CHAPTER 1

INTRODUCTION
1.1 Background of the study

The development of a country is always measured by its economic development.

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 issue of the shares and
through financial institutions such as banks, in the form of credits, overdrafts etc.

Financial institutions act as an intermediary between the individuals who lend and who
borrow. 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 economy of that country. Economic
development is supported by financial institutions of that country. Financial institution
indicates the financial strengths, position and environment of the institution. The various
branches of bank in towns and villages are offering various types of service. 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 expenditures on real assets and users of money are
those units whose expenditure on real assets exceeds their earnings.

Any institution offering deposits subjects of withdrawal on demand and makings loans of
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
objectives of collecting the idle fund, and mobilizing them to productive sectors causing
overall economic development. A bank is the financial institution which renders various
financial services besides taking deposits and lending loans. Bank is financial institution
which deals with money by accepting various types of financial services. In the modern

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economy, banks are to be not as the dealer of the country’s wealth but also are to
mobilize of the recourses 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 institution in the economy, they are
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 automobiles dealers for short term
working capital for business and have become increasingly active in recent years in
making long- term business loans for new plants and equipment (Shekhar and 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 functions 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 brokerages,
investment banking and saving function) (Vaidhya,1999:5).

The most important function of commercial banks is lending. Bank has to make some
banking practices for lending such as transferring property in bank’s name. The transfer
is temporarily made for a loan price and interest. Lending money is nowadays becoming
main resources of revenue to the bank and it also involves high risks. Bank will not
provide loan unless it has sufficient resources to the borrowers that will be needed in case
of future recovery.

Today no banker can survive for a long run without proper standing of economy and no
pace ahead without proper banking system. Moreover, the ability of bank 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

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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 customers’ 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, capacity of borrowers to utilize the fund. The
percentage of borrower’s stake in the business is the basic elements which measures the
quality of borrower and ultimately the quantity of 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.

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 urban area and rural economy has not been touched by this

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change in financial sector. Hence, in conclusion it can be summarized that the technical
and quantitative development of the financial sector is overall economy cannot be
considered utmost.

For most banks, loans are the largest and most obvious source of credit risk, however
other source 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
acceptance, interbank transactions, trade financing, foreign exchange transactions,
financial futures, swaps, bonds, equities, options, and extension of commitments and
guarantees and settlement of transactions.

1.1.1 Origin and Development of Banks in Nepal

It is assumed that the regular history of coinage in Nepal began from the 5 th century A.D.
The advent of 12th century marked a new period economic history in Nepal. Sliver
coinage was introduced in this period which widened the scope for trade. The second
major logical order of development was found in the innovation of interest bearing
private debt such as bonds, mortgages and loans. Like other countries the existence of
unorganized money market consisting of landlords, shahukars, shopkeepers and other
money lenders were the ancient bankers of Nepal. Tejarath Adda established during the
tenure of Prime Minister Ranodip Singh in 1993 B.S. was the first step towards the
Institutional development of Banking in Nepal. Tejarath Adda didn't collect deposit from
the public but gave loans to employees and public against the bullion at very low interest
rate of 5 percent.

Modern and organized form of banking started in Nepal in 1994 B.S. with the
enhancement of first codified law "Nepal Bank Kanoon" and establishment of Nepal
Bank Limited (NBL) as the first bank in the country in same year. After almost eighteen
years of establishment of NBL, there was a need of central bank for the surveillance of
banking activities which leads to the establishment of Nepal Rastra Bank (NRB). Nepal
Rastra bank was established with an objective of supervising, protecting and directing the
functions of commercial banks activities. The major challenge before NRB today is to

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ensure robust health of financial institutions. NRB has introduced prudential measures for
financial institutions to safeguard the interest of public. NRB really requires
strengthening their policy making, supervision and inspection mechanism.

The speedy development is possible only when banking services reaches every nooks and
corner of the country. Government then established Rastriya Banijya Bank in 2022 B.S.
as fully government owned commercial. Commercial banks not only carry commercial
transactions it also carries the functions of all types of financial institutions. Hence,
Industrial Development centre (IDC) was set up in 2013 B.S. for industrial development
which was converted to Nepal Industrial Development Corporation (NIDC) in 2016 B.S.
Similarly, Agriculture Development bank (ADB) was established in 2024 B.S. to provide
finance for agricultural producers and enhance agricultural productivity through the
introduction of modern agricultural techniques. In order to enhance capital market
activities Security Exchange Centre was established in 1976 which was renamed as Nepal
Stock Exchange (NEPSE). With the establishment of ADB and RBB, banking services
reached to both urban and rural areas which helped people reduce their burden of paying
high interest rate to lenders. NRB also gives incentives to NBL to expand their branches
to rural areas.

The foreign commercial banks made their way to Nepal during early 40s. Nepal Arab
Bank limited (renamed as NABIL), a joint venture bank established in 2041 B.S. was co-
owned by the Emirates Bank International Limited (Dubai), Nepalese financial institution
and local public. The bank come with the concept of marketing i.e. customer is the king
in the Market. Nepal Indosuez Bank Ltd, now known as Nepal Investment bank Limited
(NIBL) established in 2042 B.S. with joint ownership by the French Banque Indosuez,
Rastriya Banijya Bank, Rastriya Beema Sasthan and the local public. Thirdly, Nepal
Grindlays Bank Limited, now called Standard Chartered Bank (SCB) established in 2043
B.S. was co-owned by a British firm called Grinlayas Bank, Nepal Bank Limited and the
local public. By now there are 31 commercial banks operating their activities under the
Commercial Bank Act 2031 B.S., Nepal Rastra Bank Act 2058 B.S., Company Act 2053
B.S. and Contract Act 2056 B.S.

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1.2 Brief Profile of Siddhartha Bank Limited

Siddhartha bank limited (SBL), established in 2002 as the seventeenth commercial bank
of the country. 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 immune business acumen and share their valuable experiences
towards the betterment of the Bank.

Currently, the bank has been catering to the unique needs of its diverse clientele all over
the country through an extensive branch network of 46 branches and ATMs spread from
Chandragadhi in the east to Mahendranagar in the west. Siddhartha bank has been one of
the pioneer banks to serve the rural populace of the country, untouched by the formal
banking system, with its innovative branchless banking service branded as ‘Sajilo
Banking Sewa’. Throughout its journey, Siddhartha bank has capitalized on every new
opportunity that enables it to better serve its customers with highly qualitative services.
Most importantly, the bank has always justified the support and trust of its valuable
customers and stakeholders by rendering them innovative market offerings, customer
oriented service delivery and better financial performance year by year. The bank
envisages identifying viable opportunities and creating better ways to reach and serve the
customers in the future as well. The bank is committed as ever to be the ‘bank for Your
Prosperity’ to all its customers and stakeholders

Within a short span of time, Siddhartha Bank has 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.

SBL has been able to gain significant trust of the customers and all other stakeholders to
become one of most promising commercial bank 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 product 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

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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 the 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 retaining highly motivated and committed
staff. It directs it’s 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 bank in the banking industry in terms of profitability,

productivity and innovation.
 Aim at total customer satisfaction by rendering efficient and diversified financial
services through improved technology.
 Be the place of pride to all its stakeholders.

Capital Structure of the Bank:

 Authorized capital Rs. 3,00,00,00,000

 Issued capital Rs. 1,81,35,53, 600
 Paid up capital Rs. 1,81,35,53,600

Source: Annual Report 2013/14

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1.3 Statement of the Problem

The primary functions of banks and financial institutions are to accept deposit and grant
loans and advances. Banking sector is the backbone of any economy because they
mobilize the ideal resources in various productive sectors. Banks in Nepal have been
facing various challenges and problems. Some of them arising due to unclear policy of
government and many of them arising due to borrowers defaulting on loan repayments.
After liberalization of economy, banking sectors has various opportunities. Deposits in
banks have been increasing beyond banks' capacity to lend. Hence the banks and
financial institutions are competing among themselves to advance credit to limited
opportunity sectors. Banks and financial institution are investing in house loans, hire
purchase loan for safety purpose. Lack of good lending opportunities banks are facing
problems of excess liquidity. Nowadays banks have increasing number of deposits in
fixed and saving accounts but have decreasing trend in lending. 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 bank‘s credit is going towards negative trend. Non-performing credits
of the banks are increasing year by year. To control such type of state the regulatory body
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 bank, I have been selected SBL.

