LOAN AND ADVANCE OF NEPAL BANK LIMITED

A Project Work Report

By

Anita Kafle

Symbol No: 703270052

T.U. Redg. No: 7-2-327-408-2016

Kailali Multiple Campus

Submitted To

The Faculty of Management

Tribhuvan University

Kathmandu

In partial fulfillment of the Requirement for the degree of

BACHELOR OF BUSINESS STUDIES (BBS)

Dhangadhi, Kailali

January 2021

Declaration
I hereby declare that the work of the project report entitled “LOAN AND ADVANCE OF NEPAL BANK
LIMITED” Submitted to Faculty of Management, Tribhuvan University, Kathmandu is an original piece
of work under the supervision of MR. Padam Raj Joshi, faculty member, Kailali Multiple Campus,
Dhangadhi, Kailali and is submitted in partial fulfillment of the requirements for the award of the
degree of Bachelor of Business Studies (BBS). This project work report has not been submitted to any
other university or institutions for the award of any degree or diploma.

….....................

Anita Kafle

Date:

Acknowledgement
This study is mainly concerned with the analysis of “LOAN AND ADVANCE OF NEPAL BANK LIMITED “.
It has been prepared as per the course of Bachelor of Business Studies (fourth year). The project
work report could not be initiated without the assistance of some gracious people whom I must
thank.

I am extremely grateful to project supervisor Mr. Padam Raj Joshi, Campus Chief who gave
me fruitful suggestions and guidance to frame out this report and Tribhuvan University for
their generous encouragement and undertaking the supervision of my entire research work.

I am thankful to my friends who directly or indirectly supported me during my research, for

being with me all the time till the completion of this research. At last, I would like to express
my sincere gratitude to me and to my parents for always encouraging and inspiring me in
whatever way it is possible.

TABLE OF CONTENTS

Title Page

Declaration

Supervisors Recommendation

Endorsement

Acknowledgement
Table of Contents

List of Tables

List of Figures

Abbreviations

CHAPTER 1: INTRODUCTION

1.1 Background of the Study

1.2 Profile of the Organization
1.3 Objectives of the Study
1.4 Rationale of the Study
1.5 Literature Review
1.5.1 Conceptual Review
1.5.2 Review of Related Studies
1.6 Research Methodology
1.7 Limitations of the Study

CHAPTER 2: RESULT AND ANALYSIS

2.1 Analysis of Loans, Advances and Overdraft

2.2 Analysis of Various Ratios of NBL
2.3 Analysis of Correlation between Loan and Deposit
2/4 Major Findings

CHAPTER 3: SUMMARY AND CONCLUSIONS

3.1 Summary
3.2 Conclusions

BIBLOGRAPHY
APPENDIX

LIST OF TABLES

Table Title Page

1 Loans, Advances and Overdraft
2 Loans and Advances to Total Asset Ratio
3 Loans and Advances to Total Deposit
4 Investment to Loan and Advance Ratio
5 Interest Income to Total Loans and Advance Ratio
6 Interest income to Total Ratio
7 Loan Loss Provision to Loan and Advance Ratio
8 Non-Preforming Loan to Total Loan and Advances Ratio
9 Correlation between Non-Performing Loan and Net Profit
 ABBREVATIONS

ATM = Automated Teller Machine

B.S = Bikram Sambat

CEO = Chief Executive Officer

CPPG = Credit Policy and Procedure Guide

CQC = Credit Quality Control

F/Y = Fiscal Year

Govt. = Government

HBL = Himalayan Bank Limited

LBL = Laxmi Bank Limited

Ltd. = Limited
NPL = Non-Performing Loan

NRB = Nepal Rastra Bank

T.U. = Tribhuvan University

TL = Total Loan

USD = United State Dollar

CHAPTER 1

INTRODUCTION

1.1 Background

Loan and advances dominate the assets side of the balance sheet of any bank. Similarly, earning
from such loan and advances occupy a major space in income statement of the banks. However,
it is very important to be remained that most of the bank failure in the world due to shrinkage
on the value of the loan and advance. Here loan is known as risky assets. Risk of non-repayment
of loan is known as credit risk or default risk. Performing loans have multiple benefits to the
society while non-performing loan erodes even existing capital.

