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By:
SHOVA MAHARJAN
Shanker Dev Campus
Campus Roll No: 755/061
T.U. Registration No: 7-2-24-557-2001
Kathmandu, Nepal
September, 2010
RECOMMENDATION
This is to certify that the Thesis
Submitted by:
SHOVA MAHARJAN
Entitled:
......
.....
..
Prof. Dr. Kamal Deep Dhakal
(Campus Chief)
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VIVA-VOCE SHEET
We have conducted the viva voce of the thesis presented
by
SHOVA MAHARJAN
Entitled:
Viva-Voce Committee
....
....
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DECLARATION
I hereby declare that the work reported in this thesis entitled MANAGING CORE RISK
SHOVA MAHARJAN
Researcher
Campus Roll No.: 755/061
T.U. Regd. No.: 7-2-24-557-2001
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ACKNOWLEDGEMENT
The completion of this thesis is a matter of great pleasure for me. It has fulfilled the partial
requirement for the Degree of Master of Business Studies as well as helped me to enhance my
practical knowledge on the subject matter. It wouldnt have been completed without invaluable
support, supervision and suggestions from my teachers, elders, colleagues, and friends.
Therefore, I would like to share the joy with all who owe equal credit for it.
First of all my sincere gratitude goes to my honorable teacher as well as the thesis supervisor
Assoc. Prof. Kishor Maharjan, Shanker Dev Campus, who helped me by providing significant
ideas, encouragement and techniques besides his invaluable time. Besides him, I would like to
thank Prof. Bisheshwor Man Shrestha, Head of Research Department, Shanker Dev Campus,
for his valuable inspiration and suggestions.
Let me offer my sincere thanks to the staffs of Bank of Kathmandu Limited and Nepal
Industrial and Commercial Bank Limited for their support and cooperation in collecting data
and other information during the study. I would like to thank the respondents of questionnaire
for their efforts in answering the questions and the library staffs of Shanker Dev Campus and
also the Central Library of Tribhuvan University for providing references to me.
In the same way, I am also thankful to my parents, and friends for their endless encouragement
and facilitation in preparing this Thesis.
Shova Maharjan
Researcher
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5.2 Conclusion
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5.3 Recommendations
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BIBLIOGRAPHY
APPENDICES
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Title
Page No.
4.1
42
4.2
44
4.3
47
4.4
49
4.5
51
4.6
53
4.7
55
4.8
56
4.9
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4.10
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4.11
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4.12
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4.13
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4.14
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4.15
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4.16
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4.17
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4.18
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4.19
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4.20
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4.21
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4.22
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4.23
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4.24
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4.25
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Title
Page No.
4.1
44
4.2
46
4.3
51
4.4
53
4.5
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4.6
59
4.7
60
4.8
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4.9
64
4.10
65
4.11
67
4.12
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4.13
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4.14
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4.19
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4.20
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4.21
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Bank of Kathmandu
C.V.
Coefficient of Variation
CL
Credit Loss
CLP
DC
Doubtful Credit
Exp.
Exposure
Max.
Maximum
ME
Maximum Exposure
NIC
NP
Net Profit
NPC
NPC/TC
NRB
P.E.
Probable Error
Coefficient of Correlation
S.D.
Standard Deviation
SSC
TA
Total Assets
TC
Total Credit
TC/TA
WO
Written Off
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INTRODUCTION
1.3 Background of the Study
Risk is inherent in all aspects of a commercial operation, however for Banks and financial
institutions, credit risk is an essential factor that needs to be managed. Credit risk is the
possibility that a borrower or counter party will fail to meet its obligations in accordance with
agreed terms. Credit risk, therefore, arises from the banks dealings with or lending to
corporates, individuals, and other banks or financial institutions.
Credit risk management needs to be a robust process that enables banks to proactively manage
loan portfolios in order to minimize losses and earn an acceptable level of return for
shareholders. Central to this is a comprehensive IT system, which should have the ability to
capture all key customer data, risk management and transaction information including trade &
Forex. Given the fast changing, dynamic global economy and the increasing pressure of
globalization, liberalization, consolidation and dis- intermediation, it is essential that banks
have robust credit risk management policies and procedures that are sensitive and responsive to
these changes.
Sound credit management is a prerequisite for a financial institutions stability and continuing
profitability, while deteriorating credit quality is the most frequent cause of poor financial
performance and condition. The prudent management of credit risk can minimize operational
risk while securing reasonable returns.
The board and management should set goals or targets for their loan portfolio mix, as part of
their annual planning process. The loan portfolio should be monitored on an ongoing basis, to
determine if performance meets the board's expectations, and the level of risk remains within
acceptable limits.
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The purpose of this study is to provide directional guidelines to the banking sector that will
improve the risk management culture, establish minimum standards for segregation of duties
and responsibilities, and assist in the ongoing improvement of the banking sector in Nepal.
Credit risk management is of utmost importance to Banks, and as such, policies and procedures
should be endorsed and strictly enforced by the MD/CEO and the board of the Bank.
financial institutions, NRB has renewed its directives of the credit loss provision. Therefore, it
is necessary to analyze the credit risk management or credit disbursement recovery provision
for loss and write off of credit. As the sample of commercial banks, Bank of Kathmandu and
Nepal Industrial and Commercial Bank have been selected.
Research problems may be stated in the form of following questions:a) To what extent is the credit of the bank vulnerable to the credit risk?
b) Whether the bank has kept adequate loan loss provision to cover the credit risk?
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Chapter I is the introduction chapter. It includes background of the study, statement of the
problems, objectives of the study, significance of the study, and limitations of the study and
organization of the study.
Chapter II deals with review of literatures, which includes conceptual/ theoretical review and
review of related studies.
Chapter III is research methodology which includes research design, population and sample,
source of data, data collection techniques and data analysis tools.
Chapter IV deals with analyzing the data of the sampled banks related to the credit risk and the
opinions of the respondents. It also shows major finding of the study.
Chapter V includes summary and conclusion of the study. It also deals with recommendations
suggested.
Besides these, Bibliography and Appendix are presented at the end of the study.
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REVIEW OF LITERATURE
2.3 Conceptual Review
2.1.1 Credit Risk
Credit risk in its simplest definition refers to the task of loss through default on financial
assets. If this risk in not managed and mitigated effectively and efficiently, the fundamental
business of lending can bring trouble to entire financial industry. Establishing an effective
credit risk management framework should be a top priority for every organization in this
regard. But, if the established framework is not feasible enough for generating sufficient return
for the stakeholders, one cannot hope that it will be sustainable in the long run. So, the
managements of the financial institutions have to find out an effective, at the same time,
profitable and sustainable credit risk management policy for the smooth running of its
operations in the lending business. (Saunders; 1999: 43-44)
Credit risk is an investor's risk of loss arising from a borrower who does not make payments as
promised. Such an event is called a default. Another term for credit risk is default risk. Investor
losses include lost principal and interest, decreased cash flow, and increased collection costs,
which arise in a number of circumstances:
A consumer does not make a payment due on a mortgage loan, credit card, line of credit,
or other loan
A business does not make a payment due on a mortgage, credit card, line of credit, or
other loan
A business or consumer does not pay a trade invoice when due
A business does not pay an employee's earned wages when due
A business or government bond issuer does not make a payment on a coupon or
principal payment when due
An insolvent insurance company does not pay a policy obligation
An insolvent bank won't return funds to a depositor
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In terms of equity, a bank must have substantial amount of capital on its reserve, but not too
much that it misses the investment revenue, and not too little that it leads itself to financial
instability and to the risk of regulatory non-compliance. Credit risk management is risk
assessment that comes in an investment. Risk often comes in investing and in the allocation of
capital. The risks must be assessed so as to derive a sound investment decision. And decisions
should be made by balancing the risks and returns. (Carty & Fons; 1993: 45)
Giving loans is a risky affair for bank sometimes and certain risks may also come when banks
offer
securities
and
other
forms
of
investments.