Credit is the most important function of banks. It is regarded as the core operation of
every bank but the banking sector is far from this fact. Thus, credit management is
concerned as heart issue in Nepalese banking sectors. Nepalese banks are lacking
scientific and imperial research that could identify the issue of credit management. Banks
and financial institutions are investing in house loan and hire purchase loan for safe
purpose. Due to lack of good lending opportunities, banks appear to be facing problems
of excess liquidity. And also due to unhealthy competition among banks the recovery of
the bank‘s credit is going towards negative trend. Non-performing credits of the banks
are increasing year by year. In this regard, the performance of Nepalese banks is to be
analyzed in terms of credit management.

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The current study analyzes the trend in deposit collection and lending, the overall
performance of SBL in terms of financial ratios such as liquidity ratios, profitability
ratios, and non-performing loans. The study also examines how well SBL has managed
its capital adequacy and lending, and the relation between profitability and credit
management.

1.4 Objectives of the study

The main objective of this study is to have true insight of the credit management of
Siddhartha bank. Besides this, following are the specific objective

Specific Objectives:

 To analyze the trends of deposit collection and credit lending.

 To analyze performance of SBL in terms of financial indicators of liquidity ratio,
profitability ratio, non- performing loan.
 To measure relation between profitability and credit management of SBL
 To analyze capital adequacy ratio

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1.5 Significance of the study

The study will be significant for various groups

 It may be helpful to management of Siddhartha bank.

 It may be valuable property for the library use
 It may be helpful to the persons and parties such as general readers, decision
makers, brokers, traders, stock holders, financial agencies, business man and
general Public.
 The study may be used as pilot work for the future research.
 Though, this is only study but it gives feedback to policy makers, will useful them
who formulate the policy for regulation.

1.6 Limitations of the study

This study has been carried out within certain limitations. The major limitations are as
follows:

 The scope of the study is to analyze credit management of Siddhartha

Bank Limited.
 The accuracy of the result is depended on annual report of the bank.
 This study is based on the ten years data from 2004/05 to 2013/14.

1.7Organization of the Study

The whole study has been divided into five chapters.

Chapter 1: Introduction.

It is the initial chapter which includes background of the study, history of banking
system, a brief review of Siddhartha bank, statement of the problem, significance and
limitation of the study.

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Chapter 2: Review of literature

This chapter includes conceptual reviews, review of articles and journal, review of
previous thesis.

Chapter 3: Research Methodology

This chapter reveals the methodology adopted in carrying out the research work. It
includes the interpretation parts like research design, sources of data, sampling and
population, data collection techniques and data analysis tools i.e. financial and statistical
tools.

Chapter 4: Data Presentation and Analysis

This chapter deals with the presentation and analysis of data with the help of various
analytical tools and techniques and major findings of the study are also included.

Chapter 5: Summary, Conclusions and Recommendation

This is the last chapter of the study which includes summary of the study, conclusion of
the major findings.

Beside these, bibliography, appendices and other related items or findings will also be
included at the end of the study.

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 CHAPTER 2

REVIEW OF LITERATURE
Review of literature is a crucial part of all dissertations. In other words it’s 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 one’s chosen field of
study, and what remains to be done. For reviews and abstracts, indexes, reports, and
dissertation or research studies published by various institutions, encyclopedia etc.

 Literature review
 Theoretical/ conceptual framework

2.1 Literature Review

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, she has considered GDP as the
dependent variable and various sectors of lending viz. agriculture, industrial, commercial,
services, 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 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.”

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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 Asia region.
He had also given possible measure 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 data 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 lengths of time the assets has been in form of none
obliged by the loanee. The more time it has elapsed the more chance default 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 does 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.

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Finally he concluded that financial institutions are beset with burden of mounting level of
NPAs in developing countries.” Such assets debar income flow of financial institution
while claiming additional resources in the form of provisioning thereby hindering gainful
investments. Rising of NPAs cannot be taken as stimulus but the vigilance depends to
solve the problems 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 thus protect their loan in the failure
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.

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 predicted 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 both quantitative and qualitative
investigation into the future and this generate other analyses at different time points
during the course of the loan.

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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 party and thymus reduce their exposure to the risk of an
obligor’s default. Credit enhancement technique, helps to reduce the credit risk of an
obligation, play 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 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 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 derivatives help
to transfer credit 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 can invest
indirectly in foreign bands at 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 practice in Banks:
an Appreciation.” The banks in Bangladesh have started undertaking a number of
quantitative and qualitative measures to understand the risks involved 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 where as in the
concept of modern banking a bank keenly feels to measure the business risk over the

15
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 borrower’s 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 proper application of
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 non-performing 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
non-performing 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 in debt markets. The specific phenomenon I study is the market for
credit derivatives. a credit derivatives 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 assets. 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

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expanded very rapidly from about $180billion in 1997 to $893 billion in 2000(British
Bankers Association 2000). When discussing credit derivatives, practitioners typically
highlight two characteristics that different them from other secondary loan market. First,
bankers stress that the ease with which credit derivatives may be traded allows them to
manage concentration risk in their portfolios.

The paper’s 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 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.

2.2 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 aware 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.

2.2.1 Concept of credit

“Credit is the sum of 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

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a bank is known as credit.” (Oxford Advanced Learners Dictionary, 1992). “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)

2.2.1.1 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 willingness to
pay 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 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.

Barley and Myers urge that bank credits with maturities exceeding 1 year is called term
credits. “The firm agrees to pay interest based on the bank’s prime rate and to repay
principle in the regular installments. Special patterns of principle payments over time can
be negotiated to meet the firm’s special needs”. (Brealy & Myres, 1991:89).

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.

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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.
 Credit 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 principal and interest over the maturity of the credit. Hire
agrees to take the goods on hire at a stated rental including their repayment of principles
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 buildings, 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 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. Maturities on construction credits range from 12 months to as long 4
to 5 years, depending on the size of the specific project. The basic guideline principal
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”. (Johnsons, 1940:83).

19
Consortium Credit : No single institution grant credit to the project due to single
borrower limit or other reasons 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 project’s assets.

Credit Cards and Revolving Lines of Credit: Bankers 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
the standardization, centralized department processing 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 funds to the customer at lower cost.

Off-Balance Sheet Transaction: In fact, bank guarantee and letter of credit refers 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 is used for the sake of the customers in favor of the other party
(beneficiary) up to the approved limit. Generally, a certain percent amount is taken as
margin from the customer and the customer’s 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 agreements 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).

20
2.2.2 Credit Management

Credit management is a term used to identify accounting functions usually conducted

under the umbrella of accounting receivables. Essentially, this collection of process
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 credit worthless
of the customer base. This is particularly important if the company choose to extend
some types of credit line or 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 reception of some form of commercial credit. This includes gathering
data on the potential customer’s current financial condition, including to current credit
score. The current ratio between income and 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

21
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 to 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 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 inter-bank transactions. The goal of the
credit risk management is to maximize a bank’s risk adjusted rate of return by
maintaining the credit risk exposure 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
settlement of transaction.

Credit promotes economic growth and contributes the nation’s wealth. People deposit
their surplus money in 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-a-days 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.

22
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 bank’s risk adjusted rate of return by maintaining credit
risk exposure 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. The
effective management of credit risk is very essential and critical components of a
comprehensive approach to risk management and essential to 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.

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 management practices may differ among banks depending upon
the nature and complexity of their credit activities, a compressive 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 Home, 1999:432)

The income and profits of the bank depend upon the lending procedure applied by the
bank. And 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

23
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 objectives of profit maximization and social welfare.
Formulation of sound investment policies and co- ordinate and planned efforts pushes
forward the forces of economic growth.

2.2.3 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- where 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 invested as to the
following:

-Whether it is easily marketable.

-Value of security at present.

24
 - 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.

2.2.4 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 the legal person. It can do nothing alone. A bank established without the aim of
gaining the profit is central bank. Other banks 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. 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 liquidity 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 needs 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 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 profit. So it
should maintain equality in it.

25
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.

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 direction 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

26
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 regulation as well as different directions issued by Nepal Rastra Bank,
rules and regulations issued by Nepal government while mobilizing its funds.

2.2.5 Factors Affecting Credit Policy of Banks

There are so many internal and external factors which affects 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 company’s 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, completeness and nature of alliance of the borrower’s

management team weakness in replacements needs to be evaluated.

4. Technical Strength

27
It determines the strength and quality of the technical support 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 needs to
be evaluated.

