
they will select the asset with the lower level of risk. Risk is the deviation of actual returns
from an expected return. The more the deviation, the more will be the risk. To minimize the

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deviation, we need to diversify our fund into different securities or assets. The objective of
portfolio analysis is to develop a portfolio that has the maximum return at whatever level of
risk the investor deems appropriate. Diversification of portfolio helps to minimize risk.

Commercial Banks should follow portfolio concept while advancing their fund as a loan.
There is an age-old adage- 'Don't put all of your eggs in one basket'. This saying is very
important to the bank while investing their fund or while advancing loan. Banks should not
grant loan in only one sector. To minimize loan risk, a bank must diversify its lending on
different sectors. Diversification is essential to the creation of an efficient investment as it can
reduce the variability of returns around the expected return. Diversification means dividing
available assets across a number of different securities. Diversification of loan portfolio helps
to sustain loan facilities of a bank because if one sector loan is default, there may be high
income from other sector loans. In this way, the loss occurred from default loans can be
compensated by the returns of good loans.

Loan Advancement Portfolio means different types of loans granted by Commercial Banks. It
basically represents the allocation of funds to different types of consumption and investment
loans having different degree of risk and varying rates of return, in such a way, that balances
the conflicting goal of maximizing return and minimizing risk. Commercial banks loan
portfolio covers corporate loan, industrial loan, construction loan, project loan, hire purchase
loan, production loan, consumer loan, deprived sector loan, priority sector loan, margin
lending loan, auto loan, overdraft loan, working capital loan, demand loan etc. The process of
managing banks' loan advancement portfolio considers a number of relevant and influencing
factors such as the availability of funds, liquidity required, central bank's rules and
regulations that abides banks, risk associated with the respective industries and the expected
rate of return on respective loan sanctioned sectors. On the other hand, banks should carefully
examine the macro economic indicators such as interest rate, inflation, aggregate expected
money multiplier, national income, savings ratio etc. Effective management of bank's loan
portfolio can lead the banks into the success on loan constitute.

1.1.3 An Introduction to the Selected Commercial Banks

The selection of sample banks has been made with an attempt to achieve the maximum
variety in respect to their loans characteristics. Kumari Bank Ltd., Himalayan Bank Ltd. and

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Bank of Kathmandu Ltd. have been selected for the research purpose. Brief introductions to
these banks have been made in the following paragraphs:

[Link] Kumari Bank Ltd.

Kumari Bank Ltd. came into existence as the fifteenth commercial bank of Nepal by starting
its banking operations from April 03, 2001with an objective of providing competitive and
modern banking services in the Nepalese financial market. The head office of the Kumari
Bank Ltd. is located at Durbarmarg, Kathmandu. The Bank has paid up capital of NPR
2,431.68 Million with an authorized capital of NPR 5,000 Million.

Kumari Bank Ltd. has been providing wide range of modern banking services through 36
points of representations located in various urban and semi urban part of the country, 34
branches outside and inside the valley, and 2 extension counters. The bank is pioneer in
providing some of the latest/lucrative banking services like E-banking and SMS Banking
services in Nepal. The bank always focus on building sound technology driven internal
system to cater the changing needs of the customers that enhance high comfort and value.
Similarly the bank has been providing 365 days banking facilities, extended banking hours
till 7 PM in the evening, utility bill payment services, inward and outward remittance
services, online remit services and various other banking services.

Visa Electron Debit Card, which is accessible in entire VISA linked and POS terminals both
in Nepal and India, has also added convenience to the customers. The bank has been able to
get recognition as an innovative and fast growing institution striving to enhance customer
value and satisfaction by backing transparent business practice, professional management,
corporate governance and total quality management as the organizational mission.

The key focus of the bank is always center on serving unfulfilled needs of the classes of
customers located in various parts of the country by offering modern and competitive
banking products and services in their door step. The bank always prioritizes the priority of
the valued customers.

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The bank has offered the following schemes of loans to the corporate and retail customers;

1. Corporate Loan
- Term Loan - Short Term Loan
- Hire Purchase Loan - Bill Discounting/ Purchase
- Loan Syndication - Overdraft
- Trust Receipt Loan - TR/Importers Loan
- Export Credit - Deprived Sector

2. Retail/ Consumer Loan

- Home Loan
- Educational Loan
- Private Vehicle Loan
- Commercial Vehicle Loan
- Loan against First Class Bank Guarantees
- Loan against Marketable Securities
- Loan against Deposit of KBL
- Loan against Government Bond

[Link] Himalayan Bank Ltd. (HBL)

Himalayan Bank Ltd. (HBL), a joint venture bank with Habib Bank Ltd. Pakistan, was
established on 1993. The head office of HBL is located at Thamel, Kathmandu. Despite the
cut-throat competition in the Nepalese Banking sector, Himalayan Bank has been able to
maintain a lead in the primary banking activities – Loans and Deposits. As at mid-April2015,
it has paid up capital of NPR3,332.70 Million with an authorized capital of NPR 4,000
Million. It has 44 branches in the Nepalese market.

The current shareholding of bank shows that the promoters have 85% share (where 20% of
foreign institution) and the General Public have 15% share. Products and services provided
by Himalayan Bank are Deposits, Loans, International Banking, Himal Remit, Card Services,
SMS Banking, Internet Banking, and Safe Deposit Locker.

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Loan and Advances providing by HBL are:

1. Corporate Loan
- Project/Consortium Loan - Non Revolving Cash Credit
- Working Capital Financing - Overdraft Facility
- Demand Loan - Revolving Cash Credit
- Trust Receipt Loan - Export Credit Facilities
- Pledge Loan - Bank Guarantee
- Letters of Credit - Export Credit Facilities
- Import Credit for Taxes Transfer and Demand Draft Payment
- Documentary Bills Purchased and Discounted
- Clean Bills Purchased and Discounted

2. Retail/ Consumer Loan

- Hire Purchase Loan
- Housing Loan
- Subidha Loan
- Credit Card Loan
- Loan against Fixed Deposit Receipt
- Loan against Government Bonds and Bonds of Bank
- Loan against First Class Bank Guarantees
- Loan against Shares

[Link] Bank of Kathmandu Ltd. (BOK)

Bank of Kathmandu Ltd. was established in 1995 under the Company Act in collaboration
with the Siam Commercial Bank Public Company Ltd, Thailand. The Siam Commercial
Bank has diluted and reduced its equity to 25% by selling Nepalese citizens in 1998 of its
initial holding. The head office of BOK is located at Kamaladi, Kathmandu. As at mid-April
2015, it has paid-up capital of NPR 2120.21 million. Now, the bank is providing its service
through its 50 branches, 58 ATM locations, 8 extension counters and 24 branchless banking
services.

The main products and services of BOK are Deposit Product, Loan and Advances,
International Trade, Global Banking Solution, Debit Card/ATM, Bank of Kathmandu Visa,
Credit Card and Other Services.

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BOK has been providing Loans and Advances on the following topic:
- Corporate Credit (Project Finance/Consortium Lending)
a. Term Loan
b. Working Capital Finance
c. Overdraft
d. Demand/Short-term Loan
e. Trust Receipt/Importers Loan
f. Export Loan
- Business Credit
a. Demand/Short-term Loan
b. Trust Receipt/Importers Loan
c. Loan against Fixed Deposit
d. Loan against Govt. Bond/1st Class Bank Guarantee
e. Priority Sector/Deprived Sector Loan
- Retail Banking
a. Housing Loan
b. Car4U Loan
c. Car4U Refinancing Loan
d. LCV Loan
e. HCV Loan
f. Education Loan
g. Personal Loan
- Development Credit Unit
a. General Micro Finance
b. Agriculture and Forest based Product Loan
c. Equipment Finance
d. Vehicle and Accessories Finance
- BOK Udhyamshil Karja

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1.2 Statement of the Problem

The adoption of economic liberalization policy, particularly the financial sector liberalization
policy has paved the way for establishment of new banks and non-bank financial institutions
in the country. By the end of mid-July 2015, there are 199banks and non-bank financial
institutions licensed by Nepal Rastra Bank. Now, the Nepal Rastra Bank has adopted the
merger policy to increase the competition among the BFIs and to strengthen the quantitative
and qualitative aspects of the services that the BFIs provide to the general public and trade
and industry so as to facilitate the economic growth and economic development of the
country. Nowadays, Nepalese financial market is introducing new technology, efficient
service delivery, new banking system, new banking products, customer satisfaction
techniques etc. Consequently, all the financial services are suffering from throat-cut
competition. Lending services also cannot be untouched from such competition.

Nepalese commercial banking sector is taken as a successful area in Nepal. Most of the
commercial banks are running in profit, however, it has found that some of them are in even
sick position due to their improper loan advancement. Nepalese commercial banks are not
following sound diversification on lending. For instance: at one time, commercial banks had
advanced a large portion of their loan to garment, hotel and carpet industries but these sectors
become sick and got in trouble to repay the loan. Again, BFIs had done that mistake by
advancing their large portion of loans on unproductive sectors like real estate, housing which
had created liquidity and others problem in the BFIs. In USA, some of the large banks went
bankrupt because of their excessive investment in real estate and housing sector. Similarly,
non-performing loans has been becoming a challenge for commercial banks. It is a barrier for
stability and development of banking sector.

Likewise, NRB has enforced different directives regarding loan. NRB Directives can also be
a challenge for commercial banks.

Therefore, there are many problems that are in existence in Nepalese banking sector. Mainly,
the study seeks to find out the following questions:
i. Are Nepalese commercial banks following diversifications principle at loan
advancement?
ii. What is the proportion of total lending in total deposit?
iii. What is the proportion of non-performing loans in total lending?

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iv. What are the trend of deposit, loan and non-performing loans of Nepalese commercial
banks?
v. What is the contribution of loans and advances on profitability of the banks?
vi. What is the relationship of loans and advances with deposit, net profit and non-
performing loans?
vii. Do the commercial banks follow the NRB's Directives regarding lending?

1.3 Objectives of the Study

Every study has some objectives. The study without any objective cannot be imagined. This
study also has some objectives. The main objectives of the study are:
* To analyze the composition and diversification of loan portfolio of Nepalese
commercial banks.
* To examine the level of total lending in total deposit of Nepalese commercial banks.
* To examine the level of non-performing loans in total lending of Nepalese
commercial banks.
* To analyze the trend of deposits, loans and non-performing Loans.
* To measure the contribution of loans and advances on profitability of banks.
* To explore the relationship of loans and advances with deposit, net profit and non-
performing loans.
* To find out whether the Nepalese commercial banks have been following the NRB’s
Directives regarding lending practices or not.

1.4 Significance of the Study

Lending is one of the main functions of commercial banks where the whole banking business
is rested upon. Loan Portfolio is typically the largest asset and predominate the source of
revenue. Also, it is one of the greatest sources of risk to a bank’s safety and soundness. Loan
portfolio problems have historically been the major causes of bank losses and failures.
Commercial bank’s lending influences the whole economy of a country. So, that is an
important reason to study the banking loan portfolio.

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As the study has made mainly to analyze the loan portfolio of commercial banks, it will
provide valuable insight to different stakeholders about the lending. The study will provide
the information to the depositors about the utilization of their deposits (i.e., how much
deposits have been distributed as loans) and about their deposits’ safeness (if the banks have
much performing loans, their deposits are safe and vice versa).Similarly, it will provide the
information to the borrowers about the types and priority of loans that the banks have given
in lending activities. Further, it will provide the information to the concerned banks about
their lending position and efficiency and to NRB about its directives’ effectiveness. Similarly,
the study will view the NRB directives related to the loan and will show the clear picture of
the condition of loans and non-performing loans of commercial banks which will be useful
for interested persons. Likewise, the findings of the study will facilitate the further studies to
carry on the study ahead. Therefore, I believe, the study will be beneficial for a number of
individuals, groups and organizations directly and indirectly.

1.5 Limitations of the Study

This study is not a comprehensive study. This study is conducted for the partial fulfillment of
the requirements for the degree of Master of Business Studies (MBS). So, there are many
deficiencies that may be found in this study due to various limitations. Some of the
limitations are as follows:
* This study doesn’t cover the whole commercial banks. Due to the time and resource
factors, only three commercial banks are taken for the study.
* This study is based on secondary data. The analysis and conclusion of the study is
fully depended on the accuracy and reliability of data available from various sources
and concerned organizations.
* This study covers only past five fiscal years i.e. 2010/11 to 2014/15 due to time and
resource constraint.
* The study is limited to the lending aspect mainly with the loans and advances only.

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1.6 Organization of the Study

Chapter I: Introduction

The first chapter is introduction. This chapter deals with the introduction that includes
background of the study, introduction of sampled Banks, statement of the problem,
objectives, limitations and organization of the study.

Chapter II: Review of Literature

This chapter deals on descriptive conceptual framework of lending. It considers to the review
of books, related articles, previous thesis and review of NRB directives.

Chapter III: Research Methodology

This chapter explains the research methodology used in the study which includes research
design, population and sample, sources of data, data analysis techniques and data analysis
tools.

Chapter IV: Data Presentation and Analysis

This chapter is the major part of the study in which all collected relevant data are analyzed
and interpreted by the help of different financial and statistical tools. In this chapter, we
explain the major findings of the study.

Chapter V: Summary, Conclusion and Recommendation

This chapter is suggestive to all concerned in accordance of analysis and interpretation of

data. It gives a summary of the study, recommendations made for concerned authorities and
institutions as well as conclusion of the study are also carried out.

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CHAPTER-II
REVIEW OF THE LITERATURE

Review of Literature is concerned with the past findings related to the topic that provides the
base for the further research or study. It is a vital process in research works.

Literature Review means reviewing research studies and other pertinent prepositions in the
related area of the study so that all the past studies, their conclusions and deficiencies and
further research can take place. Reviewing the literature is a continuous process. It begins
before a research problem is finalized and continues until the report is finished.

“Reviewing the literature involves a number of steps: researching for existing literature in the
area of study, reviewing the selected literatures; using it to develop a theoretical framework
from which the study emerges and also using it to develop a conceptual framework which
will become the basis of researcher investigation." (Kumar; 2005:38)

Literature review is done from the secondary sources, and as such, do not report any new or
original experimental work. It is mainly focused on the work of other researcher who has
done research on the same topic. It focuses on the objective, statement of problem and
findings done by the researchers. Its ultimate goal is to bring the reader up to date with
current literature on a topic and forms the basis for another goal.

This chapter is concerned with the review of related studies and different aspects of the topic;
Loan Portfolio Management of Commercial Banks in Nepal expressed by different great
scholars, in more detail and descriptive manner. For this study, many materials related to
topic, mainly, books, articles and different journals, NRB directives, and thesis are consulted
and reviewed.

This chapter is divided into four parts:

* Conceptual Framework.
* Review of Journals and Articles.
* Review of NRB Directives Related to Lending.
* Review of Thesis.

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2.1 Conceptual Framework

Conceptual Framework is a theoretical review that examines various conceptual concepts and
theories that have been put forward. This review is also called as books review. This review
puts forward an argument as to which is most relevant.

In the study Loan Portfolio Management, conceptual review or theoretical review deals with
the theories and concepts related to Commercial Banks, Loan, and Portfolio.

2.1.1 Commercial Bank

A Commercial bank is a 'Grade A' Financial Intuition, which pools together the savings of the
community and arranges them for the productive area. Commercial Bank accepts deposits
from the public on the condition of repayment on demand. They are the life blood and
foundation stone for the economic development of the country. They fulfill the demand of the
customers by providing loan whenever they needed which benefits both the customers and
the bank and in overall that helps in the economic development of the country.

