Sei sulla pagina 1di 94

CREDIT MANAGEMENT OF SIDDHARTHA

DEVELOPMENT BANK LIMITED

Submitted by
Shiva Raj Khanal
Shanker Dev Campus
Campus Roll No.: 502/064
T.U. Regd. No.: 7-2-39-4-2002
Symbol No.: 390809/066

Submitted to
Office of the Dean
Faculty of Management
Tribhuvan University

In partial fulfillment of the requirement for the degree of


Master of Business Studies

Kathmandu, Nepal
February, 2014

RECOMMENDATION

This is to certify that the thesis

Submitted by:
Shiva Raj Khanal

Entitled
CREDIT MANAGEMENT OF SIDDHARTHA DEVELOPMENT BANK
LIMITED
has been prepared as approved by this Department in the prescribed format of
the Faculty of Management. This thesis work is forwarded for examination.
...
Mr. Kapil Khanal
(Thesis Supervisor)

....

...

Prof. Dr. Kamal Deep Dhakal Asso.Prof. Prakash Singh Pradhan


Chairperson, Research Committee

Date: .

Property of Shanker Dev Campus Library 2

(Campus Chief)

VIVA-VOCE SHEET

We have conducted the viva-voce of the thesis presented


by
Shiva Raj Khanal
Entitled:
CREDIT MANAGEMENT OF SIDDHARTHA DEVELOPMENT BANK
LIMITED
And found the thesis to be the original work of the student and written
according to the prescribed format. We recommend the thesis to be accepted as
partial fulfillment of the requirement for the
Degree of Masters in Business studies (M.B.S.)

Viva-Voce Committee

Head, Research Committee

..

Member (Thesis Supervisor)

..

Member (External Expert)

..

Date: ..

Property of Shanker Dev Campus Library 3

DECLARATION

I hereby declare that the work reported in this thesis entitled Credit
Management of Siddhartha Development Bank Limited submitted to
Office of the Dean, Faculty of Management, Tribhuvan University, is my
original work done in the form of partial fulfillment of the requirement for the
degree of Master of Business Studies (MBS) under the supervision of Mr.
Kapil Khanal, Lecturer of Shanker Dev Campus.

.
Shiva Raj Khanal
Campus Roll No.: 502/064
Shanker Dev Campus

Property of Shanker Dev Campus Library 4

ACKNOWLEDGEMENTS

This thesis entitled Credit Management of Siddhartha Development Bank


Limited has been a matter of great pleasure for me to complete this thesis
work under the supervision and constructive guidance of respected advisor Mr.
Kapil Khanal, Lecturer of Shanker Dev Campus. He helped me in providing all
sorts of guidelines, constructive, critical and analytical support in order to
complete this thesis work in the form as required by the faculty of
management, Shanker Dev Campus and Tribhuvan University for the partial
fulfillment-Degree of Master in Business Studies (MBS).
I would like to extend my profound gratitude to all honorable teachers of
Shanker Dev Campus, staffs of library and administration of the campus and all
my colleagues who helped me directly and indirectly for the completion of this
thesis work.
I would like to extend my appreciation to the staffs of concerned companies
who provided me the necessary data and information.
I must also acknowledge to Central library of TU, for providing required
books, journals and articles.
Finally, I would like to extend my heartily thanks to all the members of my
family and relatives who inspired me in many ways to cope during the entire
period of the study.

Shiva Raj Khanal


February, 2014

Property of Shanker Dev Campus Library 5

TABLE OF CONTENTS

Page No.
Recommendation

Viva-Voce Sheet

ii

Declaration

iii

Acknowledgements

iv

Table of Contents

List of Tables

viii

List of Figures

ix

Abbreviations

CHAPTER-I: INTRODUCTION

1.1 Background of the Study

12

1.2 Statement of the Problem

15

1.3 Objectives of the Study

17

1.4 Significance of the Study

17

1.5 Limitations of the Study

18

1.6 Organization of the Study

18

CHAPTER-II: REVIEW OF LITERATURE


2.1 Theoretical Review
2.1.1 Concept of Credit
2.1.1.1 Types of Credit

9
20
21
21

2.1.2 Credit Management

24

2.1.3 Credit Risk Appraisal

28

2.1.4 Credit Policy of Bank

28

2.1.5 Factors Affecting Credit Policy of Banks

31

2.1.6 Review of Nepal Rastra Bank Directives

32

2.2 Review of Articles

33

2.3 Research Gap

39

Property of Shanker Dev Campus Library 6

CHAPTER -III: RESEARCH METHODOLOGY

29

3.1 Research Design

40

3.2 Population and Sampling

40

3.3 Nature and Sources of Data

41

3.5 Data Analysis Tools

41

3.5.1 Financial Tools

42

3.5.2 Statistical Tools

44

CHAPTER FOUR: DATA PRESENTATION AND ANAYLSIS

37

4.1 Analysis of Secondary Data

48

4.1.1 Deposits of SDBL

48

4.1.2 Deposit Composition of SDBL

50

4.1.3 Trend of Deposit Collection

52

4.1.4 Loans and Advances of SDBL

53

4.1.5 Trend of Loan and Advances

54

4.1.6 Loan and Advances to the Deposit Collection

55

4.1.7 Percentage Change in Deposit Collection and Loan and Advances 56


4.1.8 Coefficient of Correlation between Deposit Collection and Loan
Disbursement

57

4.1.9 Analysis of Profitability Ratios

58

4.1.10 Analysis of Liquidity Ratio:

61

4.1.11 Analysis of Non-Performing Loan

65

4.1.12 Sector-Wise Loan

66

4.1.13 Analysis of Capital Adequacy

67

4.1.14 Relationship of Total Lending and Total Deposit to Profitability

68

4.2 Analysis of Primary Data

69

4.2.1 Knowledge of Directives Issued by NRB Related to Credit Policy 69


4.2.2 Implementation of NRB Directives Related to Credit Policy

70

4.2.3 Using Credit Analysis before Approval of Any Loan Proposal

70

4.2.4 Visiting the Project Site at the Time of Granting Loan

71

4.2.5 Maintaining Right Level of Liquidity

72

Property of Shanker Dev Campus Library 7

4.2.6 Practices of Credit Policy in Good Way

73

4.2.7 Arising Credit Related Problems

74

4.2.8 Types of Credit Related Problems Faced

74

4.2.9 Reviewing the Loans and Advances on Periodic Basis

75

4.2.10 Period of Reviewing Loans and Advances

75

4.2.11 Maintaining Sufficient Provision for Loan Losses

76

4.2.12 Percent of Loan Loss Provision

77

4.2.13 Relation between Credit Position and Profitability

77

4.3 Major Findings of the Study

78

CHAPTER V: SUMMARY, CONCLUSION AND


RECOMMENDATIONS

70

5.1 Summary

81

5.2 Conclusion

83

5.3 Recommendations

84

BIBLIOGRAPHY

86

APPENDICES

vii

Property of Shanker Dev Campus Library 8

LIST OF TABLES
Table No. 4.1: Deposits Collection by SDBL

Page No.
49

Table No. 4.2: Deposit Composition

50

Table No. 4.3: Loans and Advances of SDBL


Table No. 4.4: Loan Disbursed to the Deposit Collection

53
55

Table No. 4.5: Deposit Collection and Loan and Advances


57
Table No. 4.7: Coefficient of Correlation between Deposit Collection and Loan
Disbursement
Table No. 4.8: Analysis of Net Interest to Total Assets
Table No. 4.9: Net Profit to Total Assets Ratio
Table No. 4.10: Return on Equity Capital

58
59
59
60

Table No. 4.11: Analysis of Current Ratio

61

Table No. 4.12: Cash and Bank Balance to Total Deposit


Table No. 4.13: Cash and Bank Balances to Current Assets

62
63

Table No. 4.14: Loans and Advances to Current Assets


Table No. 4.15: Non-Performing Loan to Total Loan

64
65

Table No. 4.16: Analysis of Sector-wise Loan


Table No. 4.17: Capital Adequacy Ratio

66
67

Table No. 4.18: Total Amount of Net Profit, Deposit and Lending
Table No. 4.18: Relationship between Lending and Deposit to profitability

68
68

Table No. 4.19: Knowledge of Directives Issued by NRB Related to Credit


Policy
69
Table No. 4.20: Implementation of NRB Directives Related to Credit Policy 70
Table No. 4.21: Using Credit Analysis before Approval of Any Loan Proposal
70
Table No. 4.22: Visiting the Project Site at the Time of Granting Loan
Table No. 4.23: Maintaining Right Level of Liquidity
Table No. 4.24: Practices of Credit Policy in Good Way
Table No. 4.25: Arising Credit Related Problems

71
72
73
74

Table No. 4.26: Reviewing the Loans and Advances on Periodic Basis
Table No. 4.27: Period of Reviewing Loans and Advances

75
75

Table No. 4.28: Maintaining Sufficient Provision for Loan Loses

76

Table No. 4.29: Relation between Credit Position and Profitability

77

Property of Shanker Dev Campus Library 9

LIST OF FIGURES

Page No.
Figure No.4.1: Deposit Collection of SDBL

49

Figure No. 4.2: Deposit Composition of SDBL

52

Figure No. 4.3: Trend of Deposit Collection

52

Figure No. 4.4: Loan and Advances of SDBL

54

Figure No. 4.5: Trend of Loan and Advances

54

Figure No. 4.6: Loan Disbursement to Deposit Collection

56

Figure No. 4.7: Knowledge of Directives Issued by NRB Related to Credit


Policy

69

Figure No. 4.9: Using Credit Analysis before Approval of Any Loan Proposal
71
Figure No. 4.10: Visiting the Project Site at the Time of Granting Loan

72

Figure No. 4.11: Practices of Credit Policy in Good Way

73

Figure No. 4.11: Arising Credit Related Problems

74

Figure No. 4.13: Period of Reviewing Loans and Advances

76

Figure No. 4.14: Relation between Credit Position and Profitability

77

Property of Shanker Dev Campus Library 10

ABBREVIATIONS
A.D.

Anno Domini

A.M.

Arithmetic Mean

B.S.

Bikram Sambat

BOK

Bank of Kathmandu

C.V.

Coefficient of Variation

EPS

Earning Per Share

F/Y

Fiscal Year

G.M

General Manager

Ktm.

Kathmandu

Ltd.

Limited

M.

Million

MBS

Master of Business Studies

NBL

Nepal Bank Limited

NIBL

Nepal Investment Bank Limited

No.

Number

NPA

Non-Performing Assets

NPL

Non-Performing Loan

NRB

Nepal Rastra Bank

P.E

Probable Error

Pvt.

Private

Coefficient of Correlation

ROE

Return on Equity

Rs.

Rupees

S.E

Standard Error

T. U.

Tribhuvan University

Property of Shanker Dev Campus Library 11

CHAPTER-I
INTRODUCTION
1.1 Background of the Study
The prosperity of every developing country can be insured by its economic
growth. Different profit and non-profit institutions are to be established for
economic growth, for which the source of finance is very essential. Profit
oriented institutions usually obtain these sources through ownership capital,
public capital through the issues of shares and through financial institutions
such as banks, in the form of credits, overdrafts etc.
Financial institutions are the backbone of the economic development of any
country. A small financial institution is a vital contributor to the financial
health of the national economy. The financial institutions are often fragile and
susceptible to failure because of poor management, particularly in financial
management. National development of any country depends upon the economic
development of that country and economic development is supported by
financial in institution of that country. Financial infrastructure indicates the
financial strength, position and environment of the institutions. The various
branches of bank in towns and villages are offering various types of services. In
past, they just used to accept deposits from the savers of money (surplus units
of the society) and give loan to the users of money (deficit units of the society).
Savers of the money are those units whose earning exceeds expenditure on real
assets and user of money is those units whose expenditure on real assets
exceeds their earnings.
Any institution offering deposits subjects to withdrawal on demand and making
loans of a commercial or business nature is a bank. Banks constitute an
important segment of financial infrastructure of any country. Bank came into
existence mainly with the objective of collecting the idle fund, and mobilizing
them to productive sector causing overall economic development. A bank is the
financial departmental store, which render various financial services besides
taking deposits and lending loans. Bank is the financial institution, which deals

Property of Shanker Dev Campus Library 12

with money by accepting various types of financial services. In the modern


economy, banks are to be not as the dealer of money but as the lender of the
economic development. Banks are not just the storehouse of the country's
wealth but also are to mobilize of the resources necessary for the economic
development (Shrestha, 2009/10:2).
Banking is one of the most heavily regulated business in the world (Vaidhya,
1999: 5). Banks are among the most important financial institutions in the
economy. They are the principal source of credit (loan-able funds) for millions
of individuals and families and for many units of government. Moreover, bank
often act as a major source of credit to small local business ranging from
grocery stores to automobile dealers for their stock. Banks are among the most
important sources of short term working capital for business and have become
increasingly active in recent years in making long-term business loans for new
plant and equipment (Shekhar & Shekhar, 1999: 6).
Banks are such financial institutions that offer the widest range of financial
services especially credit, savings payment services and perform the widest
range of financial functions of any business firm in the economy. The most
important function are; lending and investing money (the credit function),
making payments on behalf of customers for their purchase of goods and
services (the payment function), managing financial assets and real property for
customers in investing and raising funds (through the brokerage, investment
banking and saving functions) (Vaidhya, 1999: 5).
Lending is the most important function of a commercial bank. For lending
procedure, bank has to make some banking practices such as transferring
property in banks name. The transfer is temporarily made for a loan price &
interest. Lending money is nowadays becoming main resources of revenge to
the bank and it also involves high risk. Bank will not provide loan unless it has
sufficient sources to the borrower that will be needed in case of future
recovery.

Property of Shanker Dev Campus Library 13

Today no banker can survive for long run without proper standing of economy
and no place ahead without proper banking system. Moreover, the ability of
banks is to gather and analyze financial information that has given rise to
another view of why banks exist in modern society. Most borrowers and
depositors prefer to keep their financial records confidentially, especially, from
competitors. Banks are able to fulfill this need by offering high liquidity in the
deposits they sell. More people believe that banks play only narrow role in the
country, taking deposits and making loans. The modern bank has to adopt new
roles in order to remain competitive and responsive to public needs (NRB,
Smarika, 2010/11/11: 41).
Banks are expected to support their local communities with an adequate supply
of credit for all legitimate business and customer needs to price that credit
reasonably in line with competitively determined interest rates. Bank loan
support the growth of new business and jobs within the banks trade territory
and promote economic vitality. Banks make a wide variety of loans to a wide
variety of customers for many different purposes from purchasing automobiles,
and buying new furniture, taking dream vacation or purchasing college
education, to constructing home and office buildings.
Going through loan granting provision, bank will through safety of funds,
purpose of loans, security for loans, profitability spread of loan portfolio etc.
besides this, the character of person receiving credit, the capacity of borrower
to utilize the fund, the percentage of borrower stake in the business are the
basic elements which measures the quality of borrower and ultimately the
quantity of the loan.
In this way bank plays an important part in the development of trade,
commerce and industry. Today no bankers can survive for long run without
proper standing of economy and economy cannot pace ahead without proper
banking system built.

