Position of Non-Performing Loans 1

Position of Non- Performing Assets: A Comparative Study in Government Owned Banks of

Nepal

Business Research Report

Submitted to

Pokhara University

In partial fulfillment of the requirements for the

Bachelor of Business Administration- Banking and Insurance

By

Alberto Gurung, Dipesh Raj Pandey, Mohatav Ansari, Raman Shrestha, Sanjay Gautam and

Shishir Acharya

Under the Supervision of

Mr. Mabindra Regmi

December 2014
Position of Non-Performing Loans 2

Acknowledgement

It gives us tremendous pleasure in acknowledging the valuable assistance extended towards us

by various personalities in the successful completion of this research.

First of all we would like to express our gratitude to Mr. Mabindra Regmi for entrusting us to

conduct the project work. We would like to express our gratitude towards him for providing us

with his valuable guidelines, comments, and suggestions which have given us great help while

preparing this report.

We would like to thank Ace Institute of Management for providing us with the opportunity to

visit different organizations to conduct the research. We would also like to thank the bank

employees who helped us to carry out our research.

Position of Non-Performing Loans 3

Executive Summary

Banks play an important role in the economic development of a country. Banks are growth

drivers of the country and the banking business is exposed to various risk, such as credit risk,

liquidity risk, interest risk, market risk, operational risk and management risk. Apart from these

risks, another very important risk that banks have to face is risk of loan recovery. The sound

financial position of a bank depends upon the recovery of loans or its level of Non-performing

loans (NPLs). Reduced NPLs generally gives the impression that banks have strengthened their

credit appraisal processes over the years and growth in NPAs involves the necessity of

provisions, which bring down the overall profitability of banks. The magnitude of NPA is

comparatively higher in government owned banks of Nepal. To improve the efficiency and

profitability of government owned banks, the NPL needs to be reduced and controlled. In this

study, an effort has been made to evaluate and compare the non-performing assets of the

government owned banks of Nepal (Nepal Bank Limited, Rastriya Banijya Bank, Agricultural

Development Bank Limited) from 2064 B.S. to 2070 B.S. This study attempts to ascertain the

major determinants of non-performing assets in the Nepalese banking sector and find possible

measures that banks in Nepal (especially government owned banks) can take to manage their

current NPLs and avoid future NPLs.

Position of Non-Performing Loans 4

Table of Contents

1. Introduction

1.1 Background of the Study……………………………………………………………6

1.2 Statement of the Problem……………………………………………………………7

1.3 Objectives of the Study……………………………………………………………...7

1.4 Research Questions………………………………………………………………….8

1.5 Rationale of the Study……………………………………………………………….8

1.6 Limitations of the Study…………………………………………………………….8

2. Literature Review

2.1 Literature Review…………………………………………………………………...10

2.2 Research Gap………………………………………………………………………..12

2.3 Theoretical Framework……………………………………………………………...12

3. Research Methodology

3.1 Research Design……………………………………………………………………..14

3.2 Population and Sample………………………………………………………………14

3.3 Nature and Sources of Data………………………………………………………….15

3.4 Data Collection Procedures…………………………………………………………..15

3.5 Data Analysis………………………………………………………………………...15

4. Data Analysis

4.1 Reliability Analysis…………………………………………………………………..16

4.2 Loan and Advances of State Owned Banks………………………………………….16

4.3 Trend of NPL in State Owned Banks………………………………………………..18

4.4 Correlation between NPL and Bank Profitability……………………………………19

Position of Non-Performing Loans 5

4.4.1 Nepal Bank Limited………………………………………………………..20

4.4.2 Rastriya Banijya Bank……………………………………………………..20

4.4.3 Agricultural Development Bank Limited………………………………….21

4.5 Factors Affecting Non-Performing Loans…………………………………………...21

5. Discussions, Implications and Summary

5.1Summary……………………………………………………………………..23

5.2 Conclusion.………………………………………………………………….24

5.3 Recommendations…………………………………………………………..26

References……………………………………………………………………………………….29

Annexes………………………………………………………………………………………….30
Position of Non-Performing Loans 6

CHAPTR 1

Background and Introduction

1.1 Background of the study

Banking sector plays a vital role in the economic development of a country. Its main function is

to pool the scattered idle deposits in the public and channelize it for productive uses. Saying

differently, it bridges the gap between surplus unit and deficit unit of the monetary resources.

