Professional Documents
Culture Documents
Lending Policy of Nepal Bank by Nabina Regmi
Lending Policy of Nepal Bank by Nabina Regmi
Lending Policy of Nepal Bank by Nabina Regmi
BY:
NabinaRegmi
At the
Tribhuvan University
Bhaktapur
February, 2016
STUDENT DECLARATION
This is to certify that I have completed the Summer Project entitled “Lending policy
and the performance of Bank” under the guidance of “Chandra K. Sapkota” in partial
fulfillment of the requirements for the degree of Bachelor of Business
Administrationat Faculty of Management, Tribhuvan University. This is my original
work and I have not submitted it earlier elsewhere.
Date: Signature:
Name:
II
CERTIFICATE FROM THE SUPERVISOR
This is to certify that the summer project entitled “Lending Policy and the
Performance of Bank” is an academic work done by “NabinaRegmi” submitted in the
partial fulfillment of the requirements for the degree of Bachelor of Business
Administration at Faculty of Management, Tribhuvan University under my guidance
and supervision. To the best of my knowledge, the information presented by him/her
in the summer project report has not been submitted earlier.
Designation
Date:
III
ACKNOWLEDGEMENT
This summer project report entitled “Bank Lending and the Performance of Bank” has
been conducted to satisfy the partial fulfillment of the requirements for the degree of
Bachelor of Business Administration (BBA), Faculty of Management, Tribhuwan
University.
Similarly, I would like to express my gratitude towards all teachers of Army Multiple
Campus, for their immense support and instruction for motivating me to complete my
report writing. Further, I would like to express my warm respect to my parents Mr.
Tuk Bdr. Regmi and Mrs. Usha Devi Regmi including my friends for their affection
and emotional support to pursue the study.
NabinaRegmi
February, 2016
IV
TABLE OF CONTENTS
Acknowledgement .......................................................................................................IV
CHAPTER-I................................................................................................................... 1
INTRODUCTION ......................................................................................................... 1
CHAPTER- II .............................................................................................................. 10
3.1. Conclusion..................................................................................................... 33
Bibliography ................................................................................................................. A
VI
LIST OF TABLES
VII
LIST OF FIGURES
VIII
EXECUTIVE SUMMARY
The main objective of this study is to investigate the impact of bank lending and the
performance of Nepal Bank Limited. Using data covering the period from 2011 to
2015, the results of the analysis indicate that lending has positive impact on the
performance (profitability) of bank. Secondary data such as: annual reports of the
bank, reports by Nepal Rastra Bank, different kinds of books, journal and newspaper
were used. Different tools such as: are standard deviation, coefficient of variation
(CV), Mean, Ratio analysis (Loan to total assets ratio, Loan to total deposit ratio,
sector wise loan ratio), Return on assets, Return on equity, Net interest income (NII)
and correlation. The findings from study show that bank earns profit through loan
services by collecting loan interest. It was also discovered that the bank is issuing out
more of its deposit in the form of interest bearing loans, which, in turn, generate more
income.
IX
CHAPTER-I
INTRODUCTION
1.1.Context Information
In Nepal, number of banks and other financial institution are increasing with the aim
of operating the various activities in the economy. The history of financial system of
Nepal began in 1937 with establishment of Nepal Bank Limited as the first
commercial bank of the country. After the establishment of Nabil Bank as a private
commercial bank, there has been a huge public attraction towards the opening of
banking institutions in Nepal. Commercial banks are established for operating
commercial activities in the economy. Ayodele and Raphael (2014) found that good
lending policy of a bank has contributed to the growth of profitability. Good lending
policy helps to minimize the risks associated with loan, and maintain the standard.
The principal lending objective of a bank is to provide growth, profitability and
liquidity (Osayameh, 1986).
1
Granting a loan involves the risk, but the bank must have a strong lending policy to
avoid bad debts and Non-performing loans which increases the profitability of the
bank. Loans and deposits is one of the prime factors for determining the profitability
of the bank. The bank accepts more deposits and offer more loans to the customer
which increases the profit of the bank. So, both loans and deposit are equally
important in the banking operation. If bank make more loans to the customers at the
same time bank will suffer from liquidity problem which may provide negative
impact on the performance of the bank.
Commercial bank provides various types of loan in which the most important types of
loan are: term loan, revolving loan, corporate loan, consumer loan (Rose & Hudgins,
2014). When loan is granted for a fixed period exceeding three years and is repayable
according to the schedule of repayment, it is known as term loan. Revolving credit
agreement is a formal line of credit whether the bank makes legal commitment to
extend credit up to maximum amount. Corporate loans are the loans which are granted
for big business houses. And consumer loan refers to the loan made to individuals and
families. It consists of loan to individual for personal, household or family
consumption.
