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A STUDY OF CAMEL ANALYSIS OF COMMERCIAL BANKS

(REFERENCE TO EVEREST BANK LTD., BANK OF KATHMANDU AND NEPAL INDUSTRIAL AND COMMERCIAL BANK LTD.)

By: ESHA RAI Shanker Dev Campus T.U. Regd. No: 7-1-3-1838-2001 Campus Roll No: 2077/063

A Thesis 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 (M.B.S)

Kathmandu, Nepal March, 2010

RECOMMENDATION
This is to certify that the Thesis

Submitted by:

ESHA RAI
Entitled:

A STUDY OF CAMEL ANALYSIS OF COMMERCIAL BANKS


(REFERENCE TO EVEREST BANK LTD., BANK OF KATHMANDU AND NEPAL INDUSTRIAL AND COMMERCIAL BANK LTD.)

has been prepared as approved by this Department in the prescribed format of the Faculty of Management. This thesis is forwarded for examination.

..... Rita Maskey Lecturer (Thesis Supervisor)

...... Prof. Bisheshwor Man Shrestha (Head of Research Department)

... Prof. Dr. Kamal Deep Dhakal (Campus Chief)

VIVA-VOCE SHEET
We have conducted the viva voce of the thesis presented by

ESHA RAI
Entitled:

A STUDY OF CAMEL ANALYSIS OF COMMERCIAL BANKS


(REFERENCE TO EVEREST BANK LTD., BANK OF KATHMANDU AND NEPAL INDUSTRIAL AND COMMERCIAL BANK LTD.) 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

Master Degree of Business Studies (M.B.S.) Viva-Voce Committee . .... ....

Head, Research Department Member (Thesis Supervisor)

Member (External Expert)

TRIBHUVAN UNIVERSITY Faculty of Management Shanker Dev Campus

DECLARATION

I hereby declare that the work reported in this thesis entitled A STUDY OF CAMEL ANALYSIS OF COMMERCIAL BANKS (REFERENCE TO EVEREST BANK LTD., BANK OF KATHMANDU AND NEPAL INDUSTRIAL AND

COMMERCIAL BANK LTD.) 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 Master Degree in Business Studies (M.B.S.) under the supervision of Rita Maskey, Lecturer of Shanker Dev Campus.

ESHA RAI Researcher T.U. Regd. No. : 7-1-3-1838-2001 Campus Roll No. : 2077/063

TABLE OF CONTENTS
Recommendation Viva- Voce Sheet Declaration Acknowledgement Table of Contents List of Tables List of Figures Abbreviations Page No. CHAPTER I INTRODUCTION 1 3 8 9 9 10 10 10

1.1 Background of the Study 1.2 Introduction of the Organizations 1.3 Focus of the Study 1.4 Statement of the Problem 1.5 Objective of the Study 1.6 Significant of the Study 1.7 Limitation of the Study 1.8 Organization of the Study CHAPTER II 2.1 ction 2.2 tical Review 2.2.1 of Banking in Nepal 2.2.2 pt of Commercial Bank 2.2.3 ons of Commercial Banks

REVIEW OF LITERATURE Introdu 12 Theore 12 History 13 Conce 15 Functi 17

2.2.4 pt of Bank Supervision 2.2.5 ves of Bank Supervision 2.2.6 s of Bank Supervision 2.2.7 isory and Monitoring System of the Nepal Rastra Bank 2.2.8 pt of CAMEL Banks Rating System 2.3 Composite of Ratings 2.4 Camels Components 2.5 Review of Previous Studies 2.5.1 Review of Journals and Articles 2.5.2 Review of Thesis CHAPTER III 3.1 Introduction 3.2 Research Design 3.3 Population and Sampling of Data 3.4 Periods Covered 3.5 Source of Data 3.6 Data Analysis Tools 3.6.1 al ratio analysis tools 3.6.1.1 Adequacy Ratio (CAR) 3.6.1.2 Assets Quality 3.6.1.3 Management 3.6.1.4 Earning 3.6.1.5 Liquidity RESEARCH METHODOLOGY