The former one is called depositor and the later one is called borrower. The economic health of

every financial system is dependent upon the soundness of banking industry.

The history of modern banking in Nepal accounts only for 78 years- institutional banking in

Nepal was started only after the establishment of Nepal Bank Limited in 1994 BS under the

provision of Nepal Bank Kanoon 1993. Since then Nepalese banking sector has undergone major

changes and reforms. Banks’ exposure to new market in terms of geography and product

variation is also increasing day by day. Simultaneously, the risk of bank failure or operational

difficulties is also increasing. Among them Non-Performing Loan (NPL) is one of the potential

causes posing threat to Nepalese banks. Especially the state owned banks are facing critical

problems due to large NPA portfolio.

Among the assets in a bank’s balance- sheet, NPL is restricted to loans and advances: the earning

from which are dues for more than 90 days. As long as an asset generates the income expected

from it and does not disclose any unusual risk other than normal commercial risk, it is treated as

performing asset, and when it fails to generate the expected income it becomes a “Non-

Performing”. .The primary purpose of Phase II Financial Sector Reforms (1991- 1998) adopted
Position of Non-Performing Loans 7

by the then His Majesty Government was to address the problem of Defaulted loan on Public

Banks. In today’s context also state-owned banks are facing high level of NPLs.

1.2 Statement of the Problem

Non- performing loans of banks are one of the biggest obstruct to the growth and profitability of

any bank as it fails to generate revenue to the bank that it should have served. Higher amount of

NPL ratios may even question the bank survivability. They are “financial pollution” and may be

harmful to economic growth and social welfare (ShihongZeng, 2012). Nepalese state owned

banks are still experiencing a huge amount of non- performing assets each year in their balance

sheet. It is affecting their financial standing. Government has continuously adopted 3 financial

sector reform strategies to strengthen the internal control and risk management systems in these

banks. Lending cannot be stopped because it is the primary function of bank. Thus, banks need a

vigorous effort and policies for effective recovery of their default loans. This research measures

the actual position of non- performing assets in state owned banks and its relation to various

other variables.

1.3 Objectives of the Study

The main objective of my research is to measure, explain and compare the non- performing

assets of three state owned banks. The specific objectives are:

1. To assess and find out trend in NPAs portfolio of state owned banks.

2. To carry comparative study of NPAs with bank profitability.

3. To make appropriate suggestions to avoid future NPAs and managing existing NPAs in

state owned banks.

Position of Non-Performing Loans 8

1.4 Research Questions

To fulfill the above mentioned objectives the following research questions will be tried to answer

and analyze:

1. What is the position of NPAs in Nepalese state owned banks for last five monetary years?

2. How the banks’ profit and NPAs are correlated?

3. What could be the measure to manage and avoid NPAs in state owned banks?

1.5 Rationale of the Study

This study has the following rationale:

1. Students of banking as well as general public can extract important information about

NPAs in state owned banks from this study.

2. The study also suggests measures to banks to manage their current NPAs and avoid

future NPAs.

3. The study may assist government in creating and implementing new strategies to control

NPAs.

1.6 Limitations of the Study

Some of the limitations of this research are:

1. The data are collected and analyzed only for 7 years. If data of more number of years

have been analyzed, the result would have been more statistically accurate.
Position of Non-Performing Loans 9

2. We constructed a self designed questionnaire to find the major reason of high NPL (Non-

Performing Loan) in state owned banks. Some of the respondents filled the questionnaire

very quickly, due to which accurate information might not have been gained.

3. Time and money constrains is another limitation that I experienced during the research

period.

4. Since we had to explain the questionnaire to some of the participants who partially

understood English, our personal influence may also have affected their view.

5. This study is conducted to fulfill the course requirement of BBA- BI semester IV not to

investigate for the generalization purpose.

Position of Non-Performing Loans 10

CHPATER 2

Literature Review and Conceptual Framework

2.1 Literature Review

In the banking literature, the issue of NPAs has been frequently revisited in several theoretical

and empirical studies. “A loan is non- performing when payments of interest and principle are

past due 90 days or more, or at least 90 days of the interest has been capitalized, refinanced or

delayed by agreement, or payments are less than 90 days overdue, but there are other good

reasons to doubt that payment will be made full” (International Monetary Fund, n. d). NRB

Directive (2009) has classified NPAs in four categories:

• Pass: Loans/ advances which have not overdue and which are overdue by period up to 3

months.

