CREDIT MANAGEMENT OF NABIL BANK LIMITED

A Project Work Report

By

Nijan Jyakhwo

TU Reg. No: 7-2-39-574-2016

Exam Symbol No: 390009

Group: Account

Submitted To

The Faculty of Management

Tribhuvan University
Kathmandu, Nepal

In partial fulfillment of the requirement for the Degree of

BACHELOR OF BUSINESS STUDIES (BBS)

Research Committee
Shanker Dev Campus
Kathmandu, Nepal
January, 2021
 DECLARATION

I hereby declare that the project work entitled “CREDIT MANAGEMENT OF

NABIL BANK LTD” submitted to the Faculty of Management, Tribhuvan
University, Kathmandu is an original piece of work under the supervision of Mr.
Binod Kumar Pandey, faculty member, SHANKER DEV CAMPUS, Putalisadak,
Kathmandu, 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 institution for the award of any degree or
diploma.

………...........

Nijan Jyakhwo

January, 2021

ii
 SUPERVISOR’S RECOMMENDATION

The project work report entitled “A CASE STUDY ON CREDIT MANAGEMENT

OF NABIL BANK LTD.'' submitted by Nijan Jyakhwo of Shanker Dev Campus,
Putalisadak, Kathmandu is prepared under my supervision as per the procedure and
format requirements laid by the Faculty of Management, Tribhuvan University, as
partial fulfillment of the requirements for the award of the degree of Bachelor of
Business Studies (BBS). I, therefore, recommend the project work report for
evaluation.

………………….……

Binod Kumar Pandey

January, 2021

iii
 ENDORSEMENT

We hereby endorse the project work report entitled “CREDIT MANAGEMENT OF

NABIL BANK LTD '' submitted by NijanJyakhwo of Shanker Dev Campus,
Putalisadak, Kathmandu, in partial fulfillment of the requirements for award of the
Bachelor of Business Studies (BBS) for external evaluation.

……………… ……………..

Asso. Prof. Dr Kapil Khanal Prof. Dr. Keshav Raj Joshi

Chairman, Research Committee Campus Chief

January, 2021 January, 2021

iv
 ACKNOWLEDGEMENT

This fieldwork report has been duly prepared and submitted to meet the partial
requirement of BBS program for the subject of ''Credit management of Nabil bank
limited'' designed by faculty of management of T.U. It has been prepared to give a
summarized view of credit management of Nabil bank of different years. So, some
problems and solutions are also presented in this report. For easier study the data has
been presented by tables, graphs and have been interpreted using some statistical
methods and figures. This report tries to focus on the credit situation of Nabil bank
only.

First of all, I would like to express my sincere gratitude to my respected teacher Mr.
Binod Kumar Pandey for the guidance and kind co-operation in order to complete this
report writing. During the study period, several people directly or indirectly helped
me to shape the study in this form. So, I would express my profound gratitude and
sincere appreciation to my respected teachers, dear friends and staffs of our college.

Finally, I am very much thankful to my family and my colleagues for their continued
moral support.

NijanJyakhwo

BBS 4th Year

Shanker Dev Campus

Putalisadak, Kathmandu

v
 TABLE OF CONTENTS

Title Page.......................................................................................................................i

Declaration....................................................................................................................ii

Supervisor’s Recommendation.....................................................................................iii

Endorsement.................................................................................................................iv

Acknowledgement...........................................................................................................v

Table of Contents .........................................................................................................vi

List of Tables...............................................................................................................viii

List of Figures...............................................................................................................ix

Abbreviations.................................................................................................................x

CHAPTER ONE: INTRODUCTION........................................................................1

1.1 Background of Study..............................................................................................1

1.2 Profile of Nabil Bank Ltd.......................................................................................1

1.2.1 Capital structure............................................................................................2

1.2.2 Structure of Bank..........................................................................................3

1.3 Statement of Problem............................................................................................4

1.4 Objectives of the study...........................................................................................4

1.5 Related Literature Review......................................................................................4

1.5.1 Conceptual Review......................................................................................5

1.5.2 Review of Empirical Studies........................................................................6

1.5.3 Research Gap...............................................................................................7

1.6 Research Methodology...........................................................................................8

1.6.1 Population and Sample................................................................................8

1.6.2 Sources of data.............................................................................................9

1.6.3 Data collection procedures...........................................................................9

vi
 1.6.4 Techniques of analysis...............................................................................10

1.6.5 Classification and Tabulation of Data........................................................10

1.7 Limitations of Study.............................................................................................12

1.8 Chapter Plan ....................................................................................................12

CHAPTER TWO: RESULT AND ANALYSIS......................................................14

2.1 Ratio Analysis......................................................................................................14

2.1.1 Total Loans and Advance to Total Deposit (Credit to Deposit Ratio).......14

2.1.2 Non- Performing Loan to Total Loans and Advances Ratio.....................15

2.1.3 Non-Performing Loans to Loan Loss Provision Ratio...............................16

2.1.4 Loan loss provision to Total Loans and Advances Ratio...........................18

2.1.5 Return on loans and advances ratio............................................................19

2.1.6 Interest Income on Loans and Advances Ratio..........................................21

2.1.7 Total Interest Expenses to Total Deposit and Borrowing Ratio............23

2.1.8 Capital Adequacy Ratio.............................................................................24

2.2 Secondary Data and Analysis...............................................................................26

2.3 Major Finding.......................................................................................................30

CHAPTER THREE: SUMMARY AND CONCLUSIONS....................................32

3.1 Summary..............................................................................................................32

3.2 Conclusion............................................................................................................33

REFERENCES...........................................................................................................34

APPENDIX.................................................................................................................35

vii
 LIST OF TABLES

Contents Page No.

