EFFECT OF INTEREST RATE ON LOAN & ADVANCE OF

NABIL BANK AND NIC ASIA BANK LIMITED

A Research Proposal

By
Bindu Shrees
Rammani Multiple Campus
TU Registration No. 7-2-1055-161-2020

Submitted to
Faculty of Management
Tribhuvan University
Kathmandu
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CHAPTER I

INTRODUCTION

1.1 Background of the Study

A commercial bank is a financial institution that provides services like loans,

certificates of deposits, savings bank accounts bank overdrafts, etc. to its customers.
These institutions make money by lending loans to individuals and earning interest on
loans. Various types of loans given by a commercial bank are business loans, car
loans, house loans, personal loans, and education loans. (The Economic Times, n.d.).
A loan is a type of credit arrangement in which a sum of money is lent to another
party with the expectation of future repayment of the principal amount, typically
along with interest. Loans can be structured as a one-time lump sum or as an open-
ended line of credit, and they come in various forms, including secured, unsecured,
personal, and commercial loans. An advance refers to a payment or loan made before
the delivery of goods, services, or the occurrence of an event. In financial contexts, it
often denotes funds provided ahead of schedule, with the expectation of future
repayment or adjustment. (Investopedia, n.d.). An interest rate refers to the amount
charged by a lender to a borrower for any form of debt given, generally expressed as a
percentage of the principal. Interest rates can be fixed or variable and are influenced
by factors such as inflation, government policies, and the supply and demand for
credit. (Corporate Finance Institute, n.d.) A rise in interest rates typically discourages
borrowing due to higher repayment costs, while lower rates encourage more loan
demand. In the context of the Nepalese banking system, the relationship between
interest rates and bank lending is a vital area of analysis, particularly in a developing
financial market where monetary policy changes financial market where monetary
policy changes and economic stability directly influence credit dynamics . This study,
therefore, aims to descriptively analyze how fluctuations in interest rates affect the
volume of loans and advances provided by two major commercial banks in Nepal-
Nabil Bank and NIC Asia Bank- over a defined period. The research focuses on
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observing the lending trends of these banks in response to changes in interest rates,
without establishing direct causality, in line with the nature of descriptive research.

Nabil Bank and NIC Asia Bank were selected for this study because of their
prominent standing, operational scale, and influential role in Nepal's banking industry.
Nabil Bank, established in 1984 as the first private sector commercial bank in as the
first private sector commercial bank in Nepal, is known for its strong corporate
governance, diversified financial services, and consistent profitability (Nabil Bank,
2023). The bank has built a reputation for innovation, international banking practices,
and a significant contribution to the financial sector. NIC Asia Bank, which emerged
from the merger of NIC Bank and Bank of Asia in 2013, has become one of the
fastest-growing commercial banks in the country, with a wide network of branches, a
large customer base, and aggressive credit expansion strategies (NIC Asia Bank,
2023). Both banks are licensed and regulated by Nepal Rastra Bank and operate under
the same monetary and prudential guidelines, yet their strategies in setting interest
rates and managing credit vary. This comparative study provides a meaningful
opportunity to understand how different banks within the same regulatory framework
adjust their lending behavior in response to interest rate changes. Furthermore, the
rationale for selecting these institutions lies in their ability to reflect broader industry
trends, given their market share, lending portfolio, and active engagement in national
economic development. By analyzing and comparing data on interest rates and credit
disbursement from both banks, this study contributes to the existing body of
knowledge on bank behavior in Nepal, and provides useful insights for policymakers,
financial analysts, and banking professionals concerned with improving credit
efficiency and monetary policy outcomes.

