TH3192CD

CREDIT MANAGEMENT OF SIDDHARTHA

DEVELOPMENT BANK LIMITED

Submitted by

Shiva Raj Khanal

Shanker Dev Campus

Campus Roll No.: 502/064

T.U. Regd. No.: 7-2-39-4-2002

Symbol No.: 390809/066

Submitted to

Office of the Dean

Faculty of Management

Tribhuvan University

In partial fulfillment of the requirement for the degree of

Master of Business Studies

Kathmandu, Nepal

February, 2014

RECOMMENDATION

This is to certify that the thesis

Submitted by:

Shiva Raj Khanal

Entitled

CREDIT MANAGEMENT OF SIDDHARTHA DEVELOPMENT BANK

LIMITED

has been prepared as approved by this Department in the prescribed format of

the Faculty of Management. This thesis work is forwarded for examination.

…………………….…….. ………..………………….. ……………….………..

Mr. Kapil Khanal Prof. Dr. Kamal Deep Dhakal Asso.Prof. Prakash Singh Pradhan

(Thesis Supervisor) Chairperson, Research Committee (Campus Chief)

Date: ……………….

Property of Shanker Dev Campus Library 2

VIVA-VOCE SHEET

We have conducted the viva-voce of the thesis presented

by

Shiva Raj Khanal

Entitled:

CREDIT MANAGEMENT OF SIDDHARTHA DEVELOPMENT BANK

LIMITED

And found the thesis to be the original work of the student and written

according to the prescribed format. We recommend the thesis to be accepted as

partial fulfillment of the requirement for the

Degree of Master’s in Business studies (M.B.S.)

Viva-Voce Committee

Head, Research Committee …………………………..

Member (Thesis Supervisor) …………………………..

Member (External Expert) ..…………………………

Date: …………………..


DECLARATION

I hereby declare that the work reported in this thesis entitled “Credit

Management of Siddhartha Development Bank Limited” submitted to

Office of the Dean, Faculty of Management, Tribhuvan University, is my

original work done in the form of partial fulfillment of the requirement for the

degree of Master of Business Studies (MBS) under the supervision of Mr.

Kapil Khanal, Lecturer of Shanker Dev Campus.

…………………….

Shiva Raj Khanal

Campus Roll No.: 502/064

Shanker Dev Campus


ACKNOWLEDGEMENTS

This thesis entitled “Credit Management of Siddhartha Development Bank

Limited” has been a matter of great pleasure for me to complete this thesis

work under the supervision and constructive guidance of respected advisor Mr.

Kapil Khanal, Lecturer of Shanker Dev Campus. He helped me in providing all

sorts of guidelines, constructive, critical and analytical support in order to

complete this thesis work in the form as required by the faculty of

management, Shanker Dev Campus and Tribhuvan University for the partial

fulfillment-Degree of Master in Business Studies (MBS).

I would like to extend my profound gratitude to all honorable teachers of

Shanker Dev Campus, staffs of library and administration of the campus and all

my colleagues who helped me directly and indirectly for the completion of this

thesis work.

I would like to extend my appreciation to the staffs of concerned companies

who provided me the necessary data and information.

I must also acknowledge to Central library of TU, for providing required

books, journals and articles.

Finally, I would like to extend my heartily thanks to all the members of my

family and relatives who inspired me in many ways to cope during the entire

period of the study.

Shiva Raj Khanal

February, 2014


TABLE OF CONTENTS

Page No.

Recommendation i

Viva-Voce Sheet ii

Declaration iii

Acknowledgements iv

Table of Contents v

List of Tables viii

List of Figures ix

Abbreviations x

CHAPTER-I: INTRODUCTION 1

1.1 Background of the Study 12

1.2 Statement of the Problem 15

1.3 Objectives of the Study 17

1.4 Significance of the Study 17

1.5 Limitations of the Study 18

1.6 Organization of the Study 18

CHAPTER-II: REVIEW OF LITERATURE 9

2.1 Theoretical Review 20

2.1.1 Concept of Credit 21

2.1.1.1 Types of Credit 21

2.1.2 Credit Management 24

2.1.3 Credit Risk Appraisal 28

2.1.4 Credit Policy of Bank 28

2.1.5 Factors Affecting Credit Policy of Banks 31

2.1.6 Review of Nepal Rastra Bank Directives 32

2.2 Review of Articles 33

2.3 Research Gap 39


CHAPTER -III: RESEARCH METHODOLOGY 29

3.1 Research Design 40

3.2 Population and Sampling 40

3.3 Nature and Sources of Data 41

3.5 Data Analysis Tools 41

3.5.1 Financial Tools 42

3.5.2 Statistical Tools 44

CHAPTER FOUR: DATA PRESENTATION AND ANAYLSIS 37

4.1 Analysis of Secondary Data 48

4.1.1 Deposits of SDBL 48

4.1.2 Deposit Composition of SDBL 50

4.1.3 Trend of Deposit Collection 52

4.1.4 Loans and Advances of SDBL 53

4.1.5 Trend of Loan and Advances 54

4.1.6 Loan and Advances to the Deposit Collection 55

4.1.7 Percentage Change in Deposit Collection and Loan and Advances 56

4.1.8 Coefficient of Correlation between Deposit Collection and Loan

Disbursement 57

4.1.9 Analysis of Profitability Ratios 58

4.1.10 Analysis of Liquidity Ratio: 61

4.1.11 Analysis of Non-Performing Loan 65

4.1.12 Sector-Wise Loan 66

4.1.13 Analysis of Capital Adequacy 67

4.1.14 Relationship of Total Lending and Total Deposit to Profitability 68

4.2 Analysis of Primary Data 69

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

4.2.2 Implementation of NRB Directives Related to Credit Policy 70

4.2.3 Using Credit Analysis before Approval of Any Loan Proposal 70

4.2.4 Visiting the Project Site at the Time of Granting Loan 71

4.2.5 Maintaining Right Level of Liquidity 72


4.2.6 Practices of Credit Policy in Good Way 73

4.2.7 Arising Credit Related Problems 74

4.2.8 Types of Credit Related Problems Faced 74

4.2.9 Reviewing the Loans and Advances on Periodic Basis 75

4.2.10 Period of Reviewing Loans and Advances 75

4.2.11 Maintaining Sufficient Provision for Loan Losses 76

4.2.12 Percent of Loan Loss Provision 77

4.2.13 Relation between Credit Position and Profitability 77

4.3 Major Findings of the Study 78

CHAPTER V: SUMMARY, CONCLUSION AND

RECOMMENDATIONS 70

5.1 Summary 81

5.2 Conclusion 83

5.3 Recommendations 84

BIBLIOGRAPHY 86

APPENDICES

vii


LIST OF TABLES

Page No.

Table No. 4.1: Deposits Collection by SDBL 49

Table No. 4.2: Deposit Composition 50

Table No. 4.3: Loans and Advances of SDBL 53

Table No. 4.4: Loan Disbursed to the Deposit Collection 55

Table No. 4.5: Deposit Collection and Loan and Advances 57

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

Disbursement 58

Table No. 4.8: Analysis of Net Interest to Total Assets 59

Table No. 4.9: Net Profit to Total Assets Ratio 59

Table No. 4.10: Return on Equity Capital 60

Table No. 4.11: Analysis of Current Ratio 61

Table No. 4.12: Cash and Bank Balance to Total Deposit 62

Table No. 4.13: Cash and Bank Balances to Current Assets 63

Table No. 4.14: Loans and Advances to Current Assets 64

Table No. 4.15: Non-Performing Loan to Total Loan 65

Table No. 4.16: Analysis of Sector-wise Loan 66

Table No. 4.17: Capital Adequacy Ratio 67

Table No. 4.18: Total Amount of Net Profit, Deposit and Lending 68

Table No. 4.18: Relationship between Lending and Deposit to profitability 68

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

Policy 69

Table No. 4.20: Implementation of NRB Directives Related to Credit Policy 70

Table No. 4.21: Using Credit Analysis before Approval of Any Loan Proposal

70

Table No. 4.22: Visiting the Project Site at the Time of Granting Loan 71

Table No. 4.23: Maintaining Right Level of Liquidity 72

Table No. 4.24: Practices of Credit Policy in Good Way 73

Table No. 4.25: Arising Credit Related Problems 74

Table No. 4.26: Reviewing the Loans and Advances on Periodic Basis 75

Table No. 4.27: Period of Reviewing Loans and Advances 75

Table No. 4.28: Maintaining Sufficient Provision for Loan Loses 76

Table No. 4.29: Relation between Credit Position and Profitability 77


LIST OF FIGURES

Page No.

Figure No.4.1: Deposit Collection of SDBL 49

Figure No. 4.2: Deposit Composition of SDBL 52

Figure No. 4.3: Trend of Deposit Collection 52

Figure No. 4.4: Loan and Advances of SDBL 54

Figure No. 4.5: Trend of Loan and Advances 54

Figure No. 4.6: Loan Disbursement to Deposit Collection 56

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

Policy 69

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

71

Figure No. 4.10: Visiting the Project Site at the Time of Granting Loan 72

Figure No. 4.11: Practices of Credit Policy in Good Way 73

Figure No. 4.11: Arising Credit Related Problems 74

Figure No. 4.13: Period of Reviewing Loans and Advances 76

Figure No. 4.14: Relation between Credit Position and Profitability 77


ABBREVIATIONS

A.D. - Anno Domini

A.M. - Arithmetic Mean

B.S. - Bikram Sambat

BOK - Bank of Kathmandu

C.V. - Coefficient of Variation

EPS - Earning Per Share

F/Y - Fiscal Year

G.M - General Manager

Ktm. - Kathmandu

Ltd. - Limited

M. - Million

MBS - Master of Business Studies

NBL - Nepal Bank Limited

NIBL - Nepal Investment Bank Limited

No. - Number

NPA - Non-Performing Assets

NPL - Non-Performing Loan

NRB - Nepal Rastra Bank

P.E - Probable Error

Pvt. - Private

r - Coefficient of Correlation

ROE - Return on Equity

Rs. - Rupees

S.E - Standard Error

T. U. - Tribhuvan University


CHAPTER-I

INTRODUCTION

1.1 Background of the Study

The prosperity of every developing country can be insured by its economic

growth. Different profit and non-profit institutions are to be established for

economic growth, for which the source of finance is very essential. Profit

oriented institutions usually obtain these sources through ownership capital,

public capital through the issues of shares and through financial institutions

such as banks, in the form of credits, overdrafts etc.

Financial institutions are the backbone of the economic development of any

country. A small financial institution is a vital contributor to the financial

health of the national economy. The financial institutions are often fragile and

susceptible to failure because of poor management, particularly in financial

management. National development of any country depends upon the economic

development of that country and economic development is supported by

financial in institution of that country. Financial infrastructure indicates the

financial strength, position and environment of the institutions. The various

branches of bank in towns and villages are offering various types of services. In

past, they just used to accept deposits from the savers of money (surplus units

of the society) and give loan to the users of money (deficit units of the society).

Savers of the money are those units whose earning exceeds expenditure on real

assets and user of money is those units whose expenditure on real assets

exceeds their earnings.

Any institution offering deposits subjects to withdrawal on demand and making

loans of a commercial or business nature is a bank. Banks constitute an

important segment of financial infrastructure of any country. Bank came into

existence mainly with the objective of collecting the idle fund, and mobilizing

them to productive sector causing overall economic development. A bank is the

financial departmental store, which render various financial services besides

taking deposits and lending loans. Bank is the financial institution, which deals


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

economy, banks are to be not as the dealer of money but as the lender of the

economic development. Banks are not just the storehouse of the country's

wealth but also are to mobilize of the resources necessary for the economic

development (Shrestha, 2009/10:2).

Banking is one of the most heavily regulated business in the world (Vaidhya,

1999: 5). Banks are among the most important financial institutions in the

economy. They are the principal source of credit (loan-able funds) for millions

of individuals and families and for many units of government. Moreover, bank

often act as a major source of credit to small local business ranging from

grocery stores to automobile dealers for their stock. Banks are among the most

important sources of short term working capital for business and have become

increasingly active in recent years in making long-term business loans for new

plant and equipment (Shekhar & Shekhar, 1999: 6).

Banks are such financial institutions that offer the widest range of financial

services especially credit, savings payment services and perform the widest

range of financial functions of any business firm in the economy. The most

important function are; lending and investing money (the credit function),

making payments on behalf of customers for their purchase of goods and

services (the payment function), managing financial assets and real property for

customers in investing and raising funds (through the brokerage, investment

banking and saving functions) (Vaidhya, 1999: 5).

Lending is the most important function of a commercial bank. For lending

procedure, bank has to make some banking practices such as transferring

property in bank’s name. The transfer is temporarily made for a loan price &

interest. Lending money is nowadays becoming main resources of revenge to

the bank and it also involves high risk. Bank will not provide loan unless it has

sufficient sources to the borrower that will be needed in case of future

recovery.