To guide against negative consequences related to the loan, banks need to map out
clear policies and guidelines for efficient and effective credit operation. Nepal Bank
Limited provides two types of loan and advances which includes sector wise loan and
advances and product wise loan and advances. This study focuses on the product wise
loan policy of Nepal Bank Limited that includes: term loan, overdraft, trust receipt
loan/ import loan, Real estate loan, margin type loan, deprived sector loan, education
loan, personal residential home loan etc. Since the past few years, lending on product
wise sector mainly in real estate is increased. Due to increase in real estate loan, the
NRB has issued some regulatory directives to banks and financial institutions to limit
the loan flow in real estate (Nepal Rastra Bank, 2011). This is done to reduce the risk
associated with the high concentration of loan in a single sector. If bank and financial
institution invest in single type of sector and if it has to face the losses, the bank has to
undergo huge risk as the risk is not diversified. Hence, the performance of bank will
be negatively affected.
2
The banks offer more loans to the customers for the benefit of interest revenue, on the
same time there is possibility for a risk of liquidity. Simultaneously it negatively
affects the bank profitability (Rasiah, 2010).Thus; this study is based on product wise
lending of Nepal Bank Limited. This study mainly focuses on the lending sectors and
its impact on the performance of the bank.
The main purpose of the study is to find out the impact of loan policy on the
performance of bank. Other specific purposes of this study are:
To find out the trend in various types of product wise loan and advances.
To identify the loan lending sectors of bank.
This study is mainly concerned with the lending policy and its impact on the
performance of bank. The success of any organization depends upon the policies,
rules and regulation, human resources, guidelines etc. They provide to increase the
performance of the bank. Hence, credit policy is an important standard because only a
strong credit policy helps to achieve the target performance of the bank. This study
gives the general overview on the lending policy adopted by Nepal Bank Limited. It
provides understanding on productivity of lending policy of Nepal Bank Limited. This
study focuses on aggregate lending policy based on product wise lending. There is a
need to identify the composition of product wise loan in the loan portfolio of Nepal
Bank Limited. The study will be helpful in capturing the existing scenario of lending
sectors and to the policy makers for formulating necessary policy guidelines for the
product wise lending sectors.
The project is beneficial for all concerned parties such as: shareholders, depositors,
lenders, employees’ business person etc. If the lending policy of bank is good then the
net interest income will be increased, which eventually contribute in increasing the
wealth of shareholders. Good lending policy is also beneficial for depositors because
good lending policy decreases non-performing loan, which reduces the loss of the
3
bank. As attractive lending policy provides the various loan scheme for business
person which increases the interest income of bank. Proper regulation is desired in
lending sector and absence of which may reflect improper way of financing the loan.
That is why it is become necessary to identify the status of financing the loan, its
procedure and the impact of loan in different sectors.
This study also helps in understanding amount of loan lending on different product
wise sectors, efficiency on recovery of loan and effectiveness of credit policy of the
bank. It provides information about the relationship between lending policy and the
performance (profitability) of bank. Profitability of bank is influenced by various
factors which may include: types of loan, external factors such as government rules
and regulation, political environment etc. policy of the bank, borrower’s behavior,
interest rate, economic situation (Chang Kuo, Lie-Huey, Yi-Hsun, Shuhui Yu
&Chinfu Wu, 2010). Every sector may not be profitable so, the bank have to make
proper credit appraisal that involves the assessment of three main aspects: the
applicant, the purpose and the security (Rose & Hudgins, 2014).
1.4.Limitation of Study
This study only deals with the lending policy and the performance of Nepal
Bank Limited.
The data is collected through secondary sources. So, its effectiveness depends
upon the validity of the data provided by the bank.
This study deals only with the total loan investment (product wise) but not
with the other areas of the bank.
Only the five fiscal years (2069-2073) data are taken for the report.
4
1.5.Literature Survey
Literature survey is that descriptive analysis of any specific topic which is related
only that topic and gives more essential information. It is an act of reviewing the
article of other authors in related topic which is helpful to present clear objective of
the study. It helps to guide the researcher to be in track to fulfill the objective of the
study.
Since, loan is the important source of profit for banks. The profitability of bank can be
determined by the policies related to the credit. Many scholars in discussing about the
loan policies said that there is positive relationship between lending policy and the
profitability of the bank (Ayodele & Raphael, 2014; Vincent & David, 2012; Chang
Kuo et. al 2010).
Liew (1970) explain that when interest rates for loans increased, profitability would
increase. Lown and Peristiani (1996) thought that when banks tried to reduce loans,
they would increase interest rates to increase the difficulties for the borrowers. Lown
and Peristiani exhibited significant positive correlations in small banks, and
insignificant negative correlations in large banks, indicating that the two loan policies
had a mixed influence on the interest rate.
Pringle’s (1974) assumption based on the borrowers and the interest rates, the bank
could earn profit by controlling the amount of loans and investing in government
bonds, to set the target function as in the case when banks pursued the goal of
maximizing private wealth. He argued that the amount of loans would be affected by
the spread of deposits (minus risk-free rate of interest), the spread of loan, the amount
of the deposits in the next period, and the capital of the bank. The study emphasized
that the risk-free rate of interest did not influence the bank’s decision regarding the
amount of the loans.