1.2 Profile of the Organization

Nabil Bank Limited
Nabil Bank Limited, established in 1984, holds the distinction of being the first
private sector commercial bank of Nepal. With its foundation laid through the
collaboration of foreign investors and local promoters, Nabil Bank introduced modern
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banking practices to Nepal, setting new standards of excellence in service delivery

(Nabil Bank, 2023). Over the years, the bank has maintained its leadership position
through continuous innovation, technological advancement, and a strong commitment
to customer satisfaction. Nabil Bank offers a comprehensive range of services,
including retail banking, corporate banking, SME financing, investment banking, and
international trade facilitation. The bank's wide network of branches, ATMs, and
digital banking platforms ensures convenient access for its diverse clientele across
urban and rural areas. Furthermore, Nabil Bank's focus on financial inclusion,
sustainability, and digital transformation has reinforced its reputation as a forward-
looking financial institution. It has consistently achieved high profitability, stable
asset quality, and robust capital adequacy, establishing itself as one of the most
trusted and respected banks in Nepal. In recent years, Nabil Bank has expanded its
reach through strategic partnerships and by adopting cutting-edge digital banking
solutions, offering products such as mobile banking, internet banking, QR payments,
and remittance services.

Mission

The bank's vision to be the "Bank of First Choice" and its mission to deliver
excellence in banking services continue to guide its operational and strategic
initiatives. With a strong emphasis on governance, compliance, and customer-
centricity, Nabil Bank has become a benchmark for other banks operating in the
Nepalese financial system.

NIC Asia Bank Limited

NIC Asia Bank Limited emerged in 2013 from the successful merger of NIC Bank
and Bank of Asia Nepal, creating one of the largest and most dynamic commercial
banks in Nepal. The merger represented a significant milestone in Nepal's banking
sector, marking a new era of consolidation and competitiveness (NIC Asia Bank,
2023). Since its formation, NIC Asia Bank has demonstrated remarkable growth in
terms of asset size, branch network, customer base, and profitability. It provides a
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wide array of financial products and services including deposit accounts, loans and
advances, trade finance, remittance, insurance, and investment services. NIC Asia
Bank is particularly known for its aggressive market strategies, innovative banking
products, and extensive branch expansion. The bank operates over 360 branches,
more than 100 extension counters, and hundreds of ATMs across the country, making
it one of the most accessible banks for customers. Its technological advancements
such as mobile banking, internet banking, and digital wallets have further
strengthened its service offerings and customer advancements such as mobile
banking, internet banking, and digital wallets have further strengthened its service
offerings and customer convenience. NIC Asia Bank's commitment to financial
inclusion is evident through its active participation in rural banking and SME
financing programs. In addition, the bank has consistently been recognized with
national and international awards for its outstanding performance, corporate
governance, and innovation in banking practices.

Mission

NIC Asia Bank's mission to be the most admired and preferred bank reflects its
dedication to operational excellence, customer satisfaction, and sustainable growth.
The bank continues to leverage its strengths in technology, human resources, and
service innovation to enhance its competitiveness in Nepal's evolving financial
landscape.

1.3 Objective of the Study

Interest rates have a significant influence on the volume of loans and advances
provided by banks. Understanding how changes in interest rates affect the lending
activities of Nabil Bank Limited and NIC Asia Bank Limited is important for banks,
policymakers, and borrowers. Therefore, the main objective of this study is to
examine the effect of interest rates on loans and advances of these two leading banks.

The specific objectives of the study are:

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 To examine the level of analysis of interest rate on loans and advances of

Nabil Bank Limited and NIC Asia Bank Limited.
 To compare the impact of interest rate fluctuations on the volume of loans and
advances between Nabil Bank Limited and NIC Asia Bank Limited.
 To analyze the trend of interest rates and corresponding changes in loans and
advances over the selected study period.