Conce 18 Objecti 19 Proces 19 Superv 20 Conce 20 21 22 25 25 26

30 30 30 30 30 31 Financi 31 Capital 31 32 33 34 35

CHAPTER IV 4.1 Introduction

DATA PRESENTATION AND ANALYSIS 37 37 Capital

4.2 Data Presentation and Analysis 4.2.1 Adequacy 4.2.1.1 Core Capital Ratio (CCR) 4.2.2 Quality 4.2.2.1 Non-Performing loan 4.2.2.2 Loan Loss Coverage Ratio 4.2.2.3 Loan Loss Provision Ratio 4.2.3 ement 4.2.4 Earnings 4.2.4.1 Earning per Shares 4.2.4.2 Return on Equity 4.2.4.3 Return on Assets 4.2.5 ty 4.2.5.1 Cash & Bank Balance Ratio 4.2.5.2 Investment in Government Security Ratio (IGSR) 4.3 Major Findings CHAPTER V 5.1 Summary 5.2 Conclusion 5.3 Recommendations

37 41 Assets 44 44 47 50 Manag 52

56 56 59 61 Liquidi 64 64 66 69

SUMMARY, CONCLUSION AND RECOMMENDATIONS 73 74 76

Bibliography Appendices

LIST OF TABLES
Table No. 2.1 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 Title Page No. 16 39 42 45 48 51 53 57 59 62 64 67

List of licensed Commercial Banks in Nepal Capital Adequacy Ratio Core Capital Ratio Non-Performing Loan Ratio Loan Loss Coverage Ratio Loan Loss Provision Ratio Management Efficiency Ratio Earning per Shares Return on Equity Return on Assets Cash & Bank Balance Ratio Investment in Government Security Ratio

LIST OF FIGURES
Figure No. 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15 4.16 4.17 4.18 4.19 4.20 4.21 4.22 Capital Adequacy Ratio Capital Adequacy Ratio Core Capital Ratio Core Capital Ratio Non-Performing Loan Ratio Non-Performing Loan Ratio Loan Loss Coverage Ratio Loan Loss Coverage Ratio Loan Loss Provision Ratio Loan Loss Provision Ratio Management Efficiency Ratio Management Efficiency Ratio Earning per Shares Earning per Shares Return on Equity Return on Equity Return on Assets Return on Assets Cash & Bank Balance Ratio Cash & Bank Balance Ratio Investment in Government Security Ratio Investment in Government Security Ratio Title Page No. 39 40 42 43 45 46 48 49 51 52 54 55 57 58 60 60 62 63 65 66 68 68

CHAPTER - I
INTRODUCTION
1.9 Background of the Study

In any economy, the important of financial sector in general and banking sector in particular cannot be undermined. Banking sector plays the significant role in overall development of the economy in all countries. Thus it is said that the banking sector mirrors the larger economy. Its linkage to all sectors makes it a proxy for what is happening in the economy as a whole. As this aspect various financial institutions are growing rapidly on last decades. Commercial banks are one of the vital aspects of banking sector, which deals in process of analyzing the available resources in the needed sector. Bank plays the intermediary role in-between surplus and deficit of financial sector. Banks motivate people to keep their surplus money as deposits in the bank then bank utilize that money by providing loan to these people who have deficit and need of that fund or by investing that fund in other profitable sector. The word Bank has been derived from the Italian word Banco which means a place for keeping, lending and exchanging money. The bank is a financial institution, which deals with money. It accepts deposits from individuals and organizations and grants loans to them. It allows interest on the deposits made and charges interest on the loans granted. Since, it accepts deposits and grants loans, it is regarded as the trader of money. Further, it creates credit and supports for the formation of capital and hence it is regarded as Manufacturer of Money. The growth of financial sector in Nepal is much better as compare to other sectors. Despite of conflict and political insurgency, banking and financial sector continued growing. Numbers of banks and financial institutions are increasing day by day. Similarly banking habit of people is also in increasing trend. A single institution cannot fulfill all the services demanded by the customers. So, different types of bank also emerged in the banking industry specializing in different functions areas. There are different types of banks. Among them commercial bank is one.