Table 2. 1: Loans and Advances to Total Deposit Ratio..............................................14

Table 2.2: Non-Performing Loan to Total Loans and Advances Rattio......................15
Table 2.3: Non-Performing Loan to Loan Loss Provision Ratio.................................16
Table 2.4:Loan Loss Provision to Total Loans and Advances Ratio...........................18
Table 2.5: Return on loans and advances ratio............................................................20
Table 2. 6: Interest Income to Loans and advances.....................................................21
Table 2.7: Total Interest paid to Total Deposit and Borrowing Ratio.........................23
Table 2. 8: Capital Adequacy Ratio.............................................................................25
Table 2. 9: Model Employed by the Banks to identify Credit Worthiness of
Customer ......................................................................................................................
Table 2. 10: Response on fulfillment of Capital Adequacy requirement.....................27
Table 2. 11: Response on Credit Risk Policy as a part of Company-wide Capital
Management Strategy..................................................................................................

viii
 LIST OF FIGURES

Contents Page No.

Figure 2.1: Loans and Advances to Total Deposit Ratio.............................................15

Figure 2.2: Non- Performing Loan to Total Loans and Advances Ratio.....................16
Figure 2.3: Non-Performing Loan to Loan Loss Provision Ratio................................17
Figure 2.4: Loan Loss Provision to Total Loans and Advance Ratio..........................19
Figure 2.5: Return on loans and advances ratio...........................................................21
Figure 2. 6: Interest Income on Loans and Advance...................................................22
Figure 2.7: Total Interest paid to Total Deposit and Borrowing Ratio (%).................24
Figure 2. 8: Capital Adequacy Ratio............................................................................26
Figure 2. 9: Model Employed by the Banks to identify Credit Worthines of
customer.......................................................................................................................
Figure 2. 10: Response on fulfillment of Capital Adequacy requirement...................28
Figure 2. 11: Response on Credit Risk Policy as a part of Company-wide Capital
Management Strategy...................................................................................................28
Figure 2. 12: Capital Reserve Maintained on and off Balance Sheet Risks................29

ix
 ABBREVIATIONS

% : Percentage

A. D : Anno Domini

B.C : Before Christ

B. S : Bikram Sambat

F/Y : Fiscal Year

No. : Number

NPL : Non performing loans

NRB : Nepal Rastra Bank

REG. NO. : Registration Number

Rs. : Rupees

SEC : Section

x
 1

CHAPTER ONE
INTRODUCTION

1.1 Background of Study

Credit risk is one of the most vital risks for any commercial bank. Credit risk arises
from non-performance by a borrower. It may arise from either an inability or an
unwillingness to perform in the recommitment contracted manner. The real risk from
credit is the deviation of portfolio performance from its expected value. The credit
risk of a bank is also effect the book value of a bank. The more credit of a particular is
in risk, the more probability of a bank to be insolvent. (Khan,2008)

Credit management is the most crucial and important among the activities performed
by the commercial banks. The commercial banks are inspired with the motive of
gaining profit. To fulfill these objectives, they should widely manage and improve its
overall credit management sector. They must pay much more attention to the flow of
credit. In fact, bank should follow the credit policy, which should match the present
economic situation to flow loan to various sectors staying under its capacity,
objectives and profitability. Hence, these efficient policy, followed by loan approval,
loan administration, credit audit, project appraisal, collateral, payment of debt and
interest, legal consideration and other conditions of loan flow is known as credit
management.

Special loan schemes, loan approval, loan documentation, loan follow up and credit
renews and settlements of loan are steps involved in loan management.

1.2 Profile of Nabil Bank Ltd

Nabil Bank Limited is Nepal’s first Venture Bank which commenced its operation on
12 July 1984 under and Commercial Bank Act 2031. Dubai Bank Limited was the
first joint venture partner of NABIL but now its foreign joint venture partner is NB
(International) Limited, Ireland and getting management support from National Bank
 2

Limited, Dhaka, Bangladesh. NABIL Bank Limited had the official name Nepal Arab
Bank Limited till 31st December 2001.

Amongst several leading banks from Nepal who participated and was evaluated,
NABIL Bank Limited was awarded the bank of the year Nepal distinction for 2004.
The strength of Nabil Bank’s balance-sheet, its performance in the period under
review, the investment that the bank made in the enhancement of its technological
base and human resource development, had been the main criteria on which the bank
was presented the award. The bank of the year award, on the most coveted awards in
the global banking arena today, has been received as a mark of excellence for the
Bank.

The Board of Directors of NABIL consists of:

 Chairman Mr. Shambhu Prasad Poudyal

 Director Mr. Dayaram Gopal Agrawal
 Director Mr. Nirvana Kumar Chaudhary
 Director Mr. Ashish Sharma
 Director Mr. Virendra Paul Dani
 Director Mr. Krishna Prasad Sharma
 Professional Director Mr. Pratap Kumar Pathak
 Chief Executive Officer Mr. Sashin Joshi

1.2.1 Capital structure

Authorized Capital Rs. 10,000,000,000

Issued Capital Rs. 9,010,000,000

Paid-up capital Rs. 8,010,000,000

 3

1.2.2 Structure of Bank

BOD

Internal CEO General

Audit Council
Board and
Chief Risk Secretary
officer

Government HRM Group Consumer Operation Chief

Relation Banking and IT Group Financial

Group Group officer

Chief Operation
Officer

Accounts Client
Service

Monitoring
Sales and Corporate Wealth
and
trading Finance Management
Reporting
Trade
Processing and
Operations
Support
Control

IT
 4

1.3 Statement of Problem

This report will give answer to the following questions:

 How sound is the credit collecting operation of Nabil Bank?

 What is the degree of non-performing loan to the total loan given by Nabil
Bank?
 What is the degree of loan loss provision to total loans and advances given by
Nabil Bank?

1.4 Objectives of the Study

The objectives of this study are as follows:

 To analyze the total credit situation of the bank

 To analyze the uncollectable or non-performing loan of the bank.
 To analyze loan loss provision to total loans and advances ratio.