Today no banker can survive for long run without proper standing of economy

and no place ahead without proper banking system. Moreover, the ability of

banks is to gather and analyze financial information that has given rise to

another view of why banks exist in modern society. Most borrowers and

depositors prefer to keep their financial records confidentially, especially, from

competitors. Banks are able to fulfill this need by offering high liquidity in the

deposits they sell. More people believe that banks play only narrow role in the

country, taking deposits and making loans. The modern bank has to adopt new

roles in order to remain competitive and responsive to public needs (NRB,

Smarika, 2010/11/11: 41).

Banks are expected to support their local communities with an adequate supply

of credit for all legitimate business and customer needs to price that credit

reasonably in line with competitively determined interest rates. Bank loan

support the growth of new business and jobs within the banks trade territory

and promote economic vitality. Banks make a wide variety of loans to a wide

variety of customers for many different purposes from purchasing automobiles,

and buying new furniture, taking dream vacation or purchasing college

education, to constructing home and office buildings.

Going through loan granting provision, bank will through safety of funds,

purpose of loans, security for loans, profitability spread of loan portfolio etc.

besides this, the character of person receiving credit, the capacity of borrower

to utilize the fund, the percentage of borrower stake in the business are the

basic elements which measures the quality of borrower and ultimately the

quantity of the loan.

In this way bank plays an important part in the development of trade,

commerce and industry. Today no bankers can survive for long run without

proper standing of economy and economy cannot pace ahead without proper

banking system built.


In this way, Nepalese banking has stepped a great stride in its development.

However, Nepalese banking has not been succeeded in bringing change in the

economy in society and with people. The large portion of national economy is

still behind the touch of present banking system. The unorganized moneylender

has been playing a monopoly role in granting the loan to public of remote

economy and this monopoly results in excessively higher interest rate than that

of institutional banker. Thus, the moneylenders are still exploiting the public of

rural sector in the absence of easy access to banking activities. Increasing the

number of financial institutions has not proportionately increased the total

banking behavior of people. This is because most of the financial institutions

are situated in the urban area and rural economy has not been touched by this

change in financial sector. Hence, in conclusion it can be summarized that the

technical and quantitative development of the financial sector is found

satisfactory but its qualitative impact on overall economy cannot be considered

utmost.

For most banks, loans are the largest and most obvious source of credit risk,

however other sources of credit risk exist throughout the activities of a bank,

including in the banking book and in the trading book, and both on and off the

balance sheet. Banks are increasingly facing credit risk in various financial

instruments other than loans, including acceptances, inter bank transactions,

trade financing, foreign exchange transactions, financial futures, swaps, bonds,

equities, options, and in the extension of commitments and guarantees and the

settlement of transactions.

1.2 Statement of the Problem

Banks in Nepal have been facing various challenges and problems. Some of

them arising due to the economic condition of the country, some of them

arising due to confused policy of government and many of them arising due to

default borrowers. After liberalization of economy, banking sector has various

opportunities.


However, the financial institutions are increasing regularly. Liquidity is

maximum with the financial institutions. Hence, the banks and financial

institutions are competing among themselves to advance credit to limited

opportunity sectors. Banks and financial institutions are investing in house

loan, hire purchase loan for safety purpose. Lack of good lending opportunities,

banks are facing problems of over liquidity. Nowadays, banks have increasing

number of deposits in fixed and saving accounts but have decreasing trend in

lending behaviors. So, this has caused major problems in commercial banks.

Nowadays, due to competition among banks, the interest rate charge for loan is

in decreasing trend. Due to unhealthy competition among banks, the recovery

of the bank’s credit is going towards negative trends. Non-performing credits

of the banks are increasing year by year. To control such type of state, the

regulatory body of the banks and financial institutions, NRB has renewed its

directives of the credit loss provision. Therefore, it is necessary to analyze the

‘credit management’ or credit disbursement recovery provision for loss and

write off of credit. As the sample of commercial banks, have been selected.

Credit is the most effective and sincere area in banks. It is regarded as the heart

of every bank. But the banking sector is far from this fact. Thus, Credit

management is considered as the heart issues in Nepalese banking sector.

Nepalese banks are lacking scientific and imperial research that could identify

the issues of credit management. Banks and financial institutions are investing

in house loan, hire purchase loan for safe purpose. Due to lack of good lending

opportunities, banks appear to be facing problem of excess liquidity. Due to

unhealthy competition among the banks, the interest rate for the loan is in

decreasing trend and the recovery of the banks credit is going towards negative

trends. In this regard, the performance of Nepalese banks is to be analyzed in

terms of their credit. Some research questions regarding to the credit practices,

credit efficiencies, liquidity position, industrial environment, management

quality, organization climate are considered as a clear evident in present

situation. Thus to know the problems faced by Nepalese banks related to the


investment, Siddhartha Development Bank Limited is selected for study and

the specific research questions regarding credit management in SDBL are

identified as follows:

• What is the trend in the deposit collection of SDBL?

• How does the SDBL disburse loan and recover their loan?

• What is the position of deposit collection and lending?

• Is there any relationship between loan disbursement and principal

collection?

1.3 Objectives of the Study

The main objective of this study is to have true insight of the credit

management of SDBL. Beside this, following are the specific objectives:

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

• To measure to relationship between profitability and credit management

of SDBL.

• To analyze the performance of SDBL in terms of liquidity, profitability,

sector wise loan, non-performing loan.

• To analyze capital adequacy of SDBL.

1.4 Significance of the Study

Most of the banks are gaining a wide popularity through their efficient

management and professional services and playing a great role in the economy.

The main purpose of the bank is to have effective credit management so that

stakeholders get satisfactory. This study adds new idea and findings about the

concerned bank.

This study is helpful for all the concerned parties which add new idea and

findings about the Siddhartha Development Bank Limited. The study that will


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

groups of people/organizations are:

• Important to the management of Siddhartha Development Bank Limited

for self-assessment of what they have done in the past and guide them in

their future plans and program.

• Important to the shareholders.

• Important to the financial agencies, stock exchanges and stock traders,

who are interested in the performance of the bank as well as the

customer, depositors and debtors who can identify the better bank to

deal with in terms of profitability, safety and liquidity.

• Important to the interested outsides parties like investors, competitors,

personnel of the banks, dealers and market makers.

• Important to the macro level policy makers like government and NRB

for the formulation of further policies in regard to economic

development.

1.5 Limitations of the Study

This study has been carried out with certain limitations. The major limitations

are as follows:

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

Development Bank Limited.

• The accuracy of the result is depended on annual report of the bank.

• This study is based on the five years data from 2008/09 to 2012/13.

1.6 Organization of the Study

The whole study is divided into five different chapters and they are given as

follows:

Chapter-I: Introduction: First chapter is introduction section which describes

the background of the study, statement of the problem, objectives of the study,

significance of the study, limitations of the study and organization of the study.


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

second chapter of the study which contains conceptual framework of the credit,

review of articles, past related thesis and research gap.

Chapter-III: Research Methodology: Research methodology refers to the

various sequential steps to be adopted by a researcher in studying a problem

with certain objectives in view. This chapter includes research design, data

collection and analysis technique and research variables.

Chapter-IV: Data Presentation and Analysis:. Data processing, data analysis

and interpretation are given in this chapter and there is use of techniques

relating to analysis such as ratio, descriptive expression, diagrams and so forth.

Chapter-V: Summary, Conclusion and Recommendations: This chapter is

devoted to the summary of the research, conclusion derived on the basis of data

analyzed and the recommendations for improvement to the concerned

organization.

Finally, bibliography and appendices have also been incorporated.


CHAPTER-II

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 review study, the researcher uses

different books and journal, reviews and abstracts, indexes, reports, and

dissertation or research studies published by various institutions, encyclopedia

etc.

• Theoretical/Conceptual Framework

• Review of Related Studies

2.1 Theoretical Review

The review of textbook and other reference materials such as: newspaper,

magazines, research articles, journals and past thesis have been included in this

topic. Credit administration involves the creation and management of risk

assets. The process of lending takes in to consideration about the people and

system required for the evaluation and approval of loan requests, negotiation of

terms, documentation, disbursement, administration of outstanding loans and

workouts, knowledge of the process and awareness of its strength and

weakness are important in setting objectives and goals for lending activities

and for allocating available funds to various lending functions such as

commercial, installment and mortgage portfolios


2.1.1 Concept of Credit

“Credit is the sum amount of money lent by the creditor (Bank) to the borrower

(Customers) either on the basis of security or without security. Sum of the

money lent by a bank, is known as credit”. (Oxford Advanced Learners

Dictionary, 1992)3. “Credit and advance is an important item on the asset side

of the balance sheet of any type of bank. Bank earns interest on credits and

advances, which is one of the major sources of income for banks. Bank

prepares credit portfolio, otherwise it will not only add bad debts but also affect

profitability adversely”. (Khadka & Singh, 2069: 42).

“Credit is financial assets resulting from the delivery of cash or other assets by

a lender to a borrower in return for an obligation of repay on specified on

demand. Banks generally grants credit on four ways”. (Pandey, 1992: 432).

2.1.1.1 Types of Credit

Overdrafts: It denotes the excess amount withdrawn over their deposits. In

other words bank provide sum limit of money to their value customer

according to their believe ness and level of transaction.

Cash Credit: The credit is not given directly in cash but deposit account is

being opened on the name of credit taker and the amount credited to that

account. In this way, every credit creates deposit.

Term Credit: It refers to money lent in lump sum to the borrowers. It is

principle form of medium term debt financing having maturities of 1 to 8 years.

Barely and Myers urge that bank credits with maturities exceeding 1 years are

called term credits. “The firm agrees to pay interest based on the 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.

Priority or Deprived sector Credit: Commercial banks are required to extend

advances to the priority and deprived sector 3.5 percent of the total Credit must

be toward priority sector including deprived sector. Institutional support to

‘Agriculture Development bank’ and ‘Rural Development Bank’ are also

considered under this category. Deprived sector lending includes:

• Advances to poor/downtrodden/weak/deprived people up to Rs 30,000

for generating income or employment.

• Institutional Credit to Rural Development Bank.

• Credits to NGOs those are permitted to carryout banking transactions for

lending up to Rs.30, 000.

Hire Purchase Financing (Installment Credit): Hire-Purchase credits are

characterized by periodic repayment of principle and interest over the maturity

of the credit. Hirer agrees to take the goods on hire at a stated rental including

their repayment of principle as well as interest with an option to purchase.

Housing Credit (Real Estate Credit): Financial institutions also extend credit

to their customers. It is different types, such as residential building, commercial

complex, construction of warehouse etc. It is given to those who have regular

income or can earn revenue from housing project itself.

Project Credit: Project credit is granted to the customers as per project

viability. The borrowers have to invest certain proportion to the project from

their equity and the rest will be financed as project credit. “Construction credit

is short-term credits made to developers for the purpose of completing

proposed projects. Maturities on developers for completing proposed projects.


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

years, depending on the size of the specific project. The basic guideline

principle involved in disbursement policy is to advance funds corresponding to

the completion stage of the project. Term of credit needed for project fall under

it”. (Johnson, 1940: 83).

Consortium Credit: No single financial institution grant credit to the project

due to single borrower limit or other reason and two or more such institutions

may consent to grant credit facility to the project of which is baptized as

consortium credit. It reduces the risk of project among them. Financial bank

equal (or likely) charge on the project’s assets.

Credit Cards and Revolving Lines of Credit: Banks are increasingly

utilizing cards and revolving lines of credit to make unsecured consumer credit.

Revolving credit line lowers the cost of making credit since operating and

processing cost are reduced. Due to standardization, centralized department

processes revolving credits resulting reduction on administration cost.

Continued borrowing arrangement enhances cost advantages. Once the credit

line is established, the customer can borrow and repay according to his needs

and the bank can provide the fund to the customer at lower cost.

Off-Balance Sheet Transaction: In fact, bank guarantee and letter of credit

refer to off balance sheet transactions of financial institution. It is also known

as contingent liability. Contingent liability pinpoints the liability, which may or

may not arise during the happening of certain event. Footnotes are kept as

references to them instead of recording in the books of accounts.

It is non-funded based remunerative facilities but more risky than the funded

until adequate collateral are not taken. Lets its two varieties be described

separately.

Bank Guarantee: It used for the sake of the customers in favor of the other

party (beneficiary) up to the approved limit. Generally, a certain percent


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 agreement of L/C. “It is also

known as importers letter of credit since the bank of importer do not open

separate L/C for the trade of same commodities” (Johnson, 1940:85).

2.1.2 Credit Management

Credit management is a term used to identify accounting functions usually

conducted under the umbrella of accounting receivables. Essentially, this

collection of processes involves qualifying to extension of credit to a customer,

monitors the reception and logging of payments on outstanding invoices, the

initiation of collection procedures, and the resolution of disputes or queries

regarding charges on a customer invoice. When functioning efficiently, credit

management serves as an excellent way for the business to remain financially

stable.

The process of credit management begins with accurately assessing the credit-

worthiness of the customer base. This is particularly important if the company

chooses to extend some type of credit line or revolving credit to certain

customers. Proper credit management calls for setting specific criteria that a

customer must meet before receiving this type of credit arrangement. As part of

the evaluation process, credit management also calls for determining the total

credit line that will be extended to a given customer.