Fraser (1974) used American banks in 1969 and 1970 as the study sample, and
applied canonical correlation analysis to find that the composition of loans (the ratio
of different types of loans including real estate, agriculture, consumer and business
loans) would significantly affect the bank at the 0.01 significant level.
5
Graddy and Kyle (1979) started with the equation on balance sheet, concluded that the
amount of loans, deposits, bank capital and labour cost were factors that were
significant to a bank’s profitability. It is also found that when banks increased the
amount of their loans in earning assets, at 0.01 significance level, they would
significantly and positively influence the labour cost ratio (the labour cost to earning
assets).
Arshadi and Lawrence (1987) in the study of an empirical investigation of new bank
performance divided the factors that influenced bank performance into seven types,
including cost, structure, loan composition, deposit composition, regional factors,
economic condition and scale. The loan composition type categorized the total
amount of loans into real-estate loans, agricultural loans, consumer loans and business
loan. The study empirically found that agricultural loans and business loans were
significantly negatively correlated with operating performance and it is also found
that loan composition directly influenced bank performance.
Hannan (1991) in an empirical analysis of the relationship between loans and interest
rates, found that whatever the amount of the loan was, the interest rate and the amount
of loan exhibited a significant negative correlation.
Jordan (1998) took the new banks in England from 1989 to 1992 as his sample to test
the hypothesis. The study used cost efficiency and profit efficiency as proxy variables
for bank performance. Through examination, he found that the amount of bad loans
did have a significant positive correlation with profitability, providing that the effect
of the loan policy hypothesis did exist. It is also found that when banks have high
non-performing loans (NPLs), it means that they have easier loan policies, or are
more willing to engage in loan services.
Molyneux (1998) under the assumption that managers of banks pursued to maximized
profitability, minimize risk, and maximize expected utility, conclude that the two
major factors influencing a bank’s amount of loans were the profitability of the loans
and the risk faced by the bank itself. This study discussed that how behavior loan
affects bank performance.
6
Chang Kuo et.al (2010) examines the impact of IT loans on the performance of banks.
They used the variables such as, IT loan ratio, consumer loan ratio, debt ratio,
correlation, ROA, ROE, and total loan to total assets ratio for the analysis of data. The
finding of the study is that there is positive correlation between the consumer loan
ratio and bank performance, suggesting that it is beneficial for banks to exploit the
consumer loans market. Conversely, they find that the changes in the political and
economic environment have a negative effect on the performance of banks.
Vincent and David (2012) explain about the efficiency and effectiveness of credit
policies in commercial banks. They tried to examine relationship between credit
policies and performance of loan advancement. It is of great importance to evaluate a
credit policy to know if it is on right track or if it is a deviation from the bank’s goals.
They come up with the conclusions that credit policies indeed affect the performance
of commercial bank. Although, the bank have efficient and effective credit policies,
bad debts still exist and banks should continue to improve their lending policies and
should train staff to the highest expertise. Interest rate should be reduced with the
prevailing inflation rate.
Ayodele and Raphael (2014) argue that having a good credit policy in bank goes a
long way in minimizing the incidence of bad debts. It was also discovered that
prudent credit assessment and disbursement, dynamic credit monitoring and decisive
actions should be implemented which all helped the bank to maintain high quality of
assets and a high level of profitability. They came up with the conclusions that loan
default has not been the only problem leading to bank distress. Bank should avail
themselves of other means of generating income besides loan and advances so as to
diversify their earning base and to minimize over dependence on loan and advances.
All these would go a long way in reducing the risk associated with their operations
through loans and credit as a means of getting return.
Nepal Rastra Bank (2011) examines the situation of real estate financing undertaken
by banks and financial institutions, the procedures of real estate lending and the
impact of policy changes on the nature of real estate financing. The finding of the
study was that the housing and real estate market is still fresh in Nepal. There is need
to explore new products, modality of regulation and supervision.
Owino Michael (2013) in the study of “the effect of the lending policies on the levels
of non- performing loans (NPLs) of commercial banks in Kenya” states that the
proper adherence to the lending policies can reduce the level of non-performing loans.
The study used descriptive survey approach and used 43 commercial banks in Kenya.
The non-performing loans of banks are an important criterion to assess the financial
health of banking sector. It reflects the asset worth, credit risk and competence in the
allocation of resources to the productive sectors. The lending policies were found to
be very beneficial to the credit department in that they guide the lending process and
that it ring uniformity with the bank network.
8
1.6.Research methods used for data collection and analysis
1.6.1. Research Methodology
The methodology of the study is descriptive in nature and makes use of secondary
data. The secondary data is very easy to collect and less time consuming. The
descriptive methodology is used to describe the relationship between the lending
policy and theperformance of bank. The various methods adopted to collect the
required data in the course of preparing fieldwork report are as follows:
In order to collect data, secondary sources of data and information were used. But in
general, secondary sources are easy to collect and less time consuming. In this project,
the data is collected from the annual reports of the bank and reports by NRB. Beside
these, sources of information were derived through the literatures concerned with the
bank lending policy, profitability etc. were collected from different kinds of books,
journals and newspaper.