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 weakness in security threatens the bank’s second way
out”(Khadka and Singh, 2069:139).

2.2.6 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. 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 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.

28
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:

Loan Classification Criteria for Provisioning Provision Rate

Pass Not past due and past due for a 1%

period up to 3 months.
Substandard Past due for a period of 3 months 25%
to 6 months.
Doubtful Past due for a period of 6 months 50%
to 1 year.
Loss Past due for a period of more than 100%
1 year or advances which have
least possibility of recovery.

Source: NRB Directives, 2013 (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 Single Borrower Credit Limit

 Funds 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.
 Non-fund based (off-balance items) can be issued up to 30% of core capital to
a single customer, firms, company and group of related customer.

29
 CHAPTER 3
RESEARCH METHODOLOGY
Research methodology is a way of reaching towards the solution of a problem through a
planned and systematic dealing with the collection, analysis and interpretation of facts
and figures. This explains the various steps, techniques and tools that are generally
adopted by the researcher in studying the research problem along with the logic behind
them.

The main objective of the research work is to study the credit management of Siddhartha
Bank Limited. In order to realize the objective and carry the research, an appropriate
research methodology has been designed. It gives the way to solve research problem
systematically. Under this research design, population and sample, source and types of
data and data analysis tools have been described.

3.1 Research design

Research design is the arrangement of conditions for collection and analysis of data in a
manner that aims to combine relevance to the research purpose with economy in
procedure (Kothari, 1990: 39).

Research design is the conceptual structure within which research is performed. It is an

overall framework or plan, which specifies the sources and types of information relevant
to the research problem. The main objective of the study is to analyze the credit
management of Siddhartha bank of ten years period from 2004/05 to 2013/14. This study
is more analytical, empirical and less descriptive. At first all the data and information are
collected. After that data are analyzed by using financial and statistical tools. In analysis
part interpretation and comments are also made where necessary. Result and conclusion
along with some recommendation are also given as per the findings.

3.2 Population and Sample

In the present context there are 31 commercial banks operating in Nepal. Nepal Rastra
bank being the central bank of Nepal Recommend direct and control the establishment,

30
operation and dissolution of all the commercial banks in Nepal. Siddhartha Bank is
selected as sample of this study. The sampling technique used in this study is judgmental.

3.3 Sources and Collection of Data

Mainly the study is conducted on the basis of secondary data. Secondary data are those
that are produced by other or used by someone previously. The required data are
extracted from balance sheets, profit and loss accounts and different financial reports of
Siddhartha Bank. Other supplementary data and information are collected from test
books, articles published in newspaper, journals, magazines, unpublished thesis, various
reports published by NRB, guidelines and directives regarding the subject matter.

The annual reports of the bank are collected from its head office and also downloaded
through the company websites. Various websites were surfed to gather relevant
information. The reference materials which helped a lot in conducting the study were
collected from Central library T.U. and Shanker Dev Library, Journals, magazines,
newspaper and well wishers.

3.4 Data Analysis Tools

The core of research wok lies on the presentation and analysis of collected data so
suitable tools and proper analysis is to be made to make data effective. The evaluation of
data is carried out to the pattern of data available. The collected raw data are at first
scanned and tabulated under various heads; results calculated are then compared and
interpreted.

3.4.1 Financial Tools

Financial tools are used to get the precise knowledge of a business which in turn is
fruitful in exploring the strengths and weakness of the financial policies and strategies. In
the financial analysis, a ratio is used as a benchmark for evaluating the financial position

31
and performance of the firm, so ratio analysis is used in this study. The following ratios
are going to be analyzed under the financial performance analysis.

3.4.1.1 Liquidity Ratio

The ratio measures bank's ability to serve its short-term obligation. The firm should
remain an appropriate liquidity position neither excess nor less. Inadequate liquidity can
lead to unexpected cash dearth. High liquidity is also not good as ideal money earn
nothing, leading to lower assets yield and contributing to poor earnings performance.
Important liquidity ratios that have been used in the study are listed below:

a. Current Ratio
It is a test of liquidity. It measures short-run debt paying ability of the firm. In other
words, it measures the availability of current assets for meeting current liabilities. This
ratio is called working capital ratio. It is calculated by dividing current assets by current
liabilities and 2:1 is regarded as standard.

Current assets are those assets which are convertible in cash within a year or so. They
include cash and bank balance, investment in treasure bills, money at short call or
placements, short term loans and advances, bills purchased and discounted, overdrafts,
bills for collection, prepaid expenses, other receivable etc.

Current liabilities are those obligations maturing in the year. It includes current account
deposits, saving account deposits, margin deposits, call deposits, intra-bank reconciliation
account, bills, payable, bank overdrafts, provisions, accursed expenses, bills for
collection, customers acceptance liabilities etc. Current ratio is calculated by dividing
current assets by current liabilities.

Current ratio equal to 2:1, i.e., current assets double the current liabilities, is considered
to be satisfactory one. Higher current ratio indicates that the firm is in liquid and has
ability to pay its current obligations in time as and when they become due. And on the
other hand, lower current ratio represents that the liquidity position of the firm is not
good and the firm will face difficult in payment of current obligations in time.

32
 b. Liquid Fund/ Total Deposit

The ratio indicates portion of total deposit that bank have to maintained as most liquid
assets such as cash, and balance with NRB and other banks. Optimum ratio shows the
strong liquidity position of the bank. High ratio is not favorable as it affects
profitability due to idleness of high-interest bearing fund. Ratio is calculated by using
following formula,

Cas h∧Bank Balance

Liquid Fund/ Total Deposit =
Total deposit

3.4.1.2 Leverage Ratio

Leverage ratio measures bank's ability to serve long-term obligation. It evaluates the
financial risk of long term creditors. Greater the proportion of owner's capital in capital
structure lesser will be financial risk born because bank will be able to pay interest to
debt holders irrespective of the profit or loss incurred by the firm. Important leverage
ratios that have been used in the study are listed below:

a. Capital Adequacy ratio

Capital adequacy ratio is used to assess the strength of capital in case of bank. It is
evaluated by compliance with the requirement stipulated by NRB. The ratio of banks
is regularly monitored through their returns to submit to NRB. As per NRB
requirement it was fixed 12% till 2007/8 and 10% from fiscal year 2008/09. A very
high or low ratio is undesirable in terms of lowered return or lowered solvency.

Total Capital Fund

Capital Fund/ Risk weighted Assets (CAR) =
Total Risk Weig hted Assets

33
3.4.1.3 Activity/ Turnover Ratio

The ratio measures how effectively bank is managing its assets. It indicates how quickly
certain current assets are converted into cash. Higher ratio means management is efficient
in utilization of its resources. They show sound profitability position of the firm. Low
ratio means management is inefficient in utilization of the resources. Important activity
ratios that have been used in the study are listed below:

a. Credit to total deposit ratio (CD ratio)

The ratio measures the extent to which the banks are successful to mobilize their total
deposit on loan and advances. It indicates the proportion of total deposits invested in
loan and advances. Loan and advances consists of loans, advances, cash credit,
overdrafts and foreign bills purchased and discounted. It is calculated as,

Loan∧ Advances
Credit to total deposit =
Total Deposit

b. Investment to Total Deposit

The ratio shows how efficiently the major resources of the bank have been mobilized.
Investment consists of investment in Nepal Government (NG) treasury bills,
development bonds, company shares and others type of investment. It is calculated as,

Investment
Investment to Total Deposit =
Total Deposit

c. Loan and advances to total assets

This ratio measures what portions of assets have been funded for income generation.
Higher ratio means bank has used large proportion of assets for income generation
and vice versa. The ratio is calculated as,

34
 Loan∧ Advances
Loan and advances to total assets =
Total Assets

3.4.1.4 Assets Quality Ratio

The ratio measures quality of bank's assets i.e. the recoverability of the risk assets and the
revenue earning potential of the bank. Only the investment is not of great significance but
the return from them with minimum default in payment by debtors is significant. A firm
may be in state of enough profit but unable to meet liabilities i.e. its assets quality in not
well. Important assets quality ratios that have been used in the study are listed below:

a. Risk weighted assets to Total assets

The ratio represents the risk associated in banking assets. Higher the ratio indicates
higher risk being taken by bank on the assets and vice versa. It is calculated as,

Risk weig h ted assets

Risk weighted assets to Total assets =
Total Assets

b. Non Performing Credit to Total credit

The ratio measures credit risk on the total loan and thus represent the quality of
assets the bank is carrying on. Higher ratio means higher risk on the assets or lower
quality of the portfolio and vice versa. It is calculated as,