“Commercial Banks bring into being the most important ingredient of the money supply-
demand deposits-through the creation of credit in the form of loan and investments." (Crosse;
1963:1)

“Commercial Banks is a credit institution that allows its creditors (depositors) to transfer
claims by check.” (Gatlordhart and Kenen; 1961:22)

“The commercial banks are those banks that pool together the saving of the community and
arranges for their productive use. They supply their financial needs of modern business by
various means. They accept deposit from the public on the condition that they are repayable
on demand or on short notice. Commercial banks are restricted to invest their fund in
corporate securities. Their business is confined to financing the short term needs of trade and
industry such as working capital financing. They cannot finance in fixed assets. They grant
loan in the form of cash credits and overdraft. Apart from financing, they also render service
like collection of bills and cheques, safe keeping of valuable, financial advising etc. to their
customers. (Vaidya; 1985:38)

17
"The operations of Commercial Bank are two-sided; one side involves attracting and holding
the fund of customers. The other side involves investing the funds in such a way as to
maximize the bank's income." (Culbertson; 1972: 135)

“Commercial Banks are the only one institution that accepts demand deposit, their role is to
furnish short-term funds to business, agriculture, and government but through the year they
have become veritable departmental stores of finance. Their functions include substantial
activity in the granting of intermediate term credit through term-loan and long-term credit
through leasing and the acquisition of government bonds and mortgage. Other services
include acceptance of time and saving deposit and the making consumer loans." (Robiheck
and Cohenman; 1967: 61)

Thus, advancing loan is the important and primary function of the Commercial Banks. It
makes possible to financing of the agricultural, commercial and industrial activities of the
nation. And, almost all banks have the loans and advances as their major source of income.

2.1.2 Loan

Loan is the credit provided by financial institutions to their client. "A loan customarily
includes a specified rate of interest that must be paid with the principal amount of the loan at
the maturity of a loan contract.” (Welshans and Melicher; 1980:55). Loans and Advances are
provided against the personal security of the borrower or against the security of immovable
and movable properties. Loans and Advances are the most importance assets of commercial
banks which dominate the assets side of balance sheet.

A Commercial Bank is a profit-making business corporation and making profit is its main
objective. Loans and advances are the main source of creating profitability for them.

"Loans represent the most important part of the total bank assets, and income from loans is
the greatest contributor to bank profits. The principal profit making activities of Commercial
Banks is making loan to its customers." (Reed and [Link]; 1976:105)

"The Loan Portfolio of the banks is the largest part of their total assets, and it accounts for the
greatest part of their earnings." (Vickers; 1985:180)

"The term credit is used to designate a type of transaction, a type of commercial relationship
between individuals or business organization. When credit is used, values pass from one

18
party to another with the understanding that payment will be made at a future time. (Bartels;
1967: 3)

[Link] Loan Classification

Bank loans can be classified in a variety of ways such as on the basis of maturity, origin,
purpose, performance, methods of repayment and many others. Some are described as below:

i) Security

On the basis of security loans can be classified into two types; secured and unsecured.
Secured loans involve the pledge of specific collateral. Pledge collateral for secured loans
may consist of a verity of assets such as real state, warehouse receipts, account receivables,
plants and equipments, trust receipts, corporate stocks, bonds etc. The basic requirement of
such assets is marketability.

Unsecured loan means a loan not so secured. Such loans are based more exclusively on the
integrity and financial condition of the borrower, his expected future income, and his past
record of repayment.

ii) Maturity

Banks loans can be classified according to the maturity of the loan contract as short,
intermediate and long-term.

Short-term loans are usually defined as those with maturities of one year or less, intermediate
loans mature in more than one year and up to seven or eight year and long-term loans have
still longer maturities.

iii) Purpose

Other important method of classifying loans in an economic analysis of bank lending is on

the basis of the purpose of the loan by the borrower.

We have such categories as corporate loan, business loan, consumer loan, real estate loan,
industrial loan, housing loan, vehicle loan, agriculture loan education loan, loans for
purchasing and carrying securities etc.

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IV) Origin

Loans can be also classified on the basic of origin. The portfolio of commercial bank is
derived principally from three major sources, directly from borrowers, by the purchase of
notes from dealers of auto-mobiles and other consumer goods and by purchasing notes from
commercial paper dealers.

Loans and advances is the major source of income of commercial banks and it is the greater
contributor to bank profit, however, it is very important to remember that performing loans
only can add the profit of bank and can move the banks towards the way of success where
non-performing loans move the bank towards the way of [Link] known saying prevails
in banking sector that- ‘A bad loan can wipe out the profit from hundred good loans’.
Therefore, Bankers must try of lent good loans.

[Link] Good Lending Techniques

In order to make a good advances banker has to ensure the following:

i) The Character of the Borrower

The banker should thoroughly enquire into the integrity and reliability of the borrower. The
success of the loan very much depends on the truth of representation of the facts made by the
customer and his capacity to run the scheme to a successful conclusion. This depends on his
technical competence management skill and experience in particular industry or trade.

ii) Collection of Credit Information

In case of new customers, the banker has to collect credit information before deciding to
make an advance to the customer. Such can be collected through the loan application and
documents submerged by the borrowers and by personal [Link] can also ascertain from
managers of other banks, other traders, financial broker etc.

iii) Nature of the Proposition

Banker should give emphasis on nature of the proposition before deciding loan advancement.

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iv) Security

No doubt banker should rely more on the customer and his proposition. But, still it is risky to
lend without security.

v) Capacity

The banker must reasonably be sure about the capacity and integrity of the customer
regarding utilization of credit for the purpose for which it is taken. The customer must have
the marginal competence and hard working nature.

vi) The Amount

Banker should approve the limit to the customer by analyzing the nature and volume of the
business. Banker should monitor that the amount of the loan required is properly utilized for
which the loan has been taken.

vii) Source of Repayment

The banker should enquire the source of borrower from which repayment of loan is promised.

viii) Profitability

Interest on advance is the main sources of banker’s revenue and the interest charged on
advances depend on several factors such as the bank rate on loans and advances, the rate of
interest paid on deposits and the risk involved in the particular advance and any other special
consideration. The bank should analysis the profitability of loans and advances before
granting it.

[Link] Credit Appraisal

Credit Appraisal is the process of judging the soundness of credit proposals by carefully
assessing the risks involved in extending credit to the proposals submitted by the borrowers.
Appraisal involves basically two aspects. They are: determination of the credit limit to be
given and the safety of such credit. Bankers are mostly guided by the security offered, the
character of the borrower and their past experience involving a detailed study of business
plans, analysis of balance sheet, profit and loss accounts, cash flow statementand fund flow

21
statement of both past and projected by using ratio analysis. The usual steps involved in the
appraisal of credit are given below.

i) Initial Interview with the Customers:

In the initial interview, the banker ascertains the following:

 The character, capacity, integrity of the borrower.
 The purpose for which the loan is being requested – whether productive or
unproductive.
 Prospects of his/her proposal whether it will succeed or fail.
 Repayment capacity of the borrower including a consideration of the source of
repayment.
 The collateral that is being offered as security must be investigated from the
following viewpoint:
o Whether it is easily marketable.
o Value of the security at present.
o Whether the value of the security is likely to be stable or not.
o In case of default in repayment whether it is easily transferable or not.

ii) Credit Investigation of the Customers:

For credit investigation of the customer, the banker looks into:

 Past history of the account reports from other bankers and people in the same line
of business in the case of new customer,
 Documents like memorandum of the association, articles of association, charges
registered and also the journal of annual return available with the registrar of joint
stock companies,
 A visit to customer's place of business.

iii) Analysis of audited and projected balance sheet, profit and loss account, cash
flow statement and funds flow analysis in the case of existing companies.

iv) In the case of new companies or new projects of existing companies, there must
be a critical appraisal of the projects which includes the followings:
 Examination of technical feasibility whether project is economically viable.

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 The competence of the managerial personnel to successfully complete and run the
project.
 Examination of the cash flow to ensure the repayment of the loans and advances.
(Radhaswamy; 1979: 210)

[Link] Components of Loan Policy

Normally, the established loan policy consists following components:
 Loan volume
 Loan mix
 Pricing
 Lending authority
 Securities
 Risk analysis
 Loan administration and control mechanism
 Loan classification.

[Link] Principles of Good Lending

A banker has to follow a cautious policy and conduct the business of lending on the basis of
certain sound principle. Credit and investment should be secured and generate good income.
Therefore, it is important that bank extends credit facilities based on certain principles, which
are as follows:
 Principle of safety and security
 Principle of liquidity
 Principle of profitability
 Principle of diversification
 Principle of national interest.

2.1.3 Portfolio

In general, portfolio is a combination of assets or investment alternatives that provides the

investor a maximum attainable return for a given level of risk or a minimum risk for a given
level of return. In other word, portfolio could be defined as the composite mix of ownership
to financial assets investments in which a particular investor wishes to invest.

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"A Portfolio simply represents practice among investors of having their funds in more than
one asset. The combination of investment asset is called a portfolio". (Weston &Brighman;
1982: 245)

"Portfolio means a collection or group of assets." (Gitman Lawrence; 1988: 243)

"Portfolio construction involves identifying those specific assets in which to invest as well as
determining the proportions of the inventors' wealth to put into each one." (Sharpe, Alexander
and Bailey; 2000:155)

Thus, a portfolio is the holding of a collection of investment. The concept of portfolio comes
from “NOT PUTTING ALL THE EGGS IN ONE BASKET”.

[Link] Concept of Portfolio Management

The management of portfolio is called portfolio management. The portfolio theory evaluates
the reduction of non-systematic or diversifiable risks through the selection of securities or
other instruments in to a composite holding or portfolio.

[Link] Assumptions of Portfolio Management

The basic theory assumes that the returns are independent, investors’ expectations are
homogeneous and probability distributions are stable.

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[Link] Portfolio Diversification

Portfolio diversification helps to minimize risk and different diversification techniques have
been developed for reducing portfolio risk.
Under simple diversification, securities are selected and are provided equal weight. A
portfolio consisting of 10 to 15 randomly selected securities can eliminate almost all
diversifiable risk.
Some investment counselors advocate selecting securities from different industries to achieve
better diversification. It is certainly better to follow this advice than to select all securities in
the portfolio from one industry.
Portfolio risk can also be reduced by rating the securities. It suggests that portfolio managers
can reduce portfolio risk to levels lower than those attainable with simple diversification by
not diversifying across lower-quality assets.

[Link] Capital Market Theory

Capital market theory provides the framework for determining the pricing of all the assets.
Capital market theory deals with an equilibrium model of assets prices. Specially, capital
market theory postulates the exe-ante risk-return relationship in individual assets as well as
portfolios under equilibrium conditions.

[Link] Capital Assets Pricing Model

Capital assets are the long term financial as well as real assets and CAPM is based on the
pricing of these assets. Modern portfolio theory of Markowitz suggests that the investment
decision should be based on the total risk and the price of assets should also be determined on
the basis of the total risk. But the CAPM suggests that, any investor can create a portfolio of
assets that will eliminate virtually all diversifiable risk, the only relevant risk is non-
diversifiable risk, and therefore, the investment decision and the pricing of capital assets
should be based on the non-diversifiable risk.

[Link] Market Portfolio

The market portfolio is a portfolio consisting of all the securities where the proportion
invested in each security corresponds to its relative market value. The relative market value
of a security is equal to the aggregate market value of the security divided by the sum of
aggregate market values of all securities. It plays a central role in the CAPM because the

25
efficient set consists of an investment in the market portfolio, coupled with a desired amount
of either risk free borrowing or lending.

[Link] Capital Market Line

The capital market line (CML) is the relationship between total risk and portfolio, σ p and the
expected portfolio return, E(RP) which consists of the total risk free asset and the market
portfolio. However, the total risk of an individual asset should not be used to measure its
riskiness. Because some of the risk as reflected in total risk can be eliminated by
diversification.

Finally, loan portfolio management means managing different types of loan granted by banks.
It basically represents the allocation of fund to different types of consumption and investment
loans having different degree of risk and varying rates of return. Loan is advanced by
making portfolio to minimize the risk and to maximize the return. There is one saying that
'Don't put all eggs on the same basket'. This saying is very important for banking sectors. It
means bankers should not grant the loan in only one sector. If loan is advanced in only one
sector, the loan may shrink if that sector becomes sick. Therefore, a bank must diversify its
loan advancement on different sectors.

2.2 Review of Journals and Articles

A bank is a government regulated, profit making business that operates in competition with
other banks and financial institutions to serve the saving and credit needs of its customers.
The primary business of banks is accepting deposits and lending money. Banks accept
deposit from customers who want the safety and convenience of deposit service and the
opportunity to earn interest on their excess funds. (Sapkota, 2011)

Kunwar, (2001) in his article, "Consortium Loan," has explained the importance of
consortium loan. He has described, 'A consortium loan is a type of loan in which commercial
banks, in syndication, finance a project. This is done with the aim of diversifying the risk of
the commercial Banks.

He further explained that consortium lending offers both banks and borrowers an ideal option
to meet their requirement conveniently. For the borrowers, consortium finance will help raise
a large volume of loans. It will help to minimize the time and the cost involved in the lending
arrangement. It will also be instrumental in reducing risk to the lenders, and will help

26
mobilize financial resources through various financial institutions and banks to promote large
projects in the country. The government will also have to initiate changes in the environment
in such a way that the banks are able to use their liabilities properly. It becomes absolutely
necessary that consortium financing be developed in such a way that it serves as an important
tool for the development of the nation.

Karki, (2059 B.S.) has published her article, "Challenges of Non-Performing Loan
Management in Nepal" where she has mentioned the causes of increasing trend of non-
performing loan. The major causes that she has identified are:
- Poor loan analysis
- Guarantee oriented loan system
- Depreciation of valued assets
- Misuse of loan
- Lack of regular supervision of loan.

Poudyal, (2009), in his article, "The Problem of Non-Performing Loans" has explored that
high risk and connected lending practices, lack of appropriate credit appraisal mechanism and
monitoring system led to undermine the banking systems' credit portfolios. He further added
that the public sector banks have been under a restructuring 2program supported by the
World Bank since 2000. As part of restructuring program, loan recovery, aggressive loan
write-offs and improved supervision have contributed to the significant fall in the level of
NPLs in these banks. However, the public banks still maintain a high NPL figure and a
significant negative capital adequacy ratio. Foreign joint venture banks and private sector
banks have faced much better in terms of NPLs compare to their state counter parts.

He has suggested that addressing the NPL and capital deficiency of the public banks should
be the government's priority. The government should recapitalize NBL and RBB to bring all
of them above the minimum CAR level of 11 percent and ensure sound management
practices, credit worthiness of borrowers and implement bust collection mechanism to
address defaults, given the history of politically influenced lending.

Shrestha (2011) in her article “Lending Operations of Commercial Banks of Nepal and its
Impact on GDP”has presented the analysis of contribution of commercial bank’s lending to
the GDP of Nepal. She has set the hypothesis that there has been a positive impact of lending
of commercial banks to the GDP. In research methodology, she has considered GDP as the

27
dependent variable and various sector of lending i.e. agriculture, industrial, commercial,
service, general and social sector as independent variables. A multiple regression technique
has been applied to analyze the contribution.