Commercial banks represent a key financial intermediary because they serve all types of surplus and deficit units. They offer deposit accounts with the size and maturity characteristics desired by surplus units. They repackage the funds received from deposits to provide loans of the size and maturity desired by deficit units. They have the ability to assess the creditworthiness of deficit units that apply for loans, so that they can limit their exposure to credit (default) risk on the loans they provide (Madura J., 1999: 506).

The commercial bank has been a vital role for economic development. Banks are intermediaries, which mobilize funds through the prudential combination of investment portfolio in advanced countries. Now Nepal is underdevelopment country so that joint venture Banks are still to be realize as an essential mechanism of mobilizing interval saving through various Banking schemes in the economy they can accumulate and collect the capital among other prerequisite.

Commercial banks are suppliers of the

finance for trade and industry as well as other

sector, which plays the vital role for economic and financial development of the country. They help in the formulation of capital by investing the savings in productive areas. Normally Banking facility is available in underdeveloped country (Like Nepal) is urban area. In almost of the countries banking facilities are concentrated into urban and semiurban area, they wanted stay far from rural area due to lower rate of return or higher risk. But in fact, without it, other sector of economy can not be flourished.

Banking often perceived on milestone of economy growth of any country. The Banking history is very much old because the first systematic public Banking history or institution goes to credit to Bank of Venice, Italy established in 1157 AD. About after 250 years of bank of Venice establishment, other two bank founded name a as Bank of Barcelona and bank of Genoa in 1401 and 1407 A.D. Respectively then after Bank of Amsterdam is established in 1609 AD. The Bank of England was established in 1694 AD. But the modern banking is started only after introducing banking Act 1883 A.D. in USA. When the government has liberalized economy policy and democracy in the country then the growth of commercial bank is very much. In current situation (Jan. 2010) 26 commercial

bank are operating and providing their services to customers. Nepal Rastra Bank (NRB) is the monitoring and regulating body of financial institutions (Viz. commercial banks, development banks and finance companies). NRB poses the directive of maintaining Rs. 2000 million on a paid up capital with in dated of 15 July 2009 AD (Kantipur daily, 20Aug.2008) which is the mandatory rule of NRB.

1.10 Introduction of the Organizations Everest Bank Limited Everest Bank Limited (EBL) stared its operation in 1994 with a view and objectives of extending professionalized and efficient banking services to various segments of the society. Its joint venture partner, Punjab National Bank (PNB), (holding 20% equity in the bank) is the largest nationalized bank in India having 112 years of banking history. The bank is providing customer friendly services through a network of 34 branches in Nepal.

The bank has Authorized Capital of Rs.1,000,000,000, Issued Capital of Rs.840,620,000 and Paid up Capital of Rs.838,821,000. Out of Paid up Capital, local Nepalese Promoters hold 50% stake in the Banks equity, while 20% of equity is contributed by joint venture partner PNB whereas remaining 30% is held by the public. (EBL Annual report 2008/09)

EBL was one of the first bank to introduce Any Branch Banking System (ABBS) in Nepal. It has introduced Mobil Vehicle Banking system to serve the segment deprived of proper banking facilities through its Birtamod Branch, which is also the first of its kind. The bank was bestowed with the NICCI Excellence award by Nepal India chamber of commerce for its spectacular performance under finance sector. This bank has been conferred with Bank of the Year 2006 by the banker, a publication of financial times, London.

The main and best features of this bank are: One of the Largest Network among private sector banks spread across Nepal and all connected with ABBS.

Strong Joint Venture Partner providing Technical Support. Representative office in India to facilitate remittance from India. Direct Drawing arrangement with PNB and HDFC bank India whereby instant payment is done on presentation of the instrument. Direct amount credit in PNB branches commented with Central Banking System and RTGS member banks via speed remittance. More than 126 remittance payout location in Nepal.

EBL in association with Smart Choice Technology (SCT) is providing ATM service to its customers through more than 74 ATMs and over 850 point of sales across the country. ATM sharing arrangement with Punjab National Bank has facilitated usage of EBL Debit Card at more than 1000 PNB ATM outlets across the India at a nominal rate. Similarly, Indian tourists and businessmen having PNB cards will be able to use EBL ATM, while in Nepal.