Several factors are used as part of the credit management process to evaluate

and qualify a customer for the receipt of some form of commercial credit. This

includes gathering data on the potential 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 factor is regarded as credit. It is most challenging job

because it is the backbone in banks. Thus, effective management of credit

should seriously be considered.

In my view, management is the optimum utilization of resources of an

organization. Management is the system, which helps to complete the every job

effectively and efficiently. Credit management is also the system, which helps

to manage credit effectively. In other words, credit management refers

management of credit exposures arising from loans, corporate bonds and credit

derivatives. Credit exposures are the main source of investment in development

banks and return on such investment is supposed to be main source of income.

Credit management strongly recommends analyzing and managing the credit

risks. Credit risk is defined as the possibility that a borrower will fail to meet its

obligations in accordance with the agreed terms and conditions. Credit risk is

not restricted to lending activities only but includes off balance sheet and 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 the settlement of transactions.

The credit policy of a firm provides the framework to determine whether or not

to extend credit and how much credit to extend. The credit policy decision of a

bank has two broad dimensions; credit standards and credit analysis. A firm has

to establish and use standards in making credit decision, develop appropriate

sources of credit and methods of credit analysis.

Credit promotes economies growth and contributes the nation’s wealth. People

deposit their surplus money in the bank and may lend those collected funds to

the various business and companies. These firms in return may invest in new

factories and equipment to increase their productivity. As a result investment

raises the nation's living standard. Now days, most companies issue stocks and

bonds to raise the capital needed for business expansion instead of borrowing

from the banks. Similarly government also issue bonds to obtain fund to invest

in the projects like construction of damps, roads, Bridges and schools etc. All

such investment by individual business as well as government involves a

sacrifice of present value to get expected future benefits and income which is

probably uncertain.

Credit risk is most simply defined as the potential that a bank borrower or

counterparty will fail to meet its obligations in accordance with agreed terms.

The goal of credit risk management is to maximize a bank’s risk adjusted rate

of return by maintaining credit risk exposures within acceptable parameters.

Banks need to manage the credit risk inherent in the entire portfolio as well as

the risk in individual credits or transactions. Banks should also consider the

relationships between credit risk and other risks. The effective management of


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

management and essential to the long term success of any banking

organization.

For effective credit management, there is major role of sound credit policies

and the practices of those policies. The sound practices address the following

area:

• Establishing an appropriate credit risk environment.

• Operating under a sound credit granting process.

• Maintaining an appropriate credit administration, measurement and

monitoring process.

• Ensuring adequate controls over credit risk.

“Although specific credit risk management practices may differ among banks

depending upon the nature and complexity of their credit activities, a

comprehensive credit risk management program will address these four areas.

Those practices should also be applied in conjunction with sound practices

related to the assessment of assets quality, the adequacy of provisions and

resources and the disclosure of credit risk all of which have been addressed in

other recent Basel Committee document”. (Van Horne, 1999: 432)

The income and profit of the bank depend upon the lending procedure applied

by the bank. And the lending policy and investment in different securities also

affect the income and profit. In the investment procedures and policies, it is

always taken in mind that the greater the credit created by the bank, the higher

will be the profitability. A sound lending investment policy is not only pre-

requisite for banks profitability but also crucially significant for the promotion

of commercial saving of developing countries like Nepal.

The sound policies help development banks maximize quality and quantity of

investment and there by achieving the objective of profit maximization and

social welfare. Formulation of sound investment policies and co-coordinated

and planned efforts pushes forward the forceps of economic growth.


2.1.3 Credit Risk Appraisal

Although specific credit risk management practices may differ among banks

depending upon the nature and complexity of their credit advances, credit

appraisal is art through which every practical banker master from out of

experience and can never be reduced to an absolute science. In spite of several

technical aids, such as ratio analysis of financial statements, cash flow and fund

flow statements, Profit and Loss account, Balance Sheet available to the

modern banker, the ability to make a correct loan decision very much depends

on the critical judgment, common sense perceptive intelligence and

discriminating sense of the lending banker. However, the usual steps involved

in the appraisal of credit risks are:

• The character, capacity, collateral and integrity of the borrower

• Repayment capacity of the borrower including a consideration of the

source of income.

• Prospects of the proposal- whether it will succeed.

• The purpose of the loan which is being requested is whether productive

or unproductive.

• The collateral that is being offered as security must be investigated as to

the following:

- Whether it is easily marketable

- Value of security at present

- Whether the value is likely to be stable or it is the security such that

its value fluctuates considerably

- In case of default in payment, if it is easily transferable.

2.1.4 Credit Policy of Bank

The bank is inspired with the goal of earning profit. How to scattering the loan

is one of the most important things. There are many reasons after the goal of

gaining profit. A bank is legal person. It can do nothing alone. A bank

established without the aim of graining the profit is central bank. Other banks


are inspired with the object of earning profit and helping the economic

development and finally to take the social responsibility. They should have the

ability to use the policy of banking investment and to implement it much more

carefully otherwise a bank may be unsuccessful in its goal. It is essential to

carryout the business of lending consistency. For effective credit management,

following credit policy are very essential for every bank.

1. Principle of Liquidity

Liquidity means the whole money stock in the economy. The liquid property

means cash stock of the banks the amount of short term, current account and

short term government and business security and the Treasury bill. A bank

should not forget the principle of liquidity while it is following its investment

policy. A bank should able to return the deposit when demanded by the

depositors. A banker has to ensure that money will come as in demand or as per

agreed terms of repayment. For this purpose bank need liquid cash.

2. Principle of Profitability

The objective of bank is to earn profit. The bank should focus from which

sectors it can earn much profit. The bank can earn more profit from safe and

long term investment. If bank pays its attention only on profit, liquidity will be

less and if it pays attention on the liquidity, it can't be a long-term investment

and the bank doesn't earn profit. So it should maintain equality in it.

3. Principle of Safety

A bank should pay special emphasis on safety. If the investment area is unsafe

it is not a good for the bank. There will be no doubt of loss whether it is greater

or little, if the bank has not invested in a safe sector. Before making any

investment, the bank should seriously study whether it is safe to invest or not.


4. Principle of Diversification

The principle of diversification means, to invest the money in the various

sectors. The bank by studying and analyzing the different sectors where it is

possible to earn more from little investment should extend its environment. If

bank invest in various sectors, it become successful to keep it in balance. As

the statement, the bank should not keep all its eggs in the same basket and

should invest in various sectors.

5. Principle of Marketability

A bank should adopt the principle of marketability. The bank should invest by

taking the security of high quality as far as possible. Bank should study the

market value of the goods, which are taken as a security. There should not be

investment by taking the securities of such goods which are not saleable in the

market.

6. Principle of National Interest

The objective of bank should not go against the national interest. The banks

should follow the rules and regulations as well as policy and directions given

time to time by the Nepal Rastra Bank. The bank should make its investment,

which is suitable to the national interest and provides benefit to the society.

7. Principle of Tangibility

Though it may be considered that tangible property does not yield on income

apart from direct satisfaction of possession of property, many intangible

securities may lost their value due to price level inflation. A bank should prefer

tangible security rather than intangible one.

8. Principle of Legality

Illegal securities will bring out many problems for the investor. A bank must

follow the rules and regulations as well as different directions issued by Nepal


Rastra Bank, rules and regulations issued by Nepal government while

mobilizing its funds.

2.1.5 Factors Affecting Credit Policy of Banks

There are so many internal and external factors which affect the credit policy of

banks. Generally, the following factors are to be considered to make effective

credit management. It helps to get effective credit worthiness.

1. Industrial Environment

It determines the nature of the industry, its attractiveness and the 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, competences and nature of alliances of the

borrower's management team weaknesses in replacements needs to be

evaluated.

4. Technical Strength

It determines the strength and quality of the technical support required for

sustainable operation of the Company in terms of manpower and the

technology used. Appropriate technical competence of the manpower, the

viability of the technology uses. Availability of after sales service cost of

maintenance and replacements need to be evaluated.


5. Security Realization

“It determines the control over various securities obtained by bank to secure the

loan provided extractability of the security documents and present value of the

properties mortgaged with the bank weaknesses in security threatens the bank's

second way out” (Khadka and Singh, 2069: 139).

2.1.6 Review of Nepal Rastra Bank Directives

Central Bank NRB has established a legal framework by formulating various

rules and regulations to mobilize or invest the deposit of the bank in different

sectors of the different parts of the nation, to prevent them from the financial

problems. Those rules and regulations are discuss which are formulated by

NRB in terms of investment and credit to priority sector, deprived sector, other

institution, single borrower limit, CCR, loan loss provision, capital adequacy

ratio, interest spread, productive sector investment etc. Bank is directly related

to the fact that how much fund must be collected as paid up capital while

establishing the bank at certain place of the nation, how much fund is needed to

expand the branch and counters. But we discuss only those which are related to

credit management of the development bank. The directives given by NRB for

effective credit management are as follows:

1) Directives on Loan Classification and Loss Provision

With a view to improve the quality of assets of bank, NRB has directed

development bank to classify their outstanding loan and advances, investment

and other assets into four categories. The classification is done in two ways.

The loans of more than one hundred thousands are to be classified as per debt

services ratio, repayment situation and financial condition of borrower,

management efficiency and quality of collateral. The loans of less than one

hundred thousands have to be classified as per maturity period.

According to the circulars, the loans are classified based on weakness and

dependence on collateral securities into four categories and prescribed the

provisioning rate as follows:


Loan

Classification

Criteria for Provisioning Provision

Rate

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

months.

1%

Substandard Past due for a period of 3 months to 6

months.

25%

Doubtful Past due for a period of 6 month to 1 year. 50%

Loss Past due for a period of more than 1 year or

advances which have least possibility of

recovery.

100%

Source: NRB, Directives, 2012/13 (www.nrb.org.np)

2) Directives for Investment in Productive Sector

Being a developing country, Nepal needs to develop its infrastructure and other

primary productive sectors like agriculture, industrial etc. NRB has directed

banks to extend at least 40 percent of its credit to productive sector.

3) Directives for the Single Borrower Credit Limit

I. Fund based credit and advances can be issued up to 25% (upper limit)

of core capital to a single customer, firm, company and a group of

related customers.

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

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

customer.

2.2 Review of Articles

Shrestha S. (2006) in an article entitled "Lending operations of commercial

banks of Nepal and its impact on GDP" presented the objectives to make an

analysis of contribution of commercial banks' lending to the Gross Domestic

Product (GDP) of Nepal. She has set a hypothesis that there has been a positive

impact of lending of commercial banks to the GDP. In research methodology,


she has considered GDP as the dependent variable and various sectors of

lending viz. agriculture, industrial, commercial, service, general and social

sectors as independent variables. A multiple regression technique has been

applied to analyze the contribution.

The multiple analyses have shown that all the variables except service sector

lending have positive impact on GDP. Thus in conclusion, she has accepted the

hypothesis, i.e. there has been positive impact on GDP by the lending of

commercial banks in various sectors of economy, except service sector

investment."

Chhetri D.B. (2005) , in an article titled "Non Performing Assets: A need for

Rationalization" the writer has attempted to provide connection of the term

NPA and its potential sources , implication of NPA in financial sector in the

South East Asian region .He had also given possible measures to contain NPA.

"Loans and advances of financial institutions are meant to be serviced either

part of principal of the interest of the amount borrowed in stipulated time as

agreed by the parties at the time of Loan settlement. Since the date becomes

past dues, the loan becomes non-performing assets. The book of the account

with lending institution should be effectively operative by means of real

transaction effected on the part of debtor in order to remain loan performing.

As stated by the writer, the definition of NPA differs from country to country.

In some of the developing countries of Asia Pacific Economic cooperation

(APEC) forum, a loan is classified as non-performing only after it has been

arrear for at least 6 months. Similarly, it is after 3 months, in India. Loans thus

defaulted are classified into different categories having their differing

implication on the assets management of financial institution. He also stated

that NPAs are classified into practices into 3 categories namely substandard,

Doubtful and loss depending upon the temporal position of loan default.” Thus

the degree of NPA assets depends solely on the length of time the assets has

been in form of none obliged by the loanee. The more time it has elapsed the


accordingly. “As per Mr. Chhetrie's view, failure of business for which loan is

used, defective and below standard credit appraisal system credit program

sponsored by government, slowdown in economy/recession, diversion of fund

is some of the factors leading to accumulation of NPAs.

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

further added that the liability of credit institution dies not limit to the amount

declared as NPAs but extend to extra amount that required for provisioning

depends upon the level of NPAs and their quality. As per his view, rising level

of NPAs create a psyche of worse environment especially in financial

institution like waving interest, rescheduling the loan, writing off the loan,

appointing private recovery agent, taking help of land etc NPAs can be

reduced.

Finally he conducted that financial institution are beset with burden of

mounting level of NPAs in developing countries.” Such assets debar income

flow of financial institution while claming additional resources in the form of

provisioning thereby hindering gainful investments. Rising of NAPs cannot be

taken as stimulus but the vigilance depended to solve the problem like this,

eventually will generate vigor to gear up the banking and financial activities in

more active way contributing the energizing growth."