The multiple analyses have shown that all the variable except service sector lending have
positive impact on GDP. Thus, in conclusion, she has accepted the hypothesis i.e. there has
been positive impact on GDP by the lending of commercial banks in various sector in
economy, except service sector investment.

Ghimire (2012) in his article titled “Credit Sector Reform and NRB” has tried to highlight
the effect of change of amendment in NRB directives regarding loan classification and loan
loss provisioning. Although the circumferences leading to financial problem or crisis in many
Nepali banks differ in many respects, what is common among most of the banks is increased
size of non-performing assets. To resolve the problem of losses or likely losses of this nature
facing the industry, NRB has amended several old directives and issued many new circulars
in recent years.

He pointed that since majority of the loans of most of the commercial banks of the country at
present falls under substandard, doubtful and even loss categories, loan loss provision now
compared to previous arrangement would be dramatically higher. He has also stated that
tightening provisioning requirements on NPL is essential to ensure that banks remain liquid
even during economic downturns.

In conclusion, he has mentioned that in the recent years NRB has worked for management
and reform of the credit of the financial institutions more seriously and NRB has adopted
reforms not just to deal with problematic banks but also to strengthen banking supervision to
reduce the livelihood of the future crisis. All prudential directives of NRB in the connection
of credit sectors reforms have been made revised on and after April 2001. To adopt such
changes, there can be some difficulties and for better and harmonized reforms, NRB should
continue to be supportive, proactive and also participative to take opinion of the bankers for a
change in regulations/policy taking place in the future.

In the post report titled “Loan Loss Provision Rises Notably” published on Nepal Rastra
Bank Samachar – Vol 47 (2013), the reporter has made an endeavor to highlight some facts
and figures regarding loan loss provision of commercial banks. The banking sector is
witnessing a huge surge in loan provision reserve lately. The increment is primarily a result

28
of directive issued by NRB in 2012 that introduced stringent loan provisioning criteria for
commercial banks. The reporter further states that apart from the two technically insolvent
government-invested banks, the loan provision of other joint venture and private banks has
also risen significantly and the notable increments seen in the loan loss provisioning amounts
is due to the eight-point prudential directives that the central bank issued to all the
commercial banks. The reporter concludes that the directives laid down stringent guidelines
relating to loan loss providing to ensure a good health of the overall banking system. The
directives require loans to be provisioned to the extent of cent percent if payment is defaulted
for one year. Likewise, the directives require loans to be provisioned to extent of 25% if
payment is defaulted for over three months and 50% if the payment is defaulted for over six
months to 1 year.

2.3 Review of NRB Directives

NRB has issued Unified Directives-2071 to licensed Bank and Financial institutions. Some of
them, related to the study, have reviewed to fulfill the objective of the study.

2.3.1 Classification of Loans and Advances

According to Directive no.2 (1), Loans and Advances can be classified into four categories on
the basis of loan’s repayment due period (or ageing).These are as follows:
i) Pass loan: Loans and Advances whose repayment amount are not past due or past due
for a period up to three months shall be included in this category.
ii) Sub-Standard loan: Loans and Advances which are past due for period of three
months to six months shall be included in this category.
iii) Doubtful loan: Loans and Advanced which are past due for a period of six months to
one year shall be included in this category.
iv) Loss Loan: Loans and Advances which are past due for a period of more than one
year shall be included in this category.

Pass loan is defined as a performing loan and restructured/rescheduled, sub-standard,

doubtful and loss loan are defined as non-performing loans.

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2.3.2 Arrangement of Loan Loss Provision

In directive no. 2 (9), loss loan provision that should be maintained by commercial banks for
their different loans and bills purchased is described.
Table: 2.1
Loan classification
Loan Classification Minimum Required loan loss provision
Pass Loan 1%
Sub-standard Loan 25%
Doubtful Loan 50%
Loss Loan 100%

Following loan loss provision should be maintained for reschedule or restructure loan:

a. If loan is classified as a pass loan on the process of reschedule or restructure, for such
type of loan, at least 12.5 percent loan loss provision shall be arranged. For sub-
standard, doubtful and loss loan on the process of reschedule or restructure, the loan
loss provision that is maintained before reschedule or restructure should not be
changed till two years.

In respect of following Equal Monthly Installment (EMI) loans, additional loan loss
provision for reschedule or restructure shall not be maintained if loan principal and
interest are regular:
- Loan installment amount or installment number becomes less due to
prepayment installment.
- Loans period or installment amount is changed due to change in market
interest rate.
b. If interest and principal of restructured or rescheduled loans have been served
regularly since last two years, such loans can be converted into pass loan.

2.3.3 Limit Determination of Loan, Advances or Facility

a. Grade ‘A’, 'B' and 'C' financial institutions can lend loan maximum 25 percent of
their core capital on fund-based single loan and maximum 50 percent of their core
capital on non-fund based single loan.

The limit of single customer loan provided on export sector, small or medium
industries, medicine production industries, agriculture sector, tourism industries,

30
cement industries, iron industries and others productivity sectors which help in
national productivity and employment is fixed at maximum 30 percent.

b. Licensed financial institutions can invest maximum 50 percent of their core capital on
fund based loan and non-fund based facility related to hydropower project, electricity
transmission line and cable car project. But, to invest loan more than 25 percent of
core capital, concerned institution must have Power Purchase Agreement necessarily.

2.3.4 Risk Classification

The licensed institutions should classify the risk for the risk monitoring purpose on following
ways:
1. Liquidity risk
2. Interest risk
3. Foreign exchange risk
4. Loan and investment risk
5. Operational risk

2.3.5 Provision regarding cash reserve

The grade A, B and C graded financial institutions should keep 5%, 4.5% and 4% cash
reserve of their total deposit.

2.3.6 Provision regarding statutory liquidity ratio

The A, B and C graded financial institutions should keep 12%, 9% and 8% statutory liquidity
reserve. But, those B and C graded financial institutions which do not accept current and call
deposits should maintain 6% statutory liquidity reserve.

2.4 Review of Thesis

Before this thesis, several theses have been conducted. Some of them, as supposed to be
relevant for this study, are presented below:

Sijapati, (2004), on his study "Analysis of Loan-Investment Portfolios of Commercial Banks"

has the following objectives:
- To identify the priority and deprived sector loan outstanding of banks.
- To analyze the composition of loan investment portfolios.
- To measure the relative rate of return and risk on the loan.

31
- To analyze the trend of interest accrued amount.

He has analyzed the data of his study by applying statistical and financial tools like standard
deviation, coefficient of correlation, correlation analysis, test of hypothesis, total loan
outstanding to deprived and priority sector loan, loans and investment to total deposit ratio
etc.

The major findings of his study are:

- Both the investments and loans and Advances of financial system are in a rising trend
during the study period.
- The study revealed that sampled banks have provided significant amount of credit to
different sectors of economy such as agriculture, mining productions,
communications, transportation and many more.
- In relation to the classification -wise analysis of sampled banks' loans and advances,
the study has revealed that these banks polices around an average of 9.03 percent of
non-performing loans. The largest portion of 14.2 percent is held by NBBL and the
least portion of 4.45 percent held by SCBL among the sampled banks.
- One the analyses that were focused on the average growth on annual loan-loss
provision, total provision, and total and net loan outstanding of these sampled banks
has revealed that these bank's annual loan loss provision grew by 46.1 percent, total
loan loss provision grew by 37.8 percent total loan outstanding grew by 16.2 percent
and net loan outstanding grew by 15.5 percent annually.
- During the study period of 1998 to mid-January 2004, sampled banks' interest accrued
has increased by 41.1 percent annually.

Devkota, (2005), on his study, "Lending Policy of Joint Venture Banks in Nepal: A Case
Study of NBIL, SCBNL and HBL" has the following objectives:
- To study the lending policy of commercial bank and its effect on lending practice.
- To measure the lending strength with respect to the volume of contribution made by
each bank in lending.
- To analyze the portfolio behaviour of lending made on private priority and productive
sector.
- To measure the lending performance of commercial banks.

32
He has analyzed his study by using financial and statistical tools like Activity ratio,
profitability ratio, standard deviation, coefficient of variance, time series etc.

His study's major findings are as follows:

- NRB has directed the commercial banks to extend a certain percentage of their total
outstanding (ranging from 7.25 percent, to 10 percent) loan to the priority sector. The
commercial banks satisfied the priority sector lending requirement and also deprived
sector loan has lending satisfactory during the study period.
- The portfolio analysis has revealed that the flow of loans and advances in private
sector has the lowest priority among these commercial banks.
- Among the various measures of profitability ratios, the EPS reflects the relative
measures of profitability. The performance of SCBNL is significantly better than
other two banks.
- The propensity of growth measured by trend analysis has revealed the HBL, supper
performance not only in performance, not only in percentage growth but also volume.

Joshi, (2008), in her thesis, "A Study of Credit Management and Its Effect on Non-
Performing Assets in Nepalese Joint Venture Banks: A Comparative Study of EBL and
NABIL bank" has the following objectives:
- To assess credit practices of selected Nepalese joint venture banks and to explore the
credit efficiency of these banks.
- To explore the relationship of loans and advances and non-performing loans.

She has analyzed the raw data by applying statistical tools like standard deviation, coefficient
of variance, correlation analysis and financial tools like asset management, credit efficiency,
profitability etc.

And, her major study results are:

- Lending policy of EBL with regard to non-performing loan to total loans and
advances was found lowest value as compare to Nabil bank.
- EBL has low degree of ratio of interest suspense to invest income from loans and
advances. The low degree of ratio of 0.0779 shows that it has high interest turnover.
The decreasing ratio is also the symbol of effectiveness.
- Correlation coefficient between loans and net profit of NABIL bank was found 0.508
it means moderate relationship between loans and net profit whereas EBL has 0.938

33
and it shows the high relationship between loan and Net profit. In the same way, co-
efficient of determination of Nabil Bank and EBL are 25.8 percent and 87.98 percent
of total change in net profit by total loan in Nabil bank and EBL respectively. The
profit is highly determined by loan in EBL as compared to Nabil bank.

Bajagai, (2009), has conducted a research entitled, "A Case Study on Lending Policy and
Practices of Commercial Banks in Nepal" The main objectives of his study are:
- To study the relationship among different financial indicators.
- To measure the efficiency of lending policy.
- To identify major weakness of lending policy of sample banks and to analysis the
portfolio behavior of lending policy of these banks.

He has analyzed the data of his study by applying financial tools such as loan and investment
to total deposit, total interest bearing deposit to total deposit, non-performing loan to total
loans ratio, Cash and bank balance to total deposit ratio etc. and statistical tools such as
standard deviation, regression analysis, coefficient of variation etc.

Major findings of his study are as follows:

- EBL is able to maintain cash and bank balance to total deposit ratio and NABL and
LBL did not maintain their ratio.
- The volume of interest income from loans and advances is in increasing trend during
the study period.
- The volume of non-performing loan is in increasing trend but the growth rate of NPL
is in decreasing trend.
- Regression equation of Non-performing loan and advance on loan and advances of
LBL is negative which reveals the negative relationship between these two variables.
- The volume amount of loan and advances of all sampled banks is in increasing trend
that indicates in the future the commercial banks are able to generate more profit from
their lending activity.
- Nabil and EBL are able to get highest profit in the study period, however, LBL was
suffering from loss.
Mahat (2013), in her thesis, “Comparative Study of Deposit and Loan Portfolio Management
of Kumari Bank Ltd. and Everest Bank Ltd.” has the following objectives:
- To compare the liquidity management, asset management, efficiency, profitability
position, investment practices,

34
- To find out the relationship between deposit and total investment, deposit and loan
and advances and net profit,
- To find out the non-performing loan position of the banks,
- To evaluate the portfolio management of the banks.

He has analyzed the data of his study by applying various financial tools and statistical tools
such as ratios, mean, standard deviation and correlation.

Major findings of his study are as follows:

- Deposit portion of both the banks are in increasing trend where current deposits are
highly increased than other deposit.
- Loans and advances to total deposit ratio of KBL is ranging from 0.82 to 0.89 where
as the ratio of EBL is ranging from 0.71 to 0.80.
- Loan loss provision to total loans and advances ratio of KBL is ranging from 0.01 to
0.02 where as the ratio of EBL is 0.03 to 0.04. KBL has less loan loss provision to
total loans and advances than that of EBL.
- Non-performing loans to total loans and advances ratio of KBL is consistent with 0.01
& EBL is ranging in between 0.01 & 0.02.
- Interest income to total income ratio of both the banks are fluctuating over the
periods.
- Net interest margin of KBL is in between 0.03 to 0.05 whereas the net interest margin
of EBL is in between 0.03 to 0.06. Net interest margin of both the banks is decreased
in last four years.
Dhakal (2014), has conducted a thesis titled “Loan Portfolio Management of Himalayan
Bank Ltd.”. The main objectives of his study are:
- To analyze the effectiveness of lending policy of the selected commercial banks,
- To examine the trend of deposit and loans of commercial bank,
- To study the liquidity position, the impact of deposit on liquidity and its effect on
lending performance,
- To measure the performance in quality, efficiency and contribution of profitability.
He has analyzed the data of his study by applying ratio analysis, cash flow analysis, trend
analysis, comparative statement analysis as well as statistical analysis.
The major findings of his study are:
- Advances to total deposit ratio of HBL is in increasing trend.

35
- The loans and advances to total assets ratio is also in the increasing trend till first four
year but in the last year the ratio decreases. The ratio of HBL is quite fluctuating. It
indicates that HBL having large volume of capital in business have not been
succeeded in generating proportionately higher volume of loans and advances.
- Interest income to total income ratio of HBL is quite impressive which reveals that
HBL invested the fund successfully to earn the interest. Correlation coefficient
between total deposits and loans and advances were found positively correlated.
Correlation coefficient between investment and loans and advances were found
negatively correlated.

2.5 Research Gap

The purpose of this study is to develop some expertise and ideas in the area of loan and
advances. It is focused on seeing the loan portfolio composition of three commercial banks
and tried to receive some ideas and knowledge and make suggestion about the loan portfolio
management of these banks.

The review of above relevant literature has contributed to enhance the fundamental
understanding and knowledge which is required to make study meaningful and purposive. It
is true that it has been found some previous theses related to same topic and when completing
this study, the previous studies have been not ignored because they provide the foundation to
the present study. However, the present thesis is somewhat different than previous theses.
Previous theses were unable to present the exact condition of loan portfolio management of
Nepalese commercial banks. Similarly, the previous researchers could not submit the present
facts or latest information. To fulfill the above mentioned gaps and to remove the weakness
of previous theses, this study is carried out by using the most updated data and latest
information as available. Similarly, this study analyzes the entire Loan Portfolio (i.e. security
wise, sector wise, product wise) of sample banks showing the lending priority sequence of
selected banks. Therefore, regarding all this things, I think, the current study is a supplement
to overcome the weakness and the limitation of previous studies. This study can provide the
latest information about the loan portfolio of Nepalese commercial banks and, certainly, it
will prove landmark for the upcoming students and other personals interested in this topic.

36
CHAPTER-III
RESEARCH METHODOLOGY

3.1 Introduction

Research means to search the problems again and again to find out something more about the
problem. Research may be defined as a method of studying, analyzing and conceptualizing
social life in order to extend, modify, correct or verity knowledge, whether that knowledge
aids in construction of a theory or in practice of an art. Similarly, methodology refers the
various steps that are generally adopted by a researcher in his/her research problem along
with the logic behind it. Therefore, Research methodology is the process of arriving at a
solution of the problem through planned and systematic dealing with the collection, analysis
and interpretation of facts and figures.