Property of Shanker Dev Campus Library 14

In this way, Nepalese banking has stepped a great stride in its development.
However, Nepalese banking has not been succeeded in bringing change in the
economy in society and with people. The large portion of national economy is
still behind the touch of present banking system. The unorganized moneylender
has been playing a monopoly role in granting the loan to public of remote
economy and this monopoly results in excessively higher interest rate than that
of institutional banker. Thus, the moneylenders are still exploiting the public of
rural sector in the absence of easy access to banking activities. Increasing the
number of financial institutions has not proportionately increased the total
banking behavior of people. This is because most of the financial institutions
are situated in the urban area and rural economy has not been touched by this
change in financial sector. Hence, in conclusion it can be summarized that the
technical and quantitative development of the financial sector is found
satisfactory but its qualitative impact on overall economy cannot be considered
utmost.
For most banks, loans are the largest and most obvious source of credit risk,
however other sources of credit risk exist throughout the activities of a bank,
including in the banking book and in the trading book, and both on and off the
balance sheet. Banks are increasingly facing credit risk in various financial
instruments other than loans, including acceptances, inter bank transactions,
trade financing, foreign exchange transactions, financial futures, swaps, bonds,
equities, options, and in the extension of commitments and guarantees and the
settlement of transactions.
1.2 Statement of the Problem
Banks in Nepal have been facing various challenges and problems. Some of
them arising due to the economic condition of the country, some of them
arising due to confused policy of government and many of them arising due to
default borrowers. After liberalization of economy, banking sector has various
opportunities.

Property of Shanker Dev Campus Library 15

However, the financial institutions are increasing regularly. Liquidity is


maximum with the financial institutions. Hence, the banks and financial
institutions are competing among themselves to advance credit to limited
opportunity sectors. Banks and financial institutions are investing in house
loan, hire purchase loan for safety purpose. Lack of good lending opportunities,
banks are facing problems of over liquidity. Nowadays, banks have increasing
number of deposits in fixed and saving accounts but have decreasing trend in
lending behaviors. So, this has caused major problems in commercial banks.
Nowadays, due to competition among banks, the interest rate charge for loan is
in decreasing trend. Due to unhealthy competition among banks, the recovery
of the banks credit is going towards negative trends. Non-performing credits
of the banks are increasing year by year. To control such type of state, the
regulatory body of the banks and financial institutions, NRB has renewed its
directives of the credit loss provision. Therefore, it is necessary to analyze the
credit management or credit disbursement recovery provision for loss and
write off of credit. As the sample of commercial banks, have been selected.
Credit is the most effective and sincere area in banks. It is regarded as the heart
of every bank. But the banking sector is far from this fact. Thus, Credit
management is considered as the heart issues in Nepalese banking sector.
Nepalese banks are lacking scientific and imperial research that could identify
the issues of credit management. Banks and financial institutions are investing
in house loan, hire purchase loan for safe purpose. Due to lack of good lending
opportunities, banks appear to be facing problem of excess liquidity. Due to
unhealthy competition among the banks, the interest rate for the loan is in
decreasing trend and the recovery of the banks credit is going towards negative
trends. In this regard, the performance of Nepalese banks is to be analyzed in
terms of their credit. Some research questions regarding to the credit practices,
credit efficiencies, liquidity position, industrial environment, management
quality, organization climate are considered as a clear evident in present
situation. Thus to know the problems faced by Nepalese banks related to the

Property of Shanker Dev Campus Library 16

investment, Siddhartha Development Bank Limited is selected for study and


the specific research questions regarding credit management in SDBL are
identified as follows:
What is the trend in the deposit collection of SDBL?
How does the SDBL disburse loan and recover their loan?
What is the position of deposit collection and lending?
Is there any relationship between loan disbursement and principal
collection?
1.3 Objectives of the Study
The main objective of this study is to have true insight of the credit
management of SDBL. Beside this, following are the specific objectives:
To analyze the trends of deposit collection and credit lending.
To measure to relationship between profitability and credit management
of SDBL.
To analyze the performance of SDBL in terms of liquidity, profitability,
sector wise loan, non-performing loan.
To analyze capital adequacy of SDBL.
1.4 Significance of the Study
Most of the banks are gaining a wide popularity through their efficient
management and professional services and playing a great role in the economy.
The main purpose of the bank is to have effective credit management so that
stakeholders get satisfactory. This study adds new idea and findings about the
concerned bank.
This study is helpful for all the concerned parties which add new idea and
findings about the Siddhartha Development Bank Limited. The study that will

Property of Shanker Dev Campus Library 17

have importance to various groups but in particular is directed to a certain


groups of people/organizations are:
Important to the management of Siddhartha Development Bank Limited
for self-assessment of what they have done in the past and guide them in
their future plans and program.
Important to the shareholders.
Important to the financial agencies, stock exchanges and stock traders,
who are interested in the performance of the bank as well as the
customer, depositors and debtors who can identify the better bank to
deal with in terms of profitability, safety and liquidity.
Important to the interested outsides parties like investors, competitors,
personnel of the banks, dealers and market makers.
Important to the macro level policy makers like government and NRB
for the formulation of further policies in regard to economic
development.
1.5 Limitations of the Study
This study has been carried out with certain limitations. The major limitations
are as follows:
The scope of the study is to analyze credit management of Siddhartha
Development Bank Limited.
The accuracy of the result is depended on annual report of the bank.
This study is based on the five years data from 2008/09 to 2012/13.
1.6 Organization of the Study
The whole study is divided into five different chapters and they are given as
follows:
Chapter-I: Introduction: First chapter is introduction section which describes
the background of the study, statement of the problem, objectives of the study,
significance of the study, limitations of the study and organization of the study.
Property of Shanker Dev Campus Library 18

Chapter-II: Review of Literature: Review of related literature is described in


second chapter of the study which contains conceptual framework of the credit,
review of articles, past related thesis and research gap.
Chapter-III: Research Methodology: Research methodology refers to the
various sequential steps to be adopted by a researcher in studying a problem
with certain objectives in view. This chapter includes research design, data
collection and analysis technique and research variables.
Chapter-IV: Data Presentation and Analysis:. Data processing, data analysis
and interpretation are given in this chapter and there is use of techniques
relating to analysis such as ratio, descriptive expression, diagrams and so forth.
Chapter-V: Summary, Conclusion and Recommendations: This chapter is
devoted to the summary of the research, conclusion derived on the basis of data
analyzed and the recommendations for improvement to the concerned
organization.
Finally, bibliography and appendices have also been incorporated.

Property of Shanker Dev Campus Library 19

CHAPTER-II
REVIEW OF LITERATURE
Review of literature is a crucial part of all dissertations. In other words its just
like fact are finding based on sound theoretical framework oriented towards
discovery of relationship guided by experience, resonating and empirical
investigation. It helps to find out already discovered things. Review of relevant
literature implies putting new spectacle in old eyes to think in new way by
posting the problem with new data and information to see that what results are
derived. The primary purpose of literature is to learn and it helps researcher to
find out what research studies have been conducted in ones chosen field of
study, and what remains to be done. For review study, the researcher uses
different books and journal, reviews and abstracts, indexes, reports, and
dissertation or research studies published by various institutions, encyclopedia
etc.
Theoretical/Conceptual Framework
Review of Related Studies
2.1 Theoretical Review
The review of textbook and other reference materials such as: newspaper,
magazines, research articles, journals and past thesis have been included in this
topic. Credit administration involves the creation and management of risk
assets. The process of lending takes in to consideration about the people and
system required for the evaluation and approval of loan requests, negotiation of
terms, documentation, disbursement, administration of outstanding loans and
workouts, knowledge of the process and awareness of its strength and
weakness are important in setting objectives and goals for lending activities
and for allocating available funds to various lending functions such as
commercial, installment and mortgage portfolios

Property of Shanker Dev Campus Library 20

2.1.1 Concept of Credit


Credit is the sum amount of money lent by the creditor (Bank) to the borrower
(Customers) either on the basis of security or without security. Sum of the
money lent by a bank, is known as credit. (Oxford Advanced Learners
Dictionary, 1992)3. Credit and advance is an important item on the asset side
of the balance sheet of any type of bank. Bank earns interest on credits and
advances, which is one of the major sources of income for banks. Bank
prepares credit portfolio, otherwise it will not only add bad debts but also affect
profitability adversely. (Khadka & Singh, 2069: 42).
Credit is financial assets resulting from the delivery of cash or other assets by
a lender to a borrower in return for an obligation of repay on specified on
demand. Banks generally grants credit on four ways. (Pandey, 1992: 432).
2.1.1.1 Types of Credit
Overdrafts: It denotes the excess amount withdrawn over their deposits. In
other words bank provide sum limit of money to their value customer
according to their believe ness and level of transaction.
Cash Credit: The credit is not given directly in cash but deposit account is
being opened on the name of credit taker and the amount credited to that
account. In this way, every credit creates deposit.
Term Credit: It refers to money lent in lump sum to the borrowers. It is
principle form of medium term debt financing having maturities of 1 to 8 years.
Barely and Myers urge that bank credits with maturities exceeding 1 years are
called term credits. The firm agrees to pay interest based on the banks prime
rate and to repay principle in the regular installments. Special patterns of
principle payments over time can be negotiated to meet the firms special
needs. (Brealy & Myres, 1991: 89).

Property of Shanker Dev Campus Library 21

Working Capital Credit: Working capital denotes the difference between


current assets and current liabilities. It is granted to the customers to meet their
working capital gap for supporting production process. A natural process
develops in funds moving through the cycle are generated to repay a working
capital credit.
Priority or Deprived sector Credit: Commercial banks are required to extend
advances to the priority and deprived sector 3.5 percent of the total Credit must
be toward priority sector including deprived sector. Institutional support to
Agriculture Development bank and Rural Development Bank are also
considered under this category. Deprived sector lending includes:
Advances to poor/downtrodden/weak/deprived people up to Rs 30,000
for generating income or employment.
Institutional Credit to Rural Development Bank.
Credits to NGOs those are permitted to carryout banking transactions for
lending up to Rs.30, 000.
Hire Purchase Financing (Installment Credit): Hire-Purchase credits are
characterized by periodic repayment of principle and interest over the maturity
of the credit. Hirer agrees to take the goods on hire at a stated rental including
their repayment of principle as well as interest with an option to purchase.
Housing Credit (Real Estate Credit): Financial institutions also extend credit
to their customers. It is different types, such as residential building, commercial
complex, construction of warehouse etc. It is given to those who have regular
income or can earn revenue from housing project itself.
Project Credit: Project credit is granted to the customers as per project
viability. The borrowers have to invest certain proportion to the project from
their equity and the rest will be financed as project credit. Construction credit
is short-term credits made to developers for the purpose of completing
proposed projects. Maturities on developers for completing proposed projects.

Property of Shanker Dev Campus Library 22

Maturities on construction credits range from 12 months to as long as 4 to 5


years, depending on the size of the specific project. The basic guideline
principle involved in disbursement policy is to advance funds corresponding to
the completion stage of the project. Term of credit needed for project fall under
it. (Johnson, 1940: 83).
Consortium Credit: No single financial institution grant credit to the project
due to single borrower limit or other reason and two or more such institutions
may consent to grant credit facility to the project of which is baptized as
consortium credit. It reduces the risk of project among them. Financial bank
equal (or likely) charge on the projects assets.
Credit Cards and Revolving Lines of Credit: Banks are increasingly
utilizing cards and revolving lines of credit to make unsecured consumer credit.
Revolving credit line lowers the cost of making credit since operating and
processing cost are reduced. Due to standardization, centralized department
processes revolving credits resulting reduction on administration cost.
Continued borrowing arrangement enhances cost advantages. Once the credit
line is established, the customer can borrow and repay according to his needs
and the bank can provide the fund to the customer at lower cost.
Off-Balance Sheet Transaction: In fact, bank guarantee and letter of credit
refer to off balance sheet transactions of financial institution. It is also known
as contingent liability. Contingent liability pinpoints the liability, which may or
may not arise during the happening of certain event. Footnotes are kept as
references to them instead of recording in the books of accounts.
It is non-funded based remunerative facilities but more risky than the funded
until adequate collateral are not taken. Lets its two varieties be described
separately.
Bank Guarantee: It used for the sake of the customers in favor of the other
party (beneficiary) up to the approved limit. Generally, a certain percent

Property of Shanker Dev Campus Library 23

amount is taken as margin from the customer and the customers margin
account is credited.
Letter of Credit (L/C): It is issued on behalf of the customer (buyer/importer)
in favor of the exporter (seller) for the import of goods and services stating to
pay certain sum of money on the submission of certain documents complying
the stipulated terms and conditions as per the agreement of L/C. It is also
known as importers letter of credit since the bank of importer do not open
separate L/C for the trade of same commodities (Johnson, 1940:85).
2.1.2 Credit Management
Credit management is a term used to identify accounting functions usually
conducted under the umbrella of accounting receivables. Essentially, this
collection of processes involves qualifying to extension of credit to a customer,
monitors the reception and logging of payments on outstanding invoices, the
initiation of collection procedures, and the resolution of disputes or queries
regarding charges on a customer invoice. When functioning efficiently, credit
management serves as an excellent way for the business to remain financially
stable.
The process of credit management begins with accurately assessing the creditworthiness of the customer base. This is particularly important if the company
chooses to extend some type of credit line or revolving credit to certain
customers. Proper credit management calls for setting specific criteria that a
customer must meet before receiving this type of credit arrangement. As part of
the evaluation process, credit management also calls for determining the total
credit line that will be extended to a given customer.
Several factors are used as part of the credit management process to evaluate
and qualify a customer for the receipt of some form of commercial credit. This
includes gathering data on the potential customers current financial condition,
including to current credit score. The current ratio between income and

Property of Shanker Dev Campus Library 24

outstanding financial obligations will also be taken into consideration.