• Sub- standard: Loans/advances which are overdue by a period from three months to a

maximum period of six months.

• Doubtful: Loans/advances which are overdue by a period from six-months to maximum

period of one year.

• Loss: Loans/advances which are overdue by a period of more than one year.

Reddy (2002) illustrates the causes of NPAs in Banks of Asia Pacific Countries being real estate

speculation, lack of adequate monitoring, legal impediments, political implications, moral hazard

etc. Regmi (2008) viewed the causes of high level of NPAs in Nepalese banks is due to lack of

guiding rules, accountability and responsibility, political interferences, business failure, poor
Position of Non-Performing Loans 11

monitoring, insider lending, and poor governance. Das (2007) points that expansion of credit is

most for banking industry however the banks must be cautious of the fact that high credit growth

may lead to high NPA in developing economies where Exploring the consequences of NPAs,

Arya (2013) states that NPAs not only affect current profit but also the future stream of profit. It

reduces the ROI (Return on Investment) adversely affecting the current earning of bank. Neither

principal amount nor interest amount is being received to the bank against the assets. The

mobilization of fund is stopped. Time and effort of management is another indirect cost which

bank has to bear due to NPA. Now days’ banks have special employees to deal and handle NPAs

which is additional cost to bank. A high level of NPA in the bank causes deterioration of

goodwill and public faith. Selvarajan and Vadivalagan (2003) saw the devastating effect of high

level of non- performing assets saying that non- performing loans epitomize bad investment.

They misallocate credit from good projects, which do not receive funding, to failed projects. Bad

investment ends up in misallocation of capital, labor and natural resources. The economy

performs below its production potential. When non- performing loan spill over the banking

system contracting the money stock may finally lead to economic contraction.

The non- performing loan is an unavoidable burden for any banking companies. The NPA cannot

be eliminated because it is the nature of banking business being associated with risk but can be

reduced by taking precaution during the time of lending. It is necessary to develop

professionalism, insure corporate governance, strict monitoring by the supervision, strong credit

control mechanism and formation and implementation of necessary rules and guidelines (Regmi,

2008). Advances provided by the bank need to be done pre- sanctioning evaluation and post-

disbursement control so that NPA is decreased. Securitization on problematic loan portfolio can

significantly reduce new NPA possibilities (Narula and Singla, 2014).

Position of Non-Performing Loans 12

2.2 Research Gap

Many studies have been done to address the problem of non- performing loan in Nepalese

banking sector. Many studies identify with the NPL position of overall banking sector of Nepal.

Some of the studies have taken one of the state owned commercial banks as their sample. No

studies on NPL analysis of state owned banks merely have been done. Considering this research

gap this study has been carried out.

2.3 Theoretical Framework

The banks, in their books, have different kind of assets, such as cash in hand, balances with other

banks, investment, loans and advances, fixed assets and other assets. Non- performing assets are

the loans, advances and investments that have stopped serving income to the bank (Selvarajan

et.al, 2013). The study identifies mainly two factors that determine and influences the portfolio

of non- performing loans in banks’ balance sheet. The first one focuses on the overall macro-

economic conditions that affect borrower’s repaying capacity while the second one attributes the

level of non- performing assets to bank level factor.

This study considers non- performing loans of banks as an independent variable and the banking

and macro- economic factors be the dependent variables.

.
Position of Non-Performing Loans 13

Schematic Diagram of Theoretical Framework

Bank Non- performing

Profitability Loans of bank

Macro- economic Bank Level

Factors Factors

• Moral Hazard
• Economic Trend
• Management
Incompetency • Regulatory Framework
• Policy Loopholes
Position of Non-Performing Loans 14

CHAPTER 3

Research Methodology

3.1 Research Design

The main purpose of the study is to know the relation between Non- Performing Loans and

Profitability of the banks under study along with interpreting the trend of Non- Performing Loan

ratios over the five accounting periods starting from 2066 BS to 2070 BS. Hence, this study

follows the research design of both Trend Analysis and Comparative Correlational Research.

