CHAPTER I

INTRODUCTION

1.1 Background of the Study

Banks play an important part in a country's economic growth. A bank is an economic
development resource that retains the confidence of all groups of society and gives
loan to them. So, commercial banks are financial institutions that primarily deal with
trade, commerce, industry, and agriculture and demand regular financial and other
assistance from them in order to expand and thrive. Commercial banks' goal is to
acquire idle resources from various sources and move them into the most profitable
industry. The role of the commercial bank in the generation and mobilization of
internal capital, as well as the development effort, is crucial (VanHorne,1977).

The idea of banking originated in ancient history, thanks to the efforts of ancient
goldsmiths who pioneered the practice of storing people's gold and jewels in such an
arrangement. Depositors who leave their gold for safekeeping will get their gold and
valuables in exchange for a nominal charge for safekeeping and service.

Money plays a critical function in the economy. Money management that is proper
and well-planned directs, decides, and improves the health and productivity of the
whole financial sector, and the financial sector's performance affects the economy's
growth. As a result, money is the issue that has to be managed, and banks are the
managers. They act as intermediaries to channel funds to productive business
companies and projects.

Banks provide loan and advances to sectors, individuals, and businesses that boost the
nation's output. For instance, a loan to the agricultural sector improves the agricultural
produce. Farmers may utilize the loan money to develop their product, which will
help to encourage agriculture. Similarly, loan and advances to individuals and
businesses assist them to grow their earnings and profits. They can utilize the amount
as needed at the appropriate location and time.

The most important factor in the formation and running of any commercial or non-
profit organization is the source of funds. Profit-oriented institutions often get these
resources through ownership capital, public capital raised through stock offerings, and
financial institutions such as banks, which provide credit, overdraft, and other
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financial services. Commercial banks, Other Banking Institutions (OBIs), and Non-
Bank Financial Institutions (NBFIs) all play essential roles in the mobilization of
financial resources. This category of financial institutions includes roughly 17
insurance organizations, including deposit insurance and the Credit Guarantee
Corporation, as well as one Employee Provident Fund and one Citizen Investment
Trust. Securities such as corporate shares, debentures, and bonds are also available.

Banking plays an important part in a country's economic growth. Nepal Bank Limited
(NBL) is the country's first commercial bank. Commercial banks are the financial
institutions' beating hearts. They retain the deposits of a variety of persons,
government agencies, and businesses. They made cash accessible to borrowers,
people, businesses, and government entities through their lending and investment
operations. As a result, they help both the flow of goods and services from companies
to consumers and the government's financial operations by providing a major
percentage of the medium of exchange. They are the means through which monetary
policy is influenced. These statistics demonstrate that the nation's commercial banking
sector is critical to the economy's operation. A bank is a resource for economic
development, which maintains the self-confidence of various segments of society and
extends credit to the people (Sources: NBL annual report).

The more developed financial systems of the world characteristically fall into three
parts
a) The Central Bank
b) Commercial Banks
c) Other financial institutions

Financial intermediaries are what they're called. The origins of the banking industry
may be traced back to its leading role. A bank's most fundamental function is lending.

Lending's relevance in the banking industry hasn't altered and is as crucial as it was in
the beginning. Lending comes in a variety of forms. There are two types of lending:
fund-based and non-fund-based. Cash Credit, Overdrafts, demand and term credits,
invoices purchased and discounted, export packaging credit, project loan, and so on
are all examples of fund-based lending. Documentary credit, guarantees, and bill co-
acceptance facilities are all examples of non-fund-based credit. The investment,
financing, and dividend decisions for a business are the key financial functions, albeit

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the specifics vary for each organization. Funds are raised from outside sources and
given to various purposes. The flow of funds inside the company is kept track of.
Returns, repayments, products, and services are all examples of benefits to financing
sources. These functions are required in all types of businesses, governments, banks,
agencies, and non-profit organizations.

1.1.1 Development of Commercial Banks in Nepal

A commercial bank is a form of the bank that engages in money exchange, receiving
deposits, and extending loan, and is not linked to co-operative, agricultural, industrial,
or other types of banks (Commercial Bank Act, 2031 B.S. Nepal). Commercial banks
are financial institutions that combine the community's funds and put them to
constructive use. Money is transferred from savers to consumers through commercial
banks. They make loan and advances out of the money they get from deposits.

In Nepal, the contemporary financial system has a short history. Before the eighth
century, evidence of a money lending function was discovered in practice. People
used to borrow money from money lenders and pay interest on it back then. The
Malla King JayasthitiMalla categorized individuals into 64 groups based on their
working activities in the 14th century. "Tanka Dhari" was one of them; they were in
the monetary transaction or money loan industry. It demonstrates that the loan
procedure was prevalent in Nepal under the Malla dynasty. Prime Minister Ranodip
formed the "Tejarath Adda" banking organization under the Rana reign. Prior to the
founding of Nepal Bank Ltd., the institution was compelled to give credit to
government officials at a 5% interest rate, after which they made loan to the general
public against gold, silver, and jewelry as collateral. Tejarat increased loan
availability by opening a few new branches.

Tejarat was unable to provide the entire society's credit demands. It was a government
agency that solely benefited government employees. As a result, the general public
had to rely on moneylenders. The country's need for a commercial bank was
recognized in order to free rural people from the clutches of lenders and to encourage
commerce and industry.

It has played a pioneering role in promoting banking practices among the general
public. The Nepal Rastra Bank was established in 1956 as the central bank of Nepal
by the Nepal Rastra Bank Act, 2012 BS, to manage and control banking system
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growth, monetary policy development, currency issuance regulation, and capital
mobilization for economic development. Following that, the NRB shifted its focus to
the growth of the banking sector by developing related regulations and procedures.
There was no organized organization to govern and regulate the country's monetary
system before this. It is a self-governing corporation that is wholly owned by the
Nepalese government and seeks to enhance the country's banking sector. In 1959, the
NRB began printing money. To meet the country's rising credit needs, the commercial
bank "Rashtriya Banijya Bank" was created in 1966 under the RBB Act, 1964, with
completely government equity of Rs.10 million in permitted capital and Rs.2.5
million in paid-up capital (Sources: FIU-Nepal: Annual Report 2020/21).

The government implemented "Financial Sector Reforms" in 1980. The government

has permitted international banks to establish joint venture banks in Nepal to speed up
the country's economic growth and to service the country's high banking system.
Nabil Bank Ltd. (Former Name - Nepal Arab Bank Ltd.) was the first joint venture,
founded in 1984. The creation of joint venture banks in 1984 transformed the
financial landscape. Commercial banks are becoming more numerous. Various
financial institutions, such as Joint Venture Banks, Domestic Commercial Banks,
Growth Banks, Finance Companies, and Co-operative societies, have sprung up since
then to meet the country's financial demands, therefore supporting the country's
financial development. The total number of commercial banks and financial intuitions
in Nepal is provided in the table below, which provides an overview of financial
institutions that provide banking services in Nepal.

1.1.2 Functions of Commercial Banks

Banks acquire idle money from the public by paying a high-interest rate, and they
may profit by lending it to businesses, industries, and agriculture, as well as investing
in government bonds. As a result, commercial banks' primary duty is to mobilize idle
resources in productive regions by collecting them from various sources and creating
profit. Commercial banks execute a variety of tasks, which can be stated as follows:

1.1.2.1Accepting Deposits
Commercial banks take a wide range of deposits, primarily in three categories:
current, savings, and fixed deposits.

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Current Deposit: Also known as demand deposits, current deposits entail the
banker's commitment to pay legal currency on demand. As a result, the bank pays no
interest on the deposits.

Saving Deposit: Deposits acquired from general savers, small depositors, and low-
income depositors are referred to as savings deposits. The bank normally provides a
little amount of interest to depositors on their money.

Term Deposit: A fixed deposit is one in which the customer's money is put for a set
amount of time; it is typically used by individuals who do not require money for a set
period. As a result, the bank pays the depositor a greater rate of interest.

1.1.2.2 Loan that is being advanced

A commercial bank acquires cash by accepting various types of deposits, which it
subsequently mobilizes through loan and advances. Direct loan and advances are
made to all sorts of people based on the borrowers' personal security or the security of
their moveable and immovable property. Banks provide loan in four different ways:

a. Direct Loan
b. Overdrafts
c. Cash Credit
d. Discounting bill of exchange

1.1.2.3 Agency Services

A commercial bank may help you invest in a variety of ways. It is responsible for
purchasing and selling securities on behalf of its clients. Subscriptions, premium
rentals, and other fees are paid by banks. Checks, bills, promissory notes, dividends,
interest, and other items are collected on behalf of consumers. For these services, the
bank charges a nominal commission. It also represents its customers, other banks, and
financial institutions as a correspondent or representative.

1.1.2.4 Credit Creation

Commercial banks' most significant job is credit generation. Deposits and advance
loan are accepted. When a bank advances a loan, it establishes an account for the
borrower to draw money by check as needed.

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1.1.2.5 Other Functions
Other functions of the commercial banks are as follows:
a. Assist in foreign trades:
Commercial bank discounts the bills of exchange drawn by Nepalese exporters on the
foreign importers and enables the exporters to receive money in the native currency.

b. Offers Security Brokerage Services:

Many commercial banks have begun to market security brokerage services offering
customers the opportunity to buy stocks, bonds, and other securities without having to
go to a security dealer or broker.

c. Financial Advising
Many banks offer a wide range of financial advisory services from helping in
financial planning and consulting business managers.

1.1.3 Profiles of the Banks under Study

In this section, a general introduction of the banks under study is being attempted to
furnish for the easy reference of the samples to the research (Sources: Annual report
of NABIL bank 2021).

1.1.3.1 NABIL Bank Limited

It began as the first bank in Nepal incepted by multinational (primarily foreign)
investors (as Nepal Arab Bank Ltd) on 12 July 1984. The bank was incorporated with
the objective of providing modern, international-standard financial services to
businesses. It is the nation’s first Private sector bank, commencing its business in
Nepal.

Its Dubai government-owned majority share was purchased in 1995 by Nepal's only
billionaire businessman, Binod Chaudhary. It maintains its head office at its Nabil
Center, Durbar Marg flanking the chief avenue of the capital leading to its grand
palace. It has the largest staff of private commercial banks in Nepal. [1] Nabil Bank
operates through its wide network of 135 branch offices, 183 ATMs, numerous POS
terminals, remittance agents spread across the nation. The Bank also has over 170
international correspondent banking relationships. Nabil Bank operates its investment
banking arm through its subsidiary Nabil Investment Banking Ltd. (Sources:
https://nabilbank.com/)
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NABIL has Rs 1.6 billion in authorized capital, Rs 9.65 million in issued capital, and
Rs. 9.65 million in paid-up capital. The following is a list of its shareholders:
Foreign Entity 50 %
Other Licensed Institution 6.15 %
Other Entities 11.08 %
Individual 2.77 %
General Public 30 %

100%
1.1.3.2 Himalayan Bank Limited
Himalayan Bank Ltd. was founded in 1992 under the Company Act of 1964 as a joint-
venture bank with Pakistan's Habib Bank Ltd. The bank began operations in February
of 1993. The bank's major goal is to provide contemporary banking services such as
Tele Banking to businesspeople, industrialists, and other professionals, as well as
agricultural, commercial, and industrial loan. HBL has Rs.2 billion in authorized
capital, Rs.1.01 billion in issued capital, and Rs.1.01 billion in paid-up capital. The
following is its share subscription:
Other Entities 65 %
Foreign Institution 20 %
General Public Shareholders 15 %

100%

1.2 Statement of the Problem

After the global economic crisis, credit risk has remained one of the topical issues of the
financial system has caught the attention of both scholars and industry professionals
(Kurawa & Garba, 2014). Credit risk (i.e., default risk, performance risk, or counterparty
risk) is defined as the possibility that a contractual party will fail to meet its obligations in
accordance with the agreed terms (Brown & Moles, 2012). It is a risk of financial loss
whereby money invested by banks to their customers in the form of loan is not repaid
(Giesecke, 2004). Credit risk is a significant risk faced by banks by the nature of their
activity and the success of banks in terms of financial performance depends on efficient
management of it than any other type of risk that bank faces (Giesecke, 2004).

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Regarding this, it is observed that Nepalese commercial banks have faced many
difficulties over the years, with the main cause of serious banking problems remaining
directly related to credit risks for borrowers and counterparties, poor portfolio risk
management in which they fail to determine the best asset combination to invest in,
which should have a negative correlation, or a failure to pay attention to changes in
economic or other circumstances that can lead to deterioration. However, some
policies have been reformed in recent years in order to improve bank performance,
and some measures have been put in place to mitigate the negative effects of lending.
They have concentrated on mergers in order to increase capital requirements while
decreasing competition.

The majority of Nepalese commercial banks have been found to approve loan that
have not been thoroughly scrutinized. This could result in an increase in loan defaults
and non-performing loan. As a result, the existing credit risk management procedures
are insufficient to compete with Nepal's current financial and economic challenges. It
is necessary to investigate whether this investment in credit risk management is
financially viable for banks. As a result, this research is conducted to analyze the
credit risk management and a bank's financial performance in Nepal with reference to
NABIL Bank Limited and Himalayan Bank Limited which are the old and leading
joint-venture commercial banks in Nepal.

This study attempts to provide empirical evidence to support the validity of the
theories in order to assist bank management in determining the best credit risk
strategies that improve bank performance. Furthermore, because Nepal's banking
industry is still growing, it should ensure that effective strategies are put in place to
minimize risk and maximize loan performance at any given point in time.

Various issues are dealt with for the purpose of this study. Some of the research
questions that have been made under the issues are as follows:

a. What is the credit position of NABIL Bank limited (NABIL) and Himalayan
Bank Limited (HBL)?
b. What is the trend of credit risk associated with lending of NABIL and HBL?
c. What is the status of non-performing loan and loan loss provision of NABIL
and HBL?

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 d. What is the relationship between loan and advance and total deposits of
NABIL and HBL?
e. What is the profitability position of NABIL Bank limited (NABIL) and
Himalayan Bank Limited (HBL)?

1.3 Objective of the Study

The general objectives of the study are as follows:

 To analyze the credit position of NABIL Bank limited (NABIL) and
Himalayan Bank Limited (HBL)
 To analyze the trend of credit risk associated with lending of NABIL and
HBL.
 To analyze the status of non-performing loan and loan loss provision of
NABIL and HBL.
 To examine the relationship between loan and advance and total deposits of
NABIL and HBL.
 To examine the profitability position of NABIL and HBL.
As the results of the report, a definite and accurate conclusion has been drawn to
provide a true image of the organization's financial performance and credit risk
management.