Competent credit management seeks to not only protect the vendor from
possible losses, but also protect the customer from creating more debt
obligations that cannot be settled in a timely manner.
Credit is regarded as the most income generating assets especially in banks.
Credit is regarded as the heart of the Development banks in the same sense
that; it occupies large volume of transaction; it covers the main part of the
investment activities based in credit; it is the main factor for creating
profitability; it is the main source of creating profitability and it determines the
profitability. It affects the overall economy of the economy. In today's context,
it also affects on national economy to some extent. It is proved from very
beginning that credit is the shareholder's wealth maximization derivative.
However, other factors can also affect profitability and wealth maximization
but the most important factor is regarded as credit. It is most challenging job
because it is the backbone in banks. Thus, effective management of credit
should seriously be considered.
In my view, management is the optimum utilization of resources of an
organization. Management is the system, which helps to complete the every job
effectively and efficiently. Credit management is also the system, which helps
to manage credit effectively. In other words, credit management refers
management of credit exposures arising from loans, corporate bonds and credit
derivatives. Credit exposures are the main source of investment in development
banks and return on such investment is supposed to be main source of income.
Credit management strongly recommends analyzing and managing the credit
risks. Credit risk is defined as the possibility that a borrower will fail to meet its
obligations in accordance with the agreed terms and conditions. Credit risk is
not restricted to lending activities only but includes off balance sheet and interbank transactions. The goal of the credit risk management is to maximize a
banks risk adjusted rate of return by maintaining the credit risk exposure

Property of Shanker Dev Campus Library 25

within acceptable parameters. For most banks, loan are the largest and most
obvious sources of credit risk, however, other sources of credit risk exist
throughout the activities of a bank, including in the banking book, and in the
trading book, and both increasingly facing credit risk in various financial
instruments other than land, including acceptances, inter bank transactions and
guarantees and the settlement of transactions.
The credit policy of a firm provides the framework to determine whether or not
to extend credit and how much credit to extend. The credit policy decision of a
bank has two broad dimensions; credit standards and credit analysis. A firm has
to establish and use standards in making credit decision, develop appropriate
sources of credit and methods of credit analysis.
Credit promotes economies growth and contributes the nations wealth. People
deposit their surplus money in the bank and may lend those collected funds to
the various business and companies. These firms in return may invest in new
factories and equipment to increase their productivity. As a result investment
raises the nation's living standard. Now days, most companies issue stocks and
bonds to raise the capital needed for business expansion instead of borrowing
from the banks. Similarly government also issue bonds to obtain fund to invest
in the projects like construction of damps, roads, Bridges and schools etc. All
such investment by individual business as well as government involves a
sacrifice of present value to get expected future benefits and income which is
probably uncertain.
Credit risk is most simply defined as the potential that a bank borrower or
counterparty will fail to meet its obligations in accordance with agreed terms.
The goal of credit risk management is to maximize a banks risk adjusted rate
of return by maintaining credit risk exposures within acceptable parameters.
Banks need to manage the credit risk inherent in the entire portfolio as well as
the risk in individual credits or transactions. Banks should also consider the
relationships between credit risk and other risks. The effective management of

Property of Shanker Dev Campus Library 26

credit risk is a critical component of a comprehensive approach to risk


management and essential to the long term success of any banking
organization.
For effective credit management, there is major role of sound credit policies
and the practices of those policies. The sound practices address the following
area:
Establishing an appropriate credit risk environment.
Operating under a sound credit granting process.
Maintaining an appropriate credit administration, measurement and
monitoring process.
Ensuring adequate controls over credit risk.
Although specific credit risk management practices may differ among banks
depending upon the nature and complexity of their credit activities, a
comprehensive credit risk management program will address these four areas.
Those practices should also be applied in conjunction with sound practices
related to the assessment of assets quality, the adequacy of provisions and
resources and the disclosure of credit risk all of which have been addressed in
other recent Basel Committee document. (Van Horne, 1999: 432)
The income and profit of the bank depend upon the lending procedure applied
by the bank. And the lending policy and investment in different securities also
affect the income and profit. In the investment procedures and policies, it is
always taken in mind that the greater the credit created by the bank, the higher
will be the profitability. A sound lending investment policy is not only prerequisite for banks profitability but also crucially significant for the promotion
of commercial saving of developing countries like Nepal.
The sound policies help development banks maximize quality and quantity of
investment and there by achieving the objective of profit maximization and
social welfare. Formulation of sound investment policies and co-coordinated
and planned efforts pushes forward the forceps of economic growth.
Property of Shanker Dev Campus Library 27

2.1.3 Credit Risk Appraisal


Although specific credit risk management practices may differ among banks
depending upon the nature and complexity of their credit advances, credit
appraisal is art through which every practical banker master from out of
experience and can never be reduced to an absolute science. In spite of several
technical aids, such as ratio analysis of financial statements, cash flow and fund
flow statements, Profit and Loss account, Balance Sheet available to the
modern banker, the ability to make a correct loan decision very much depends
on the critical judgment, common sense perceptive intelligence and
discriminating sense of the lending banker. However, the usual steps involved
in the appraisal of credit risks are:
The character, capacity, collateral and integrity of the borrower
Repayment capacity of the borrower including a consideration of the
source of income.
Prospects of the proposal- whether it will succeed.
The purpose of the loan which is being requested is whether productive
or unproductive.
The collateral that is being offered as security must be investigated as to
the following:
- Whether it is easily marketable
- Value of security at present
- Whether the value is likely to be stable or it is the security such that
its value fluctuates considerably
- In case of default in payment, if it is easily transferable.
2.1.4 Credit Policy of Bank
The bank is inspired with the goal of earning profit. How to scattering the loan
is one of the most important things. There are many reasons after the goal of
gaining profit. A bank is legal person. It can do nothing alone. A bank
established without the aim of graining the profit is central bank. Other banks

Property of Shanker Dev Campus Library 28

are inspired with the object of earning profit and helping the economic
development and finally to take the social responsibility. They should have the
ability to use the policy of banking investment and to implement it much more
carefully otherwise a bank may be unsuccessful in its goal. It is essential to
carryout the business of lending consistency. For effective credit management,
following credit policy are very essential for every bank.
1. Principle of Liquidity
Liquidity means the whole money stock in the economy. The liquid property
means cash stock of the banks the amount of short term, current account and
short term government and business security and the Treasury bill. A bank
should not forget the principle of liquidity while it is following its investment
policy. A bank should able to return the deposit when demanded by the
depositors. A banker has to ensure that money will come as in demand or as per
agreed terms of repayment. For this purpose bank need liquid cash.
2. Principle of Profitability
The objective of bank is to earn profit. The bank should focus from which
sectors it can earn much profit. The bank can earn more profit from safe and
long term investment. If bank pays its attention only on profit, liquidity will be
less and if it pays attention on the liquidity, it can't be a long-term investment
and the bank doesn't earn profit. So it should maintain equality in it.
3. Principle of Safety
A bank should pay special emphasis on safety. If the investment area is unsafe
it is not a good for the bank. There will be no doubt of loss whether it is greater
or little, if the bank has not invested in a safe sector. Before making any
investment, the bank should seriously study whether it is safe to invest or not.

Property of Shanker Dev Campus Library 29

4. Principle of Diversification
The principle of diversification means, to invest the money in the various
sectors. The bank by studying and analyzing the different sectors where it is
possible to earn more from little investment should extend its environment. If
bank invest in various sectors, it become successful to keep it in balance. As
the statement, the bank should not keep all its eggs in the same basket and
should invest in various sectors.
5. Principle of Marketability
A bank should adopt the principle of marketability. The bank should invest by
taking the security of high quality as far as possible. Bank should study the
market value of the goods, which are taken as a security. There should not be
investment by taking the securities of such goods which are not saleable in the
market.
6. Principle of National Interest
The objective of bank should not go against the national interest. The banks
should follow the rules and regulations as well as policy and directions given
time to time by the Nepal Rastra Bank. The bank should make its investment,
which is suitable to the national interest and provides benefit to the society.
7. Principle of Tangibility
Though it may be considered that tangible property does not yield on income
apart from direct satisfaction of possession of property, many intangible
securities may lost their value due to price level inflation. A bank should prefer
tangible security rather than intangible one.
8. Principle of Legality
Illegal securities will bring out many problems for the investor. A bank must
follow the rules and regulations as well as different directions issued by Nepal
Property of Shanker Dev Campus Library 30

Rastra Bank, rules and regulations issued by Nepal government while


mobilizing its funds.
2.1.5 Factors Affecting Credit Policy of Banks
There are so many internal and external factors which affect the credit policy of
banks. Generally, the following factors are to be considered to make effective
credit management. It helps to get effective credit worthiness.
1. Industrial Environment
It determines the nature of the industry, its attractiveness and the Companys
position within the industry. Structural weakness of a Company does affect to
its credit policy.
2. Financial Conditions
It depends upon the borrower's capacity to repay through cash flow as the first
way out the strength of second way out i.e. through collateral liquidation is also
assessed. Further the possibility of fall back on income of sister organization in
case of financial crunch of the Company.
3. Management Quality
It determines the integrity, competences and nature of alliances of the
borrower's management team weaknesses in replacements needs to be
evaluated.
4. Technical Strength
It determines the strength and quality of the technical support required for
sustainable operation of the Company in terms of manpower and the
technology used. Appropriate technical competence of the manpower, the
viability of the technology uses. Availability of after sales service cost of
maintenance and replacements need to be evaluated.

Property of Shanker Dev Campus Library 31

5. Security Realization
It determines the control over various securities obtained by bank to secure the
loan provided extractability of the security documents and present value of the
properties mortgaged with the bank weaknesses in security threatens the bank's
second way out (Khadka and Singh, 2069: 139).
2.1.6 Review of Nepal Rastra Bank Directives
Central Bank NRB has established a legal framework by formulating various
rules and regulations to mobilize or invest the deposit of the bank in different
sectors of the different parts of the nation, to prevent them from the financial
problems. Those rules and regulations are discuss which are formulated by
NRB in terms of investment and credit to priority sector, deprived sector, other
institution, single borrower limit, CCR, loan loss provision, capital adequacy
ratio, interest spread, productive sector investment etc. Bank is directly related
to the fact that how much fund must be collected as paid up capital while
establishing the bank at certain place of the nation, how much fund is needed to
expand the branch and counters. But we discuss only those which are related to
credit management of the development bank. The directives given by NRB for
effective credit management are as follows:
1) Directives on Loan Classification and Loss Provision
With a view to improve the quality of assets of bank, NRB has directed
development bank to classify their outstanding loan and advances, investment
and other assets into four categories. The classification is done in two ways.
The loans of more than one hundred thousands are to be classified as per debt
services ratio, repayment situation and financial condition of borrower,
management efficiency and quality of collateral. The loans of less than one
hundred thousands have to be classified as per maturity period.
According to the circulars, the loans are classified based on weakness and
dependence on collateral securities into four categories and prescribed the
provisioning rate as follows:

Property of Shanker Dev Campus Library 32

Loan

Criteria for Provisioning

Classification
Pass

Provision
Rate

Not past due and past due for a period up to 3

1%

months.
Substandard

Past due for a period of 3 months to 6

25%

months.
Doubtful

Past due for a period of 6 month to 1 year.

50%

Loss

Past due for a period of more than 1 year or

100%

advances which have least possibility of


recovery.
Source: NRB, Directives, 2012/13 (www.nrb.org.np)
2) Directives for Investment in Productive Sector
Being a developing country, Nepal needs to develop its infrastructure and other
primary productive sectors like agriculture, industrial etc. NRB has directed
banks to extend at least 40 percent of its credit to productive sector.
3) Directives for the Single Borrower Credit Limit
I.

Fund based credit and advances can be issued up to 25% (upper limit)
of core capital to a single customer, firm, company and a group of
related customers.

II.

Non-fund based (off-balance items) can be issued up to 30% of core


capital to a single customer, firm, company and group of related
customer.

2.2 Review of Articles


Shrestha S. (2006) in an article entitled "Lending operations of commercial
banks of Nepal and its impact on GDP" presented the objectives to make an
analysis of contribution of commercial banks' lending to the Gross Domestic
Product (GDP) of Nepal. She has set a hypothesis that there has been a positive
impact of lending of commercial banks to the GDP. In research methodology,

Property of Shanker Dev Campus Library 33

she has considered GDP as the dependent variable and various sectors of
lending viz. agriculture, industrial, commercial, service, general and social
sectors as independent variables. A multiple regression technique has been
applied to analyze the contribution.
The multiple analyses have shown that all the variables except service sector
lending have positive impact on GDP. Thus in conclusion, she has accepted the
hypothesis, i.e. there has been positive impact on GDP by the lending of
commercial banks in various sectors of economy, except service sector
investment."
Chhetri D.B. (2005) , in an article titled "Non Performing Assets: A need for
Rationalization" the writer has attempted to provide connection of the term
NPA and its potential sources , implication of NPA in financial sector in the
South East Asian region .He had also given possible measures to contain NPA.
"Loans and advances of financial institutions are meant to be serviced either
part of principal of the interest of the amount borrowed in stipulated time as
agreed by the parties at the time of Loan settlement. Since the date becomes
past dues, the loan becomes non-performing assets. The book of the account
with lending institution should be effectively operative by means of real
transaction effected on the part of debtor in order to remain loan performing.

As stated by the writer, the definition of NPA differs from country to country.
In some of the developing countries of Asia Pacific Economic cooperation
(APEC) forum, a loan is classified as non-performing only after it has been
arrear for at least 6 months. Similarly, it is after 3 months, in India. Loans thus
defaulted are classified into different categories having their differing
implication on the assets management of financial institution. He also stated
that NPAs are classified into practices into 3 categories namely substandard,
Doubtful and loss depending upon the temporal position of loan default. Thus
the degree of NPA assets depends solely on the length of time the assets has
been in form of none obliged by the loanee. The more time it has elapsed the

Property of Shanker Dev Campus Library 34

accordingly. As per Mr. Chhetrie's view, failure of business for which loan is
used, defective and below standard credit appraisal system credit program
sponsored by government, slowdown in economy/recession, diversion of fund
is some of the factors leading to accumulation of NPAs.

He said that there is serious implication of NPAs, on financial institution. He


further added that the liability of credit institution dies not limit to the amount
declared as NPAs but extend to extra amount that required for provisioning
depends upon the level of NPAs and their quality. As per his view, rising level
of

NPAs create a psyche of worse environment especially in financial

institution like waving interest, rescheduling the loan, writing off the loan,
appointing private recovery agent, taking help of land etc NPAs can be
reduced.

Finally he conducted that financial institution are beset with burden of


mounting level of NPAs in developing countries. Such assets debar income
flow of financial institution while claming additional resources in the form of
provisioning thereby hindering gainful investments. Rising of NAPs cannot be
taken as stimulus but the vigilance depended to solve the problem like this,
eventually will generate vigor to gear up the banking and financial activities in
more active way contributing the energizing growth."
Crosby, French and Oughton (2007), in their article Banking lending
valuations on commercial property elaborates that the banking community are
trying to identify the value on which they can apply a loan value ratio and thus
protect their loan in the future should the borrower default. A simplistic
understanding the value therefore suggest that figure provided should be the
figure which has a life for the length of the loan. However the very concept is
economically impossible in any market with volatility. Values can only be
snapshots in time. They do not have a shelf life.

Property of Shanker Dev Campus Library 35

For this reason BLV is conceptually and practically redundant in real estate
markets. It appears on the surface to be a solution to the banks requirement for
the reduced risk property lending. In reality, it may indeed transfer that risk by
demanding a level of protection to the bank that the valuation cannot give. But
if values agree to it, it could open the way to successful negligence claims in
the aftermath of poor lending decisions. This is because the concepts appears
the determinants of the virtually certain level of value below which the value
will not fall for an indeterminate time into the future. Values are vulnerable to
claims that their valuation was too high, should values fall below that level at
any time during the loan. Sustainable value is predicated on having a shelf life
but the application believes this fundamental requirement. Values must have a
time point. The concept is redundant, the target unidentifiable and the
definition ambiguous. It is little wonder that the application appears
mechanistic. Market value is an obtainable and useful piece of information to
the lender. Worth in the market sets this in context and gives the lender a view
of whether market prices are at current sustainable levels. In obtaining worth,
the value is obliged to carry out both quantitative and qualitative investigation
into the future and this generates other analyses at different time points during
the course of the loan.
Mundul (2010), in his article on "Understanding of credit derivative Business
Age September emphases Credit derivative enable financial institution and
companies to transfer credit risk to a third parity and thymus reduce their
exposure to the risk of an obligors default. Credit enhancement technique,
which helps reduce the credit risk of an obligation, play a key role in
encouraging loans and investment in debts.
In legal term credit derivative are privately negotiated bilateral contract to
transfer credit risk from one party to another.