The risk of losses that result in the default of payment of the debtors is a kind of risk that must
be expected. A bank has to keep substantial amount of capital to protect its solvency and to
maintain its economic stability. The greater the bank is exposed to risks, the greater the amount
of capital must be when it comes to its reserves, so as to maintain its solvency and stability.
(Moody; 2000: 31)
Credit risk management must play its role then to help banks be in compliance with Basel II
Accord and other regulatory bodies. For assessing the risk, banks should plan certain estimates,
conduct monitoring, and perform reviews of the performance of the bank. They should also do
Loan reviews and portfolio analysis in order to determine risk involved. Banks must be active
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a) Risk-Based Pricing: Lenders generally charge a higher interest rate to borrowers who are
more likely to default, a practice called risk-based pricing. Lenders consider factors relating
to the loan such as loan purpose, credit rating, and loan-to-value ratio and estimate the effect
on yield (credit spread). (Delianedis & Geske; 1998: 35)
b) Covenants: Lenders may write stipulations on the borrower, called covenants, into loan
agreements:
Periodically report its financial condition.
Refrain from paying dividends, repurchasing shares, borrowing further, or other specific,
voluntary actions that negatively affect the company's financial position.
Repay the loan in full, at the lender's request, in certain events such as changes in the
borrower's debt-to-equity ratio or interest coverage ratio. (Delianedis & Geske; 1998:
37)
c) Credit Insurance and Credit Derivatives: Lenders and bond holders may hedge their
credit risk by purchasing credit insurance or credit derivatives. These contracts the transfer
risk from the lender to the seller (insurer) in exchange for payment. The most common
credit derivative is the credit default swap. (Kealhofer; 1993: 65)
d) Tightening: Lenders can reduce credit risk by reducing the amount of credit extended,
either in total or to certain borrowers. For example, a distributor selling its products to a
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Also, statistical risk measures are much more subject to model risk than exposure- based
metrics, but they often permit a more meaningful risk aggregation across, for example,
products, obligors, or business lines than their exposure counterparts. The classic example of
credit lines that are difficult to aggregate under normal conditions is the case of counterparty
risk limits and traditional credit lines for a single obligor. These considerations show that no
single risk metric is a panacea. Rather, the question of which to use depends on which risk
metric best fits the purpose at hand. (Morgan; 1997: 66-67)
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b) Capital: The equity contribution of owners and its ratio to debt (leverage). These are
viewed as good predictors of bankruptcy probability. High leverage suggests a greater
probability of bankruptcy. (Altman & Saunders; 1997: 32)
c) Capacity: The ability to repay, which reflects the volatility of the borrowers earnings. If
repayments on debt contracts follow a constant stream over time, but earnings are volatile
(or have a high standard deviation), there may be periods when the firms capacity to
repay debt claims is constrained. (Altman & Saunders; 1997: 33)
d) Collateral: In the event of default, a banker has claims on the collateral pledged by the
borrower. The greater the priority of this claim and the greater the market value of the
underlying collateral, the lower the exposure risk of the loan. (Altman & Saunders; 1997:
33)
e) Cycle (or Economic) Conditions: The state of the business cycle; an important element
in determining credit risk exposure, especially for cycle-dependent industries. For
example, durable goods sectors tend to be more cycle-dependent than nondurable goods
sectors. Similarly, industries that have exposure to international competitive conditions
tend to be cycle-sensitive. (Altman & Saunders; 1997: 33)
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Adoption of internal ratings for the purpose of assessing regulatory capital requirements has the
potential to distort the integrity of the rating system, especially if banks view capital as costly
and wish to minimize that cost. Supervisors will have to validate the accuracy of a wide variety
of internal rating systems. This may prove impossible without access to large amounts of data,
as well as in the presence of non quantifiable subjective factors that make the rating system into
an unverifiable black box. Moreover, reliance on internal ratings raises concerns about: (1) the
ongoing integrity of each system; (2) the consistency and comparability of the ratings,
particularly across national boundaries; and (3) the evolution and disclosure of best-practices
methods that become international standards. (Theodore; 1999: 110-113)
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Principle One: The role of the Board in Establishing a Policy for Managing Credit Risk
The Board of Directors (or its equivalent) of an organization should (a) devise a Credit Risk
policy (including criteria governing the allocation of Credit Limits) and a strategy which is
consistent with the commercial policy and objectives, the financial position, the risk appetite
and the levels of expertise of the organization; (b) ensure that there is an adequate framework
of systems and controls in place to give effect to that policy; and (c) ensure that the senior
managers appointed to the task of establishing, overseeing and operating within that framework
of systems and controls have the appropriate qualities and expertise to carry out that task. In
determining its Credit Risk policy, the Board should take into account the fact: (Belkin,
Forest, Aguais, & Suchower; 1998: 75-78)
a. that techniques, systems and controls put in place to manage Credit Risk, while helping
to quantify, control and mitigate or offset the risk of default, will not necessarily
eliminate it altogether;
b. that Credit Risk should not be seen in isolation, but as part of a group of inter-related
risks e.g. market risk, liquidity risk, legal risk and operational risk, the totality of which
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Principle Two: Establishing a Framework of Systems and Controls for Managing Credit
Risk (the Framework)
Senior management should establish an independent framework of systems and controls which
fully reflects the Credit Risk policy and strategy set by the Board of Directors, accords with
accepted principles of good corporate governance and is capable of identifying, measuring,
pricing, recording, monitoring, managing, mitigating and reporting on the organizations Credit
Risk (the Framework). While the Framework may vary in detail from organization to
organization, it should: (Belkin, Forest, Aguais, & Suchower; 1998: 82-84)
a. be consistent with the policy objectives determined by the Board;
b. adequately reflect the objectives, requirements and criteria;
c. be embedded in the culture of the organization and understood by all relevant
employees;
d. be founded on the principle of functional segregation;
e. establish clear and suitably documented procedures and allocation of responsibilities and
functions to individual managers and staff; and
f. be implemented and monitored by persons who are adequately trained and have
sufficient knowledge, competence, qualities and authority to discharge their duties
effectively.
Principle Three: Establishing Practices and Procedures within the Framework for the
Effective Assessment, Evaluation Measurement and Management of Credit Risk.
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Evaluation of Credit Risk and subsequent approval of counterparty relationships and limits
should be based on appropriate quantitative measures, be founded on all relevant data, and be
properly documented.
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The adoption by an organization of these (or other similar) principles and practices should help
to reduce its overall exposure to risk, aid the organizations awareness and understanding of
that risk, foster greater market integrity and confidence (and therefore increased liquidity) and
improve trading efficiencies to the advantage of all market participants and their counterparties.
However, it is recognized that, because of the size or the nature of the business of an
organization, it may not have the resources or systems or it may not be necessary to implement
in detail all the recommendations set out in these Guidelines (e.g. where the degree of Credit
Risk to which an organization is subject does not justify the costs of full implementation).
Nevertheless, all organizations should consider carefully the concerns that lie behind the
principles and how they might otherwise be addressed to help manage and reduce their overall
exposure to Credit Risk. It is important to bear in mind that Credit Risk can never be totally
eliminated and that the overall objective of good management in this area is to be able to
manage its potential to impact negatively on an organization.
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Step-1: Curing Loan: The objective at this step is to decide whether the loan can be returned
permanently to the performing portfolio, preferably without encountering any economic losses,
and which treatment ought to be applied to achieve this aim. Key success factors are the time
horizon in which action steps are taken (since the cure rate typically decreases within a very
short period) and efficient communication with the customer to identify the reasons for
repayment problems and arrive at a mutual agreement, if possible. To support the decision that
is to be made at this point, it is important to measure the probability of default or re-default of
the customer (if cured). (Wall & Koch; 2000: 37)
Step-2: Restructuring Loan: If the decision in previous step has been negative i.e. the loan
cannot be returned to the portfolio, the objective will then be to determine whether the bank
should replace the non-performing loan with a loan that might be less profitable than the
original but still a worthwhile investment. Key success factors at this stage are a timely
response and decision by the bank as well as a correct assessment of the customer probability to
(re-) default on the new loan. Relevant metrics at this point are:
a. Future debt service capacity of the client, considering the payment characteristics of the
new loan.
b. Probability of (re-) default on the new loan.
c. Profitability of the restructured loan.
d. Expected recovery from a liquidation of the original loan (if it is not restructured).