The operating of the banking institutions has been governed by the government rules and
regulations, international industry norms, relevant acts, Memorandum of Association (MOA),
instruction given at the time of getting intent and directives issued by Central bank from time to
time. Similarly, the expectation of the stakeholder should be taken into consideration. All
banking institutions is supposed to confine their activities within the stated framework.

Risk exist if there are two or more than two outcomes. There is risk in every loan. Loan loss
provision is the accumulated fund that is divided as safeguard to cover possible losses. It means
 that it is accumulated provisioning fund, which is used as safety fund to cover future loses. It is
expected provision fund. The amount required for provisioning depends upon the level of NPAs
trend of repayment of loan and economic stage of the county. The high-quality loan requires low
loss provision, whereas bad loan requires high loan loss provisions. Loan loss provision made for
performing loan is called specific loan loss provisioning.

The bank in Nepal is facing with the problem of increasing liquidity in the system. Further,
Rastriya Banijya Bank is increasing liquidity in the system through various rate cuts. Bank can get
rid of its excess liquidity by increasing its lending but, often shy away from such an option due to
high risk of default. In order to promote certain norms for healthy banking practice, most of the
developed economies requires all bank to maintain minimum liquid and cash reserve broadly
classified into Cash Reserve Ratios (CRR) and the Statutory Liquidity Ratio (SLR). A rate cut for
instant, decrease in RR result into lesser fund to be locked up in NRBs vaults and further infuses
greater funds into a banking system. However almost all the banks are facing the problem of bad
loan, nonperforming assets, thinning margins, etc. as result of which, banks are little reluctant in
granting loan to corporates. As, such though in its monetary policy NRB announces the bankers
no longer warmly greet rate cut but such news.

.
1.2 Profile of the Organization

His Majesty King Tribhuvan inaugurated Nepal Bank Limited on Kartik 30.1994 B.S.
This marked the beginning of an era of formal banking in Nepal. Until then all
monetary
tractions were carried out by private dealers and trading center. Then Prime Minister
Maharaja Juddha Shumsher J.B.R. speaking on the occasion with the kind
permission of His

Majesty the King stated this work which is being done in the larger interest of the
nation is a great moment for me. Until today a bank could not be opened in Nepal.
Therefore, this bank, which is being established under the name of Nepal Bank
Limited to fill that need and to be inaugurated by His Majesty the King, is a moment
of great joy and happiness. The Bank's objectives to render service to the people
whether rich or poor and to contribute to the nation's development will also need the
support and best wishes of all, which I am confident will be forthcoming.
In that era, very few understood or had confidence in this new concept of formal
banking, rising equity shares were not easy and mobilization of deposits even more
difficult. This was evident when the bank floated equity shares worth NRs.
2,500,000, but was successful only in raising NRs. 842.000. In the absence of any
bank in Nepal the economic progress of the country was being hampered and
causing inconvenience to the people and therefore with the objective of fulfilling that
need by providing service to the people and for the betterment of the country, this
law in hereby promulgated for the establishment of the Bank and its operation the
total deposits for the first year was NRS.17,02,025 where current deposits were
about NRs. 12.98.898 fixed was about NRs.3,88,964 and saving was NRs. 14,163.
Loan disbursed and outstanding at the end of the first year was NRs. 1,985. 000.

From the very conception and its creation. Nepal Bank Ltd, was as joint venture
between the government and the private sector. Out of 2500 equity shares of
NRs.100 face value.40% was subscribed by the government and the balanced i.e.,
60% was offered for the sale to private sector. There were only 10 shareholders
when the bank first started. Nepal Bank Limited, the first bank of Nepal was
established in November 15, 1937 A.D(Kartik, 30. 1994). It was formed under the
principle of Joint venture Joint venture between govt. & general public). NBL's
authorized capital was Rs. 10 million & issued capital Rs. 2.5 million of which paid-up
capital was Rs. 842 thousand with 10shareholders. The bank has been providing
banking through its branch offices in the different geographical locations of the
country.