1.5 Related Literature Review

A Literature review is a summary and analysis of current knowledge about a

particular topic or areas of inquiry. In other words, the analysis of previous studies for
knowing the research in detail is known as literature review. After selecting the topic
of the research, the researcher should study different journals, periodicals,
newspapers, published or unpublished bibliographies, books etc. to collect or gather
the information about the selected topic of the research. This process of studying
different educational materials is known as a review of the literature.

Literature review in every research acts as the foundation of the base of the research.
Review of literature gives the framework of the research process. Review of literature
facilitates to find out what research studies have been done in one’s chosen field, this
case is credit management of NABIL bank. This chapter focuses on previous
 5

researches done and the sources from which knowledge about the related topic is
gained.

Some definitions of literature review given by various authors are given in the points
below:

“Review of literature means reviewing research studies of other relevant preposition

in the related area of the study so that all part studies, their conclusions and
deficiencies may be known and further research can be concluded.” (Pantta & Wolf,
1999).

“A literature review uses as its database reports of primary or original scholarship,

and does not report new primary scholarship itself. The primary reports used in the
literature may be verbal, but in the vast majority of cases reports are written
documents. The types of scholarship may be empirical, theoretical, critical/analytic, or
methodological in nature. Second a literature review seeks to describe, summarize,
evaluate, clarify and/or integrate the content of primary reports” (Cooper, 1988).

“The review of relevant literature is nearly always a standard chapter of a thesis or

dissertation. The review forms an important chapter in a thesis where its purpose is to
provide the background to and justification for the research undertaken. Bruce, who
has published widely on the1 topic of the literature review, has identified six elements
of a literature review. These elements comprise a list; a search; a survey; a vehicle for
learning; a research facilitator; and a report” (Bruce, 1994).

1.5.1 Conceptual review

Credit management is one of the most important activities in any company and cannot
be overlooked by any economic enterprise engaged in credit irrespective of its
business nature. It is the process to ensure that customers will pay for the products
delivered or the services rendered. Myers and Brealey (2003) describe credit
management as methods and strategies adopted by a firm to ensure that they maintain
an optimal level of credit and its effective management.

It is an aspect of financial management involving credit analysis, credit rating, credit

classification and credit reporting. Nelson (2002) views credit management as simply
 6

the means by which an entity manages its credit sales. It is a prerequisite for any
entity dealing with credit transactions since it is impossible to have a zero credit or
default risk.

1.5.2 Review of empirical studies

Khan (2008) illustrates that credit risk is one of the most vital risks for any
commercial bank. Credit risk arises from non-performance by a borrower. It may arise
from either an inability or an unwillingness to perform in the recommitment
contracted manner. The real risk from credit is the deviation of portfolio performance
from its expected value. The credit risk of a bank is also effect the book value of a
bank. The more credit of a particular is in risk, the more probability of a bank to be
insolvent.

Owojori (2011) highlighted that available statistics from the liquidated banks clearly
showed that inability to collect loans and advances extended to customers and
directors or companies related to directors/managers was a major contributor to the
distress of the liquidated banks. At the height of the distress in 2007, when 60 out of
the 115 operating banks were distressed, the ratio of the distressed banks’ non-
performing loans and leases to their total loans and leases was 67%. The ratio
deteriorated to 79% in 2008; to 82% in 2009; and by December 2010, the licenses of
35 of the distressed banks had been revoked. In 2011, only one bank (Peak Merchant
Bank) was closed. No other bank was closed in the year 2011. Therefore, the number
of banking licenses revoked by the CBN since 1994 remained at 36 until January
2010.

Moti (2012) argue that intelligent and effective management of credit lines is a key
requirement for effective credit management. Furthermore, to minimize the risk of
bad debt and over-reserving, banks ought to have greater insight into important
factors like, customer financial strength, credit score history and changing payment
patterns

Andrianova (2013) studied the bank’s decisions about granting, or refusing to grant, a
loan, about the interest rate, and about the level of loan default provisioning will
depend on the accuracy of risk recognition and assessment. The accuracy of risk
 7

factor assessments is evaluated relative to the number of errors in the recognition of

"bad" and "good" loans (i.e. borrowers) and their average number. The accuracy of
risk factor assessments is determined in a similar manner when loans are classified
into more than two classes. Furthermore, the stability of risk assessment
methodologies is characterized by the property of statistical methods known as
robustness. Different methodologies of risk assessment, or one and the same
methodology used with different algorithms, yield dissimilar classifications of loans
into "good" and "bad". The application of different methodologies may result in the
categorization of one and the same loan as either “good” or “bad”. Such instability in
loan classification may affect the assessment of 20% of total number of loans.

Karki (2015) examined the impact of credit risk on the profitability of Nepalese
banks. Findings from the study revealed that credit risk management has a significant
impact on the profitability of Nepalese banks. Hence, they opined that banks’
profitability is inversely influenced by the levels of loans and advances, non-
performing loans and deposits thereby exposing them to great risk of illiquidity and
distress. Although, some considerable amount of literature exists on the interaction
between finance and credit management on banks liquidity position, however, the
same is not true in developing economies like Nepal where there is a relatively dearth
in literature in this area, coupled with the huge institutional differences between
Nigeria and other developed economies.

Sindani (2016) studied on “Bank Insolvency and The Problem of Non-performing

loans from Micro Finance Sector in Kenya” found out that credit terms formulated by
the microfinance institutions do affect loan performance; the involvement of credit
officers and customers in formulating credit terms affects loan performance. Interest
rates charged had a negative effect on the performance of the loans, the higher the
interest rates the lower the loan performance. Credit risk controls adopted by
microfinance institutions have an effect on loan performance, credit insurance,
signing of covenants with customers, diversification of loans, credit rating of
customers, reports on financial conditions, refrain from further borrowing had an
effect on loan performance. Collection policies adopted by microfinance institution
had an effect on loan performance, stringent policy had a great impact on loan
 8

performance, and the lenient policy had an effect but was not as great as that of
stringent policy.