If the banks decision is not to restructure, multi-product customers will enter step-3, whereas
(in most cases) single-product customers will be directly routed to step-4. (Wall & Koch;
2000: 38-39)
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The detailed rules that determine the decision at this point will focus on those metrics. Thus, in
addition to the usual risk measures, customer value measurement methods and principles enter
the picture. It is, therefore, necessary that debt management assume a customer perspective,
rather than the usual product-related view. (Wall & Koch; 2000: 40-42)
Step-4: Selling Loan: Finally, the goal of is to determine whether selling the loan is more
profitable than liquidation and subsequent recovery. This question will be posed only if the
respective bank is in a position to perform non-performing loan (NPL) transactions in the credit
markets and if a suitable deal is planned. At the same time, however, banks of all sizes are
increasingly gaining access to the skills necessary to enter into NPL transactions, mainly by
sharing the use of relevant platforms with other institutions. Thus, the objective of this step is
becoming relevant for an increasing number of institutions. (Wall & Koch; 2000: 43)
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Loans and advances falling in this category of sub-standard, Doubtful and loss are classified
and defined as Non-performing loan. It is appropriate in the view of the banks management;
there is not restriction in classifying the loan and advances from low risk category to high risk
category. For instance, loans falling under substandard may be classified into doubtful or loss
and loans falling under doubtful may be classified into loss category. The term loan and
advances also includes bulls purchased and discounted.
2. Additional Arrangement in Respect of Pass Loan: Loan and advances fully secured by
gold, silver, fixed deposit receipts, credit cards and government securities shall be include
under pass category. Loans against fixed deposit receipts of other banks shall also qualify for
inclusion under pass loan. However, where collateral of fixed deposit receipt or government
securities or NRB bonds is placed as extra security, such loan has to be classified on the basis
of clause 1 to clause 7. While renewing working capital loan having maturity period up to one
year can be classified as pass loan. If the interest of working capital nature loans and advance is
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3. Additional Arrangement in Respect of loss Loan: Even if the loan is not past due, loans
having any or all of the following discrepancies shall be classified as loss.
a. Security is not sufficient,
b. The borrower has been declared bankrupt,
c. The borrower is absconding or cannot be found,
d. Purchased or discounted bills are not realized within 90 days from the due date and non
fund based letter of credit and guarantees etc are not realized within 90 days from the
date of conversion into fund based are not realized within 90 days,
e. The credit has not been used for the purpose originally intended,
f. Owing to non-recovery, initiation as to auctioning of the collateral has passed six
months and if the recovery process is under litigation,
g. Loan provided to the borrowers included in the blacklist of credit information center
(CIC),
h. Project or business is not in operative conditions, project or business is not in operation,
i. Credit Card Loan is not written off within 90 days from past due date.
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6. Letter of Credit and Guarantees: If letter of credit and guarantees and other contingent
liabilities converted into fund based liabilities and have to be paid, in such condition such loan
shall be classified as pass loan within 90 days from the date of conversion into fund based.
After 90 days such loan shall be classified as loss loan.
7. Rescheduling and Restructuring of the Loan: If the bank is confident on the following
bases of written plan of action submitted by borrower, it may reschedule or restructure the
loans and advances. Clear bases of rescheduling or restructuring should be attached with loan
files.
a. If there is proof of adequate documents and collateral security relating to loan.
b. If the bank is confident in recovery of restructured or rescheduled loans and advances.
8. Loan Loss Provisioning: The loan loss provisioning, on the basis of the outstanding loans
and advances and bills purchases classified as per this directives, shall be provided as follows:
Classification of Loan
Pass loan
1%
Sub-standard loan
25%
Doubtful loan
50%
Loss
100%
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Massive credit expansion in developed countries has been due in large part to the introduction
and wide diffusion of risk transfer techniques (insurance, securitization, derivatives, etc.) and
the wider acceptance of different types of collateral (inventories, accounts receivables,
warehouse receipts, etc.). In Latin America, the most common risk transfer instruments
available are publicly financed loan guarantee funds; however, they are used only modestly (25
percent). Historically, guarantee funds have been plagued with problems of high costs, limited
additionality, and moral hazard. Recent work has shown that the most successful guarantee
funds in Latin America (in terms of additional) are those in Chile, and that much of the positive
impact is due to adequate regulation. In order to introduce some of the other risk transfer
instruments more commonly found in developed financial markets, investments will be needed
to reform and strengthen the insurance industry, capital markets, credit bureaus, commercial
codes, secured transaction frameworks, and information disclosure rules.
Burns & Stanley (2008), in their article, Managing Consumer Credit Risk, have stated that
the tools for improving management of consumer credit risk have advanced considerably in
recent years as industry leaders and their advisors have focused on the development of
increasingly sophisticated analytical tools.
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Fatemi & Fooladi (2009), in their article, Credit Risk Management: A Survey of Practices,
have stated that credit risk arises from uncertainty in a given counterparty's ability to meet its
obligations. The increasing variety in the types of counterparties (from individuals to sovereign
governments) and the ever-expanding variety in the forms of obligations (from auto loans to
complex derivatives transactions) has meant that credit risk management has jumped to the
forefront of risk management activities carried out by firms in the financial services industry.
In a survey of the largest financial institutions based in the US, the study finds that identifying
counterparty default risk is the single most-important purpose served by the credit risk models
utilized. Close to half of the responding institutions utilize models that are also capable of
dealing with counterparty migration risk. Surprisingly, only a minority of banks currently
utilize either a proprietary or a vendor-marketed model for the management of their credit risk.
Interestingly, those that utilize their own in-house model also utilize a vendor-marketed model.
Not surprisingly, such models are more widely used for the management of non-traded credit
loan portfolios than they are for the management of traded bonds.
Gillespie, Hackwood & Mihos (2010), in their article, Managing Credit Risk for Global
Commodity Producers, have stated that commodity producers require robust systems,
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However, many leading commodity producers have implemented robust controls and tools to
manage the credit risk process. This study has sought to highlight five areas of focus to improve
the management of credit risk; a) producers should develop an internal credit rating system for
customers, b) internal credit limits should be used as the main control point in the export
process, c) close relationships should be maintained with credit insurers and banks, d) a
standard credit risk process and set of tools should be used by all marketing and sales
personnel, and e) a portfolio view of credit risk should be reviewed regularly by a senior
executive team.
Ganzi & Huppman (2010), in their article, Credit Risk Management: How the Banking
Industry is Integrating Environmental & Social Issues: Is Being Green Financially
Responsible?, have stated that credit risk management is undergoing an important transition.
Banks are no longer treating environmental and other social issues as peripheral to their
business concerns; they no longer focus simply on recycling paper or using energy-efficient
light bulbs. Based on meetings with 80 officers at 38 leading financial institutions, a study
financially supported by Environmental Resources Management (ERM), indicates that the
majority of the worlds large banks agree that integrating environmental and broader social
issues into their core credit risk management process is essential to managing credit risk in the
21st century. Leading banks such as Citigroup, ABN AMRO, Westpac, and Barclays, to name a
few, now view these non-traditional issues as real credit risk variables that may potentially
affect their clients bottom lines as well as their own.
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Lama (2007), in his thesis, A Study on Credit Management of Agriculture Development Bank
Limited, has the main objective to evaluate the lending procedure of ADBL. In addition to this
main objective, the study has other specific objectives;
a. To evaluate the trend of loan investment, collection and outstanding.
b. To show the achievement of purpose-wise and term-wise loan disbursement, outstanding
and collection of ADBL.
c. To study lending policy, loan recovery procedure, interest rate and discount of ADBL.