In order to accomplish the objectives of the study, the data has been used especially of the
secondary nature. The collected data will be analyzed by using various statistical and
financial tools which are believed to the useful for the study. For this purpose, the financial
data of the last five year i.e. 2009/10 to 2013/14 have been examined and the following
research methods have been adopted.

3.2 Research Design

The proposed study is mainly based on two types of research design namely Descriptive and
Analytical. Descriptive research design is used for conceptualization, problem identification,
conclusion and suggestions for the study. Similarly, Analytical research design is used to
analyze gathered facts and information and to critically evaluate it as well.

3.3 Population and Sample

The population refers to the industries of the same nature and its services and products in
general. Thus, under the study of Loan Portfolio Management of Nepalese Commercial
Banks, total number of commercial banks including domestic and joint venture bank
operating in Nepal is the population. And, among these banks, Kumari Bank Ltd., Himalayan
Bank Ltd. and Bank of Kathmandu Ltd. are taken as sampled banks.
Here, Population Size = 30
Sample Size =3, Sample Percent = 10.

37
3.4 Sources of Data and Data Collection Techniques

The data presented in this study are of secondary type. For the purpose of the study, the data
are gathered from various sources such as reports and websites. The major sources of data for
the study are:
* Annual report of Kumari Bank Ltd.,
* Annual report of Himalayan Bank Ltd.,
* Annual report of Bank of Kathmandu Ltd.,
* NRB reports,
* Various publications dealing in the subject matter of the study,
* Various articles published in the newspapers.

3.5 Data Analysis Tools

Presentation and analysis of the collected data is the core of the research work. The collected
raw data are first presented in a systematic manner in tabular form and then, they are
analyzed by applying different financial tools such as assets management ratio, profitability
ratio & credit risk ratio and statistical tools such as arithmetic mean, standard deviation,
coefficient of variation, correlation, coefficient of determination are calculated to achieve the
research objectives. Besides these, some graphs, charts and tables are presented to analyze
and interpret the findings of the study.

3.5.1 Financial Tools

Financial tools are used to examine the financial strengths and weakness of the bank. In this
research all the possible financial tools are used which are as follows:

1. Asset Management Ratio

Assets management ratio measures how efficiently the bank manages the resources at its
command. It shows the financial condition of the institutions. This ratio is analyzed to
identify the major strengths and weaknesses of the institutions. The following ratios are
calculated under this:

38
i. Loans and Advances to Total Assets Ratio

This ratio measures the proportion of loans and advances in the structure of total assets. It
also measures the proportion of risky asset in total assets structure. This ratio can be
calculated by using following formula:

Loans and advances

Loans and Advances to Total Assets Ratio = Total Assets
Where, Total Assets = Cash balance + Bank balance + Money at call and Short notice+
Investments + Loans, Advances and Bills Purchased + Fixed Assets + Other.

ii. Total Loans and Advances to Total Deposit Ratio

This ratio is calculated to find out to what extent the banks are able to mobilize their
depositor’s fund to earn profit by providing the funds to outsiders in the form of loans and
advances. The greater ratio indicates the better utilization of total deposit and vice versa. This
ratio can be calculated by using following formula:

Total Loans and advances

Total Loans and Advances to Total Deposit Ratio = Total Deposit
Where, total loans and advances includes loans and advances and Bills purchased /
discounted.

Total Deposit= Current Deposit + margin Deposit + Saving Deposit + Fixed Deposits + Call
Deposit + Certificate of Deposit + others Deposit.

2. Profitability Ratio

Profitability ratios are calculated to measure the efficiency of operation of a firm in term of
profit. It is an indicator of the financial performance of any institution. This implies that the
higher the profitability ratio, better the performance of the bank and vice-versa. The
following ratios are calculated under this:

39
i. Net Profit to Total Loans and Advances Ratio

Net profit to Loans and Advances ratio measures the percentage of Net profit against the
Loans and Advances. This ratio can be calculated by using following formula:

Net Pr ofit
Net Profit to Total Loans and Advances Ratio= Total Loansand Advances

ii. Interest Income from Loan and Advances to Total Interest Income Ratio

Interest Income from loans and advances to total interest income ratio is calculated to find out
the proportion of lending interest in total interest. This ratio can be calculated by using
following formula:

Interest Income from Loan and Advances to Total Interest Income Ratio =
Interest Income from LoansandAdvances
Total Interest Income

Where, Total Interest Income = Interest from loans and advances + Interest from Investment
+ Interest from Agency Balances + Interest from money at call and short notice + Interest
from others.

iii. Total Interest Income to Total Income Ratio

Total interest income to total income ratio has been calculated to find out the proportion of
interest income in total income and to measure the performance of Banks. This ratio can be
calculated by using following formula:

Total Interest Income

Total Interest Income to Total Income Ratio = Total Income

Where, Total Income = Interest Income + Income from Commission and discounts +
Exchange Fluctuation Income + Non-operating Income + Others Income + Provision written
back.

40
3. Credit Risk Ratio

Credit risk ratio measures the quality of loans and advances. It measures the possibility that
loan will not be paid or that investment will deteriorate in quality or go into default with
consequent loss to the bank. The following ratios are evaluated under this topic:

i. Non-Performing Loans to Total Loans and Advances Ratio

This ratio determines the proportion of non-performing loans (NPL) in total loan portfolio.
The NPL has the negative impact on the profitability of the banks. The higher ratio indicates
the bad quality of assets of banks in the form of loans and advances which shows the high
credit risk and vice-versa. This ratio can be calculated by using following formula:

Total Non-Performing Loan to Total Loans and Advances Ratio

TotalNon−Performig Loans
= Total Loans and Advances

Where, Total Non-Performing Loan = Sub-standard Loan + Doubtful Loan + Loss Loan.

ii. Loan Loss Provision to Total Non-Performing Loan Ratio

This ratio shows the proportion of LLP to total NPL of banks. NPL is the burden of financial
loans of the banks which creates the credit risk to the banks. The LLP works as a safeguard
against the future contingencies that may create due to the NPL. This ratio can be calculated
by using following formula:

Loan Loss Provision to Total Non-Performing Loan Ratio

Total Loan Loss Pr ovision
= Total Non− Perfor min g loan

41
3.5.2 Statistical Tools

For supporting the study, various statistical tools can be applied. In this study, the following
statistical tools are used:
i. Arithmetic Mean
ii. Standard Deviation
iii. Coefficient of Variation
iv. Correlation Coefficient
v. Coefficient of Determination
vi. Probable Error
vii. Trend Analysis

i. Arithmetic Mean

Arithmetic mean or simply a mean of a set of observations is the sum of all the observations
divided by the number of observations.

Let, X1, X2, X3 .... Xn be the n values of the variable then their arithmetic mean denoted by X
is defined by
X 1 + X 2 + X 3 ..... X n
X=
n
ΣX
X=
 n
Where, n is the number of observations.

ii. Standard Deviation

The standard deviation is the absolute measure of dispersion. Standard deviation is the square
root of the mean of the squared deviation where deviation is the difference between an
outcome and the expected mean value of the standard deviation. It is denoted by .

√
2
Σ( X −X )
σ=
n
Where, n = no. of observation.

42
iii. Coefficient of Variation

Coefficient of variation is a relative measure of risk. The coefficient of dispersion based on

standard deviation multiply by 100 is known as the Coefficient of Variation (C.V). It is a

suitable measure for comparing variability of two series wills same or different units. If X
be the arithmetic mean an , the standard deviation of the distribution, then the C.V. is
defined by
σ
C .V . = x 100
X

iv. Correlation Coefficient

Correlation Coefficient is used to describe the degree to which one variable in the linearly
related to other variables. It refers the closeness of the relationship between two or more
variables. Correlation may be of the following three types:
a. Positive and Negative
b. Linear and Non-Linear
c. Simple, Multiple and Partial

If two variables vary in the same direction i.e. if increase in the value of one variable results
increase in the value of other variable, then the two variables said to have positive
correlation. On the other hand, two variables are said to have negative correlation if two
variables move in the opposition direction.

The correlation between two variables is said to be linear when a unit change in one variable
result a constant change in the other variable over the entire range of the values and if
corresponding to a unit change in one variable, there is no constant change in other variable,
then correlation is said to be non -linear.

The correlation between two variables is known as simple correlation. When three or more
variables are considered, then the correlation may be multiple or partial.

The following methods can be used to study the correlation between two variables:
i. Scatter diagram
ii. Karl Pearson's correlation coefficient
iii. Spearman's rank correlation

43
In this study, Karl Pearson's Correlation Coefficient method is used to analyze the data.

r=
∑ xy
√ Σx 2 × Σy 2
Where, x = X− X and y = Y −Y

Interpretation:
i. When, r = 1, there is positively perfect correlation between the two variables.
ii. When, r = (-1), there is a negatively perfect correlation between the two variables.
iii. When, r = 0, the variable are uncorrelated.
iv. Nearer the value of r to +1, closer will be the relationship between the variables and
nearer the value of r to 0, lesser will be the relationship.

v. Coefficient of Determination

Coefficient of determination is the square of correlation coefficient (r). It describes the extent
of changes in dependent variable that can be explained by the independent variables.

vi. Probable Error (P.E.)

The P.E. of the coefficient of correlation helps in interpreting its value. With the help of P.E.,
it is possible to determine the reliability of the coefficient in so far as in depends on the
conditions of random sampling. The P.E. of the coefficient of correlation is obtained as
follows:

1−r 2
P.E. = 0.6745 x √n
Where, r = correlation coefficient, and n = number of pairs of observation

Interpretation

It the value of 'r' is less than six times of P.E, there is no evidence of correlation i.e. the value
of 'r' is insignificant. And, if the value of 'r' is more than six times of P.E., the coefficient of
correlation is practically certain i.e. the value of 'r' is significant.

44
vii. Trend Analysis

Trend analysis is an analysis of financial variables over time used to determine the pattern of
growth which enables us to forecast the future behavior of the studied variables, changes in
the values of these variables and past behavior of these variables. This information is crucial
for management to make decision regarding future. This method is widely used in practice.
Trend Analysis is based on the assumption that past tendencies continue in the future. Under
this heading the effort has been made to calculate trend values of deposit, loan and advances,
and non-performing loan from mid July 2009/10 to 2013/14. The trend behavior of these
variables is analyzed by using the following trend equation:

y = a + b.x

The above trend equation can be calculated using following two normal equations:

∑ y=na+b ∑ x …………………….(i)
∑ xy=a ∑ x +b ∑ x 2 ………………..(ii)
Where,

y= variable
x= Time span

45
CHAPTER – IV
DATA PRESENTATION AND ANALYSIS

Presentation and Data Analysis chapter is the major chapter of this study because it includes
detail analysis and interpretation of data from which concrete results of Nepalese financial
market can be obtained. This chapter determines the quality of the study.

The main objective of the study is to analyze the loan portfolio management of commercial
banks. In this chapter, all the efforts have been made to show the clear picture of lending
portfolio and lending operation of commercial banks.

To fulfill the objectives, relevant data collected from the various sources have been analyzed
and interpreted using various financial and statistical tools following the research
methodology explained in the third chapter. Various tools, diagrams, graphs have been used
as per the need to present and analyze the data. This chapter also provides the major findings
of the study which are very helpful for the subject matter of this study.

4.1 Ratio Analysis

An arithmetic relationship between two figures is ratio. In other words, the relationship
between two accounting figures expressed in mathematical term is known as financial ratio.
Ratio analysis is used to compare a firm’s financial performance and status to that of other
firms or to itself overtime. Ratio Analysis assists in identifying the major strengths and
weakness of any institution. It is a technique of analysis and interpretation of financial
statement. It is very helpful for decision making of any forms. To fulfill the objectives of the
study; the following ratios are calculated and then analyzed as per the need.

4.1.1 Assets Management Ratio

The following ratios are calculated under this:

[Link] Loans and Advances to Total Assets Ratio

This ratio measures the proportion of loans and advances in the structure of total assets which
reflects to which extent commercial banks are success in mobilizing their fund on loans and
advances for the purpose of income generation. It also measures the proportion of risky asset
in total asset structure.

46
A high degree of this ratio indicates the good performance of banks in mobilizing the funds
on loans and advances and vice-versa. However, in its reverse side, the higher this ratio also
indicates the higher risky asset in total assets structure.
Table: 4.1
Loans and Advances to Total Assets Ratio
(In Percentage)

FY KBL HBL BOK Industry

2009/10 72.08 65.50 71.23 59.62
2010/11 71.38 67.54 70.56 60.11
2011/12 70.09 64.32 65.14 58.34
2012/13 68.63 64.96 69.31 59.75
2013/14 70.59 61.59 72.51 61.05
Mean 70.55 64.78 69.75 59.77
S.D. 1.32 2.16 2.82 0.98
C.V. 1.86 3.33 4.05 1.63
Source: [Link]
Figure: 4.1
Loans and Advances to Total Assets Ratio

80
70
60
50
Percentage

40 KBL
HBL
30 BOK
20 Industry

10
0
2009/10 2010/11 2011/12 2012/13 2013/14
Fiscal Year

The Table 4.1 and the figure 4.1 show the Loans and Advances to Total Assets Ratio of
sampled banks and the industry. This table shows that the KBL has the greatest average ratio
i.e. 70.55% among the sampled banks which shows that the KBL has the highest proportion
of loans and advances in its total assets structure. This highest proportion is the indicator of

47
successful mobilization of fund on loans and advances. So, it can be said that the KBL has
successfully mobilized its fund on loans and advances during the study period. On the other
hand, this high ratio indicates that the KBL has the higher risky asset. The BOK also seems
closely consistence with the KBL in this ratio which has 69.75% average mean ratio. The
HBL has the lowest ratio i.e. 64.78% as compared to other sampled banks which indicates
that the bank is unsuccessful to mobilize its fund on loans and advances and it has lowest
risky asset than other banks. Comparing to industry average, all the sample banks are
aggressive in lending loans and advances and has riskier assets than industry.

Likewise, it is found that the BOK has the highest C.V. i.e. 4.05% and the KBL has the
lowest C.V. i.e. 1.86% among the sampled banks. The HBL has the C.V. of 3.33%. On the
basis of C.V., it can be said that the BOK has the greatest variability and the KBL has the
lowest variability in this ratio during the study period. Comparing to industry, all the sampled
banks have the higher C.V. It shows that all the sampled banks have higher variability in
loans and advances. Similarly, the loans and advances to total assets ratio of KBL and HBL
seem to decrease during the study period. The ratio of BOK seems to decrease up to FY
2011/12 from FY 2009/10 and then increase from FY 2012/13 to FY 2013/14.