Crosby, French and Oughton (2007), in their article “Banking lending

valuations on commercial property” elaborates that the banking community are

trying to identify the value on which they can apply a loan value ratio and thus

protect their loan in the future should the borrower default. A simplistic

understanding the value therefore suggest that figure provided should be the

figure which has a life for the length of the loan. However the very concept is

economically impossible in any market with volatility. Values can only be

snapshots in time. They do not have a shelf life.


For this reason BLV is conceptually and practically redundant in real estate

markets. It appears on the surface to be a solution to the banks’ requirement for

the reduced risk property lending. In reality, it may indeed transfer that risk by

demanding a level of protection to the bank that the valuation cannot give. But

if values agree to it, it could open the way to successful negligence claims in

the aftermath of poor lending decisions. This is because the concepts appears

the determinants of the virtually certain level of value below which the value

will not fall for an indeterminate time into the future. Values are vulnerable to

claims that their valuation was too high, should values fall below that level at

any time during the loan. Sustainable value is predicated on having a shelf life

but the application believes this fundamental requirement. Values must have a

time point. The concept is redundant, the target unidentifiable and the

definition ambiguous. It is little wonder that the application appears

mechanistic. Market value is an obtainable and useful piece of information to

the lender. Worth in the market sets this in context and gives the lender a view

of whether market prices are at current sustainable levels. In obtaining worth,

the value is obliged to carry out both quantitative and qualitative investigation

into the future and this generates other analyses at different time points during

the course of the loan.

Mundul (2010), in his article on "Understanding of credit derivative Business

Age September” emphases Credit derivative enable financial institution and

companies to transfer credit risk to a third parity and thymus reduce their

exposure to the risk of an obligor’s default. Credit enhancement technique,

which helps reduce the credit risk of an obligation, play a key role in

encouraging loans and investment in debts.

In legal term credit derivative are privately negotiated bilateral contract to

transfer credit risk from one party to another. Some credit enhancement

methodologies have existed for the in debts. Some credit enhancement

methodologies have existed for a longtime with the support of guarantee, letter

of credit or insurance product. However such mechanism works best during


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

financial mechanisms have been developed over the past few decades. Such

credit risks instruments are normally refer to as credit derivatives. Credit

derivative helps to transfer credit risk away from the lender to some other

party. Now credit derivative grew popular both as tools for hedging credit risk

exposure as well as method of investing in certain types of credit risk.

Credit derivative not only helps corporation and financial institution to manage

to their credit risk but also enabled a new set of individual retail client to invest

in bonds and stocks previously unaffordable. Through credit derivative

individual investor ca invest indirectly in foreign bonds at a lower price. Credit

derivative helps investor isolated credit, and transfer it to other investor who

are better suited to managing it or who finds the investment opportunity more

interesting.

Rahman (2011) has published an article on "Credit Risk Management

Practices in Banks: An Appreciation." The banks in Bangladesh have started

undertaking a number of quantitative and qualitative measures to understand

the risks involve in credit or chance of default which may come from the

failure of counterparty or obligor (client) to fulfill his/her commitments as per

agreed terms and contractual agreement with the bank. Traditionally, a bank

gives emphasis on collateral in funding to the clients whereas in the concept of

modern banking a bank keenly feels to measure the business risk over the

security risk for ensuring the timely repayment of invested funds. Now-a-days

a banker likes to adopt a number of sophisticated financial techniques in credit

appraisal process with a view to assessing the 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 the much-demanded credit risk management guidelines

along with effective risk grading system.

Karim (2012) has published an article on "Impact of Risk Management on

Non-Performing Loans and Profitability of Banking Sector of Pakistan." The

aim of this study is to investigate the impact of risk management on 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 indebt markets. The

specific phenomenon I study is the market for credit derivatives. A credit

derivative is a trade in which one party, the protection buyer, makes periodic

payments to another party, the protection seller, in exchange for which the

protection seller indemnifies the protection buyer against any losses he

experiences as a consequence of the default of some credit-risky reference

asset. Banks are thus able to pass the default risks associated with their assets

on to third parties while simultaneously retaining legal title to the assets. The

market for these derivatives has expanded very rapidly from about $180 billion

in 1997 to $893 billion in 2000(British Bankers Association 2000). When

discussing credit derivatives, practitioners typically highlight two

characteristics that differentiate them from other secondary loan markets. First,

bankers stress that the ease with which credit derivatives may be traded allows

them to manage concentration risk in their portfolios.

The 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 Holmstro¨m

and Tirole (1997), augmented to allow for risk- averse bankers and variable

project quality. I consider cash-constrained entrepreneurs who use debt to

finance one of two positive net present value (NPV) projects. One project has a

higher NPV, while the other yields nontransferable private benefits to the

entrepreneur. By monitoring their borrowers, bankers can ensure that they

select the first-best project. This skill is denied to the dispersed holders of

bonds.

2.3 Research Gap

The purpose of this research is to develop some expertise in one’s area, to see

what new contribution can be made and to receive some ideas, knowledge and

suggestions in relation to credit management of Siddhartha Development Bank

Limited. Thus, the previous study can’t be ignored because they provide the

foundation to the present study. In other words, there has to continuity in

research. This continuity in research is ensured by linking the present study

with the past research studies. Here, it is clear that the new research cannot be

found on that exact topic, i.e. Credit Management of Siddhartha Development

Bank Limited. Therefore, to fulfill this gap, this research is selected. To

complete this research work, many books, journals, articles and various

published and unpublished dissertations are followed as guideline to make the

research easier and smooth. In this regard, here we are going to analyze the

different procedure of credit management, which is considered only on

Siddhartha Development Bank Limited. Our main research problem is to

analyze whether the SDBL is able to utilize the resources effectively or not. To

achieve this main objective, various financial and statistical tools are used.

Similarly, trend analysis of investment and profit are reviewed to make this

research complete. Therefore, this study is useful to concerned banks as well as

different persons: such as shareholders, investors, policy makers, stockbrokers,

state of government etc.


CHAPTER -III

RESEARCH METHODOLOGY

Research methodology helps to find out accuracy, validity and suitability. The

justification on the present study cannot be obtained without help of proper

research methodology. For the purpose of achieving the objectives of the study,

the applied methodology will be used.

This topic presents the short outline of the methods applied in the process of

analyzing the credit management of SDBL. Research is a systematic method of

finding out the solution to a problem whereas research methodology refers to

the various sequential steps to adopt by a researcher in studying a problem with

certain objective in view.

3.1 Research Design

Research design is a plan of structure and strategy of investigation conceived

so as to obtain answer to research questions and to control variances'

(Kerlinger, 1986: 275). Research design is that outline which configures the

collection and of this research concerns with descriptive and analytical type of

research design.

Descriptive research design is the process of accumulating facts. It does not

necessarily seek to explain relationship and test hypotheses make predictions or

get at analysis style of the data and information. Whereas analytical type of

research design is used to clear the situations by the help of various tools.

According to the subject matter this research also clarified by using various

tools.

3.2 Population and Sampling

A population is a complete enumeration of each and every unit of the universe

as a whole. It is related to the total study of the material in detail. There are 88


‘B’ class licensed banks in Nepal but this study considers only Siddhartha

Development Bank Limited.

3.3 Nature and Sources of Data

Both primary and secondary sources of data have been collected in order to

achieve the real and actual results:

Primary Sources of Data

Primary data relevant to right study have been gathered through questionnaire

and observation of institution itself. Fifteen personnel of SDBL head office and

branch had selected for the sources of primary data. 13 questionnaires are

distributed to the staffs of concerned bank and their responses have been

collected for study.

Secondary Sources of Data

The major sources of secondary data for this study are as follows:

• Annual reports of the bank.

• Previous studies and reports.

• Reports of Nepal Rastra Bank Samachar and Banking and Financial

Institutions Statistics published by Nepal Rastra Bank.

• Journal and other publish and unpublished related document and reports

for Central Library of T.U., Library of Shanker Dev Campus, Library of

Nepal Rastra Bank.

• Various Internet Websites related to banking and finance.

3.5 Data Analysis Tools

Presentation and Analysis of the collection data is the core part of the research

work. The collected raw data are first presented in systematic manner in tabular

form and are then analyzed by applying different financial and statistical tools

to achieve the research objectives.


3.5.1 Financial Tools

In this study financial tools are used as ratio analysis. “Ratio analysis is the

numerical relationship between any two variables of financial statements,

which should serve some meaningful purpose. Ratios are expression of logical

relationships between items in the financial statements of a single period. A

ratio can show a relationship between two items on different scanning to

financial statements or between two items on different financial statements.

Thus, ratio analysis is a total of scanning the financial statements of the firm.”

(Bajracharya, et al., 2008/09: 1017). To evaluate the performance of company,

we need to ascertain statistical data. The analysis of finance of ratios involves

two types of comparison. First, the analysis can compare a present ratio with

peer and expected future ratios for the company. The second method of

composition involved comparing the ratios of one firm with two of similar

firms or with industry average at the same point in time. Such a comparison

gives insight into the relative financial condition and performance over time.

A. Liquidity Ratios

Liquidity ratios are used to judge a firm’s ability to meet short term obligations.

From them much insight can be obtained into the present cash solvency of

company and its ability to remain solvent in the event of adherent. Essentially,

we wish to compare short-term obligations with the short-term resources

avoidable to meet these obligations. The following ratios have been used in

order to calculate the liquidity position of the Siddhartha Development Bank

Limited.

Current Ratio

Current ratio provides about the short-term solvency of the firms. IT establishes

the relationship between current assets and current liabilities of which is

expressed as:


Current ratio = sliabilitieCurrent

assetsCurrent

Cash and Bank Balance to Total Deposit Ratio

This ratio points the banks capacity to cover their deposit like current, call

saving and margin.

A higher ratio is preferred since bank is able to cover deposits. It can be

expressed as:

Cash and bank to total deposit ratio = depositTotal

balancebankandCash

Cash and bank balance to current assets ratio

This ratio highlights the percentage of readily available funds with the bank. A

higher ratio is preferable like the earlier stated ratio in its case too. It can be

calculated as:

Cash and bank balance to current ratio = assetsCurrent

balancebankandCash

Loan and advances to current assets

This ratio highlights the percentage of loan and advance in current assets.

Higher ratios means greater loan advances are in current assets and lower ratio

means lower loans and advances are in current assets. It is calculated as:

Loan and advances to current ratio = assetsCurrent

advancesandLoan

B. Profitability Ratios

Some of the important profitability ratios are used here as follows:

Net Interest to total assets ratio

Net interest means receive interest minus interest paid. It is also known as

interest spread. The high ratio indicates that profitability of the bank. Similarly,

the low ratio indicates that low profitability of the bank. It can be expressed as:


Net interest to total assets ratio = assetsTotal

erestNet int

Net Profit to Total Assets Ratio

It measures the profitability of fund invested in the banks assets. It is computed

by dividing the net profit by total assets including profit and loan account (debt

side). Higher ratio is preferable since it has more operating efficiency of the

firm and vice-versa. It is expressed as:

Net profit to total assets ratio = assetsTotal

profitNet

Return on Net Worth (ROE)

Net worth denotes the owners claim in the asset of the bank's remain often

subtracting total external liabilities from total assets. Here, total assets represent

all the assets beside accumulated loss and intangible assets. The ratio exhibits

the rate of return earned on net worth (or shareholders fund or equity). Its

compensation is to be done as:

Return on net worth = )worthNet

taxafterworthNet

3.5.2 Statistical Tools

a. Measures of Central Tendency

Measures of central value are simple statistical treatments of distribution that

attempts to find the single figure to describe the entire distribution. It is the best

possible value of a group of variables that singly represents to whole group. In

the statistical analysis the central value falls within the approximately middle

value of the whole data. Among the several tools of measuring central value,

the mean has been used in this analysis where and when necessary. The mean

is the arithmetic average of a variable. Arithmetic Mean of a series is given by

Mean ( X ) =N

X∑


b. Standard Deviation

Standard deviation (S.D.) is the most popular and the most useful measure of

dispersion. It indicates the ranges and size of deviance from the middle or

mean. It measures the absolute dispersion. Higher the value of standard

deviation higher is the variability and vice versa. It is the positive square root

of average sum of squares of deviations of observations from the arithmetic

mean of the distribution.

It can be calculated as follows:

Standard Deviation ( )N

XX2)( −∑

=σ

c. Coefficient of Variation

The percentage measure of coefficient of standard deviation is called

coefficient of variation. The less is the C.V the more is the uniformity and

consistency and vice versa. Standard deviation gives an absolute measure of

dispersion. Hence where the mean value of the variable is not equal it is not

appropriate to compare two pairs of variables based in S.D. only. The

coefficient of variation measures the relative measures of dispersion, hence

capable to compare two variables independently in terms of their variability.

Coefficient of Variation (C.V) = 100X

×σ

d. Correlation Coefficient (r)

Correlation refers to the degree of relationship between two variables.

Correlation coefficient determines the association between the dependent

variable and independent variable. If between the variables, increase or

decrease in one cause increase or decrease in another, then such variables are

correlated variables. “Correlation may be defined as the degree of linear

relationship existing between two or more variables. Two variables are said to

be correlated when the change in the value of one is accompanied by the

change of another variable.” There are different techniques of calculating


correlation coefficient. Among various techniques we have used Karl Pearson

coefficient of correlation.