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Guragain (2009), in his thesis, Credit Practices: A Study on NABIL Bank Ltd., SCB Nepal
Ltd. and Himalayan Bank Ltd., has the major objective of examining the credit management
in the selected banks. The specific objectives of the study are;
a. To determine the liquidity position, the impact of deposit in liquidity and its effect on
credit practices.
b. To measure the bank's lending strength.
c. To analyze the portfolio behavior of credit and measure the ratio and volume of lending
made in agriculture, priority and productive sector.
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Simkhada (2010), in her thesis, Credit Policy of Commercial Banks in Nepal, has the
objective to provide the credit practices in NIBL and SBI bank. The specific objectives are;
a. To examine the liquidity and assets management of NIBL and SBI.
b. To evaluate the investment policy of NIBL and SBI.
c. To study the growth ratio of loan and advances.
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RESEARCH METHODOLOGY
3.1 Research Design
Generally, research design is the plan, structure and strategy of investigation conceived so as to
obtain answer to research questions and to control variance. It is arrangement for collection and
analysis of data. To achieve the objective of this study, descriptive and analytical research
design has been used. Some financial and statistical tools have been applied to examine facts
and descriptive techniques have been adopted to evaluate the core risk, especially the credit risk
of the banks.
The sources of secondary data are mainly AGM reports of BOK, NIC and NRB and other
concerned organizations, bulletins, publication, researches, journals, articles, unpublished thesis
reports, newspapers, books, authorized websites and internet. Whereas the source of primary
data is the collection of opinions from employees, shareholders, depositor and borrowers of the
observed banks through questionnaire.
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a) Mean
Arithmetic mean or simply a mean of a set observation is the sum of all the observations
divided by the number of observations. Arithmetic mean is also known as the arithmetic
average.
Let x1, x2, x3, ., xn be the n values of the variable then their arithmetic mean be
denoted by x is defined by,
b) Standard Deviation
The standard deviation is the absolute measure of dispersion in which the drawbacks present in
other measures of dispersion are removed. It is said to be the best measure of dispersion as it
satisfies most of the requisites of a good measure of dispersion.
c) Coefficient of Variation
The coefficient of dispersion based on standard deviation multiplied by 100 is known as the
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d) Correlation Coefficient
When the relationship is of quantities nature, the appropriate statistical tool for discovering and
measuring the relationship and expressing it in a brief formula is known as correlation. If the
values of the variables are directly proportional then the correlation is said to be positive. On
the other hand, if the values of the variables are inversely proportional, the correlation is said to
be negative, but the correlation said to be negative, but the correlation coefficient always
remains within the limit of +1 to -1. By Karl Pearson, the simple correlation coefficient (R) is;
e) Regression Lines
The regression line is the line that gives the best estimate of one variable for any given value of
the other variable. The simple regression equation of dependent variable (Y) on the
independent variable (X) is given by;
y = a + bx
Where,
X = the value of independent variable
Y = the value of dependent variable
a = Y-intercept
b = slope of the trend line/coefficient of regression
Kathmandu - 47
f) Trend Analysis
A widely and most commonly used method to describe the trend is the method of least square.
Let the trend line between the dependent variable y and the independent variable x (i.e. time) be
represented by;
Yc
a + bx (i)
Where,
a = y intercept or value of y when x = 0
b = slope of the trend line or amount of change that comes in y of a unit change in x.
na + bx .. (ii)
xy
ax + bx2 (iii)
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FYBOKNICFYTCTARatioTCTARatio2004/056182.059857.1362.724909.35751
0.3965.372005/067488.7012278.3360.996902.1210383.6066.472006/079694.1014
581.3966.489128.6511679.3478.162007/0812747.7217721.9271.9311465.3315238
.7375.242008/0914945.7120496.0072.9213915.8518750.6374.22Mean67.0171.89
S.D.4.785.06C.V.%7.137.03
Kathmandu - 49
In addition, the ratio of total credit to total assets of NIC has increased for the first three years,
and then it has decreased in the last two fiscal years, although both the credit and total assets of
the bank have increased in each year. This implies that the pace of increment in total assets of
the bank is greater than that of total credit in last two years. In other word, the bank has
diversified its total fund in other assets as well. In five consecutive fiscal years, the total credit
of the bank has reached to Rs. 13915.85 millions by the end of the fiscal year 2008/09 from Rs.
4909.35 in the fiscal year 2004/05, and the total asset of the bank has ranged from Rs. 7510.39
millions in the fiscal year 2004/05 to Rs. 18750.63 millions in the fiscal year 2008/09.
Moreover, the ratio of total credit to total assets has mounted to 78.16% in the fiscal year
2006/07 from 65.37% in the fiscal year 2004/05, and by the end of the fiscal year 2008/09, the
ratio is 74.22%. In average, NIC bank has mobilized 71.89% of the total assets in granting
credit and the uniformity in the ratio is also high, i.e. the variation is just 7.03%.
Palpably both the banks have taken credit as the major use of the fund and thus they have
disbursed the credit aggressively. However, the average disbursement ratio on total assets of
NIC is higher than that of BOK, indicating high risk in the total assets of NIC through credit
default. Considering the credit risk, presumably NIC bank has decreased the preponderance of
the total credit on total assets in the last two fiscal years.
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FYBOKNICFYNPCTCRatioNPCTCRatio2004/05308.516182.054.99185.4349
09.353.782005/06203.627488.702.72179.556902.122.602006/07243.309694.102.5
1101.149128.651.112007/08236.9012747.721.8698.1611465.330.862008/09190.31
14945.711.27129.1813915.850.93Mean2.671.85S.D.1.271.15C.V.%47.4462.27
Kathmandu - 51
Alike BOK, NIC bank has also decreased its non performing credit in the five consecutive
fiscal years, i.e. from Rs. 185.43 millions in the fiscal year 2004/05 to Rs. 129.18 millions in
the fiscal year 2008/09, although the non performing credit of the bank is lowest, Rs. 98.16
millions, in the fiscal year 2007/08. Consequently, the non performing credit to total credit of
NIC has followed decreasing trend in first four fiscal years, and thus it has been lowered from
3.78% in the fiscal year 2004/05 to 0.86% in the fiscal year 2007/08, while in the fiscal year
2008/09, it is 0.93%. In average, 1.85% of the total credit granted has been turned to non
performing credit and the variation in such conversion is 62.27%, indicating high fluctuation.
Comparing the banks on the basis of the non performing credit to total credit, it has been
ascertained that the credit management of the NIC is more effective than that of BOK, as a
result the credit risk on the granted amount is less in NIC in comparison that of BOK in each
fiscal year. However, the attempt of BOK in drastically reducing the credit risk, i.e. the non
performing credit to total credit, could be omen of sound credit management in future.
Kathmandu - 52
FYBOKFYNPCSSCDCCLFYRs.Rs.%Rs.%Rs.
%2004/05308.5188.4228.6689.8129.11130.2842.232005/06203.6271.6135.1
78.804.32123.2160.512006/07243.3039.8616.3836.5815.03166.8668.582007
/08236.90100.1842.2919.258.13117.4749.592008/09190.3136.9119.3921.08
11.08132.3269.53Mean236.5367.4028.3835.1013.53134.0358.09S.D.41.102
5.399.6428.768.5417.2410.68C.V.
%17.3837.6733.9581.9263.1312.8618.39FYNICFYNPCSSCDCCL
Kathmandu - 53
(Source: Appendix V)
To analyze the credit risk of the bank in depth, the structure of non performing credit has been
scrutinized. The table emblazons that the trend of sub standard credit of BOK has traced the
same path, i.e. increasing or decreasing, of the non performing credit in most of the fiscal years.
As a result the sub standard credit has decreased from Rs. 88.42 millions in the fiscal year
2004/05 to Rs. 36.91 million by the end of the fiscal year 2008/09. Further, the coverage of sub
standard credit has followed fluctuating trend and thus it has ranged from 16.38% in the fiscal
year 2006/07 to 35.17% in the fiscal year 2008/09. In average, 28.38% of the total non
performing credit has been represented by sub standard credit. Similarly, the doubtful credit of
the BOK has fluctuated extremely during the five consecutive fiscal years, and thus it has
ranged from Rs. 89.81 millions in the fiscal year 2004/05 to Rs. 8.80 in the fiscal year 2005/06.