[Link] Total Loans and Advances to Total Deposit Ratio

This ratio is calculated to find out to what extent the banks are able to mobilize their
depositor’s fund to earn profit by providing the funds to outsiders in the form of Loans and
Advances. The greater ratio indicates the better utilization of total deposit and vice versa. The
ratios of sampled banks are presented in the following table:

Table: 4.2
Total Loans and Advances to Total Deposit Ratio (in percentage)
FY KBL HBL BOK Industry
2009/10 84.70 74.40 82.03 74.40
2010/11 86.11 77.14 83.11 76.79
2011/12 80.12 73.26 75.28 71.73
2012/13 76.50 74.85 81.43 74.18
2013/14 79.40 70.07 82.97 74.90
Mean 81.37 73.94 80.96 74.40
S.D. 3.96 2.58 3.25 1.81
C.V. 4.86 3.49 4.01 2.44
Source: [Link]

48
Figure: 4.2
Total Loans and Advances to Total Deposit Ratio
100
90
80
70
60
Percentage

50 KBL
40 HBL
BOK
30
Industry
20
10
0
2009/10 2010/11 2011/12 2012/13 2013/14
Fiscal Year

The table and the figure 4.2 show the Total Loans and Advances to Total Deposit ratio of
sampled banks over the study period 2009/10 to 2013/14. As comparing the mean value of
the table, the KBL seems the most successful bank in mobilizing its deposits on loans and
advances because it has the highest mean value i.e. 81.37% than other sampled banks. This
mean value indicates that the KBL has distributed 81.37% of its deposits on loans and
advances. The BOK is in second position in this race which has maintained 80.96% of this
ratio. As compared to industry average, all the sampled banks seem aggressive in utilizing its
deposits in loans and advances. Similarly, HBL has the lowest ratio of 73.94% among the
sampled banks. Likewise, the C.V. of KBL, HBL, BOK and industry are 4.86%, 3.49%,
4.01% and 2.44% respectively. This figure shows that the KBL has the highest and the HBL
has the lowest C.V. among the sampled banks. So, we can say that the KBL has the highest
variability and the HBL has the lowest variability in this ratio as comparing with other
sampled banks. Comparing to industry, the C.V. of all the sampled banks has higher
variability than industry. Likewise, it can be seen that the loans and advances to total deposit
ratio of all the sampled banks are fluctuating over the study period.

From the above analysis, we can conclude that the KBL and BOK seem to be strong in
mobilizing its total deposits on loans and advances. But, the HBL seems to be weak in
mobilizing its total deposits on loans and advances which is lower than the industry average
i.e. 73.94% < 74.40%.

49
4.1.2 Profitability Ratio

Profitability position of Banks can be evaluated through following different ways:

[Link] Net Profit to Total Loans and Advances Ratio

There are various sources to generate the profit, however, in banking sector, loans and
advances is the main source of it. So, in this part of analysis, discussion will be made on the
contribution of loans and advances in net profit. Net profit to Loans and Advances ratio
measures the percentage of net profit against the loans and advances. The higher ratio
indicates the greater contribution of loans and advances to earn the profit of banks and vice-
versa.
Table: 4.3
Net profit to Total Loans and Advances Ratio
(In Percentage)
FY Banks
KBL HBL BOK
2009/10 3.39 3.12 3.06
2010/11 1.64 4.47 3.50
2011/12 1.48 3.01 3.24
2012/13 1.50 2.58 2.74
2013/14 1.47 2.43 1.83
Mean 1.90 3.12 2.87
S.D. 0.84 0.81 0.64
C.V. 44.31 25.82 22.42
Source: [Link]

50
Figure: 4.3
Net profit to Total Loans and Advances Ratio

5.0
4.5
4.0
3.5
3.0
Percentage

2.5
KBL
2.0 HBL
1.5 BOK
1.0
0.5
0.0
2009/10 2010/11 2011/12 2012/13 2013/14
Fiscal Year

The table 4.3 and the figure 4.3 show the Net Profit to Total Loans and Advances of three
sampled banks during the period of 2009/10 to 2013/14. The figure of the table indicates that
the KBL has the lowest mean ratio i.e. 1.90 which shows the lending inefficiency as
compared to other sampled banks. Similarly, S.D. and C.V. of the KBL are the greatest than
the other banks that shows the more variability of the KBL in this ratio. On the other hand,
the HBL has the highest mean ratio i.e. 3.12% which indicates that the HBL’s lending
performance is the best among the sampled banks, however, it can be seen that the HBL
couldn’t reduce the variability of this ratio. It lies in the second position in the variability of
this ratio among the sampled banks. The BOK has the lowest C.V. i.e. 22.42% among the
sampled banks even though it has mean value (i.e. 2.87) lesser than the HBL. On the basis of
C.V., it can be said that the BOK has the lowest variability among the sampled banks.
Likewise, this ratio of all sampled banks seems to fluctuate during the study period.

[Link] Interest Income from Loans and Advances to Total Interest Income Ratio

This ratio is calculated to find out the proportion of interest from loans and advances in total
interest. It is said that loans and advances is the most income generating assets of every bank.
Loans and advances generate the income to the banks through the interest income. Interest
income is the major part of total income. If interest income from loans and advances occupied

51
higher proportion in total interest income, there will be greater contribution of loans and
advances to generate the income as well as the profit of the banks and vice-versa.

Higher this ratio shows the more ability of banks to get more income from their loans and
advances which indicates the lending efficiency of banks and vice-versa.

Table: 4.4
Interest Income from Loans and Advances to
Total Interest Income Ratio
(In Percentage)
FY Banks
KBL HBL BOK
2009/10 72.55 90.13 91.28
2010/11 91.04 88.85 90.90
2011/12 90.87 89.25 88.55
2012/13 95.74 92.09 94.24
2013/14 96.38 92.63 95.39
Mean 89.32 90.59 92.08
S.D. 9.72 1.69 2.74
C.V. 10.88 1.87 2.98
Source: [Link]
Figure: 4.4
Interest Income from Loans and Advances to
Total Interest Income Ratio

120

100

80
Percentage

60
KBL
HBL
40
BOK

0
2009/10 2010/11 2011/12 2012/13 2013/14
Fiscal Year

52
The table 4.4 and the figure 4.4 show the interest income from loans and advances to total
interest income ratio of three sampled banks. Referring the mean value of this table, the BOK
has the highest of this ratio among other sampled banks i.e. 92.08% which indicates the
highest lending efficiency of this bank and has the greater contribution of its loans and
advances on income generation than other sampled banks. Similarly, the KBL has the lowest
of this ratio i.e. 89.32% among the sampled banks. So, the KBL has the lowest contribution
of its loans and advances on income generation than other banks. Likewise, HBL is in second
position in this ratio. As the C.V. of KBL is higher than the other sampled banks i.e. 10.88%,
this ratio of KBL has fluctuated more over the study period. But, the C.V. of HBL and BOK
is less i.e. 1.87% and 2.98% respectively, which shows the consistency of this ratio over the
study period.

Likewise, this ratio of all sampled banks tends to increase during the study period.

[Link] Total Interest Income to Total Income Ratio

Income is a vital part of any business organizations. Income can be earned from various
sources. However, in banking sector, interest income plays a greater contribution to generate
the total income. So, this ratio has been calculated to find out the proportion of interest
income in total income and to measure the performance of sampled Banks. The recent ratio
proves that more than 50% of total interest income is occupied by interest income from loans
and advances. So, this ratio also shows the contribution of loans and advances to generate the
banking profit.

The higher this ratio indicates the better performance of banks on mobilizing their fund for
the purpose of income generation and the higher contribution of loans and advances to
generate the total income as well as the profit of the banks.

53
Table: 4.5
Total Interest Income to Total Income Ratio
(In Percentage)
FY Banks
KBL HBL BOK
2009/10 92.63 83.84 82.76
2010/11 92.05 84.41 85.70
2011/12 92.15 82.22 84.52
2012/13 91.09 81.76 81.99
2013/14 85.60 78.71 84.27
Mean 90.70 82.19 83.85
S.D. 2.91 2.23 1.48
C.V. 3.21 2.71 1.76
Source: [Link]
Figure: 4.5
Total Interest Income to Total Income Ratio
95

85
Percentage

KBL
80 HBL
BOK
75

70
2009/10 2010/11 2011/12 2012/13 2013/14
Fiscal Year

The above table 4.5 and the figure 4.5 show the interest income to total income ratio of the
sampled banks. The KBL has the highest mean value i.e. 90.70% among the sampled banks
during the study period which indicates that the MBL’s loan and advances has the highest
contribution to generate its profit and better performance of the bank to mobilize the fund in
income generation source. Similarly, this ratio of HBL and BOK are 82.19%, 83.85%
respectively. This figure shows that the HBL has the lowest of this ratio than other sampled
banks which indicates that the HBL’s loan and advances has the lowest contribution to
generate its profit. Likewise, BOK is in second position. Likewise, during the study period,

54
this ratio of KBL and HBL seem to decrease and of BOK seems to fluctuate. Regarding this
ratio, KBL has the more variability than other two banks.

4.1.3 Credit Risk Ratio

The following ratios are evaluated under this topic:

[Link] Non-Performing Loans to Total Loans and Advances Ratio

This ratio determines the proportion of Non-Performing Loans in total loan portfolio. Non-
performing loan is the financial burden for the financial institutions. The NPL has the
negative impact on the profitability of the banks. Higher this ratio indicates the bad quality of
assets of banks in the form of loans and advances which shows the high credit risk and vice-
versa.

Table: 4.6
Non-Performing Loan to Total Loans and Advances Ratio
(In Percentage)
FY Banks
KBL HBL BOK
2009/10 0.40 3.16 1.18
2010/11 1.12 3.92 1.82
2011/12 2.24 2.06 2.30
2012/13 3.88 2.19 1.50
2013/14 3.49 2.58 1.06
Mean 2.23 2.78 1.57
S.D. 1.49 0.77 0.50
C.V. 66.89 27.58 31.97
Source: [Link]

55
Figure: 4.6
Non-Performing Loan to Total Loans and Advances Ratio

4.5
4.0
3.5
3.0
Percentage

2.5
2.0 KBL
HBL
1.5
BOK
1.0
0.5
0.0
2009/10 2010/11 2011/12 2012/13 2013/14
Fiscal Year

The table 4.6 and the figure 4.6 represent the Non-Performing Loans to total Loans and
Advances ratio of sampled Banks. On this table, the average ratio shows that the HBL has the
highest mean ratio than other sampled Banks. It has 2.78% average ratio. This ratio shows
2.78% of total loans and advances of the HBL is the NPL which indicates the inefficiency of
the bank in loan lending and recovery as compared to other sampled banks. The KBL and
BOK have 2.23% and 1.57% of this ratio. From the table and figure, it can be seen that BOK
is more efficient in lending loans and advances and recovering non-performing loans.

From the table, it can be seen that this ratio of all sampled banks is fluctuating over the study
period. This ratio of KBL has increased during the first four FYs and decreased during the
last FYs. HBL is trying to decrease this ratio but couldn’t decrease during last two FYs. This
ratio of BOK has increased during first two FYs and decreased during last two FYs.

At last, it can be concluded that all sampled banks are able to maintain their NPL at
satisfactory level. If we analyze the average value of sampled banks, we can see that all
sampled banks have this ratio less than the international standard i.e. 5% which shows the
lending efficiency of the sampled Commercial Banks. If we analyze the NPL to total loans
and advances ratio of sampled banks during the study period, it can be seen that the
maximum of this ratio is 3.92% which is the HBL’s in FY 2010/11. From the above table, it

56
can be seen that KBL has the highest variability of this ratio i.e. 66.89% compared to other
sampled banks.

[Link] Loan Loss Provision to Non-Performing Loan Ratio

Loan loss provision is the compulsion factor in lending practices. NRB has directed that all
commercial banks should maintain at least 1% provision from the outstanding balance of any
type of the loan. Loan Loss Provision to Non-Performing Loan ratio shows the proportion of
LLP to total NPL of banks. NPL is the burden of financial loans to the banks which creates
the credit risk to the banks. The LLP works as a safeguard against the future contingencies
that may create due to the NPL. Higher the ratio indicates the lower credit risk and higher the
financial strength of the bank and vice- versa. From the credit risk point of view, higher the
ratio is the better to the banks even though the high LLP reduces the banking profitability.

Table: 4.7
Loan Loss Provision to Non-Performing Loan Ratio
(in times)
FY Banks
KBL HBL BOK
2009/10 3.31 1.19 1.91
2010/11 1.76 1.04 1.50
2011/12 1.27 1.27 1.14
2012/13 0.96 1.25 1.63
2013/14 1.18 1.18 1.85
Mean 1.70 1.19 1.60
S.D. 0.95 0.09 0.31
C.V. 55.86 7.54 19.28
Source: [Link]

57
Figure: 4.7
Loan Loss Provision to Non-Performing Loan Ratio

3.50

3.00

2.50

2.00
Precentage

1.50 KBL
HBL
1.00 BOK

0.50

0.00
2009/10 2010/11 2011/12 2012/13 2013/14
Fiscal Year

The above table 4.7 and the figure 4.7 shows the Loan loss provision to Non-performing loan
ratio of three sampled banks. As comparing the mean value, the KBL has the highest of this
ratio i.e. 1.70 times which indicates that the KBL has the lowest credit risk than other
sampled banks during the study period. It has the LLP 1.7 times more than its NPL.
Similarly, the BOK and HBL have this ratio of 1.60 times and 1.19 times respectively which
indicates that the HBL has the lowest of this ratio which shows the highest credit risk of this
bank than other sampled banks. Likewise, this ratio of all the sampled banks are in
fluctuating during the study period.

[Link] Loss Loan Provision Made by Sampled Banks

NRB has classified loans into four categories as Pass, Sub-standard, Doubtful, and Loss and
set up directive regarding maintaining loan loss provision for these loans. According to NRB
directive, the required percentages of loan loss provision on these loans are as: 1% for Pass
loan, 25% for Sub-standard loan, 50% for Doubtful loan and 100% for Loss loan. And, these
percent have not been changed during the study period. The loan loss provision maintained
by sampled bank on their different loans is analyzed as following:

58
Table: 4.8
Percentage of Loss Loan Provision
FY Banks
KBL HBL BOK
2009/10 1.35 3.91 2.32
2010/11 2.02 4.27 2.80
2011/12 2.89 2.69 2.68
2012/13 3.89 2.84 2.49
2013/14 4.28 3.11 1.99
Mean 2.89 3.36 2.46
S.D. 1.23 0.69 0.32
C.V. 42.63 20.54 13.01
Source: [Link]

Figure: 4.8
Percentage of Loss Loan Provision
4.0

3.0
Percentage

2.0 KBL
1.0 HBL
BOK
0.0
2009/10 2010/11 2011/12 2012/13 2013/14
Fiscal Year

The table 4.8 and the figure 4.8 show the loan loss provision maintained by sampled banks
for their loan and advances. According to the table, HBL is maintaining higher of this ratio
than other sampled banks. This shows that HBL has the higher NPL in loan portfolio than
other sampled banks. The BOK has the lowest of this ratio as per the table.

4.2 Loan Portfolio Analysis

Portfolio is a combination of assets or investment alternatives that provides a maximum

attainable return for a given level of risk or minimum risk for a given level of return. Loan is
a most important asset of commercial banks. The above mentioned ratio analysis also shows
that more than 50% of commercial banks total assets is occupied by loans and advances. It is
also a most income generating assets of commercial banks. However, it is very risky asset. If
loans become bad, it will lead the banks towards the liquidation. Therefore, every bank must
be careful while granting the loan. Banks can minimize credit risk by making the lending

59
portfolio. Lending portfolio means granting the fund on different types of loan like auto
loans, industrial loans, bills purchased, hire purchase loan, construction loan, overdraft, term
loan, margin lending, real estate loan etc. According to Nepal Rastra Banks’ reporting format,
there are 15 headings of sector wise- loan portfolio and eleven headings of product-wise loan
portfolio. In this part, the loan portfolio of three sampled banks over the study period FY
2009/10 to FY 2013/14 has been analyzed and the attempts has been made to evaluate
whether the sampled banks have been following the portfolio concept or not while mobilizing
their fund as a loan and in which sector they have been showing more interest.