Total Non−Performing Loan

Non Performing loan to Total Credit =
Total Loan

c. Loan loss provisions to Total loan

Each bank has to keep the loan loss provision for loan as per the direction of NRB.
The ratio measures the aggregate percentage of loan loss provision kept by bank on
loan and advances and thus eventually measure security position. Higher ratio means
lower impact of existing bad loan on the bank's future profitability. It is calculated
as,

35
 Loan Loss Provisions
Loan loss provision to Total loan and advance =
Total Loan

3.4.1.5 Profitability Ratio

Profitability is an indicator of bank's capacity to carry risk and/or increase its capital. It
also indicates competitiveness and confirms the quality of management. Profit provides a
cushion against short term problems and is good source of retain earnings. Profitability
ratios are designed to highlight the end result of Banks. Important Profitability ratios that
have been used in the study are listed below:

a. Return on Shareholders' Equity ratio (ROE)

The ratio indicates how well the firm has used the capital of owner's. The earning of
satisfactory return is most desirable objective of bank as common or ordinary share
holders are entitled to the residual of profit. Higher ratio means bank is paying higher
return to its share holders and vice versa. It is calculated as,

Net profit after tax

Return on shareholders' Equity ratio (ROE) = '
S h are h olde r s Equity

b. Return on Total Assets ratio (ROA)

The ratio indicates efficiency of assets mobilization. It measures the productivity of

assets. The ratio helps management in identifying the factors that have a bearing on
overall performance of the firm. Higher ratio shows higher return on the assets used
in the business thereby indicating effective use of resources available and vice versa.
It is calculated as,

Net Profit after Tax

Return on Total Assets ratio (ROA) =
Total Assets

c. Return on Investment (ROI)

36
 Bank invests their fund in different profitable sector including treasury bills, bonds
and other to generate more profit. The ratio measures whether the bank's return is
adequate to meet the obligations created by investment like interest payment, bad
investment provision etc.

Net Profit after Tax

Return on Investment (ROI) =
Investment

d) Interest Earned to Total Asset Ratio

Interest earned to total assets ratio shows percentage of interest income as
compared to the assets of the bank.
This ratio is calculated by dividing interest income by total assets as follows:
Total Interest Income
Interest Earned to Total Asset Ratio = Total Assets

3.4.2 Statistical Tools

To meet the objective of the study statistical tools are equally important. It helps us to
analyze the relationship between two or more variables. In this study following statistical
tools are used.

3.4.2.1 Arithmetic Mean ( Average)

Arithmetic means of given set of observation is the sum of the observation divided by
the number of observation. Arithmetic mean represents the entire data by a single value.
Simple Arithmetic mean is used in this study as per necessary for the analysis. It is
denoted as ( X ) and formula used to calculate it as follows:

Mean ( X ) =
∑X
N
Where,
∑ X = Sum of the observation
N = Number of observation

3.4.2.2 Standard Deviation

37
Karl person suggested it as a widely used measure of dispersion and defined as the given
observations from their arithmetic mean of a set of value. It is used as absolute measure
of Dispersion or variability. When value of S.D. is higher there is higher variability or
vice versa. It is denoted as (σ ) and calculated as:

S.D. (σ ) =
√ ( X−X )2
N

Where,

(σ ) = Standard Deviation

(N) = No of observations

3.4.2.3 Co-Variance (CV)

Co-efficient of variance is the relative measure of dispersion comparable across

distribution, which is defined as the ratio of the standard deviation to the mean express in
percent. It is denoted as (C.V.) and calculated as:

σ
C.V = × 100
X

3.4.2.4 Least Square linear Trend

Trend analysis is a very useful and commonly applied tool to forecast the future event in
quantitative term on the basis of the tendencies in the dependent variable in the past
period. Straight line trend implies that irrespective of the seasonal, cyclic and irregular
fluctuation the trend value increases or decreases by absolute amount per unit of time.
The linear trend values form a series in arithmetic progression.

Mathematically
Y=a+bx
Where Y=value of dependent variable

38
a = Y- intercept
b = slope of the trend line
X = value of the independent variable i.e. time
Normal equations fitting above are

∑ Y =Na+b ∑ X
∑ XY =a ∑ X +b ∑ X 2
Since ∑ X=0

a = ∑ ¿¿Y/N

b = ∑ ¿¿XY/∑ ¿¿X2

3.4.2.5 Probable Error of Correlation Coefficients

Probable error of correlation coefficient tests the reliability of n observed value of
correlation coefficient. It shows the extent to which correlation coefficient is dependable
as it depends upon the condition of random sampling.

Probable error of correlation coefficient is denoted by P.E 9r) and obtained as:
1−r 2
P.E (r) = 0.6745 x √ n
The probable error is used to test whether the calculated value of sample correlation
coefficient is significant or not. (Shara 7 Chaudary, 2058 B.S., p-411)
A few rules for the interpretation of the significance for correlation coefficient are as
follows;
I. if < P.E. , then the value of r is not significant (i.e.) insignificant
II. If > P.E. , then r is definitely significant
In other situations, nothing can be calculated with certainty

39
 CHAPTER 4

DATA PRESENTATION AND ANALYSIS

Data presentation and analysis deals with analysis and interpretation of data according to
the research methodology to attain objectives of the study that have been set in first
chapter. This is an important chapter of the study. The purpose of this chapter is to
introduce the mechanism of data analysis and interpretation.

This chapter deals with the presentation, analysis and interpretation of relevant data of
Siddhartha Bank Ltd in order to fulfill the objectives of the study. The main objective of
the study is to analyze the credit management of Siddhartha bank.

4.1 Deposits of SBL

Banks collect the scattered funds from the public in the form of deposits and mobilize in
the productive sectors. The volume of credit extension depends upon the deposit base of a
bank besides other factors. The deposits collected by SBL can be divided as current,
saving, fixed, call, and other deposits. The deposits collection by the bank in 10 years
(2004/05-2013/14) is presented in the table below.

Table No.4.1: Deposits Collection by SBL Rs. in million

Fiscal Year Deposit Inc/Dec. in deposit % inc/decrease

collection collection
2004/05 2462.43 - -
2005/06 3918.08 1455.65 59.11
2006/07 6625.08 2707.00 69.09
2007/08 10191.44 3566.36 53.83

40
2008/09 15854.80 5663.36 55.57
2009/10 20197.03 4342.23 27.39
2010/11 21575.65 1378.62 6.83
2011/12 25948.51 4372.86 20.27
2012/13 28392.82 2444.31 9.42
2013/14 35408.65 7015.83 24.71
Source: Annual reports of respective years.

The above table shows the deposit collected by Siddhartha bank from fiscal year
2004/05-2013/14. There is increasing trend in deposit collection. In the year 2004/05, the
collected amount of deposits is Rs.2462.43 million. Rs. 3918.08 million is collected in
the year 2005/06.This is increased by 59.11 percent. In 2006/07 the deposits collected
amount is Rs. 6625.08 million. Similarly, in 2007/08 collected deposit amount is Rs.
10191.44 million which is 3566.36 million greater than previous year and in percent it
has increased by 53.83 percent. Total deposit collection in 2009/10 is 20197.03 million.
In the year 2010/11 the collected deposit amount is Rs. 21575.65 million which is Rs.
1378.62 million greater than the year 2009/10 and in percent it has increased by
6.83percentages. Similarly, deposit collection by SBL has increased by 20.27, 9.41 and
24.71 percent than previous year respectively. The deposits collected by SBL annually
for ten year (2004/05-2013/14) can be presented in the following graph.

Figure No. 4.1: Deposit Collection of SBL

40000
35000 deposits in million (Rs)
30000
25000
20000
15000
10000 deposits in million (Rs)

5000
0
2004/ 2005/ 2006/ 2007/ 2008/ 2009/ 2010/ 2011/ 2012/ 2013/
05 06 07 08 09 10 11 12 13 14

41
Source: Table No. 4.1

4.2 Deposit Composition of SBL

The deposit composition of SBL also has significance. The following table shows the
composition of deposit of SBL.