Some credit enhancement

methodologies have existed for the in debts. Some credit enhancement


methodologies have existed for a longtime with the support of guarantee, letter
of credit or insurance product. However such mechanism works best during
Property of Shanker Dev Campus Library 36

economic upturns. As an alternative to commercial risk mechanism, various


financial mechanisms have been developed over the past few decades. Such
credit risks instruments are normally refer to as credit derivatives. Credit
derivative helps to transfer credit risk away from the lender to some other
party. Now credit derivative grew popular both as tools for hedging credit risk
exposure as well as method of investing in certain types of credit risk.
Credit derivative not only helps corporation and financial institution to manage
to their credit risk but also enabled a new set of individual retail client to invest
in bonds and stocks previously unaffordable. Through credit derivative
individual investor ca invest indirectly in foreign bonds at a lower price. Credit
derivative helps investor isolated credit, and transfer it to other investor who
are better suited to managing it or who finds the investment opportunity more
interesting.
Rahman (2011) has published an article on "Credit Risk Management
Practices in Banks: An Appreciation." The banks in Bangladesh have started
undertaking a number of quantitative and qualitative measures to understand
the risks involve in credit or chance of default which may come from the
failure of counterparty or obligor (client) to fulfill his/her commitments as per
agreed terms and contractual agreement with the bank. Traditionally, a bank
gives emphasis on collateral in funding to the clients whereas in the concept of
modern banking a bank keenly feels to measure the business risk over the
security risk for ensuring the timely repayment of invested funds. Now-a-days
a banker likes to adopt a number of sophisticated financial techniques in credit
appraisal process with a view to assessing the borrowers business as well as
financial position rigorously. The use of sophisticated techniques for measuring
the financial, business and other risks is yet to be established in the banking
operations very fast due to the advent of computer based technologies. In some
cases, the rate of adoption of analyzing tools and techniques is highly
remarkable in credit operation. This attitude of the bankers has been changed
by introducing quality training and reinforcing sophisticated financial as well
as risk grading techniques. A strong database is the demand of the day for the

Property of Shanker Dev Campus Library 37

proper application of the much-demanded credit risk management guidelines


along with effective risk grading system.
Karim (2012) has published an article on "Impact of Risk Management on
Non-Performing Loans and Profitability of Banking Sector of Pakistan." The
aim of this study is to investigate the impact of risk management on nonperforming loan and profitability of banking sector of Pakistan. Five banks
were selected for data collection and whole data was secondary in nature. The
result of this study reveals that there is no proper mechanism for risk
management in banking sector of Pakistan. Study also concluded that nonperforming loans are increasing due to lack of risk management which
threatens the profitability of banks. This study provides suggestion that banking
sector can avoid their non-performing loans by adopting methods suggested by
state bank of Pakistan.
Morrison (2013) has published an article on "Credit Derivatives,
Disintermediation, and Investment Decisions." This paper examines the
consequences for the real sector of disintermediation indebt markets. The
specific phenomenon I study is the market for credit derivatives. A credit
derivative is a trade in which one party, the protection buyer, makes periodic
payments to another party, the protection seller, in exchange for which the
protection seller indemnifies the protection buyer against any losses he
experiences as a consequence of the default of some credit-risky reference
asset. Banks are thus able to pass the default risks associated with their assets
on to third parties while simultaneously retaining legal title to the assets. The
market for these derivatives has expanded very rapidly from about $180 billion
in 1997 to $893 billion in 2000(British Bankers Association 2000). When
discussing

credit

derivatives,

practitioners

typically

highlight

two

characteristics that differentiate them from other secondary loan markets. First,
bankers stress that the ease with which credit derivatives may be traded allows
them to manage concentration risk in their portfolios.
The papers arguments are developed as follows. First, I build a model for
corporate financing that rests on the value insider bank-held debt creates for the
dispersed holders of publicly quoted securities. This approach was first

Property of Shanker Dev Campus Library 38

suggested by Fama (1985): the model of this paper is similar to Holmstrom


and Tirole (1997), augmented to allow for risk- averse bankers and variable
project quality. I consider cash-constrained entrepreneurs who use debt to
finance one of two positive net present value (NPV) projects. One project has a
higher NPV, while the other yields nontransferable private benefits to the
entrepreneur. By monitoring their borrowers, bankers can ensure that they
select the first-best project. This skill is denied to the dispersed holders of
bonds.
2.3 Research Gap
The purpose of this research is to develop some expertise in ones area, to see
what new contribution can be made and to receive some ideas, knowledge and
suggestions in relation to credit management of Siddhartha Development Bank
Limited. Thus, the previous study cant be ignored because they provide the
foundation to the present study. In other words, there has to continuity in
research. This continuity in research is ensured by linking the present study
with the past research studies. Here, it is clear that the new research cannot be
found on that exact topic, i.e. Credit Management of Siddhartha Development
Bank Limited. Therefore, to fulfill this gap, this research is selected. To
complete this research work, many books, journals, articles and various
published and unpublished dissertations are followed as guideline to make the
research easier and smooth. In this regard, here we are going to analyze the
different procedure of credit management, which is considered only on
Siddhartha Development Bank Limited. Our main research problem is to
analyze whether the SDBL is able to utilize the resources effectively or not. To
achieve this main objective, various financial and statistical tools are used.
Similarly, trend analysis of investment and profit are reviewed to make this
research complete. Therefore, this study is useful to concerned banks as well as
different persons: such as shareholders, investors, policy makers, stockbrokers,
state of government etc.

Property of Shanker Dev Campus Library 39

CHAPTER -III
RESEARCH METHODOLOGY
Research methodology helps to find out accuracy, validity and suitability. The
justification on the present study cannot be obtained without help of proper
research methodology. For the purpose of achieving the objectives of the study,
the applied methodology will be used.
This topic presents the short outline of the methods applied in the process of
analyzing the credit management of SDBL. Research is a systematic method of
finding out the solution to a problem whereas research methodology refers to
the various sequential steps to adopt by a researcher in studying a problem with
certain objective in view.
3.1 Research Design
Research design is a plan of structure and strategy of investigation conceived
so as to obtain answer to research questions and to control variances'
(Kerlinger, 1986: 275). Research design is that outline which configures the
collection and of this research concerns with descriptive and analytical type of
research design.
Descriptive research design is the process of accumulating facts. It does not
necessarily seek to explain relationship and test hypotheses make predictions or
get at analysis style of the data and information. Whereas analytical type of
research design is used to clear the situations by the help of various tools.
According to the subject matter this research also clarified by using various
tools.
3.2 Population and Sampling
A population is a complete enumeration of each and every unit of the universe
as a whole. It is related to the total study of the material in detail. There are 88

Property of Shanker Dev Campus Library 40

B class licensed banks in Nepal but this study considers only Siddhartha
Development Bank Limited.
3.3 Nature and Sources of Data
Both primary and secondary sources of data have been collected in order to
achieve the real and actual results:
Primary Sources of Data
Primary data relevant to right study have been gathered through questionnaire
and observation of institution itself. Fifteen personnel of SDBL head office and
branch had selected for the sources of primary data. 13 questionnaires are
distributed to the staffs of concerned bank and their responses have been
collected for study.
Secondary Sources of Data
The major sources of secondary data for this study are as follows:
Annual reports of the bank.
Previous studies and reports.
Reports of Nepal Rastra Bank Samachar and Banking and Financial
Institutions Statistics published by Nepal Rastra Bank.
Journal and other publish and unpublished related document and reports
for Central Library of T.U., Library of Shanker Dev Campus, Library of
Nepal Rastra Bank.
Various Internet Websites related to banking and finance.
3.5 Data Analysis Tools
Presentation and Analysis of the collection data is the core part of the research
work. The collected raw data are first presented in systematic manner in tabular
form and are then analyzed by applying different financial and statistical tools
to achieve the research objectives.

Property of Shanker Dev Campus Library 41

3.5.1 Financial Tools


In this study financial tools are used as ratio analysis. Ratio analysis is the
numerical relationship between any two variables of financial statements,
which should serve some meaningful purpose. Ratios are expression of logical
relationships between items in the financial statements of a single period. A
ratio can show a relationship between two items on different scanning to
financial statements or between two items on different financial statements.
Thus, ratio analysis is a total of scanning the financial statements of the firm.
(Bajracharya, et al., 2008/09: 1017). To evaluate the performance of company,
we need to ascertain statistical data. The analysis of finance of ratios involves
two types of comparison. First, the analysis can compare a present ratio with
peer and expected future ratios for the company. The second method of
composition involved comparing the ratios of one firm with two of similar
firms or with industry average at the same point in time. Such a comparison
gives insight into the relative financial condition and performance over time.
A. Liquidity Ratios
Liquidity ratios are used to judge a firms ability to meet short term obligations.
From them much insight can be obtained into the present cash solvency of
company and its ability to remain solvent in the event of adherent. Essentially,
we wish to compare short-term obligations with the short-term resources
avoidable to meet these obligations. The following ratios have been used in
order to calculate the liquidity position of the Siddhartha Development Bank
Limited.
Current Ratio
Current ratio provides about the short-term solvency of the firms. IT establishes
the relationship between current assets and current liabilities of which is
expressed as:

Property of Shanker Dev Campus Library 42

Current ratio =

Current assets
Current liabilitie s

Cash and Bank Balance to Total Deposit Ratio


This ratio points the banks capacity to cover their deposit like current, call
saving and margin.
A higher ratio is preferred since bank is able to cover deposits. It can be
expressed as:
Cash and bank to total deposit ratio =

Cash and bank balance


Total deposit

Cash and bank balance to current assets ratio


This ratio highlights the percentage of readily available funds with the bank. A
higher ratio is preferable like the earlier stated ratio in its case too. It can be
calculated as:
Cash and bank balance to current ratio =

Cash and bank balance


Current assets

Loan and advances to current assets


This ratio highlights the percentage of loan and advance in current assets.
Higher ratios means greater loan advances are in current assets and lower ratio
means lower loans and advances are in current assets. It is calculated as:
Loan and advances to current ratio =

Loan and advances


Current assets

B. Profitability Ratios
Some of the important profitability ratios are used here as follows:
Net Interest to total assets ratio
Net interest means receive interest minus interest paid. It is also known as
interest spread. The high ratio indicates that profitability of the bank. Similarly,
the low ratio indicates that low profitability of the bank. It can be expressed as:

Property of Shanker Dev Campus Library 43

Net interest to total assets ratio =

Net int erest


Total assets

Net Profit to Total Assets Ratio


It measures the profitability of fund invested in the banks assets. It is computed
by dividing the net profit by total assets including profit and loan account (debt
side). Higher ratio is preferable since it has more operating efficiency of the
firm and vice-versa. It is expressed as:
Net profit to total assets ratio =

Net profit
Total assets

Return on Net Worth (ROE)


Net worth denotes the owners claim in the asset of the bank's remain often
subtracting total external liabilities from total assets. Here, total assets represent
all the assets beside accumulated loss and intangible assets. The ratio exhibits
the rate of return earned on net worth (or shareholders fund or equity). Its
compensation is to be done as:
Return on net worth =

Net worth after tax


Net worth)

3.5.2 Statistical Tools


a. Measures of Central Tendency
Measures of central value are simple statistical treatments of distribution that
attempts to find the single figure to describe the entire distribution. It is the best
possible value of a group of variables that singly represents to whole group. In
the statistical analysis the central value falls within the approximately middle
value of the whole data. Among the several tools of measuring central value,
the mean has been used in this analysis where and when necessary. The mean
is the arithmetic average of a variable. Arithmetic Mean of a series is given by
Mean ( X ) =

X
N

Property of Shanker Dev Campus Library 44

b. Standard Deviation
Standard deviation (S.D.) is the most popular and the most useful measure of
dispersion. It indicates the ranges and size of deviance from the middle or
mean. It measures the absolute dispersion. Higher the value of standard
deviation higher is the variability and vice versa. It is the positive square root
of average sum of squares of deviations of observations from the arithmetic
mean of the distribution.
It can be calculated as follows:
Standard Deviation ( ) =

( X X ) 2
N

c. Coefficient of Variation
The percentage measure of coefficient of standard deviation is called
coefficient of variation. The less is the C.V the more is the uniformity and
consistency and vice versa. Standard deviation gives an absolute measure of
dispersion. Hence where the mean value of the variable is not equal it is not
appropriate to compare two pairs of variables based in S.D. only. The
coefficient of variation measures the relative measures of dispersion, hence
capable to compare two variables independently in terms of their variability.
Coefficient of Variation (C.V) =

100
X

d. Correlation Coefficient (r)


Correlation refers to the degree of relationship between two variables.
Correlation coefficient determines the association between the dependent
variable and independent variable. If between the variables, increase or
decrease in one cause increase or decrease in another, then such variables are
correlated variables. Correlation may be defined as the degree of linear
relationship existing between two or more variables. Two variables are said to
be correlated when the change in the value of one is accompanied by the
change of another variable. There are different techniques of calculating

Property of Shanker Dev Campus Library 45

correlation coefficient. Among various techniques we have used Karl Pearson


coefficient of correlation.
It is calculated as follows:
Correlation Coefficient (r) =

xy
N x y

Where,
x =X X

y= YY

x = Standard Deviation of Series X


y = Standard Deviation of Series Y

N = No. of pairs of observation


On simplification of the equation of r, we obtain the following formula for
computing r.
r=

xy
x . y
2

The Karl Pearson Coefficient of correlation always falls between 1 to +1. The
value of correlation in minus signifies, the negative correlation and in plus
signifies the positive correlation. If,
r = 0, There is no relationship between the variables
r < 0, There is negative relationship between the variables
r > 0, There is positive relationship between the variables
r = +1, the relationship is perfectly positive.
r = -1, the relationship is perfectly negative.
The reliability of the correlation coefficient is judged with the help of probable
error (P.E). It is calculated as follows:
Probable Error (P.E.) =

0.6745(1 r 2 )
N

Where, r = correlation coefficient


N= No. of pairs of observation.
If r > 6 P.E, then the correlation coefficient is significant and reliable.