Moreover, the doubtful credit to non performing credit has also fluctuated drastically in the
periods, and thus the ratio is highest, 29.11%, in the fiscal year 2004/05 and lowest, 4.32%, in
the fiscal year 2005/06. In average, the doubtful credit covered 13.53% of the total credit
granted. However, in most of the fiscal years, the credit loss to non performing credit of BOK
has increased compared to that of the previous years. The credit loss of the bank has ranged
from Rs. 117.47 millions in the fiscal year 2007/08 to Rs. 166.86 millions in the fiscal year
2006/07. In addition, the credit loss to non performing credit of the bank is maximum, 69.53%,
in the fiscal year 2008/09 and it is minimum, 42.23%, in the fiscal year 2004/05. In average,
more than half, 58.09%, of the non performing credit has remained most vulnerable to credit
risk, and the variation in such risk extent is 18.39%.
Kathmandu - 54
Rs.Rs.%Rs.%Rs.
%2004/05185.4345.9724.7911.396.14128.0769.072005/06179.550.650.367.864.38
171.0495.262006/07101.146.136.060.930.9294.0893.022007/0898.169.639.8111.76
11.9876.7778.212008/09129.182.421.8761.1347.3265.6350.81Mean138.6912.968.
5818.6114.15107.1277.27S.D.37.4116.798.7521.6116.9738.3116.37C.V.
%26.97129.58102.03116.10119.9435.7621.19
Analyzing the structure of non performing assets, it has been ascertained that the non
performing assets of both the banks is outweighed by the credit loss. Both the bank should
adopt tight recovery and monitoring policy to deduct such pernicious assets. However, among
the two observed banks, the credit risk, on the basis of the component of non performing assets,
is higher in NIC than in BOK, as the credit loss to non performing assets is higher in NIC in
comparison to that of BOK.
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Alike in BOK, the credit loss provisioning amount in NIC is also in fluctuating trend, and thus
it has ranged from Rs. 187.25 millions in the fiscal year 2006/07 to Rs. 246.16 millions in the
fiscal year 2005/06. In contrast, the ratio of credit loss provision to total credit of the bank has
been gradually decreased. The ratio has been deducted to 1.70% in the fiscal year 2008/09 from
4.03% in the fiscal year 2004/05. In average, the bank has been able to maintain the credit loss
provisioning to total credit to 2.62%, and the variation in the ratio is 37.42%.
It seems that both the banks have contemplated about the destructive effect of default credit, as
a result both the banks have significantly deducted the non performing credit of the bank. This
Kathmandu - 56
FYBOKNICFYCLPTCRatioCLPTCRatio2004/05269.476182.054.36197.644909
.354.032005/06229.627488.703.07246.166902.123.572006/07294.779694.103.0418
7.259128.652.052007/08285.0812747.722.24200.6511465.331.752008/09298.4214
945.712.00236.4613915.851.70Mean2.942.62S.D.0.830.98C.V.%28.1537.42
Figure 4.3
Credit Loss Provisioning to Total Credit
FYBOKNICFYWritten OffTCRatioWritten
OffTCRatio2004/05209.136182.053.3839.234909.350.802005/0695.217488.701.27
29.726902.120.432006/07---9694.100.00103.329128.651.13
Kathmandu - 57
Alike BOK, NIC bank has also deducted the unrecoverable credit and interest suspense.
However the written off amount has fluctuated during the entire observed periods, and thus it
has varied from Rs. 4.38, in lowest, in the fiscal year 2008/09 to Rs. 103.32 millions, in highest,
in the fiscal year 2006/07. The written off credit and interest suspense to total credit has also
fluctuated during the periods. It has 0.80% in the fiscal year 2004/05, 0.43% in the fiscal year
2005/06, 1.13% in the fiscal year 2006/07, 0.18% in the fiscal year 2007/08 and 0.03% in the
fiscal year 2008/09. In average, the written off credit and interest expenses has represented
0.51% of the total credit amount, and the ratio has varied by 78.49%, indicating highly
inconsistency.
The table has enlightened that NIC bank has written off credit and interest expenses more
regularly than the BOK. Despite this, the credit risk in NIC bank is lower than that of BOK,
Kathmandu - 58
2007/0845.4012747.720.3620.5111465.330.182008/09---14945.710.004.3813915.850.03Mean1.000.51S.D.1.280.40C.V.%127.5378.49
FYBOKNICFYMax. Exp.TCRatioMax.
Exp.TCRatio2004/05161.056182.052.61119.304909.352.432005/06257.217488.70
3.43179.386902.122.602006/07250.009694.102.58207.449128.652.272007/08476.6
212747.723.74215.4611465.331.882008/09256.0714945.711.71345.9613915.852.4
9Mean2.812.33S.D.0.710.25C.V.%25.3910.75
Kathmandu - 59
Comparing the two banks on the average ratio, it can be considered that the credit risk is high in
BOK as compared to that of NIC, since the ratio is higher in BOK. However, NIC bank should
also halt the increasing trend of the maximum exposure to single borrower amount to decrease
the credit risk.
Figure 4.5
Concentration of Maximum Exposure to a Single Borrower to Credit
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Also, the regression analysis indicates that an increment in Rs. 1 of non performing credit leads
to Rs. 1.90 decrease in net profit in BOK, if the other variable, 734.89, remains constant, and
Rs. 1.37 decrease in net profit of NIC, if the other variable, 375.33, remains stable. Thus it is
palpable that the effect of non performing credit is slightly trivia in NIC as compared to that in
BOK. However, it cannot be deduced that the net profit of both the bank solely depends upon
the fluctuation on non performing credit, since there is statistically insignificant relationship
between non performing credit and net profit, as the correlation coefficient between these two
variables in both the banks is lower than the calculated 6 P.E.
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The positive correlation has eventually resulted that with the increase in Rs. 1 of the maximum
exposure to single borrower, the net profit of BOK increases by Rs. 0.56, if the variable,
128.68, remains constant, and the net profit of NIC increases by Rs. 1.00, if the variable, 27.02, remains rigid. However, the relationship between net profit and maximum exposure to
single borrower could be justified only in NIC, since the calculated r value is greater than
corresponding 6 P.E. only in NIC bank. Thus, net profit of BOK may not increase even with the
increase in maximum exposure, as per the probability test, in some circumstances.
Kathmandu - 62
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Similarly, the decrease amount in credit loss in NIC is highest than the other component of non
performing credit. The substandard credit decreases by Rs. 7.81 millions per year, the credit
loss decreases by Rs. 21.92 millions per years, while in contrast the doubtful credit increases by
Rs. 10.34 millions per year. This shows that NIC will be able to deduct the credit loss, which is
considered more proximity for causing the credit written off, most effectively, but will be
unsuccessful to control the growing doubtful credit. Nevertheless, the substandard credit of the
bank will be nil, since negative, the doubtful credit will be Rs. 90.98 millions, and the credit
loss will also be nil, since negative, by the end of the fiscal year 2013/14. If NIC pays more
concern to decrease the doubtful credit, the chance of decreasing credit risk in the bank is
inevitable.
FYBOKNICFYSSCDCCLSSCDCCL2009/1045.06-3.00133.5310.4849.6341.372010/1137.62-15.70133.36-18.2959.9719.462011/1230.1728.40133.20-26.1070.30-2.462012/1322.73-41.10133.03-33.9180.6424.372013/1415.28-53.80132.87-41.7290.98-46.29Regression
Y=89.73
7.45X73.21
12.70X134.53
0.17X36.40
7.81X-12.40 +
10.34X172.86
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Whereas the person supporting cross border risk is just trivia, i.e. only 7% of the employees,
which has represented 4% of the total respondents. Finally, 10% of the total respondents; 13%
of the employees and 7% of the shareholders, have stated that the bank should consider the
discourage business types for credit advancement while formulating the credit guideline.
Considering the overall majority, it can be assumed that the decision on single borrower limit is
most crucial for credit guideline.