Ownership Pattern
Government of Nepal 62.21%
General Public 37.79%
Source: www.nbl.com

Capital Structure of NBL

Authorized capital 10,00,00,00,000
Paid-up Capital 8,04,66,62,000
Source: Arthik Daily News, 2075

1.3 Objectives of the Study

The field work is done with the basic purpose of having practical exposure to the
theoretical knowledge gained, and to turn the requirement for the degree of Master
of Business Studies. The objective of the study is given below:
 To show the present condition of Loan management in NBI.
 To examine various stages involved in loan management process in NBI.
 To examine the trend of loans and advances and interest income of NBL.
.
.
1.4 Rationale of the Study
The following are the few points, which throw lights on the importance of this thesis.
Asa business student, it is a golden opportunity to show skill in financial analysis: this
report will show the intelligence and skill of the student. This report is a criterion for
evaluation of the student's qualification. This report will provide student an
experience in financial analysis. This report will provide information the student as to
how the business house is running. This report might be useful for those who are
willing to know something about the loan management in Bank. This report may be
useful for the library purpose so that any student wanting to prepare a report can
have some ideas about it. This report can be used as a guideline while preparing a
small project report. This report is prepared for the partial fulfillment of the
requirement for the Bachelor Degree of Business Studies.

1.5 Review of Literature

1.5.1 Conceptual Review

As in most of the countries, the banking system predominate the financial system of
Nepal. Among these institutions, the banking sector's share in the total deposit and
lending is not only significantly high but that the problems and the stake in this sector
are also accordingly challenging. A big chunk of resources is being utilized on loan
and advances. As the return from loan flotation is higher than the return froni iny
other activity, banks and financial institutions are concentrating their financial
activities for the management of the loan and advances. By virtue of principal for
higher return higher risk should be taken and vice versa. The mushrooming growth
of the banks and financial institutions have leaded them towards cutthroat
competition. On the other hand, economic condition of the country is not grooming
rather remain stagnant Adhikari. 2013).
Non-Performing Loans (NPL) or Non-Performing Assets (NPA) is a burning problem
of Nepalese financial sector. In the present banking scenario. NPA is being more
headaches for the banking sector (Ghimire 2005). In the general context. a non
performing asset is nothing but those advances that do not generate income. In
other words, it refers to those unproductive assets of any firm that cannot be
converted into cash within specific time limit. If the credit allowed by banks and
financial institution turns bad, it creates NPA. NPA percentage in assets portfolio
shows health of bank. The performance of any financial institution is greatly measure
with the coverage of NPA in the particular institution. Since the prime sources of
income for the bank are generated through income from loan and advances,
increase in non-performing assets may lead bank in verge of collapse.
As per the rules laid down by Nepal Rastra Bank, the loan and advance which are
overdue for 3 month or more should be treated as NPL. Therefore, the significance
of the study is for banking sector. Major impact of NPL lies in the fact it does not
generate income. The credit remains idle. As overdue ageing more than three-
month, six month and one year requires 25%, 50% and 100% provision for income,
which is virtually sure to reduce the profit. Furthermore, borrowing cost of resources
locked in NPL and opportunity loss due in none recycling of funds are other impact. It
also increases the administrative and recovery cost and legal cost as well. Effect on
employee morale and decision making. lower image and rating of bank and reduce
investor and foreign aid agency confidence are some of the prominent impact.

The negative level of capital fund, high level of NPL poor risk management skill
government weaknesses and these several deficiencies have been found in the
banking so with the view to addressing the huge problem and challenges of this
sector, the strategies paper of the government in financial sector reforms has
focused more on the banking sector as the overriding component of the overall
financial sector reforms strategy in the Nepal. But it does not mean that other areas
have been neglected. The other area such as insurance sector, securities market
and corporate sector are also being strengthens side byside the government (Thapa
2010).

Beside risk underlying in the business other factors also effects in the increment of
non- performing loan. These are attitude of the borrower, types and quality of
collateral taken and legal complication created by the borrower during the loan
recovery process. Reduction of NPL has always been a major problem for ever
commercial bank in recent days. NPL management has been the top priority for
banks. As easier, said than done. it's always been nerve-racking task for banks and
whole banking industry now is struggling to get rid of it through various means. Loan
and advances dominate the assets the assets side of the balance sheet of any bank.
Similarly, earning from such loan and advances occupy a major space in income
statement of the banks. However, it is very important to be remained that most of the
bank failure in the world due to shrinkage on the value of the loan and advance.
Here loan is known as risky assets. Risk of non-repayment of loan is known as credit
risk or default risk. Performing loans have multiple benefits to the society while non-
performing loan erodes even existing capital.