Property of Shanker Dev Campus Library 46

If r < P.E, then the correlation coefficient is insignificant and there is no


evidence of correlation.
e. Trend Analysis
Trend analysis is one of the statistical tools which is used to determine the
improvement or deterioration of its financial situation. Trend analysis informs
about the expected future values of various variables. The Least square method
has been adopted to measure the trend behaviors of the selected Bank. This
method is widely used in practices. The formula of least square method for the
straight line is represented by the following formula.
Yc = a + bX
Where,
Yc = Trend Values
a = Y intercept or the computed trend figure of the Y variable, when X =
0
b = Slope of the trend line of the amount of change in Y variable that is
associated with change in 1 unit in X variable.
X = Variable that represent time i.e. time variable
The value of the constants a and b can be determined by solving the
following two normal equations.

Y = Na + b X ... (i)
XY = a X + b X (ii)

Property of Shanker Dev Campus Library 47

CHAPTER FOUR
DATA PRESENTATION AND ANAYLSIS
In this chapter the relevant information available has been used by analyzing
the loan management of SDBL for the fulfillment of the research objectives.
The data of fives year (2008/09-2012/13) has been presented for the purpose of
study. This study is based on both primary and secondary data. Sources of
secondary data are the annual reports of the bank, books, journals, published or
unpublished reports etc. Primary data has been collected through direct
interview with the staffs of the bank. For the purpose of analysis, data has been
presented in the form of tables and charts. Data presentation and analysis is
done to fulfill the objective of the study. The objectives of the study are to
analyze the trend of every years deposit collection and loan investment, to
measure total amount disbursed, out of total deposit collected two measure
performance of bank in terms of profitability, liquidity, NPL, to study the
attitudes of employees of SDBL in regard to the performance of the bank.
4.1 Analysis of Secondary Data
4.1.1 Deposits of SDBL
Bank collects the scattered funds form the public in the form of deposits and
mobilization in the productive sector. The volume of credit extension depends
upon the deposit base of a bank besides other factors. The deposits collected by
SDBL can be divided as current, saving, fixed, call and other deposits. The
deposits collection by the bank in 5 years (2008/09-2012/13) is presented in the
table below:

Property of Shanker Dev Campus Library 48

Table No. 4.1


Deposits Collection by SDBL
Year

Deposit collection

Inc/Dec. in deposit
collection
2008/09
1602.22
2009/10
1719.28
117.06
2010/11
3479.94
1760.66
2011/12
4001.52
521.58
2012/13
4954.22
952.70
Source: Annual reports of respective years.

Rs. in million
% inc./decrease
7.31
102.41
14.99
23.81

The above table shows the deposit collected by SDBL from the year 2008/092012/13. There is increasing trend in deposit collection from 2008/09-2012/13.
In 2008/09 the deposits collected amount is Rs. 1602.22 million. Similarly, in
2009/10 collected deposit amount is Rs. 1719.28 million which is 117.06
million greater than previous year and in percent it has increased by 7.31
percentages. Total deposit collection in 2010/11 is 3479.94 million. In 2011/12
the collected deposit amount is 4001.52 million which 521.58 million greater
than the year 2010/11 and in percent it has increased by 102.41. Similarly,
deposits collection by SDBL has increased by 14.99 and 23.81 percent than
previous year respectively. The deposits collected by SDBL annually for 5
years (2008/09-2012/13) can be presented in following graph.
Figure No.4.1
Deposit Collection of SDBL

Property of Shanker Dev Campus Library 49

4.1.2 Deposit Composition of SDBL


The deposit composition of SBL also has significance. The following table
shows the composition of deposits of SDBL.
Table No. 4.2
Deposit Composition
Rs. in million
Year

Deposit
Saving

Fixed

Current

Total
%

Call

Other

deposit

2008/09

373.99 23.34 309.44 19.31 792.34 49.45 33.63

2.10 92.82

5.79

1602.22

2009/10

300.47 17.47 988.24 57.48 202.34 11.77 94.22

5.48 133.94 7.79

1719.21

2010/11 1745.49 50.19 1004.23 28.87 302.44 8.69 102.44 2.94 323.34 9.30

3477.94

2011/12 1761.33 44.02 1436.43 35.89 121.98 3.05 674.34 16.85 7.43

0.18 4001.51

2012/13 2353.54 47.51 1451.19 29.29 897.40 18.11 105.63 2.13 146.46 2.96

4954.22

Sources: Annual report and financial statements of corresponding years.


The above table shows the composition of deposit of SDBL viz., current,
saving, fixed, call and other deposits. Here, it can be seen that more amounts
have been collected in fixed deposits and other deposits during the year
2009/10 and 2011/12 respectively than other years. In the year 2010/11,
2008/09 and 2011/12, the maximum amounts of deposits have been collected in
saving, current and call account respectively.
Saving deposits have continuously increased during the years except 2009/10.
Similarly fixed deposit collection has also continuously increased during to
years. But deposit collection of current, call and other deposit have fluctuated
during these years.
In the year 2008/09, saving deposit collection is 23.34 percent of total deposit
and in the year 2009/10, it decreases to 17.47 percent. But after this year saving
deposit shows high degree of increasing trend. In 2012/13, this is 47.51 percent
of total deposit. It indicates that cost of source is decreasing.

Property of Shanker Dev Campus Library 50

In the year 2008/09, the amount of fixed deposits seems 309.44 million. After
this year this deposit shows high degree of increasing trend. It indicates that to
cost of source of fund is increasing trend. It virtually affects in profitability. It
can be said that there is negative relation between profitability and cost of
source of fund.
In the research period current, call and other deposits of SDBL were
fluctuating. Current deposit is maximum in the year 2011/12 i.e. 674.34 million
and maximum amount of other deposits collected in the year 2012/13 i.e.
146.46 million. The bank heavily depends on saving deposits in the total
composition because to saving deposit has greater contribution in total deposit
collection. Similarly, the fixed deposit is in second rank for the contribution in
total deposit collection. Then current deposit is in third and call deposit is in
fourth rank. In the research period other deposits is in fifth rank because this
deposit has less contribution in the total deposit collection.
The amount collected in fixed deposit is more appropriate to lend because of its
fixed nature but its cost of fund is high. Similarly, the saving deposits are also
useful because of low cost of saving deposit in comparison to fixed deposits.
How deposit is optimum in saving, fixed, current, call and other deposit, it
depends on the nature of loan. If there is high demand of long term loan, the
bank should increase fixed deposit. Otherwise, the bank should increase
different deposits such as saving, current, call and other short- term deposits.
The following chart shows the above information.

Property of Shanker Dev Campus Library 51

Figure No. 4.2: Deposit Composition of SDBL

Source: Table No. 4.2


4.1.3 Trend of Deposit Collection
The trend of total deposit in coming year is analyzed using the trend analysis.
The following trend line shows the projection of total deposit of SDBL up to
2017.
Figure 4.3: Trend of Deposit Collection

Source: Table No. 4.2 (Calculation from SPSS software).

Property of Shanker Dev Campus Library 52

The above figure shows that the deposit collection by this bank is in increasing
trend if other things remaining constant. According to the trend forecast the
deposit collection in the year 2008/09 will be 1353.76, in 2009/10 it will be Rs.
2252.39 million and in the year 2017/18 it will be Rs. 9441.43 million
respectively. It is increased by 898.624 million every year.
4.1.4 Loans and Advances of SDBL
A bank takes deposit and lends loan and advances. Giving loans and advances
are the major task of any bank. Loan and advances is a major chunk of assets in
assets side. Because of cut throat competition in banking sector and limited
area of investment giving loan and advances is difficult and critical job.
Table No. 4.3: Loans and Advances of SDBL
Rs. in million

Year

Loan and advances

Inc/Dec. in loan and advances

% inc./decrease

2008/09

798.82

2009/10

1494.02

695.20

87.03

2010/11

2883.28

1389.26

92.99

2011/12

3697.66

814.38

28.24

2012/13

3564.64

-133.02

-3.59

Source: Annual reports.

The above table shows loan and advances. The table shows that loan and
advances are more fluctuating in the year 2009/10 and 2010/11. In 2008/09
loan and advances amounted to 798.82 million. It is increased by 87.03 percent
and reached to 1494.02 million in the year 2009/10. Similarly, loan and
advances in 2010/11 amounted to Rs. 2883.28 million. It is 92.99 percent
greater than former year. This percentage is the highest percentage increase in
study period. In 2011/12 loan and advances reached up to Rs. 3697.66 million
but there is an increasing trend but the rate of growth is decreasing. Loan and
advances in 2012/13 is Rs. 3564.64 million, which is -3.59 percent less than
previous year. The loan and advances of SDBL can be presented in a form of
bar chart.

Property of Shanker Dev Campus Library 53

Figure No. 4.4: Loan and Advances of SDBL

Source: Table No. 4.3


4.1.5 Trend of Loan and Advances
The trend of loan and advances in the coming years is analyzed using the trend
analysis. The following trend line shows the projection of total loan and
advances of SDBL upto 2018.
Figure No. 4.5: Trend of Loan and Advances

Source: Table No. 4.3 (Calculation from SPSS software).

Property of Shanker Dev Campus Library 54

The above figure shows that the loan and advances by this bank is in increasing
trend if other things remain constant. According to the trend forecast the loan
and advances in the 2012/13 will be Rs. 4034.734 million, in 2013/14 it will be
Rs. 4808.26 million and in year 2017/18 it will be Rs. 7902.36 million
respectively. It is increased every year by Rs. 773.528 million.
4.1.6 Loan and Advances to the Deposit Collection
To evaluate the lending performance of banks, it is important to know, how
much the amount is disburse out of total deposit collection. Loan and advances
to deposit collection of SDBL has been presented in the table below:
Table No. 4.4: Loan Disbursed to the Deposit Collection
Rs. in million

2008/09

798.82

1602.22

% of loan and advance out of total


deposit
49.86

2009/10

1494.02

1719.21

86.90

2010/11

2883.28

3477.94

82.90

2011/12

3697.66

4001.51

92.41

2012/13

3564.64

4954.22

71.95

Year

Loan and advances

Total Deposit

Source: Annual reports.


The above table shows the amount of loan disbursement in comparison to the
amount of deposit collected. In fiscal year 2008/09 the amount of deposit
collected was Rs. 1602.22 million out of which Rs. 798.82 million was given
as loan. It turns out to be 49.86 percent of the total deposit collection. In the
year 2009/10 Rs. 1494.02 million was disbursed out of Rs. 1719.21 million of
deposit collection which is 86.90 percent of the total deposit. Similarly, in
2010/11 Rs. 2883.28 million was disbursed out of Rs. 3477.94 million of total
deposit. It comes to 82.90 percent of total deposit. In the year 2011/12 Rs.
3697.66 million was disbursed out of total deposit of Rs. 4001.51 million
which is 92.41 percent of the total deposit. In 2012/13 Rs. 3564.64 million was
utilized in loan and advances out of total deposit of Rs. 4954.22 million. It
Property of Shanker Dev Campus Library 55

comes 71.95 percent of total deposit. The highest percentage of loan and
advances to total deposit was in the fiscal year 2011/12 which is 92.41. In
every year loan and advances is lower than total deposit but it is utilized more
than 70% in every fiscal year except than FY 2008/09. This shows the fund is
utilizing properly. Loans and disbursed to deposits can be presented in the
following chart:
Figure No. 4.6: Loan Disbursement to Deposit Collection

2008/09

2009/10

2010/11

2011/12

2012/13

Source: Table No. 4.4


4.1.7 Percentage Change in Deposit Collection and Loan and Advances
Loan disbursement is made out of deposit collection. So, usually the amount
disburse is proportionate to the deposit collection. IN order to find out whether
loan disburse has been affected by the change in deposit collection or not. This
has been presented in the table below:

Property of Shanker Dev Campus Library 56

Table No. 4.5: Deposit Collection and Loan and Advances


Rs. in million
Year

% change in deposit collection

% change in loan and advances

2008/09

2009/10

7.31

87.03

2010/11

102.41

92.99

2011/12

14.99

28.24

2012/13

23.81

-3.59

Source: Table No. 4.1 and 4.3.


In 2009/10 percent change in deposit is 7.31 percent but percent change in loan
is 87.03 percent. Similarly, in 2010/11, 102.41 percent change was recorded in
deposit but in loan there is only 92.99 percent change. In 2011/12, percent
change in deposit is 14.99 percent and percent change in loan is 28.24 percent.
In the year 2012/13 percent change in deposit is 23.81% and in loan -3.59%. In
every year change in loan and deposit has fluctuated. But deposit has fluctuated
more than the loan. Comparing to all other years deposits and loans have
fluctuated most in 2010/11.
4.1.8 Coefficient of Correlation between Deposit Collection and Loan
Disbursement
The relationship between deposit and loan must be optimum to gain profit. This
tool measures the degree of relationship between these variables. In this
analysis, deposit is independent variable (x) and loan is dependent variable (y).
The main reason of finding out the coefficient of correlation between these two
variables is to justify whether collected deposit is significantly used as loan
disbursed or not. The table below shows the value of 'r' and 'r2', probable error
(P.E.) and 6PE between deposit and loan and advances of SDBL for the study
period.

Property of Shanker Dev Campus Library 57

Table No. 4.7: Coefficient of Correlation between Deposit Collection and


Loan Disbursement
Coefficient of correlation (r)

r2

Probable error

6 PE

0.9499

0.9023

0.044

0.2629

Source: Calculation from SPSS software.


The above table shows that the coefficient of correlation between deposit
collection and loan disburse is 0.9499 which shows that here is highly positive
relationship between these two variables. It also shows that there is optimum
utilization of collected deposit by the bank. The coefficient of determination is
0.9023. This shows that 90.23 percent of the total variation in dependent
variable deposit is explained by independent variable that is loan, loan disburse
and deposit collection is positively correlated which shows that an increase in
total deposit leads to increase in loan disburse. Normally, a higher coefficient
of correlation between deposit and loan is a good sign. It indicates that the
efficient management of the bank. SDBL is successful in mobilizing its
collected deposit. Probable Error (PE) is calculated to be 0.044 and 6 PE is
0.2629. The value of 'r' is more than 6 PE which indicates that there is
significant relationship between total deposit collection and total loan
disbursement.
4.1.9 Analysis of Profitability Ratios
Maximization of profitability is the core objective of any business organization.
Profitability is an important measure of a companys operating success. There
are two areas for judging profitability; (1) relationships in the income statement
that indicate a companys ability to recover costs and expenses, (2) relationship
of income to various balance sheet measures that indicate to companys relative
ability to earn incomes from the assets employed. The stockholders primary
concern is the profitability measures of the firm. Lenders also desire a
minimum return on the borrowers investment to be on the safe side.
(Bajrachary, Ojha, Goet, Sharma, 2008/09: 1024) Bank profitability is the net
after tax income or net earnings of a bank. It is usually measured in equity
capital.

Property of Shanker Dev Campus Library 58

i. Analysis of Net Interest Income to Total Assets:


Table No. 4.8: Analysis of Net Interest to Total Assets
Rs. in million
Year
Net interest income
2008/09
51.93
2009/10
79.66
2010/11
140.89
2011/12
189.95
2012/13
168.73
Total Mean
126.232
Source: Annual report.