4.2.1 Analysis of Sector wise Loans and Advances Portfolio

According to NRB schedule, there are fifteen heading of sector-wise lending portfolio. The
loan portfolios advanced by sampled banks are analyzed as below.

Table: 4.9
Proportion of Sector wise Loan and Advances of KBL
(In Percentage)
Sectors 2010 2011 2012 2013 2014 Average
Agriculture and Forest Related 2.75 2.77 2.02 2.06 2.35 2.39
Fishery Related 0.00 0.00 0.00 0.00 0.00 0.00
Mining Related 1.86 2.78 0.84 4.01 3.95 2.69
Manufacturing (Producing) Related 17.97 18.33 28.89 25.72 28.37 23.86
Construction 11.39 12.05 13.07 12.33 12.15 12.20
Electricity, Gas and Water 1.34 1.06 1.46 3.30 4.50 2.33
Metal Products, Machinery & Electronic
Equipment 1.99 2.32 3.44 2.80 2.18 2.55
Transportation Communication and Public
Utilities 8.19 4.64 3.80 4.68 5.39 5.34
Wholesaler and Retailer 8.89 10.16 14.85 15.54 16.22 13.13
Finance, Insurance and Real Estate 17.10 15.17 13.08 9.90 9.63 12.98
Hotel or Restaurant 1.69 2.10 2.34 1.55 1.07 1.75
Other Services 3.62 3.72 6.21 6.97 5.02 5.11
Consumption Loans 10.15 8.36 2.21 2.54 2.36 5.12
Local Government 0.00 0.00 0.00 0.00 0.00 0.00
Others 13.04 16.53 7.78 8.60 6.81 10.55
Total 100 100 100 100 100 100

Source: [Link]

The above table 4.9 shows the proportion of different types of loan to total lending amount of KBL.
Referring the mean of this table, the priority sequence of KBL’s Sector wise loan advancement seems

60
as: (1) Manufacturing (Producing) related, (2) Wholesaler and Retailers, (3) Finance, Insurance and
Real Estate, (4) Construction, (5) Others, (6) Transportation Communication and Public Utilities, (7)
Consumption loans, (8) Other services, (9) Mining related, (10) Metal products, machinery and
electronic equipment, (11) Agriculture and forest related, (12) Electricity, gas and water and (13)
Hotel and restaurant, (14) Fishery related and (15) Local government respectively. The bank has not
advanced on the heading of fishery related and local government sector loan. During the study period,
the loan advancement of KBL seems to fluctuate on manufacturing related, wholesaler and retailer,
finance, insurance and real estate and consumption loans sector more during study period. Similarly,
the loan advancement of KBL seems to increase on manufacturing related, electricity, gas and water
and wholesaler and retailer. Likewise, the loan advancement of KBL seems to decrease on agriculture
and forest related, transportation, communication and public utilities, finance, insurance and real
estate, hotel or restaurant, consumption loans and others sectors. Therefore, from the above table, it
can be said that the KBL has been investing its largest proportion of total lending amount on
manufacturing sector. And the bank has given less priority on fishery related and local government
related sector.

Table: 4.10
Proportion of Sector wise Loans and Advances of HBL (In Percentage) Source: [Link]

Sectors 2010 2011 2012 2013 2014 Average

Agriculture and Forest Related 2.08 2.04 2.53 3.15 2.14 2.39
Fishery Related 0.00 0.00 0.00 0.00 0.00 0.00
Mining Related 0.00 0.00 0.00 0.00 0.00 0.00
Manufacturing (Producing) Related 38.94 37.74 33.15 31.61 33.94 35.08
Construction 5.38 4.11 5.24 7.31 7.61 5.93
Electricity, Gas and Water 1.98 2.66 1.87 2.30 1.26 2.01
Metal Products, Machinery & Electronic
Equipment 0.15 0.10 0.22 0.10 0.13 0.14
Transportation Communication and Public
Utilities 3.85 4.30 3.98 4.67 3.66 4.09
Wholesaler and Retailer 13.89 14.47 14.48 17.52 20.28 16.13
Finance, Insurance and Real Estate 7.85 15.48 14.05 10.67 10.46 11.70
Hotel or Restaurant 2.37 2.46 2.21 2.42 2.54 2.40
Other Services 7.38 6.56 9.73 9.55 7.29 8.10
Consumption Loans 7.10 2.40 1.77 1.60 2.46 3.07
Local Government 1.02 0.77 1.42 0.00 0.55 0.75
Others 8.02 6.91 9.33 9.10 7.67 8.21
Total 100 100 100 100 100 100

The above table 4.10 shows the proportion of different types of loan to total lending amount
of HBL. Referring the mean of this table, the priority sequence of HBL’s sector wise loan

61
advancement seems as: (1) Manufacturing (Producing) related, (2) Wholesaler and Retailers,
(3) Finance, Insurance and Real Estate, (4) Others, (5) Other services, (6) Construction, (7)
Transportation, Communication and Public Utilities, (8) Consumption loans, (9) Hotel or
restaurant, (10) Agriculture and forest related, (11) Electricity, gas and water, (12) Local
government, (13) Metal products, machinery and electronic equipment, (14) Fishery related
and (15) Mining related respectively. The bank has not advanced on the heading of fisher
related and mining related loans. During the study period, the loan advancement of HBL
seems to fluctuate on manufacturing related, wholesaler and retailer, finance, insurance and
real estate and consumption loans sector more during study period. Similarly, the loan
advancement of HBL seems to increase on construction, wholesaler and retailer. The loan
advancement of HBL seems to fluctuate on other sectors over the study period. From the
above table, it can be said that the HBL has been investing its largest proportion of total
lending amount on manufacturing sector, wholesaler and retailer and finance, insurance and
real estate. And the bank has given no priority on fishery related and mining related sector.
Table: 4.11
Proportion of Sector wise Loans and Advances of BOK
(In Percentage)
Sectors 2010 2011 2012 2013 2014 Average
Agriculture and Forest Related 1.00 0.74 1.92 2.63 2.63 1.78
Fishery Related 0.00 0.00 0.00 0.00 0.00 0.00
Mining Related 0.00 0.00 1.55 0.00 0.00 0.31
Manufacturing (Producing) Related 23.68 27.36 30.16 30.02 30.02 28.25
Construction 9.36 8.24 7.64 7.34 7.34 7.98
Electricity, Gas and Water 1.36 3.79 5.46 5.55 5.55 4.34
Metal Products, Machinery &
Electronic Equipment 0.17 1.13 1.22 1.42 1.42 1.07
Transportation Communication and
Public Utilities 11.86 0.89 0.75 0.97 0.97 3.09
Wholesaler and Retailer 24.35 24.30 20.25 24.56 24.56 23.61
Finance, Insurance and Real Estate 13.61 12.49 12.72 9.62 9.62 11.61
Hotel or Restaurant 0.81 0.91 0.90 1.29 1.29 1.04
Other Services 7.25 7.20 6.96 6.79 6.79 7.00
Consumption Loans 0.40 7.36 4.99 6.12 6.12 5.00
Local Government 0.00 0.00 0.00 0.00 0.00 0.00
Others 6.16 5.60 5.48 3.68 3.68 4.92
Total 100 100 100 100 100 100
Source: [Link]

62
The above table 4.11 shows the proportion of different types of loan to total lending amount
of BOK. Referring the mean of this table, the priority sequence of BOK’s sector wise loan
advancement seems as: (1) Manufacturing (Producing) related, (2) Wholesaler and Retailers,
(3) Finance, Insurance and Real Estate, (4) Construction, (5) Other services, (6) Consumption
loans, (7) Others, (8) Electricity, gas and water, (9) Transportation, Communication and
Public Utilities, (10) Agriculture and forest related, (11) Metal products, machinery and
electronic equipment, (12) Hotel or restaurant, (13) Mining related, (14) Local government
and (15) fishery related respectively. The bank has not advanced on the heading of fishery
related and local government loans. During the study period, the loan advancement of BOK
seems to fluctuate on Transportation, Communication and Public Utilities, manufacturing
related, wholesaler and retailer, finance, insurance and real estate, electricity, gas and water
and consumption loans sector more during study period. Similarly, the loan advancement of
BOK seems to increase on agriculture and forest related, manufacturing related, electricity,
gas and water, Metal products and machinery and electronic equipment,. The loan
advancement of HBL seems to fluctuate on other sectors over the study period. From the
above table, it can be said that the BOK has been investing its largest proportion of total
lending amount on manufacturing sector, wholesaler and retailer and finance, insurance and
real estate. And the bank has given no priority on fishery related, mining related and
government sector.

Finally, the sector wise loan portfolio of sampled banks can be summarized as follows:

Table: 4.12

63
Average Proportion of Sector wise Loan and Advances of Sampled Banks
S. Sectors KBL HBL BOK Avera
N ge
o.
1 Agriculture and Forest Related 2.39 2.39 1.78 2.19
2 Fishery Related 0.00 0.00 0.00 0.00
3 Mining Related 2.69 0.00 0.31 1.00
4 Manufacturing (Producing) Related 23.86 35.08 28.25 29.06
5 Construction 12.20 5.93 7.98 8.70
6 Electricity, Gas and Water 2.33 2.01 4.34 2.90
7 Metal Products, Machinery & Electronic
Equipment 2.55 0.14 1.07 1.25
8 Transportation Communication and Public
Utilities 5.34 4.09 3.09 4.17
9 Wholesaler and Retailer 13.13 16.13 23.61 17.62
10 Finance, Insurance and Real Estate 12.98 11.70 11.61 12.10
11 Hotel or Restaurant 1.75 2.40 1.04 1.73
12 Other Services 5.11 8.10 7.00 6.74
13 Consumption Loans 5.12 3.07 5.00 4.40
14 Local Government 0.00 0.75 0.00 0.25
15 Others 10.55 8.21 4.92 7.89
Total 100.0 100.0 100.0
0 0 0 100.00
Source: [Link]

The above table 4.12 shows the average proportion of sector wise loan and advances of
sampled banks of the period FY 2009/10 to 2013/14. Referring the table, it can be said that
manufacturing sector is a most dominant sector among all sector wise loan portfolios. This
sector has 29.06% mean value. Similarly, Wholesaler and Retailer sector takes the second
highest position. Finance, insurance and real estate sectors’ loan takes the third highest
position. Likewise, local government, mining related, metal products, machinery and
equipments sectors take the lowest position. These sectors have only 0.25, 1.00 and 1.25
percentage mean value receptively. And, all sampled banks have not advanced on fishery
related sector during the study period.

At last, we can conclude that all the sampled banks have given first priority for
manufacturing sector. They have advanced largest proportion of their total lending on this
sector. They have given second priority on Wholesaler and Retailers sector during the study
period. However, they all have not advanced on fishery related sector. Similarly, it can be
seen that the sampled banks have been giving less priority for local government, mining

64
related and metal products, machinery and equipments sectors loan. They have been
advancing very little percentage on this sector.

4.2.2 Analysis of Product wise Loan and Advances Portfolio of Sampled Banks

The product wise loans and advances portfolio shows the proportion of banks investment on
loans and advances on the basis of the product. It shows that on which product the bank is
giving more priority when advancing its loans. The product wise loans and advances of the
sampled banks during 2013/14 have been analyzed on the below table.
Table: 4.13
Proportion of product wise Loans and Advances
Mid July (2014)
(In Percentage)
Products KBL HBL BOK Average
1. Term Loan 18.56 12.22 13.34 14.70
2. Overdraft 27.43 16.13 26.79 23.45
3. Trust Receipt Loan/Import loan 4.89 15.48 3.96 8.11
4. Demand & Other Working Capital Loan 19.42 23.26 25.92 22.87
5. Res. Per. H. Loan (up to Rs. 10 Million) 8.54 7.59 6.27 7.47
6. Real Estate Loan 8.95 5.89 3.13 5.99
7. Margin Nature Loan 2.36 1.18 0.39 1.31
8. Hire Purchase Loan 3.73 5.35 7.37 5.48
9. Deprived Sector Loan 4.36 4.08 4.11 4.18
10. Bills Purchased 0.06 4.41 6.56 3.68
11. Other Products 1.71 4.39 2.16 2.75
Total 100.00 100.00 100.00 100.00
Source: [Link]

The above table 4.13 shows that Overdraft is the most dominate loan which has highest mean
value i.e23.45 percent. Similarly, Demand & others Working Capital loan, Term loan, Trust
Receipt loan/Import loan, Res. Per. H. Loan (up to Rs. 10 Million), Real Estate loan, Hire
Purchase Loan are in second, third, fourth, fifth, sixth and seventh highest position. They
have 22.87%, 14.70%, 8.11%, 7.47%, 5.99% and 5.48% mean value respectively. However,
Margin Nature loan, Other Products Loan, Bills purchased loan, and Deprived Sector loan
have very little proportion. They have only 1.31%, 2.75%, 3.68% and 4.18% mean value
respectively.

The figures of the table show that KBL gave first priority to advance on overdraft loan. Then,
it gave the priority on demand and others working capital loan, term loan, hire purchase loan,

65
real estate loan, Res. Per. H. Loan (up to Rs. 10 Million), Trust Receipt loan/ Import loan ,
Deprived sector loan, Hire Purchase Loan, Margin Nature Loan, Other product loan and Bills
purchased loan receptively. The figures of the table show that KBL gave least priority on
Bills Purchased.

HBL gave first priority for Demand and Other working capital loan. It gave second, third and
fourth priority for Overdraft, Trust receipt/Import Loan and term Loan respectively. It gave
the least priority for Margin Nature Loan.

BOK gave first priority for Overdraft Loan. It gave second, third and fourth priority for
Demand and Other working capital Loan, Term Loan and Trust receipt/Import Loan and Res.
Per. H. Loan (up to Rs. 10 Million) respectively. It gave the least priority for Margin Nature
Loan.

4.3 Correlation Analysis

4.3.1 Correlation between Deposits and Loans and Advances

The coefficient of correlation between deposit and Loans and Advances measures the degree
of relationship between these two variables. This analysis takes deposit as the independent
variable (x) and Loans and Advances as the dependent variable (Y). The main objective of
computing correlation between these two variables is to find out whether deposits are
significantly used as loans and advances in a proper manner or not.
Table: 4.14
Correlation Coefficient between Deposits and Loans and Advances
Evaluation Criterions
Banks
R r2 P.E 6P.E Remarks
KBL 0.9923 0.9846 0.0047 0.0279 Significant
HBL 0.9923 0.9847 0.0046 0.0277 Significant
BOK 0.9855 0.9712 0.0087 0.0522 Significant
Source: [Link]

From the table 4.14 presented above, it can be seen that, during the study period, the
correlation coefficient between Deposit and Loans and Advances of KBL, HBL and BOK are
0.9923, 0.9923 and 0.9855 respectively. This figure shows that there is high degree of
positive relationship between Deposit and Loans and Advances on all the sampled banks. It
indicates that an increase in total deposits leads to increase in loans and advance amount. The

66
values of r2 of these banks are 0.9846, 0.9847 and 0.9712 respectively. This explains that
98.46% of KBL’s, 98.47% of HBL’s and 97.12% of BOK’s loans and advances is depended
on their deposit collection and 1.54% of KBL’s, 1.53% of HBL’s and 2.88% of BOK’s loan
and advances is affected by other factors. According to the value of r 2, it can be said that the
HBL’s loans and advances is most affected by deposit and KBL’s loans and advances is least
affected by deposit as comparing the sampled banks.