1.5.3 Research gap

After reviewing various studies related to credit, investment, fund mobilizing and
financial performance, it has been noticed that studies are focusing on policies
implemented by banks for their financial performance rather than giving focus to
actual credit position and non-performing loans of the bank. Hence, the gap of
ignoring actual credit position and non-performing loan of the bank has been
addressed in this study.

1.6 Research Methodology

The research methodology is the process of arriving to the solution of the problems
through planned and systematic dealing with the collection, analysis and
interpretation of facts and figures.

As the research entirely consider about the “Credit Management of Nabil Bank”, the
main purpose of this study is to show credit and its utilization in Nabil with its
financial positions, collection and uses of funds, its prospects and its position in
context of Nepal as well as to recommend suggestions for its improvement. Those
research methodologies have been used which proves helpful to analyze credit
management.

For purpose of achieving the objectives, the following methodology is used. The data
has been collected by acquiring various kinds’ reports, bulletins and journals from the
organization.
 9

As this study focuses on finding out the actual data relating to credit management of
Nabil bank and analyzing them, this research can be concluded as analytical and
descriptive research.

The study report is based mostly on secondary information of Nabil. In addition to

this, reference has been made in library consult, class lectures, books related to
banking, financial management and accounting during the preparation of this study.

1.6.1 Population and sample

 10

1.6.1.1 Population. Population is also known as universe; it is every available

information or data from which sample is drawn out. Population is the whole
universe of data from which the sampling frame is drawn out in order to select the
sample. In other words, it also refers to the collection of the whole unit that
researchers are interested in knowing about them. In the case of this report total
twenty-seven commercial banks can be considered as population.

1.6.1.2 Sample. A sample is some elements of the population which help to

draw out conclusion about the entire population. In other words, the sample is a
miniature picture or cross section of the entire group from which sample regarding
the research is taken.

In the case of this research Nabil bank has been taken as sample as it will be very
impracticable and difficult to study all banks at once.

Now in the context of credit of Nabil bank ltd, among available data, previous
data of only five years F/Y (2072/73 -2076/77) has been taken as sample as it is
hard to analyze all previous data all at once.

1.6.2 Sources of data

1.6.2.1 Secondary data. The data which are collected from some published
or unpublished sources are known as secondary data. These types of data are
collected from the secondary source; such sources may be the field of study of
some other places or published articles.

The major portion of this report contains the secondary data from the following
sources:

Annual report of Nabil bank F/Y (2072/73 -2076/77)

Reports of Nepal Rastra Bank (F/Y (2072/73 -2076/77)

1.6.3 Data collection procedure

 11

As previously said, this Research data is mainly collected from secondary sources of
data. The data collection procedure is relatively simple. Internal sources of data such
as Annual reports, Interim performance report are collected from the official website
of the respective commercial bank which is www.nabilbank.com

The external data are collected from the journals and articles published in the
newspapers and internet. Annual report of NRB is also collected from the website of
Nepal Rastra bank.

1.6.4 Techniques of analysis

The data collected from the above stated sources has been classified tabulated and
interpreted for easier study.

1.6.5 Classification and tabulation of data

The data collected are classified tabulated and arranged in a manner to make it easily
understandable with the use of tables in a chronological order. After classification the
data is tabulated.

Diagrammatic Representation of Data

Various diagrams are used to present the data more clearly. The diagrams used are as
follows:

 Bar Diagram
 Line graph

1.6.5.1 Financial tools.

a. Total Loans to Total Deposit Ratio The loan to deposit ratio (LDR) is used to
assess a bank’s liquidity by comparing a bank’s total loans to its total deposit
for the same period. It is expressed as a percentage.
The formula for LDR is:
LDR = Total Loans/Total Deposit
b. Non-Performing Loans to Total Loans Ratio,
 12

This ratio is calculated by the formula:

Non-Performing Loans to Total Loans Ratio = Non-performing loan /Total loan

c. Loan Loss Provision to Non-Performing Loan Ratio,

The ratio is calculated by the formula
Loan Loss Provision to Non-Performing Loan Ratio = Loan Loss Provision/ Non-
performing loan

d. Loan Loss Provision to Total Loans Ratio,

The ratio is calculated by the formula:
Loan Loss Provision to Total Loans Ratio = Loan Loss Provision /Total loan

e. Return on Loan and Advances Ratio,

The ratio is calculated by the formula
Return on Loan and Advances Ratio = NPAT/ Loans and Advance*100

f. Interest Income on Loans and Advances Ratio

The ratio is calculated by the formula
Interest Income on Loans and Advances Ratio = Interest Income/Loans and
Advance

g. Total Interest Expenses to Total Deposit and Borrowing Ratio

The ratio is calculated by the formula

Total Interest Expenses to Total Deposit and Borrowing Ratio = Total Interest
Expenses/ Total Deposit and Borrowing

h. Capital Adequacy Ratio

Capital Adequacy is used to describe the adequacy of capital resources of the bank in
the relation to the risk associated with its operations.
The commercial banks are required to maintained 11% of Capital Adequacy in form
of 5.5% in core capital and supplementary capital is to be maintained.
 13

Capital Adequacy Ratio = [(core capital+ supplementary capital)/total Risk weighted

assets]*100

i. Risk Weighted Assets

The risk-weighted value of category of assets is determined by multiplying the
nominal value of the category as per the balance sheet with the risk weight assigned
thereto.