Total assets
566.03
2449.79
4241.56
4948.30
5652.49
3571.634

Ratio (%)
9.17
3.25
3.32
3.84
2.99
4.51

The above table shows net interest and total assets from FY 2008/09 to FY
2012/13. There is both are increasing trend. In 2008/09, the net interest is Rs.
51.93 million which is 9.17 percent of total assets. In the year 2009/10, net
interest is Rs. 79.66 million which comes to 3.25 percent of total assets. The
trend of Net interest income ratio to the total assets. In 2010/11, net interest is
Rs. 140.89 million which is 3.32 percent of total assets. In 2011/12, net interest
is Rs. 189.95 million which 3.84 percent of total assets. This is significantly
greater than previous year. Net interest of Rs. 168.73 million is collected in
2012/13 which is 2.99 percent of total assets with Rs. 5652.49 million. Net
interest is increasing trend from 2008/09 to 2011/12 but it decreases in FY
2012/13. It indicates that interest earn is greater than interest paid. In other
word, we can say that there is moderate utilization of collected fund.
ii. Analysis of Net Profit to Total Assets
Table No. 4.9: Net Profit to Total Assets Ratio
Rs. in million

Year
2008/09
2009/10
2010/11
2011/12
2012/13
Source: Annual reports.

NPAT
16.99
35.19
48.66
65.53
(72.90)

Total assets
566.03
2449.79
4241.56
4948.30
5652.49

Property of Shanker Dev Campus Library 59

Ratio (%)
3.00
1.44
1.15
1.32
-1.29

The above table shows the relation between net profit and total assets. In the
study period, net profit is increasing trend except year 2012/13. In 2008/09, net
profit is Rs. 16.99 million which is 3.00 percent of the total assets which has
highest ratio of profit to the total assets shown in the study period. Similarly, in
2009/10, net profit of the bank is 35.19 million, which is 1.44 percent of total
assets. In 2010/11, the bank has earned profit of Rs. 48.66 million and 1.15
percent of the total assets. The bank earned 1.32 percent of profit of the total
assets in 2011/12, which is Rs. 65.53 million. In FY 2012/13, the bank is in
loss by Rs. 70.90 million which is -1.29 percent of the total assets.
So, we can say that the bank can be able proper utilize of the assets because the
profit of bank is increasing every year except in year 2012/13.
iii. Analysis of Return on Equity Capital
Table No. 4.10: Return on Equity Capital
Rs. In million

Year

NPAT

Equity Capital

Ratio (%)

2008/09

16.99

645.00

2.63

2009/10

35.19

645.00

5.46

2010/11

48.66

645.00

7.54

2011/12

65.53

693.35

9.45

2012/13

(72.90)

645.00

-11.30

Source: Annual reports.


Equity capital is Rs. 645 million in each year except year 2011/12. In 2011/12
Equity capital is Rs. 693.35 million. In Fiscal year 2008/09, net profit of the
bank 16.99 million. In the same year, equity capital is 645 million. The ratio of
NPAT and equity is 2.630.In 2009/10; net profit is Rs. 35.19 million which is
5.46 percent of equity. In 2010/11, it increased to Rs. 48.66 million which
came to 7.54 percent of total assets. In FY 2011/12 net profit is 65.53 million.
So, net profit to equity ratio also increased to 9.45 percent. The bank bears loss
of Rs. 72.90 million in 2012/13. So, the banks ratio of net profit to the equity

Property of Shanker Dev Campus Library 60

capital is -11.30 percent. Here, the ratio of NPAT to the Equity capital is
increasing trend except year 2012/13.

It indicates that the financial

performance of bank is good. In coming year the bank can earn more profit.
4.1.10 Analysis of Liquidity Ratio:
Short-term lenders such as suppliers and creditors use liquidity analysis to
assets the risk level and ability of a firm to meet its current obligations.
Satisfying these obligations requires the use of the cash resources available as
of the balance sheet date and the cash to be generated through the operating
cycle of the firm. (Bajracharya, Ojha, Goet, Sharma, 2008/09: 1018)
i. Analysis of Current Ratio
Table No. 4.11: Analysis of Current Ratio
Rs. in million

Year
2008/09
2009/10
2010/11
2011/12
2012/13
Source: Annual reports.

CA
1305.54
1767.35
2425.33
2798.54
3054.18

CL
615.24
933.23
1127.12
1325.23
2287.17

Ratio
2.12
1.89
2.15
2.11
1.34

From the above table, in 2008/09 the SDBL has 2.12 times current ratio
between current assets and current liabilities. But in 2009/10, the current ratio
declined to 1.89 times. In every year, current assets are greater than current
liabilities. Similarly, in 2010/11, the current ratio is 2.15, which is slightly
greater than in the former year. IN the fiscal year 2011/12 the ratio between
current assets and current liabilities are 2.11 times. In 2012/13, this ratio is
decreased to 1.34 times. This ratio shows that the current assets are not
sufficient to pay current liabilities in comparison to the former year.
The standard ratio current assets and current liabilities are 2:1. There is
standard ratio between current assets and current liabilities except year 2009/10
and 2012/13. It indicates that the bank able to pay current liabilities on time.
Property of Shanker Dev Campus Library 61

ii. Analysis of Cash and Bank Balance to Total Deposit


Table No. 4.12: Cash and Bank Balance to Total Deposit
Rs. in million
Year
Cash and bank balance
2008/09
138.50
2009/10
140.43
2010/11
181.24
2011/12
338.22
2012/13
214.097
Source: Annual reports.

Total deposit
1602.22
1719.21
3477.94
4001.51
4954.22

Ratio (%)
8.64
8.17
5.21
8.45
4.32

Cash and bank balance and total deposits in 2008/09 are Rs. 138.50 million and
Rs. 1602.22 million respectively. Cash and bank balances come 8.64 percent of
the total deposit. In 2009/10, a cash and bank balance seems 140.43 million and
1719.21 million respectively. The ratio of cash and bank balance to the total
deposit is 8.17 percent. Similarly, in 2010/11, the cash and bank balance is Rs.
181.24 million which is 5.21 percent of the total deposit. We can see that in
2010/11, the percent of cash and bank balance is decreasing rate. In 2011/12,
cash and bank balance is Rs. 338.22 million which is 8.45 percent of the total
deposit. But in 2012/13 year, the lowest percent of the cash and balance to the
total deposit is 4.32 percent.
In above table, it is found that every year's cash and bank balance ratio lies
between 4 to 9 percent. The highest percentage of the cash and bank balance of
the study period is in 2008/09. It indicates that the bank is able to pay cash to
deposit holders. In other words, it can be said that the large amount is in idle
with cash and bank balance indicates lack of proper utilization of assets.
Similarly, the lowest percent of the cash and bank balance is 4.32 percent
which indicates that more fund utilized in loan and advances.

Property of Shanker Dev Campus Library 62

iii. Analysis of Cash and Bank Balance to Current Assets


Table No. 4.13: Cash and Bank Balances to Current Assets
Rs. in million
Year

Cash and bank balance

Current assets

Ratio (%)

2008/09

138.50

1305.54

10.61

2009/10

140.43

1767.35

7.95

2010/11

181.24

2425.33

7.47

2011/12

338.22

2798.54

12.09

2012/13

214.097

3054.18

7.01

Source: Annual reports.


In the above table in 2008/09, cash and bank balance and current assets are Rs.
138.50 million and Rs. 1305.54 million respectively. But in 2009/10, cash and
bank balance is Rs. 140.43 million which is 7.95 percent of the total deposit. It
can be seen that the percentage of the cash and bank balance to current assets is
in decreasing rate after the year 2008/09 to 2010/11. In 2010/11, there was Rs.
181.24 million balances in the cash and bank. This is 7.47 percent of the total
current assets. In the year 2011/12, the cash and bank balance is 338.22
million. It comes 12.09 percent of total current assets. In year 2012/13 cash and
bank balance is 214.097 million. This is 7.01 percent of the total current assets.
It can be seen that there is the cash and bank balance to current assets is in
fluctuating trend. The highest percent of the cash and bank balance to current
assets is shown in 2011/12. It indicates that the bank is able to pay contingent
liabilities and grab market opportunities. In other words, the large amount in
cash and bank balance indicates lack of inefficient of the management. The
lowest percent of the cash and bank balance to current assets in 2012/13, which
indicates that more fund utilized in other investment like government
securities, loan and advances. In other words, it means less chance to grab
market opportunity.

Property of Shanker Dev Campus Library 63

iv. Analysis of Loans and Advances to Current Assets


Table No. 4.14: Loans and Advances to Current Assets
Rs. in million
Year

Loan and advances

Current assets

Ratio (%)

2008/09

798.82

1305.54

61.19

2009/10

1494.02

1767.35

84.53

2010/11

2883.28

2425.33

118.88

2011/12

3697.66

2798.54

132.13

2012/13

3564.64

3054.18

116.71

Source: Annual reports.


In the above table in 2008/09, the loans and advances and current assets are Rs.
798.82 million and Rs. 1305.54 million respectively. In this year, loans and
advances appear 61.19 percent of the current assets. But in 2009/10, the
percentage of loans and advances to current assets is 84.53 percent. Again in
2010/11, the percentage of the loan and advances to current assets is 118.88
percent. It is increasing by 34 percent. In 2011/12, the exposure of loan and
advances has been seen of Rs. 3697.66 million among the total current assets,
which comes to 132.13 percent. Similarly, the percentage of the loans and
advances to current assets in 2012/13 is 116.71 percent which is less than
previous year. In this year, loans and advance is 3564.64 million and current
assets are 3054.18 million.
In above table, it can be seen that the huge amount of the current asset is used
for loans and advances. The lowest percentage of the loans and advances to
current assets is 61.19 percent in 2008/09. It means that there is less outflow of
loan. In 2011/12 there is highest percentage of loans and advances to current
assets which is 132.13 percent. It indicates that more funds are utilized in loans
and advances.

Property of Shanker Dev Campus Library 64

4.1.11 Analysis of Non-Performing Loan


Table No. 4.15: Non-Performing Loan to Total Loan
Rs. in million
Year

Non-performing loan

Loans and advances

Ratio (%)

2008/09

8.25

798.82

1.03

2009/10

10.22

1494.02

0.68

2010/11

14.13

2883.28

0.49

2011/12

17.32

3697.66

0.47

2012/13

19.18

3564.64

0.54

Source: Annual reports.


In above table shows that, in 2008/09 the total loans and advances are Rs.
798.82 million in which Rs. 8.25 million is non-performing loan, and it is 1.03
percent of the total loan. But in 2009/10, NPL is Rs. 10.22 million. It comes to
0.68 percent of the total loan. It is very small ratio in comparison to previous
year. In 2010/11, the ratio of NPL to loan is 0.49 percent. In 2011/12, loan and
advances are Rs. 3697.66 million and non-performing loan is Rs. 17.32 million
which comes to 0.47 percent of the total loan. Similarly, in 2012/13 total loan
is 3564.64 million and NPL is 19.18 million. It is 0.54 percent of total loan.
The rate of NPL is very low on the study period except the fiscal year 2008/09.
The lowest percent of NPL is in 2011/12 which is 0.47 percent. The highest
percent of NPL is in 2008/09 which is 1.03 percent. NPL and profit have
negative relation. If NPL increases the profit automatically decreases and viceversa. According to NRB, the criterion for non-performing loan is limited up to
5 percent. From this point, it can be concluded that the loan mobilizing is good.

Property of Shanker Dev Campus Library 65

4.1.12 Sector-Wise Loan


Table No. 4.16: Analysis of Sector-wise Loan
Rs. in million
Sector

2008/09 2009/10 2010/11 2011/12 2012/13

Agriculture

390.23

522.23

1201.36 1323.51 1419.82 4857.15

Industry

15.22

116.22

228.46

513.21

717.15

1590.26

Service

4.11

144.53

244.26

428.35

298.33

1119.58

215.77

436.44

612.13

611.22

1875.56

388.36

485.14

757.96

774.31

500.31

2906.08

10.13

14.50

46.15

17.81

88.59

Real Estate
Business
Other loan and

Total

advances
Total

798.82

1494.02 2883.28 3697.66 3564.64 12438.42

Source: Annual reports.


Agriculture sector is profitable sector. So the bank disburse highest amount of
loan in that sector but lowest loan disbursed in service sector because of the
political situation of the country.
The table 4.16 shows sector-wise loan disbursement of the SDBL since 5 years.
Disbursing loan all sectors has increasing trend in every year except 2012/13.
The largest portion of the amount is disbursed in agriculture sector which is Rs.
4857.15 million. The total five year loan of the SDBL is Rs. 12438.42 million.
Similarly, 2nd largest portion of the loan is Rs. 2906.08 million disbursed in the
business sector. Then, largest amount of the loan is disbursed in building and
construction sector. This is Rs. 1875.56 million. The least loan is provided in
other loan and advances. This is 88.59 million. Then, the lowest amount is
disbursed in service sector. It is 1119.58, third lowest loan provided in
industrial sector. This is 1590.26 million.

Property of Shanker Dev Campus Library 66

4.1.13 Analysis of Capital Adequacy


Table No. 4.17: Capital Adequacy Ratio
Year

Minimum capital adequacy ratio

Capital adequacy of

according to NRB

SDBL

2008/09

47.00

2009/10

10

32.56

2010/11

11

12.92

2011/12

11

12.24

2012/13

11

17.99

Source: Annual reports.


In the above table, the capital adequacy prescribed by NRB for bank and
financial institutions and comply of SDBL regarding the same has been
presented. The capital adequacy ratios are 9, 10, 11, 11 and 11 percent of the
year 2008/09, 2009/10, 2010/11, 2011/12 and 2012/13 respectively. In
2008/09, the capital adequacy of the SDBL is 47 percent which is 38 percent
greater than NRB standard. In 2009/10, the capital adequacy rate of the SDBL
is 32.56 percent which is also greater by 22.56 percent. Similarly, in 2010/11
the rate is 12.92 percent; it is 1.92 percent greater than NRB standard. The
bank maintain 12.24 percent capital adequacy in 2011/12, though the
prescribed capital adequacy was same as the last year. Finally, in 2012/13 the
capital adequacy of the SBDL is increasing at 17.99 percent. This is also higher
than previous year.
Capital adequacy of the SDBL from 2008/09-2011/12 is decreasing trend. But
in 2012/13, it is increase. However, it has maintained NRB rules and
regulations. SDBL has greater adequacy ratio than NRB prescribed. It indicates
that SDBL has strong financial condition. Because if the disburse loan is
default, it does not affect the bank's lending capacity.

Property of Shanker Dev Campus Library 67

4.1.14 Relationship of Total Lending and Total Deposit to Profitability


Principally the relationship between lending and profitability is positive
whereas Deposit and profitability is negative. Here, the relationship between
lending, deposit and profitability is shown in following table:
Table No. 4.18: Total Amount of Net Profit, Deposit and Lending
Rs. in million
FY
Net profit
2008/09
16.99
2009/10
35.19
2010/11
48.66
2011/12
65.53
2012/13
-72.90
Source: Annual reports.