It is calculated as follows:

Correlation Coefficient (r) =yxN

xy

σσ

∑

Where,

x = XX − y = YY −

=σx Standard Deviation of Series X

=σ yStandard Deviation of Series Y

N = No. of pairs of observation

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

computing r.

r = ∑ ∑

∑22 y.x

xy

The Karl Pearson Coefficient of correlation always falls between –1 to +1. The

value of correlation in minus signifies, the negative correlation and in plus

signifies the positive correlation. If,

r = 0, There is no relationship between the variables

r < 0, There is negative relationship between the variables

r > 0, There is positive relationship between the variables

r = +1, the relationship is perfectly positive.

r = -1, the relationship is perfectly negative.

The reliability of the correlation coefficient is judged with the help of probable

error (P.E). It is calculated as follows:

Probable Error (P.E.) =N

)r1(6745.0 2−

Where, r = correlation coefficient

N= No. of pairs of observation.

If r > 6 P.E, then the correlation coefficient is significant and reliable.


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

evidence of correlation.

e. Trend Analysis

Trend analysis is one of the statistical tools which is used to determine the

improvement or deterioration of its financial situation. Trend analysis informs

about the expected future values of various variables. The Least square method

has been adopted to measure the trend behaviors of the selected Bank. This

method is widely used in practices. The formula of least square method for the

straight line is represented by the following formula.

Yc = a + bX

Where,

Yc = Trend Values

a = Y intercept or the computed trend figure of the Y variable, when X =

0

b = Slope of the trend line of the amount of change in Y variable that is

associated with change in 1 unit in X variable.

X = Variable that represent time i.e. time variable

The value of the constants ‘a’ and ‘b’ can be determined by solving the

following two normal equations.

∑ ∑+= XbNaY ……………... (i)

∑ ∑∑ += XbXaXY ………… (ii)


CHAPTER FOUR

DATA PRESENTATION AND ANAYLSIS

In this chapter the relevant information available has been used by analyzing

the loan management of SDBL for the fulfillment of the research objectives.

The data of fives year (2008/09-2012/13) has been presented for the purpose of

study. This study is based on both primary and secondary data. Sources of

secondary data are the annual reports of the bank, books, journals, published or

unpublished reports etc. Primary data has been collected through direct

interview with the staffs of the bank. For the purpose of analysis, data has been

presented in the form of tables and charts. Data presentation and analysis is

done to fulfill the objective of the study. The objectives of the study are to

analyze the trend of every year’s deposit collection and loan investment, to

measure total amount disbursed, out of total deposit collected two measure

performance of bank in terms of profitability, liquidity, NPL, to study the

attitudes of employees of SDBL in regard to the performance of the bank.

4.1 Analysis of Secondary Data

4.1.1 Deposits of SDBL

Bank collects the scattered funds form the public in the form of deposits and

mobilization in the productive sector. The volume of credit extension depends

upon the deposit base of a bank besides other factors. The deposits collected by

SDBL can be divided as current, saving, fixed, call and other deposits. The

deposits collection by the bank in 5 years (2008/09-2012/13) is presented in the

table below:


Table No. 4.1

Deposits Collection by SDBL

Rs. in million

Year Deposit collection Inc/Dec. in deposit collection

% inc./decrease

2008/09 1602.22 - -

2009/10 1719.28 117.06 7.31 2010/11 3479.94 1760.66 102.41

2011/12 4001.52 521.58 14.99

2012/13 4954.22 952.70 23.81

Source: Annual reports of respective years.

The above table shows the deposit collected by SDBL from the year 2008/09-

2012/13. There is increasing trend in deposit collection from 2008/09-2012/13.

In 2008/09 the deposits collected amount is Rs. 1602.22 million. Similarly, in

2009/10 collected deposit amount is Rs. 1719.28 million which is 117.06

million greater than previous year and in percent it has increased by 7.31

percentages. Total deposit collection in 2010/11 is 3479.94 million. In 2011/12

the collected deposit amount is 4001.52 million which 521.58 million greater

than the year 2010/11 and in percent it has increased by 102.41. Similarly,

deposits collection by SDBL has increased by 14.99 and 23.81 percent than

previous year respectively. The deposits collected by SDBL annually for 5

years (2008/09-2012/13) can be presented in following graph.

Figure No.4.1

Deposit Collection of SDBL


4.1.2 Deposit Composition of SDBL

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

shows the composition of deposits of SDBL.

Table No. 4.2

Deposit Composition

Rs. in million

Year Deposit Total

deposit Saving % Fixed % Current % Call % Other %

2008/09 373.99 23.34 309.44 19.31 792.34 49.45 33.63 2.10 92.82 5.79 1602.22

2009/10 300.47 17.47 988.24 57.48 202.34 11.77 94.22 5.48 133.94 7.79 1719.21

2010/11 1745.49 50.19 1004.23 28.87 302.44 8.69 102.44 2.94 323.34 9.30 3477.94

2011/12 1761.33 44.02 1436.43 35.89 121.98 3.05 674.34 16.85 7.43 0.18 4001.51

2012/13 2353.54 47.51 1451.19 29.29 897.40 18.11 105.63 2.13 146.46 2.96 4954.22

Sources: Annual report and financial statements of corresponding years.

The above table shows the composition of deposit of SDBL viz., current,

saving, fixed, call and other deposits. Here, it can be seen that more amounts

have been collected in fixed deposits and other deposits during the year

2009/10 and 2011/12 respectively than other years. In the year 2010/11,

2008/09 and 2011/12, the maximum amounts of deposits have been collected in

saving, current and call account respectively.

Saving deposits have continuously increased during the years except 2009/10.

Similarly fixed deposit collection has also continuously increased during to

years. But deposit collection of current, call and other deposit have fluctuated

during these years.

In the year 2008/09, saving deposit collection is 23.34 percent of total deposit

and in the year 2009/10, it decreases to 17.47 percent. But after this year saving

deposit shows high degree of increasing trend. In 2012/13, this is 47.51 percent

of total deposit. It indicates that cost of source is decreasing.


In the year 2008/09, the amount of fixed deposits seems 309.44 million. After

this year this deposit shows high degree of increasing trend. It indicates that to

cost of source of fund is increasing trend. It virtually affects in profitability. It

can be said that there is negative relation between profitability and cost of

source of fund.

In the research period current, call and other deposits of SDBL were

fluctuating. Current deposit is maximum in the year 2011/12 i.e. 674.34 million

and maximum amount of other deposits collected in the year 2012/13 i.e.

146.46 million. The bank heavily depends on saving deposits in the total

composition because to saving deposit has greater contribution in total deposit

collection. Similarly, the fixed deposit is in second rank for the contribution in

total deposit collection. Then current deposit is in third and call deposit is in

fourth rank. In the research period other deposits is in fifth rank because this

deposit has less contribution in the total deposit collection.

The amount collected in fixed deposit is more appropriate to lend because of its

fixed nature but its cost of fund is high. Similarly, the saving deposits are also

useful because of low cost of saving deposit in comparison to fixed deposits.

How deposit is optimum in saving, fixed, current, call and other deposit, it

depends on the nature of loan. If there is high demand of long term loan, the

bank should increase fixed deposit. Otherwise, the bank should increase

different deposits such as saving, current, call and other short- term deposits.

The following chart shows the above information.


Figure No. 4.2: Deposit Composition of SDBL

Source: Table No. 4.2

4.1.3 Trend of Deposit Collection

The trend of total deposit in coming year is analyzed using the trend analysis.

The following trend line shows the projection of total deposit of SDBL up to

2017.

Figure 4.3: Trend of Deposit Collection

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


The above figure shows that the deposit collection by this bank is in increasing

trend if other things remaining constant. According to the trend forecast the

deposit collection in the year 2008/09 will be 1353.76, in 2009/10 it will be Rs.

2252.39 million and in the year 2017/18 it will be Rs. 9441.43 million

respectively. It is increased by 898.624 million every year.

4.1.4 Loans and Advances of SDBL

A bank takes deposit and lends loan and advances. Giving loans and advances

are the major task of any bank. Loan and advances is a major chunk of assets in

assets side. Because of cut throat competition in banking sector and limited

area of investment giving loan and advances is difficult and critical job.

Table No. 4.3: Loans and Advances of SDBL

Rs. in million

Year Loan and advances Inc/Dec. in loan and advances % inc./decrease

2008/09 798.82 - -

2009/10 1494.02 695.20 87.03

2010/11 2883.28 1389.26 92.99

2011/12 3697.66 814.38 28.24

2012/13 3564.64 -133.02 -3.59

Source: Annual reports.

The above table shows loan and advances. The table shows that loan and

advances are more fluctuating in the year 2009/10 and 2010/11. In 2008/09

loan and advances amounted to 798.82 million. It is increased by 87.03 percent

and reached to 1494.02 million in the year 2009/10. Similarly, loan and

advances in 2010/11 amounted to Rs. 2883.28 million. It is 92.99 percent

greater than former year. This percentage is the highest percentage increase in

study period. In 2011/12 loan and advances reached up to Rs. 3697.66 million

but there is an increasing trend but the rate of growth is decreasing. Loan and

advances in 2012/13 is Rs. 3564.64 million, which is -3.59 percent less than

previous year. The loan and advances of SDBL can be presented in a form of

bar chart.


Figure No. 4.4: Loan and Advances of SDBL


4.1.5 Trend of Loan and Advances

The trend of loan and advances in the coming years is analyzed using the trend

analysis. The following trend line shows the projection of total loan and

advances of SDBL upto 2018.

Figure No. 4.5: Trend of Loan and Advances

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


The above figure shows that the loan and advances by this bank is in increasing

trend if other things remain constant. According to the trend forecast the loan

and advances in the 2012/13 will be Rs. 4034.734 million, in 2013/14 it will be

Rs. 4808.26 million and in year 2017/18 it will be Rs. 7902.36 million

respectively. It is increased every year by Rs. 773.528 million.

4.1.6 Loan and Advances to the Deposit Collection

To evaluate the lending performance of banks, it is important to know, how

much the amount is disburse out of total deposit collection. Loan and advances

to deposit collection of SDBL has been presented in the table below:

Table No. 4.4: Loan Disbursed to the Deposit Collection

Rs. in million

Year Loan and advances Total Deposit % of loan and advance out of total

deposit

2008/09 798.82 1602.22 49.86

2009/10 1494.02 1719.21 86.90

2010/11 2883.28 3477.94 82.90

2011/12 3697.66 4001.51 92.41

2012/13 3564.64 4954.22 71.95


The above table shows the amount of loan disbursement in comparison to the

amount of deposit collected. In fiscal year 2008/09 the amount of deposit

collected was Rs. 1602.22 million out of which Rs. 798.82 million was given

as loan. It turns out to be 49.86 percent of the total deposit collection. In the

year 2009/10 Rs. 1494.02 million was disbursed out of Rs. 1719.21 million of

deposit collection which is 86.90 percent of the total deposit. Similarly, in

2010/11 Rs. 2883.28 million was disbursed out of Rs. 3477.94 million of total

deposit. It comes to 82.90 percent of total deposit. In the year 2011/12 Rs.

3697.66 million was disbursed out of total deposit of Rs. 4001.51 million

which is 92.41 percent of the total deposit. In 2012/13 Rs. 3564.64 million was

utilized in loan and advances out of total deposit of Rs. 4954.22 million. It


comes 71.95 percent of total deposit. The highest percentage of loan and

advances to total deposit was in the fiscal year 2011/12 which is 92.41. In

every year loan and advances is lower than total deposit but it is utilized more

than 70% in every fiscal year except than FY 2008/09. This shows the fund is

utilizing properly. Loans and disbursed to deposits can be presented in the

following chart:

Figure No. 4.6: Loan Disbursement to Deposit Collection


4.1.7 Percentage Change in Deposit Collection and Loan and Advances

Loan disbursement is made out of deposit collection. So, usually the amount

disburse is proportionate to the deposit collection. IN order to find out whether

loan disburse has been affected by the change in deposit collection or not. This

has been presented in the table below:

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


Table No. 4.5: Deposit Collection and Loan and Advances

Rs. in million

Year % change in deposit collection % change in loan and advances

2008/09 - -

2009/10 7.31 87.03

2010/11 102.41 92.99

2011/12 14.99 28.24

2012/13 23.81 -3.59

Source: Table No. 4.1 and 4.3.

In 2009/10 percent change in deposit is 7.31 percent but percent change in loan

is 87.03 percent. Similarly, in 2010/11, 102.41 percent change was recorded in

deposit but in loan there is only 92.99 percent change. In 2011/12, percent

change in deposit is 14.99 percent and percent change in loan is 28.24 percent.

In the year 2012/13 percent change in deposit is 23.81% and in loan -3.59%. In

every year change in loan and deposit has fluctuated. But deposit has fluctuated

more than the loan. Comparing to all other years deposits and loans have

fluctuated most in 2010/11.

4.1.8 Coefficient of Correlation between Deposit Collection and Loan

Disbursement

The relationship between deposit and loan must be optimum to gain profit. This

tool measures the degree of relationship between these variables. In this

analysis, deposit is independent variable (x) and loan is dependent variable (y).