Services that the bank is providing currently Deposit Loan

Current Account Saving Account Saving premium account Cumulative Deposit Scheme Sunaulo Bhavishya Yojana Unfixed Fixed Deposit Scheme USD Account EBL NRN Deposit

1. Retail Loan Home Loan Vehicle loan Education Loan Future Lease Rental Professional loan Loan Against Mortgage Bike loan

2. Corporate Loan Working Capital Finance Project Finance Trade Finance Consortium Finance

Loan Against Life Insurance Share loan Tractor and Water Pump finance

Bank of Kathmandu Limited "We make your life easier" is the slogan that Bank of Kathmandu (BOK) is renowned for. BOK was established in 12th March 1995 as 10th commercial bank of Nepal with the objective to stimulating the Nepalese economy and taking it to new heights. BOK aims to facilitate the nation's economy and to become more competitive globally. BOK is committed to delivering quality services to the customers, generating good returns for their shareholders, providing attractive incentive for their employees and serving the community through stronger corporate social responsibilities. To achieve these, BOK has been focusing on its set objectives right from the beginning. BOK was started as a joint venture with Syam Bank of Thailand. The bank has Authorized Capital of Rs.1,000,000,000, Issued Capital and Paid up Capital of Rs.844,397,900. Out of Paid up Capital, 41.81% of the shares are owned by the promoters and 58.19% of the shares are owned by the public (BOK Annual report 2008/09). BOK takes pride in using Financial, banking application software, The Banker Technology Award 2004. In summary, the following main objectives have been focused by BOK: To contribute to the sustainable development of the nation by mobilizing domestic savings and channeling them into productive areas. To use the latest banking technology to provide better, reliable and effective services at a reasonable cost. To facilitate trade by making financial transactions easier, faster and more reliable through relationships with foreign banks and money transfer agencies. To contribute to the overall socio-economic development of Nepal. Bank of Kathmandu Limited has become a prominent name in the Nepalese banking sector. BOK has today become a landmark in the Nepalese banking sector by being among the few commercial banks, which is entirely managed by Nepalese professionals and owned by the public.

Products and Services BOK has introduced various products and services in order to facilitate the requirements of customers. Deposit 1. Current Account 2. Saving Account General Savings Ladder Savings Sajilo Bachat Yojana Jestha Lagani Kosh (JLK) Griha Laxmi Bachat Hello Savings 3. Call Deposits 4. Fixed Deposit 5 Recurring Deposits Loan and Advances 1. Corporate Credit a. Project Finance (Term Loan) b. Working Capital Finance Overdraft Demand / Short-term loan (Trade Finance) Trust Receipt/ Importers Loan (Trade Finance) Export Loan Consortium Lending 2. Business Credit a. Demand / Short-term loan (Trade Finance) b. Trust Receipt/ Importers Loan (Trade Finance) 3. Retail Banking a. Housing Loan b. Vehicle Loan Car 4 U Loan LCV Loan/ Buses LCV Loan/ Trucks c. Education Loan d. Foreign Employee Loan e. Festivity Loan 4. Other Services a. Safe Deposit Locker b. ATM / Debit Card

Nepal Industrial & Commercial Bank Nepal Industrial & Commercial Bank Limited (NIC Bank) commenced its operation on 21 July 1998 from Biratnagar. The current shareholding pattern of the Bank constitutes of promoters holding 51% of the shares while 49% is held by general public. The bank has Authorized Capital of Rs. 1,600,000,000, Issued Capital and Paid up Capital of Rs. 1,140,480,000 (NIC Annual Report 2008/09). The shares of the Bank are actively traded in Nepal Stock Exchange. Within 10 years of commencing business, the Bank has grown rapidly with 16 branches throughout the country while 2 more are planned to be opened this year. All branches are interconnected through V-Sat and are capable of providing real time on-line transactions. It is the first commercial Bank in Nepal to get ISO 9001:2000 certifications for quality management system. Furthermore, NIC Bank became the first Bank in Nepal to get a line of credit by International Finance Corporation (IFC), an arm of World Bank Group under its Global Trade Finance Program, enabling the Bank's Letter of Credit and Guarantee to be accepted/ confirmed by more than 200 banks worldwide. NIC Bank's organizational structure is designed to support its business goals. However, it is flexible enough in seeking to ensure effective control, supervision, and consistency in standards across all businesses at the same time. The organization structure is divided into five major areas such as Consumer Banking, Business Banking, Special Assets Management, Treasury and Liability Marketing and Transaction Banking all of which are supported by the corporate center. The Bank believes in continuously offering new and value added services to its customers, with commitment to quality and value to its clients at the same time. Accordingly, the Bank has been in the forefront in launching innovative and superior products having unique customer friendly features with immense success. The Bank is awarded the "Bank of the Year 2007-Nepal" by the financial publication of The Financial Times, U.K.-The Banker. world-renowned