1.6.5.2 Statistical tools. The statistical tools used for data analysis are:

a. Mean
A mean is the average value or the sum of all the observation divided by the number
of observations and it is given by the following formula:

∑X
Mean ( X ) =
n

b. Standard Deviation(SD)
The measurement of the slatterns of the mass of the figures in a series about an
average is known as dispersion. The standard deviation measures the absolute
dispersion. Means a high degree of uniformity of the observations as well as
homogeneity of the series, a large standard deviation means just the opposite. In this
study standard deviation of different ratios are calculated as under:

Standard Deviation (σ ¿ =
√ ∑ (X −X )2
n

where,

∑ (X −X )2 = Sum of square of deviation from mean

n = No. of observations

∑X =Summation of the values

N= No. of Observation
c. Coefficient of Variation(CV)
 14

Times coefficient of SD is called of variation. It is denoted by C. V. Thus,

Formula,
S .D.
C.V =
X

1.7 Limitations of the Study

Limitations of this study are as follows:

 This study covers limited dimensions of the subject matter.
 This study uses only ratio analysis as a technique for analysis of credit
management by Nabil Bank.
 This study covers only five fiscal years’ historical data of Nabil Bank Limited.

1.8 Chapter Plan

This study is organized in three chapters:

Chapter I: Introduction
The first chapter of this study includes general background, statement of problems,
objectives of the study, significance of the study, research methodology, review of
literature Limitations of the Study and Organization of the Study.

Chapter II: Results and Analysis

The chapter deals with presentation of the data using appropriate tables and figures
and their interpretation.

Chapter III: Summary and Conclusion

This chapter includes the brief sketch of the study, conclusion and implications of the
study.
 15

CHAPTER TWO
RESULT AND ANALYSIS

1.9 Ratio Analysis

1.9.1 Total loans and advance to total deposit (credit to deposit ratio)

As per NRB this ratio must be kept 80% or below. The ratio is below:

Table 2. 1: Total Loans and Advance to Total Deposit (Credit to Deposit Ratio)

(Amount in Rs.’000)

Year Total Loan and Advance Total Deposit Ratio

2072/73 56,203,077 75,388,790 74.55%

2073/74 67,161,671 104,237,910 64.43%

2074/75 77,730,402 110,267,271 70.49%

2075/76 91,491,252 118,896,156 76.95%

2077/78 100,773,771 134,571,083 74.88%

Mean 72.26%

S.D 4.96

C.V% 6.86

Source: Annual Report of Nabil Bank ltd (Appendix).

Table 2.1, shows that Nabil Bank ltd has every year been lending its money staying
in the safe side. As per NRB directives all the bank should not exceed more than
eighty percentages of its total deposit, after economic recession suffered worldwide as
they were investing more money in the real state same scenario was in our country as
well, as to protect from same NRB published unified directives 2067, starting that
who has cross the limit should reduce to 80%.
 16

Loans and Advances to Total Deposit Ratio

Loans & Advances to Total Deposit Ra-
78 76.95
76 74.55 74.88
74
72 70.49
70
tio (%)

68
NABIL
66 64.43
64
62
60
58
2071/72 2072/73 2073/74 2074/75 2075/76
Years

Figure 2.1: Loans and Advances to Total Deposit Ratio.

Figure 2.1, shows that loans and advances to total deposits of the Nabil bank ltd,
which is fluctuating over five years. The higher ratio is 76.95% in the FY 2074/75.
The lowest ratio is 64.43% in the FY 2072/73. The analysis shows that the bank is
mobilizing its total deposits in loan and advances adequately.

1.9.2 Non- performing loan to total loans and advances ratio

Higher the ratio implies the bad quality of assets of banks in the form of loans and
advances. Hence the lower NPL to credit ratio is preferred.
Table 2.2: Non- Performing Loan to Total Loans and Advances Ratio
(Amount in Rs. ‘000)
Year Non-Performing Loans & Advances Ratio
Loan
2072/73 54,691,648 1,256,075 2.29%
2073/74 65,501,925 1,220,819 1.86%
2074/75 76,106,016 8,890,354 11.68%
2075/76 89,877,125 7,280,590 8.10%
2076/77 100,773,771 8,175,012 8.11%
Mean 6.408
S.D. 4.218
C.V.% 65.82
Source: Annual Report of Nabil Bank ltd (appendix).
 17

Table 2.2, the highest ratio is 11.56% in FY 2073/74 and the lowest ratio is 1.86 in the
F/Y2072/73. Their mean is 6.408.

Non- Performing Loan to Total Loans and Advances Ratio

14
Non- Performing Loan to Total Loans and Advances

12

10

8
NABIL
Ratio(%)

0
2071/72 2072/73 2073/74 2074/75 2075/76
Year

Figure 2.2: Non- Performing Loan to Total Loans and Advances Ratio
From figure, we can understand higher the non-performance loan less the profit the
bank get. As we can see from the data above it has fluctuating ratio every year.
The highest ratio is 11.68% in the fiscal year 2073/74. And the lowest ratio is 1.68%
in FY2072/73.

1.9.3 Non-performing loans to loan loss provision ratio

Loan loss provision is the compulsion factor in lending practices and non–performing
loan is the evil factor in banks. If they are high, then they will decrease the amount of
profit which the bank target to receive.
 18

Table 2.3: Loan to Loan Loss Provision Ratio Non-Performing

(Amount in Rs.’000)
Year Non-Performing Loans Loan Loss Provision Ratio

2072/73 1,256,075 53,984,408 2.32%

2073/74 1,220,819 65,940,851 1.85%

2074/75 8,890,354 76,841,366 11.56%

2075/76 7,280,590 90,768,819 8.02%

2076/77 8,175,012 111,784,235 7.31%

Mean 6.212

SD 4.100

CV% 0.66

Source: Annual Report of NABIL

Table 2.3 loss loan provision is the compulsory part of the bank since they
maintained at least 1% as a provision from the outstanding balance of any type of
loan. the non-performing loan holds only the portion of loan loss provision amount.

Non-Performing Loan to Loan Loss Provision Ratio

Non-Performing Loan to Loan Loss Provision

14

12

10

8
Ratio

NABIL
6

0
2071/72 2072/73 2073/74 2074/75 2075/76
Year

Figure 2.3: Non-Performing Loan to Loan Loss Provision Ratio

 19

Figure 2.3 shows that in the bank ratio is in decreasing trend till 2072/73 and
increases in the FY 2073/74 then decreasing in increase rate in the FY 2074/75 as
well as in 2075/76. The highest and lowest ratio are 11.56% and 1.85% respectively.