Total deposit
1602.22
1719.21
3477.94
4001.51
4954.22

Total lending
79.88
14.94
28.83
36.98
35.65

Table No. 4.18: Relationship between Lending and Deposit to profitability

Lending and Net Profit


-0.1059
0.011

Correlation(r)
Coefficient of
determination (r2)
Source: Calculation through SPSS software.

Deposit and Net Profit


-0.4311
0.1858

From table No. 4.18, the net profit seems in increasing trend in every fiscal
year except FY 2012/13 and total deposit amount is also in increasing trend in
every fiscal year. But total lending amount is Rs. 79.88 million in FY 2008/09
but it is highly fluctuating during the study period. The table reveals that the
negative relationship of net profit and lending i.e. -0.1059. Similarly, the
relationship between net profit and borrowing is also negative i.e. 0.4311.
Coefficient of determination of lending and net profit shows the effect of
lending on net profit is 1.1% whereas 98.9% caused of other factors to net
profit. Similarly net profit is caused of deposit by 18.58% whereas other factors
caused on net profit is 81.82%.

Property of Shanker Dev Campus Library 68

4.2 Analysis of Primary Data


To meet the objective of the study, primary data have been taken, analyzed and
then conclusion drawn on the basis of the findings. Primary data are collected
through the questionnaire distributed to the staff of SDBL. These people are
familiar with the credit management of the bank. Questionnaires have been
appended at the end.
4.2.1 Knowledge of Directives Issued by NRB Related to Credit Policy
Respondents were asked about the NRB issued the directives related to credit
policy, their responses are presented below:
Table No. 4.19: Knowledge of Directives Issued by NRB Related to Credit
Policy
Variables
a) Yes
b) No
c) Dont know
Total
Source: Opinion survey, 2013

Respondents
25
2
5
32

Percentage (%)
78
6
16
100

Figure 4.7: Knowledge of Directives Issued by NRB Related to Credit


Policy

The figure shows that 78 percent of the respondents response Yes, 6 percent
respondents response No and remaining 16 percent says dont know about this

Property of Shanker Dev Campus Library 69

query. It shows that maximum respondents are known about directives related
to credit policy issued by NRB.
4.2.2 Implementation of NRB Directives Related to Credit Policy
The question wants to clear that SDBL implementing to directives issued by
NRB related to credit policy. To responses are as follows:
Table No. 4.20: Implementation of NRB Directives Related to Credit
Policy
Variables
a) Yes
b) No
c) Dont know
Total
Source: opinion survey, 2013

Respondents
32
32

Percentage (%)
100
100

The table shows that 100 percent respondents response Yes about this query.
It shows that SDBL is implementing cent percent directives issued by NRB
related to credit policy.
4.2.3 Using Credit Analysis before Approval of Any Loan Proposal
The question wants to clear that SDBL used credit analysis before approval any
loan proposal. The responses are as follows:
Table No. 4.21: Using Credit Analysis before Approval of Any Loan
Proposal
Variables

Respondents

Percentage (%)

a) Yes

32

94

b) No

c) Dont know

Total

32

100

Source: Opinion survey, 2013

Property of Shanker Dev Campus Library 70

Figure No. 4.9: Using Credit Analysis before Approval of Any Loan
Proposal

The figure shows that 94 percent respondents are convinced that SDBL used
credit analysis before approving any loan proposal but 6 percent respondents
says dont know about it.
4.2.4 Visiting the Project Site at the Time of Granting Loan
Respondents were asked to SDBL officers to visit to project site at the time of
granting loan. The responses are as follows:
Table No. 4.22: Visiting the Project Site at the Time of Granting Loan
Variables

Respondents

Percentage (%)

a) Yes

26

81

b) No

c) Dont know

13

Total

32

100

Source: Opinion survey, 2013

Property of Shanker Dev Campus Library 71

Figure No. 4.10: Visiting the Project Site at the Time of Granting Loan

The figure shows that 81 percent respondents agrees that SDBL officers visit
the project site at the time of granting loan, 6 percent respondent opinions that
No and remaining 13 percent respondents opinion that they Dont know. Most
of the respondent agrees that bank officers visit the project site at the time of
granting loan.
4.2.5 Maintaining Right Level of Liquidity
The responses regarding maintaining right level of liquidity are as follows:
Table No. 4.23: Maintaining Right Level of Liquidity
Variables

Respondents

Percentage (%)

a) Yes

32

100

b) No

c) Dont know

32

100

Total
Source: Opinion survey, 2013

The table shows that 100 percent respondent opinions that Yes. So, it reflects
that SDBL have right level of liquidity.

Property of Shanker Dev Campus Library 72

4.2.6 Practices of Credit Policy in Good Way


The question was asked regarding "Whether the practices of credit policy in
good way?" The responses in this question are as follows:
Table No. 4.24: Practices of Credit Policy in Good Way
Variables

Respondents

Percentage (%)

a) Yes

24

75

b) No

c) Dont know

19

Total

32

100

Source: Opinion survey, 2013


Figure No. 4.11: Practices of Credit Policy in Good Way

The figure shows that 75 percent respondents opinions that Yes, 6 percent
respondents opinions that No and remaining 19 percent respondents opinions
that dont know about this query. Most of the respondents agree that the credit
practices adopted by SDBL in good position and minority respondents dont
know about it.

Property of Shanker Dev Campus Library 73

4.2.7 Arising Credit Related Problems


For this query, the responses are shown in the below table:
Table No. 4.25: Arising Credit Related Problems
Variables

Respondents

Percentage (%)

a) Yes

17

53

b) No

10

31

c) Dont know

16

Total

32

100

Source: Opinion survey, 2013


Figure No. 4.11: Arising Credit Related Problems

The figure shows that 53 percentage respondents response Yes about it, 31
percentage response No and remaining 16 percentage response dont know
about it. So, SDBL are facing credit related problems.
4.2.8 Types of Credit Related Problems Faced
The responses are as follows:

Problem arises due to government policy.

Problem arises due to recession in the business.

Problem is on real estate.


Property of Shanker Dev Campus Library 74

Problem arises from misused of funds.

Unsecured loan is provided to person.

4.2.9 Reviewing the Loans and Advances on Periodic Basis


The responses are as follows
Table No. 4.26: Reviewing the Loans and Advances on Periodic Basis
Variables

Respondents

Percentage (%)

a) Yes

32

100

b) No

c) Dont know

32

100

Total
Source: Opinion survey, 2013

The table shows that 100 percentage respondents are in favour of loans and
advances which indicate that loans and advances are reviewed on a periodic
basis in the bank.
4.2.10 Period of Reviewing Loans and Advances
The responses are shown in the below table:
Table No. 4.27: Period of Reviewing Loans and Advances
Variables

Respondents

Percentage (%)

a) Monthly

b) Quarterly

28

88

c) Semi-annually

d) Annually

e) If any

32

100

Total
Source: opinion survey, 2013

Property of Shanker Dev Campus Library 75

Figure No. 4.13: Period of Reviewing Loans and Advances

The figure shows that 88 percentage respondent opinions that SDBL should be
reviewed loans and advances in quarterly basis whereas 6 percent respondents
are in favour of monthly basis and another 6 percent respondent agrees that
loans and advances are reviewed on semi-annually basis. It shows that
generally loans and advances are reviewed in quarterly basis.
4.2.11 Maintaining Sufficient Provision for Loan Losses
For this query of maintaining sufficient provision for loan losses, the responses
are as follows:
Table No. 4.28: Maintaining Sufficient Provision for Loan Loses
Variables

Respondents

Percentage (%)

a) Yes

32

100

b) No

c) Dont know

32

100

Total
Source: opinion survey, 2013

The table shows that 100 percent respondents are in favour of option Yes. So,
we can say that SDBL is maintaining sufficient provision for loans losses.

Property of Shanker Dev Campus Library 76

4.2.12 Percent of Loan Loss Provision


The responses for Loan loss provision maintaining by SDBL as follows

Good Debt

1%

Sub-standard Debt

25%

Doubtful Debt

50%

Bad Debt

100%

4.2.13 Relation between Credit Position and Profitability


The question was asked regarding "Whether there is relationship between credit
position and profitability." The responses are as follows.
Table No. 4.29: Relation between Credit Position and Profitability
Variables

Respondents

Percentage (%)

a) Yes

28

87

b) No

c) Dont know

13

Total

32

100

Source: Opinion survey, 2013


Figure No. 4.14: Relation between Credit Position and Profitability

Property of Shanker Dev Campus Library 77

The figure shows that 87 percent respondents are in favour of Yes but 13
percent respondent opinions that dont know about it. We can assume that there
is relationship between credit position and profitability in SDBL.
4.3 Major Findings of the Study
From the analysis of secondary and primary data following major findings have
been drawn:
Findings from secondary data:
Deposit collection of SDBL is in increasing trend. We find that there is
continuous increasing trend from 117.06 million to 952.70 million.
In all the year total saving deposit has more contribution than other
deposit except year 2008/09 and 2009/10. In year 2008/09, current
deposit has highest contribution to the total deposit and in year 2009/10
fixed deposit has highest contribution to the total deposit.
Loan and advances have continuous increasing trend except year
2012/13 although the banking sector have cut throat competition.
Higher deposited amount is utilized in loan and advances. The lowest
percent of deposits to loan and advances are 49.86 percent in year
2008/09 and highest is 92.41 percent in year 2011/12.
Correlation between deposit collection and loan disbursement is 0.9499.
This indicates that these two variables relation is highly positive. Hence
the analysis found r is also greater than 6PE; it reveals that the relation is
significant.
Net interest to total assets ratio is fluctuating trend during the year. It is
ranged from 2.99 to 9.17 percent.
Net profit to total assets ratio is also in decreasing trend. It is 3 percent
in FY 2008/09 and -1.29 percent in FY 2012/13.
Return on equity capital is satisfactory. It is increasing trend during the
year except year 2012/13.

Property of Shanker Dev Campus Library 78

The current ratio of SDBL is found fluctuating. It is around the 2:1


standard. It ranged from 1.34 times to 2.15 times.
The cash and bank balance is sufficient for deposit holders. The SDBL
has 4.32 percent to 8.64 percent.
Cash and bank balance to current assets ratio is spread from 7.01 percent
to 12.09 percent. It is in fluctuating trend.
All portions of current assets are used in loans and advances, which
shows continuous increasing trend.
The first, second and third greatest amount of loan disbursed sector is
agriculture, business and building and construction sector.
Non-performing loan to loans and advances ratio is ranged from 0.47 to
1.03 percent. This shows the bank could not managed its loans properly
in safety sector.
The relationship of net profit and lending is found negative i.e. -0.1564.
Similarly, the relationship between net profit and deposit is also negative
i.e. -0.4311.
Coefficient of determination of lending and net profit shows the effect of
lending on net profit is 1.1% whereas 98.9% caused of other factors to
net profit. Similarly net profit is caused of deposit by 18.58% whereas
other factors caused on net profit is 81.82%.
Findings from Primary Data
About 78 percent of the respondents response were found of knowing
about NRB directives, 6 percent respondents did not know about it
whereas remaining 16 percent says dont know about NRB directives.
All the respondents were found agreed on implementing NRB
directives.
About 94 percent respondents are convinced that SDBL used credit
analysis before approving any loan proposal but 6 percent respondents
says dont know about it.

Property of Shanker Dev Campus Library 79

About 81 percent respondents agrees that SDBL officers visit the project
site at the time of granting loan, 6 percent respondent opinions that No
and remaining 13 percent respondents opinion that they Dont know.

All the respondents were agreed on maintaining right level of liquidity.


About 75 percent respondents were agreed on credit practices, 6 percent
respondents opinions that no and remaining 19 percent respondents
opinions that dont know about this query.
From the study it is found that 53 percentage respondents response of
facing credit problems, 31 percentage response no and remaining 16
percentage response dont know about it.
100 percentage respondents are in favour of loans and advances which
indicate that loans and advances are reviewed on a periodic basis in the
bank.
About 88 percentage respondent opinions that SDBL should be
reviewed loans and advances in quarterly basis whereas 6 percent
respondents are in favour of monthly basis and another 6 percent
respondent agrees that loans and advances are reviewed on semiannually basis. It shows that generally loans and advances are reviewed
in quarterly basis.
All the respondents were agreed that SDBL is maintaining sufficient
provision for loans losses.
About 87% of the respondents said the relationship between credit
position and profitability is existed. But 13 percent respondent opinions
that dont know about it. We can assume that there is relationship
between credit position and profitability in SDBL.

Property of Shanker Dev Campus Library 80

CHAPTER V
SUMMARY, CONCLUSION AND RECOMMENDATIONS
This is the concluding chapter which provides summary of the study,
conclusion, and recommendations for further improvement based on the
analysis and interpretation of data.
5.1 Summary
Analysis of credit management with to Siddhartha Development Bank Limited
has been prepared to fulfill the requirement of Masters of Business Studies
(MBS) program. This study is mainly based on the annual report provided by
the concerned bank. While sampling the bank for study, only one development
bank has been taken as sample.
For this work various tools are used to study and this study is primarily based
on secondary data. However the analysis is done on the basis of primary data
also. For the secondary data, the most important financial tools are used for the
findings of different types of ratios. Similarly statistical method is used to find
out mean, trend analysis. The secondary data is abstracted from the annual
report of concerned bank. The study covers the periods of five year from
2008/09 to 2012/13. For collection of the primary data, the schedules of
questionnaires were developed and asked to the employees of the bank. The
personal interview was also conducted to know their opinion.
To conclude this study, the whole study has been divided into five chapters of
the different aspects. The summary of each chapter can be presented in each
paragraph.
However, the financial institutions are increasing regularly. Liquidity is
maximum with the financial institutions. Hence, the banks and financial
institutions are competing among themselves to advance credit to limited
opportunity sectors. Banks and financial institutions are investing in housing
loan, hire purchase loan for safety purpose. Now days, banks have increasing

Property of Shanker Dev Campus Library 81

number of deposits in fixed and saving accounts but have decreasing trend in
lending behaviors. So, this has caused major problems in development banks.
Now days, due to competition among banks, the interest rate charge for loan is
in decreasing trend. Due to unhealthy competition among banks, the recovery
of the banks credit is going towards negative trends. Non-performing credits
of the banks are increasing year by year. To control such type of state, the
regulatory body of the banks and financial institutions, NRB has renewed its
directives of the credit loss provision. Therefore, it is necessary to analyze the
credit management or credit disbursement recovery provision for loss and
write off of credit.
The objective of the study is to analyze the credit management of Siddhartha
Development Bank. The specific objectives are to analyze the trends of deposit
collection and credit lending i.e. loan and advances, to assess total amount of
loan, to evaluate the performance of SDBL in terms of liquidity, profitability,
sector-wise loan, non-performing loan, to analyze capital adequacy of SDBL
and to know the view of employees in regarding to credit management.
Literature review is done in second chapter relating to the financial
performance has been reviewed. By reviewing some previous studies, many
inputs can be taken for the study and other researcher can also take advantages
from this section. However, various researchers have been conducted on
lending practice, credit policy, financial performance and credit management of
various commercial banks. Past researchers have not properly analyzed about
lending and its impact on the profitability. The ratios have not categorized
according to nature.
In third chapter explains about the methodology of the study. Generally, a
common research design possesses the five basic elements viz. (i) selection of
problem (ii) methodology (iii) data gathering (iv) data analysis and (v) report
writing. The Present study follows the descriptive as well as exploratory design
to meet the stated objectives of the study. The research is based on primary as
well as secondary source of data, even though adequate data are collected from
secondary sources. Here, the total 86 development banks constitute the