The operating of the banking institutions has been governed by the government rules
and regulation, international industry, norms, relevant acts, Memorandum of
Association (MOA), Article of Association (AOA), instruction given at the time of
getting intent and Directives issued by Central bank from time to time. Similarly, the
expectation of the stakeholder should also be taken into consideration. All banking
institution is supposed to confine their activities within the stated framework. Non-
performing loans, also called non-performing Assets, are loans on which repayments
or interest payments are not being made on time. A loan is an asset for a bank as
the interest payments and the repayment of the principal creates a stream of cash
flows. The interest payments made by its borrower a bank makes its profits. Banks
usually treat assets as non-performing if they are not serviced for some time. If
payments are late for a short time a loan is classified as past due. Once a payment
becomes really late the loan classified as non-performing.

1.5.2 Review of Previous Studies

Ghimire. (2005), prepared a thesis entitled "Non-performing Assets of commercial

Banks: causes and effects."
.
The main objectives of this study are as follows:
 To analyze the cause and effects of non-performing assets in commercial
bank
 To evaluate the impacts of NPA on the profitability of commercial bank
 To analyze the level of NPA selected commercial banks.

Major finding of this study are as follows:
 Non-performing assets and overall profitability of the banks tend to have
inverse relationship
 Profitability of the bank tends to have inverse relationship between credits
extend and increment on nonperforming assets and it may be significant in
case of aggressive credit expansion.
 Findings showed that Non-Banking Assets is credited due to having non-
performing assets.
.
Shrestha. (2009). prepared a thesis entitled "A study on the credit risk management
of Nepalese Commercial Banks" aims at the following objective taking Kumari Bank
Ltd (KBL) and Machhapuchre Bank Ltd (MBL) as sample banks:
 To examine the credit risk position of the selected commercial banks in Nepal
 To analyze the credit risk management system and practices of KBL and MBL
 To evaluate the organizational structure of KBL and MBL to manage the credit
risk.

Major finding of this study are as follows:

 The concentration risk is the main source of credit risk for both and MA
Similarly, lack of systematic and thorough cred processing is
major source of credit risk in these banks
 The problems in credit processing include lack of thorough credit
assessment, absence of testing and validation of new lending techniques,
subjective decision making by senior management, lack of effective credit
review process, failure to monitor borrowers or collateral values, and failure
of banks to take sufficient account of business cycle effects etc.

Khadka (2011), prepared a thesis entitled "Non-performing Assets of Nepalese

commercial Banks" the main objectives of this study are as follow:
 To analyze the non-performing assets of the commercial banks
 To examine the level of NPAs in total assets, total deposits and lending of
commercial banks.
 To examine whether the Nepalese commercial banks are following the NRB
directives regarding nonperforming assets or not
.
The major findings of this study are as follows:
 The level of NPA of Nepal Bangladesh Bank limited seemed greater
than all of the other banks under the study. Similarly, Nepal SBI Banks
and Bank of Kathmandu stand at second and third position
respectively,
  The position of NABIL Bank Limited seemed to be quite satisfactory
because the bank has been reducing its NPA every year and NPA of
Nepal Investment Bank has been reducing it at minimum than that of
all the other banks and it is found that none of the banks have been
following the directives of NRB regarding the loan loss provision

 Neupane. (2012). prepared a thesis entitled "Non-performing Assets
and Profitability of Commercial Banks in Nepal" the main objective of
this study is to access the non-performing assets of the commercial
banks under the study. The other specific objectives of the present
study are as follows:
 To study the trend and composition of non-performing assets of commercial
banks.
 To analysis the major profitability indicators of commercial banks.
 To access the relationship between the profitability and the non-performing
assets of the commercial banks.
 To recommend for the improvement of the management of NPA based on the
findings of the study.