Table No. 4.2: Deposit Composition Rs. in million

Year Total
Deposit Composition
Saving % Fixed % Current % Call % Other %

2004/05 754.73 30.65 1104.89 44.87 51.46 2.09 551.34 22.39 - - 2462.43
2005/06 1128.46 29.78 1632.09 43.07 82.29 2.17 1029.55 27.17 56.5 1.44 3918.08
2006/07 1881.66 28.4 3022.56 45.6 227.60 3.43 1493.26 22.5 - - 6625.08
2007/08 2622.24 25.7 4562.72 44.8 284.89 2.79 2721.58 26.7 - - 10191.44

2008/09 3445.69 21.73 7158.20 45.1 295.74 1.87 4841.41 30.53 113.76 0.71 15854.80

2009/10 2961.26 14.66 10195.73 50.48 353.74 1.75 6564.86 32.50 121.44 0.60 20197.03

2010/11 3169.66 14.69 11458.27 53.1 512.33 2.37 6279.72 29.11 155.67 0.72 21575.65

2011/12 5661.72 21.82 10966.94 42.26 702.67 2.70 8322.41 32.07 294.77 1.14 25948.51

2012/13 7385.58 26.01 10708.84 37.71 895.03 3.15 9143.93 32.21 - - 28392.82
2013/14 9523.22 26.89 11876.22 33.5 2166.99 6.12 11509.93 32.5 265.78 0.75 35408.65

Source: Annual report and financial statements of corresponding years.

The above table shows the composition of SBL viz., current, saving, fixed, call and other
deposits. Here, it can be seen that more amounts have been collected in fixed deposits,
call and saving deposits during the year 2004/05 to 2013/14. In the year 2012/13 and
2013/14, the maximum amounts of deposits have been collected in fixed account and
saving account respectively.

42
Saving deposits have been continuously increased during the all years except 2009/10.
Similarly fixed deposit collection has also continuously increased during the years except
2011/12 and 2012/13. But deposit collection of current, call and other deposit have
fluctuated during these years. In the year 2004/05, the saving deposit collection is 30.65
percent of total deposit and in the year 2005/06, it decreases to 29.78 percent. But from
the year 2006/07 to 2009/10 saving deposit decreases to 28.4 to 14.66 percent
respectively. But after this year saving deposit shows increasing trend. In 2013/14, this is
26.89 percent of total deposit. It indicates that cost of source is decreasing.

In the year 2004/05 the amount of fixed deposits seems Rs 1104.89 million. In the year
2011/12 and 2012/13 amounts of fixed deposit are lesser than previous year 2010/11. But
in the year 2013/14 the amount of fixed deposit increased than the previous year. It
indicates that cost of source of fund is decreasing 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 year 2013/14 the amount of call deposit is highest in comparison to all other years.
The trend of call deposit is increasing from the year 2004/05 to 2013/14.

In the research period current, call and other deposits of SBL were fluctuating. Current
deposit is maximum in the year 2013/14 i.e. 2166.99 million and maximum amount of
other deposits collected in the year 2013/14 is Rs 265.78million.The bank has heavily
depends on fixed deposits in the total composition because fixed deposits has greater
contribution in total deposit collection. Similarly, the saving deposit is in second rank for
the contribution in total deposit collection. Then call deposit is in third and current
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

43
bank should increase different deposits such as saving, current, call and other short- term
deposits. The following chart shows the above information.

Figure No. 4.2: Deposit Composition of SBL

Rs. in million

14000

12000

10000

8000 Saving
Fixed
6000 Current
Call
4000 other

2000

0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
/05 /06 /07 /08 /09 /10 /11 /12 /13 /14

Source: Annual report and financial statements of corresponding years.

4.3 Loans and Advances of SBL

A bank takes deposit and lends loan and advances. Giving loans and advances are the
major task of any bank. Loan and advances is 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 jobs.

44
Table No. 4.3: Loans and Advances of SBL Rs. in Million

Year Loans and Advances Inc/Dec. in Loans %inc./decrease

and Advances
2004/05 2371.25 - -
2005/06 3789.12 1417.87 59.79
2006/07 6223.86 2434.74 64.26
2007/08 9335.60 3111.74 49.99
2008/09 13328.62 3993.02 42.77
2009/10 16653.85 3325.23 24.94
2010/11 18384.03 1730.18 10.38
2011/12 20217.58 1833.55 9.97
2012/13 23086.56 2868.98 14.19
2013/14 27186.91 4100.35 17.76
Source: Annual reports.

The above table shows loans and advances. The table shows that loan and advances are
more in increasing trend but in decreasing growth rate. In 2004/05 loan and advances
amounted to 2371.25 million. It is increased by 59.79 percent and reached to Rs. 3789.12
million in the year 2005/06. During the year 2006/07 it is increased by 64.26 percent and
reached to Rs. 6223.86 million. This percentage is the highest percent increased in study
period. It is increased by 49.99 percent and reached to 9335.6 million in the year
2007/08. Similarly loan and advances are in increasing trend but the growth rate is
decreasing from the year 2008/09 to 2011/12.In 2008/09 the collected amount of deposit
is Rs. 13328.62 million. This is 42.77 percent greater than previous year. In 2011/12 loan
and advances reached up to Rs. 20217.58 million but there is an increasing trend but the
rate of growth is decreasing. Loan and advances in 2012/13 is Rs. 23086.56 million,
45
which is 14.19 percent greater than previous year. But the loan and advances is increased
by 17.76 percent in the year 2013/14 and reached Rs. 27186.91 million. This percent is
the highest percentage increased in study period. The loan and advances of SBL can be
presented in the form of bar chart.

Figure No. 4.3: Loans and Advances

Loans and Advances

30000

25000

20000

15000 Loans and Advances

10000

5000

0
5 6 7 8 9 0 1 2 3 4
4 /0 5/0 6/0 7/0 8/0 9/1 0/1 1/1 2/1 3/1
0 0 0 0 0 0 1 1 1 1
20 20 20 20 20 20 20 20 20 20

Source: Table No. 4.3

4.4 Loans and Advances to Deposit Collection

To evaluate the lending performance of banks, it is important to know, how much the
amount is disbursed out of total deposit collection. Loan and advances to deposit
collection of SBL has been presented in the table below:

46
Table No. 4.4 Loan to Deposit Collection

Rs. in million

Year Loans and Advances Total Deposit collection % of loan and advance out of total
deposit
2004/05 2371.25 2462.43 96.29
2005/06 3789.12 3918.08 96.71
2006/07 6223.86 6625.08 93.94
2007/08 9335.60 10191.44 91.60
2008/09 13328.62 15854.80 84.07
2009/10 16653.85 20197.03 82.45
2010/11 18384.03 21575.65 85.20
2011/12 20217.58 25948.51 77.91
2012/13 23086.56 28392.82 81.31
2013/14 27186.91 35408.65 76.78
Source: Annual Reports

The above table shows the amount of loan disbursement in composition to the amount of
deposit collected. In fiscal year 2004/05 the amount of deposit collected was Rs.2462.43
million out of which Rs. 2371.25 million was given as loan. It turns out to be 96.29
percent of the total deposit collection. In the year 2005/06 Rs 3789.12 million was
disbursed out of Rs. 3918.08 million. In the year 2006/07, 93.94 percent loan was
disbursed out of Rs. 6625.08 million deposit collection. In the year 2007/08 Rs. 9335.60
million was disbursed out of Rs. 10191.44 million of deposit collection which is 91.60
percent of the total deposit collection. In the year 2008/09 the amount of deposit collected
was Rs.15854.80 million out of which Rs. 13328.62 million was given as loan. It turns
out to be 84.07 percent of the total deposit collection. In the year 2009/10 Rs.
16653.85millionwas disbursed out of Rs. 20197.03 million of deposit collection which is
82.45 percent of the total deposit. Similarly, in 2010/11 Rs. 18384.03 million was

47
disbursed out of Rs. 21575.65 million of total deposit. It comes to 85.21 percent of total
deposit. In the year 2011/12 Rs. 20217.58 million was disbursed out of total deposit of
Rs. 25948.51 million which is 77.91 percent of the total deposit. In 2012/13 Rs. 23086.56
million was utilized in loan and advances out of total deposit of Rs. 28392.82 million. It
comes 81.31 percent of total deposit. In the year 2013/14 Rs. 27186.91 million was
disbursed out of total deposit Rs. 35408.65 million. It comes 76.78 percent of total
deposit collection. The highest percentage of loan and advances to total deposit was in
the fiscal year 2005/06 which is 96.71 percent. In every year loan and advances is lower
than total deposit but it is utilized more than 76 percent in every fiscal year. This shows
the fund is utilizing properly.