1.9.4 Loan loss provision to total loans and advances ratio

Loan loss provision is the summation of provision made against all type of loan as per
the NRB directives. Loan loss provision, in the fact is the cushion against future
contingency created by the default of the profit loss A/c and definitely decreases the
profit of the bank.

Table 2.4: Loan loss provision to total loans and Advance Ratio

(Amount in Rs.’000)

Year Loan Loss Provision Loans and Advances Ratio

2072/73 53,984,408 54,691,648 0.987

2073/74 65,940,851 65,501,925 1.006

2074/75 76,841,366 76,106,016 1.009

2075/76 90,768,819 89,877,127 1.010

2076/77 111,784,235 100,773,771 1.109

Mean 1.0242

SD 0.048

C.V% 4.68

Source: Annual Report of Nabil Bank ltd (appendix)

Table 2.4 shows the loan loss provisions to total loans and advances of Nabil Bank
Ltd. Of five years i.e. from 2072/73 to 2075/76. The ratio of Nabil is 0.987%,
1.006%, 1.009%, 1.010% and 1.109% for 2072/73, 2073/74, 2074/75 , 2075/76 and
2076/77 respectively. The average ratio is 1.0242%, standard deviation is 0.048% and
C.V. is 4.68%.
 20

According to NRB provisioning loan of each types due up to 3 months (1 day- 90

days is categorized (pass/performing category) the provisioning for 1% of outstanding
loan amount, 3 months to 6 months (91 days- 180 days) due loan is categorized (sub-
standard category) the provisioning for 25 % outstanding loan amount. Similarly, 6
months to 1 year (181days-365 days) due loan need to be provisioned under (doubtful
category) for 50% of outstanding loan amount and for more than 1-year loan due
100% of outstanding balance is provisioned under (bad category) to loan loss
provision.

Loan Loss Provision to Total Loans and Advance Ratio

1.12
1.1
Loan Loss Provision to Total Loans and

1.08
1.06
1.04
Advance Ratio

NABIL
1.02
1
0.98
0.96
0.94
0.92
2071/72 2072/73 2073/74 2074/75 2075/76

Figure 2.4: Loan Loss Provision to Total Loans and Advance Ratio
Figure 2.4 shows the loan loss ratio has increasing trend. It has higher ratio 1.109% in
FY 2075/76 and lowest ratio is 0.987 in FY2072/73. Higher ratio of loan loss
provision doesn’t sound good and lower ratio represents better performance of the
bank.

1.9.5 Return on loans and advances ratio

Net profit refers to that profit which is obtained after all types of deduction like
employee bonus, tax, provision etc. Higher the ratio better is the performance of the
 21

bank. This ratio is calculated by dividing net profit of the bank by total loan and
advances.

Table 2.5: Return on loans and advances ratio

(Amount in Rs. ‘000)

Year NPAT loans and advance Ratio

2072/73 2,331,446 54,691,648 4.26%

2073/74 2,093,813 65,501,925 3.20%

2074/75 2,819,333 76,106,016 3.70%

2075/76 3,613,200 89,877,127 4.02%

2076/77 4,021,317 100,773,771 3.99%

Mean 3.834

SD 0.406

C.V% 10.58

Source: Annual Report of Nabil Bank ltd (appendix)

Table 2.5 shows that return on loans and advances ratio are 4.26%, 3.20%, 3.70%,
4.02% and 3.99% for 2072/73, 2073/74, 2074/75 , 2075/76 and 2076/77 respectively.
The mean ratio is 3.834%, standard deviation is 0.406% and C.V. is 10.58%.
 22

Return on loans and advances ratio

Return on loans and advances ratio
4.5
4
3.5
3
2.5
2 NABIL
1.5
1
0.5
0
2071/72 2072/73 2073/74 2074/75 2075/76
Year

Figure 2.5: Return on loans and advances ratio

Figure 2.5 clearly shows the ratio of return on loan and advance of Nabil Bank Ltd is
fluctuating trend. In five-year study period, it takes highest ratio 4.26% in the fiscal
year 2072/73 and lowest ratio of 3.20% in fiscal year 2073/74.

1.9.6 Interest income on loans and advances ratio

Interest income to loan and advance ratio is defined as the ratio of total interest
income to total loan and advance. This ratio measures the percentage of total interest
of total interest income against total loan and advance. A high ratio indicates higher
income on total loan and advances.

Table 2. 6: Interest Income on Loans and Advance

(Amounts in Rs. ‘000)

Year Interest income Loans and Advances Ratio

2072/73 5,636,158 54,691,684 10.30%

2073/74 5,762,345 65,501,925 8.79%

2074/75 6,155,660 76,106,016 8.08%

2075/76 8,065,591 89,877,127 8.97%

 23

20776/77 11,386,498 100,773,771 11.30%

Mean 9.488

SD 1.292

C.V% 13.61

Source: Annual Report of Nabil Bank ltd (appendix)

Table 2.6 shows that interest income on loans and advance ratio are 10.30%, 8.79%,
8.08%, 8.79% and 11.30% for 2072/73, 2073/74, 2074/75 , 2075/76 and 2076/77
respectively. The mean ratio is 9.488%, standard deviation is 1.292% and C.V. is
13.61%.

Interest Income on Loans and Advance

12
Interest Income on Loans and Advance

10

6
NABIL

0
2071/72 2072/73 2073/74 2074/75 2075/76
Year

Figure 2. 6: Interest Income on Loans and Advance

Figure 2.6 shows the mean interest income ratio of five years of Nabil bank ltd is
11.30. Interest income is directly proportional to loans and advances. If loan and
advances increased, then interest income also increased and vice versa. In case of
Nabil bank ltd., comparing the data of five-year interest income is first decreasing and
then increasing.
 24

1.9.7 Total interest expenses to total deposit and borrowing ratio

Interest paid to total deposit and borrowing ratio is defined as the ratio of total of
total interest paid to total deposit and borrowing. This ratio measures the percentage
of the total interest expenses against total deposits and borrowing. A high ratio
indicates higher expenses on total deposit and borrowing.