1.4 Significance of the Study

The financial information presented to directors gets more difficult to grasp as the
financial services business becomes more sophisticated. Without competent analysis
and assessment of financial data, quality governance is impossible. Directors must
have the capacity to recognize and manage risk. This research will undoubtedly assist
HBL and NABIL management and directors in minimizing the risk of lending.

Besides this study will be useful to more people and organizations such as:

 Government
 Trade Creditors
 Investors
 Stockbrokers
 Academicians
 Policy formulators
 General Public
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1.5 Limitations of Study
This study has been conducted under many limitations. Some of them are as follows:
 The study period spans just five fiscal years from 2016/17 to 2020/21.
 The study has been conducted only based on secondary data gathered.
 Despite the other Nepalese commercial banks, the study solely looks at
Himalayan Bank Limited and Nabil Bank Limited.
 Only descriptive statistics and correlation analysis have been used to analyze
the data. Other sophisticated tools and techniques have been ignored.

1.6 Organization of the Study

The entire study is organized into five chapters, as shown below.
Chapter I: Introduction
Chapter II: Review of Literature
Chapter III: Research Methodology
Chapter IV: Data Presentation and Analysis
Chapter V: Summary, Conclusion, and Recommendations

The "Introduction" chapter covers the current economic situation in Nepal, an

overview of the financial sectors, an introduction to banking, the background of the
study, an introduction to the banks under investigation, a statement of the problem,
the study's objectives, limitations, and significance.

The "Review of Literature" is the second chapter. Risk management, kinds, reasons,
and capital adequacy framework are examined in the conceptual framework with
reference to a survey of related publications and studies. Similarly, several papers and
publications, as well as Nepalese legislation and regulation governing banking
activity, are examined.

The research technique utilized in the study is explained in Chapter III, which covers
research designs, population and samples, data collecting procedures, data analysis
methods, and data presentation methods.

The study's fourth chapter is the most important. The display and analysis of data
using financial and statistical methods are covered in this chapter.

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The fifth and final chapter focuses on proposals, which contain a review of the study's
primary results, recommendations, and suggestions for future improvement, as well as
the study's conclusions.

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 CHAPTER II
REVIEW OF LITERATURE

For all types of studies, a review of literature is essential, which helps to find out what
research studies have been conducted in one has chosen field of study and what
remains to do. In fact, a review of literature begins with a search for a suitable topic
and continues throughout the duration of the research work. It is a path to find out
what other research in this area uncovered. It is the process of locating, obtaining,
reading, and evaluating the research literature in the area of the student’s interest. It is
also a means to avoid investing problems that are already been positively answered.

2.1 Conceptual / Theoretical Review

The commercial bank plays an important and active role in the economic growth of a
country. The study adopted credit risk management as the independent variable
because it is believed that the robustness of such a system could be altered or changed
under different financial institutions. Bank performance is adopted as the dependent
variable which is basically the key factor that the research seeks to interrogate its
changes of the credit risk management systems.

The major studies related to the issue effect of credit risk management on the financial
performance of commercial banks have been reviewed as follows. Baral (2005) has
examined the financial health of the joint venture banks in the CAMEL framework
and found the health of joint venture banks is better than that of the other commercial
banks. In addition to this, the perusal of indicators of different components of
CAMEL has indicated that the financial health of joint venture banks is not so strong
to manage the possible large-scale shocks to their balance sheet and their health is
fair.

Kithinji (2010) has found that the bulk of the profits of commercial banks is not
influenced by the amount of credit and nonperforming loan suggesting that other
variables other than credit and non-performing loan impact profits. Commercial banks
that are keen on making high profits should concentrate on other factors other than
focusing more on the amount of credit and non-performing loan.

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Karki (2011) has evaluated the impact of credit risk on the profitability of Nigerian
banks. The findings revealed that banks' profitability is inversely influenced by the
levels of loan and advances, non-performing loan, and deposits thereby exposing
them to great risk of illiquidity and financial distress. Furthermore, weak credit risk
management decreases the profitability, affects the quality of its assets, and increase
loan losses and non-performing loan which may eventually lead to financial distress.

Oludhe (2011) has concluded that capital adequacy, asset quality, management
efficiency, and liquidity have a weak relationship with the financial performance of
banks in Kenya. Earnings have a strong relationship with financial performance. This
is because earnings as proxies by return on assets determine the ability of a bank to
increase capital (through retained earnings), absorb loan losses, support the future
growth of assets, and provide a return to investors.

Kolapo et al. (2012) have shown that the effect of credit risk on bank performance
measured by return on assets of the banks is cross-sectional invariant. A 100 percent
increase in the non-performing loan decreases return on assets i.e. profitability by
about 6.2 percent, a 100 increase in loan loss provision also decreases profitability by
about 0.65 percent whereas a 100 percent increase in total loan and advances
increases profitability by about 9.6 percent.

Fredrick (2012) has concluded that credit risk management by use of CAMEL
indicators has a strong impact on the financial performance of the commercial banks
in Kenya. The study reveals that capital adequacy, asset quality, management
efficiency, and liquidity have a weak relationship while earnings have a strong
relationship with the financial performance of the banks. This study has concluded
that the CAMEL model can be used as a proxy for credit risk management of
commercial banks in Kenya.

Poudel (2012) has shown that default rate, cost per loan assets and capital adequacy
ratio have an inverse impact on the bank's financial performance whereas default rate
is the most predictor of the bank's financial performance.

Abiola and Olausi (2014) have analyzed the impact of credit risk management on
commercial banks' performance in Nigeria. The panel regression model was
employed for the estimation of the model. In this model, Return on Equity (ROE) and
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Return on Asset (ROA) was used as the performance indicators whereas Non-
Performing Loan (NPL) and Capital Adequacy Ratio (CAR) as credit risk
management indicators of the commercial banks. The findings have revealed that
credit risk management has a significant impact on the performance of the banks in
Nigeria. Furthermore, the results have shown that the sampled have poor credit risk
management practices; hence the high levels of the non-performing loan in their loan
portfolios. Despite the high levels of the NPLs, their profit levels keep rising as an
indication of the transfer of the loan losses to other customers in the form of large
interest margins.

Kodithuwakku (2015) has analyzed the impact of credit risk management on the
performance of commercial banks in Sri Lanka by using both primary and secondary
data. The study has suggested that all the independent variables except loan provision
and total loan have a negative impact on profitability. The non-performing loan, loan
provision, and loan provision to non-performing loan of the banks are significantly
negatively related to ROA. The results of the study verify the objectives that better
credit risk management results in better bank performances. The banks should ensure
that they deploy a well-established credit risk management policy framework.

Gizaw et al. (2015) have conducted their study and the data were analyzed by using
descriptive statics and panel data regression model. The results revealed that non-
performing loan, loan loss provision, and capital adequacy have a significant impact
on the profitability of the commercial banks in Ethiopia. Mutua (2015) has found that
there was a significant relationship between bank performance (in terms of return on
asset) and credit risk management (in terms of risk identification, monitoring, and
credit sanctions. Better credit risk management results in better bank performance.
Thus, it is of crucial importance that banks practice prudent credit risk management
and safeguard the assets of the banks and protect the investors' interests.

2.2 Risk Management

The process of monitoring or analyzing risk and then establishing risk management
measures is known as risk management. A prioritizing method is used in ideal risk
management, in which the risks with the highest loss and chance of occurrence are
dealt with first, while risks with a lesser probability of occurrence and smaller loss are
dealt with subsequently.
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In practice, the procedure may be quite challenging, and balancing risks with a high
chance of occurrence but lower loss vs. risks with a high loss but lower probability of
occurrence is frequently mismanaged.

The right allocation of resources is also a challenge for risk management. This is how
the concept of opportunity cost works. Risk management resources should be better
spent on other profitable tasks. Again, effective risk management uses the fewest
resources feasible while minimizing the impact of hazards as much as possible.

2.2.1 Risk Management Process

Risk management is the process of identifying, assessing, and controlling threats to an
organization's capital and earnings. These risks stem from a variety of sources
including financial uncertainties, legal liabilities, technology issues, strategic
management errors, accidents, and natural disasters. A successful risk management
program helps an organization consider the full range of risks it faces. Risk
management also examines the relationship between risks and the cascading impact
they could have on an organization's strategic goals. (Sources: www.techtarget.com)

Identifying possible hazards is a necessary first step in risk management. The risks
must then be evaluated in terms of their potential for loss severity and the likelihood
of occurrence.

All risk management strategies fall into one or more of these four primary categories
after hazards have been recognized and assessed:

 Avoidance
 Reduction
 Retention
 Risk Transfer

It's conceivable that making the best use of these tactics won't be achievable. Some of
these may include compromises that the company or individual making the risk
management decisions does not agree with.

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Risk Avoidance

Risk avoidance entails refraining from engaging in a potentially dangerous activity.

An example would be avoiding purchasing a house or company in order to avoid the
associated liability. Another option is to avoid flying altogether to avoid the chance of
the plane being hijacked. While avoiding risks may appear to be the best option, it
also implies foregoing the possible advantage that accepting (retaining) the risk would
have provided. Avoiding the danger of loss by not entering a business also eliminates
the opportunity for profit.

 Risk Reduction
Risk reduction refers to techniques that lessen the severity of a loss. Sprinklers, for
example, are meant to put out a fire and limit the danger of fire-related damage. This
procedure may result in a bigger loss due to water damage and so may not be
appropriate.

 Risk Retention
Accepting the loss when it comes is part of risk retention. This is where true self-
insurance fits in. By default, any risks that are not avoided or transferred are kept.

 Risk Transfer
It refers to persuading another person to take on the risk, usually through a contract.
One sort of risk transmission is insurance. Contract wording that transfers risk to
another party without the payment of an insurance premium is another example. This
is a common method of transferring liability among construction or other contractors.

Some approaches to risk management may be divided into several groups. Risk-
retention pools theoretically hold the risk for the group, but dispersing it over the
whole group necessitates risk transfer among individual members. This differs from
regular insurance in that no premiums are transferred among group members.

2.2.2 Risk Management

Persuading another individual to take on the risk, generally through a contract, is what
it means. Insurance is one type of risk transfer. Another example is contract phrasing
that transfers risk to another party without the payment of an insurance premium. This
is a frequent way for construction or other contractors to shift liabilities.

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Some risk management techniques may be classified into numerous categories. Risk-
retention pools hold the risk for the group in theory, but spreading it over the whole
group implies risk transfer among individual members. In contrast to traditional
insurance, no premiums are shared among group members. In addition, progressive
risk management ensures risks of a high priority are dealt with as aggressively as
possible. Moreover, the management will have the necessary information that they
can use to make informed decisions and ensure that the business remains profitable
(Sources: www.corporatefinanceinstitute.com)

 Pre-requisite for Risk Management

There are additional requirements for banks to acquire the capacity to efficiently
monitor and manage risk. To begin measuring risk, the country must have strong
accounting and disclosure requirements that offer accurate, relevant, complete, and
timely information to banks, allowing them to analyze the condition and performance
of borrowers and counterparties. Accounting systems must be backed up by auditing
mechanisms and effective legal consequences for supplying false or misleading
information to government agencies and others in order to assure accuracy. To detect
and analyze risk, banks require a workforce with significant risk management
knowledge. An adequate legal system and credit culture in which borrowers are
expected to repay and are penalized if they do not, are yet further pre-requisite for
sound and accurate risk management, finally, the potential for conflicts of interest on
risk management must be limited.

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 Legal Provision Regarding Risk Management in Nepal
In terms of risk management, the Nepal Rastra Bank has issued specific guidelines to
commercial banks in order to reduce various sorts of risks. The principal risks
encountered by banks are grouped into the following categories, according to the
NRB Act of 2012, section 22, paragraph 38

1. Liquidity risk
2. Interest risk
3. Foreign exchange risk
4. Credit risk
(Source: Directives 1-11 given by NRB)

Fundamental Elements of Sound Risk Management

The essential principles of solid risk management are simple to articulate in theory but
significantly more complex to put into practice on a case-by-case basis. Each
circumstance is distinct, based on the responsibilities and capacities of individuals as
well as the institutions' structures, activities, and goals. Of course, what works for one
company may not be suitable for another. Furthermore, the concept of a solid or
acceptable risk management system in the context of a specific organization is always
evolving as new technology accommodates innovations and better information as
market efficiency develops. Institutions must adapt and enhance their processes in
order to remain competitive. Aside from these exceptions, though, many
fundamentals apply across the board. Support for critical initiatives must come from
the top in any institution. Senior management and the governing board of each
company must determine the risk appetite of the organization by setting suitable rules,
restrictions, and standards, and ensuring that they are followed and enforced. Risk
must then be quantified, managed, and communicated to key decision-makers within
the institution. There must also be sufficient accountability, clear lines of authority,
and separation of roles between the business function and those responsible for risk
management and internal control.

 Types of Risks Bank Face

Any profit-maximizing firm, including banking, must deal with both macroeconomic
(recession) and microeconomic risks (new competitive threats). Because of the
lending side of the intermediary job, credit risk, or the risk that a borrower would

18
default on a bank loan, is the risk that most people associate with banks. In general,
the risk is defined as the volatility of the firm's net cash flows' standard deviation.
Risk management is critical to the bank's profitability. A bank's solvency may be
jeopardized by poor risk management (Sources: CFI Education Inc.).

Credit risk: Credit risk is the major risk that banks are exposed to during the normal
course of lending and credit underwriting. Credit Risk is the risk of delay in the
servicing of the loan or the risk that an asset or a loan becomes irrecoverable.

Liquidity funding risk: This is the risk of insufficient liquidity for normal operating
requirements, that is, the ability of the bank to meet its liabilities when they fall due.
Funding risk is the risk that a bank is unable to fund its day-to-day operations.

Payment risk: Payment risk is created if one party to a deal pays money or delivers
assets before receiving its cash or assets, thereby exposing, it to potential loss. The
term systematic risk also refers to payment risk.

Interest rate risk: Interest rate risk arises if interest rate mismatches in both the
volume and maturity of interest-sensitive assets, liabilities, and off-balance sheet
items. An unanticipated movement in interest rates can seriously affect the
profitability of the banks.

Price risk or Market risk: Banks incur market risk on instruments traded in well-
defined markets. If a bank is holding instruments on accounts (e.g., bonds, equities),
then it is exposed to price or market risk, the risk that the price of the instrument will
be volatile.