Property of Shanker Dev Campus Library 82

population of the data and Siddhartha Development Bank Limited under the
study constitutes the sample under the study. Mainly financial methods are
applied for the purpose of this study. Appropriate statistical tools are also used.
Fourth chapter is data presentation and analysis. Data analysis tools mentioned
in the third chapter is used to analyze the data in this chapter. Various ratios
that are related to financial performance of the bank have been used to analyze
the financial performance of the SDBL.
5.2 Conclusion
In total deposit composition, the portion of the saving deposit has in first rank,
fixed deposits is in second rank and current deposit in the third rank, other
deposit in the fourth and call deposit in the last rank. Although the narrow area
of investment, and cut throat competition in banking sector, loans and advances
of the SDBL shows continuous increasing trend. Loans and advances are lower
than total deposit i.e. all deposits are somehow utilized in loan and advances.
Correlation between deposit collection and loan disbursement is 0.9499. It
indicates that the relations of two variables are highly positive. The relation is
significant because r is greater than 6PE.
Net interest to total assets ratio shows increasing trend but the rate is very low
in previous year. Because of low net interest to total assets ratio, the
profitability of the bank shows also low. Net profit to total assets ratio of SDBL
is fluctuated i.e. increase in former year and decrease in later years. It proves
net assets of the bank is not fixed. Return on equity capital is shown in
increasing trend in first four year, and then it has been decreased in fifth year.
That is why, increment in capital is higher than the increment in return on
equity respecting in fifth year.
The current ratio 2:1 of the SDBL is equal closely related to 2:1. It indicates
that the liquidity position of the SDBL can be supposed as satisfactory. Cash
and bank balance to current assets can be seen in satisfactory level. It has
maintained NRB directives. There is 7.01 percent to 12.09 percent of the cash
and bank in total current assets. The first, second and third greatest amount of

Property of Shanker Dev Campus Library 83

loan is disbursed in agriculture, business, building and construction


respectively. Similarly, lowest in other loans and advances sectors. NPL of the
SDBL is fluctuating. In the study period low and high NPL of the bank is 8.25
million and 19.18 million. It can be assumed that as international practice. It
shows low quality of lending of the SDBL. Capital adequacy of the SDBL is
sufficient against NRB standard. It indicates that the lending capacity of SDBL
is high.
From primary survey, it shows that maximum respondents are known about
directives related to credit policy issued by NRB. SDBL is implementing cent
percent directives issued by NRB related to credit policy. Most of the
respondent agrees that bank officers visit the project site at the time of granting
loan. Most of the respondents agree that the credit practices adopted by SDBL
in good position and minority respondents dont know about it. Credit
problems arises due to problem arises due to government policy, problem arises
due to recession in the business, problem is on real estate, problem arises from
misused of funds and unsecured loan is provided to person. All the respondents
were agreed that SDBL is maintaining sufficient provision for loans losses.
5.3 Recommendations
The present study can be a valuable piece of research works in credit
management. It explored the existing situation and identified the various
components for further improvement in credit management. In order to better
improvement of the "Loan management of the SDBL" the following
recommendations have been made on the basis of findings of the study:
Excess concentration of loan lending on some certain area depicts the
fact that people lack in identifying new innovation. Most of the people
do similar types of business thinking to have more return. This
germinates excess competition of the business and risk for bankers.
Hence, it should provide technical support to prospects for identifying
new opportunities and to capitalize those opportunities.
It is truly realized that gradual shift of focus from traditional lending to
retail banking such as auto loan, housing loan, education loan and
personal loan.
Property of Shanker Dev Campus Library 84

The banks should increase loan disbursement in industrial sector.


Capital adequacy of the bank is not in NRB. So, the bank should keep it
this standard.
The bank should spend some profit in social activities. It affects the
public positive attitude towards the bank.
Loan should flow on profitable and viable sectors. This will result
increase in interest income of the loan and advances of which will uplift
profit of the organization.
Due to poor credit administration, the credit recovery process is slow as
well as legal process in the recovery of credit is lengthy and ineffective.
Clear-cut objective and policy of the credit management is lacking so
that non-performing credit is going upward. To get better result in the
coming future, bank should reduce the volume of non-performing credit.
The banks should adopt efficient and modern management concept to
make their activities quick and moving there by fulfilling the growing
demand of current financial services.
Total deposit is not correlated with the loan and advances. This is very
serious matter and the main reason is the case of over liquidity that the
bank has maintained so far. Thus, the bank should mobilize the deposit
and try to bring the correlation between total deposit and loan and
advance in an appropriate level.
To meet customers requirement the bank should focus on value added
tasks like making front line decisions, making actions plans, improving
process reviewing progress, analyzing successes and failures, providing
feedback to suppliers, reducing costs etc.

Property of Shanker Dev Campus Library 85

BIBLIOGRAPHY
Bajracharya P., Ojha K.P, Goet J., Sharma S. (2008/09), Managerial
Accounting Nepalese Perspective, Kathmandu: Asmita Books Publisher
and Distributors.
Basnet S. (2008), Credit Management of Rastriya Banijya Bank Limited,
Kathmandu: Central Department of Management, T.U
Brealy, R. & Myres, S. (1991), Principle of Corporate Finance, New Delhi:
Mc-Graw Hill Publishing Company Private Limited.
Cheney, M.J. & Moses, A.E. (1988), Fundamentals of Investment, St. Paul:
West Publishing Company.
Clemen, J.H. (1963), Banking Lending, London, Butterworth Publishers.
Crosby, N., French, N. and Oughton, M. (2009). Banking Lending Valuations
on Commercial Property. The Boss. P. 66-83. .
Dahal P. (2009), Credit Management of Nepal Commerce and Credit Limited,
Kathmandu: Shanker Dev Campus , Putalisadak.
Dhakal, M.N. (2011), A Study on Credit Risk Management of Standard
Chartered Bank and Rastriya Banijya Bank, Kathmandu: Shanker Dev
Campus, Putalisadak.
Dipendra B.C (2005), Non Performing Assets: A Need for Rationalization.
Kathmandu: Nepal Rastra Bank Samachar Nepal Rastra Bank, vol. 50, p
17
Ghimire S. (2010), A Study on Credit Management of Joint Venture
Commercial Bank with reference to NIBL and BOK, Kathmandu:
Shanker Dev Campus, Putalisadak.
Johnson, E. (1940), Commercial Bank Management, New York: The Dryden
press Private Limited.
Karim, Yasir (2012). "Impact of Risk Management on Non-Performing Loans
and Profitability of Banking Sector of Pakistan." International Journal
of Business and Social Science. Federal Urdu University of Arts,
Science and Technology Islamabad, Pakistan. Vol. 3 No. 7; April 2012.
Property of Shanker Dev Campus Library 86

Karki A. (2006), A Study on Credit Management and Analysis of Commercial


Bank, Kathmandu: Shanker Dev Campus, Putalisadak.
Khadka, S.J. & Singh, H.R. (2069), Banking and Insurance, Kathmandu: M.K.
Publishers.
Kothari, C.R. (1990), Research Methodology, Method and Techniques, New
Delhi: Wiley Eastern Private Limited.
Maharjan R. (2008), Credit Management of HBL and NABIL, Kathmandu:
Shanker Dev Campus, Putalisadak.
Morrison, Alan D. (2013). "Credit Derivatives, Disintermediation, and
Investment Decisions." Chicago Journal. Said Business School,
University of Oxford, Chicago. Vol. 78, No. 2, pp. 621-648.
Mundul, Sujit (2010). Understanding of credit derivative. Business Age. p.
26.
Pandey, I. M. (1999), Financial Management, New Delhi: Vikas Publishing
House Private Limited.
Poudyal, G., Basnet, D. and Pant, K. (2069), Research Methodology.
Kathmandu: Dreamland Publication.
Rahman, Saidur (2011). "Credit Risk Management Practices in Banks: An
Appreciation." Journal of Islamic Economics, Banking and Finance,
Islami Bank Training and Research Academy (IBTRA), Dhaka. Vol. 50
7, No. 3, Jul Sep 2011.
Shekher & Shekher (1999), Banking Theory and Practice, New Delhi: Vikas
Publishing House Private Limited.
Shrestha, M.K. (2009/10), Finacial Management, Kathmandu: Curriculum
Development Centre.
Shrestha, R. (2002), A Comparative Study on Investment Policy of Indosuez
Bank Ltd. and Everest Bank Ltd, Kathmandu: Shanker Dev Campus,
Putlisadak.
Shrestha, Sunity. (1993), Lending Operation of Commercial Banks of Nepal
and Its Impact on GDP, The Business Voice of Nepal, The special issue
of Banijya Samachar, T.U. Kritipur.
Property of Shanker Dev Campus Library 87

Singh R. (2008), Credit Managemet of BOK and NABIL, Kathmandu: Central


Department of Management, T. U
Vaidya, S. (1999), Banking Management, Kathmandu: Monitor Nepal.
Van Horne, J.C. (1999), Financial Management and Policy, New Delhi:
Prentice Hall of India Private Limited.
www.nrb.org.np
www.sdbl.com.np

Property of Shanker Dev Campus Library 88

APPENDIX-I
QUESTIONNAIRE

Sir,
First of all, I want to introduce myself as a student of Shanker Dev Campus. I
would like to request you to fill up the following questionnaires prepared for
collection of your views as valuable resources for my research work. This
research is conducted for the partial fulfillment of the requirements for the
degree of MBS. It would be of great value should you help in this project work
by filling the following questionnaire:
Shiva Raj Khanal
Please tick () an option which you favor most.
1. Do you know the directives issued by NRB related to credit policy?
(a) Yes

(b) No

(c) Dont Know

2. If yes, are the SDBL implementing the directives issued by NRB related
to credit policy?
(a) Yes

(b) No

(c) Dont Know

3. Do the SDBL use credit analysis before approval any loan proposal?

(a) Yes

(b) No

(c) Dont Know

4. Does any bank officer visit the project site at the time of granting loan?
(a) Yes

(b) No

(c) Dont Know

Property of Shanker Dev Campus Library 89

5. Whether the bank has right level of liquidity or not?


(a) Yes
(
)
(b) No

(c) Dont Know

6. Is the credit practices adopted by SDBL in good position?


(a) Yes
(
)
(b) No

(c) Dont Know

7. Is there credit related problems in your bank?


(a) Yes

(b) No

(c) Dont Know

8. If yes, then what kinds of problems facing by your bank?


.................................. ..

9. Whether loans and advances are reviewed on periodic basis?


(a) Yes
(
)
(b) No

(c) Dont Know

10. If yes, then which period?


(a) Monthly

(b) Quarterly

(c) Semi annually

(d) annually

(e) If any..

Property of Shanker Dev Campus Library 90

11. Is your bank maintaining sufficient provision for loan losses?


(a) Yes

(b) No

(c) Dont Know

12. If yes, then what is the % of loan losses provision maintaining by your
bank?
(a) Good debts
..
(c) Doubtful debts ..

(b) Sub- standard debts .


(d) Bad debts
.

13. Is there any relationship between credit position and profitability?


(a) Yes

(b) No

(c) Dont Know

Property of Shanker Dev Campus Library 91

APPENDIX-II
A Profile of Siddhartha Development Bank Limited
Siddhartha Development Bank Limited (SDBL), established in 2002 and
promoted by prominent personalities of Nepal, today stands as one of the
consistently growing banks in Nepal. While, the promoters come from a wide
range of sectors, they possess immense business acumen and share their
valuable experiences towards the betterment of the Bank.
Within a short span of time, Siddhartha Bank has been able come up with a
wide range of products and services that best suits its clientele Siddhartha Bank
has been posting growth in its portfolio size and management of the bank has
been thoroughly professional.
SDBL has been able to gain significant trust of the customers and all other
stakeholders to become one of to most promising commercial banks in the
country in less than 10 years of its operation. The bank is fully committed
towards customer satisfaction. The range and scope of modern banking
products and services the bank has been providing is an example to its
commitment towards customer satisfaction. It is this commitment that has
helped the bank register quantum growth every year. And the bank is confident
and hopeful that it will be able to retain this trust and move even further
towards its mission of becoming one of the leading banks of the industry.
VISION
Siddhartha bank runs with a vision to be financially sound, operationally
efficient and keep abreast with technological developments.
MISSION
The bank desires to be one of to leading banks of the industry by fulfilling the
interest of the stakeholders and also aims to provide total customer satisfaction
by way of offering innovative products and by developing and satisfaction bay
Property of Shanker Dev Campus Library 92

way of offering innovative products and by developing and retaining highly


motivated and committed staff. It directs all its efforts to move ahead with
increased profits. The following mission statement is a guide to meet the vision
of the bank:

Be one of the leading of to industry in terms of profitability,


productivity and innovation.

Aim at total customer satisfaction by rendering efficient and diversified


financial services through improved technology.

Build a highly motivated and committed team of staff by nurturing a


good work culture to achieve superior individual performance aiming to
enhance organizational effectiveness.

Be the place of pride to all its stakeholders.

Head office of SDBL is in Tinkune, Kathmandu. It is established under


company act, 2063 and operated under bank and financial institutional act,
2063. Bank started its banking transaction since 25th June 2002.
Bank is committed to do following works to achieve its objectives:
To provide loan on sector of agriculture, industry, trade, SMEs, Microcredits, housing and land development and service business sector by
utilizing available resources and skills.
To operate special programmed by selecting poor and backward
populated socially for upgrading their life style.
To provide banking service and help them for select and implement of
right projects for rural semi-rural and urban sector of its geographical
people according development bank concept.
To develop and implement alternative scheme for mobilization of
internal resources as well as external resources.
To provide certain level of loan against group liabilities to less income
generated people and scheduled group for their suitable projects.

Property of Shanker Dev Campus Library 93

Salient Features of the bank:


Debit card and ATM facility.
Any branch banking facility.
Maximum benefit and security to depositors.
Loan facility to entrepreneurs on easy process and in low cost interest.
Special program to use the technology and human resources.
Easy and quick computerized banking services.
Money transfers facilities.
Remittance facilities.
Capital structure of the bank:
Authorized capital Rs. 1,30,00,00,000
Issued capital Rs. 65, 00, 00,000
Paid up capital Rs. 64, 50, 00,000
(Source: Annual Report, 2011/12/12).
The study content have been focused on credit management procedure and
effectiveness, loan disbursement, loan recovery and loan outstanding position
of the financial institution. In essence, the current study through light on the
credit management to draw attention of new researchers and the management
of the bank in order to aware them in their vital activities.

Property of Shanker Dev Campus Library 94