The ratio fluctuated throughout the study period. The ratio indicated the proportion of
total deposits invested in loans and advances. Too low ratio gives a picture of the ideal
cash in the bank. As per banking practice, banks maintain the ratio around 70-75%. In the
year 2013/2014, the bank has the good ratio of 76.78% which shows that the bank is
successful in utilizing its deposits on loans and advances.

Loans and advances disbursed to total deposit can be presented in the following chart:

Figure No. 4.4 loan Disbursed to Deposit Collection

40000

35000

30000

25000

20000 Loans and Advances

15000 Total Deposit collection

10000

5000

0
2004/ 2005/ 2006/ 2007/ 2008/ 2009/ 2010/ 2011/ 2012/ 2013/
05 06 07 08 09 10 11 12 13 14

48
Source: Table No. 4.4

4.5 Percentage Change in Deposit Collection and Loans 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:

Table No. 4.5: Deposit Collection and Loan and Advances

Year % change in % change in loan and advances

deposit collection
2004/05 - -
2005/06 59.11 59.79
2006/07 69.09 64.26
2007/08 53.83 49.99
2008/09 55.57 42.77
2009/10 27.39 24.94
2010/11 6.83 10.38
2011/12 20.27 9.97
2012/13 9.42 14.19
2013/14 24.71 17.76
Source: Table No. 4.1 and 4.3

In the year 2005/06, change in deposit is 59.11 percent and the change in loan is 59.79
percent. Likewise, in the year 2006/07 the change in deposit collection and loan
disbursement is 69.09 and 64.26 percent respectively. In 2007/08 percent change in
deposit is 53.83 percent but the percent change in loan is 49.99 percent. Similarly, in
2008/09, 55.57 percent change was recorded in deposit but in loan there is an only 42.77
percent change. In 2009/10 percent change in deposit is 27.39 percent but percent change
in loan is 24.94 percent. In 2010/11, 6.83 percent change was recorded in deposit but in
loan there is only 10.38 percent change. In 2011/12, percent change in deposit is 20.27
percent and 9.97 percent change in loan. In the year 2012/13 percent change in deposit is
9.42 % and in loan 14.19%. In the year 2013/14 percent change in deposit is 24.71 and in

49
loan the percent change is 17.76 percent. In every year changes in loan and deposit has
fluctuated. But deposit has fluctuated more than the loan.

4.6 Profitability Ratios

Maximization of profitability is the core objective of any business organization.

Profitability is an important measure of a company’s operating success. The technique of
ratio analysis has considerable significance in studying the financial stability, liquidity
and profitability of the bank. It is a quantitative analysis of information contained in
company's financial statement. It has been used to evaluate the financial health, operating
result and growth of the SBL bank.

a) Net Interest Income to Total Assets:

Table No. 4.6: Analysis of Net Interest to Total Assets

Rs. in million

Year Net interest Total assets Ratio (%)

income
2004/05 105.87 3099.23 3.41
2005/06 151.85 4756.94 3.19
2006/07 209.81 7954.66 2.64
2007/08 321.68 11668.36 2.75
2008/09 451.96 17881.75 2.52
2009/10 611.80 22802.43 2.68
2010/11 765.05 24405.87 3.13
2011/12 857.35 29628.73 2.89
2012/13 1155.58 33691.22 3.43
2013/14 1348.17 40277.75 3.35
Total Mean 597.91 19616.69 3.00
Source: Annual reports.

50
The above table shows net interest income and total assets from fiscal year 2004/05 to
2013/14.The ratio is calculated by dividing net interest income by total assets. The ratio
remained 3.41%, 3.19%, 2.64%, 2.75%, 2.52%, 2.68%, 3.13%, 2.89%, 3.43%, and 3.35%
in the study period.Net interest is increasing trend from 2004/05 to 2013/14. It indicates
that interest earn is greater than interest paid. In other word, we can say that the
management is successful in utilization of collected fund.

b) Net profit to Total Assets

Table No. 4.7 Net Profit to Total assets Ratio
Rs. in million

Year Net profit after tax Total assets Ratio (%)

2004/05 69.92 3099.23 2.26
2005/06 65.25 4756.94 1.37
2006/07 95.31 7954.66 1.19
2007/08 143.17 11668.36 1.22
2008/09 217.92 17881.75 1.21
2009/10 240.85 22802.43 1.06
2010/11 311.42 24405.87 1.27
2011/12 330.46 29628.73 1.11
2012/13 482.56 33691.22 1.43
2013/14 700.53 40277.75 1.74
Total Mean 265.74 19616.69 1.39
Source: Annual reports

The above table shows the relation between net profit after tax and total assets. In the
study period, net profit is increasing trend except year 2005/06.

The ratio is calculated by dividing net profit after tax by total assets. The ratio remained
2.26%, 1.37%, 1.19%, 1.22%, 1.21%, 1.06%, 1.27%, 1.11%, 1.43% and 1.74% in the
study period. Profit shows the performance of any company, however, the level of profit
needs to be seen in consideration of total balance sheet size of the company. Higher ratio
indicates the success of management in overall operation. In year 2004/05, 2013/14,

51
2012/13, and 2005/06 the ratio was in highest position. SBL is more successful in getting
return from asset in year 2004/05.
So, we can say that the bank can be able to proper utilize of the assets because the profit
of the bank is increasing every year except in year 2005/06.

c) Return on Equity Capital

Table No. 4.8: Return on Equity Capital Rs. in million

Year Net profit after Equity capital Ratio(%)

tax
2004/05 69.92 388.23 18.00
2005/06 65.25 603.14 10.82
2006/07 95.31 793.71 12.00
2007/08 143.17 1068.35 13.40
2008/09 217.92 1278.74 17.04
2009/10 240.85 1603.54 15.02
2010/11 311.42 1988.40 15.66
2011/12 330.46 2183.27 15.13
2012/13 482.56 2502.20 19.28
2013/14 700.53 3000.38 23.35
Source: Annual reports

Return on equity capital is calculated by dividing the net profit after tax by equity capital
fund. Equity capital is increasing in trend throughout the research period. SBL is doing
well since its net profit after tax is increasing. From the above table we can say the
performance of the bank is good. Return on equity capital remained 18%, 10.82%,
12.00%, 13.40%, 17.04%, 15.02%, 15.66%, 15.13%, 19.28%, and 23.25% in the study
period. The return on equity capital remained in between 10.82% to 23.35%. In the year
2004/05, 2008/09, 2012/013, 2013/14, 2009/10, 2010/11, and 2011/12 the financial
performance and return on equity is good. In the year 2004/05 the equity capital is Rs
388.23 million and net profit after tax is Rs. 69.92 million. So the return on equity capital
is 18.00%. .Equity capital is Rs. 793.71 million in 2006/07 and the net profit is Rs. 95.31
million. So the return on equity is 12 percent. In the fiscal year 2007/08 the net profit is
52
Rs. 143.17 million and the equity capital is Rs. 1068.35 million. In the same year return
on equity is 13.40 percent. But in the fiscal year 2013/14, this ratio was improved and
becomes 23.35 percent on return on equity capital. It indicates that the bank is doing well
and improving the financial performance.

4.7 Liquidity Ratio:

Commercial banks collect funds from community on the commitment of return when
they demand it. Thus, banks should maintain satisfactory liquidity position to satisfy the
immediate and short term credit needs of the community. Liquidity position of SBL for
two periods was analyzed using following liquidity ratio.

a) Current Ratio
Table No. 4.9: Analysis of Current Ratio

Rs. in million

Year Current assets Current liabilities Ratio

2004/05 1282.00 1292.52 1:1
2005/06 2077.32 2147.96 .97:1
2006/07 3350.04 3178.52 1.05:1
2007/08 5018.08 4958.10 1.01:1
2008/09 8067.22 7918.97 1.02:1
2009/10 15377.21 14423.91 1.07:1
2010/11 17322.91 10585.58 1.64:1
2011/12 21344.54 19930.49 1.07:1
2012/13 24642.05 22374.63 1.10:1
2013/14 29125.51 24936.20 1.17:1
Source: Annual reports

53
The analysis covers the year from 2004/05 till 2013/14. Current assets consists cash
balance, money at call, loan and advances and bills purchased other assets and investment
in Nepal Government securities. Current liabilities include deposit liabilities, bills
payable and other liabilities.