Various statistical tools were used to understand about the impact of lending policy on
the performance of bank. The impact of lending policy on the performance of bank is
examined through charts, trend lines and graphs with the help of Microsoft Excel. The
tools that are used for data analysis are standard deviation, coefficient of variation
(CV), Mean, Ratio analysis (Loan to total assets ratio, Loan to total deposit ratio,
sector wise loan ratio), Return on assets, Return on equity, Net interest income (NII)
and correlation.
9
CHAPTER- II
Nepal Bank Limited was established in November 15, 1937 A.D (Kartik 30, 1994) as
a first commercial bank of Nepal. It was formed under the principle of joint venture
(joint venture between government and general public). Joint venture means a
business entity created by two or more parties, generally characterized by shared
ownership, shared return and risks, and shared governance. The chairman of Nepal
Bank Limited is Mr. Janardhan Sharma Acharya, representative from Ministry of
Finance. The concept of joint venture is based upon the conceptual of synergy.
Nepal Bank Limited was established with the objectives to render service to the
people whether rich or poor to contribute to the nation’s development. NBL’S
authorized capital was Rs 10 million and issued capital Rs. 2.5 million of which paid-
up capital was Rs. 842 thousand with 10 shareholders. According to the Banking and
financial statistics july, 2015, NBL’S paid-up capital is Rs. 6464.0 million. The bank
has been providing banking services through its branch office in different
geographical location of the country.
The main objective of Nepal Bank Limited is to provide world class banking services
by achieving excellence in customer service and adopting high level technology. It
focuses on increasing the sustainable profit.The total deposits for the first year was
10
NRs. 17,02,025 where current deposits was 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. The vision of Nepal Bank Limited is
“Pioneer bank with the complete business solution”.
Various banks provide various types of loan and advances. Nepal Bank Limited
provides credit on product wise loan and advances and security wise loan and
advances. This study only focuses on product wise loan and advances. Nepal Bank
Limited provides credit on following sector:
1. Term Loan
Term loan is a type of loan which is granted for a fixed period exceeding three
years and is repayable according to the schedule of repayment. The period of
term loan may extend upto 10 years in some cases upto 20 years. A term loan is
generally granted for fixed capital requirements, for instance, investment in
plant and machinery, land and equipment, purchasing flat or apartment house
etc. The lending rate on industrial/ commercial term loan is 9% to 10% and
11% to 12% on housing plan.
2. Overdraft
Trust receipt loan/ import loan is a short-term cash advance that enables the
customer as an importer to meet the customer’s immediate payment obligations
11
with the use of Letter of Credit presentation or Import Documentary Collection.
This arrangement allows the importer to acquire and sell goods by using letter
of credit. The lending rate on trust receipt loan is 8% to 9%.
Demand & working capital loan is a short- term loan which is used to finance
day to day operation of business. It is normally a loanfor a
comparablysmallamount,and is notusedto buy long-term assets and investment
purposes.It is used to cover account payables, salary and wages etc. The
working capital loan involves hypothecation, overdraft, pledge loan, demand
and loan against government securities. The interest rate is 9% to 11% in all
types of working capital loan.
It is the loan that is provided by bank for personal use especially for home. The
interest rate fixed by Nepal Bank Limited on home loan is 9.5% on 5 years
term, 10.5% on 10 years term, 11% on 15 years and above term, 9% on NBL
professional home loan and 9.5% on Nepalaxmi home loan.This loan is
provided for:
Real estate refers to the immoveable property such as land, land and house or
any type of building or infrastructure used for either residential or business or
any other purposes. A real estate loan is a loan that is usually secured by
mortgage. It is also known as mortgage loan. The lending rate on real estate
loan is 11% to 12%.
12
7. Margin Nature Loan
Hire purchase loan is a type of loan that is provided by a bank for purchasing
car, motorcycle, computer, washing machine etc. It is an arrangement
wherebya customer acquires an asset by paying an initial installment and
repays the other part of the cost of the asset over a period of time or the term
of contract. The lending rate on hire purchase loan is 10.5% to 11.5%.
13
Table: 1 Loan Flow of Nepal Bank Limited
Amount in Rs Million
Table: 1 show that most of the funds are invested in term loan which is Rs. 7146.78
million in comparison with others loan. Similarly, the least funds are invested in bills
purchased. It seems there is increasing trend in investing funds in different sectors.
The loan in demand and working capital loan, deprived sector loan and bills
purchased are highly fluctuated. The loan in real estate sector is increasing from 2011
to 2014 but in 2015, it is decreased to Rs.1235.45.