Figure 4.8
Crucial Element for Making Credit Guideline (in Total)
ResponseEmployeeShareholderTotalResponseNo.%No.%No.%Industry &
Business Focus533213723Types of Credit Facilities320427723Single Borrower
Limit4278531240Cross Border Risk170014Discouraged Business
Types21317310Total151001510030100
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Table 4.13
Procedure for Alleviating Credit Risk
ResponseEmployeeShareholderTotalResponseNo.%No.%No.%Risk-Based
Pricing320427723Covenants6404271033Credit Insurance &
Derivatives0021327Tightening213320517Diversification427213620Total15100151
0030100
Kathmandu - 68
Likewise, 13% of the employees, 20% of the shareholders, and 17% of the total respondents
have urged the practice of tightening, which involves reducing the credit amount, obliging
borrower to make payment in time etc., can lessen the credit risk. Finally, 27% of the
employees, 13% of the shareholders and 20% of the total respondents have suggested that the
bank should diversify its credit portfolio to various sectors either than concentrating on limited
area to prevent and finally reduce the credit risk. Considering the overall majority, it can be
inferred that the practice of covenants would be the optimum procedures for the bank to lessen
the credit risk.
Figure 4.9
Procedure for Alleviating Credit Risk (in Total)
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In addition, 27% of the employees, 20% of the shareholders and 23% of the total respondents
have affirmed that the assessment of the market value of collateral pledged against the credit is
most important while making credit assessment and risk gauging. Besides these, 6% of the
shareholders, which represents 4% of the total respondents, have said that the cycle of the
business, or the economic condition, of borrower should be predicted cautiously while making
credit assessment and risk grading. Eventually, on the basis of the overall majority, it can be
concluded that undoubtedly the paying capacity of the borrower is most crucial for making
credit assessment and risk grading.
Kathmandu - 70
ResponseEmployeeShareholderTotalResponseNo.%No.%No.
%Character213427620Capital320320620Capacity6404271033Collateral427320723
Cycle (Economic Condition)001614Total151001510030100
ResponseEmployeeShareholderTotalResponseNo.%No.%No.%Expert
System533427930Artificial Neural System170014Rating System320427723Credit
Scoring System6407461343Total151001510030100
Kathmandu - 71
Figure 4.11
Effective Approach for Credit Management & Risk Reduction (in Total)
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In addition, 13% of the employees, 13% of the shareholders, and 13% of the total respondents
have pointed out that the ineffectiveness of the bank in projecting credit enhancement program
can lead to credit default. Finally, 27% of the employees, 33% of the shareholders and 30% of
the total respondents have stated that the loophole in contractual document to mitigate credit
risk invites the chances of credit default. Analyzing all the principles and the majority of the
total respondents, it can be inferred that the bank mainly fails to establish the practices and
procedures for effective assessment, evaluation measurement and management of credit risk; as
a result the credit risk augments.
Kathmandu - 73
ResponseEmployeeShareholderTotalResponseNo.%No.%No.%Role of BOD in
Establishing
Appropriate Policy170014Framework System & Control32017413Assessment &
Evaluation5337471240Credit Enhancement213213413Contractual
Document427533930Total151001510030100
ResponseEmployeeShareholderTotalResponseNo.%No.%No.%Curing
Credit8535331343Restructuring Credit427213620Terminating Customer
Relationship213427620Selling Credit17427517Total151001510030100
Kathmandu - 74
Similarly, 13% of the employees, 27% of the shareholders, and 20% of the total respondents
have stated that the bank would be more interested in terminating customer relationship, and
determining prospective relationship with the customer. Moreover, 7% of the employees, 27%
of the shareholders and 17% of the total respondents have said that the bank would be more
interested in selling credit rather than liquidating and subsequent recovery. Thus, considering
all the options and the majority of the responses, it can be considered that the bank would be
more interested in curing the loan rather than performing other sort of actions.
Figure 4.13
Banks Interest after Identifying Sort of Risk (in Total)
Kathmandu - 75
Kathmandu - 76
ResponseEmployeeDepositorBorrowerTotalResponseNo.%No.%No.%No.
%Yes8534273201533No747106612802965Dont
Know00170012Total15100151001510045100
Kathmandu - 77
ResponseEmployeeDepositorBorrowerTotalResponseNo.%No.%No.%No.
%Agriculture4274273201125Business3205336401431Household8536406402044To
tal15100151001510045100
Kathmandu - 78
ResponseEmployeeDepositorBorrowerTotalResponseNo.%No.%No.%No.
%Severely Affected5336407471840Moderately Affected7476406401942Nominally
Affected320320213818Total15100151001510045100
ResponseEmployeeDepositorBorrowerTotalResponseNo.%No.%No.%No.
%Strict Recovery Policy5334274271329Rebate for Timely
Payment3203205331125Monitoring6408536402044New Rule &
Regulation17000012Total15100151001510045100
Kathmandu - 79
Figure 4.17
Best Option to Solve Non Performing Credit (in Total)
Employee
Depositor
Borrower
Total
Kathmandu - 80
Kathmandu - 81
Kathmandu - 82
ResponseEmployeeDepositorBorrowerTotalResponseNo.%No.%No.%No.
%Paper Document5333202131022Collateral Valuation7475334271636Interest
Rate3206408531738Employee Behavior00170012Time
Period00001712Total15100151001510045100
ResponseEmployeeDepositorBorrowerTotalResponseNo.%No.%No.%No.
%Dragging Guarantor173200049Counseling Borrower5334276401533Selling
Collateral7476404271738Supporting
Technically213213533920Total15100151001510045100
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ResponseEmployeeDepositorBorrowerTotalResponseNo.%No.%No.%No.
%Careful Evaluation7476405331840Appropriate Int. Rate32017427818Monitoring
Activity3205333201124Timely
Collection213320320818Total15100151001510045100
Kathmandu - 84
Kathmandu - 85
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Credit risk is risk due to uncertainty in a counterparty's (also called an obligor's or credit's)
ability to meet its obligations. Because there are many types of counterpartiesfrom
individuals to sovereign governmentsand many different types of obligationsfrom auto
loans to derivatives transactionscredit risk takes many forms. Banks manage it in different
ways. In assessing credit risk from a single counterparty, bank must consider three issues.
Firstly the bank should consider default probability: What is the likelihood that the counterparty
will default on its obligation either over the life of the obligation or over some specified
horizon, such as a year? Secondly the bank should consider credit exposure: In the event of a
default, how large will the outstanding obligation be when the default occurs? And finally the
bank should consider recovery rate: In the event of a default, what fraction of the exposure may
be recovered through bankruptcy proceedings or some other form of settlement?
The manner in which credit exposure is assessed is highly dependent on the nature of the
obligation. If a bank has loaned money to a firm, the bank might calculate its credit exposure as
the outstanding balance on the loan. Suppose instead that the bank has extended a line of credit
to a firm, but none of the line has yet been drawn down. The immediate credit exposure is zero,
Kathmandu - 88
The goal of credit management is to optimize the company's sales and profits by keeping both
credit risk and payment delinquencies within acceptable limits. Sound credit management
involves finding the right balance in the risk/reward relationship between sales and bad-debt
losses.
Eventually, the study aims to analyze the management of core risk, credit risk, in the banking
sector of the country. To achieve this objective, the study gauges the credit risk level in the
banks, especially in BOK and NIC, tests credit loss provision kept by the bank in relation to
total credit, evaluates the better policy and procedural guidelines that the bank should follow to
lessen the credit risk, and collects the opinion for effective credit management.
5.2 Conclusion
Analyzing the secondary data, it can be concluded that the credit is the major use of the fund in
both the banks. The NIC bank is, however, more aggressive in credit disbursement than BOK,
as a result it can be assumed that the credit risk is more in NIC. Nevertheless, the analysis of
the non performing credit to total credit has capsized such assumption and thus the credit
management of the NIC is more effective than that of BOK. Further, analyzing the structure of
Kathmandu - 89
The statistical analysis justified that the net profit of both the bank does not solely depend upon
the fluctuation on non performing credit, since there is statistically insignificant relationship
between non performing credit and net profit. Despite this, the regression analysis indicates that
the non performing credit has slightly greater impact on profit in BOK than in NIC. Further, the
maximum exposure to single borrower limit has turned to be favorable for NIC in raising the
profit.