Likewise, the 6 P.E of KBL, HBL and BOK are 0.0279, 0.0277 and 0.00522 respectively.
This figures show that all sampled banks have r > 6 P.E; so, there is evidence of significant
correlation between deposit and loans and advances of all sampled banks. This further reveals
that there is significant positive relationship between deposits and Loans and Advances.

4.3.2 Correlation between Net Profit and Loans and Advances

The coefficient of correlation between Net profit and Loans and Advances measures the
degree of relationship between these two variables. This analysis takes Loans and Advances
as the independent variable (X) and Net profit as the dependent variable (Y). The purpose of
computing correlation coefficient between these variables is to justify whether Net profit is
depended on the volume of Loans and Advances or not and whether there is any significant
relationship between these two variables.
Table: 4.15
Correlation Coefficient between Net Profit and Loans and Advances
Evaluation Criterions
Banks 2
R r P.E 6P.E Remarks
KBL -0.2471 0.0611 0.2832 1.6993 Insignificant
HBL 0.0448 0.0020 0.3010 1.8062 Insignificant
BOK -0.2572 0.0662 0.2817 1.6901 Insignificant
Source: [Link]

From the table presented above, it can be seen that during the study period of FY 2009/10 to
FY 2013/14, the correlation coefficient of Loans and Advances and Net Profit of KBL, HBL
and BOK are -0.2471, 0.0488 and -0.2572 respectively. From this figures, it can be said that
there is a low degree of positive relationship between these two variables in KBL and BOK.
However, there is low degree of positive correlation between these two variables in HBL.
From the above result, it can be said that loans and advances is not the main factor to

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determine the profit of the bank. The profit of the banks greatly influence by the factors other
than the loans and advances.

Likewise, the 6 P.E of these banks are 1.6993, 1.8062 and 1.6901 respectively. The value of
‘r’ of all the three sampled banks is less than their value of 6 P.E. So, there is insignificant
correlation between these variables of all the three sampled banks.

4.3.3 Correlation between Non-performing Loan and Loans and Advances

The coefficient of correlation between Non-Performing Loan and Loans and Advances
measures the degree of relationship between these two variables. This analysis takes Loans
and Advances as an independent variable (X) and Non-Performing Loan as a dependent
variable (Y).
Table: 4.16
Correlation Coefficient between Non-performing Loan and
Loans and Advances
Evaluation Criterions
Banks
r r2 P.E 6P.E Remarks
KBL 0.9522 0.9066 0.0282 0.1690 Significant
HBL 0.1734 0.0301 0.2926 1.7554 Insignificant
BOK 0.0925 0.0085 0.2991 1.7944 Insignificant
Source: [Link]

The table 4.16 shows the correlation coefficient between Non-performing Loans and Loans
and Advance of sampled banks. The table shows that the correlation coefficient of KBL is
0.9522 which indicates that there is high degree of positive relationship between these two
variables in KBL. It means that increase/decrease in the total volume of loans and advances
would increase/decrease the volume of NPL. The correlation coefficient of HBL and BOK
are 0.1734 and 0.0925 respectively. This indicates that there is low degree of positive
relationship between these two variables in these banks. It means increase in the volume of
Loans would slightly increase in the volume of NPL and vice-versa. Likewise, the coefficient
of determination (r2) shows that 90.66% of KBL’s, 3.01% of HBL’s and 0.85% of BOK’s
Non-Performing loans is determined by Loans and Advances. This figure shows that NPL of
KBL is highly determined by loan as compared to other sampled banks.

Likewise, the figures of 6 P.E shows that the HBL and BOK have r < 6 P.E which indicate
that there is no evidence significant of correlation i.e. the value of ‘r’ is insignificant in these

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banks. However, in the KBL, the value of r is more than 6 P.E which indicates the value of
‘r’ is significant in this bank.

4.4 Trend Analysis

4.4.1 Trend Analysis of Deposit

The trend analysis shows the trend of deposit collection in the past years and is used to
estimate the future pattern of trend that may be positive or negative. Trend analysis of deposit
helps the management to estimate its future volume of deposit and to make the plan about the
mobilizing of deposit. The trend of deposit in the coming years is computed by using the
trend method which shows the pattern of deposit growth that may be positive or negative.
Trend analysis of deposit helps the management to estimate its future volume of deposit and
to make the plan about the deposits. The following table shows the trend of total deposit of
KBL, HBL and BOK up to the FY 2013/14 and the estimation for 2014/15.
Table: 4.17
Trend of Deposit
(Rs. In Million)
Banks
FY
KBL HBL BOK
2010 17,432.25 37,609.40 20,315.80
2011 16,986.28 40,920.60 21,018.40
2012 21,985.20 47,731.00 24,991.40
2013 25,318.57 53,072.30 27,700.99
2014 27,578.38 64,674.90 34,115.70
2015 30,447.50 68,686.45 35,913.17
Source: [Link]
Figure: 4.9
Trend of Deposit
80,000
70,000
60,000
50,000
KBL
40,000
HBL
30,000 BOK
20,000
10,000
0
2010 2011 2012 2013 2014 2015

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The above table and figure show the trend of deposit of all three banks and it can be seen that
the deposit of all the sampled banks are increasing. Except for 2011, the deposit of KBL is
increasing and it is expected to reach Rs. 30,447.50 Million in FY 2014/15. The deposit of
HBL is increasing during the study period and it is expected to reach Rs. 68,686.45 Million in
FY 2014/15. And the deposit of BOK is increasing during the study period and it is expected
to reach Rs. 35,913.17 Million in FY 2014/15. This value indicates that HBL’s deposit will
be highest as comparing the sampled banks in FY 2014/15. Similarly, referring the table, it
can be said that KBL and BOK will be in second and third position respectively on the basis
of forecasted total volume of deposit. The trend of deposit is also shown in following trend
line:

4.4.2 Trend Analysis of Loans and Advances

The trend of loans and advances in the coming years is computed by using the trend method
which shows the pattern of loans and advances growth that may be positive or negative.
Trend analysis of loans and advances helps the management to estimate its future volume of
loans and advances and to make the plan about the loans and advances. The following table
shows the projection of total loans and advances of KBL, HBL and BOK for FY 2014/15
based on the non-performing loan from FY 2010 to FY 2014.

Table: 4.18
Trend of Loans and Advances
(Rs. in thousand)
Banks
FY KBL HBL BOK
2010 14,766 27,981 16,665
2011 14,626 31,567 17,468
2012 17,614 34,965 18,814
2013 19,369 39,724 22,556
2014 21,898 45,320 28,304
2015 23,357 48,762 29,271
Source: [Link]

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Figure: 4.10
Trend of Loans and Advances
60,000

50,000

40,000

KBL
30,000
HBL
BOK
20,000

10,000

0
2010 2011 2012 2013 2014 2015

The above table and figure show the trend of loans and advances of all three banks and it can
be seen that the loans and advances of all the sampled banks are increasing. The loans and
advances of KBL is increasing and it is expected to reach Rs. 23,357 Million in FY 2014/15.
The loans and advances of HBL is increasing during the study period and it is expected to
reach Rs. 48,762 Million in FY 2014/15. And the loans and advances of BOK is increasing
during the study period and it is expected to reach Rs. 29,271 Million in FY 2014/15. This
value indicates that HBL’s loans and advances will be highest as comparing the sampled
banks in FY 2014/15. Similarly, referring the table, it can be said that BOK and KBL will be
in second and third position respectively on the basis of forecasted total volume of loans and
advances.

4.4.3 Trend Analysis of Non-Performing Loan

The trend of Non-Performing Loans in the coming years is computed by using the trend
method which shows the pattern of Non-Performing Loans growth that may be positive or
negative. Trend analysis of Non-Performing Loans helps the management to estimate its
future volume of Non-Performing Loans and to take corrective actions. The following table
shows the projection of total Non-Performing Loans of KBL, HBL and BOK for FY 2014/15
based on the non-performing loan from FY 2010 to FY 2014.

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Table: 4.19
Trend of Non-Performing Loan
(Rs. in thousand)
Banks
FY KBL HBL BOK
2010 60 920 202
2011 168 1,293 326
2012 400 741 443
2013 781 901 346
2014 796 1,197 305
2015 1,066 1,059 392
Source: [Link]
Figure: 4.11

Trend of Non-Performing Loan

1,400

1,200

1,000
Non-performing Loan

800
KBL
600
HBL
400 BOK

200

0
2010 2011 2012 2013 2014 2015
Year

The above table and figure show the trend of non-performing loans of all three banks and it
can be seen that the non-performing loans of KBL is increasing and the non-performing loans
of HBL and BOK are fluctuating. The non-performing loan of HBL is more fluctuating than
the non-performing loan of BOK. The non-performing loans of KBL are increasing and it is
expected to reach Rs. 1,066 Million in FY 2014/15. The non-performing loans of HBL are
fluctuating during the study period and it is expected to reach Rs. 1,059 Million in FY
2014/15. And the non-performing loans of BOK are fluctuating during the study period and it
is expected to reach Rs. 392 Million in FY 2014/15. This value indicates that KBL’s non-
performing loans will be highest as comparing the sampled banks in FY 2014/15. Similarly,

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referring the table, it can be said that HBL and BOK will be in second and third position
respectively on the basis of forecasted total volume of non-performing loans.

4.5 Movement Analysis

In this topic, the volume of different variables and theirs’ movement are measured
individually. The volume of individual variables enables to the gross contribution of
respected banks in those aspects. The ratio analysis solely describes the ratio between the two
variables but does not tell about the absolute value of those variables. Therefore, in this part,
some of the important individual variables’ movement is examined.

4.5.1 Analysis of Movement of Loans and Advances

Loans and Advances is a major income source of banking sector. As discussed above, loans
and advances is crucial asset of banking business, which may lead to liquidation the banks if
not maintain properly. In this part of study, the movement of loans and advances of selected
banks have been analyzed. The following tables represent the movement of loans and
advances of sampled banks.
Table: 4.20
Movement of Loan and Advances
(Rs. in thousand)
Banks KBL HBL BOK
FY Amount Incr. / Decr. % Amount Incr. / Decr. % Amount Incr. / Decr. %
2010 14,766 - 27,981 - 16,665 -
2011 14,626 -0.95 31,567 12.82 17,468 4.82
2012 17,614 20.43 34,965 10.77 18,814 7.70
2013 19,369 9.96 39,724 13.61 22,556 19.89
2014 21,898 13.06 45,320 14.09 28,304 25.48
Source: [Link]

The table shows the movement of loans and advances of three sampled banks. Referring the
table, it can be said that the total volume of loans and advances of all sampled banks seems to
increase except the loans and advances of KBL in 2011. However, the increasing rate is not
regular in all sampled banks. The loan amount of KBL was increased by -0.95%, 20.43%,
9.96% and 13.06% in 2011, 2012, 2013 and 2014 respectively. So, the loans and advances of
KBL is more fluctuating in the study period.

In HBL, total volume of loans and advances seemed to increase at increasing rate during the
study period except in 2012. The loan amount of HBL was increased by 12.82%, 10.77%,

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13.61% and 14.09% in 2011, 2012, 2013 and 2014 respectively. The highest increment of the
HBL’s loan was in 2014 since the loans and advances of HBL was increased by 14% in 2014.

In BOK, total volume of loans and advances seemed to increase at increasing rate during the
study period. The loan amount of BOK was increased by 4.82%, 7.70%, 19.89% and 25.48%
in 2011, 2012, 2013 and 2014 respectively. The highest increment of the BOK’s loan was in
2014 since the loans and advances of BOK was increased by 25.48% in 2014.

4.5.2 Analysis of Movement of Non-Performing Loan

The movement of NPL is examined in this part of study to know the increasing /decreasing
rate and of NPL of commercial banks. The result can be used to make future strategies related
with non-performing loans of the banks. The following tables represent the movement of
NPL of sampled banks.

Table: 4.21
Movement of Non-Performing Loan
(Rs. in thousand)
Banks KBL HBL BOK
Incr. / Decr. Incr. / Decr. Incr. / Decr.
FY Amount % Amount % Amount %
2010 60 - 920 - 202 -
2011 168 179.37 1,293 40.54 326 61.45
2012 400 138.24 741 -42.74 443 35.89
2013 781 95.28 901 21.66 346 -21.97
2014 796 1.88 1,197 32.83 305 -11.94
Source: [Link]

The table shows the movement of non-performing loans of the three sampled banks.
Referring the table, it can be said that the total volume of non-performing loans of KBL and
BOK seems to decrease and the non-performing loans of HBL seems to fluctuate during the
study period.

The non-performing loans of KBL was increased by 179.37%, 138.24%, 95.28% and 1.88%
in 2011, 2012, 2013 and 2014 respectively. It can be said that the non-performing loans of
KBL is increasing at decreasing rate during the study period. The highest increment of the
KBL’s non-performing loans was in 2011 since the non-performing loans of KBL was
increased by 179.37% in 2011.

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In HBL, total volume of non-performing loans seemed to fluctuate during the study period.
The non-performing loans of HBL was increased by 40.54%, -42.74%, 21.66% and 32.83%
in 2011, 2012, 2013 and 2014 respectively. The highest increment of the HBL’s non-
performing loans was in 2011 since the non-performing loans of HBL was increased by
40.54% in 2011.

In BOK, total volume of non-performing loans seemed to increase in 2011 and 2012 and
decrease in 2013 and 2014. The non-performing loan of BOK was increased by 61.45%,
35.89%, -21.97% and -11-94% in 2011, 2012, 2013 and 2014 respectively. The highest
increment of the BOK’s non-performing loans was in 2011 since the non-performing loans of
BOK was increased by 61.45% in 2011.

At last, it can be concluded that KBL’s NPL is increasing at decreasing rate during the study
period. HBL’s NPL is seemed to fluctuate during the study period. But, the NPL of BOK is
decreasing during the study period. This could be because of good corporate governance,
managerial efficiency, operational efficiency etc. Likewise, it is seen that all sampled banks’
NPL was increased in FY 2011.

4.6 Major findings of the study

Ratio Analysis
 The study has revealed that Loans and Advances is a most important and dominant
asset of commercial banks. More than 60% of their asset is occupied by loans and
advances.
 During the study period, the KBL seems the most successful bank in lending its
deposit as loan and advances. The HBL has the lowest total loans and advances to
total deposit ratio among the sampled banks. BOK is in second position. Likewise, it
is seemed that KBL has the highest variability and the HBL has the lowest variability
in this ratio. This ratio of all the sampled banks is fluctuating during the study period.
 The study has revealed that Net profit to total loans and advances ratio of HBL is the
highest and the KBL is the lowest among the sampled banks during the study period.
The BOK has the lowest variability and the KBL has the highest variability in this
ratio. Likewise, this ratio of all sampled banks seems to fluctuate during the study
period.