1.4 Rationale / Significance of the Study

Interest rate is a key factor that influences the amount of loans and advances provided
by banks. When interest rates rise or fall, it directly affects how much people and
businesses are willing to borrow. Studying the effect of interest rates on loans and
advances is important to understand how banks like Nabil Bank Limited and NIC
Asia Bank Limited manage their lending activities, especially in a competitive
banking environment like Nepal.
This study is important because it helps bank managers make better decisions about
setting interest rates and managing their loan portfolios. It is also useful for
policymakers, who can use the findings to shape better monetary and banking
policies. Borrowers and investors will also benefit by gaining a clearer understanding
of how interest rate changes can impact their borrowing costs and investment plans.
Overall, the study will provide important information that can help improve banking
practices, strengthen financial stability, and support the growth of the economy.

1.5 Literature Review

The literature review aims to critically analyze and summarize previous research
related to the effect of interest rates on loans and advances provided by commercial
banks. This section explores theoretical foundations and empirical studies that
examine how fluctuations in interest rates influence banks’ lending behavior. Drawing
upon both global and Nepalese contexts, the review provides insights into the
mechanisms through which interest rates impact credit distribution. It also helps to
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position the current study within the existing body of knowledge, supporting the
analysis of Nabil Bank Limited and NIC Asia Bank Limited.

Review of previous studies

The relationship between interest rates and loans and advances has been a critical
subject in the field of banking and finance. Interest rates serve as both an incentive
and a deterrent for borrowers, influencing how much credit individuals and businesses
are willing to take. Similarly, they guide how much banks are willing to lend. A
number of researchers-both in Nepal and internationally-have investigated this
dynamic and provided useful insights into how interest rates affect credit distribution.

Efanga et al., (2020) examined the efficacy of commercial banks' loans and advances
in Nigeria, focusing on the impact of interest rate spread. The study's objective was to
analyze this impact using data from the Central Bank of Nigeria Statistical Bulletin
(2018) and the International Monetary Fund's International Financial Statistics. The
dependent variable was banks' loans (logLA), while independent variables included
interest rate spread (IRS), monetary policy rate (MPR), statutory reserve (SR),
inflation rate (INFR), and exchange rate (EXR). The study adopted an ex-post facto
research design, utilizing secondary data readily available for analysis. The Auto-
Regressive Distributed Lag (ARDL) Model was employed for estimation, with
several diagnostic tests confirming the model's goodness of fit and validity. The
findings indicated a positive and significant response of commercial banks' loans and
advances to the impact of interest rate spread in Nigeria. Consequently, the study
concluded that interest rate spread positively influenced commercial banks' loans and
advances within the study's scope. It recommended that commercial banks in Nigeria
maintain their current interest rate spread strategy, as it is profitable and fosters high
demand for their loans and advances in the country.
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Khan (2014) investigated how changes in interest rates affected the profitability of
four major Nepali commercial banks. The purpose of this study is to investigate how
interest rates and exchange rates affect commercial banks in Nepal's profitability. This
examination is quantitative and in view of the investigation of observational
reasonable standards. Gathering information utilizing optional information with the
purposive examining strategy, the example comprises of two business banks out of
28. The information investigation strategy utilized was board information relapse
examination utilizing SPSS, rendition 26 of the product. The outcomes showed that
the loan cost affected financial productivity, while the swapping scale affected
financial benefit. The financing cost and swapping scale meaningfully affect banking
benefit.