3.2 Population and Sample

Primarily, this study is focused on collecting, analyzing and interpreting the quantitative

information collected from three state owned commercial banks of Nepal. The finding of the

study will be the conclusion and suggestions to the state owned commercial banks only. Being a

census study, the population and sample of this research is total number of the state owned

banks.

For the second part of this research, population is identified as the total number of employees of

credit departments of three state owned banks. Thirty employees working for the state owned

banks under credit department were selected as sample to fill up the self- designed

questionnaires. The employees of head branch were selected because this study focuses on

factors affecting NPL on national level and the employees of head branch are acquainted to the

national data.
Position of Non-Performing Loans 15

3.3 Sources and Nature of the Data

Both primary and secondary data have been used for the study. The primary data was collected

by using self-designed questionnaire. The secondary was collected from the financial statements

of the state owned banks.

3.4 Data Collection Procedures

A Likert scale questionnaire ranging from 1 (strongly disagree) to 5 (strongly agree) was used to

find the major factor ( moral hazard or management incompetency or policy loopholes or

economic trend or regulatory framework) of high non-performing loans in state owned banks of

Nepal. Similarly the income statement, balance sheet, statement of loan classification were

reviewed to find the different aspects of bank performance such as performing and non-

performing loan ratio, trend of total loan amount and profitability. Then Pearson’s Correlation

was used to find the relationship between profit and NPL of state owned banks.

3.5 Data Analysis

The data were analyzed using SPSS 16.0. Frequency distributions, graphs and correlations were

computed. Pearson’s Correlation Coefficient was used. Excel was also used for graphs and

charts.
Position of Non-Performing Loans 16

CHAPTER 4

Data Analysis and Interpretation

This chapter is the heart of the report. In this chapter, the secondary data provided by the banks

under study are analyzed and interpreted using SPSS 16.0 and Microsoft Excel 2010. Similarly,

the questionnaires filled by participants are tabulated and analyzed in order to come closer to our

objectives. That very analysis is mainly presented in this chapter with the help of figures and

charts.

4.1 Reliability Analysis

This research is reliable for analyzing the relationship between NPL position and profitability of

state owned banks of Nepal. In this research, Cronbach’s Alpha is .671.

Reliability Statistics

Cronbach's Alpha N of Items

.671 9

4.2 Loan and Advances of State Owned Commercial Banks

Credit creation is one of the primary functions of commercial banks. Loan and advances are

treated as asset in banks’ balance sheet as it generates income to the bank. Interest earning from

loan is the major revenue for bank. Higher amount of loan and advances represents better
Position of Non-Performing Loans 17

financial performance of bank. The state owned commercial banks are doing well in terms of

lending since their entry to banking industry.

Figure 4.Loan and advances of state owned banks

6E+10
NBL
RBB
5E+10
ADBL

4E+10

3E+10

2E+10

1E+10

0
2064 2065 2066 2067 2068 2069 2070

Figure 4.1 shows that the loan and advances amount of all three state owned banks is increasing

over the sample period. The loan amount of NBL in Year 2064 BS was Rs.13, 743,629,452.

After six years in Year 2070 BS the loan amount was Rs.37, 840,732,288. This shows annual

46% (approx.) average increase in loan for the sample period. Similarly, the loan amount of RBB

in Year 2064 BS was Rs.24, 775,727,774.44. In Year 2070 BS the amount reaches to Rs.49,

044,912,288.71 with an average annual increase of 8.5% (approx.). The amount of loan and

advances of ADBL in Year 2064 was Rs.34, 440,369,395.19. This amount increased to Rs.54,

918,507,832 with an annual average increase of 10.5% (approx.). On the basis of loan amount,
Position of Non-Performing Loans 18

ADBL is the highest performer among state owned banks. However, in terms of annual increase

in lending, NBL seems to be doing very well than other two banks.

4.3 Trend of non- performing loans in state owned banks

On the basis of performance or regularity in repayment of interest and principle amount, loan is

categorized into Performing and Non- Performing Loan. Performing loan is also known as pass

loan and non- performing as failed loan because they have failed to generate revenue to the

bank that they should have served.

