CHAPTER I

INTRODUCTION

This proposal study about

1.1 Background of the Study

Effective loan management practices directly impact the profitability and

sustainability of financial institutions like Nepal Bank Limited and Agricultural

Development Bank Limited. Well-managed loans ensure timely repayments, reducing

the risk of defaults and non-performing assets (NPAs). This, in turn, safeguards the

banks' financial health and enables them to continue providing essential financial

services. Loans are a major source of income for financial institutions, contributing to

their capital reserves. Based on bank and financial institution act 2017- ‘’Creditor”

means a person or a body corporate to whom/which a bank or financial institution has

to pay and the term also includes a depositor and debenture-holder for the purpose of

liquidation process.’’ Efficient loan management ensures a steady inflow of interest

payments, which can be used for lending to other borrowers. This availability of

capital improves the institutions' liquidity and ability to meet customers' financial

needs. Financial institutions play a pivotal role in fueling economic growth by

providing funds for various productive activities, such as business expansion,

infrastructure development, and entrepreneurship. Citation

Effective loan management facilitates the allocation of funds to projects that have the

potential to drive economic development, create jobs, and improve living standards.

Sound loan management practices enable financial institutions to lend to a diverse

range of borrowers, including individuals and businesses. This promotes financial

inclusion by providing access to credit for those who may have been excluded from

the formal financial system. Increased access to credit empowers individuals and

small businesses to invest, expand, and contribute to economic activities. Citation

The primary function of a reputed bank is the credit management. But management of

credit is not an easy job. Tamplin (2023) stated that credit risk refers to the possibility

of a borrower failing to meet their financial obligations. This may result in losses for

the lender or investor. A financial institution that manages its loans well demonstrates

its competence, prudence, and responsible lending practices. This instills confidence

among investors, shareholders, and depositors, leading to increased investments and

deposits, further contributing to the institution's stability.

History of Bank

1.2 Profile of the Organization

In this part of the study, researcher will discuss very brief about profile of sample

banks.

Nepal Bank Limited

Nepal Bank Limited (NBL), the first bank of Nepal proudly holds the glory of

marking the formal beginning of banking system in Nepal. Nepal Bank Limited was

established as FIRST bank of Nepal on Kartik 30, 1994 (November 15, 1937 A.D.)

under Nepal Bank Act 1937. The bank was established with an authorized capital of

Rs.10 million, issued capital of Rs.2.5 million and paid up capital of Rs.0.842 million.

The share held by government and private sector was 60% and 40% respectively.

Notably, Nepal Bank Limited was inaugurated by King Tribhuvan with supportive

vision of Prime Minister Juddha Shumsher Jung Bahadur Rana to institutionalize

formal banking system in Nepal. Before the establishment of NBL, all monetary

transactions were carried out by private dealers and trading centers. It was the time
when there was no trust for such formal banking system. This reflected in under

subscription of shares (OnlyRs.0.842 million could be raised out of floated capital of

Rs.2.5 million). Raising deposit and mobilizing the collected deposit was even more

difficult. The corporate vision of the bank is to be the most preferred bank of the

Nation with complete banking solutions. Citation

Agricultural Development Bank Limited

Agricultural Development Bank, Nepal was established in 1968 under the ADBN Act

1967, as successor to the cooperative Bank. The Land Reform Savings Corporation

was merged with ADBN in 1973. Subsequent amendments to the Act empowered the

bank to extend credit to small farmers under group liability and expand the scope of

financing to promote cottage industries. The amendments also permitted the bank to

engage in commercial banking activities for the mobilization of domestic resources.

The bank is also involved in commercial banking operations since 1984, to provide

commercial banking services. The bank has 51% share of Government of Nepal and

49% of general public. The enactment of Banks and Financial Institutions Act

(BAFIA) took all the banks and financial institutions (BFIs) under its umbrella and

abolished all the acts related to the BFIs including the ADBN Act, 1967. Since then,

the bank has been working as a public limited company registered under the

Companies Act, 2006 and is licensed as "A class financial institution" by Nepal

Rastra Bank from 2006. The corporate vision of the bank is to be the bank with

complete banking solution at your own door step. Citation

1.3 Statement of the Problem

Resent problem related with loan management with citation

If loan management is not properly managed what problem is face by organization

with 3 problem in paragraph.