14
18000
Figure: 1 shows the product wise lending of Nepal Bank Limited in different fiscal
years. The maximum amount is invested in term loan and minimum amount is
invested in bill purchased. There is increasing trend of term loan, overdraft, and
personal home loan. The bill purchased and deprived sector loan is highly fluctuated
and other loans are slightly fluctuating. In 2015 the bank invests more amounts on
demand and working capital loan.
15
2.2.2. Descriptive Statistics
2.2.3. Mean Standard Deviation and Coefficient of variance
Particulars Mean SD CV
Term Loan 7146.78 1374.84 19.24
Overdraft 4816.23 1503.55 31.22
Import Loan 841.71 88.14 10.47
Working Capital Loan 6785.7 3478.31 51.26
Res. Per. H. Loan 2280.76 722.59 31.68
Real Estate Loan 1085.63 240.25 22.13
Margin Nature Loan 1363.41 337.91 24.78
Hire Purchase Loan 1589.57 214.73 13.51
Deprived Sector Loan 999.24 766.01 76.66
Bills Purchased 73.98 59.52 80.46
Other Product 10783.99 3023.31 28.04
Table: 2 shows the average, standard deviation and coefficient of each lending sector
of Nepal Bank limited. Mean shows the average loan invested in different sectors in
different year. According to the mean, the bank invests most of the amount in term
loan from 2011 to 2015. Standard deviation and coefficient of variance measures the
variability of data. Standard deviation shows that there is high amount variability in
working capital loan. Working capital loan have high SD that is 3478.31% that means
it involves more risk. According to the CV, bill purchased and deprived sector loan
has high amount fluctuation it means that data are more fluctuating which involves
more risk.
16
Mean
12000
10000
8000
6000
4000
2000
0 Mean
Figure: 2 reveals that the bank has invested most of the amount in term loan and
working capital loan. The average loan invested in term loan is Rs 7146.78 million
and in working capital loan is Rs 6785.7 million. The least amount is invested in bill
purchased and import loan that is Rs 73.98 million and Rs 841.71 million
respectively. It means that bank is less concerned about bill purchased and import
loan.
SD
4000
3500
3000
2500
2000
1500
1000
500
0 SD
17
Figure: 3 reveals that the working capital loan has high SD that is 3478.31% that
means the data is more fluctuating and involves more risk. Bill purchased and import
loan has least standard deviation that is 59.52% and 88.14% respectively. Such loan
has less fluctuation and involves less risk.
CV
90.00
80.00
70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00 CV
Figure: 4 reveals that the CV of import loan is 10.46% which is less in comparison to
others. The less coefficient of variance means less variability in loan. The loan
amounts in import loan are slightly fluctuated than others. The CV of Bill Purchased
and deprived sector is high i.e. 80.46% and 76.66% respectively. Higher the CV,
higher will be the variability in amount of loan and the risk is also high. The loan
amount in deprived sector and bill purchased is highly fluctuated.
The loans to assets ratio measure the total loans outstanding as a percentage of total
assets. The higher this ratio indicates a bank is loaned up and its liquidity is low. The
higher the ratio, the more risky a bank may be to higher defaults. Under the basis of
high risk and high returns, increasing the total loans to total loans to total assets ratio
should have a positive influence on bank performance.
18
The Loan to Assets Ratio is defined by the following formula.
Total Loan
Loan to Assets Ratio = × 100
Total Assets
Amount in Rs Million
Particulars/ Years Total Loan Total Assets Total Loan to Total assets
2011 26709.9 55700.1 47.9531
Ratio (%)
2012 29699.2 61071.9 48.6299
2013 37855.3 77171.2 49.0536
2014 41196 83311.1 49.4484
2015 53374 90309.2 59.1014
Table: 3 shows that the maximum ratio is 59.1014% and the minimum ratio is
47.953% which shows there is slight increase in loan amount. When the ratio is
higher, it means the banks will be more enthusiastic in offering loans to the general
public instead of letting them remain unused, which have much higher risk. Under the
basis of high risk and high returns, increasing the total loan to total assets ratio should
have positive impact on the performance of bank. Hence the loan ratio is increasing
gradually in every year so it has positive impact on the bank performance.
19
Total loan/Total Assets(%)
70
Loan to Total Asset ratio 60
50
40
30
20 Total
loan/Total
10 Assets(%)
0
2011 2012 2013 2014 2015
Fiscal Years
Figure: 5 shows that loan ratio is increasing gradually from 2011 to 2014. But from
2014, the loan ratio has been increased rapidly to 59.1014%. When the ratio is higher,
it means the bank is providing more loan to the public instead of letting them remain
unused or using them to purchase securities.
Total Loan to total deposit measures the extent to which the banks are successful to
mobilize their total deposit on loan and advances. It shows the relationship between
loan and advances to total deposit. In general the loan-deposit ratio is measures bank’s
liquidity as well as profitability of the bank. The ratio is calculated by dividing the
total amount of loans, by total amount of deposits (Michael Taillard, 2014). The
resulting figure is expressed as a percentage.