The main reason of finding out the coefficient of correlation between these two

variables is to justify whether collected deposit is significantly used as loan

disbursed or not. The table below shows the value of 'r' and 'r2', probable error

(P.E.) and 6PE between deposit and loan and advances of SDBL for the study

period.


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

Loan Disbursement

Coefficient of correlation (r) r2 Probable error 6 PE

0.9499 0.9023 0.044 0.2629

Source: Calculation from SPSS software.

The above table shows that the coefficient of correlation between deposit

collection and loan disburse is 0.9499 which shows that here is highly positive

relationship between these two variables. It also shows that there is optimum

utilization of collected deposit by the bank. The coefficient of determination is

0.9023. This shows that 90.23 percent of the total variation in dependent

variable deposit is explained by independent variable that is loan, loan disburse

and deposit collection is positively correlated which shows that an increase in

total deposit leads to increase in loan disburse. Normally, a higher coefficient

of correlation between deposit and loan is a good sign. It indicates that the

efficient management of the bank. SDBL is successful in mobilizing its

collected deposit. Probable Error (PE) is calculated to be 0.044 and 6 PE is

0.2629. The value of 'r' is more than 6 PE which indicates that there is

significant relationship between total deposit collection and total loan

disbursement.

4.1.9 Analysis of Profitability Ratios

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

“Profitability is an important measure of a company’s operating success. There

are two areas for judging profitability; (1) relationships in the income statement

that indicate a company’s ability to recover costs and expenses, (2) relationship

of income to various balance sheet measures that indicate to company’s relative

ability to earn incomes from the assets employed. The stockholders primary

concern is the profitability measures of the firm. Lenders also desire a

minimum return on the borrower’s investment to be on the safe side.

(Bajrachary, Ojha, Goet, Sharma, 2008/09: 1024) Bank profitability is the net

after tax income or net earnings of a bank. It is usually measured in equity

capital.


i. Analysis of Net Interest Income to Total Assets:

Table No. 4.8: Analysis of Net Interest to Total Assets

Rs. in million

Year Net interest income Total assets Ratio (%)

2008/09 51.93 566.03 9.17

2009/10 79.66 2449.79 3.25

2010/11 140.89 4241.56 3.32

2011/12 189.95 4948.30 3.84

2012/13 168.73 5652.49 2.99 Total Mean 126.232 3571.634 4.51

Source: Annual report.

The above table shows net interest and total assets from FY 2008/09 to FY

2012/13. There is both are increasing trend. In 2008/09, the net interest is Rs.

51.93 million which is 9.17 percent of total assets. In the year 2009/10, net

interest is Rs. 79.66 million which comes to 3.25 percent of total assets. The

trend of Net interest income ratio to the total assets. In 2010/11, net interest is

Rs. 140.89 million which is 3.32 percent of total assets. In 2011/12, net interest

is Rs. 189.95 million which 3.84 percent of total assets. This is significantly

greater than previous year. Net interest of Rs. 168.73 million is collected in

2012/13 which is 2.99 percent of total assets with Rs. 5652.49 million. Net

interest is increasing trend from 2008/09 to 2011/12 but it decreases in FY

2012/13. It indicates that interest earn is greater than interest paid. In other

word, we can say that there is moderate utilization of collected fund.

ii. Analysis of Net Profit to Total Assets

Table No. 4.9: Net Profit to Total Assets Ratio

Rs. in million

Year NPAT Total assets Ratio (%)

2008/09 16.99 566.03 3.00

2009/10 35.19 2449.79 1.44

2010/11 48.66 4241.56 1.15

2011/12 65.53 4948.30 1.32

2012/13 (72.90) 5652.49 -1.29



The above table shows the relation between net profit and total assets. In the

study period, net profit is increasing trend except year 2012/13. In 2008/09, net

profit is Rs. 16.99 million which is 3.00 percent of the total assets which has

highest ratio of profit to the total assets shown in the study period. Similarly, in

2009/10, net profit of the bank is 35.19 million, which is 1.44 percent of total

assets. In 2010/11, the bank has earned profit of Rs. 48.66 million and 1.15

percent of the total assets. The bank earned 1.32 percent of profit of the total

assets in 2011/12, which is Rs. 65.53 million. In FY 2012/13, the bank is in

loss by Rs. 70.90 million which is -1.29 percent of the total assets.

So, we can say that the bank can be able proper utilize of the assets because the

profit of bank is increasing every year except in year 2012/13.

iii. Analysis of Return on Equity Capital

Table No. 4.10: Return on Equity Capital

Rs. In million

Year NPAT Equity Capital Ratio (%)

2008/09 16.99 645.00 2.63

2009/10 35.19 645.00 5.46

2010/11 48.66 645.00 7.54

2011/12 65.53 693.35 9.45

2012/13 (72.90) 645.00 -11.30


Equity capital is Rs. 645 million in each year except year 2011/12. In 2011/12

Equity capital is Rs. 693.35 million. In Fiscal year 2008/09, net profit of the

bank 16.99 million. In the same year, equity capital is 645 million. The ratio of

NPAT and equity is 2.630.In 2009/10; net profit is Rs. 35.19 million which is

5.46 percent of equity. In 2010/11, it increased to Rs. 48.66 million which

came to 7.54 percent of total assets. In FY 2011/12 net profit is 65.53 million.

So, net profit to equity ratio also increased to 9.45 percent. The bank bears loss

of Rs. 72.90 million in 2012/13. So, the bank’s ratio of net profit to the equity


capital is -11.30 percent. Here, the ratio of NPAT to the Equity capital is

increasing trend except year 2012/13. It indicates that the financial

performance of bank is good. In coming year the bank can earn more profit.

4.1.10 Analysis of Liquidity Ratio:

“Short-term lenders such as suppliers and creditors use liquidity analysis to

assets the risk level and ability of a firm to meet its current obligations.

Satisfying these obligations requires the use of the cash resources available as

of the balance sheet date and the cash to be generated through the operating

cycle of the firm.” (Bajracharya, Ojha, Goet, Sharma, 2008/09: 1018)

i. Analysis of Current Ratio

Table No. 4.11: Analysis of Current Ratio

Rs. in million

Year CA CL Ratio

2008/09 1305.54 615.24 2.12

2009/10 1767.35 933.23 1.89 2010/11 2425.33 1127.12 2.15

2011/12 2798.54 1325.23 2.11

2012/13 3054.18 2287.17 1.34


From the above table, in 2008/09 the SDBL has 2.12 times current ratio

between current assets and current liabilities. But in 2009/10, the current ratio

declined to 1.89 times. In every year, current assets are greater than current

liabilities. Similarly, in 2010/11, the current ratio is 2.15, which is slightly

greater than in the former year. IN the fiscal year 2011/12 the ratio between

current assets and current liabilities are 2.11 times. In 2012/13, this ratio is

decreased to 1.34 times. This ratio shows that the current assets are not

sufficient to pay current liabilities in comparison to the former year.

The standard ratio current assets and current liabilities are 2:1. There is

standard ratio between current assets and current liabilities except year 2009/10

and 2012/13. It indicates that the bank able to pay current liabilities on time.


ii. Analysis of Cash and Bank Balance to Total Deposit

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

Rs. in million

Year Cash and bank balance Total deposit Ratio (%)

2008/09 138.50 1602.22 8.64

2009/10 140.43 1719.21 8.17

2010/11 181.24 3477.94 5.21

2011/12 338.22 4001.51 8.45

2012/13 214.097 4954.22 4.32


Cash and bank balance and total deposits in 2008/09 are Rs. 138.50 million and

Rs. 1602.22 million respectively. Cash and bank balances come 8.64 percent of

the total deposit. In 2009/10, a cash and bank balance seems 140.43 million and

1719.21 million respectively. The ratio of cash and bank balance to the total

deposit is 8.17 percent. Similarly, in 2010/11, the cash and bank balance is Rs.

181.24 million which is 5.21 percent of the total deposit. We can see that in

2010/11, the percent of cash and bank balance is decreasing rate. In 2011/12,

cash and bank balance is Rs. 338.22 million which is 8.45 percent of the total

deposit. But in 2012/13 year, the lowest percent of the cash and balance to the

total deposit is 4.32 percent.

In above table, it is found that every year's cash and bank balance ratio lies

between 4 to 9 percent. The highest percentage of the cash and bank balance of

the study period is in 2008/09. It indicates that the bank is able to pay cash to

deposit holders. In other words, it can be said that the large amount is in idle

with cash and bank balance indicates lack of proper utilization of assets.

Similarly, the lowest percent of the cash and bank balance is 4.32 percent

which indicates that more fund utilized in loan and advances.


iii. Analysis of Cash and Bank Balance to Current Assets

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

Rs. in million

Year Cash and bank balance Current assets Ratio (%)

2008/09 138.50 1305.54 10.61

2009/10 140.43 1767.35 7.95

2010/11 181.24 2425.33 7.47

2011/12 338.22 2798.54 12.09

2012/13 214.097 3054.18 7.01


In the above table in 2008/09, cash and bank balance and current assets are Rs.

138.50 million and Rs. 1305.54 million respectively. But in 2009/10, cash and

bank balance is Rs. 140.43 million which is 7.95 percent of the total deposit. It

can be seen that the percentage of the cash and bank balance to current assets is

in decreasing rate after the year 2008/09 to 2010/11. In 2010/11, there was Rs.

181.24 million balances in the cash and bank. This is 7.47 percent of the total

current assets. In the year 2011/12, the cash and bank balance is 338.22

million. It comes 12.09 percent of total current assets. In year 2012/13 cash and

bank balance is 214.097 million. This is 7.01 percent of the total current assets.

It can be seen that there is the cash and bank balance to current assets is in

fluctuating trend. The highest percent of the cash and bank balance to current

assets is shown in 2011/12. It indicates that the bank is able to pay contingent

liabilities and grab market opportunities. In other words, the large amount in

cash and bank balance indicates lack of inefficient of the management. The

lowest percent of the cash and bank balance to current assets in 2012/13, which

indicates that more fund utilized in other investment like government

securities, loan and advances. In other words, it means less chance to grab

market opportunity.


iv. Analysis of Loans and Advances to Current Assets

Table No. 4.14: Loans and Advances to Current Assets

Rs. in million

Year Loan and advances Current assets Ratio (%)

2008/09 798.82 1305.54 61.19

2009/10 1494.02 1767.35 84.53

2010/11 2883.28 2425.33 118.88

2011/12 3697.66 2798.54 132.13

2012/13 3564.64 3054.18 116.71


In the above table in 2008/09, the loans and advances and current assets are Rs.

798.82 million and Rs. 1305.54 million respectively. In this year, loans and

advances appear 61.19 percent of the current assets. But in 2009/10, the

percentage of loans and advances to current assets is 84.53 percent. Again in

2010/11, the percentage of the loan and advances to current assets is 118.88

percent. It is increasing by 34 percent. In 2011/12, the exposure of loan and

advances has been seen of Rs. 3697.66 million among the total current assets,

which comes to 132.13 percent. Similarly, the percentage of the loans and

advances to current assets in 2012/13 is 116.71 percent which is less than

previous year. In this year, loans and advance is 3564.64 million and current

assets are 3054.18 million.

In above table, it can be seen that the huge amount of the current asset is used

for loans and advances. The lowest percentage of the loans and advances to

current assets is 61.19 percent in 2008/09. It means that there is less outflow of

loan. In 2011/12 there is highest percentage of loans and advances to current

assets which is 132.13 percent. It indicates that more funds are utilized in loans

and advances.


4.1.11 Analysis of Non-Performing Loan

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

Rs. in million

Year Non-performing loan Loans and advances Ratio (%)

2008/09 8.25 798.82 1.03

2009/10 10.22 1494.02 0.68

2010/11 14.13 2883.28 0.49

2011/12 17.32 3697.66 0.47

2012/13 19.18 3564.64 0.54


In above table shows that, in 2008/09 the total loans and advances are Rs.

798.82 million in which Rs. 8.25 million is non-performing loan, and it is 1.03

percent of the total loan. But in 2009/10, NPL is Rs. 10.22 million. It comes to

0.68 percent of the total loan. It is very small ratio in comparison to previous

year. In 2010/11, the ratio of NPL to loan is 0.49 percent. In 2011/12, loan and

advances are Rs. 3697.66 million and non-performing loan is Rs. 17.32 million

which comes to 0.47 percent of the total loan. Similarly, in 2012/13 total loan

is 3564.64 million and NPL is 19.18 million. It is 0.54 percent of total loan.

The rate of NPL is very low on the study period except the fiscal year 2008/09.

The lowest percent of NPL is in 2011/12 which is 0.47 percent. The highest

percent of NPL is in 2008/09 which is 1.03 percent. NPL and profit have

negative relation. If NPL increases the profit automatically decreases and 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.