Thus, researcher will study on the topic of loan……

There has been a series of relentless effort on the research of loan management of

commercial banks in Nepal where different dimensions are tested and evaluated with

samples from different country context. It is relevant that there are different types of

tools and index that assist the banks to do well when its about managing their loan and

capital ratio along with bank’s return or profitability. Commercial banks in Nepal, like

anywhere else, face the challenge of effectively assessing and managing credit risk.

This involves accurately evaluating the creditworthiness of borrowers and ensuring

that loans are given to customers who are likely to repay them. Inaccurate risk

assessment can lead to a high rate of non-performing loans (NPLs), which can impact

the bank’s profitability and stability. Therefore, this study is mainly focused in

generating the solution related to the loan management and how these two banks NBL

and ADBL are closer in accomplishing their corporate mission.

In the past, some researcher found out that businesses and individuals did not have

sufficient collateral to secure loans, making it difficult for banks to mitigate the risk

associated with lending. Moreover, inadequate documentation and verification

processes did lead to higher default rates. A less robust regulatory and legal

framework for loan recovery enforcement are also some challenges for these two

banks when burrowers default. This is because delays in legal processes and difficulty

in recovering collateral can discourage banks from lending. As per the current CEO of

NBL; Krishna Bahadur Adhikari 2023 ‘The services that we used to give to the

customer through a manual process are now can be dealt with online services whether

its related to business loans/ personal loans, or jewelry loans, demats and most

importantly in the present context we are liable to determine the flexible base rate by
considering the monetary policy through NRB and the regulations of Banker’s

Association of Nepal which directly impacts the Cost of Fund, Cost of SLR, Cost of

Operation. However, in the immediate context in my personal view the monetary

policy is not capable to bring the policy that decreases the interest rate of the market.

Its solely depends upon the market mechanism.’’

For quite some time, the economy of Nepal is taking a downward turn. The previous

government under Nepali Congress leader Sher Bahadur Deuba and the present

government under Pushpa Kamal Dahal ‘Prachanda’ adopted certain measures to

revitalize the economy. Despite that, the economic condition of the country continues

to deteriorate. The government is receiving revenue that is hardly enough to meet the

recurrent expenditures. Heavy loans with certain conditionalities could put Nepal in a

debt trap. Fear is also looming large that Nepal could be greylisted by the Financial

Action Task Force (FATF), a global anti-money laundering watchdog, which could

further negatively impact the growth of the country. People’s livelihood is largely

affected due to inflation, which is 8 percent on-year basis. The government has zero

control over inflation as the country is import-dependent. Due to the increase in prices

in the international market, Nepal is forced to procure goods, including fuels,

chemical fertilisers, food, etc. at a higher price. While the prices of goods, land, and

shares are increasing at an exponential rate, there is no growth as such in the

agricultural, industrial or even service sectors.

Accordingly, such situation is actually the main reason for motivation for this study

and source of identification of the problems related to the loan management and how

these two banks are contributing to such.

Its evident that there is a relevant gap in the literature which is why this study will try

to fill such gap, examining the impact of loan management for these 2 banks- NBL

and ADBL. Comparatively,

1.4 Objective of the Study

The main objective of research is to analyze loan management practices of

commercial banks and come out with solid recommendation to enhance loan

management. However, specific objectives are given below:

 To assess loan management process, system and practices.

 To evaluate and to reduce the impact of nonperforming loan.

 To analyze the relationship between liquidity stress, market risk exposure,

confidence in consumer and investor, interest margins and regulatory and

government measures.

 To analyze different benefits that the loan management might bring

1.5 Research Question

Change objective into WH questions

1.6 Hypothesis of the Study

1.7 Rationale of the Study

As there has been a lot of several researches conducted on the topic of loan

management of commercial banks, this study will add more evident or points to the

existing literature. Accordingly, this study will help to give a clear and effective

overview on loan management function by the commercial banks in the light of these

banks NBL and ADBL. The economic conditions, interest rates, regulatory

environment, credit risk assessment and political instability are the prime reason for

all the commercial banks to face competition these days. This has increased the
 importance of loan management as a very important topic to discuss. Therefore, the

significance of the study can be expressed through the given points below;

a. A good study tools for the students who wants to fetch a realistic information about

the loan management of commercial banks through the examples of these two banks.

b. Shareholder, investors, and bankers can seek guidance or idea through this study

where they can maximize their profits ultimately.

c. To all the rational or interest sensitive bankers out there, this study can help them in

making a right decisions after knowing the core process of loan management system

by the commercial banks of Nepal.

1.8 Delimitation of the Study

1.9 Organization of the Study