Total Loan
Total Loan to Total deposit ratio = × 100
Total Deposit
20
Table: 4 Loans to Total Deposit Ratio
Amount in Rs Million
Particulars/ Years Total Loan Total Deposit Loan to Deposit Ratio (%)
2011 26709.9 46804.2 57.0673
2012 29699.2 56042.6 52.9939
2013 37855.3 62988.9 60.0983
2014 41196 69341.2 59.4105
2015 53374 78007.2 68.4218
Table: 4 show that the maximum loan to deposit ratio is 68.42189% and the minimum
is 52.99399%. A high loan to deposit ratio means that the bank is issuing out more of
its deposit in the form of interest bearing loans, which, in turn, generate more income.
If bank provide more than its credit limit i.e. 80%, it means if the ratio is too high, the
bank may not have enough liquidity to cover any unforeseen fund requirements, and
conversely, if the ratio is too low, the bank may not be earning as much as it could be.
In the table the maximum ratio is 68.42% which is less than credit limits. The bank is
earning profit and not suffered from liquidity.
60
50
40
30 Loan to Deposit
20 Ratio(%)
10
0
2011 2012 2013 2014 2015
Fiscal Years
21
Figure: 6 show that the loan to deposit ratio is fluctuating. If the ratio is more
fluctuating, it involves risk. In 2012, the ratio is decreased to 52.99% that means the
bank were issuing less loan to the public. The ratio is increasing in 2013 and 2015 that
means the bank is earning more profit by issuing more loans to the public.
Table: 5 reveal the sector wise loan to deposit ratio in different years. In 2011, 2012
and 2014, bank is issuing more of its deposit in term loan that is 11.65%, 10.93% and
12.10% respectively. In 2013 and 2015, bank is issuing more deposit in working
capital loan that is 11.75% and 16.9243% respectively. In general, the loan-deposit
ratio measures bank’s liquidity as well as profitability of the bank. A high LDR
indicates two things, firstly the bank is issuing out more of its deposits in the form of
interest-bearing loans; secondly the bank generates more income. There is high LDR
in 2015 that is 68.42%. In 2015, bank is issuing more deposit in terms of loan which
increases the profit of the bank.
22
18.00
Term Loan to Deposit
16.00
Overdraft to total Deposit
14.00 Ratio
Figure: 7 reveal that the ratio of term loan is higher in 2011, 2012 and 2014. It means
that the bank is issuing more deposit as a term loan in years 2011, 2012 and 2014. The
ratio of working capital loan is higher in the year 2013 and 2015. It was decreased in
the year 2014. The other loan ratios are in average.
Return on assets measure the net income that the bank is able to generate from total
assets investment. This ratio is an indicator of managerial efficiency to measure
whether a bank manager is able to convert the bank’s assets into net earnings or not.
In other words, ROA measure the management’s ability to utilize the real and
financial resources of the bank to generate returns (Sapkota & Rawal, 2016). It is
calculated by dividing bank’s net income by total assets.
Net Income
Return on Assets (ROA) = × 100
Total Assets
23
Table: 6 Return on Assets
Amount in Rs Million
Table: 5 reveal that the maximum ROA is in year 2013 that is 1.025648% and the
minimum is in year 2012 that is 0.288778%. This clearly shows that there is positive
relationship between net income and ROA. As net income increased ROA also
increased in year 2013.
Return on Assets
1.2
0.8
ROA
0.6
0.2
0
2011 2012 2013 2014 2015
Fiscal Years
Return on Assets (ROA) is important measures through which bank’s profitability can
be measured. If the ratio is higher, the management is efficiently utilizing its assets.
The maximum ROA is 1.025648% in 2013. The minimum is 0.288778% in 2012. The
ROA is more fluctuating due to the fluctuation in net income. Net income was
24
decreased in year 2012 due to increase in interest expenses and deferred tax. So, the
ROA is also decreased in year 2012. There is positive relationship between net
income and ROA.
Net Income
Return on Equity (ROE) = × 100
Total equity capital
Amount in Rs Million
Table: 6 shows that the maximum ROE is in 2011 that is 100.7983% and the
minimum ROE is in year 2015 that is 8.1380%. The ROE is more fluctuating as
sometime it increased more rapidly and sometime it decreased at minimum level.
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Return on Equity
120
100
80
ROE
60
Return on Equity
40
20
0
2011 2012 2013 2014 2015
Fiscal Years
Figure: 9 shows that maximum ROE is in year 2011 and minimum ROE is in year
2015. The ROE is continuously decreasing from year 2013 to 2015. Generally, bank
shareholders prefer ROE to be high. It is possible; however, that an increase in ROE
indicates increased risk. From 2012 to 2015, it shows that there is less risk in the
bank. It also concludes that there is positive relationship between net income and
ROE.