Table 2.7: Total Interest paid to Total Deposit and Borrowing Ratio (%)
(Amount in Rs 000’)

Year Interest Paid Deposit and Borrowing Ratio

2072/73 1,939,745 75,388,790 2.57%

2073/74 2,236,281 104,237,910 2.14%

2074/75 1,829,689 110,267,271 1.65%

2075/76 2,606,090 118,896,156 2.20%

2076/77 5,082,712 134,571,083 3.77%

Mean 2.466

SD 2.446

C.V% 99.18

Source: Annual Report of Nabil Bank Ltd (Appendix)

 25

Total Interest paid to Total Deposit and Borrowing Ratio (%)

Total Interest paid to Total Deposit and Borrow-
4

3.5

2.5
ing Ratio (%)

2
NABIL
1.5

0.5

0
2071/72 2072/73 2073/74 2074/75 2075/76
Year

Figure 2.7: Total Interest paid to Total Deposit and Borrowing Ratio (%)

Figure 2.7, we can see that Nabil Bank Ltd. have able to maintained total interest paid
to total deposit and borrowing ratio. It has its highest ratio of 3.77.in fiscal year
2075/76 and lowest ratio of 1.65% in fiscal year 2073/74.
1.9.8 Capital adequacy ratio

The capital adequacy ratio (CAR) is a measure of a bank’s capital. It is expressed as a

percentage of a bank’s risk weighted credit exposures. Also known as capital- to-risk
weighted assets ratio (CRAR), it is used to protect depositors and promote the
stability and efficiency of financial system around the world. Two types of capital are
measured:

 Tier one capital which can absorb losses without a bank being required to
cease trading
 Tier two capital which can absorb losses in the event of a winding –up and
so provides a lesser degree of protection to depositors.
Capital Adequacy is to maintain sufficient capital fund in consideration with total risk
weight exposure.
 26

Table 2. 8: Capital Adequacy Ratio (%)

(Amount in Rs. ‘000)
Year Total Capital Fund Risk Weighted Exposure Ratio

2072/73 8,302,904 73,854,239 11.24%

2073/74 10,154,456 87,766,260 11.56%

2074/75 12,203,614 104,039,643 11.72%

2075/76 14,752,688 118,827,902 12.40%

2076/77 18,710,876 143,877,440 13.00%

Mean 11.984

SD 0.70

C.V% 5.84

Source: Annual Report of Nabil Bank ltd (appendix)

Table 2.8 shows that Nabil Bank Ltd has been meeting minimum required capital
adequacy. However, as we discussed earlier that bank and financial institutions are
only meeting minimum standards, if they truly want to minimize risk and have sound
financials then they have to go beyond the expectations of the NRB. In above figure,
we can see sample banks ratio are hovering around the required minimum criteria
posed by NRB i.e. 11%. The higher the capital adequacy ratio, the higher the level of
protection available to depositors. Nabil Bank Ltd is able to maintain higher capital
adequacy ratio on 2075/76.
 27

Capital Adequacy Ratio

13.5
13
Capital Adequacy Ratio

12.5
12
11.5 NABIL

11
10.5
10
2071/72 2072/73 2073/74 2074/75 2075/76
Year

Figure 2. 8: Capital Adequacy Ratio

Figure 2.8 shows the capital adequacy ratio of Nabil Bank of five years from 2072/73
to 2076/77. This ratio is in increasing trend and it has fulfilled the capital adequacy
requirement as required by NRB Regulation.

1.10 Secondary Data and Analysis

Table 2. 9: Question No 1

SN Credit worthiness Frequency %

1 Credit Portfolio View 3 15
2 Equity Based Approach 10 50
3 Rating Based Approach 7 35
Total 20 100
Table 2.9, reveals the significant indicator of credit worthiness of Nabil bank ltd
between credit portfolio view, equity based approach, rating based approach. 10 out
of 20 respondents are in the favor of equity based approach.7 out of 20 respondents
are in the favor of rating based approach.3 7 out of 20 respondents are in the favor of
credit portfolio view. As per the response, equity based approach is more significant
than other approach.

1. Which of the below model are employed by the banks to identify credit
worthiness of customer?
 28

Question No 1
Credit Portfolio View Equity Based Approach Rating based approach

15%

35%

50%

Figure 2. 9: Model Employed by the Banks to identify Credit Worthiness of customer

Figure 2.9, reveals the credit worthiness of Nabil Bank Limited. The highest
percentage is 50% of equity based approach and lowest percentage is 15% of credit
portfolio view. It means that equity based approach is employed by the bank to
identify credit worthiness of customer.

Table 2. 10 Question No 2

SN Response Minimum Credit Off balance

1 Yes 15 17 10

2 No 5 3 10

Total 20 20 20

In the above table, reveals positive response regarding the question. The respondent
of Nabil bank Ltd indicated in the favor of “yes” rather than “no”.
a. Is the minimum capital asset ratio requirement risk weighted in line with the
base II guidelines?
 29

Question No 2a
yes No

25%

75%

Figure 2. 10: Response on fulfillment of Capital Adequacy requirement

In the diagram, 75% says “yes” ,25 % say “no”. It represents that there is minimum
capital assets ratio of Nabil Bank ltd.

b. Is credit risk policy part of the company –wide capital management strategy?

Question No 2b
Yes NO

15%

85%

Figure 2. 11: Response on Credit Risk Policy as a part of Company-wide Capital

Management Strategy.
In the diagram, 85% says “yes”, 15% says “no”. It represents that there is credit risk
policy part of the company –wide capital management Strategy.

c. Is adequate capital reserve maintained on off –balance sheet risks?