Acharya and Vyas (2022) examined the effect of interest rates on the profitability of
commercial banks in Nepal. The study analyzed the impact of interest rate spread on
Nepalese commercial banks' profitability using data from mid-July 2011/12 to
2020/21. The objective was to determine the influence of interest rate changes on
bank profitability, utilizing financial information collected from annual reports
published on company websites. The study included twenty-six commercial banks,
excluding Rastriya Banijya Bank due to its full government ownership and significant
management influence. Three dependent variables of firm performance were
considered: Return on Assets (ROA), Return on Equity (ROE), and Earnings Per
Share (EPS), with Interest Rate Spread (IRS) as the main independent variable.
Control variables for firm performance included Capital Adequacy Ratio (CAR),
Total Deposit to Total Assets (TDTA), Shareholders Equity to Total Assets (SETA),
Total Deposit to Shareholders Fund (TDSF), Total Lending to Total Assets (TLTA),
and Net Interest Income to Total Assets (NIM). The research adopted a quantitative
research method, reporting descriptive statistics and using panel data regression
models to examine the relationship between IRS and profitability. The results
indicated a positive impact of interest rate spread on firm performance, with a one
percentage increase in IRS associated with a 0.137% increase in ROA, 1.37%
increase in ROE, and 8.11% increase in EPS
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Maharjan (2020) had investigated about credit risk and profitability of five banks of
Nepal from 2007/08 to 2016/17 with independent variables: capital adequacy ratio,
non-performing loan, loans and advances to deposit ratio, loan loss provision ratio and
profitability measures: ROA & ROE. This study concludes that NPL has inverse but
insignificant impact on profitability however, CAR and loan loss provision have
positive significant impact. In India, Jain and R (2021) found negative significant
relationship between non-performing assets and ROE, but insignificant relation
between CAR and ROE.

Beutler et al., (2020) analyzed the impact of interest rate risk on bank lending, using
regulatory data on the net interest rate risk exposure of Swiss banks. Their research
aimed to analyze how interest rate fluctuations affect banks' lending behaviors, the
impact of nominal interest rate changes on economic capital and loan growth trends,
and the degree to which nominal interest rate increases lead to reduced cumulative
loan growth. They also examined the role of economic capital in absorbing potential
losses and its influence on lending capacity. Utilizing a descriptive study design with
multiple regression analysis, the researchers found that a one percentage point rise in
nominal interest rates reduces cumulative loan growth by approximately 30 basis
points after one year. This decline is attributed mainly to decreased economic capital
resulting from higher interest rates. Banks with greater exposure to interest rate
fluctuations experience more pronounced effects on loan growth. Higher interest rates
reduce economic capital, leading to more cautious lending practices. The study
highlights the significant role of interest rate risk in loan growth reduction following
interest rate shocks and underscores the importance of effective risk management
strategies. The findings suggest that regulatory frameworks and internal risk
management procedures should focus on monitoring and mitigating interest rate risk
to protect economic capital and sustain lending capacity. Understanding the nuances
of interest rate risk can help formulate more effective monetary policies that balance
inflation control with economic activity and bank lending.
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Adhikari (2017) conducted a study on the impact of interest rate on loans and
advances in Nepalese commercial banks. The study concluded that there is a
significant negative relationship between interest rate and the volume of loans
disbursed. Lower interest rates were associated with higher levels of lending activity.

Ghimire (2018) studied the interest rate sensitivity of loan portfolios in Nepalese
banks. The study showed that interest rate changes directly influenced loan demand,
particularly among business and retail clients. The research emphasized that banks
needed to strategically adjust their lending rates to maintain credit flow and
profitability.

Thapa and Poudel (2019) investigated the relationship between monetary policy tools
(including interest rates) and lending behavior in Nepal. The findings confirmed that
interest rate changes had a strong impact on commercial bank lending, and
recommended that central banks should carefully manage interest rate fluctuations to
maintain credit growth and economic stability.

Shrestha (2020) focused on how interest rate changes affected the financial
performance and loan distribution in top commercial banks in Nepal. The research
found that lower interest rates improved the banks' loan portfolios and profitability,
especially when supported by stable macroeconomic conditions.

Koirala (2021) performed a comparative analysis of two major banks in Nepal-Nabil

Bank and NIC Asia Bank-and found that both banks experienced loan growth when
interest rates were low, with NIC Asia showing slightly higher sensitivity to interest
rate changes.

Expanding internationally, Bernanke and Gertler (1995) proposed that changes in

interest rates directly impact borrowing behavior through what is known as the credit
channel of monetary transmission. This theory emphasized that higher interest rates
reduce bank lending due to decreased demand and tighter credit conditions.
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Mishkin (2007) highlighted that interest rates are one of the most effective monetary
tools for regulating credit and investment. He found that in both developed and
developing countries, a reduction in interest rates significantly boosts bank lending,
investment activity, and overall economic growth.