Foreign exchange or Currency risk: Under flexible exchange rates, any net short or
long open position in a given currency will expose the bank to foreign exchange risk,
a special type of market risk. A bank with global operations experiences multiple
currency risk, which arises from adverse exchange rate fluctuations.

Sovereign and Political risks: Sovereign risk normally refers to the risk that a
government will default on debt owed to a private bank. Political risk is the risk of
political interference in the operation of a bank. It can range from banks being

19
subjected to interest rate or exchange Control regulations, to nationalization or
privatization of loan.

Operating risk: It is the risk associated with loss arising from fraud or unexpected
expenses such as litigation.

Global Banking risk: Global diversification of assets often allows a bank to improve
upon its risk management, thereby raising profitability and shareholder value-added.
The banks with branches or subsidiaries in other countries are part of their
infrastructure exposed to currency, exchange Control, and political risk.

 Risk Assessment
Risk assessment of a particular project is a very detailed and minute process. The
relationship manager (RM) collects the raw information from various sources before
the assessment. The risk assessment procedure can be divided into Numeric Risk
Grading and Core Risk Assessment.

1. Numeric Risk Grading

Under this system of risk assessment, the various risks associated with the project
are given a combination of numeric and alphabetic representation/value such that
the project is assigned a specific risk grade. This process and components under
this grading system are as under:

a. Industry Risk
Under this segment, risk value is assigned to the project on the basis of the
evaluation of industrial components such as current market trend, level and
interest of competition, barriers to entry of other firms in the similar business
industry, market base, and effect of change in the external environment factors in
the business.

b. Business Risk
Under this segment, risk value is assigned on the basis of the evaluation of the
components associated with the business such as nature and quality of product,
current market positioning of the product, number of suppliers of raw materials
used in the production of the product, and number of buyers of the product
management, quality, the technology used, etc.

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c. Financial Risk
Under this segment, if the project is running a business then the numeric value is
assigned on a basis of financial evaluation on the components such as sales trend,
profit trend, cash flow, liquidity, solvency (Debt Equity Ratio), etc. However, if
the project is a startup venture then a standard numeric value is assigned.

d. Account Performance Risk

Here the numeric risk value is assigned on the basis of past account performance
of the com any (for running a business) with the bank such as a number of years
of relationship with the banks, timely repayment of interest and principal amount,
utilization of the credit facility extended, etc. However, if a project is a start-up
venture then a standard numeric value is assigned.

e. Security Coverage
Under this section numeric value is assigned to the project on the basis of security
coverage for the amount of the loan to be extended. Here security refers to the
value of the tangible collateral security such as land and building, plant and
machinery, other fixed assets, hypothecated (charge held by the Bank) current
assets like inventory stock and account receivable. If the value of tangible security
is 100% of the amount of loan extended / to be extended, a standard numeric risk
value is assigned and for a greater or lesser than 100% of the loan amount, a
different numeric value is assigned to the project.

By adding the total numeric risk value assigned to the project under industry risk,
financial risk, business risk, and account performance risk, an alphabetic risk
value is assigned to the project. The combined alphabetic risk value assigned for
security coverage gives the credit risk grade for the project. By looking at this
credit risk grade, management can identify the quality of the loan and the amount
of the risk associated with the project is calculated.

2. Core Risk Assessment

This occupies the core part of the CA (Credit Application) prepared by the RM for
approval of credit facilities to be extended to the project under review. The
component dealt with under this segment are the same as under the credit risk
grading segment, however far more vast and detailed. The RM will have to invest
sufficient time, effort, and knowledge in order to outsource the information

21
 needed for the assessment of the risk associated with the project and the probable
mitigations.
Here the RM identifies various risks associated with the following risk segment
and then probable mitigation/solutions to those risks.

 Industry Risk
 Business and management risk
 Financial/cash flow risk
 Facility Structure
 Security Risk
 Account Performance Risk

If the identified risk doesn’t have an existing solution then a specific control measure
is developed in order to mitigate those risks.

 Capital Adequacy Framework

Capital Adequacy determines the capacity of the bank in terms of meeting the time
liabilities and other risks such as credit risk, operational risk, etc. In the most simple
formulation, a bank's capital is the "cushion" for potential losses, which protects the
bank's depositors or other lenders. Banking regulators in most countries define and
monitor CAR to protect depositors, thereby maintaining confidence in the banking
system.

Basel Framework
Prior to 1988, there was no uniform international regulatory standard for setting bank
capital requirements. In 1988, the Basel Committee on Banking Supervision (BCBS)
1 developed the Capital Accord to align the capital adequacy requirements applicable
especially to banks in G-10 countries - which is known as Basel I. There are two key
concepts introduced under Basel I. First, it defined what banks could hold as capital,
as well as designating capital as Tier 1 or Tier 2 according to its loss-absorbing or
creditor-protecting characteristics. The second key concept introduced in Basel I was
that capital should be held by banks in relation to the risks that they face. The major
risks faced by banks relate to the assets held on the balance sheet. Thus, Basel I
calculated banks’ minimum capital requirements as a percentage of assets, which are
adjusted in accordance with their risk and assigning risk weights to assets. Higher

22
weights are assigned to riskier assets such as corporate loan, and lower weights are
assigned to less risky assets, such as exposures to government.

The BCBS released the "International Convergence of Capital Measurements and

Capital Standards: Revised Framework", popularly known as Basel II, on June 26,
2004. This framework was updated in November 2005 and a comprehensive version
of the framework was issued in June 2006. Basel II builds significantly on Basel I by
increasing the sensitivity of capital to key bank risks. In addition, Basel II recognizes
that banks can face a multitude of risks, ranging from the traditional risks associated
with financial intermediation to the day-to-day risks of operating a business as well as
the risks associated with the ups and downs of the local and international economies.
As a result, the new framework more explicitly associates capital requirements with
the particular categories of major risks that banks face.

The new capital framework also recognizes that large, usually internationally active
banks have already put in place sophisticated approaches to risk measurement and
management based on statistical inference rather than judgment alone. Thus, the
framework allows banks, under certain conditions, to use their own ‘internal’ models
and techniques to measure the key risks that they face, the probability of loss, and the
capital required to meet those losses. In developing the new framework, the Basel
Committee wanted to incorporate many elements that help promote a sound and
efficient financial system over and above the setting of minimum capital
requirements. With this in mind, the Basel II framework incorporates three
complementary ‘pillars’ that draw on the range of approaches to help ensure that
banks are adequately capitalized incommensurate with their risk profile.

The BCBS recommendations on capital accord are the important guiding framework
for the regulatory capital requirement to the banking industry all over the world and
Nepal is no exception. Realizing the significance of capital for ensuring the safety and
soundness of the banks and the banking system, at large, NRB has developed and
enforced capital adequacy requirements based on international practices with an
appropriate level of customization based on the domestic state of market
developments. The existing regulatory capital is largely based on the Basel
committee's 1988 recommendations.

23
With a view of adopting the international best practices, NRB has already expressed
its intention to adopt the Basel II framework in a simplified form. This framework
provides the guidelines for the implementation of the Basel II framework in Nepal.
Reminiscent of the International convergence of capital measurements and capital
standards, this framework also builds around three mutually reinforcing pillars, viz.
minimum capital requirements, the supervisory review process, and disclosure
requirements (Sources: NRB Strategic plan 2012-2016).

Objective
The main objective of this framework is to develop a safe and sound financial system
by way of a sufficient amount of qualitative capital and risk management practices.
This framework is intended to ensure that each commercial bank maintains a level of
capital that follows the following criteria:

 It is adequate to protect its depositors and creditors.

 It is commensurate with the risk-associated activities and profile of the
commercial bank.
 It promotes public confidence in the banking system.

Pre-requisites
The effective implementation of this framework is dependent on various factors.
Some such pre-requisites are as follows:

 Implementation of Basel Core Principles for Effective Banking Supervision

 Adoption of the sound practices for the management of Operational Risk

 Formulation and adoption of comprehensive risk management policy

 Adherence to a high degree of corporate governance

The board of directors of each bank is responsible for establishing and maintaining, at
all times, an adequate level of capital. The capital standards herein are the minimum
that is acceptable for banks that are fundamentally sound, well managed, and have no
material financial or operational weaknesses. Thus, the banks are generally expected
to operate the limits prescribed by this framework.

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This capital adequacy framework is applied uniformly to all "A" class financial
institutions on a stand-alone basis and as well as on a consolidated basis, where the
bank is a member of a consolidated banking group. For the purpose of capital
adequacy, the consolidated bank means a group of financial entities, the parent or
holding company of which a bank is a subsidiary. All banking and other relevant
financial activities (both regulated and unregulated) conducted within a group
including a bank shall be captured through consolidation. Thus, majority-owned or
controlled financial entities should be fully consolidated. If any majority-owned
subsidiaries institutions are not consolidated for capital purposes, all equity and other
regulatory capital investments in those entities attributable to the group will be
deducted and the assets and liabilities, as well as third party capital investments in the
subsidiary, will be removed from the bank’s balance sheet for capital adequacy
purposes.

2.2.3 Review of Related Empirical Previous Studies

Before this thesis, some students have conducted several thesis works. Some of them,
that are relevant for this study, are presented below.

Tuladhar (2017) in the thesis entitled “Financial Performance Analysis of Himalayan

Bank Limited” has studied the financial performance of Himalayan Bank Limited in
reference to the ratio analysis. Tuladhar has concluded Himalayan bank has been able
to invest in various securities and projects which are less risky compared to Loan and
Advances and highlighted, Himalayan Bank has disbursed loan and advances more
than the deposit it has accumulated. At the same time, Himalayan Bank has been able
to maintain its liquidity position. She has also recommended banks diversify their
investments into less risky sectors.

Pandey (2012), "NRB Directives, their implementation and impact on commercial

Banks: A case study of Himalayan Bank Limited" Tribhuvan University has carried
out a study with the objectives to find out the impact of changes in NRB directives on
the performance of the commercial banks and to find out whether the directives were
implemented or not. According to his findings, the directives if not properly addressed
have the potential to wreck the financial system of the country. The directives in
themselves are not that important unless properly implemented. The implementation
part depends upon the commercial banks. In case commercial banks are making such

25
huge profits with full compliance with NRB directives, then the commercial banks
would deserve votes of praise because they would then be instrumental in the
economic development of the country. All the changes in NRB directives made
impacts on the bank and the result are the followings:

 An increase in operational procedures of the bank, increase the operational cost of

the bank.
 A short-term decrease in profitability results in fewer dividends to shareholders
and fewer bonuses to the employees.

Dali (2013) in the thesis entitled “Risk Management of Commercial Banks in Nepal”
has been studied the credit risk management system of commercial banks, has studied
the requirement of loan loss provisions and its effect on liquidity and profitability of
commercial banks.

Regmi (2014) conducted a thesis “A study on credit practices of joint venture

commercial banks with reference to Nepal SBI Bank Ltd. and Nepal Bangladesh Bank
Ltd.” The basic objectives of this thesis are:
 To determine the impact of deposit in liquidity and its effect on lending practices.
 To know the volume of the contribution made by both banks in lending.
 To examine lending efficiency and its contribution to profit.
 To analyze the trend of deposit utilization towards loan and advances and net
profit and their projection for the next five years.

The major findings of this study are:

 In terms of liquidity ratio, the current ratio of NSBL is higher than that of NBBL.
The ratio of the liquid fund to the current liability of NSBL is higher than NBBL.
This shows that NBBL has less consistency than NSBL. The ratio of cash and
bank balance to the deposit of NSBL is higher than that of NBBL. Cash and bank
balance to interest-sensitive deposits measure the liquidity risk arising from the
fluctuation of interest rates in the market. The ratio of cash and bank balance to
the interest-sensitive deposit of NSBL is higher than NSBL. NSBL has a poor
position due to the high volume of interest-sensitive liability in the deposit mix.
 The ratio of loan and advances to total assets of NBBL is higher than NSBL.
Likewise, the mean ratio of loan and advances to the total deposit of NBBL is
higher than NSBL. The mean ratio of investment to loan and advances and
26
 investment of NSBL is higher than that of NBBL. Likewise, the ratio of total
investment to the total deposit of NSBL is higher than that of NBBL.

Maharjan (2014) in a thesis paper entitled “A Study on Analysis of Investment

Portfolio of Joint Venture Banks in Nepal” has studied the investment portfolio of
commercial banks. Maharjan has done risk and return and ratio analysis of different
investment portfolios like Loan and Advances, Government Securities and Shares and
Debenture and has concluded Loan and Advances are a highly risky investment and
yield a high return. Government Securities are less risky and yield less return.
Similarly, shares and debenture are also high risky securities. Being high risky, Loan
and Advances has a high return and it’s the key source of income for commercial
banks. Maharjan has recommended diversifying the investment and formulating an
appropriate investment policy.

Karki (2015) in the thesis paper entitled “Risk Management of Himalayan Bank
Limited”, has studied the performance of Himalayan Bank with reference to the risk
Himalayan Bank has faced and managed, and ratios related to Capital Adequacy
Ratio, Credit to Deposit Ratio, Liquidity Gap Analysis, and profitability. Karki has
concluded bank is performing well and the bank has better management of risk
associated with credit, operation, and market. He has recommended the bank should
maintain enough liquidity, follow sound credit collection policy and make effective
marketing strategies.

Basnet (2016) in the thesis paper entitled, "Credit Risk Assessment under Consortium
Financing by Nepalese Commercial Banks" has made an attempt to analyze the risk
associated with consortium financing in reference to the project related to medical
college financed by Bank of Kathamndu. In this thesis, Basnet has presented
profitability of medical college and return in investing in the project and concluded
that risk associated with consortium financing is minimal and risk is shared amount
the financial institution even the project fails. Basnet has recommended consortium
financing is less risky and it will yield a high return.

Shrestha (2017) in their thesis paper entitled, “Credit Risk Management of Nabil
Bank Limited and Nepal Investment Bank Limited” has mainly focused on the
lending practices and the volume of credit in comparison to the deposits. She

27
concluded that in terms of liquidity ratio, the current ratio of NIBL is higher than that
of Nabil Bank Ltd. The ratio of the liquid fund to the current liability of NIBL is
higher than Nabil. Among the various measures of profitability ratio return on equity
(ROE) and earnings per share (EPS) reflects the relative measure of profitability. The
performance of Nabil Bank Ltd is better than NIBL.

Simkhada (2018), “Credit Policy of Commercial Banks in Nepal” has the objective to
provide the credit practices in NIBL and SBI bank. The specific objectives are:

 To examine the liquidity and assets management of NIBL and SBI.

 To evaluate the investment policy of NIBL and SBI.
 To study the growth ratio of loan and advances.
 To analyze the investment to total deposit and net profit NIBL and SBI.