 30

Question No 2c
Yes No

40%

60%

Figure 2. 12: Capital Reserve Maintained on and off Balance Sheet Risks.
In the diagram, 60% says yes, 40% says No. It represents that there is adequate
capital reserve maintained on off –balance sheet risks.

Table 2. 11 Question No. 3

SN Risk Management Frequency

1 Reporting regular, formal basis 10

2 Continuous Management Reporting 9
3 Not reported at all 1

Total 20

Table, reveals the risk management of Nabil Bank ltd between reporting regular,
continuous management reporting, not reported at all. Highest frequency is 10 of
reporting regular and the lowest frequency is 1 of not reported at all.

3. Which of the following best describe the way credit risk management is reported
within your organization?
 31

Question No 3
Regular Continuous Not report at all

5%

50%
45%

In the diagram, reveals the best way of credit risk management is reporting takes
places on a regular, formal basis and worst reporting is not at all.

1.11 Major Finding

From the above analysis of credit risks, following major finding have been obtained:

 The average loans and advances to total deposit ratio of 72.26% reveals that every
year its lending is in the safe side because as per NRB directives all the bank
should not exceed more than eighty percentage of its total deposit , after
economic recession suffered worldwide as they were investing more money in the
real state same scenario was in our country as well ,as to protect from same NRB
published unified directives 2067 , starting that who has cross the limit should
reduce to 80%. So it has maintained liquidity position is somehow in good
condition
 High non- performing loan of 6.408% in average, indicates lower credibility of the
borrowers. This means, there has been some inefficiency in the lending, which has
resulted in non-payment of interest and principal by the borrower.
 The non-performing loan holds only small portion of loan loss provision amount
which is better for the profitability of the bank.
 32

 The average loan loss provision to total loans and advances ratio of 1.0242% is
not that high so it represents better performance of the bank.
 The average return on loans and advances ratio is 3.834% which is not high
enough so it means the performance of bank is not that satisfactory.
 The average interest income to loans and advances ratio is 9.488%. It has its
highest ratio of 11.30%.in fiscal year 2075/76 and lowest ratio of 8.08% in fiscal
year 2073/74. High ratio indicates higher income on total loans and advances.
 The average interest paid to total deposit and borrowing ratio is 2.466%. It has its
highest ratio of 3.77.in fiscal year 207576 and lowest ratio of 1.65% in fiscal year
2073/74. The higher ratio indicates higher expenses on total deposit and
borrowing.
 The average capital adequacy ratio of 11.984% represents that the bank has
maintained capital as per requirement of NRB Directives i.e. minimum 11%.
 Credit risk is one of the most important risks that a manager should deal on.
Dealing with it required extensive knowledge and experiences. Lack of systematic
and through credit processing is also the major source of the credit risk in these
banks. The problems in credit processing include lack of through 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 accounts of business cycle effects etc.
 As per the primary data collected from the questionnaire, equity based approach is
more significant approach to identify credit worthiness of the customer, the
minimum capital asset requirement is risk weighted in line with the base II
guidelines, the credit policy is part of company-wide capital management strategy
and the capital reserve maintained on and off balance sheet risks. It also reveals
the best way of credit risk management is reporting takes places on a regular than
formal basis or reporting is not at all basis.
 33

CHAPTER THREE
SUMMARY AND CONCLUSIONS

1.12 Summary

Banks are always faced with different types of risks that may have a potentially
negative effect on their business. Risk –taking is an inherent element of banking and,
indeed, profits are in part the reward for successful risk taking in business. On the
other hand, excessive and poorly managed risk can lead to losses and thus endanger
the safety of a banks depositor. Risks are considered warranted when they are
understandable, measurable, controllable and within a banks capacity to readily
withstand adverse results. Sound risk management systems enable managers of banks
to take risks knowingly, reduce risks where appropriate and strive to prepare for a
future, which by its nature cannot be predicted.

For the analysis of the data various financial ratios, average, trend analysis,
correlation coefficient graph and tables were used to obtain a clear performance of the
bank. A trend analysis was used to forecasting the future trend of bank’s performance
and correlation analysis was used to investigation the relationship between different
variable. The financial and statistical analyses are summary as below

The loan and advances to total deposit ratio of Nabil bank ltd in an average of 2.906%
of the study period. The analysis shows that the bank is mobilizing its total deposit in
loan and advance adequately and it has efficiently utilized its total deposit for loan
and advances. Higher ratio reveals that it is efficient to utilize the financial resources
in productive sectors.

Loan loss provision ratio of Nabil bank ltd is an average of 32% in the study period. It
means loan loss provision of bank is in decreasing trend and which shows that the
bank is able to maintain the good ratio of loan loss provision.

 The liquidity position of this bank is satisfactory but there is inefficiency in

lending. The profitability position and overall performance is good. As per the
primary data collected from the questionnaire, equity based approach is more
 34

significant approach to identify credit worthiness of the customer, the minimum

capital asset requirement is risk weighted in line with the base II guidelines, the
credit policy is part of company-wide capital management strategy and the capital
reserve maintained on and off balance sheet risks. It also reveals the best way of
credit risk management is reporting takes places on a regular than formal basis or
reporting is not at all basis.

1.13 Conclusion

The analysis concludes that a bank uses various credit management technique,
method, tools etc. and assessment modules to handle credit risks faced by them,
moreover they occupy one common objective that is to lessen the amount of the loan
default which is principal cause of the bank failure in the short and long term planning
in concern with credit.

Some of the conclusion of the study are as below:

 The study showed that profitability ratio is in fluctuating trend which

indicates the bank is not in good condition.
 The study showed that the credit allocation by the bank to the Nepalese
economy has been on a rising trend for the last seven years. However, this
laudable credit expansion drive is being threatened by increases in non-
performing loan.

 35

REFERENCES

Websites:

NABIL Bank LTD. (2072/73-2076/78); Annual report available at

www.nabilbank.com
 36

APPENDIX