Ngugi (2001) examined interest rate behavior in Kenya and found that lending rates
were the primary factor affecting credit expansion, especially in private sector
lending. His study emphasized the importance of maintaining stable interest rate
policies to ensure consistent loan growth.

Kashyap and Stein (2000) in their U.S.-based study emphasized how monetary policy
and interest rate changes affect the balance sheets of banks, which in turn influence
their willingness to extend credit. This theory supports the idea that interest rate not
only affects demand for loans but also banks' capacity to supply them.

These studies provide a strong foundation for the present research, which compares
the specific impact of interest rate changes on loans and advances of Nabil Bank
Limited and NIC Asia Bank Limited using data from the past six years.

1.5.1 Conceptual Framework

The conceptual framework of this study is developed to understand the relationship

between interest rates and the loan and advance activities of commercial banks. It
serves as a structural guide that connects the core concepts and variables involved in
the research. This framework helps to explain how and why interest rate fluctuations
might influence the volume of loans and advances provided by Nabil Bank Limited
and NIC Asia Bank Limited.

a) Independent Variable: Interest Rate

The interest rate is the primary independent variable in this study. It refers to the cost
of borrowing money, typically expressed as a percentage of the principal loan amount.
In the banking sector, interest rates are influenced by the monetary policy of the
central bank (Nepal Rastra Bank), economic conditions, and market competition.
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Interest rates affect both:

 Lending Rate (the rate at which banks provide loans)

 Deposit Rate (the rate at which banks accept deposits)

An increase in interest rates generally makes borrowing more expensive, discouraging

individuals and businesses from taking loans. Conversely, a decrease in interest rates
lowers the cost of borrowing, thereby encouraging loan demand.

b) Dependent Variable: Loans and Advances

Loans and advances are the dependent variable in this study. These refer to the credit
facilities provided by banks to customers, including personal loans, business loans,
and other forms of credit. The volume of loans and advances issued by a bank is
directly affected by the demand for credit and the willingness of the bank to lend.

When interest rates are high, borrowers may hesitate to take loans due to higher
repayment costs, leading to a decline in loan disbursement. On the other hand, when
interest rates are low, more borrowers are likely to seek credit, increasing the volume
of loans and advances.

c) The Relationship Between Variables

The conceptual framework assumes a negative relationship between interest rate and
loan and advances. That means:

 When interest rate increases, the volume of loans and advances decreases
 When interest rate decreases, the volume of loans and advances increases

This inverse relationship is based on fundamental economic principles and previous

studies in the field of banking and finance.

d) Conceptual Model (Visual Representation)

You can represent this relationship visually like this:

Interest Rate
(Negative
Relationship)
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Loans & Advances

Fig 1.1: Conceptual Framework

This diagram shows that interest rate is the influencing (independent) variable, and
the resulting change is seen in loans and advances (dependent variable).

1.6 Research Methodology

Research methodology is the research method used to test the hypothesis. It

sequentially refers to the various steps to be adopted by a researcher in studying a
problem with certain objectives in review. Generally, it refers to the numerous
processes adopted by the researchers during the research period. The purpose of the
research methodology section is to describe the nature of the research design,
sampling, gathering and procedure and data collection and analysis procedures. This
section includes the following information.

1.6.1 Type of Research (Research Design):

This study adopts a quantitative and descriptive research design.

Quantitative research involves the collection and analysis of numerical data to

identify patterns, test relationships, and make predictions. It is useful for studying
measurable variables using statistical tools.

Descriptive research, on the other hand, aims to describe the characteristics of a

phenomenon or the relationship between variables without manipulating the
environment.

In this context, the study analyzes numerical data related to interest rates and loan and
advance amounts from Nabil Bank and NIC Asia Bank over six years to examine how
interest rates affect loan disbursement patterns.