The liquidity ratio of SBL remained 1, 0.97, 1.05, 1.01, 1.02, 1.07, 1.64, 1.07, 1.10 and
1.17 respectively in the study period. The current ratio is below the conventional standard
2:1 however looking at the nature of assets and liabilities of the commercial banks the
ratio below the standard may be accepted as satisfactory, but it signifies that the bank has
poor liquidity position. The bank may face the problem of working capital if they need to
pay the current liabilities at demand. Banks may lose their goodwill in case of delay in
the payment liabilities. Bank will have the problem in winning the confidence of current
depositors and short term lenders. But in year 2010/11 it was more close to conventional
standard and current ratio seems to be satisfactory.

b). Cash and Bank Balance to Total Deposit

Table No. 4.10: Cash and Bank Balance to Total Deposit

Rs. in million

Year Cash and Bank Total Deposit Ratio (%)

balance
2004/05 130.86 2462.43 5.31
2005/06 116.01 3918.08 2.96
2006/07 517.23 6625.08 7.81
2007/08 437.43 10191.44 4.30
2008/09 1547.69 15854.80 9.76
2009/10 2406.62 20197.03 11.92
2010/11 1905.68 21575.65 8.83
2011/12 4291.89 25948.51 16.54
2012/13 3485.78 28392.82 12.28
2013/14 7257.046 35408.65 20.50
Source: Annual reports

54
Total deposit includes current deposit, saving deposit, fixed deposit, call deposit and
other deposit. Analyzing the ratios, trend of the ratios appeared to be fluctuating. In year
2013/14 it was in the peak and in year 2005/06 it is in its lowest point. Highest ratio i.e.
20.50% shows that the strong liquidity position of the bank in year 2013/14. It indicates
that the bank is able to pay cash to deposit holders. Though high ratio indicates its high
liquidity position but it also affects profitability due to idleness of high interest bearing
fund. 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

c). Cash and Bank Balance to Current Assets

Table No. 4.11: Cash and Bank Balance to Current Assets

Rs. in million

Year Cash and Bank balance Current assets Ratio (%)

2004/05 130.86 1282.00 10.21
2005/06 116.01 2077.32 5.59
2006/07 517.23 3350.04 15.44
2007/08 437.43 5018.08 8.71
2008/09 1547.69 8067.22 19.18
2009/10 2406.62 15377.21 15.65
2010/11 1905.68 17322.91 11.00
2011/12 4291.89 21344.54 20.12
2012/13 3485.78 24642.05 14.15
2013/14 7257.046 29125.51 24.91
Source: Annual reports.

This table depicts that the ratio remained 10.21%, 5.59%, 15.44%, 8.71%, 19.18%,
15.65%, 11.00%, 20.12%, 14.15%, and 12.23% in the respective years of the review
period. From the above table we can say that the ratios are fluctuating during the study
period.

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

55
2013/14. 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 2005/06, 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 opportunities.

4.8 Non-Performing loans to Loans and Advances

Table No. 12: Non-Performing loan to Total loans and advances Rs. in million

Year Non-Performing Loans and Advances Ratio (%)

loan
2004/05 66.34 2371.25 2.79
2005/06 33.57 3789.12 0.88
2006/07 21.54 6223.86 0.34
2007/08 65.17 9335.60 0.69
2008/09 60.30 13328.62 0.45
2009/10 89.26 16653.85 0.53
2010/11 147.74 18384.03 0.80
2011/12 312.91 20217.58 1.52
2012/13 567.87 23086.56 2.45
2013/14 768.28 27186.91 2.82
Source: Annual reports.

NRB categorized loans into the four categories good loan, substandard, doubt, and bad
loan. All loans except the good loan are called non-performing loan.

This table depicts that the ratio remained 2.79%, 0.88%, 0.34%, 0.69%, 0.45%, 0.53%,
0.80%, 1.52%, 2.45% and 2.82% in the respective years of the review period. For first
three years the ratio was in decreasing trend then it increased to 0.69% in year 2007/08,

56
again it falls to 0.45% in FY 2008/09, and again it starts to increased up to 2.82 in the FY
2013/14

The rate of NPL is very low during the study period except the fiscal year 2004/05,
2012/13 and 2013/14. The lowest percent of NPL is in 2006/07 which is 0.34 percent.
The highest percent of NPL is in 2013/14 which is 2.82 percent. The NPL and profit have
negative relation. If NPL increases the profit automatically decreases and vice-versa.
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. By analyzing the non-
performing loan of the SBL we can say that the bank is performing well and its credit
management is good.

4.9 Capital Adequacy Ratio

Table No. 13: Capital Adequacy Ratio

Year Capital adequacy ratio according to core Capital Adequacy ratio

capital fund(tier 1 capital) (CAR)(tier 1 and tier 2)
2004/05 13.35 14.40
2005/06 13.29 14.16
2006/07 10.78 11.83
2007/08 10.19 11.14
2008/09 8.26 10.69
2009/10 8.10 10.16
2010/11 9.05 10.78
2011/12 8.18 11.03
2012/13 8.21 11.70
2013/14 8.39 11.39
Source: Annual reports.

Capital is the cushion against loss. Capital adequacy ratio is calculated on the basis of
probability that the bank is running into loss. Since capital is required for the protection
against loss. In Nepal commercial banks needed to10% capital adequacy ratio.

57
In the above table, the capital adequacy prescribed by NRB for bank and financial
institution and comply of SBL regarding the same has been presented. The minimum
capital adequacy ratio requirement according to core capital (tier 1) is 5.5% and 10% for
total capital (core and supplementary) i.e. (tier 1 and tier 2). The ratio remains ranging
from maximum14.40% to minimum 10.16%. It shows a bank was able to fulfill the
minimum requirement of 10% fixed by the NRB. Both the ratios based on the core capital
and total capital fund exceeds the minimum capital requirements. In 2006/07, the capital
adequacy of SBL is 11.83 percent which is 1.83 percent higher than NRB standard. In
2007/08, the capital adequacy rate of the SBL is 10.35 percent which is 0.35 percent
greater than NRB standard. In 2008/09, the capital adequacy rate is 10.69 percent which
is 0.69 percent greater than NRB standard. In 2009/10, the CAR ratio is 10.16 percent
which is also greater than NRB standard. Similarly, in 2010/11, the rate is 10.78 percent;
it is 0.78 percent greater than NRB standard. The bank maintained 11.03 percent capital
adequacy in 2011/12, though the prescribed capital adequacy was same as the last year.
In 2012/13, the capital adequacy of SBL is 11.70 percent which is higher than previous
year. And finally in 2013/14, the capital adequacy is 11.39 percent which is also greater
than the NRB standard.

Capital adequacy of SBL from 2004/05- 2013/14 is as per the NRB rules and regulations.
SBL has greater adequacy ratio than NRB prescribed. It indicates that SBL has strong
financial condition. If the disburse of loan is default, it does not affect the bank’s lending
capacity.

4.10 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).

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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 SBL for the study period.

Table No.4.14: Coefficient of correlation between Deposit Collection

and Loan Disbursement
Coefficient of r^2 Probable error 6PE
correlation (r)
0.9978 0.9957 0.00091 0.0055
Source: calculation in annex no. 2

Above table shows that the coefficient of correlation between deposit collection and loan
disburse is 0.9978 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 0.9957. This shows that 99.57 percent of 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. SBL is successful in mobilizing its collected deposit. Probable
Error (PE) is calculated to be 0.00091 and 6 PE is 0.0055. The value of ‘r’ is more than 6
PE which indicates that there is significant relationship between total deposit collection
and total loan disbursement.

4.11 Relationships of Total Lending and Total Deposit to Profitability

Principally the relationship between lending and profitability is positive. Here, the
relationship between lending, deposit and profitability is shown in the following table:

Table No. 4.15: Total Amount of Net Profit, Deposit and Lending

Rs. in million

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Year Net profit Total deposit Loans and Advances
2004/05 69.92 2462.43 2371.25
2005/06 65.25 3918.08 3789.12
2006/07 95.31 6625.08 6223.86
2007/08 143.17 10191.44 9335.60
2008/09 217.92 15854.80 13328.62
2009/10 240.85 20197.03 16653.85
2010/11 311.42 21575.65 18384.03
2011/12 330.46 25948.51 20217.58
2012/13 482.56 28392.82 23086.56
2013/14 700.53 35408.65 27186.91
Source: Annual reports.