4.1.12 Sector-Wise Loan

Table No. 4.16: Analysis of Sector-wise Loan

Rs. in million

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

Agriculture 390.23 522.23 1201.36 1323.51 1419.82 4857.15

Industry 15.22 116.22 228.46 513.21 717.15 1590.26

Service 4.11 144.53 244.26 428.35 298.33 1119.58

Real Estate 0 215.77 436.44 612.13 611.22 1875.56

Business 388.36 485.14 757.96 774.31 500.31 2906.08

Other loan and

advances

0 10.13 14.50 46.15 17.81 88.59

Total 798.82 1494.02 2883.28 3697.66 3564.64 12438.42


Agriculture sector is profitable sector. So the bank disburse highest amount of

loan in that sector but lowest loan disbursed in service sector because of the

political situation of the country.

The table 4.16 shows sector-wise loan disbursement of the SDBL since 5 years.

Disbursing loan all sectors has increasing trend in every year except 2012/13.

The largest portion of the amount is disbursed in agriculture sector which is Rs.

4857.15 million. The total five year loan of the SDBL is Rs. 12438.42 million.

Similarly, 2nd largest portion of the loan is Rs. 2906.08 million disbursed in the

business sector. Then, largest amount of the loan is disbursed in building and

construction sector. This is Rs. 1875.56 million. The least loan is provided in

other loan and advances. This is 88.59 million. Then, the lowest amount is

disbursed in service sector. It is 1119.58, third lowest loan provided in

industrial sector. This is 1590.26 million.


4.1.13 Analysis of Capital Adequacy

Table No. 4.17: Capital Adequacy Ratio

Year Minimum capital adequacy ratio

according to NRB

Capital adequacy of

SDBL

2008/09 9 47.00

2009/10 10 32.56

2010/11 11 12.92

2011/12 11 12.24

2012/13 11 17.99


In the above table, the capital adequacy prescribed by NRB for bank and

financial institutions and comply of SDBL regarding the same has been

presented. The capital adequacy ratios are 9, 10, 11, 11 and 11 percent of the

year 2008/09, 2009/10, 2010/11, 2011/12 and 2012/13 respectively. In

2008/09, the capital adequacy of the SDBL is 47 percent which is 38 percent

greater than NRB standard. In 2009/10, the capital adequacy rate of the SDBL

is 32.56 percent which is also greater by 22.56 percent. Similarly, in 2010/11

the rate is 12.92 percent; it is 1.92 percent greater than NRB standard. The

bank maintain 12.24 percent capital adequacy in 2011/12, though the

prescribed capital adequacy was same as the last year. Finally, in 2012/13 the

capital adequacy of the SBDL is increasing at 17.99 percent. This is also higher

than previous year.

Capital adequacy of the SDBL from 2008/09-2011/12 is decreasing trend. But

in 2012/13, it is increase. However, it has maintained NRB rules and

regulations. SDBL has greater adequacy ratio than NRB prescribed. It indicates

that SDBL has strong financial condition. Because if the disburse loan is

default, it does not affect the bank's lending capacity.


4.1.14 Relationship of Total Lending and Total Deposit to Profitability

Principally the relationship between lending and profitability is positive

whereas Deposit and profitability is negative. Here, the relationship between

lending, deposit and profitability is shown in following table:

Table No. 4.18: Total Amount of Net Profit, Deposit and Lending

Rs. in million

FY Net profit Total deposit Total lending

2008/09 16.99 1602.22 79.88

2009/10 35.19 1719.21 14.94

2010/11 48.66 3477.94 28.83

2011/12 65.53 4001.51 36.98

2012/13 -72.90 4954.22 35.65


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

Lending and Net Profit Deposit and Net Profit Correlation(r) -0.1059 -0.4311

Coefficient of determination (r2)

0.011 0.1858

Source: Calculation through SPSS software.

From table No. 4.18, the net profit seems in increasing trend in every fiscal

year except FY 2012/13 and total deposit amount is also in increasing trend in

every fiscal year. But total lending amount is Rs. 79.88 million in FY 2008/09

but it is highly fluctuating during the study period. The table reveals that the

negative relationship of net profit and lending i.e. -0.1059. Similarly, the

relationship between net profit and borrowing is also negative i.e. 0.4311.

Coefficient of determination of lending and net profit shows the effect of

lending on net profit is 1.1% whereas 98.9% caused of other factors to net

profit. Similarly net profit is caused of deposit by 18.58% whereas other factors

caused on net profit is 81.82%.


4.2 Analysis of Primary Data

To meet the objective of the study, primary data have been taken, analyzed and

then conclusion drawn on the basis of the findings. Primary data are collected

through the questionnaire distributed to the staff of SDBL. These people are

familiar with the credit management of the bank. Questionnaires have been

appended at the end.

4.2.1 Knowledge of Directives Issued by NRB Related to Credit Policy

Respondents were asked about the NRB issued the directives related to credit

policy, their responses are presented below:

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

Policy

Variables Respondents Percentage (%) a) Yes 25 78

b) No 2 6

c) Don’t know 5 16

Total 32 100 Source: Opinion survey, 2013

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

Policy

The figure shows that 78 percent of the respondents response Yes, 6 percent

respondents response No and remaining 16 percent says don’t know about this


query. It shows that maximum respondents are known about directives related

to credit policy issued by NRB.

4.2.2 Implementation of NRB Directives Related to Credit Policy

The question wants to clear that SDBL implementing to directives issued by

NRB related to credit policy. To responses are as follows:

Table No. 4.20: Implementation of NRB Directives Related to Credit

Policy

Variables Respondents Percentage (%)

a) Yes 32 100

b) No - -

c) Don’t know - -

Total 32 100

Source: opinion survey, 2013

The table shows that 100 percent respondents response ‘Yes’ about this query.

It shows that SDBL is implementing cent percent directives issued by NRB

related to credit policy.

4.2.3 Using Credit Analysis before Approval of Any Loan Proposal

The question wants to clear that SDBL used credit analysis before approval any

loan proposal. The responses are as follows:

Table No. 4.21: Using Credit Analysis before Approval of Any Loan

Proposal


a) Yes 32 94

b) No - -

c) Don’t know 2 6

Total 32 100

Source: Opinion survey, 2013


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

Proposal

The figure shows that 94 percent respondents are convinced that SDBL used

credit analysis before approving any loan proposal but 6 percent respondents

says don’t know about it.

4.2.4 Visiting the Project Site at the Time of Granting Loan

Respondents were asked to SDBL officers to visit to project site at the time of

granting loan. The responses are as follows:

Table No. 4.22: Visiting the Project Site at the Time of Granting Loan


a) Yes 26 81

b) No 2 6


Total 32 100



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

The figure shows that 81 percent respondents agrees that SDBL officers visit

the project site at the time of granting loan, 6 percent respondent opinions that

No and remaining 13 percent respondents opinion that they Don’t know. Most

of the respondent agrees that bank officers visit the project site at the time of

granting loan.

4.2.5 Maintaining Right Level of Liquidity

The responses regarding maintaining right level of liquidity are as follows:

Table No. 4.23: Maintaining Right Level of Liquidity


a) Yes 32 100

b) No - -

c) Don’t know - -

Total 32 100


The table shows that 100 percent respondent opinions that Yes. So, it reflects

that SDBL have right level of liquidity.


4.2.6 Practices of Credit Policy in Good Way

The question was asked regarding "Whether the practices of credit policy in

good way?" The responses in this question are as follows:

Table No. 4.24: Practices of Credit Policy in Good Way


a) Yes 24 75

b) No 2 6


Total 32 100


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

The figure shows that 75 percent respondents opinions that Yes, 6 percent

respondents opinions that No and remaining 19 percent respondents opinions

that don’t know about this query. Most of the respondents agree that the credit

practices adopted by SDBL in good position and minority respondents don’t

know about it.


4.2.7 Arising Credit Related Problems

For this query, the responses are shown in the below table:

Table No. 4.25: Arising Credit Related Problems


a) Yes 17 53

b) No 10 31


Total 32 100


Figure No. 4.11: Arising Credit Related Problems

The figure shows that 53 percentage respondents response Yes about it, 31

percentage response No and remaining 16 percentage response don’t know

about it. So, SDBL are facing credit related problems.

4.2.8 Types of Credit Related Problems Faced

The responses are as follows:

• Problem arises due to government policy.

• Problem arises due to recession in the business.

• Problem is on real estate.


• Problem arises from misused of funds.

• Unsecured loan is provided to person.

4.2.9 Reviewing the Loans and Advances on Periodic Basis

The responses are as follows

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


a) Yes 32 100

b) No - -

c) Don’t know - -

Total 32 100


The table shows that 100 percentage respondents are in favour of loans and

advances which indicate that loans and advances are reviewed on a periodic

basis in the bank.

4.2.10 Period of Reviewing Loans and Advances

The responses are shown in the below table:

Table No. 4.27: Period of Reviewing Loans and Advances


a) Monthly 2 6

b) Quarterly 28 88

c) Semi-annually 2 6

d) Annually - -

e) If any - -

Total 32 100



Figure No. 4.13: Period of Reviewing Loans and Advances

The figure shows that 88 percentage respondent opinions that SDBL should be

reviewed loans and advances in quarterly basis whereas 6 percent respondents

are in favour of monthly basis and another 6 percent respondent agrees that

loans and advances are reviewed on semi-annually basis. It shows that

generally loans and advances are reviewed in quarterly basis.

4.2.11 Maintaining Sufficient Provision for Loan Losses

For this query of maintaining sufficient provision for loan losses, the responses

are as follows:

Table No. 4.28: Maintaining Sufficient Provision for Loan Loses


a) Yes 32 100

b) No - -

c) Don’t know - -

Total 32 100


The table shows that 100 percent respondents are in favour of option Yes. So,

we can say that SDBL is maintaining sufficient provision for loans losses.


4.2.12 Percent of Loan Loss Provision

The responses for Loan loss provision maintaining by SDBL as follows-

• Good Debt 1%

• Sub-standard Debt 25%

• Doubtful Debt 50%

• Bad Debt 100%

4.2.13 Relation between Credit Position and Profitability

The question was asked regarding "Whether there is relationship between credit

position and profitability." The responses are as follows.

Table No. 4.29: Relation between Credit Position and Profitability


a) Yes 28 87

b) No - -


Total 32 100


Figure No. 4.14: Relation between Credit Position and Profitability


The figure shows that 87 percent respondents are in favour of Yes but 13

percent respondent opinions that don’t know about it. We can assume that there

is relationship between credit position and profitability in SDBL.

4.3 Major Findings of the Study

From the analysis of secondary and primary data following major findings have

been drawn:

Findings from secondary data:

• Deposit collection of SDBL is in increasing trend. We find that there is

continuous increasing trend from 117.06 million to 952.70 million.

• In all the year total saving deposit has more contribution than other

deposit except year 2008/09 and 2009/10. In year 2008/09, current

deposit has highest contribution to the total deposit and in year 2009/10

fixed deposit has highest contribution to the total deposit.

• Loan and advances have continuous increasing trend except year

2012/13 although the banking sector have cut throat competition.

• Higher deposited amount is utilized in loan and advances. The lowest

percent of deposits to loan and advances are 49.86 percent in year

2008/09 and highest is 92.41 percent in year 2011/12.

• Correlation between deposit collection and loan disbursement is 0.9499.

This indicates that these two variables relation is highly positive. Hence

the analysis found r is also greater than 6PE; it reveals that the relation is

significant.

• Net interest to total assets ratio is fluctuating trend during the year. It is

ranged from 2.99 to 9.17 percent.

• Net profit to total assets ratio is also in decreasing trend. It is 3 percent

in FY 2008/09 and -1.29 percent in FY 2012/13.

• Return on equity capital is satisfactory. It is increasing trend during the

year except year 2012/13.


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

standard. It ranged from 1.34 times to 2.15 times.

• The cash and bank balance is sufficient for deposit holders. The SDBL

has 4.32 percent to 8.64 percent.

• Cash and bank balance to current assets ratio is spread from 7.01 percent

to 12.09 percent. It is in fluctuating trend.

• All portions of current assets are used in loans and advances, which

shows continuous increasing trend.

• The first, second and third greatest amount of loan disbursed sector is

agriculture, business and building and construction sector.

• Non-performing loan to loans and advances ratio is ranged from 0.47 to

1.03 percent. This shows the bank could not managed its loans properly

in safety sector.

• The relationship of net profit and lending is found negative i.e. -0.1564.

Similarly, the relationship between net profit and deposit is also negative

i.e. -0.4311.

• Coefficient of determination of lending and net profit shows the effect of

lending on net profit is 1.1% whereas 98.9% caused of other factors to

net profit. Similarly net profit is caused of deposit by 18.58% whereas

other factors caused on net profit is 81.82%.

Findings from Primary Data

• About 78 percent of the respondents response were found of knowing

about NRB directives, 6 percent respondents did not know about it

whereas remaining 16 percent says don’t know about NRB directives.

• All the respondents were found agreed on implementing NRB

directives.

• About 94 percent respondents are convinced that SDBL used credit

analysis before approving any loan proposal but 6 percent respondents

says don’t know about it.


• About 81 percent respondents agrees that SDBL officers visit the project

site at the time of granting loan, 6 percent respondent opinions that No

and remaining 13 percent respondents opinion that they Don’t know.

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

• About 75 percent respondents were agreed on credit practices, 6 percent

respondents opinions that no and remaining 19 percent respondents

opinions that don’t know about this query.