Net interest income is the difference between the revenue generated from a bank’s
assets and the expenses associated with paying out its liabilities. In other words, it is
the difference between revenues generated by interest-bearing assets and the cost of
interest paying liabilities. For banks, assets typically include commercial and personal
loans, mortgages, construction loans and investment securities. The liabilities consist
primarily of customer’s deposit.
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Table: 8 Net Interest Incomes
Table: 7 shows that maximum net interest income (NII) is Rs 3316459 which is in
year 2015 and minimum NII is Rs 1854015 which is in year 2012. It shows that NII is
in increasing trend from year 2012 to 2015. It also shows that in year 2012 expenses
associated with paying out its liabilities is more than in others year. Higher net
interest income indicates that bank is earning more income by issuing more loans to
the public or in productive sector.
3,000,000
2,500,000
2,000,000
Net Interest
1,500,000 Income (NII)
1,000,000
500,000
0
2011 2012 2013 2014 2015
27
Figure: 10 reveal that Net Interest Income in year 2012 is decreased due to high
interest expenses. It shows that net interest income is in increasing trend from year
2012 to year 2015. It means that the bank has lent more amount as a loan or credit to
the customer. The bank has earning more interest from commercial and personal loan
and any other loans.
2.2.9. Correlation
Correlation refers to the degree and type of relationship between any two or more
variables in which they vary together over a period. Correlation helps to analyze the
relationship between two random variables. Correlation can vary from -1 to +1. A
positive correlation exists where the high values of one variable are associated with
the high value of other variables. A negative correlation means association of high
values of one with the low values of others. This study examines the relationship
between Loan to deposit ratio and ROA and between loan to total assets ratio and
ROA.Correlation can be calculated by using following formula:
n xy x y
Correlation (r) =
n x 2 ( x ) 2 n y 2 ( y ) 2
ROA (x)
ROA (x) 1
CD Ratio (y) 0.2906
Total loan/Total Assets (%) -0.1597
The correlation between loan to deposit ratio and ROA is 0.29 and correlation
between loan to total assets and ROA is -0.15 which is shown in Table: 8which
conclude that the correlation between LDR and ROA is positive but not so strong.
The correlation between loan to total assets and ROA is negative which shows that
increased in total loan to total assets, decreases the ROA of the bank that is, there is
inverse relationship between loan to total assets and ROA.
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Table: 10 Correlations between ROE, CD Ratio and Loan Ratio
ROE (X)
ROE 1
CD Ratio (y) -0.2667
Total loan/Total Assets (%) -0.4037
The correlation between credit to deposit ratio and ROE is -0.26 and correlation
between loan to total assets ratio and ROE is -0.40 which is shown in Table: 9 which
conclude that the correlation between LDR and ROE is negative that means there is
inverse relationship. The correlation between loan to total assets ratio and ROE is also
negative which shows that increased in total loan to total assets, decreases the ROE of
bank. There is inverse relationship between loan to total assets ratio and return on
equity (ROE).
NII
NII 1
Total Loan 0.9266
Total Assets 0.8917
The correlation between total loan and Net interest Income (NII) is 0.92 and
correlation between total assets and NII is 0.89 which is shown in table: 10 which
conclude that the correlation between total loan and NII is positive. It means that there
is strong positive relationship between total loan and NII. As loan increases, NII is
also increases. The correlation between total assets and NII is also positive. It also has
a strong positive relationship between total assets and NII.
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2.3.Finding and Discussion
2.3.1. Finding
Deposit is the major sources of loan in the bank. Bank is a financial intermediary by
which funds can be transferred from surplus unit to the deficit unit of the economy.
This can be performed through the acceptance of deposits of different categories.
Nepal Bank limited invests most of their deposit in term loan that is Rs. 35733.9
million. Term loan is a type of loan which is granted for a fixed period exceeding
three years and is repayable according to the schedule of repayment. The period of
term loan may extend upto 10 years in some cases upto 20 years. A term loan is
generally granted for fixed capital requirements, for instance, investment in plant and
machinery, land and equipment, purchasing flat or apartment house etc. The study has
focused on the various sectors of product wise loan and advances of Nepal Bank
Limited. From the thorough analysis of the data, the study has provided several
findings. The major findings are as follows:
1. The bank has invested most of the amount in term loan which is Rs. 35733.9
million out of Rs. 188834.9 million.
2. The CV of Bill Purchased and deprived sector is high i.e. 80.46% and 76.66%
respectively which shows that there is high variability in amount of loan and
involves high degree of risk.
3. The CV of import loan is 10.46% which is less in comparison to others. The less
coefficient of variance means less variability in loan and involves less risk.
4. The total loan to total assets ratio is in increasing trend that means the banks is
more enthusiastic in offering loans to the general public instead of letting them
remain unused, which have much higher risk. Under the basis of high risk and
high returns, increasing the total loan to total assets ratio should have positive
impact on the performance of bank.
5. The loan to deposit ratio is fluctuating but in increasing trend. In 2015 it has been
increased to 68.42% which is less than credit limits. The bank is earning profit and
not suffered from liquidity.