Analyzing the primary data, it can be inferred that the decision on single borrower limit is most
crucial for credit guideline. In addition to this, the practice of covenants would be the optimum
procedures for the bank to lessen the credit risk and more precisely the paying capacity of the
borrower is most crucial for making credit assessment and risk grading. Further, it can be
concluded that credit scoring system would be the best approach for the banks credit
management and risk alleviation. Also the bank mainly fails to establish the practices and
procedures for effective assessment, evaluation measurement and management of credit risk; as
a result the credit risk augments. Despite these, the bank would be more interested in curing the
loan rather than performing other sort of actions. Certainly on the basis of the overall majority,
it can be concluded that the bank is not most efficient in managing its credit. More deeply, the
credit disbursed for household purpose is most risky than others and the non performing credit
Kathmandu - 90
5.3 Recommendations
For the enhancement of the banking performance in management of credit risk, the following
recommendations have been provided;
Both the banks have been highly dependent on credit while mobilizing the available
funds. It would be better if both the bank diversify the available funds, and increase the
funds in investment.
Although the elevation of non performing credit is almost impossible, both the banks
can follow tight recovery policy to lessen the amount of non performing credit.
NIC bank needs to lessen the credit loss by having tight recovery policy and preventing
the sub standard credit and doubtful credit from being credit loss. Similarly BOK needs
to lessen the preponderance of credit loss in total non performing credit.
The credit risk in BOK is higher than in NIC. It would be better if BOK restructures in
credit policy and thus diminish the chances of default credit. Further, BOK should be
less dependent on the single borrower while granting the credit.
For managing the credit risk, both the bank needs to adopt the following suitable general
options, which includes;
Avoiding Risk: This can be accomplished by refusing to extend credit to high-risk
accounts. However, in most banks this is not a viable option since so many
customers could be classified as high risk that refusing to sell to them would reduce
sales to unacceptable levels.
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Cunningham, A. (1999). Bank Credit Risk in Emerging Markets. Zrich: JRP Ringier
Kunstverlag AG .
Delianedis, G. and Geske, R. (1998). Credit Risk and Risk-Neutral Default Probabilities.
London: Alastair Sawday Publishing.
Duffee, G.R. (1999). Estimating the Price of Default Risk. Copenhagen: Copenhagen
Publishing House.
Gupton, G.M. (2000). Bank Loan Loss Given Default. London: Banipal Publishing.
Kathmandu - 93
Nickell, P., Perraudin, W. and Varotto, S. (2001). Ratings versus Equity-Based Credit Risk
Modeling. Edinburgh: St Johan Patrick Publishers.
Saunders, A. (1999). Credit Risk Measurement. New York: John Wiley & Sons.
Theodore, S.S. (1999). Rating Methodology: Bank Credit Risk. Westminster: Tango Books
Publishers.
Wall, L.D., and Koch, T.W. (2000). Bank Loan-Loss Accounting. Atlanta: Peachtree Publishers
Limited.
Kathmandu - 94
. XI (3): 1-17.
NIC (F.Y. 2004/05 F.Y. 2008/09). Annual Reports. Kathmandu: Nepal Industrial and
Commercial Bank Limited.
Wenner, Mark, Navajas, Sergio, Trivelli, Carolina and Tarazona, Alvaro (2007). Managing
Credit Risk in Rural Financial Institutions in Latin America. Journal of Credit Analysis.
Washington D.C.: Mage Publishers Incorporated. XVI (7): 43-77.
Thesis:
Burlakoti, Satish (2008). Credit Policy Analysis of Commercial Bank with Special reference to
Everest Bank Limited. An Unpublished Masters Degree Thesis submitted to Faculty of
Management, T.U.
Guragain, Madhusudan (2009). Credit Practices: A Study on NABIL Bank Ltd., SCB Nepal Ltd.
and Himalayan Bank Ltd. An Unpublished Masters Degree Thesis submitted to Faculty
of Management, T.U.
Lama, Dhurba (2007). A Study on Credit Management of Agriculture Development Bank
Limited. An Unpublished Masters Degree Thesis submitted to Faculty of Management,
T.U.
Kathmandu - 95
Websites:
http://bfr.nrb.org.np/bfrdirectives.php?vw=15
http://www.bok.com.np/investorrelation/annualreport.php
http://www.nicbank.com.np/Annual-Report.pdf
Kathmandu - 96
Respondents;
Name (Optional):
Designation: Employee/Shareholder/Depositor/Borrower (Please Tick One)
(Note: Dear shareholders please answer Question no. 1 to 6, employees please answer all, and
depositors and borrowers please answer only from Question no. 7 to 14.)
1. The bank should be most cautious on which of the following element while making credit
guideline?
a) Industry and Business Segment Focus
2. To alleviate credit risk, the bank should focus mainly on which of the following procedure?
a) Risk-Based Pricing
b) Covenants
d) Tightening
e) Diversification
Kathmandu - 97
b) Capital
c) Capacity
d) Collateral
4. Which one of the following approaches will befit for your bank for effective credit management and
reducing credit risk?
a) Expert System
c) Rating System
5. The credit risk of commercial bank has been caused mainly due to the ineffectiveness of which
principle?
a) Role of BOD in establishing Policy
e) Contractual Documents
6. After identifying the sort of risk, mainly the bank is more interested to...
a) Curing Credit
b) Restructuring Credit
d) Selling Credit
7. Do you think that the commercial banks of Nepal are efficient in Credit Management?
a) Yes
b) No [
c) Dont Know
Kathmandu - 98
] b) Business
] c) Household [
b) Moderately Affected [
c) Nominally Affected [
10. Which measure is the best option to solve the problem of Non Performing Credit?
a) Strict Recovery Policy
11. If the borrower is having overdue outstanding, the bank should start follow up;
a) Within a Week
c) Within one Month
[
[
12. In you view, which of the following is the main influencing factor in credit disbursement?
a) Paper Document
b) Collateral Valuation [
]
]
c) Interest Rate
d) Employee Behavior
e) Time Period
b) Counseling Borrower
c) Selling Collateral
Kathmandu - 99
Kathmandu - 100
APPENDIX - II
a) Calculation of Mean, S.D. and C.V. of BOK
YearTC/TA
XNPC/TC
YCLP/TC
Zx = X-Xy = Y-Yz = Z-Z2
x2
y2
z2004/0562.724.994.36-4.292.321.4218.395.382.012005/0660.992.723.07-
67.01
For CLP/TC
Z = Z/5
2.94
Mean
(x-x)2
N
4.78
114.06
5
For NPC/TC
Y = Y/5 =
2.67
For NPC/TC
y
(y-y)2
N
1.27
8.03
5
For CLP/TC
z
(z-z)2
N
0.83
3.42
5
For CLP/TC
C.V.z
x
Z
28.15
0.83
2.94
Note: i) Same Process has been adopted to calculate the mean, standard deviation and
coefficient of variation of other variables.
ii) Data have extracted from the annual report of BOK.
1.27
2.67
i) Calculation of Mean
For TC/TA
Mean
X = X/5
71.89
For CLP/TC
Z = Z/5
2.62
Mean
(x-x)2
N
5.06
127.85
5
For NPC/TC
Y = Y/5 =
1.85
For NPC/TC
y
(y-y)2
N
1.15
6.66
5
For CLP/TC
z
(z-z)2
N
0.98
4.82
5
For CLP/TC
C.V.z
x
Z
37.42
0.98
2.62
Note: i) Same Process has been adopted to calculate the mean, standard deviation and
coefficient of variation of other variables.
ii) Data have extracted from the annual report of NIC.
