CHAPTER-I

INTRODUCTION

1.1 Background of the study

The term "word bank" comes from the Latin word "bank," meaning "bench." A bank's
main role is to accept lend money. Thus, a bank is a financial institution operating
directly or indirectly via capital markets. Banks are heavily regulated in most countries
due to their critical role in the financial system and their impact on national economies.
Banks must adhere to minimum capital requirements based on international capital
standards known as the Basel accords, alongside other regulations ensuring liquidity. A
bank is the largest financial entity that handles monetary transactions. Banks accept
various types of public loans that can be withdrawn on demand or short notice. This
process aids in transferring funds from savers to users.

A loan is money held at the bank, involving a transaction to transfer money to another
party for safekeeping. Loan management and financial services are economic services
provided by the finance industry, covering a broad range of businesses that manage
money, including credit unions, credit card companies, and investment firms, including
government-sponsored enterprises.

loans are provided based on the lender's needs and bank policy. Banks offer various
loans such as home loans, vehicle loans, personal loans, and more. Interest rates differ
between banks. Generally, a bank is an institution whose primary function is to facilitate
monetary transactions safely and efficiently. Banks gather deposits from savers and
lend to individuals needing credit for the same purpose. Banks collect idle money from
the public and lend it to fund seekers by offering attractive interest rates. People with a
lot of money often buy expensive items without much thought about investing. Banks
play a key role in encouraging saving and investing in productive areas.

1
Siddhartha Bank Limited (SBL) is a prominent commercial bank in Nepal, known for
its robust financial services, including loan management. This dissertation explores the
loan management practices of SBL, aiming to understand their efficiency, challenges,
and impact on the bank's overall performance. Established in 2002, SBL has grown
significantly and has become an essential player in Nepal's banking sector, providing
various financial products and services to a broad customer base.

1.2 Statement of the Problem

A problem statement clearly articulates an issue that needs to be addressed or a
condition that requires improvement. It highlights the discrepancy between the existing
problem and the desired situation. Having a clear and well-defined problem statement
is crucial for understanding the issue at hand and for developing effective solutions. In
the context of commercial banking, accepting deposits from customers and providing
loans to those in need are the primary functions. Managing these activities efficiently is
essential for the bank's success. However, banks and financial institutions are currently
facing intense competition and numerous challenges related to liquidity risk, credit risk,
inflation risk, and interest rate risk. Effective management of loans is critical to
navigating these challenges. Therefore, this study will address the following key
questions:

i. Does the investment of Siddhartha Bank Limited (SBL) in securities and loans align
with the objective of maximizing profit ?
ii. What are the trends in deposits, loans, advances, and net profits at SBL over recent
years?
iii. What is the correlation between deposits and loans at SBL ?
iv. What is the current status of profitability at Siddhartha Bank Limited ?

This research aims to provide a comprehensive analysis of these questions to offer

insights and recommendations for improving the deposit and loan management
practices at Siddhartha Bank Limited.

2
1.3 Objective of the Study
Banks offer essential services to the public by providing both deposit and credit
facilities. They collect funds from savers in the form of deposits and lend these funds to
individuals and businesses in need of financing. The effectiveness and efficiency of a
bank’s operations heavily depend on how well it manages these deposit funds.

The main objective of this study is to analyze the trends in loans within commercial
banks in Nepal, with a specific focus on Siddhartha Bank Limited. The detailed
objectives of this study are:
i. To investigate the prevailing policies and the trends in loans and advances at
Siddhartha Bank Limited.
ii. To assess the overall trends in loans, and advances of Siddhartha Bank Limited
over recent years.
iii. To explore the bank's loans.
iv. To evaluate the current status of profitability at Siddhartha Bank Limited.

Through this study, we aim to gain a comprehensive understanding of Siddhartha Bank

Limited's loan management practices, how these practices have evolved over time, and
their impact on the bank's financial performance and profitability.

1.4 Significance of the Study

The significance of this study lies in its explanation of the necessity for this particular
research, justifying its importance and potential impact in the field. It outlines how the
study will contribute to new knowledge and benefit various stakeholders. The quality
and comprehensiveness of a bank’s fund management policies are indicators of the
bank’s overall health and, by extension, the national economy. Given the crucial role that
commercial banks play in providing credit to the economy, this study’s focus on loan
management is particularly relevant. The significance of this research can be
highlighted through the following points:
i. It will help identify trends in loans and the key areas of lending among commercial
banks in Nepal.
ii. The study will analyze the specific loan activities of Siddhartha Bank Limited,
offering detailed insights.

3
 iii. The findings will be beneficial to a wide range of individuals, groups, and
organizations, both directly and indirectly.
iv. This research will provide valuable insights for banks and financial institutions,
aiding in the design of new loan products.
v. The study will offer a clear and detailed overview of the various loan strategies
employed by Siddhartha Bank Limited.

By addressing these points, the study aims to enhance the understanding of loan
management practices and their implications for the financial health of commercial
banks in Nepal.

1.5 Literature Review

According to Paint (2005), a literature review serves as a method to explore previous
research in a particular field of study. This process involves extracting the essential
themes from various sources such as publications, books, newspapers, and previous
dissertations. The aim is to highlight and summarize the key findings and insights
relevant to the research topic. A literature review can be segmented into different
sections to facilitate comprehensive coverage of the existing body of knowledge.

In the context of Nepal's banking sector, the management of loans is a pivotal aspect
that significantly influences the financial health and stability of commercial banks. This
literature review aims to delve into existing studies and research conducted in Nepal,
focusing on loan management practices, particularly within Siddhartha Bank Limited
(SBL). By examining prior literature, this review seeks to provide a comprehensive
understanding of the trends, challenges, and implications associated with loan
management in the Nepalese banking industry.