Figure 4.2 Trend of Non- performing loan in state owned banks

35
NBL

30 RBB
ADBL
25

20

15

10

0
2064 2065 2066 2067 2068 2069 2070

Fig 4.2.1 shows the trend of non- performing loans in state owned banks from year 2064 BS to

2070 BS. It shows out of total loan sanctioned by Nepal Bank Limited, 13.47% loans are NPL

whereas 86.53% is Performing Loan in year 2064. The percentage remains same with slight

change in decimal value, i.e. 13.08% and 86.92% respectively for year 2065 BS. The percentage
Position of Non-Performing Loans 19

of NPL decreases with a great leap to 4.98% and 4.84% in year 2066 BS and 2067 BS. There is a

slight increase to 5.17% in NPL ratio in year 2068 BS. The NPL ratio of NBL remained 5.58%

and 5.23% in year 2069 and 2070 BS respectively.

Similarly, the non- performing loan ratio of RBB in year 2064 is 28.63%. It is 21.43% in 2065

BS. Again, the NPL ratio decreases to 15.64% in 2066 BS. From Fig. 4.2, it is obvious that NPL

ratio of RBB is decreasing by leaps and bounds over the sample period. Till year 2070 BS the

NPL ratio of RBB that was more than 25% 8 years back, falls to 5.31%.

The NPL trend line of ADBL shows gradual improvement in NPL ratios in year 2064 to 2070

BS. The NPL ratio of ADBL in 2064 BS was 17.96% followed by 11.69% in year 2065 BS.

From year 2066 to 2069, it seems that ADBL is experiencing difficulty in reducing its NPL ratio

as NPL ratio remained within 8% to 9% in these three years.

From our trend analysis, it is very clear that RBB and ADBL experienced high amount of non-

performing loans than NBL. On the other hand NBL and RBB seem to be managing their NPL

portfolio by leaps and bounds but there is gradual improvement in NPL ratio of ADBL. The

current NPL ratio of these three state owned banks is around 5%.

4.4 Correlation between NPL and bank profitability:

PL represents the loan and advances that have failed to generate any regular income to the bank.

High amount of NPL means low amount of regular earning on loan to the bank. This directly

affects the profitability of any bank.

Position of Non-Performing Loans 20

Under this section the correlation between NPL and bank profitability of state owned banks of

Nepal is analyzed and interpreted using SPSS 16.0.

4.4.1 Nepal Bank Limited

Correlation between NPL and Profit of NBL

NPL of NBL Profit of NBL
NPL of NBL Pearson Correlation 1 -.311
Sig. (2-tailed) .498
N 7 7
Profit of NBL Pearson Correlation -.311 1
Sig. (2-tailed) .498
N 7 7

The correlation between seven years non- performing loans and Net profit for the respective

years of NBL is calculated.

The Pearson correlation of NPL and bank profitability of Nepal Bank Limited is -0.311. It means

there is negative correlation between NPL and bank profitability. Since the two tailed

significance is .498, means the correlation is not significant.

4.4.2 Rastriya Banijya Bank

Correlation between NPL and Profit of RBB

NPL of RBB Profit of RBB
NPL of RBB Pearson Correlation 1 -.340
Sig. (2-tailed) .456
N 7 7
Position of Non-Performing Loans 21

Profit of RBB Pearson Correlation -.340 1

Sig. (2-tailed) .456
N 7 7

The Pearson correlation of NPL and bank profitability of Rastriya Banijya Bank is -.314. It

means there exists negative correlation between NPL and profitability of RBB but since the

significance level is .456, it is insignificant correlation.

4.4.3 Agricultural Development Bank

Correlation between NPL and Profit of ADBL

NPL of ADBL Profit of ADBL

NPL of ADBL Pearson Correlation 1 -.572
Sig. (2-tailed) .180
N 7 7
Profit of ADBL Pearson Correlation -.572 1
Sig. (2-tailed) .180
N 7 7

The Pearson correlation of NPL and profitability of ADBL is -.572 meaning that there exist

negative correlation. However, the correlation is only significant at 20% level of significance.

4.5 Factors affecting NPL in Nepalese state owned banks.

In our study we worked on two factors affecting NPL position of three state owned banks viz.

banking level factors and macro- economic factors. Bank level factors were further categorized
Position of Non-Performing Loans 22

into moral hazard, management incompetency and policy loopholes. Similarly, macro- economic

factors are categorized into economic trend and regulatory framework.