Major finding of this study are as follows:

 NPA of NABIL is increasing trend except the fiscal year 2064/065 and the
total loan & advance is in increasing trend over the study period. The
percentages of NPA is increasing over the study period except the year
064/065. The average NPA ratio of the bank is 1.18% and standard deviation
is 0.44% over the study period.
 The trend analysis found that the increasing trend of NPA of NABIL.
Decreasing trend of SCBNL, increasing trend of NPA of HBL and deceasing
trend of NPA of NBB.
.
.
. Pradhan, (2013). prepared a thesis entitled "Non-performing Loan management of
Nabil Bank". The main objectives of this study are as follows:
 To analyze the level of non-performing loans of Nabil Bank Lid.
 To make an assessment of loan loss provision made against the NPL by Nabil
Bank Ltd.
 To examine the relationships between the NPL and profitability, assets and
business turnover of the bank.
 To evaluate the impact of non-performing loans in the performance in Nabil
Bank.
 To provide recommendation on reducing the level of NPA.

The major findings of the study:

 The loans and advances to total deposit ratio is also in the fluctuating trend.
The mean is 74.00% which indicates the average efficiency of the bank’s
utilization of its deposits. The S.D. is 4.00% and C.V is 0.00%. It is los
deviation and more consistency in advancing loans out of deposits.

Loan and Advances

The major function of commercial banks is to collect deposits or funds and disburse
to investors as loan and advances. This loan and advances are main sources of
income Loan and advances dominate the assets side of balance sheet of any bank.
Same way earning from loans and advances occupy a major portion of the income
statement of the banks. This asset generates income to the bank. So, it also
determines profitability of banks. Loan and advances granted to customers earns
interest. This interest is source of income of banks. Loan is granted as overdraft
cash credits and direct loans. Banks grant loan on the base of collateral underlying
the loan. Banks make care assessment before granting loans to investors or
business enterprises.
Performing Assets/Loans

Performing loans are those loans, which repay principal and interest timely to the
bank from the cash flow it generates. In other word, performing loan are the
productive assets that generate some profits. Loans have the certain period to return
its principle with its interest. If anyone repays loan with its interest on time is known
as the performing loan It is the most profitable assets of bank. Its help in rapid
growth of banking sector in this fast pace competitive age. Better performing loan are
the symbol of success of bank. It ultimately helps in economic growth and
development. So, such loans are necessary for overall development and prosperity
of country. However, many banks are suffering from the non-repayment of loan
amount.

Non-Performing Assets/Loans (NPAS/NPL)

NPAs are defined as bad debt. However. NPA in terms of banking sector consist of
those loans and advances, which are not performing well and likely to turn as bad
loans. One of the most emerging problems of the commercial banks is to the
management of non

performing assets/loans. So, banks have to consider and cautious about such an While
granting loan cautious, careful and through assessment, the project or investor or business
enterprises should be made.
Loan Loss Provision

Risk exists if there are two or more than two outcomes. There is risk in every loan. Lo
loss provision is the accumulated fund that is divided as safeguard to cover possible losses.
It means that it is accumulated provisioning fund, which is used as safety fund to cover
future losses. It is the expected provision fund. The amount of required for provisioning
depends upon the level of NPAs, trends of repayment of loan and economic stage of
country. The high-quality loan requires low loss provision, whereas bad loan requires high
loan loss provision. Loan loss provision made for performing loan is called general loan loss
provision and loan loss provision made for non-performing loan is called specific loan loss
provisioning.

1.6 Research Methodology

Research can be defined as an organized, systematic, database, critical scientific inquiry

or investigation into a specific problem, undertaken with the objective of finding answer
or solutions to it. It is the systematic and objective analysis and recording of controlled
observations that may lead to the developments.
Research has two important aspects. First, it is sufficiently broad to include ass types of
investigations requiring solutions to a problem. Second, it explicitly recognizes the
systematic nature of the research process in which data are gathered, recorded, analyzed.
And interpreted in an orderly manner. Research methodology refers to the various
sequential steps to be adopted by a researcher in studying a problem with certain objects in
view. It describes the methods and processes applied in a entire aspect of the study. In fact,
research methodology is a systematic way of solving the research problems.