The major findings of the study are:

 Both banks' current assets have exceeded the current liabilities therefore the ratio
is considered satisfactory. But the cash reserve ratios have fluctuated to a high
degree.
 NIBL has maintained both the current ratio and cash reserve ratio better than that
of SBI.
 The assets management ratio shows that deposit utilization of NIBL is less
effective than SBI.
 NIBL has invested a lower amount of government securities and shares and
debenture than that of NIBL.
 The growth ratio of total deposit, loan and advances, total investment, and net
profit of NIBL is less than that of SBI.

Parajuli (2018) in thesis paper entitled, “Credit Management of Nabil Bank Limited
and Himalayan Bank Limited” has examined its efficiency, effectiveness
systematization, and sincerity in disbursing and its recovery loan as well as within the
directives of Nepal Rastra Bank (NRB), financial and institutions act and its own
policy. The main objective of this study is to find out the credit management position
of sample banks HBL & NABIL.

2.3 Research Gap

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Some research gaps have been found in the previous studies. Despite much research
regarding credit risk management, very few studies have been found in the area of
Nepalese joint-venture commercial banks. Previous studies could not give a concrete
solution for credit risk management in the context of Nepalese commercial banks.

Furthermore, recent data has not been used in the previous study. However, this study
attempts to fulfill the above research gaps to some extent.

29
 CHAPTER III
RESEARCH METHODOLOGY

This section provides a brief overview of the methodology used in examining the
credit management of the selected institutions. Research methodology refers to the
various sequential steps taken by a researcher in studying a problem with a specific
goal in mind. Research is a systematic method of finding a solution to a problem,
whereas research methodology refers to the various sequential steps taken by a
researcher in studying a problem with a specific goal in mind. A research technique
aids in determining the accuracy, validity, and applicability of a study. Without
suitable research methods, the reason for the current investigation will be impossible
to establish. The applicable technique will be employed in order to achieve the study's
objectives. The current study's research approach is briefly described below.

3.1 Research Design

The research design is an integrated framework that guides the collection and analysis
of data, as well as the instruments to be used and the sampling strategy to be followed,
in order to investigate the influence of mergers on the financial performance of
chosen banks in Nepal. There are no advanced statistical methods utilized in this
analysis, and the research methodology is a case study. The information is given in
the form of a table and a diagram. As a result, the research is descriptive and
analytical. Descriptive research is a fact-finding process that looks for relevant data. It
entails the methodical gathering and presentation of facts in order to provide a clear
picture of a situation. However, analytical research design has been employed to test
the correlation between total loan and advance and total deposits of concerned banks.

3.2 Nature and Sources of Data

This study relied heavily on quantitative data. As a result, the research is reliant on
secondary sources, which refers to information that has previously been utilized and
published by a recognized organization or government. The following are the
secondary sources of data.
• Annual report of NABIL and HBL
• Documentation for internal use
• Books, periodicals, articles, and newspapers

30
The information or data gathered from various sources will be in an unprocessed state.
Direct presentation is not feasible based on given information. As a result, data must
be processed and converted into the needed format. After that, just the data for this
study is displayed. Data processing is the term for this procedure. Only the data
needed for this investigation is gathered from secondary sources (bank publications)
and provided. Various figures and tables are utilized in the presentation. A graphical
presentation is likewise produced in the same way. The computation was carried out
with the assistance of a scientific calculator and a computer software application.

3.2 Population and Sample

Currently, Nepal has 27 commercial banks (according to the website of NRB),
including govt, public, and joint venture institutions. It is not possible to research all
of them in relation to the study topic due to time and resource constraints. As a result,
samplings are taken from the population. The study's population consists of 27
commercial banks. Being old and reputed Nepalese joint venture commercial banks,
Himalayan Bank Limited and NABIL Bank Limited are chosen as samples for the
study among all Nepalese commercial banks. However, judgmental and purposive
sampling techniques have been adopted to collect the data.

3.3 Methods for Analysis

The data is analyzed based on the pattern of information available and the perceived
need. For research and presentation, this study requires more statistical tools than
financial instruments. As a result, statistical tools are emphasized, and certain
financial techniques are also employed to achieve the study's objectives.

3.4 Statistical Tools

Arithmetic Mean (X)
In a given collection of data, the arithmetic mean is the total divided by the number of
observations. In this instance, all elements are of equal importance. It exemplifies the
characteristics of the entire group. It is representative of the full mass of homogenous
data. In general, the average value is midway between the extremes, that is, the largest
and smallest objects. It is computed as follows:

X = Sum of the sizes of items

31
n = Number of observations
Standard deviation ()
In 1983, Karl Pearson established the notion of standard deviation for the first time.
The standard deviation is the positive square root of the arithmetic average of all
deviations measured from the series' arithmetic average. The standard deviation is a
measure of a distribution's absolute dispersion. The higher the dispersion, the bigger
the standard deviation, and hence the size of the values from their mean. A low
standard deviation indicates a high degree of observational consistency as well as
serve homogeneity. The standard deviation (sigma) is symbolized by the Greek letter
“” and is computed as follows.

Standard deviation () =

Where
n = Number of items in the series

= Mean

X = Variable

Coefficient of Variation (C.V.)

The coefficient of variation (C.V.) is a statistical measure of the dispersion of data
points in a data series around the mean. It is calculated in the following manner:

C.V. =

Where,
S.D = Standard Deviation
The coefficient of determination is a helpful statistic for assessing the degree of
variation between two data series, even if the means are radically different. It
quantifies the ratios of the standard deviation to the mean.

The presence of a significant coefficient of variation in a set of data suggests that the
group is more variable, less stable, and less uniform. When a group's coefficient of
variation is low, it means the group is less changeable and more stable or uniform.

32
Coefficient of Correlation (r)
The correlation analysis is a technique for determining the degree to which two
variables are related. It aids in determining the degree to which two or more variables
are related. It describes not only the magnitude but also the direction of the
association. The coefficient of correlation is a statistic that reflects how closely two
variables are connected to one another and how changes in one cause changes in the
other.

Correlation may be positive or negative which lies between  1. A simple correlation

between the interest rate on deposit and deposit amount, the interest rate on lending,
and credit or lending amount is computed in this thesis. The correlation between the
interest rate on deposit and deposit amount is positive. The interest rate on lending
and the lending amount is negative when inflation increases, interest rate also
increases in the same direction and vice versa. For our study, the following reference
is used.

 Correlation may be positive or negative and ranges from -1 to +1 when r = +1

there is positive or negative and ranges when r = 1 there is prefect negative.
Correlation, when r =0, there is no correlation, and when r < 0.5 then there is a
low degree of correlation.
 When 'r' lies between 0.7 to 0.999 (or -0.7 to -0.999) there is a high degree of
positive or negative correlation.
 When 'r' lies between 0.5 to 0.699, there is a moderate degree of correlation.
The correlation coefficient can be calculated as:

Correlation of coefficient (r ) =

x1 and x2 = two variables, correlation between them are calculated.

n= Total number of observations

3.4.1 Financial Tools

Financial tools are used to assess a company's financial health and weaknesses. Ratio
analysis is a component of the whole process of analyzing financial accounts for any
organization or industry, with the goal of making output and credit choices. Ratio
analysis is a method of comparing a company's financial performance and status to

33
those of other companies. The following ratios are generated and studied, despite the
fact that there are several ratios to analyze and interpret the financial statement.

3.4.2 Asset Management Ratios

The asset management ratio calculates the percentage of different assets and liabilities
in the balance sheet. The optimal exploitation of assets and liabilities is ensured by
competent asset and liability management. By efficiently multiplying diverse
obligations and performing assets, the banking industry turns liabilities into assets.
The following are asset and liability management ratios that are used to assess the
efficiency of a bank's asset management and portfolio management.

a. Loan and Advance to Total Deposit Ratio

This ratio is determined to determine how effectively banks use their total deposits on
loan and advances for profit-generating purposes. A ratio can be used to indicate the
relationship between the total deposit collected by the bank and the loan and advances
are given. A high ratio shows that the collected deposit is being mobilized more
effectively, and vice versa. It should be emphasized that a high ratio may not be
preferable in terms of liquidity. This ratio is derived by dividing total deposits by loan
and advances. This may be expressed as follows:

Loan and Advances to Total Deposit Ratio =

b. Loan and Advances to Total Assets Ratio

Loan and advance is the major part of total assets for the bank. This ratio indicates the
volume of loan and advances out of the Total Assets. A high degree of the ratio
indicates that the bank has been able to mobilize its fund through lending functions.

Loan and Advances to Total Assets Ratio =

c. Loan and Advances to Current Assets Ratio

Loan and advances are the major component in total Assets, which indicates the
ability of banks to canalize their deposit in the form of loan and advances to earn a
high return. If sufficient loan and advances cannot be granted, it should pay interest
on those utilized deposited funds and may lose earnings. So commercial banks

34
 provide loan and advance at an appropriate level to find out the portion of current
assets, which is granted as loan and advances.

Loan and Advances to Current Assets Ratio=

3.4.3 Activity Ratios

Activity ratio measures the performance efficiency of an organization from various
angles of its operation. These ratios indicate the efficiency of activity of an enterprise
to utilize available funds, particularly start funds. These ratios are used to determine
the efficiency, quality, and contribution of loan and advances in total profitability.
Following activity measures the performance efficiency of the bank to utilize its
funds.

a. Loan Loss Provision to Total Loan and Advances Ratio

It describes the quality of assets that a bank is holding. The low ratio indicates the
good quality of assets in the total volume of loan and advances. A high ratio indicates
more risky assets in the total volume of loan and advances.
Loan Loss Provision to Total Loan and Advances ratio

b. Non-Performing Loan to Total Loan and Advances Ratio

The percentage of non-recovery loan in total loan and advances is represented by this
ratio. The higher the ratio, the lower the loan and advance recovery. As the number of
non-performing loan rises, so does the amount of loan loss provision, lowering
earnings. It also has an impact on the banking industry as a whole. As a result, a lower
ratio suggests that the banks are performing better.

Non-Performing Loan to Total Loan and Advances Ratio =

c. Loan Loss Provision to Non-performing Loan Ratio

This ratio assesses a bank's capacity to absorb prospective non-performing loan
losses. The greater the ratio, the better the loan loss coverage. The ratio is computed
by dividing the loan loss provision's final balance by the total non-performing loan. A

35
higher ratio indicates a bank's better performance since it reflects the bank's stronger
loan loss coverage.

Loan Loss Coverage Ratio =

36
3.4.4 Credit Efficiency Ratios
Credit efficiency ratios are used to determine a company's capacity to satisfy short-
term obligations. It assesses how quickly companies turn their assets into cash to
fulfill deposit, withdrawal, and other short-term requirements. This is a fast indicator
of a company's liquidity and financial soundness.

a. Interest Expenses to Total Deposit Ratio

This ratio represents the amount of total interest paid as a proportion of the entire
deposit. A high ratio suggests that the overall deposit will incur greater interest costs.
Commercial banks rely on their capacity to produce lower-cost capital. The likelihood
of generating loan and advances has shifted as a result of the less expensive fund, and
vice versa.

Interest Expenses to Total Deposit Ratio=

b. Interest Income to Interest Expenses Ratio

The difference between the interest rates given and the interest rates paid is measured
by the interest income to interest costs ratio. The difference between the interest paid
on loan, advances, and the interest paid on deposits has been narrowed by the NRB.
The ability of commercial banks to create credit has a significant influence on this
ratio.

Interest Income to Interest Expenses Ratio =

c. Interest Income to Total Income Ratio

The volume of interest income in total income is measured by this ratio. It also aids in
the evaluation of the bank's success in other fee-based operations. The high ratio
implies that lending and investment make a large proportion to total revenue, whereas
the low ratio suggests that lending and investment make a small contribution to total
income and that other fee-based activities make a large contribution.

Interest Income to Total Income Ratio=

d. Interest from Loan, Advances, and Overdraft to Total Interest Income Ratio
The contribution of interest from loan, advances, and overdrafts is measured by this
ratio. The majority of interest revenue comes from loan and advances. As a result, this
37
ratio assesses how effectively banks have used their funds, loan, advances, and
overdrafts.
Interest from Loan, Advances, and Overdraft to Total Interest Income Ratio

3.4.5 Leverage Ratios

In practice, there are two approaches to leverage. One method looks at balance sheet
ratios to see how much borrowed money has been utilized to finance the company.
The alternative method uses income statement ratios to calculate the number of times
fixed charges are covered by operating profits to assess debt risk. Most analysts look
at both sets of ratios since they are complementary.
The ramifications of leverage ratios are numerous. First, creditors consider equity, or
cash provided by the owner, as a cushion or foundation for the use of debt. The risk of
the firm is shared mostly by the creditors if the owners supply just a small part of
overall funding. Second, by borrowing money, the owners get ownership of the
company while committing just a little amount of capital. Third, using debt with a
fixed interest rate multiplies the owners' profits and losses. Fourth, using debt with a
fixed interest rate and a set term raises the chance that the company may be unable to
satisfy its commitments.

a. Debt to Assets Ratio

The link between creditors' funds and owners' capital is depicted by this ratio. This
ratio depicts the percentage of outside funds utilized in overall financial assets.
Outsiders, such as potential shareholders, depositors, or investors, are also provided
with security and financial protection. A larger debt ratio suggests more financial risk
as well as an increase in outsider claims in total assets, whilst a lower debt ratio
indicates lower financial risk as well as a decrease in outsider claims in total assets.
Although 1:2 ratios are generally regarded as desirable, there is no hard and fast rule.
This indicates that a financing business has been successful in transferring debt to
more profitable regions. The following is what this ratio represents:

Debt Assets Ratio =

38
b. Debt-Equity Ratio
The debt-equity ratio examines the relative claims of creditors and owners against the
firm assets. Alternatively, the debt-equity ratio indicates the combinations of debt
capital and equity capital fund to the investment. The ratio is computed by using the
following formula:

Debt-Equity Ratio =

3.4.6 Profitability Ratios

Only when there is a positive differential between total revenues and total costs over a
given period of time does profit exist. The combined impacts of liquidity, asset
management, and debt on operating outcomes are represented by profitability ratios.
Profitability ratios are extremely useful in determining a company's overall
operational effectiveness. It is an accurate reflection of a company's financial success.
Profitability ratios are computed and assessed based on the relationship between net
profit and assets in this case. The following are some examples of how a company's
profitability might be presented:
a. Net Profit to Total Assets Ratio

Net Profit to Total Assets Ratio =

b. Total Interest Earned to Total Working Fund Ratio

The ratio shows the earning capacity of a bank on its total assets (working fund). This
ratio exhibits the extent to which banks are successful in mobilizing their working
funds to generate income as much as possible. The higher ratio indicates the high
earning power of the banks on their total assets. Total interest earned is calculated by
adding the total income from loan, advances, cash, credit, overdrafts, government
securities, etc. This ratio is calculated by dividing net profit by the total working fund.