1.5.1 Conceptual Review

At Siddhartha Bank Limited (SBL), gathering deposits and managing loans are key tasks
that keep the bank running smoothly.

4
Loan Management:
SBL isn't just about keeping your money safe; they also lend it out to help people and
businesses grow. When you need money for a project or to start a business, SBL might
offer you a loan. They have different types of loans, like cash credits where you can
borrow against certain assets or overdrafts where you can withdraw more money than
you have in your account. But SBL is careful about who they lend to; they check if you
can repay the loan and if the purpose of the loan is sensible and productive.

Principles of Lending:
When SBL lends money, they make sure it's safe and that the borrower can pay it back.
They also spread out their lending across different types of loans and borrowers to
minimize risks. And of course, they want to make some profit from the interest on the
loans they give out.

Loan Collection:
SBL lends money, they need to make sure it gets paid back on time. They have systems
in place to collect loan payments efficiently, which helps them manage their finances
better and offer more loans in the future.

Credit Limits:
SBL sets limits on how much money they'll lend to each person or business. This helps
them manage risks and ensures they're not giving out more money than they can afford
to lose.

In simple terms, SBL is all about responsibly handling your money, whether you're
saving it with them or borrowing from them to achieve your goals."

1.5.2 Research gap

In previous studies, there has been limited exploration of the specific relationship
between loan levels and loan collection practices within Nepalese commercial banks,
particularly focusing on institutions like Siddhartha Bank Limited (SBL). While some
research has examined factors affecting loans individually, there is a gap in
understanding how loan collection strategies impact the overall financial position of
banks, including SBL. Additionally, prior studies may not have adequately considered

5
updated data and changes in the economic landscape. Therefore, this research aims to
fill these gaps by conducting a comprehensive analysis of loan management practices at
SBL, utilizing various financial and statistical tools. By addressing these research gaps,
the study seeks to provide valuable insights into the operational dynamics and financial
performance of SBL within the context of the Nepalese banking sector.

1.6 Research Methodology

In the words of Kothari (2009), research methodology is the process of methodically
solving a research problem. This research methodology addresses not only the research
technique but also the reasoning behind its application in the situation of our research
inquiry. It also explains why we are employing the specific approach in order for the
results to be reviewed by others or by the researchers themselves. A successful research
study must employ the right technique in order to reach the stated aims. A methodical
process is seen as essential for actual fairness, better results, and superior results.

The many sequential actions to be performed by a researcher in examining an issue

with a specific purpose in mind are referred to as "research methodology." It is a way to
systematically resolve the research challenge. The fundamental purpose of this study is
to assess and analyze SBL's loan management (i.e., loan disbursement and recovery)
throughout the study period (F.Y. 2069/070 to 2079/080) and to provide suggestions.

Recommendation for improving their financial situation. The research design's data type and
sources, the population and sample data, and the data gathering technique.

1.6.1 Research Design

This study employs a descriptive research design to analyze the loan management
practices of SBL. Both qualitative and quantitative data are used to provide a
comprehensive analysis.

6
1.6.2 Population and Sample
The target population is the population of interest. The collection or aggregation of
items or the set of the results of an action is referred to as a population. The study's
population consists of 20 commercial banks functioning throughout the nation.
However, it is impossible to study everything. A sample is a representative subset of a
population chosen to explore its qualities. The population of the study is SBL loan
disbursement, with 11 years of data used as a sample for this research. According to
Baskota (2004), a sample is any number chosen to reflect the population in accordance
with some rule. Choosing a sample entail choosing components from the target
population for the end goal. It draws a general conclusion about the entire number of
elements.

1.6.3 Sampling Procedures and Technique

Sampling is a crucial aspect of any research project, as the validity of the research
heavily depends on selecting an appropriate sampling method. In this study on the loan
management practices of SBL, a systematic approach was taken to ensure accurate and
reliable data collection.

Initially, raw data was gathered from various sources. This data was then processed and
organized into tabular and chart formats based on its nature, ensuring relevance to the
research objectives. This structured presentation of data is essential for effective
sequential analysis.

The primary sources of data for this study included published papers, audited financial
statements, and annual reports from selected institutions. To supplement this
quantitative data, qualitative insights were obtained through discussions with chosen
bank executives.

The process began with manually gathering essential data from the published papers,
annual reports, and audited financial statements. This information was then compiled
into a master sheet. Subsequently, the data was transferred into a spreadsheet for
calculating financial ratios and generating the necessary figures for the study.

7
This meticulous sampling procedure ensures that the data is comprehensive and
accurately reflects the loan management practices at SBL.

1.6.4 Types and Sources of Data Collection

The study will utilize both primary and secondary data. Primary data were acquired
using instruments, such as structured questionnaires provided to banks, and other data
were retrieved from unpublished bank records. Secondary data include SBL’s and NRB
annual reports, financial statements, and published research papers.

1.7 Limitation of the Study

i. This study is exclusively focused on Siddhartha Bank Limited, limiting its scope to
this single institution.
ii. Confidentiality policies of the bank restrict access to certain critical information,
hindering a comprehensive analysis of all relevant facts and issues.
iii. The researcher may encounter challenges due to a lack of cooperation from some
respondents, and the possibility of respondent bias cannot be entirely eliminated.
iv. The analysis will rely on basic statistical and financial tools, which may not capture
the full complexity of the data.
v. The time available to conduct the study is limited, which may affect the depth and
breadth of the research.
vi. These limitations are acknowledged to provide context for the study’s findings and
to highlight areas where further research may be needed.