6. In 2011, 2012 and 2014, bank is issuing more of its deposit in term loan that is
11.65%, 10.93% and 12.10% respectively. In 2013 and 2015, bank is issuing more
30
deposit in working capital loan that is 11.75% and 16.9243% respectively. Hence,
from this we can say that Nepal Bank Limited issue more deposits in terms of
term loan and working capital loan.
7. The ROA is more fluctuating due to the fluctuation in net income. Hence, there is
positive relationship between net income and ROA.
8. The correlation between loan to deposit ratio and ROA is 0.29 and correlation
between loan to total assets and ROA is -0.15 that means there is positive
relationship between LDR and ROA and inverse relationship between loan to total
assets and ROA
9. There is negative relationship between ROE and CD ratio & ROE and loan to total
assets ratio.
10. The Net Interest Income is minimum in year 2012 because there is more expense
associated with paying out its liabilities.
11. There is strong positive relationship between NII and total loan & NII and total
assets.
2.3.2. Discussion
Bank earns profit through loan services by collecting loan interest. If the loan services
are not profitable, such performance will directly reflect upon the bank’s net interest
income (interest income – interest expenses). The study shows that a loan service of
Nepal Bank Ltd is profitable as its net interest income is increasing. If the net interest
income is high, it means that each amount that bank lend out can achieve maximum
interest. This study further analyzes the correlation between the net interest incomes
(NII) and total loan and NII and total assets in order to re-examine the impact of NII
in the bank performance. By means of correlation, it was found that the correlation
coefficient of the total loan and NII is 0.9266 and the correlation coefficient between
31
total assets and NII is 0.8917 which shows that NII has positive impact on total loan
(higher the loan, higher will be the net interest income) and total assets of the bank.
This study also examines the correlation coefficient between ROA and CD ratio and
ROA and total loan to total assets ratio. After analyzing, it was found that the
correlation coefficient between ROA and CD ratio is 0.29. This indicates that when
bank increases their CD ratio, the ROA will significantly positively benefit bank
performance. Similarly, the correlation coefficient between ROA and total loan to
total assets ratio (loan ratio) is -0.15. This indicates that when bank increases their
loan ratio, the ROA will negatively influence the bank performance. A similar result
was also found by Chang Kuo, Lie-Huey, Yi-Hsun, Shuhui Yu and Chinfu Wu
(2010). In addition, this study finds that the ROE is negatively correlated with the CD
ratio and loan ratio of the banks. Higher ROE indicates increased risk.
32
CHAPTER- III
3.1.Conclusion
This study can help banks to improve their performance. From the study, it was found
that there is positive relationship between LDR and ROA but not so strong which
means that the lending of NBL is not satisfactory. Increase in LDR increases the ROA
of bank but not in huge amount. If the bank issues more amount of deposit in terms of
product wise loan, it increases the profitability of the bank. The ROA is more
fluctuating due to the fluctuation in net income. The net income has decreased in year
2012. The loan to deposit has also decreased in year 2012. This has caused reduction
in return on assets (ROA). There is positive relationship between net income and
ROA. After analyzing the 5 years data of Nepal Bank limited, these conclusion has
been made that bill purchased and deprived sector loan has very high risk in
comparison to others because the CV of bills purchased and deprived sector is high
that is 80.46% and 76.66% respectively. The others amount of loan is also
fluctuating, which involves risk. So, the bank must make their credit policy more
strong and tight to generate more profit. The bank has invest more amount on term
loan and less concerned about deprived sector loan and bill purchased. If the bank is
able to mobilize its deposit on every sector the performance of bank will be positively
affected. The bank has mobilized its deposit in different sector as the total loan to total
deposit ratio is gradually increased.
3.2.Action Implications
This project is concerned with the bank lending and the performance of bank. The
bank provides the loan in different sector but not so much profitable. The bank is only
concerned with the term loan, working capital loan and overdraft. The following
recommendations are made based on above study:
1. The bank is less concerned about the deprived sector. So, the bank must focus on
such sector to make the better performance of bank.
33
2. The bank must increase their lending in productive sectors and must curtail its
lending on non-performing sectors such as: land and building.
3. The Nepal Bank limited should focus on high margin of loan to reduce the non-
performing loan.
4. The bank needs to make strong lending policy so that the non-performing loans
and bad debts will be decreased.
5. The ROE is more fluctuating so the bank has to stabilize the ROE by maintaining
the fix range of ROE to avoid risk and increase the profitability.
6. The net profit is fluctuating; consequently, return on assets (ROA) is fluctuating.
So, the bank should use mitigating tools such as: net income stabilization, total
assets stabilization and certaining of loan loss provision to avoid risk.
7. The bank should come up with loan differentiation strategy on the basis of the
customer need and requirements.
8. The banks staff should be given occasional training to equip them with the
relevant skills as this will go a long way in reducing the levels of non-performing
loans.
9. The bank should come up with loan diversification strategy that helps to reduce
the risk relating to the credit.
34
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