Total Interest Earned to Total Working Fund Ratio =

c. Total Interest Paid to Total Working Fund Ratio

The ratio is used to measure the percentage of total interest expenses against the total
assets. Higher the ratio higher will be the indication of interest expenses on total
assets and vice-versa. Total interest expenses consist of the expenses on the deposits,
loan and advances, borrowing, and other deposits. The ratio is calculated as follows.
39
Total Interest Paid to Total Working Fund Ratio =

40
d. Return on Loan and Advances Ratio
Return on loan and advances ratio shows how efficiently the banks have utilized their
resources to earn a good return from provided loan and advances. This ratio is
computed dividing net profit (loss) by the total amount of loan and advances and can
be mentioned as:

Return on Loan and Advances Ratio =

e. Interest Income to Loan and Advances Ratio

Interest income to loan and advances is one of the major sources of income for a
commercial Bank. The high volume of interest income is the indicator of the good
performance of lending activities.

Interest Income to Loan and Advances Ratio =

41
 CHAPTER IV
PRESENTATION AND ANALYSIS OF DATA

The most significant part of the research project is data presentation and analysis. Its
major goal is to transform raw data into something that can be understood. It is the act
of tabulating and then presenting data in a presentable numerical form utilizing
various table numbers, figures, and sources to organize data. Credit management is
one of the most essential things that has been established to help bank management
work more effectively. Credit management is the formal declaration of a commercial
bank's aims and objectives for a certain future period of time expressed in financial
terms. Credit is the most important factor in deciding profit. The study's primary goal
is to compare credit management practices in a few commercial banks. The current
chapter will go over the many parts of credit management and how they are
implemented. Credit management, in general, is the most important managerial
instrument used in commercial banks. It accomplishes this by analyzing data using a
variety of financial and statistical methods in order to satisfy the study's stated
objectives. It also compares data from different banks. It also includes a summary of
the different conclusions derived from the data analysis. In this chapter, a variety of
financial ratios are utilized to examine the credit management of the chosen
institutions.
4.1 Analysis of Credit Position of HBL and NABIL
The asset management ratio calculates the percentage of different assets and liabilities
in the balance sheet. The optimal exploitation of assets and liabilities is ensured by
competent asset and liability management. By efficiently multiplying diverse
obligations and performing assets, the banking industry turns liabilities into assets.
A. Loan and Advances to Total Deposit Ratio
The bank's loan and advances account for the majority of its overall assets. This ratio
represents the number of loan and advances as a percentage of total assets. A high
percentage implies that the bank was able to mobilize its funds through the lending
function. Lending, on the other hand, is always fraught with the possibility of default.
As a result, a high ratio denotes limited liquidity, whereas a low ratio denotes low
productivity with a high level of liquidity safety.

42
 Table 4.1
Loan & Advances to Total Deposit Ratio
(Rs in million)
HBL NABIL
Fiscal
Loan & Total Ratio(i Loan & Total Ratio(in
Year
Advances Deposit n times) Advances Deposit times)
2016/17 76394 92881 0.82 89877 118684 0.75
2017/18 82474 98988 0.83 109059 134810 0.81
2018/19 92697 109387 0.85 127500 162953 0.78
2019/20 101728 125264 0.81 148054 190806 0.78
2020/21 126048 141021 0.89 198021 223474 0.88
Mean 0.84 0.80
S.D. 0.13 0.16
C.V. (%) 15.48 20
Source: Annual Report of Selected Bank and Appendix- I
Table 4.1 shows that the loan and advances to total deposit ratio of HBL are 0.82,
0.83, 0.85, 0.81, and 0.89. Likewise, the Mean of HBL is 0.84, and its C.V is 15.48%.
Similarly, the ratio of NABIL is 0.75, 0.81, 0.78, 0.78 and 0.88 respectively. Its Mean
is 0.80, and C.V. is 20 %. From the above table, we came to know that NABIL has
invested more deposits in loan and advances than in HBL. It shows that C.V. of
HBL is 15.48 percent and that of NABIL is 20 percent. Since HBL has a lower ratio
of C.V, it indicates more consistency.

Fig
ure 4.1: Trend of Loan & Advances to Total Deposits of HBL and NABIL

B. Loan and Advances to Total Assets Ratio

43
The majority of a bank's total assets are loan and advances. The loan and advance
volume as a percentage of total assets is shown by this ratio. A high percentage
implies that the bank was able to deploy its funds through its lending function.
However, there is always the possibility of default when lending money. As a result, a
high ratio denotes a lack of liquidity, whereas a low ratio denotes a lack of
productivity while maintaining a high level of liquidity safety.
Table 4.2
Loan & Advances to Total Assets ratio
HBL NABIL
Fiscal
Loan & Total Ratio(in Loan & Total Ratio(in
Year
Advance Assets times) Advance Assets times)
2016/17 76394 107255 0.7122 89877 140697 0.6388
2017/18 82474 116462 0.7081 109059 169076 0.6450
2018/19 92697 133151 0.6961 127500 201138 0.6338
2019/20 101728 155884 0.6525 148054 237680 0.6229
2020/21 126048 178490 0.7061 198021 291066 0.6803
Mean 0.6950 0.6442
S.D. 0.21 0.23
C.V. (%) 30.21 35.70
(Rs in million)
Source: Annual Report of Selected Bank and Appendix-I

In the above Table 4.2, it shows that the ratio of loan and advances to total assets in
five years for HBL is 0.7122, 0.7081, 0.6961, 0.6525, and 0.7061, Similarly, the mean
is 0.6950. Whereas the ratio of NABIL is 0.6388, 0.6450, 0.6338, 0.6229 and 0.6803
respectively. The mean ratio is 0.6442. of HBL is 30.21% and NABIL is 35.70%,
which means HBL has the lowest ratio which indicates that HBL has a higher degree
of safety in terms of Loan and advance and total deposit ratio. Loan and advances to
total assets ratio of HBL is an increasing trend over the five years of the study period.

Fig
ure 4.2: Trend of Loan and Advances to Total Assets of HBL and NABIL
44
Figure 4.2 shows that the trend of loan and advances to total assets ratio of NABIL is
higher than that of HBL. But in the future the trend of NABIL is decreasing but the
trend of HBL is increasing. However, NABIL has a sound lending policy so that it is
able to mobilize its resources as loan and advances than HBL. The above figures clear
us that NABIL is a more risk-taking bank than HBL. Assets management in terms of
loan and advances of the banks are not so better but satisfactory.

C. Loan and Advances to Current Assets Ratio

Loan and advances account for the majority of total assets, indicating banks' capacity
to evaluate their deposits in the form of loan and advances to generate a high return. If
adequate loan and advances are not available, the bank will have to pay interest on the
deposit amounts it has used and may lose money
Table 4.3
Loan and Advances to Current Assets Ratio
Himalayan Bank Limited Nabil Bank Ltd.
Fiscal
Loan & Current Ratio(in Loan Current Ratio(in
Year
Advances Assets times) &Advances Assets times)
2016/17 76394 63445 0.8305 89877 77330 0.8604
2017/18 82474 74919 0.9084 109059 95743 0.8779
2018/19 92697 79219 0.8546 127500 104639 0.8207
2019/20 101728 88524 0.8702 148054 126645 0.8554
2020/21 126048 112838 0.8952 198021 164773 0.8321
Mean 0.8718 0.8493
S.D. 0.028 0.020
C.V. (%) 3.20 2.41
(Rs in million)
Source: Annual Report of Selected Bank and Appendix-II

Above table shows that the ratio of HBL for five years is 0.8305, 0.9084, 0.8546,
0.8702 and 0.8952 respectively, mean ratio is 0.8718 and that the ratio of NABIL is
0.8604, 0.8779, 0.8207, 0.8554 and 0.8321 respectively, mean ratio is 0.8493. In
overall comparison, HBL has the highest loan and advances to current assets ratio.
Similarly, the ratio of NABIL is fluctuating. HBL has a higher mean ratio than that of
HBL. Likewise, the ratios of NABIL have less variation and less consistency than
HBL. C.V. ratios also indicate that NABIL bank has a more consistent proportion of
current assets than HBL.

45
 Figure 4.3: Trend of Loan and Advances to Current Assets of HBL and NABIL

The above figure points out that the trend of loan and advances to current assets of
both HBL and NABIL are ups and downs. However, the trend of HBL is in increasing
trend while the trend of NABIL is in decreasing. From this trend, it can be said that
HBL has a sound lending policy so that it is able to mobilize its resources like loan
and advances than HBL. NABIL is also a risk-taker bank in comparison to HBL.
Assets management in terms of loan and advances of the banks are not so better but
satisfactory.

4.2 Measurement of Performance Efficiency of HBL and NABIL

The activity ratio is a metric that assesses an organization's performance efficiency
from a variety of perspectives. These ratios show how well an organization's activities
use available finances, particularly start-up funding. These ratios are used to measure
loan and advance efficiency, quality, and contribution to total profitability. The
following action assesses the bank's ability to effectively use its funds.

A. Loan Loss Provision to Total Loan and Advances Ratio

The loan loss provision reflects the increased likelihood of non-performing loan. An
increase in loan loss provision reduces earnings, resulting in a reduction in dividends.
However, it has a beneficial influence in that it supports bank financial conditions by
managing credit risk and reducing deposit hazards. The low ratio shows that the assets
in the overall amount of loan and advances are of excellent quality. In the overall
number of loan and advances, a high ratio suggests riskier assets.

46
 Table 4.4
Loan Loss Provision to Total Loan and Advances
(Rs in million)
HBL NABIL
Fiscal Total
Year Loan Loss Loan & Ratio(in Loan Loss Total Loan Ratio(in
Provision Advances times) Provision & Advances times)
835 76394 0.0109 30 89877
2016/17 0.0003
679 82474 0.0082 175 109059
2017/18 0.0016
133 92697 0.0014 405 127500
2018/19 0.0031
305 101728 0.003 856 148054
2019/20 0.0057
145 126048 0.0012 827 198021
2020/21 0.0041
Mean 0.0049 0.0030
S.D. 0.006 0.003
C.V.(%) 122.45 100
Source: Annual Report of Selected Bank and Appendix- II

Given table shows that the ratio of loan loss provision to total loan and advances ratio in
five years for HBL is 0.0109, 0.0082, 0.0014, 0.003, and 0.0012 respectively, Mean ratio
s 0.0049 and S.D. is 0.006. Similarly, the ratio of NABIL is 0.0003, 0.0016, 0.0031,
0.0057 and 0.0041 respectively, mean ratio is 0.0030. Loan loss provision to total loan
and advances ratio of HBL is fluctuating whereas HBL is in decreasing trend except in
2016/17 during the five years of the study period. Here, HBL has a higher mean ratio
than that of NABIL over the study Periods. According to C.V. calculation NABIL has
small but more consistent than that of HBL which indicates low risky assets in the total
volume of loan and advances

47
Figure 4.4: Trend of Loan Loss Provision to Loan and Advances Ratio of HBL and
NABIL

The figure presents that the trend line of loan loss provision to loan and advance ratio of
HBL is higher than that of NABIL over the period. The trend of HBL moves down from
2016/17 to 2020/21 then it moves upward up to 2016/17. However, the overall trend of
HBL is slowly decreasing. Regarding the trend of NABIL, the trend is decreasing fast.
This trend analysis shows that NABIL has a very low degree of provision over total
lending than HBL. It indicates that NABIL has a decreasing volume of non-performing
loan during the study period. The decreasing loan loss provision ratio indicates the better
performance and effective credit policy of NABIL than HBL.

B. Non-performing Loan to Total Loan and Advances ratio

All commercial banks have been ordered by the NRB to set up loan loss provisions
for a questionable and bad loan. Our worried banks, on the other hand, have not
disclosed information on non-performing loan in their balance sheets or profit and
loss accounts. The major indicator of NABIL and HBL has been used to measure the
volume of the non-performing loan in relation to total loan and advances. The
percentage of non-recovery loan in total loan and advances is represented by this
ratio.

48
 Table 4.5
Non-performing Loan to Total Loan and Advances
HBL NABIL
Fiscal Non- Total Non- Total
Year Performing Loan & Ratio(in Performing Loan & Ratio(in
Loan Advances times) Loan Advances times)
649 76394 0.0085 1175 89877
2016/17 0.0130
1154 82474 0.0139 872 109059
2017/18 0.008
1038 92697 0.0112 886 127500
2018/19 0.0069
1027 101728 0.0101 1450 148054
2019/20 0.0097
605 126048 0.0048 1663 198021
2020/21 0.0084
Mean 0.0097 0.0092
S.D. 0.01 0.009
C.V. (%) 103.09 97.82
(Rs in million)
Source: Annual Report of Selected Bank and Appendix-II
The table shows that the ratio of non-performing loan to total loan and advance ratio
in five years for HBL is 0.0085, 0.0139, 0.0112, 0.0101, and 0.0048 respectively.
Similarly, the ratio of NABIL is 0.0130, 0.0080, 0.0069, 0.0097 and 0.0084
respectively. The mean of HBL is 0.0097 and the Mean of NABIL is 0.0092
respectively, it can be said that NABIL has the lowest ratio than HBL. The banking
sector is seriously affected by non-performing loan. If non-performing loan increases,
the overall banking business will be affected. So, the provision amount will increase
and profit will decrease. So, it is suggested that HBL be very careful while granting
loan and do effective follow-up for recovery of non -performing loan.

49
Figure 4.5 : Trend of Non-performing Loan to Loan and Advances Ratio of HBL and NABIL

From the above figure, it can be said that the trend of non-performing loan to loan and
advance ratio is ups and downs but the overall trend is increasing. However, the trend
of NABIL is moving downward with a curve shape. The trend is going downward. It
shows that NABIL has the lowest ratio than HBL. If non-performing loan increases,
the overall banking business will be affected. So, the provision amount will increase
and profit will decrease. So, it is suggested that HBL be very careful while granting
loan and do effective follow-up for recovery of Non-performing Loan.

C. Loan Loss Provision to Non-performing Loan Ratio

The loan loss reserve indicates the increased likelihood of non-performing loan. An
increase in loan loss provision reduces earnings, resulting in a reduction in dividends.
However, it has a beneficial influence in that it supports bank financial conditions by
managing credit risk and reducing deposit hazards.