Fig. 4.3 Factors affecting NPL to increase

100
80
60
40
20
0
Moral Hazard Management Policy Economic Trend Regulatory
Incompetency Loopholes Framework

Fig 4.3 shows moral hazard and economic trend affects the NPL position of state owned

banks the most. Generally, borrowers who borrowed larger amount of fund have intention of

not repaying the loan. It may be because they are privileged class of the society or due to

slow economic growth; they could not generate adequate earning from borrowed fund.

Regulatory framework is in the third place in our survey. It measures support from regulatory

bodies in minimizing the NPL ratios. Fig 4.3 shows state owned banks are getting less

support from regulatory bodies and their regulations. Management incompetency is in fourth

place in our survey meaning that credit officers agree that management of the banks itself are

incompetent to manage the NPL portfolio. Finally, policy loopholes were the least affecting

factor among all factors we have identified.

Position of Non-Performing Loans 23

CHAPTER 5

Discussions, Implications and Summary

5.1 Summary

Financial institutions are the backbone of the economic development of any country. In other

word national development of any country depends upon the economic development of that

country and economic development is supported by financial infrastructure of that country. Bank

came to existence mainly with the objective of collecting the idle fund and mobilizing them to

productive sector causing overall economic development. This research is mainly aimed to study

the impact of non-performing assets in government owned banks of Nepal. Out of total

population of 3 government owned banks, the NPL position of all the government owned banks

were studied and compared. So, a census study was done. These banks are Nepal bank limited

(NBL), Rastriya Banijya Bank (RBB) and Agricultural Development Bank Limited (ADBL).

Secondary data have been used in the study. Financial statements of these banks and other

publications have been considered as the sources of secondary data. To come in the conclusion,

descriptive, comparative and analytical research was adopted. The collected data are recorded

systematically and presented in appropriate forms of tables and charts with appropriate

mathematical, statistical, financial and graphical tools to analyze the data. Here the data of seven

consecutive years of state owned banks have been analyzed.

The overall ratios on non- performing loans on all three banks are 7.48%, 14.37% and 10.11%

respectively. Even RBB and ADBL has decreasing trend, on an average it is quite higher than the

acceptable standard of 5%. Thus all three banks NBL, RBB and ADBL should the non

performing loans.
Position of Non-Performing Loans 24

RBB has highest portion of investment on loans and advances which shows that it has good

lending procedures and good performance but bank could not operate at profit since long time.

Similarly , NBL although has lowest portion of investment in loans and advances than RBB its

operating profit is greater .On the other hand , ADBL bank has again low portion of investment

than NBL and RBB , as a result there is negative return on loans and advances.

The correlation between NPL and banks profitability in three state- owned commercial banks is

negative but insignificant. Certainly, higher the NPL lower will be the profitability. But the

increase in NPL may not significantly affect bank profitability.

After management handed by the foreign parties both NBL and RBB are concentrating on loan

recovery management , trend analysis of loans and advances show decreasing as a result

expected trend values of next seven consecutive years show the increment profit of NBL and

RBB . This also implies that non-performing loans are decreasing which is good for banks.

Nepalese banking sector is highly affected by the vicious circle of NPL. The major factors

leading to non performing loans are moral hazard of borrowers, management incompetency,

policy loopholes, economic trend and unsupportive regulatory framework. Proper loan

classification and loan loss provisioning also helps to confront the problems of NPL. The latest

directives regarding loan classification and loan loss provisioning is very important for

maintaining sound financial health of the banks.

5.2 Conclusion

The banking sector is facing various problems. One of them, the banking has been becoming

huge victim of huge non-performing loans (NPLs). NPLs are one of the serious problems faced

by commercial banks.
Position of Non-Performing Loans 25

Although NBL and RBB has almost more than 50% of market share deposit and resources, these

two banks are facing vicious circle of NPL resulting high provision. These banks have higher

percentage on market share in lending too which are the most income generating assets but

operating in loss since long time. Similarly ADBL bank is also suffering from NPL so, this bank

also effectively manage loan to generate profit.