Product & Services NIC has introduced various products and services in order to facilitate the requirements of customers.

A. Deposits Current Account Normal Savings Call Account Fixed Deposit Account NIC Business Account NIC Life Saving Account Karmashil Bachat Khata

B.

Business Banking

a. Funded Credit Facilities Project Finance/Consortium Finance Working Capital Finance Overdraft / Demand Loan Trade Finance Export Finance Packing Credit/ Per- Shipment Loan Post-Shipment Loan Pledge Loan Margin Lending b. Non Funded Credit Facilities Import Letter of Credit (L/C) Bank Guarantees

NIC Shareholder Savings Account NIC Sikshya Kosh account NIC Super Deposit NIC Corporate Super Account

D. SME Banking NIC Small Business Loan NIC SME Trade & Industry Loan NIC Ghar Subidha (NGS) NIC Sajilo Loan NIC Auto Loan NIC Education Loan NIC Housing Loan

E. Transaction Banking NIC SMS banking ATM/ Debit Card banking Fund Transfer Purchase & Sale of Travelers Cheques Safe Deposit Locker Any Bank banking system Extended Counter Services

1.11 Focus of the Study This research study is focused on comparing the financial condition and performance of Everest bank Limited, Bank of Kathmandu and Nepal Industrial & Commercial bank

Limited in the framework of CAMEL by using descriptive and analytical research design. Here we assess the bank effectiveness, efficiency and soundness through CAMEL.

CAMEL focuses the capital, assets, management, earnings and liquidity of the bank.

1.12 Statement of the Problem The overall performance of financial institutions may not reflect by financial statement, so that major question emerges whether these are adequate to reflect the overall performance of company. Hence, there is needed to identify the overall conditions strengths, weakness, opportunity and threats of the banks. For these purpose, several financial and statistical tools and techniques are developed by different experts and financial institutions all over the world, one of them is CAMEL. This study aims to asses the financial conditions and overall performance of sampled commercial banks in the framework of CAMEL. What are the capital Adequacy ratios of commercial banks? What are the qualities of assets of banks? What are the management qualities of the banks? What are the earning capacities of the banks? What is the liquidity position of commercial banks?

1.13 Objective of the Study The main objective of the study is to examine the financial performance through CAMEL test of selected commercial banks and compare each other. To accomplish the main objective, specific objective of the study are: To check the capital adequacy, assets quality, management quality and earning capability and liquidity position of selected banks. To asses the organization investments, social corporate responsibility and services provided by selected commercial banks. On the basis of comparative analysis and conclusion drawn, recommend the related banks for the better improvement.

1.14 Significant of the Study The study deals with different financial performance and its indicator as well as financial viability of the banks. The study also significance lies mainly in identifying and comparing the financial health of banks in the framework of CAMEL. This study also provides necessary information of performance capability of their banks to the management. It provide the real picture of performance which is beneficial to potential as well as existing shareholders, about risk return and utilizing fund. The study is also useful for depositors, merchant bankers as well as other stakeholders; they can identify the overall performance of the bank. It will be helpful to those who want to conduct further study in this field. Mainly, the purposed study will be significance for the researchers, research group and academicians for the future in the view of review.

1.15 Limitation of the Study Out of twenty-six commercial banks here we only consider three banks and five fiscal years i.e. from 2004/2005 to 2008/09 for the comparative analysis of commercial banks. So this thesis shows the trend of commercial banks but not become whole mirror of all commercial banks. In this tough competition, there can be other factors beside the financial factor which effects the overall position of the bank, but all factors are not consider in this research because off limited time. This Study will be based on secondary data and information and by review of relevant literatures. Thus it may bias to some extent.