Because the majority of the non-performing loan have been recovered, the high
percentage suggests that the assets are of good quality. When the ratio is low, it means
that fewer non-performing loan have been recovered, resulting in an increase in the
loan loss reserve. This ratio's primary goal is to determine how much of the bank's
loan loss has been recovered.

Table 4.6
Loan Loss Provision to Non- Performing Loan
(Rs in million)

HBL NABIL
Fiscal Loan Non- Loan Non-
Year Loss Performing Ratio(in Loss Performing Ratio(in
Provision loan times) Provision loan times)
835 649 1.2865 30 1175
2016/17 0.0255
679 1154 0.5883 175 872
2017/18 0.2006
133 1038 0.1281 405 886
2018/19 0.4571
305 1027 0.2969 856 1450
2019/20 0.5903
145 605 0.2396 827 1663
2020/21 0.4972
Mean 0.5079 0.3541
S.D. 0.6475 0.4062
C.V. (%) 127.49 114.71
Source: Annual Report of Selected Bank and Appendix-II
50
Table 4.6 shows that the ratio of loan loss provision to non-performing loan ratio in
five years for HBL is 1.2865, 0.5883, 0.1281, 0.2969, and 0.2396 respectively.
Similarly, the ratio of NABIL is 0.0255, 0.2006, 0.4571, 0.5903 and 0.4972
respectively. The mean of HBL is 0.5079 and NABIL is 0.3541. C.V. of NABIL is
lowest than HBL which is 114.71% and 127.49% it indicates that NABIL manages
their loan in productive areas and reduces the non-performing loan much better than
HBL.

Figure 4.6: Trend of Loan Loss Provision to Non-performing Loan Ratio of HBL and
NABIL

From the above figure, it can be said that NABIL has the highest ratio than that of
HBL. The banking sector is seriously affected by loan loss coverage. If the non-loss
coverage ratio increases, the overall banking business will be good. So, from the
analysis, it can be said that NABIL is able to minimize its non-performing loan than
that of HBL. The trend analysis of loan loss provision to non-performing loan in
Figure 4.6 reflects that the trend of HBL is increasing but the trend of NABIL is
decreasing. However, both trends fluctuate. According to the figure, it can be said that
NABIL has the highest ratio than HBL. If the non-loss coverage ratio increases, the
overall banking business will be good. So, it is suggested that HBL be very careful
while granting loan and do effective follow-up for recovery of non-performing loan.

4.3 Evaluation of Credit Efficiency of HBL and NABIL

It establishes the link between the various assets and credit of the specific
organization to determine the effectiveness of the activity of the firm.

51
a. Interest Expenses to Total Deposit Ratio
This ratio represents the amount of total interest paid as a proportion of the entire
deposit. A high ratio suggests that the overall deposit will incur greater interest
costs. Commercial banks rely on their capacity to produce lower-cost capital. The
likelihood of generating loan and advances has shifted as a result of the less
expensive fund, and vice versa.
Table 4.7
Interest Expenses to Total Deposit Ratio
(Rs in million)
HBL NABIL
Fiscal
Interest Total Ratio(in Interest Total Ratio(in
Year
Expenses Deposit times) Expenses Deposit times)
3173 92881 0.0341 118684 0.0217
2016/17 2586
5403 98988 0.0545 134810 0.0377
2017/18 5087
6594 109387 0.0602 162953 0.0496
2018/19 8084
7357 125264 0.0587 190806 0.0496
2019/20 9479
2020/21 6582 141021 0.0466 9112 223474 0.0407
Mean 0.0508 0.0399
S.D. 0.0492 0.0396
C.V. (%) 96.85 99.25
Source: Annual Report of Selected Bank and Appendix-III
Table 4.6 shows that the ratio of interest expenses to total deposit ratio in five years of
HBL is 0.0341, 0.0545, 0.0602, 0.0587, and 0.0466 respectively. Similarly, the ratio
of NABIL is 0.0217, 0.0377, 0.0496 and 0.0407 respectively. The mean of HBL is
0.0508 and NABIL is 0.0399. C.V. of HBL is lowest than NABIL which is 96.85%
and 99.25% it indicates that HBL generates cheaper deposits than the NABIL. Interest
expenses from higher deposits lead to more profit.

52
 Figure 4.7: Trend of Interest Expenses to Total Deposit Ratio of HBL and NABIL

According to Figure 4.7, it can be confirmed that both trends of interest expenses to
deposit ratios are increasing. However, the increasing trend of NABIL is higher than
that of HBL. This analysis shows that HBL has generated cheaper deposits than
NABIL. Fewer Interest expenses from higher deposits tend to increase profit.
Commercial Banks are dependent upon their ability to generate cheaper funds. The
cheaper fund has moved the probability of generating loan and advances and vice
versa. Thus, it can be said that HBL is successful in collecting cheaper deposits than
NABIL.

B. Interest Income to Interest Expenses Ratio

The difference between the interest rates given and the interest rates paid is the
interest income to interest costs ratio. The difference between the interest paid on loan
and advances and the interest paid on deposits has been narrowed by the NRB. The
ability of a commercial bank to create credit has a significant influence on this ratio.

53
 Table 4.8
Interest Income to Interest Expenses ratio
(Rs in million)
HBL NABIL
Fiscal
Interest Interest Ratio(in Interest Interest Ratio(in
Year
Income Expenses times) Income Expenses times)
3173 2.1865 8116
2016/17 6938 2586 3.1384
5403 1.7997 11349
2017/18 9724 5087 2.2309
6594 1.7629 15243
2018/19 11625 8084 1.8855
7357 1.6552 16462
2019/20 12178 9479 1.7366
2020/21 10370 6582 1.5755 17188 9112 1.8863
Mean 1.7960 2.1756
S.D. 0.2109 0.5080
C.V. (%) 11.74 23.35
Source: Annual Report of Selected Bank and Appendix-III
Table 4.8 shows the interest income and interest expenses of HBL and NABIL. Here
the ratios of HBL are 2.1865, 1.7997, 1.7629, 1.6552, and 1.5755 respectively.
Likewise, the ratios of NABIL are 3.1384, 2.2309, 1.8855, 1.7366, and 1.8863
respectively. Interest income to interest expenses of HBL is in fluctuating trend
during the five years study period. Similarly, the ratios NABIL is in decreasing trend
over the five years period. Though the mean of HBL is higher than NABIL, the ratios
of HBL have less variation and more consistency than NABIL.

Figure 4.8 : Trend of Interest Income to Interest Expenses of HBL and NABIL

From the above figure, it can be said that the trends of interest income to interest
expenses ratio of both banks are decreasing. However, the trend of NABIL is more
decreasing than that of HBL. This analysis indicates that HBL has a higher degree of
54
gap between interest offered and interest charged than NABIL. This shows that HBL
has charged a high-interest rate to borrowers and offered low-interest rates to
depositors.

C. Interest Income from Loan, Advances, and Overdraft to Total Interest

Income Ratio
The contribution of interest from loan, advances, and overdrafts to total interest
revenue is measured by this ratio. The majority of interest revenue comes from loan
and advances. As a result, this ratio assesses how effectively banks have used their
funds, loan, advances, and overdrafts.
Table 4.9
Interest Income from Loan and Advances and Overdraft to Total Interest
Income
HBL NABIL
Interest Interest
Fiscal
from Total from Loan Total
Year
Loan & Interest Ratio(in & Interest Ratio(in
Advances Income times) Advances Income times)
2016/17 6938 3765 1.8427 8116 5529 1.4678
2017/18 9724 4321 2.2504 11349 6262 1.8123
2018/19 11625 5031 2.3106 15243 7159 2.1292
2019/20 12178 4821 2.5260 16462 6983 2.3574
2020/21 10370 3788 2.7375 17188 8075 2.1285
Mean 2.3334 1.9790
S.D. 0.2995 0.3089
C.V. (%) 12.83 .15.61
(Rs in million)
Source: Annual Report of Selected Bank and Appendix-III

The table shows the Interest Income from Loan and Advances and Overdraft to Total
Interest Income of HBL and NABIL. Ratios of HBL are 1.8427, 2.2504, 2.3106,
2.5260, and 2.7375 respectively. Similarly, the ratios of NABIL are 1.4678, 1.8123,
2.1292, 2.3574, and 2.1285 respectively. The mean of HBL is 2.3334 and NABIL is
1.9790 respectively. This ratio indicates how efficiently bank used their fund to
productive areas.

55
Figure 4.9: Interest Income from Loan and Advances and Overdraft to Total Interest
Income ratio of HBL and NABIL

The figure shows the Interest Income from Loan and Advances and Overdraft to Total
Interest Income of HBL and NABIL. According to the above table, both banks' ratios
are increasing trends. But the increasing speed of the trend of NABIL is becoming
slow while the speed of increasing trend of HBL is moving upward. From this figure,
it can be observed that NABIL has a higher interest income ratio than HBL. It means
NABIL is able to grant its credit (loan and advances) in high-interest-earning areas.
But it will be risky lending because a high-interest rate carries a high risk and a low-
interest rate carries a low risk.

4.4 Analysis of Risk Management of HBL and NABIL

The solvency ratio or capital structure ratio is used to assess an organization's risk.
These ratios show how owners and lenders contribute to the total amount of money
available. In general, while financing the firm's assets, a proper combination of debt
and owner's equity should be used. Leverage ratios are used to assess a company's
long-term financial status. This ratio reveals the firm's long-term financial health, debt
servicing capabilities, as well as its strengths and weaknesses. Under leverage ratios,
the following ratios are mentioned.

A. Debt-Asset Ratio
It calculates how much of the creditor's money the institution utilized to buy the
assets. The higher debt share reflects the institution's risk or burden. Debt is the most
hazardous and least expensive method of financing. Risky in the sense that debt

56
financing requires recurring interest payments regardless of economic conditions. The
following are the debt asset ratios of sample banks:
Table 4.10
Debt to Asset Ratio
(Rs in million)
HBL NABIL
Fiscal
Total Total Ratio(in Total Ratio(in
Year Total Debt
Debt Assets times) Assets times)
2016/17 94951 107255 0.8852 126380 140697 0.8982
2017/18 162323 116462 1.3937 148489 169076 0.8782
2018/19 117156 133151 0.8798 177950 201138 0.8847
2019/20 138295 155884 0.8871 211824 237680 0.8912
2020/21 158358 178490 0.8872 257208 291066 0.8836
Mean 0.9866 0.8872
S.D. 0.2035 0.01
C.V. (%) 20.63 1.13
Source: Annual Report of Selected Bank and Appendix-IV

The above table shows that the ratio of total debt to total assets of HBL in five years is
0.8852, 1.3937, 0.8798, 0.8871, and 0.8871 respectively. Likewise, the ratio of
NABIL in five years is 0.8982, 0.8782, 0.8847, 0.8912 and 0.8836 respectively. The
total debt to total assets ratio of HBL is in decreasing trend over the study period. But
HBL has the highest mean ratio than that of NABIL. Similarly, the ratios of HBL
have less variation and less consistency than NABIL.

Figure 4.10: Trend of Total Debt to Total Asset Ratio of HBL and NABIL

In above figure shows the trend of total debt to total assets ratio. The trend of NABIL
is more ups and downs but increasing tendency while the trend of HBL is moving

57
downward. This analysis indicates NABIL used outsider’s fund more than the
owner’s fund during the formation of capital structure. But HBL has more variation in
the ratios during the study period. It is a bad symptom for the bank.

B. Debt-Equity Ratio
The Debt Equity Ratio denotes the institution's debt-equity percentage. A high Debt
Equity Ratio suggests that the creditor is using more money and vice versa. If the
organization can earn a larger return than the cost of debt, a high Debt Equity ratio is
regarded as positive.
Table 4.11
Debt to Equity Ratio
(Rs in million)
HBL NABIL
Fiscal
Total Total Ratio(in Total Ratio(in
Year Total Debt
Debt Equity times) Equity times)
2016/17 94951 12304 7.7171 126380 14317 8.8272
2017/18 162323 15994 10.149 148489 20586 7.2131
2018/19 117156 16908 6.9290 177950 23188 7.6742
2019/20 138295 17589 7.8625 211824 25855 8.1927
2020/21 158358 20132 7.8659 257208 29858 8.6143
Mean 8.1047 8.1043
S.D. 1.0795 0.5951
13.32 4.34
C.V. (%)
Source: Annual Report of Selected Bank and Appendix-IV
Table 4.11 shows that the ratio of total debt to total equity of HBL in five years is
7.7171, 10.149, 6.9290,7.8625, and 7.8659 respectively. Likewise, the ratio of
NABIL in five years is 8.8272, 7.2131, 7.6742, 8.1927, and 8.6143 respectively. The
total debt to total equity ratio of HBL as well as of NABIL is in fluctuating trend in
each five-year study period. But HBL has the highest mean ratio than that of NABIL
during the study period. Similarly, the ratios of HBL have more variation but less
consistency than NABIL.

58
 Figure 4.11: Trend of Debt-Equity of HBL and NABIL

In above figure reported the trend of the Debt-Equity ratio of HBL and NABIL. Both
trends are decreasing. Comparing the two trends, the trend of HBL is more decreasing
than that of NABIL. From the analysis, it is eyeballed that HBL is more levered than
NABIL during the five years of the study period. Levered firms must bear more fixed
expenses than non-levered. It may result from a bad impact on the overall
performance of the bank in the long run.

4.5 Analysis of Profitability Position of HBL and NABIL

A bank's principal goal is to generate money by offering various sorts of services to
its clients. Over a period of time, profit is defined as the difference between total
income and total costs. Profit is required to survive in every company area in order for
it to continue to operate and expand. Profit is a commercial bank's ultimate output,
and if it does not produce enough profit, it will fail. As a result, the financial manager
examines the banks' profitability on a regular basis. Profitability is a measure of a
company's total efficiency. Profit reflects management's total success as evidenced by
sales and investment returns. The profitability ratios that are significant in this study
are listed below.

a. Return on Assets Ratio

Return on total assets is another name for this ratio (ROA). This ratio is a technique
for determining profitability in terms of financial resources invested in assets. Return
on such assets will be higher if the bank's operating money (total assets) is carefully
managed and utilized efficiently, and vice versa. The following table compares the
return on total assets (ROTA) ratios of two banks across the study period.
59
 Table 4.12
Return on Assets Ratio
HBL NABIL.
Fiscal
Net Total Ratio(in Net Total Ratio(in
Year
Profit Assets times) Profit Assets times)
2016/17 2178 107255 0.0203 3645 140697 0.0259
2017/18 1875 116462 0.0161 3981 169076 0.0235
2018/19 2763 133151 0.0207 4238 201138 0.0210
2019/20 2586 155884 0.0165 3463 237680 0.0145
2020/21 2998 178490 0.0168 4527 291066 0.0155
Mean 0.0181 0.0201
S.D. 0.0179 0.0202
C.V.(%) 98.89 100.50
(Rs in million)
Source: Annual Report of Selected Bank and Appendix-V

The above table shows Net Profit to Total Asset Ratio of HBL in five years is 0.0203,
0.0161, 0.0207, 0.0165, and 0.0168 respectively. Similarly, the ratios of NABIL are
0.0259, 0.0235, 0.0210, 0.0145 and 0.0201 respectively. The return on total assets
ratio of HBL is fluctuating over the five years of the study period. Similarly, the ratios
of NABIL fluctuated over the five years period. Here, NABIL has a higher mean
ratio than that of HBL during the study period. Likewise, the ratios of NABIL have
more variation and less consistency than HBL.