Due to instable political condition, insecurity, ineffective credit policy, and political pressure to

lend non viable project, overvaluation of collateral and even without collateral disbursement are

the major factors causing of mounting nonperforming assets in banks mainly in government

owned banks. State owned commercial banks investment has been found lower productivity due

to the lack of supervision regarding whether there is proper utilization of their investment or not.

Lack of farsightedness in policy formulation and absence of strong commitment towards its

proper implementation has also caused many problems in these banks. Proper classification and

close review of loans enable banks to monitor loan portfolio and take remedial step to safe guard

deterioration of its credit quality. Furthermore, establishment of proper rules and laws are also

essential to solve the problem on NPL. The guidelines in themselves are not important unless

properly implemented. The rules and regulation are only the tools of NRB to supervise and

monitor the financial institution. NRB need to monitor the concerned authorities in order to

ensure that they are being followed.

Position of Non-Performing Loans 26

5.3 Recommendations

Based on the above findings and conclusion, the following recommendations have been

forwarded:

During the study period, RBB and ADBL have high rate of non-performing assets loan

accompanied by higher provision. The NPL should be decreased by taking remedial action such

as implementation of proper laws to recover the bad loans especially by big and willful defaulter,

hiring assets Management Company to break the vicious circle of non-performing loans.

NBL’s average non performing loan is also high during the study period. So, this bank should

also follow the strict guidance of NRB, be more cautious and make proper analysis while

granting loans and advances. The major solution for reducing risk is to avoid lending on more

risky areas until bank doesn’t fully satisfy itself regarding the future liability of the project.

The bank has to offer training programs with related subjects like NPL, the art of dealing with

people, influencing them, winning them and finally retaining them.

The establishment of asset management company (AMC) which helps the commercial banks in

collecting their debts and improving their credit rating efficiency should be initiated. It is high

time for the bank to undertake systematic and effective approach to mitigate the burden of NPL.

In Nepalese context, following points are recommended for reducing the volume of NPL:

1. A Good credit policy is the key to the success of loan function of a bank. The root cause for a

loan to turn bad is a bad credit appraisal from the bank. Thus, a sound credit appraisal has to be

done especially by the credit department. Internationally used models like COMPARI model and
Position of Non-Performing Loans 27

four pillars model can be used.

The COMARI Model

This model identifies the major areas to be analyzed before disbursing loans to a borrower. The

areas being:

C - Character : Integrity and credibility of the borrower.

A - Ability: Borrower’s ability to manage business.

M - Margin: Is the return reasonable for risk?

P - Purpose: What is the money needed for?

A - Amount: How much is needed?

R – Repayment: How and when will we get the money

back?

I - Insurance: Are we insured?

2. During the credit analysis, the major focus should be on the ‘character’ of the client and the

purpose of him to request for the loan, rather than the collateral, he is supposed to pledge /

mortgage. The loan officer must be convinced that the customer has a well-defined purpose for

requesting bank credit and a serious intention to repay. Once the purpose is known, the officer

must determine whether the loan request is consistent with the bank’s current loan policy.

Responsibility, truthfulness, serious purpose, and serious intention to repay all monies owed

make up what a loan office calls character.

The mindset of the bankers that starts analyzing a client’s request by finding as many

possibilities as possible of the client not paying back the loan should be changed.
Position of Non-Performing Loans 28

3. Timely decision on genuine requirement of a genuine client should be done and the bank

should be willing to help the client explore his business.

4. The trend of disbursing a loan merely on the recommendations from the higher management

staff and political influences should be stopped.

5. The constant counseling and training to the credit analysts and staffs needs to be provided.

6. Depending on the situation reliable and creditworthy clients can be given appropriate

incentives that help them settle the loan.

7. Great care should be given to conduct the financial analysis of the client. Cash flow rather

than profit is what should concern the bank.

8. Since banking is also a business, customer satisfaction should always be the first concern for

the bank.

Lastly, the ethical policy of “giving life is better than killing” should not be forgotten. In other

words, the fact that recovering loans is better than auction should be kept in mind.
Position of Non-Performing Loans 29

References

Regmi, R. R., Banking law of Nepal. Kathmandu: Lumbini Pustak Pasal.

Shrestha, G. K., 2004. Financial sector reforms in Nepal. “NRB Economic Review”, 16(4), pp.

75- 90.