1.15
1.85
i) Calculation of Mean
For TC/TA
Mean
X = X/5
APPENDIX - III
a) Calculation of correlation coefficient and regression line between Net Profit & NPC of BOK
YearNPC
XNP
Yx = X-Xy = Y-Y2
x2
yxy2004/05308.51139.5371.98-145.995181.4121312.50-10508.512005/06203.62202.44-32.9183.081082.946901.952733.932006/07243.3262.396.77-23.1345.86534.90156.622007/08236.9361.500.3775.980.145773.2628.272008/09190.31461.73-46.22176.212136.1031050.678144.17Total1182.641427.598446.4565573.29-16047.1011
236.53
For NP
Y = Y/5 =
r x y ( X-X)
x
0.6819 x 114.52 (X-236.53)
41.10
or, Y-285.52
1.90 X + 449.37
or, Y
734.89 - 1.90 X
r2
-0.6819
23534.26
285.52
1-r2
0.6745 (1-r )P.E.6 P.E.0.46490.540.362.23610.16140.9684
For NP
y
y2
N
114.52
65573.29
5
i) Calculation of Mean
For NPC
Mean
X = X/5
b) Calculation of correlation coefficient and regression line between Net Profit & NPC of NIC
YearNPC
XNP
Yx = X-Xy = Y-Y2
x2
yxy2004/05185.43113.7646.74-72.102184.445198.99-3370.002005/06179.5596.5940.86-89.271669.387969.853647.562006/07101.14158.48-37.55-27.381410.15749.881028.322007/0898.16243.0640.5357.201642.843271.38-2318.272008/09129.18317.43-9.51131.5790.4817309.611251.46Total693.46929.326997.2934499.71-9558.95394
138.69
For NP
Y = Y/5 =
r x y ( X-X)
x
0.6152 x 83.07 (X-138.69)
37.41
or, Y-185.86
1.37 X + 189.47
or, Y
375.33 - 1.37 X
r2
-0.6152
15537.20
185.86
1-r2
0.6745 (1-r )P.E.6 P.E.0.37850.620.422.23610.18751.1248
For NP
y
y2
N
83.07
34499.71
5
i) Calculation of Mean
For NPC
Mean
X = X/5
APPENDIX - IV
a) Calculation of Trend Value of Sub Standard Credit of BOK
YearYear
XSSC
Yx = X-Xy = Y-Y2
x2
yxy2004/05188.42-2.0021.024.00442.01-42.052005/06271.61-1.004.211.0017.76-4.212006/07339.860.0027.540.00758.230.002007/084100.181.0032.781.001074.7932.782008/09536.912.00-30.494.00929.4060.97Total15336.9810.003222.18-74.45
For SSC
Y = Y/5 =
3.00
67.40
179.50
For SSC
10.00
N
25.39
r x y ( X-X)
x
0.4148 x 25.39 (X-3)
1.41
or, Y-67.40
7.45 X + 22.34
or, Y
89.73 - 7.45 X
X
6
7
8
9
10
y2
Y = a+bX
45.06
37.62
30.17
22.73
15.28
3222.18
5
i) Calculation of Mean
For Year
Mean
X = X/5
73520.67
0
40/L40
b
a
-7.45
89.73
22.34
0
0
For DC
Y = Y/5 =
3.00
or, Y-35.10
For DC
10.00
r x y ( X-X)
x
0.6246 x 28.76 (X-3)
1.41
12.70 X + 38.10
or, Y
73.21 - 12.70 X
X
6
7
8
9
10
y2
N
28.76
or, Y-35.10
-0.6246
203.34
35.10
Y = a+bX
-3.00
-15.70
-28.40
-41.10
-53.80
4134.85
5
i) Calculation of Mean
For Year
Mean
X = X/5
73520.67
0
40/L40
b
a
-12.70
73.21
38.10
0
0
For CL
Y = Y/5 =
3.00
or, Y-134.03
For CL
10.00
r x y ( X-X)
x
0.0136 x 17.24 (X-3)
1.41
0.17 X + 0.50
or, Y
134.53 - 0.17 X
X
6
7
8
9
10
y2
N
17.24
or, Y-134.03
-0.0136
121.91
134.03
Y = a+bX
133.53
133.36
133.20
133.03
132.87
1486.10
5
i) Calculation of Mean
For Year
Mean
X = X/5
73520.67
0
40/L40
b
a
-0.17
134.53
0.50
0
0
d) Calculation of Trend Value of Credit and Interest Suspense Write Off (WO) of BOK
YearYear
XWO
Yx = X-Xy = Y-Y2
x2
yxy2004/051209.13-2.00139.184.0019371.63-278.362005/06295.21-1.0025.261.00638.1725.262006/07300.00-69.950.004892.720.002007/08445.41.00-24.551.00602.60-24.552008/09502.0069.954.004892.72-139.90Total15349.7410.0030397.85-468.07
For WO
Y = Y/5 =
3.00
69.95
551.34
For WO
10.00
N
77.97
r x y ( X-X)
x
0.8490 x 77.97 (X-3)
1.41
or, Y-69.95
46.81 X + 140.42
or, Y
210.37 - 46.81 X
X
6
7
8
9
10
y2
Y = a+bX
-70.47
-117.28
-164.09
-210.89
-257.70
30397.85
5
i) Calculation of Mean
For Year
Mean
X = X/5
73520.67
0
40/L40
b
a
-46.81
210.37
140.42
0
0
For SSC
Y = Y/5 =
3.00
12.96
118.74
For SSC
10.00
N
16.79
r x y ( X-X)
x
0.6579 x 16.79 (X-3)
1.41
or, Y-12.96
7.81 X + 23.44
or, Y
36.40 - 7.81 X
X
6
7
8
9
10
y2
Y = a+bX
-10.48
-18.29
-26.10
-33.91
-41.72
1410.03
5
i) Calculation of Mean
For Year
Mean
X = X/5
73520.67
0
40/L40
b
a
-7.81
36.40
23.44
0
0
For DC
Y = Y/5 =
3.00
or, Y-18.61
For DC
10.00
r x y ( X-X)
x
0.6765 x 21.61 (X-3)
1.41
10.34 X - 31.01
or, Y
12.40 + 10.34 X
X
6
7
8
9
10
y2
N
21.61
or, Y-18.61
0.6765
152.81
18.61
Y = a+bX
49.63
59.97
70.30
80.64
90.98
2335.15
5
i) Calculation of Mean
For Year
Mean
X = X/5
73520.67
0
40/L40
b
a
10.34
-12.40
-31.01
0
0
For CL
Y = Y/5 =
3.00
or, Y-107.12
For CL
10.00
r x y ( X-X)
x
0.8090 x 38.31 (X-3)
1.41
21.92 X + 65.75
or, Y
172.86 - 21.92 X
X
6
7
8
9
10
y2
N
38.31
or, Y-107.12
-0.8090
270.87
107.12
Y = a+bX
41.37
19.46
-2.46
-24.37
-46.29
7337.25
5
i) Calculation of Mean
For Year
Mean
X = X/5
73520.67
0
40/L40
b
a
-21.92
172.86
65.75
0
0
h) Calculation of Trend Value of Credit and Interest Suspense Write Off (WO) of NIC
YearYear
XWO
Yx = X-Xy = Y-Y2
x2
yxy2004/05139.23-2.00-0.204.000.040.402005/06229.72-1.009.711.0094.329.712006/073103.320.0063.890.004081.680.002007/08420.511.00-18.921.00358.0418.922008/0954.382.00-35.054.001228.64-70.10Total15197.1610.005762.73-78.91
For WO
Y = Y/5 =
3.00
39.43
240.06
For WO
10.00
N
33.95
r x y ( X-X)
x
0.3287 x 33.95 (X-3)
1.41
or, Y-39.43
7.89 X + 23.67
or, Y
63.11 - 7.89 X
X
6
7
8
9
10
y2
Y = a+bX
15.76
7.87
-0.02
-7.91
-15.81
5762.73
5
i) Calculation of Mean
For Year
Mean
X = X/5
73520.67
0
40/L40
b
a
-7.89
63.11
23.67
0
0