Figure 4.12: Trend of ROA of HBL and NABIL

60
In above figure reflects the trend of ROA of HBL and NABIL. Both trends are ups
and downs. However, the trend line of NABIL is higher than that of HBL. This trend
indicates that NABIL has a better-earning capacity than that of HBL. This ratio is a
measuring tool of profitability with respect to its financial resource’s investment of
the assets. ROA indicates how profitable investments banks have.

D. Return on Loan and Advances Ratio

This ratio assesses a commercial bank's earning capability based on its ability to
mobilize funds in the form of loan and advances. Commercial banks' net profit is
based on loan and advances. As a result, calculating the Return on Total Loan and
Advances is critical for determining the banks' financial health.

Table 4.13
Return on Loan and Advances Ratio
HBL NABIL
Fiscal
Net Loan & Ratio (in Net Loan & Ratio (in
Year
Profit Advances times) Profit Advances times)
2016/17 2178 76394 0.0285 3645 89877 0.0405
2017/18 1875 82474 0.0227 3981 109059 0.0365
2018/19 2763 92697 0.0298 4238 127500 0.0332
2019/20 2586 101728 0.0254 3463 148054 0.0233
2020/21 2998 126048 0.0237 4527 198021 0.0228
Mean 0.0260 0.0313
S.D. 0.0255 0.0311
C.V. (%) 98.08 99.36
(Rs in million)
Source: Annual Report of Selected Bank and Appendix-V

The above table shows the net profit to total loan and advances ratio of HBL in five
years is 0.0285, 0.0227, 0.0298, 0.0254, and 0.0237 respectively. Similarly, the ratios
of NABIL are 0.0405, 0.0365, 0.0332, 0.0233 and 0.0228 respectively. Return on loan
and advances ratio of HBL is in fluctuating trend over the five years of the study
period. The ratio of NABIL is also in fluctuating trend in the study period. HBL has a
higher mean ratio than that of NABIL. Similarly, the ratios of NABIL have less
variation and less consistency than HBL.

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Figure 4.13: Trend of Return on Loan and Advances of HBL and NABIL

Likewise, the Above figure reports the trend of returns on loan and advances. From
the analysis, it is clear that the return on loan and advances ratio of HBL and NABIL
is very low and also in fluctuating trend. That means, the lending policy of both banks
is not so sound and credits are not granted in profitable sectors but are satisfactory in
the present economic situation.

E. Interest Income to Loan and Advances Ratio

One of the most important sources of income for a commercial bank is interest
income from loan and advances. A high level of interest revenue indicates that
lending activities are performing well.

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 Table 4.14
Interest Income to Loan & Advances Ratio
(Rs in million)
HBL NABIL.
Fiscal
Year Interest Loan & Ratio(in Interest Loan & Ratio(in
Income Advances times) Income Advances times)
2016/17 6938 76394 0.0908 8116 89877 0.0903
2017/18 9724 82474 0.1179 11349 109059 0.1040
2018/19 11625 92697 0.1254 15243 127500 0.1195
2019/20 12178 101728 0.1197 16462 148054 0.1111
2020/21 10370 126048 0.0822 17188 198021 0.0868
Mean 0.1072 0.1023
S.D. 0.017 0.012
C.V. (%) 15.86 11.73
Source: Annual Report of Selected Bank and Appendix-III
The above table shows that the interest income to loan and advances ratio of HBL in
five years period is 0.0908, 0.1179, 0.1254, 0.1197, and 0.0822 respectively.
Likewise, the ratio of NABIL is 0.0903, 0.1040 0.1195, 0.1111 and 0.0868
respectively. The calculated mean value and C.V. of HBL are 0.1072 and 15.86
percent respectively. Similarly, the mean value and C.V. of NABIL are 0.1023, and
11.73 percent respectively. From this point of view, NABIL has the best performance
in earning interest income. Interest income to loan and advances ratio of HBL is in
decreasing trend in the five fiscal years of the study period. Similarly, HBL has a
higher mean ratio than that of NABIL. Likewise, the ratios of NABIL have less
variation and less consistency than HBL.

63
Figure 4.14: Trend of Interest Income to Loan and Advances of HBL and NABIL

The above figure represents the trend of interest income to loan and advances ratio of
HBL and NABIL. Both trends are curving shape and moving upwards. The trend line
of HBL is higher than the trend line of NABIL over the period. However, the trend of
NABIL is more increased than that of HBL in the long-term. From the figure, it is
seen that HBL has a higher interest income ratio than NABIL. But it will be risky
lending because a high-interest rate carries a high risk and a low-interest rate carries a
low risk.

4.6 Trend Analysis of Different Financial Indicators

All commercial banks have their own set of financial indicators that depict the bank's
actual financial status in various ways. From the financial summary of the previous
five years, beginning with the fiscal year 2016/17 and ending with the fiscal year
2020/21, an attempt was made to examine the evolution of several financial indicators
of the two selected banks. The trajectory of two banks is examined here, namely total
deposit, total loan and advances, and net profit of HBL and NABIL.
Table 4.15
Trend of Total Deposit of HBL and NABIL
(Rs in million)
Fiscal Year HBL NABIL
2016/17 92881 118684
2017/18 98988 134810

2018/19 109387 162953

2019/20 125264 190806

2020/21 141021 223474

Source: Annual Report of Selected Bank and Appendix-I

The above table shows the structure of total loan and advances of HBL and NABIL.
The structure of total deposit of HBL and NABIL both are increasing in every fiscal
year.

64
Figure 4.15: Trend Analysis of Total Deposit of HBL and NABIL

The above figure shows the trend of total deposits of HBL and NABIL. From the
analysis, it is clear that the total deposit of NABIL is far better than that of HBL. Here
the total deposit of NABIL is higher in comparison to HBL in the year 2016/17 to
2020/21. Even though the total deposit of HBL is in an increasing trend, it is not able
to collect the higher deposit. In the figure, it is clear that NABIL is far better than
HBL from a deposit collection point of view. As the deposit of NABIL is higher in
almost all the fiscal years.

Table 4.16
Structure of Total Loan & Advances of HBL and NABIL
(Rs in million)
Fiscal Year HBL NABIL

2016/17 76394 89877

2017/18 82474 109059

2018/19 92697 127500

2019/20 101728 148054

2020/21 126048 198021

Source: Annual Report of Selected Bank and Appendix-I
From the analysis, it is clear that the total loan and advances of both banks are
satisfactory. Loan and advances of both the banks are in increasing trend. It is clear
from the figure and we can analyze that NABIL is better at investing its loan and
advances as compared to HBL.

65
Figure 4.16: Trend Analysis of Total Loan and Advances of HBL and NABIL

66
 Table 4.17
Structure of Net Profit of HBL and NABIL
(Rs in million)
Fiscal Year HBL NABIL

2016/17 2178 3645

2017/18 1875 3981

2018/19 2763 4238

2019/20 2586 3463

2020/21 2998 4527

Source: Annual Report of Selected Bank and Appendix-V

The table shows the trend of net profit of HBL and NABIL. The trends of both banks
are ups and downs. However, the trend line of NABIL is higher than that of HBL.
Both trends are observed as an increasing tendency. From the analysis, it is clear that
the net profit of NABIL is far better than that of HBL. If we figure out the trend, the
profit of NABIL is an increasing trend which is a positive sign, and profit of HBL is
fluctuating and its profit has been decreased in the year 2017/18, which doesn’t sound
good for the bank, shareholders, board members, etc. So, we can analyze that NABIL
is able to increase the profit in all the fiscal years.

Figure 4.17: Trend of Net Profit of HBL and NABIL

The above figure represents the trend of net profit of HBL and NABIL. The ratio of
HBL of net profit is consistent in comparison to NABIL bank.

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 4.7 Correlation Analysis
In research, correlation analysis is a statistical approach for calculating the link
between two variables and measuring the strength of the linear relationship between
them. Simply defined, correlation analysis determines how much one variable
changes as a result of the change in the other. A high correlation indicates that the two
variables have a strong link, whereas a low correlation indicates that the variables are
only loosely associated. They strive to find the link, patterns, important connections,
and trends between two variables or datasets in this form of study. When a rise in one
variable causes an increase in the other, the two variables have a positive correlation.
On the other hand, a negative correlation means that when one variable increases, the
other decreases and vice-versa.

a. Correlation between Loan & Advance and Total Deposit of HBL

The independent variable is the total deposit, whereas the dependent variable is the
total loan and advances. The coefficient of correlation between total deposit and total
loan and advances indicates how closely these two variables are related. The primary
goal of calculating 'r' between these two variables is to determine if total deposits are
properly employed as total loan and advances.

Table 4.21
Correlation between Loan and Advance and Total Deposit of HBL
Year X Y X2 Y2 XY
2016/17 763.94 928.81 583604.3 862688 709555.1
2017/18 824.74 989.88 680196.1 979862.4 816393.6
2018/19 936.97 1093.87 877912.8 1196552 1024923
2019/20 1017.28 1252.64 1034859 1569107 1274286
2020/21 1260.48 1410.21 1588810 1988692 1777542
n=5 4803.41 5675.41 4765382 6596901 5602699
Source: Annual Report of Selected Bank and Appendix-VI
Correlation (r) = +0.98
The above calculation shows that there is a positive relationship between total
deposits and total loan and advances of HBL. That means, if the total deposit is
increased, the total loan and advances are also increased and vice versa. So, we can
say that there is a significantly positive relationship between total deposits and total
loan and advances of HBL. From the above analysis, we can conclude that HBL has a
positive relationship with significant between total deposits and total loan and

68
advances. The relationship is significant, i.e. loan and advances is increased as the
portion increase in deposits in relation to 0.993 and vice-versa.

Table 4.22
Correlation between Loan & Advances and Total Deposit of NABIL
(Rs in million)
2 2
Year X Y X Y XY

2016/17 898.77 1,186.84 807,788 1,408,589 1,066,696

2017/18 1,090.99 1,348.10 1,190,259 1,817,374 1,470,764
2018/19 1,275.00 1,629.53 1,625,625 2,655,368 2,077,651
2019/20 1,480.54 1,908.06 2,191,999 3,640,693 28,249,59
2020/21 1,980.21 2,234.74 3,921,232 4,994,063 4,425,254
n=5 6,725.51 8,307.27 9,736,902 14,516,087 11,865,324
Source: Appendix VII

Correlation (r) = +0.98

The above calculation shows that there is a higher positive relationship between total
deposit and total loan and advances of NABIL. That means, if the total deposit is
increased, the total loan and advances is also increased and vice versa. The coefficient
of correlation between total deposits and total loan and advances is 0.98. Hence, it can
be said that there is a positive relationship and significant at all times between total
deposit and total loan and advances of NABIL.

From the above analysis, we can come to the conclusion that NABIL has a positive
relationship between total deposits and total loan and advances. The relationship is
significant, i.e. loan and advances is increased as the portion of the increase in
deposits in relation to 0.98 and vice-versa but not significant at all.

b. Coefficient of Correlation between Total Loan and Advances and Net Profit
Net profit is a dependent variable, whereas total loan and advances are independent
variables. The primary goal of computing 'r' between these two variables is to
determine if total loan and advances are effectively employed to generate profit in a
timely manner. The value of 'r' indicates whether a change in total loan and advances
contributes to a change in net profit of the same proportion or not.

69
 Table 4.23
Correlation between Total Loan & Advances and Net Profit of HBL
(Rs in million)
2 2
Year X Y X Y XY

2016/17 763.94 21.78 583604.3 474.3684 16638.61

2017/18 824.74 18.75 680196.1 351.5625 15463.88
2018/19 936.97 27.63 877912.8 763.4169 25888.48
2019/20 1017.28 25.86 1034859 668.7396 26306.86
2020/21 1260.48 29.98 1588810 898.8004 37789.19
n=5 4803.41 124 4765382 3156.888 122087
Source: Appendix VIII Correlation (r) = +0.84

The above calculation shows that there is no relationship between total loan and
advances and the net profits of HBL. That means, if the total loan and advances are
increased, the net profit is not increased in the same ratio and vice versa. The
coefficient of correlation between total loan and advances and net profit is 0.84. From
the above analysis, we can conclude that HBL has no relationship between total loan
and advances and net profit.

Table 4.24
Correlation between Total Loan & Advances and Net Profit of NABIL
(Rs in million)
2 2
Year X Y X Y XY
2016/17 898.77 1186.84 807787.5 1408589 1066696
2017/18 1090.99 1348.1 1190259 1817374 1470764
2018/19 1275 1629.53 1625625 2655368 2077651
2019/20 1480.54 1908.06 2191999 3640693 2824959
2020/21 1980.21 2234.74 3921232 4994063 4425254
n=5 6725.51 8307.27 9736902 14516087 11865324
Source: Appendix IX

Correlation (r) = +0.57

The above calculation shows that there is a positive relationship between total loan
and advances and net profit of NABIL. That means, if the total loan and advances are
increased, the net profit is also increased and vice versa. The coefficient of correlation
between total loan and advances and net profit is 0.57. Therefore, we can say that
there is a positive relationship between total loan and advances and net profit.

70
 4.8 Major Findings
The following are the major results based on the data presentation, interpretation, and
analysis:

 During the research period, HBL had a larger loan and advances to total deposit ratio
than NABIL. Similarly, NABIL has less volatility and stability in its ratios than HBL.
Based on the findings, it can be concluded that NABIL is in better shape than HBL in
terms of deposit mobilization. It also suggests that NABIL is investing more of its
funds in high-return, low-risk sectors than HBL. CV of NABIL bank and HBL is
20% and 15.48% respectively.