Selvarajan, B., &Vadivalagan, G., (2013). A Study on management of non- performing assets in

priority sector reference to Indian bank and public sector banks (PSBs). Global Journal

of Management and Business Research. 13(1), 100- 114.

Arya, M, K., (2013). Non- performing assets and the survivability of banks. Bauddhik. 4(3), 9-

15.

Singh, A., (2013). Performance of non- performing assets (NPAS) in Indian commercial banks.

International Journal of Banking, Financial Services and Management Research. 2(9),

86- 94.

Kumar, M., & Singh, G., (2012). Mounting NPAS in Indian commercial bank. International

Journal of Transformations in Business Management. 1(6).

Narula, S., &Singla, M., (2014). Empirical study on non- performing assets of bank. International

Journal of Advance Research in Computer Science and Management Studies. 2(1), 194-

199.

Chipalkatti, N., & Rishi, M., (2007). Do Indian banks understate their bad loans? The Journal of

Developing Areas. 40(2). 75- 91.

Wahlen, J. M., (1994). The nature of information in commercial banks loan loss disclosures.

American Accounting Association. 69(3). 455- 478.

Position of Non-Performing Loans 30

Annexes

Table 1: Loan and Advances of State Owned Banks

Year Banks (Loan Amount)

NBL RBB ADBL

2064 13743629452 24775727774.44 34440369395.19

2065 15748629953 27570729327.34 36604717667.24

2066 19237367652 31606735334.82 38301102688.84

2067 25039854729 35692513807.13 39582871767.12

2068 26697362005 36866104271.17 40372729139.29

2069 29549428914 40448862847.47 44988369228

2070 37840732288 49044912288.71 54918507832

Table 2: NPL Ratios

Year NBL RBB ADBL

2064 13.47 28.63 17.17
2065 13.08 21.43 11.69
2066 4.98 15.64 9.71
2067 4.84 11.42 8.36
2068 5.17 10.92 8.99
2069 5.58 7.27 8.98
2070 5.23 5.31 5.85
Position of Non-Performing Loans 31

Table 3: Amount of performing and non-performing loans

Year NBL RBB ADBL

NPL PL NPL PL NPL PL

2064 1850786765 11892842687 7092831103.47 17682896670.97 6185294996.50 28255074398.60

2065 2060567195 13688062758 5908767378.3 21661961949.04 4280510051.07 32324207616.17

2066 958571161 18581643242 4942584433.03 26664150901.79 3720774000.00 34580328688.84

2067 1211945743 23703464231 4075396381.97 31617117425.16 3309372190.07 36273499577.05

2068 1528289789 24169072216 4024644698.07 32841459573.10 3628555691.01 36744173448.28

2069 1650630041 27898798873 2940355476.28 37508507371.19 4040201382.00 40948167846

2070 1977335567 35863396721 2604812669.07 46440099619.64 3212599021.00 51705908811

Questionnaire

Please complete the following questionnaires by assigning a numerical value to each of the

statement. If you strongly agree with the statement assign 5 and if you disagree assign a 1. You

are requested to consider your bank while assigning numbers.

Strongly agree uncertain disagree Strongly

agree disagree

Borrowers have natural intention of not

repaying the loan.

Position of Non-Performing Loans 32

Businesses which are sensitive to economic

trend (e.g., luxuries) are the high defaulters.

Less loan monitoring is one of the techniques

to maintain the cost efficiency.

Insurance is most for the real and personal

property pledged as collateral.

Borrowers are not self- conscious of the

safety of collateral pledged against loan.

Borrowers’ credit worthiness is accessed

relatively less frequent after loan is

sanctioned.

Sectorial lending (priority and deprived) is

contributing to increases the NPL ratio of this

banks.

There are relaxed credit standards (e.g.

unguaranteed credit to employee of this bank

etc.) in this bank.

Different regulatory frameworks are

adequately assisting banks to minimize NPL

ratio.

Loan waiver (interest) provision of bank

contributes enough to increase the NPL.

Floating rate loans have more defaulters.

The tendency of loan default is higher in

Position of Non-Performing Loans 33

micro loans than in macro loans.

Changes in lending regulation by NRB cause

NPL to increase significantly.

Regular earning is most to be an eligible

borrower.

There is a significant default where lending is

in foreign currency.