1.6.1 Research Design

Research design is an overall framework of plan for the collection and analysis of
data that focuses on the data collection method, the research instrument utilized,
and the sampling plan to be followed. Research design is the plan, structure and
strategy of investigation conceived so as to obtain answers to research questions
and to control variance. The problem, the methodology data gathering, data analysis
and report writing are the basic elements of a research design. This research study
attempts to analyze the loan management of NBL the research design basically
follows its loan proceed methods, current scenario of management and future
planning for this section. Mostly the analysis is based upon secondary data, io of few
years' financial statements of the sample firm, collected directly from those firms and
their websites.

1.6.2 Population and Sample

In statistics, population means whole & sample means the part of the whole. Since
this study is focused on the Banks, thus, here the population encompasses all the 28
commercial Banks functioning its operation within the country. Since, study of whole
population may not be possible due to several factors; thus, sampling becomes
essential to draw inference for the population. So, among 28 Banks, one bank has
been selected by using convenient sampling methods.

1.6.3 Types of Data

Basically, this research includes secondary data and such data have been collected
from the respective banks. Moreover, several books, journals, articles and
magazines and various websites have also been considering. The research has
used secondary data. Secondary data are primarily collected by someone other than
the user. Hence primary data of a person or study can be the secondary data for
another person, research work or purpose. Secondary data are reuse of primary
data collected by someone other than researcher him or herself hence called second
hand data. Research works performed by collecting secondary data are referred to
as desk research. The entire published sources are the sources of secondary data.

1.6.5 Data Analysis Tools

The collected data will be analyzed with the help of different financial and statistical
Tools:

Financial Tools

Financial tools basically help to analyze the strength and weakness of a firm. Ratio
analysis is one of the important financial tools has been used in the study. Like
liquidity ratios are applied to measure the ability of the firms to meet short-term
obligations. It measures the speed of firm’s assets into cash to meet deposit
withdraws and other current obligations. Various types of liquidity ratios are current
ratio, cash and bank balance to total deposit ratio. cash and bank balance to current
assets ratio, investment on government securities to current assets ratio, etc.s

Statistical Tools

Statistical tools are the measure or instrument to analyze the collected data from the
difference sources. In statistic, there are numerous statistical tools to analyze the
data of various natures. In this study mainly statistical tools such as average,
standard deviation coefficient variance. coefficient correlation trend analysis.

1.7 Limitations of the Study

Though best possible efforts have been made to prepare this fieldwork report, this
report is still not free of some limitations. The limitations inherit in this report are:
 The statistics, which is used for the purpose of the study, is secondary, which
consist of banks publication, audited reports and other secondary sources.
Bank publications may not be always reliable because they may publish the
reports according to their profit policy and market situation. And personal
interviews and questionnaires may not be factual. But the audited data, which
used are more reliable.
 Some information relating to the subject matter could not be obtained
because of the bank's secrecy. So, there are some difficulties to get the
sufficient information as banks hesitate to provide data easily.
 A deep knowledge of the subject matter could not be gained because of time
restriction. So, this study is helpful to the study of loan management,
procedure of NBL only but the overall position of Bank cannot be judged by
this report.
 This study has covered only five-year data from 2071/72 to 2075/76.
 CHAPTER 2
RESULT AND ANALYSIS
This chapter contains the analysis and interpretation of the available and relevant data of
NBL as a sample bank. Five-year data period covering from the F/Y 2071/72 to 2075/76
have been analyzed and interpreted as per the research methodology defined in chapter II.
To have a deep insight of loan mgmt. in NBL. Various steps involved in loan management
are discussed. Then the trend analysis of various aspects related to loan management in
NBL is done. NBL being a commercial bank, functions in a same way by accepting deposit
from the savers and giving loan to the needy people. But before giving loans to any firms,
company or project, NBL makes appraisal and if seemed viable then only grants loan. It
provides on various heading like overdraft, term loan, loan, hire purchase loan, housing loan
etc.

2.1 Analysis of loan, Advances and Ovedraft

NBL provides loans on different headings like housing loan, hire loan, loan against
pledge etc. The position of loans and advances of NBL from F/Y 2071/72 to 2075/76
is presented through table and figure.

Table 2.1
Loans, Advances and Overdraft

Rs. In thousands
Year Loan and Change In Rs. Change In %
Advances
2071/72
2072/73
2073/74
2074/75
2075/76

Source: NBL Annual Report 2075/76