In comparison to NABIL, HBL has the greatest average loan and advances to total
assets ratio. Similarly, HBL has less volatility and stability in its ratios than NABIL.
According to the findings, HBL has a sound and superior lending policy and is better
able to deploy its resources as loan and advances than NABIL. However, both banks'
asset management in terms of loan and advances is not superior, since their total
assets are less than half of their total assets. The CV ratio of both HBL and NABIL
banks is 30.21 and 35.70 respectively.

 The loan and advances to current assets ratio of HBL is larger than that of NABIL.
HBL is able to appropriately utilize loan and advances in relation to current assets
since it has the greatest mean ratio. In comparison to HBL, NABIL appeared to be
less effective in using the loan and advances. The mean of HBL is 0.8718 and NABIL
has 0.8493.

HBL has a higher mean (0.0049) of loan loss provision to loan and advances ratio
than that of NABIL (0.0030) over the study period. From the analysis, we can come to
the conclusion that NABIL has a lower degree of provision over total lending than
HBL. It indicates that NABIL has a decreasing volume of non-performing loan during
the study period than HBL.

 As compared to HBL, NABIL has a lower non-performing loan to loan and advance
ratio. The ratios of both banks are shifting. However, HBL ratios are greater than
NABIL ratios. An increase in a non-performing loan is bad for both banks since it

71
 raises the provision and lowers earnings. The mean of HBL is 0.0097 and the mean of
NABIL is 0.0092.

NABIL has a greater loan loss coverage ratio than HBL. It means that the majority of
NABIL non-performing loan have been recovered. The fact that the loan loss
coverage ratio is increasing suggests that the entire banking industry is doing well and
is trending in the right way.

 NABIL has a higher degree of gap between interest offered and interest charged than
HBL. It indicates that NABIL has charged a high-interest rate to borrowers and has
offered a low-interest rate to depositors. These ratios also indicate that NABIL is able
to get more profit than HBL from funds mobilizations.

NABIL 's interest income to total income ratio was determined to be greater than
HBL's. The higher the NABIL ratio, the more reliant it is on fund-based operations.
The interest from loan and advances to total interest income ratio of NABIL was
found to be greater than that of HBL, showing that NABIL is capable of mobilizing
loan and advances to generate interest. NABIL has 2.1756 and HBL has 1.7960
respectively.

 In comparison to HBL, NABIL earns more interest from loan, advances, and
overdrafts. Despite the fact that both banks' ratios are growing, NABIL 's are the
highest. It shows that NABIL is offering credit (loan, advances, and overdrafts) in a
high-interest-earning sector, indicating that it is a dangerous lending firm.HBL has a
higher mean of total debt to total assets ratio than that of NABIL. But the ratios of
HBL have less variation and less consistency than NABIL. From the above analysis,
we come to the conclusion that NABIL used outsider’s funds more than the owner’s
fund during the formation of capital structure.

During the investigation, HBL had a greater mean total debt to total equity ratio than
NABIL. Similarly, HBL's ratios vary more but are more consistent than NABIL 's.
We may conclude from the data that HBL is more levered than NABIL across the
five-year research period. Levered companies must incur higher fixed costs than non-
levered companies. It may have a negative influence on the bank's overall
performance in the long run. The mean of debt to total ratio of HBL and NABIL are
8.1047 and 8.1043 respectively.
72
 During the investigation, NABIL had a greater mean net profit to total assets ratio
than HBL. Similarly, NABIL ratios are more variable and inconsistent than HBL
ratios. Based on the data, we can conclude that NABIL has a higher earning capability
than HBL. Even though HBL and NABIL seem to earn the interest on the total
working fund, NABIL is successful in earning the higher interest whereas HBL is able
to maintain the consistency in earning. NABIL failed to maintain consistency in
earning the interest as compared to HBL. The net profit to total assets ratio of HBL
and NABIL are 0.018 and 0.201 respectively.

In comparison to NABIL, HBL appeared to be effective in obtaining its working

capital from less expensive sources. Despite the fact that NABIL has a greater interest
expenditure, they are effective in preserving interest expense stability. The interest
paid by HBL is consistent.

In comparison to HBL, NABIL has the greatest mean net profit to loan and advances
ratio. The HBL ratio fluctuates more than the NABIL ratio. Based on the findings, we
can conclude that NABIL and HBL's return on loan and advances ratios are both low
and volatile. That is to say, both banks' lending policies do not appear to be excellent,
and credits are not issued in profitable industries, but they are acceptable in the
current economic climate ( HBL 0.260 and NABIL 0.0313 respectively).

 The interest revenue to loan and advances ratio of HBL is larger than that of NABIL.
Similarly, the HBL ratios are more variable and inconsistent than the NABIL ratios.
According to the investigation, HBL is competent to provide credit (loan and
advances) in a high-interest-earning market (HBL has 0.1072 and NABIL has 0.1023
respectively).

HBL has a strong positive relationship between the loan and advance amounts and
total deposits. The link is considerable, i.e., loan and advances grow as a percentage
of deposit growth in proportion to 0.98, and vice versa.

 There is a strong positive association between loan and advance amounts and total
deposits at NABIL. The link is substantial, i.e., loan and advances rise as a percentage
of deposit growth in proportion to 0.98, and vice versa, and it is not significant at
all.HBL has a high positive level of correlation between loan & advance and net

73
profit. The relationship is significant, i.e. profit is increased as the portion of the
increase in loan and advances in relation to 0.84.

There is a moderate positive association between loan and advance and net profit at
NABIL. The association is substantial, indicating that profit increases as a percentage
of increasing loan and advances in proportion to 0.57, and vice versa.

74
 CHAPTER V
SUMMARY, CONCLUSION, AND RECOMMENDATIONS

5.1 Summary
This is the final chapter of the research study, and it contains a summary of the whole
study as well as excerpts from all of the other chapters. This chapter is divided into
three sections: a summary, a conclusion, and a suggestion. In the summary section, all
four chapters (Introduction, Literature Review, Research Methodology, and Data
Analysis) are revised. Following the analysis section and comparing the theoretical
and analytical aspects, a conclusion is drawn. The conclusion section clarifies if the
theory is applicable in practice. In the recommendation section, required ideas are
offered based on the conclusion, i.e. various methods are advised to the concerned
company for improving the current state of the interest rate structure.

The current study is quite effective in meeting the study's stated objectives. The
researcher emphasizes the significance of the research paper and achieves the
objectives through a series of actions.

The study's fundamental assumption is addressed in the first chapter. Essentially, it

emphasizes the study's principle and value or significance. It also discusses research
difficulties, research challenges, the study's core aims, the study's logic, the study's
limitations, the study's procedure, and the study's introduction. Finally, it explains the
study's organizational framework.

The second chapter provides information about the development and progress made
by previous researchers in the subject or topic of study. It is beneficial to be aware of
their research endeavors. It also attempts to comprehend some of the concepts
employed in this research. Furthermore, it summarizes the past findings of the study
in order to offer information about the basis of their work and to avoid duplication of
earlier work. Finally, previous worldwide research on the idea is reviewed in order to
assess the study's findings.

The third chapter of this research goes through the various research approaches that
were employed for the investigation. Generally speaking, research methodology refers
to the study design, data sources, population and sample of data, data gathering

75
procedure, data collection techniques, data collection methods, instruments and
techniques used, and so on.

The fourth chapter of the research is concerned with data presentation and analysis. It
initially provides the generated data in tabular form and then analyzes it methodically
in accordance with the aforementioned objectives. The researcher attempts to examine
the bank's comparable financial situation or position in terms of credit practices, the
bank's comparative industrial environment in terms of credit, and the bank's
comparative management quality in terms of credit.

Finally, the fifth chapter discusses the conclusion and summary, as well as several
ideas. It draws a conclusion from the study's findings and explains the research
paper's summary. Furthermore, it offers numerous ideas for future improvement for
the selected banks.

5.2 Conclusion
The following conclusion has been reached based on the study's findings.
During the research period, HBL had a larger mean loan and advances to total deposit
ratio than NABIL. Similarly, NABIL ratios exhibit less fluctuation and stability than
HBL ratios. It also shows that NABIL invests more of its gathered funds in high-
return, low-risk sectors than HBL.

HBL has a strong and superior lending policy than NABIL and is able to utilize its
resources as loan and advances. However, both banks' asset management in terms of
loan and advances is not superior because they account for less than half of total
assets. HBL has the greatest mean ratio, indicating that it can appropriately utilize
loan and advances in relation to current assets. In comparison to HBL, NABIL
appeared to be less effective in using loan and advances. NABIL has a lower
provision-to-total-lending ratio than HBL. It suggests that NABIL had a lower volume
of non-performing loan than HBL throughout the research period.

An increase in non-performing loan is bad for both banks since it raises the provision
and reduces earnings. It implies that the majority of NABIL 's non-performing loan
have been recovered. An increase in the loan loss coverage ratio implies that the
entire banking industry is doing well and is trending in the right way.

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In comparison to NABIL, the ratio of interest expenditures to total deposit for HBL
was determined to be considerably greater. This means that NABIL is able to collect a
lower deposit than HBL. Less interest expenditure from a larger deposit tends to boost
earnings. The lower-cost fund has shifted the likelihood of producing loan and
advances and vice versa. NABIL has charged borrowers hefty interest rates while
offering savers modest interest rates. This ratio also implies that NABIL is able to
earn a higher profit from fund mobilization than HBL.

When compared to NABIL, HBL's interest expenses to total deposit ratio was found
to be much higher. As a result, NABIL can collect a lesser deposit than HBL. Less
interest expense from a greater deposit boosts earnings. The lower-cost fund has
changed the probability of providing loan and advances, and vice versa. Borrowers
have been charged high-interest rates, while savers have received low-interest rates.
This ratio also suggests that NABIL may generate a bigger return from fund
mobilization than HBL.

NABIL earns more interest on loan, advances, and overdrafts than HBL. Despite the
fact that both banks' ratios are growing, NABIL 's ratios are the highest. It shows that
NABIL is giving credit (loan, advances, and overdrafts) in a high interest generating
sector, indicating that it is a dangerous lending firm.

HBL has a higher mean total debt to total assets ratio than NABIL. However, HBL
ratios vary less and are less consistent than NABIL ratios. Based on the study, we
conclude that NABIL utilized outsider's funds more than owner's funds while forming
its capital structure.

HBL has a higher mean of total debt to total equity ratio than that of NABIL during
the research. Similarly, the ratios of HBL have more variation but more consistency
than NABIL. From the analysis, we can say that HBL is more levered than NABIL
during the five years of the study period. The levered firm must bear more fixed
expenses than non-levered. It may result from a bad impact on the overall
performance of the bank in the long run.

During the investigation, NABIL had a greater mean net profit to total assets ratio
than HBL. Similarly, NABIL ratios are more variable and less consistent than HBL

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ratios. Based on the data, we can conclude that NABIL has a higher earning capability
than HBL.

Despite the fact that both HBL and NABIL appear to earn interest on total operating
funds, NABIL is effective in earning more interest while HBL is able to maintain
consistency in earning. In comparison to HBL, NABIL failed to maintain consistency
in generating interest.HBL seemed to be successful in collecting its working fund
from less expensive sources in comparison to NABIL. Even though NABIL has a
higher interest expense, they are successful in maintaining stability on expenses of
interest. HBL has consistency in interest paid.

n compared to HBL, NABIL has the greatest mean net profit to loan and advances
ratio. The HBL ratio has more changing ratios than the NABIL ratio. Based on the
data, we can conclude that the return on loan and advances ratio of NABIL and HBL
is relatively low and variable. That is, both banks' lending policies do not sound well,
and credits are not issued in profitable areas that are desirable in the current economic
scenario.

HBL has a greater mean interest income-to-loan-and-advance ratio than NABIL.

Similarly, the ratios from the research indicate that HBL is able to extend credit (loan
and advances) in high-interest-generating areas.

HBL has a strong positive relationship between loan and advance and total deposit.
NABIL has a strong positive relationship between loan and advance and total deposit.
NABIL has a moderately favorable relationship between loan and advance and net
profit.

5.3 Recommendations
The current study might be a useful piece of research work in the field of credit
management. It investigates the current situation and analyzes the various components
for future credit management improvement. The study's findings may be useful for
people who are directly or indirectly associated with the credit policies of joint
venture commercial banks (with respect to HBL and NABIL). On the basis of the
study's analysis and findings, the following recommendations are made.

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 According to the analysis, HBL's asset management ratios are comparatively
better than HBL's during the study period. It is recommended that HBL has to
enhance its management in order to improve its performance. Similarly, NABIL
earns more interest on loan and advances. Loan and advances are the primary
sources of revenue. As a result, the right level of a portfolio should be maintained
in order to enhance profitability.

 Similarly, compared to NABIL, HBL had a lower amount of non-performing

loan during the research period. To reduce its non-performing loan and loan loss
provision, NABIL's credit management must implement policies such as fast
detection of late loan, immediate contact with borrowers, and continuous follow-
up until the loan is recovered.
 It is observed that the ratios of non-performing loan on HBL are very high.
The non-performing loan significantly impacts the banking system. If the number
of non-performing loan rises, it will have an impact on the banking industry as a
whole. As a result, the provision amount will rise while profit falls. Thus, HBL is
advised to exercise extreme caution when providing loan and to follow up
effectively on non-performing loan.

 The credit efficiency measurement yields contradictory results for the HBL
and NABIL yet, in an overall comparison of credit practice and credit efficiency
ratio, the NABIL was determined to be superior to the HBL since the majority of
the ratios developed for the study supported the NABIL. As a result, HBL’s
management is advised to improve. The research demonstrates that NABIL has a
good ratio of interest from loan and advances to total interest revenue. This
indicates that NABIL is successful in generating interest and increasing interest
turnovers. As a result, it is proposed that HBL be strong in mobilizing loan,
advance, and overdraft funds in order to earn more interest and prevent bad
interest turnover.
 The bank should monitor credit clients on a regular basis to ensure that they
have used their credit for the same reason that they agreed to when they took
credit from the bank.
 NABIL paid greater interest than HBL, implying that they utilized more
creditors' cash or paid a higher interest rate on investment. As a result, they must
employ equity funds rather than debt or pay lower interest rates. Because their
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 interest rate fluctuates so often, NABIL should maintain consistency in its
payment of interest.
 Profit is essential to the success of every firm. Profit is essential for the bank's
survival. As a result, they should have profit maximization in mind. However, in
the long run, the bank should be concerned with maximizing shareholder wealth
because they are the bank's investors.

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