Table No. 4. 16: Relationships between total lending and total deposit to
profitability

Lending and Net profit Deposit and Net profit

Correlation(r) 0.9420 0.9523
Coefficient of 0.8874 0.9068
correlation(r2)
Source: calculation in appendix no.3

From table 4.16, the net profit seems in increasing trend and the total deposit amount is
also increasing. The table reveals the positive relationship of net profit and lending is
0.9420. Similarly the relationship between net profit and deposit is also positive i.e.
0.9523. Coefficient of determination of lending and net profit shows the effect of lending
on net profit is 88.7 percent whereas 11.30% caused of other factors to net profit.
Similarly, net profit is caused of deposit by 90.68% whereas other factor caused on net
profit is 9.32%.

4.12 Trend Analysis of Total Deposit collection

Table No. 4.17: Trend Forecast of Total Deposit

Trend Forecast for Next Five Years Rs. in million

Year Forecast deposit (yc=a+bx)
2014/15 44358.35

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2015/16 48908.5
2016/17 53458.65
2017/18 58008.8
2018/19 62558.95
Source: calculation in appendix no.1 (a)

Figure No. 4.5: Trend of Deposit Collection

Forecast deposit (yc=a+bx)

70000
60000
50000
40000
Forecast deposit (yc=a+bx)
30000
20000
10000
0
5 6 7 8 9
4 /1 5 /1 6 /1 7 /1 8 /1
2 01 2 01 2 01 2 01 2 01

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 2014/15 will be 44358.35 million. It is increased every year by Rs. 4550.15
million.

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4.13 Trend Analysis of Loans and Advances
Table No. 4.18: Trend Analysis of Loans and Advances

Trend Forecast for Next Five Years Rs. in million

Year Forecast loans (yc=a+bx)
2014/15 35214.36
2015/16 38740.47
2016/17 42266.58
2017/18 45792.69
2018/19 49318.8
Source: annex no.1 (b)

Figure No. 4.6: Trend of Loans and Advances

Forecast loans and advances

(yc=a+bx)
60000

50000

40000 Forecast loans and

advances (yc=a+bx)
30000

20000

10000

0
2014/15 2015/16 2016/17 2017/18 2018/19

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
2014/15 will be 35214.36. Likewise, the loan and advances will be 49318.8 in the year
2018/19. It is increased every year by Rs.3526.11 million.
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 CHAPTER 5
SUMMARY CONCLUSION AND RECOMMENDATION
5.1 Summary of the findings Analysis

The primary objective of the study is to analyze the credit management of Siddhartha
Bank which will be useful for management, shareholders, creditors, investors, depositors,
etc. The major findings of the study are carried out by analyzing the financial data of the
bank.

Financial analysis is the process of identifying the financial strengths and weakness of the
firm by properly establishing relationship between the items of balance sheet and the
profit and loss account. Ratio analysis is one of the tools used by financial analysis for
making decisions regarding credit and investments. The primary objective of the study is
to analyze the credit management of SBL which will be useful for management,
shareholders, creditors, investors, depositors, etc. The major findings of the study are
carried out by analyzing the financial data from 2004/05 to 2013/14.

.
The analysis of trend of deposit collection shows increasing trend. Similarly there is
increasing trend in loan and advances. In total deposit composition, the bank has heavily
depends on fixed deposits because fixed deposits has greater contribution in total deposit

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collection. Similarly, the saving deposit is in second rank for the contribution in total
deposit collection. Then call deposit is in third and current 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 analysis of profitability ratio of SBL was done through net interest to total assets
ratio, net profit to total assets ratio, and return on equity ratios. The analysis of return on
equity capital is increasing in trend throughout the research period. SBL is doing well
since its net profit after tax is increasing. The return on equity capital is remained in
between 10.82% to 23.35%.Net interest is increasing trend from 2004/05 to 2013/14. It
indicates that interest earn is greater than interest paid. In other word, we can say that the
management is successful in utilization of collected fund. The analysis of net profit to
total assets shows that the bank can be able to proper utilize the assets because the profit
of the bank is increasing every year except in year 2005/06. Higher ratio indicates the
success of management in overall operation. In year 2004/05, 2013/14, 2012/13, and
2005/06 the ratio was in highest position. SBL is more successful in getting return from
asset in year 2004/05.

The analysis of liquidity position of SBL showed that the current ratio is below the
conventional standard 2:1 however looking at the nature of assets and liabilities of the
commercial banks the ratio below the standard may be accepted as satisfactory. But it
indicates that the bank has poor liquidity position. In the analysis of cash and bank
balance to total deposit, trend of the ratios appeared to be fluctuating. In year 2013/14 it
was in the peak and in year 2005/06 it is in its lowest point. Highest ratio i.e. 20.50%
shows that the strong liquidity position of the bank in year 2013/14. It indicates that the
bank is able to pay cash to deposit holders. Though high ratio indicates its high liquidity
position but it also affects profitability due to idleness of high interest bearing fund. . 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.

The analysis of assets quality ratio of SBL was measured by non- performing loan to total
loan ratio. The rate of NPL is very low during the study period except the fiscal year
2004/05, 2012/13 and 2013/14. The lowest percent of NPL is in 2006/07 which is 0.34

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percent. The highest percent of NPL is in 2013/14 which is 2.82 percent. This shows the
bank could not managed its loans properly in safety sectors. The analysis of capital
adequacy ratio showed that bank was well capitalized and had proper cushion against
future loss, securing their depositors and shareholders. Capital adequacy of SBL from
2006/07- 2013/14 is as per the NRB rules and regulations. SBL has greater adequacy
ratio than NRB prescribed. It indicates that SBL has strong financial condition. If the
disburse of loan is default, it does not affect the bank’s lending capacity.

Deposits and loan and advances are found to be positively correlated at significant level.
Similarly, deposit and net profit, loans and advances and net profit, is found to be
positively correlated at significant level. The trend analysis of total deposit, loan and
advances shows the increasing trend.

5.2 Conclusion
The objective of the study is to analyze the credit management of Siddhartha Bank
Limited. The specific objectives are to analyze the trends of deposit collection and credit
lending i.e. loan and advances to assets total amount of loan, to evaluate the performance
of SBL. The Financial performance analysis is the method through which we can analyze
the overall performance of the bank where the researcher had used mainly five ratios
liquidity, leverage, assets quality, activity and profitability. The research done fully was
based on the secondary data. Analysis helped the researcher to show clear picture of
credit management SBL.

The gist of the study is the selected Siddhartha Bank which is one of the growing bank in
Nepal. SBL has been maintaining a steady growth rate over this period. Study content
has been focused on credit management procedure and effectiveness, loan disbursement,
loan recovery and loan outstanding position of financial institution.

Although the narrow area of investment, and cut throat competition in banking sector,
loans and advances of SBL shows continuous increasing trend. Loans and advances are
lower than total deposit i.e. all deposits are somehow utilized in loans and advances.

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Correlation between deposit collection and loan disbursement is 0.9980. It indicates that
the relations of two variables are highly positive. The relation is significant because r is
greater than 6PE.

The profitability of the bank shows also good. The net interest to total assets ratio shows
increasing trend. The average of net interest income to total assets ratio is 3%. Return on
equity capital is also increasing trend. From the analysis of net profit to total assets ratio,
we can find that the bank is properly utilizing its assets.

Liquidity position of the SBL can be supposed as satisfactory. Cash and bank balance to
current assets can be seen in satisfactory level. There is 5.59% to 24.91% of cash and
bank balance in total current assets. So that it has maintained NRB directives. The rate of
NPL is very low during the study period except the fiscal year 2004/05, 2012/13 and
2013/14. The lowest percent of NPL is in 2006/07 which is 0.34 percent. The highest
percent of NPL is in 2013/14 which is 2.82 percent. This shows the bank could not
managed its loans properly in safety sectors. Capital adequacy of the SBL is sufficient
against NRB standard. It indicates that the lending capacity of SBL is high. So we can
conclude that there is very positive correlation between the loan disbursement and net
profit at significant level.

5.3 Recommendations

The analysis of research works in credit management 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 SBL” the following
recommendations have been made on the basis of findings of the study:

 The bank should maintain its liquidity position according to the requirement of
the NRB.
 The bank should spend some profit in social activities. It influences the positive
attitude of the public towards the bank.

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 Loan should flow on profitable and viable sectors. This will result in increase in
interest income of the loan and advances 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 bank should adopt efficient and modern management concept to make their
activities quick and moving there by fulfilling the growing demand of current
financial services.
 To meet customer’s 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.

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