• From the study it is found that 53 percentage respondents response of

facing credit problems, 31 percentage response no and remaining 16

percentage response don’t know about it.

• 100 percentage respondents are in favour of loans and advances which

indicate that loans and advances are reviewed on a periodic basis in the

bank.

• About 88 percentage respondent opinions that SDBL should be

reviewed loans and advances in quarterly basis whereas 6 percent

respondents are in favour of monthly basis and another 6 percent

respondent agrees that loans and advances are reviewed on semi-

annually basis. It shows that generally loans and advances are reviewed

in quarterly basis.

• All the respondents were agreed that SDBL is maintaining sufficient

provision for loans losses.

• About 87% of the respondents said the relationship between credit

position and profitability is existed. But 13 percent respondent opinions

that don’t know about it. We can assume that there is relationship

between credit position and profitability in SDBL.


CHAPTER V

SUMMARY, CONCLUSION AND RECOMMENDATIONS

This is the concluding chapter which provides summary of the study,

conclusion, and recommendations for further improvement based on the

analysis and interpretation of data.

5.1 Summary

Analysis of credit management with to Siddhartha Development Bank Limited

has been prepared to fulfill the requirement of Master’s of Business Studies

(MBS) program. This study is mainly based on the annual report provided by

the concerned bank. While sampling the bank for study, only one development

bank has been taken as sample.

For this work various tools are used to study and this study is primarily based

on secondary data. However the analysis is done on the basis of primary data

also. For the secondary data, the most important financial tools are used for the

findings of different types of ratios. Similarly statistical method is used to find

out mean, trend analysis. The secondary data is abstracted from the annual

report of concerned bank. The study covers the periods of five year from

2008/09 to 2012/13. For collection of the primary data, the schedules of

questionnaires were developed and asked to the employees of the bank. The

personal interview was also conducted to know their opinion.

To conclude this study, the whole study has been divided into five chapters of

the different aspects. The summary of each chapter can be presented in each

paragraph.

However, the financial institutions are increasing regularly. Liquidity is

maximum with the financial institutions. Hence, the banks and financial

institutions are competing among themselves to advance credit to limited

opportunity sectors. Banks and financial institutions are investing in housing

loan, hire purchase loan for safety purpose. Now days, banks have increasing


number of deposits in fixed and saving accounts but have decreasing trend in

lending behaviors. So, this has caused major problems in development banks.

Now days, due to competition among banks, the interest rate charge for loan is

in decreasing trend. Due to unhealthy competition among banks, the recovery

of the bank’s credit is going towards negative trends. Non-performing credits

of the banks are increasing year by year. To control such type of state, the

regulatory body of the banks and financial institutions, NRB has renewed its

directives of the credit loss provision. Therefore, it is necessary to analyze the

‘credit management’ or credit disbursement recovery provision for loss and

write off of credit.

The objective of the study is to analyze the credit management of Siddhartha

Development Bank. The specific objectives are to analyze the trends of deposit

collection and credit lending i.e. loan and advances, to assess total amount of

loan, to evaluate the performance of SDBL in terms of liquidity, profitability,

sector-wise loan, non-performing loan, to analyze capital adequacy of SDBL

and to know the view of employees in regarding to credit management.

Literature review is done in second chapter relating to the financial

performance has been reviewed. By reviewing some previous studies, many

inputs can be taken for the study and other researcher can also take advantages

from this section. However, various researchers have been conducted on

lending practice, credit policy, financial performance and credit management of

various commercial banks. Past researchers have not properly analyzed about

lending and its impact on the profitability. The ratios have not categorized

according to nature.

In third chapter explains about the methodology of the study. Generally, a

common research design possesses the five basic elements viz. (i) selection of

problem (ii) methodology (iii) data gathering (iv) data analysis and (v) report

writing. The Present study follows the descriptive as well as exploratory design

to meet the stated objectives of the study. The research is based on primary as

well as secondary source of data, even though adequate data are collected from

secondary sources. Here, the total 86 development banks constitute the


population of the data and Siddhartha Development Bank Limited under the

study constitutes the sample under the study. Mainly financial methods are

applied for the purpose of this study. Appropriate statistical tools are also used.

Fourth chapter is data presentation and analysis. Data analysis tools mentioned

in the third chapter is used to analyze the data in this chapter. Various ratios

that are related to financial performance of the bank have been used to analyze

the financial performance of the SDBL.

5.2 Conclusion

In total deposit composition, the portion of the saving deposit has in first rank,

fixed deposits is in second rank and current deposit in the third rank, other

deposit in the fourth and call deposit in the last rank. Although the narrow area

of investment, and cut throat competition in banking sector, loans and advances

of the SDBL shows continuous increasing trend. Loans and advances are lower

than total deposit i.e. all deposits are somehow utilized in loan and advances.

Correlation between deposit collection and loan disbursement is 0.9499. It

indicates that the relations of two variables are highly positive. The relation is

significant because r is greater than 6PE.

Net interest to total assets ratio shows increasing trend but the rate is very low

in previous year. Because of low net interest to total assets ratio, the

profitability of the bank shows also low. Net profit to total assets ratio of SDBL

is fluctuated i.e. increase in former year and decrease in later years. It proves

net assets of the bank is not fixed. Return on equity capital is shown in

increasing trend in first four year, and then it has been decreased in fifth year.

That is why, increment in capital is higher than the increment in return on

equity respecting in fifth year.

The current ratio 2:1 of the SDBL is equal closely related to 2:1. It indicates

that the liquidity position of the SDBL can be supposed as satisfactory. Cash

and bank balance to current assets can be seen in satisfactory level. It has

maintained NRB directives. There is 7.01 percent to 12.09 percent of the cash

and bank in total current assets. The first, second and third greatest amount of


loan is disbursed in agriculture, business, building and construction

respectively. Similarly, lowest in other loans and advances sectors. NPL of the

SDBL is fluctuating. In the study period low and high NPL of the bank is 8.25

million and 19.18 million. It can be assumed that as international practice. It

shows low quality of lending of the SDBL. Capital adequacy of the SDBL is

sufficient against NRB standard. It indicates that the lending capacity of SDBL

is high.

From primary survey, it shows that maximum respondents are known about

directives related to credit policy issued by NRB. SDBL is implementing cent

percent directives issued by NRB related to credit policy. Most of the

respondent agrees that bank officers visit the project site at the time of granting

loan. Most of the respondents agree that the credit practices adopted by SDBL

in good position and minority respondents don’t know about it. Credit

problems arises due to problem arises due to government policy, problem arises

due to recession in the business, problem is on real estate, problem arises from

misused of funds and unsecured loan is provided to person. All the respondents

were agreed that SDBL is maintaining sufficient provision for loans losses.

5.3 Recommendations

The present study can be a valuable piece of research works in credit

management. It explored the existing situation and identified the various

components for further improvement in credit management. In order to better

improvement of the "Loan management of the SDBL" the following

recommendations have been made on the basis of findings of the study:

• Excess concentration of loan lending on some certain area depicts the

fact that people lack in identifying new innovation. Most of the people

do similar types of business thinking to have more return. This

germinates excess competition of the business and risk for bankers.

Hence, it should provide technical support to prospects for identifying

new opportunities and to capitalize those opportunities.

• It is truly realized that gradual shift of focus from traditional lending to

retail banking such as auto loan, housing loan, education loan and

personal loan.


• The banks should increase loan disbursement in industrial sector.

• Capital adequacy of the bank is not in NRB. So, the bank should keep it

this standard.

• The bank should spend some profit in social activities. It affects the

public positive attitude towards the bank.

• Loan should flow on profitable and viable sectors. This will result

increase in interest income of the loan and advances of which will uplift

profit of the organization.

• Due to poor credit administration, the credit recovery process is slow as

well as legal process in the recovery of credit is lengthy and ineffective.

Clear-cut objective and policy of the credit management is lacking so

that non-performing credit is going upward. To get better result in the

coming future, bank should reduce the volume of non-performing credit.

• The banks should adopt efficient and modern management concept to

make their activities quick and moving there by fulfilling the growing

demand of current financial services.

• Total deposit is not correlated with the loan and advances. This is very

serious matter and the main reason is the case of over liquidity that the

bank has maintained so far. Thus, the bank should mobilize the deposit

and try to bring the correlation between total deposit and loan and

advance in an appropriate level.

• To meet 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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www.nrb.org.np

www.sdbl.com.np


APPENDIX-I

QUESTIONNAIRE

Sir,

First of all, I want to introduce myself as a student of Shanker Dev Campus. I

would like to request you to fill up the following questionnaires prepared for

collection of your views as valuable resources for my research work. This

research is conducted for the partial fulfillment of the requirements for the

degree of MBS. It would be of great value should you help in this project work

by filling the following questionnaire:

Shiva Raj Khanal

Please tick (√) an option which you favor most.

1. Do you know the directives issued by NRB related to credit policy?

(a) Yes ( )

(b) No ( )

(c) Don’t Know ( )

2. If yes, are the SDBL implementing the directives issued by NRB related

to credit policy?

(a) Yes ( )

(b) No ( )


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

(a) Yes ( )

(b) No ( )


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

(a) Yes ( )

(b) No ( )



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

(a) Yes ( )

(b) No ( )


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

(a) Yes ( )

(b) No ( )


7. Is there credit related problems in your bank?

(a) Yes ( )

(b) No ( )


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

…………………………………….................................. ……………..

……………………………………………………………………………

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

(a) Yes ( )

(b) No ( )


10. If yes, then which period?

(a) Monthly ( ) (b) Quarterly ( )

(c) Semi annually ( ) (d) annually ( )

(e) If any……………..


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

(a) Yes ( )

(b) No ( )


12. If yes, then what is the % of loan losses provision maintaining by your

bank?

(a) Good debts ………….. (b) Sub- standard debts ……….

(c) Doubtful debts ………….. (d) Bad debts ……….

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

(a) Yes ( )

(b) No ( )



APPENDIX-II

A Profile of Siddhartha Development Bank Limited

Siddhartha Development Bank Limited (SDBL), established in 2002 and

promoted by prominent personalities of Nepal, today stands as one of the

consistently growing banks in Nepal. While, the promoters come from a wide

range of sectors, they possess immense business acumen and share their

valuable experiences towards the betterment of the Bank.

Within a short span of time, Siddhartha Bank has been able come up with a

wide range of products and services that best suits its clientele Siddhartha Bank

has been posting growth in its portfolio size and management of the bank has

been thoroughly professional.

SDBL has been able to gain significant trust of the customers and all other

stakeholders to become one of to most promising commercial banks in the

country in less than 10 years of its operation. The bank is fully committed

towards customer satisfaction. The range and scope of modern banking

products and services the bank has been providing is an example to its

commitment towards customer satisfaction. It is this commitment that has

helped the bank register quantum growth every year. And the bank is confident

and hopeful that it will be able to retain this trust and move even further

towards its mission of becoming one of the leading banks of the industry.

VISION

Siddhartha bank runs with a vision to be financially sound, operationally

efficient and keep abreast with technological developments.

MISSION

The bank desires to be one of to leading banks of the industry by fulfilling the

interest of the stakeholders and also aims to provide total customer satisfaction

by way of offering innovative products and by developing and satisfaction bay


way of offering innovative products and by developing and retaining highly

motivated and committed staff. It directs all its efforts to move ahead with

increased profits. The following mission statement is a guide to meet the vision

of the bank:

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

productivity and innovation.

• Aim at total customer satisfaction by rendering efficient and diversified

financial services through improved technology.

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

good work culture to achieve superior individual performance aiming to

enhance organizational effectiveness.

• Be the place of pride to all its stakeholders.

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

company act, 2063 and operated under bank and financial institutional act,

2063. Bank started its banking transaction since 25th June 2002.

Bank is committed to do following works to achieve its objectives:

• To provide loan on sector of agriculture, industry, trade, SMEs, Micro-

credits, housing and land development and service business sector by

utilizing available resources and skills.

• To operate special programmed by selecting poor and backward

populated socially for upgrading their life style.

• To provide banking service and help them for select and implement of

right projects for rural semi-rural and urban sector of its geographical

people according development bank concept.

• To develop and implement alternative scheme for mobilization of

internal resources as well as external resources.

• To provide certain level of loan against group liabilities to less income

generated people and scheduled group for their suitable projects.


Salient Features of the bank:

• Debit card and ATM facility.

• Any branch banking facility.

• Maximum benefit and security to depositors.

• Loan facility to entrepreneurs on easy process and in low cost interest.

• Special program to use the technology and human resources.

• Easy and quick computerized banking services.

• Money transfers facilities.

• Remittance facilities.

Capital structure of the bank:

Authorized capital Rs. 1,30,00,00,000

Issued capital Rs. 65, 00, 00,000

Paid up capital Rs. 64, 50, 00,000

(Source: Annual Report, 2011/12/12).

The study content have been focused on credit management procedure and

effectiveness, loan disbursement, loan recovery and loan outstanding position

of the financial institution. In essence, the current study through light on the

credit management to draw attention of new researchers and the management

of the bank in order to aware them in their vital activities.


Documents

TH3192CD