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 Interest income from loans and advances to total interest income ratio has revealed
that more than 85 percentage of commercial Banks’ interest is occupied by loan
interest. During the study period, it is seen that the BOK has the highest mean value
and KBL has the lowest mean value in this ratio as comparing the sampled
banks .Similarly, it is seen that HBL is in second position in this ratio. The HBL has
the lowest variability and the KBL has the highest variability in this ratio. Likewise,
this ratio of all sampled banks seems to fluctuate during the study period.
 The study has revealed that KBL has the highest total interest income to total income
ratio. The BOK is in second position and the HBL is in third position in this ratio.
Likewise, this ratio of all sampled banks seems to fluctuate during the study period.
 In Credit risk measurement, it is seemed that all the sampled banks have been trying
to reduce the NPL level of their loans. They have the NPL less than the international
standard level i.e. 5% which shows the lending efficiency of commercial Banks. In
year wise analysis, it is seemed that the HBL has the highest NPL level i.e.3.92% in
FY 2010/11. Referring this, it can be said that there was no more than 3.92% of NPL
on all sampled banks during the study.
 During the study period, it was found that the HBL has the highest Non-Performing
Loans. Similarly, KBL is in second and the BOK is in third position in this ratio.
Similarly, during the study period, this ratio of all the sampled banks seemed to
fluctuate during the study period.
 During the study period, it is seemed that the MBL has the highest and the HBL has
the lowest loan loss provision to Non- Performing Loan ratio among the sampled
banks.
 NRB has issued unified Directives-2072 to licensed bank and financial institutions.
According to this directive, minimum required loan loss provision is 1% for Pass
loan, 25% for sub-standard, 50% for doubtful loan and 100% for loss loan.
 The analysis of loan loss provision has revealed that HBL has been maintaining
highest LLP and Bok has been maintaining lowest LLP.

Portfolio Analysis

76
 The loan advancement of KBL seems to fluctuate on manufacturing related,
wholesaler and retailer, finance, insurance and real estate and consumption loans
sector more during study period. Similarly, the loan advancement of KBL seems to
increase on manufacturing related, electricity, gas and water and wholesaler and
retailer. Likewise, the loan advancement of KBL seems to decrease on agriculture and
forest related, transportation, communication and public utilities, finance, insurance
and real estate, hotel or restaurant, consumption loans and others sectors. It is found
that the KBL has been investing its largest proportion of total lending amount on
manufacturing sector. And the bank has given less priority on fishery related and local
government related sector.
 The loan advancement of HBL seems to fluctuate on manufacturing related,
wholesaler and retailer, finance, insurance and real estate and consumption loans
sector more during study period. Similarly, the loan advancement of HBL seems to
increase on construction, wholesaler and retailer. The loan advancement of HBL
seems to fluctuate on other sectors over the study period. It is found that the HBL has
been investing its largest proportion of total lending amount on manufacturing sector,
wholesaler and retailer and finance, insurance and real estate. And the bank has given
no priority on fishery related and mining related sector.
 The loan advancement of BOK seems to fluctuate on Transportation, Communication
and Public Utilities, manufacturing related, wholesaler and retailer, finance, insurance
and real estate, electricity, gas and water and consumption loans sector more during
study period. Similarly, the loan advancement of BOK seems to increase on
agriculture and forest related, manufacturing related, electricity, gas and water, Metal
products and machinery and electronic equipment,. The loan advancement of HBL
seems to fluctuate on other sectors over the study period. It is found that the BOK has
been investing its largest proportion of total lending amount on manufacturing sector,
wholesaler and retailer and finance, insurance and real estate. And the bank has given
no priority on fishery related, mining related and government sector.
 All the sampled banks have given first priority for manufacturing sector. They have
advanced largest proportion of their total lending on this sector. They have given
second priority on Wholesaler and Retailers sector during the study period. However,
they all have not advanced on fishery related sector. Similarly, it is seen that the
sampled banks have been giving less priority for local government, mining related

77
and metal products, machinery and equipments sectors loan. They have been
advancing very little percentage on this sector.
 It is found that overdraft is the most dominate loan which has highest mean value
i.e23.45 percent. Similarly, Demand & others Working Capital loan, Term loan, Trust
Receipt loan/Import loan, Res. Per. H. Loan (up to Rs. 10 Million), Real Estate loan,
Hire Purchase Loan are in second, third, fourth, fifth, sixth and seventh highest
position.

Correlation Analysis
 It is found there is high degree of positive relationship between Deposit and Loans
and Advances on all the sampled banks. It indicates that an increase in total deposits
leads to increase in loans and advance amount. There is evidence of significant
correlation between deposit and loans and advances of all sampled banks.
 It is found that there is a low degree of positive relationship between loans and
advances and net profit in KBL and BOK. However, there is low degree of positive
correlation between these two variables in HBL. From the above result, it can be said
that loans and advances is not the main factor to determine the profit of the bank. The
profit of the banks greatly influence by the factors other than the loans and advances.
It is also found that there is insignificant correlation between these variables of all the
three sampled banks.
 It is found that there is high degree of positive relationship between these non-
performing loans and loans and advances of KBL. But there is low degree of positive
relationship between these two variables in HBL and BOK. This figure shows that
NPL of KBL is highly determined by loan as compared to other sampled banks. It is
also found that there is no evidence significant correlation i.e. the value of ‘r’ is
insignificant in these banks. However, in the KBL, the value of r is more than 6 P.E
which indicates the value of ‘r’ is significant in this bank.

Trend Analysis

78
 It is found that the deposit of all the sampled banks are increasing. HBL’s expected
deposit will be highest as comparing the sampled banks in FY 2014/15. Similarly,
referring the table, it can be said that KBL and BOK will be in second and third
position respectively on the basis of forecasted total volume of deposit.
 It is found that the loans and advances of all the sampled banks are increasing. HBL’s
expected loans and advances will be highest as comparing the sampled banks in FY
2014/15. Similarly, referring the table, it can be said that BOK and KBL will be in
second and third position respectively on the basis of forecasted total volume of loans
and advances.
 It is found that the non-performing loan of KBL is increasing and the non-performing
loans of HBL and BOK are fluctuating. The non-performing loan of HBL is more
fluctuating than the non-performing loan of BOK. KBL’s non-performing loans will
be highest as comparing the sampled banks in FY 2014/15. Similarly, it is found that
HBL and BOK will be in second and third position respectively on the basis of
forecasted total volume of non-performing loans.

Movement Analysis
 It is found that the total volume of loans and advances of all sampled banks seems to
increase except the loans and advances of KBL in 2011. However, the increasing rate
is not regular in all sampled banks. The loans and advances of KBL is more
fluctuating in the study period. In HBL, total volume of loans and advances seemed to
increase at increasing rate during the study period except in 2012. In BOK, total
volume of loans and advances seemed to increase at increasing rate during the study
period.
 It is found that the total volume of non-performing loan of KBL seems to increase, the
non-performing loan of BOK seems to decrease and the non-performing loan of HBL
seems to fluctuate during the study period. It is also found that KBL’s NPL is
increasing at decreasing rate during the study period. HBL’s NPL is seemed to
fluctuate during the study period. But, the NPL of BOK is decreasing during the study
period. This could be because of good corporate governance, managerial efficiency,
operational efficiency etc.
CHAPTER- V

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SUMMARY, CONCLUSION AND RCOMMENDATION

5.1 Summary

Economic growth and economic sector development is essential for developing the nation.
Nepal is underdeveloped not because of lack of the resources, but, due to lack of the capital
and proper utilization of available resources. Financial institution is the back bone of the
economic development of a country because they help in capital formation and its proper
utilization through mobilizing the savings towards productive sector. Commercial Bank is
one of the most dominant financial institutions in the economic development of Nepal. They
have made significant contribution to the economy as they provide capital for the
development of trade, industries, and business by investing the savings collected as deposit
from public. Commercial Banks perform a number of functions. However, Lending is the
principle business activity for most of the Commercial Banks. The loan is typically the
largest asset and the predominate source of revenue of Commercial Banks. As such, it is one
of the greatest sources of risk to a bank’s safety and soundness. Loan problem has historically
been the major cause of banks losses and failure. A commercial bank can minimize such risk
by making portfolio on their lending. Commercial Banks should follow the adage-“Don’t put
all of your eggs on one basket” while advancing the loan.

The major objective of the study concentrated on the analysis of Loan Portfolio composition
of Nepalese commercial banks, to examine the level of NPL in total lending, to measure the
contribution of loans on banking profitability and to explore the relationship of loans and
advances with Deposit, Net profit and Non-Performing Loan and the Trend analysis of
Deposit, Loans and Advances and Non-Performing Loans.

During the study period, all the needed data are collected from secondary sources and due to
time constraint, only three banks (KBL, HBL and BOK) have been taken as samples.
Similarly, past five fiscal years’ (i.e.2009/10 to 2013/14) data have been analyzed in this
study. To fulfill the objective of the study, various financial tools such as Asset management
ratio, Profitability Ratio, Activity ratio, Credit risk have been measured. Likewise, the
statistical tools like Standard deviation, Coefficient of Variation, Correlation Coefficient,
Coefficient of Determination, Probable Error and Trend equation have been used in analyzing
the data.

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From the analysis, it is found that all sampled banks have been following the portfolio
concept on sector-wise lending. However, it is seemed that they are not concentrated on the
optimal portfolio. They have been advancing largest share of their total lending amount on
manufacturing sector. Similarly, NRB has set up the directive regarding to be maintain loan
loss provision for different type of loans. According to the NRB directive, the requirement
percentages of loan loss provision on different types of loans are as: 1% for pass loan, 25%
on substandard loan, 50% for doubtful loan, and 100% for loss loan. During the study period,
it is seemed that KBL, HBL and BOK have not been following the NRB directive in most of
the loans loss provision. Likewise, referring the average value it can be said that loan is
occupied more than 64% of Commercial Banks’ total asset and Sampled Banks have been
successfully distributing their deposit on profit generating asset or loan. Likewise, all the
sampled banks are investing more than 70% of their deposits on loans and advances. The
income generated from loans and advances covers more than 80% of the total income. It
shows the lending efficiency and the concentration of banks in lending activities. It is found
that the NPL level of sampled banks is less than international standard i.e. 5%. Deposit and
Loan amount of sampled bank have been in increasing trend, however, it has been in
fluctuating trend. In NPL trend analysis, it is seemed that the NPL of KBL is increasing and
the non-performing loans of HBL and BOK are fluctuating.

5.2 Conclusion

Loan and advances is a most important asset of Commercial Banks. More Proportion of their
asset is occupied by loans. Loan advancement scenario of commercial banks is in increasing
trend, but, in fluctuating way. Deposit is a very important fund generation source and
Commercial Banks have been distributing most of their deposit on Loans. Interest income is a
major income source of Commercial Banks where more than 85% of interest income is
occupied by loan’s interest .Therefore, Loan is a most income generating asset of
Commercial Banks and it has a greater contribution on their profit .However, Loan is also a
very risky asset. To minimize the risk, Banks should follow the portfolio concept in lending.
It is seemed that Nepalese Commercial Banks have been following the portfolio concept in
lending. They have been advancing in most of the loan topic that classified by NRB.
However, they have not been making an optimal portfolio. They have been advancing largest
proportion of their total lending amount on one sector. In sector wise loan portfolio,

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Commercial Banks have been giving first priority for manufacturing sector. They have been
giving second priority for wholesaler and retailer sector. Still, they are showing more interest
to increase their lending amount on these sectors. Most of them are increasing their
advancing amount in these sectors. Nowadays, Commercial Banks are showing interest on
construction, finance and metal production sector, electricity, gas and water sector.
Consumable loan is also seemed an attractive sector to lending for them. Similarly, they have
not been giving priority for Agriculture sector. In the Agriculture sector, they have been
advancing very least proportion of their lending amount. Likewise, Commercial Banks have
been following the traditional way on their lending. They have been providing most of loan
on Asset Guarantee. They have not been showing interest on Credit Card and Gold / Silver
security. Similarly, on Product wise loan portfolio, Commercial Banks have been giving most
priority for Demand & other working Capital loan and Overdraft loan and least priority for
Bills purchased loan. Even though, Commercial Banks have been making the portfolio in
their lending, they cannot be free from Non-Performing Loan. However, they are able to
reduce their NPL level less than the international standard i.e.5%. To minimize the credit
risk, NRB has set up directives regarding the loan loss provision dividing the loan into four
categories. According to NRB directive, commercial banks should maintain provision 1% for
pass loan, 25% for sub-standard loan, 50% for Doubtful loan and 100% for Loss loan.
However, from the study, it is found that most of the Commercial Banks have not been
following the NRB directive strictly.

5.3 Recommendation

The study is concentrated on the past performance regarding to three commercial bank’s
loans and advances and it did not find any sort of major mismanagement on these sampled
banks’ loans. However, it is believed the following recommendations will be useful for them.
They are as follows:

i. Loan and Advances of Commercial Banks is in increasing trend which is good, but, in
highly fluctuating trend cannot be overlooked. So, the banks are recommended to
identify the reason behind their fluctuating pattern and working for ensuring that loan
follows a smooth and regular increment.

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ii. From the study, it is found that most of the Commercial Banks have not been
maintaining loan loss provision as of NRB directives. So, Commercial Banks are
recommended to adhere to the NRB directives. Following of NRB directives will help
to reduce the credit risk.

iii. Nepal is an agro-based country and without developing the agriculture sector, Nepal
cannot be developed. On the other hand, many experts have been saying that Nepal
posses many minerals. They are remained unknown due to the lack of investigation. If
they are identified, they can become one of the major sources of income for Nepal.
However, it is seemed that Nepalese Commercial Banks have not been showing
interest in these sectors. They have been advancing very little proportion of their
lending amount on these sectors. Since, Commercial Banks are most dominant
financial institution in Nepal, they should take the most responsibility in developing
the Nation to make good image in society. Therefore, Commercial Banks are
recommended to increase their volume of lending in Agriculture and Mines sectors
for the prosperity of national economy.

iv. According to above study, the market for the manufacturing and wholesaler &
retailers sector loan is highly competitive. All Commercial Banks have entered in this
business. In this situation, every banks must able to provide loan with offering
attractive schemes and package so that customers’ value could enhanced, and then,
they could grab the market. The banks would be involved in swapping which would
be the additional offer to serve the market.

v. Commercial Banks have been concentrating their operations in urban areas. Most of
the people who live in rural areas are not benefited from them. The lack of reliable
lending opportunities and fear of losing the principal may be the cause of less
orientation of their lending functions towards rural areas. Hence, it is required to be
changed the attitude among the bankers and any proposal coming to them should be
processed to conform to banking norms so that it can be sanctioned for production or
approved social objectives. So, they are recommended to increase their investing in
rural area through stretching their branches in every nook and corner of the nation.

vi. It is found that overdraft is the most dominant loan which has highest mean value.
Similarly, the sampled banks have higher proportion of their lending on Demand &
others Working Capital loan and Term loan. They have advanced very little on margin

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nature loan, real estate loan and trust receipt loan/import loan. have the highest
proportion of their lending. This shows the high concentration of loans and advances
on Overdraft Loan, Demand & others Working Capital Loan and Term Loan. This
shows that the banks are not managing their product-wise portfolio efficiently.

vii. The NPL movement analysis has revealed that most of the sampled banks’ NPL have
been increasing with greater ratio than their loan increment ratio and all sampled
banks’ NPL were increased in 2011. So, the banks are recommended to identify the
reason behind this and to take the corrective action so that the NPL could be
controlled in time.

viii. The NPL of BOK seems less than other sampled banks which indicates the lending
efficiency of it and it is seemed that the bank is reducing its NPL. To continue the
lending efficiency, the BOK should control the NPL on future also.

ix. The NPL of KBL is increasing but with very low rate. To continue the lending
efficiency, the KBL should continue the NPL on future also.

x. During the study period, it is seemed that the NPL of HBL is the greatest than other
sampled banks. So, the HBL is recommended to reduce its NPL level as possible as it
can to make its lending efficiency and to minimize the credit risk.

Common questions