1.6.2 Population and Sample:

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The population for this study includes all commercial banks operating in Nepal, as
they all engage in lending activities influenced by interest rate fluctuations. However,
this research specifically focuses on a sample of two major commercial banks: Nabil
Bank Limited and NIC Asia Bank Limited.
These banks are selected using purposive sampling, which is a non-probability
sampling method where the researcher intentionally selects specific units or cases that
are most selects specific units or cases that are most relevant to the research
objectives. In this case, the banks were chosen based on their large market share, data
availability, and consistent performance, which are crucial for analyzing the effect of
interest rate on loans and advances over six years.

1.6.3 Nature and Source of Data:

The data used in this research is secondary, quantitative, and longitudinal in nature.
Longitudinal data refers to information collected over a continuous period in this case,
six consecutive years - to observe trends, patterns, and relationships over time. This
allows the researcher to analyze how changes in interest rates have affected the
volume of loans and advances in both Nabil Bank and NIC Asia Bank.

The main sources of data include:

 Annual reports of Nabil Bank Limited and NIC Asia Bank Limited
 Publications and statistical bulletins of Nepal Rastra Bank (NRB)
 Financial statements and relevant reports available on the official websites of
the banks
 Related journals, articles and financial databases

1.6.4 Data Collection Procedure:

This study is based on secondary data, which was collected from the official websites
of Nabil Bank Limited, NIC Asia Bank Limited, and Nepal Rastra Bank (NRB). The
audited annual reports of both banks for the past six years were reviewed to collect
information on interest rates and loans and advances.
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To make sure the data was correct, the information from the banks' reports was
double- checked with data published by Nepal Rastra Bank (NRB). After that, all the
collected data was listed and arranged properly using Microsoft

Excel to make it easier to compare the two banks over the six-year period.

1.6.5 Instruments Used

In this study, the main instruments used are secondary data collection tools such as
annual reports, financial statements, and published documents of Nabil Bank and NIC
Asia Bank Limited. These reports are accessed from the official websites of the banks
and include figures related to interest rates and loans and advances over the past six
years. Additionally, Microsoft Excel is used to organize, tabulate, and analyze the
collected data. No primary tools like questionnaires or interviews are used in this
research.

1.6.6 Techniques of Data Analysis

This study uses descriptive analysis and the coefficient of correlation to examine the
relationship between interest rates and loans and advances of Nabil Bank and NIC
Asia Bank over a six-year period. Descriptive tools such as tables, percentages, and
graphs are used to present the data in a clear and organized manner.

The coefficient of correlation is calculated to measure the strength and direction of the
relationship between interest rates and loan disbursement. A positive or negative
value helps identify whether they move in the same or opposite directions. All data is
analyzed using Microsoft Excel.

1.7 Limitations of the Study:

 The study is limited to only two commercial banks.

 Only six years of data are considered, which may not capture long-term trends.
 It is based solely on secondary data; hence, the reliability of findings depends
on the accuracy of published reports.
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 The study does not account for other factors that might influence loans and
advances (such as GDP, inflation, or bank-specific strategies).
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References

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banks in Nepal. Journal of Accounting and Finance, 18(2), 13-24.

Adhikari, R., & Paudel, B. (2017). Bank-specific determinants of interest rate spread
in Nepalese commercial banks. Business and Economic Research, 7(1), 1-13.

Karki, A. (2019). Interest rate and bank lending behavior in Nepal: A time series
analysis. Journal of Central Banking Theory and Practice, 8(2), 139-155.

Khanal, S. (2017). Interest rate and loan growth in Nepal: An empirical analysis.
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Mishkin, F. S., & Eakins, S. G. (2018). Financial markets and institutions (9th ed.).
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NIC Asia Bank. (2023). Annual Report. NIC Asia Bank Limited. Retrieved from
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