1.16 Organization of the Study The study has been organized into five chapters, each devoted to some aspect of the study on Comparative CAMEL Analysis of Commercial Banks". The titles of these chapters are as follows:

Chapter: I

Introduction

This chapter deals with the subject matter consisting Background, Focus of the Study, Statement of Problem, Objectives of the Study, Significant of the Study, Limitation of the

Study of Everest Bank Limited, Bank of Kathmandu Limited and Nepal Industrial & Commercial Bank Limited.

Chapter: II

Review of Literature

The Second Chapter, Review of literature deals with review some work analysis and discussion already made in CAMEL Analysis.

Chapter: III Research and Methodology This chapter includes the research methodology adopted in carrying out the present research. It deals with Research Design, Sources of Data, Data Collection Procedure, Data Processing, Data Analysis Tools and Limitation of the Methodology.

Chapter: IV Presentation and Analysis of Data The fourth chapter is concerned with analytical frameworks. It includes the analysis of Financial Statement of Everest Bank Limited, Bank of Kathmandu Limited and Nepal Industrial & Commercial Bank Limited under the framework of CAMEL and comparing it with the guidelines set by Nepal Rastra Bank and also to each other and overall findings of all three banks.

Chapter: V Summary, Conclusion and Recommendations This is the last chapter, which consists of the suggestive framework that consists with the issues and gaps, conclusion and recommendations of the study.

CHAPTER - II
REVIEW OF LITERATURE
2.6 Introduction

Review of literature is the most important part of the study. Without clear concept on the subject matter, the study might not be conducted with in its periphery. This section provides current stage of the research work and guidelines or further study and helps to avoid unnecessary duplication of research work. This chapter is focused on brief discussion about the abstract regarding the camel analysis. In order to accomplish the objectives of the study, the chapter includes review of relevant concepts, assumption, books and journals as well as major findings of previous studies of the relevant field are included in precise manner.

The purpose of review of the literature is to develop some expertise in one's area, to see what new contribution can be made and to receive some ideas for developing a research design. Thus, the previous studies can not be ignored, because they provide the foundation to the present study. In other words, these have to be continuity in research. This continuity in research is ensured by linking the present study with the past research studies. From this, it is clear that the purpose of literature review is to find out what researcher studies have been conducted in one's chosen field of study and what remains to be done.

The review of literature is a crucial aspect because it denotes planning of the study. The main purpose of literature review is to find out what works have been done in the areas of the research problem understudy being undertaken. For review study, the researcher uses different books, reports, journals and research studies published by various institutions, unpublished dissertations submitted by master level students have been reviewed.

2.7

Theoretical Review

This section presents the theoretical aspect of the study, which includes the concept of commercial bank, function of commercial bank, concept of CAMEL rating system.

2.7.1 History of Banking in Nepal The history of modern commercial banking industry dates back to 1937 A.D. in which year Nepal Bank Limited was incorporated. Till 1984, financial sector was closed to private sector and foreign investors. Then the Government started to liberalize the financial sector in the first half of 1980s.But it speeded up this process only in early 1990s.Private Sector rushed into the finance industries especially after the restoration of democracy in 1990.Most of the commercial Banks came into operation during the decade of 1990s.Government of any countries highly monitors and controls the finance industry even in the liberalized market economy. Government does so due to its high gravity in the national economy, and to build up the confidence of private sector in its financial system. Nepal Rastra Bank (NRB) as an apex monitory authority of the country started to monitor and control the finance industry especially at the end of the 1990s by issuing directives to the financial institutions (FIs).It initiated the offsite and onsite supervision of FIs to maintain their sound financial health and to build up the confidence of private sector in the liberalized financial system and protect the interest of the investors.

Even though the specific date of the beginning of money and banking deal in Nepal is not obvious , it is speculated that during the reign of the king Manadev, the coin Manank and Gunankduring the reign of the king Gunakamadev were in use.Historically,we find the evidence of minted coin of Amshuverma in the 7th century and later the coin of Jishnu Gupta.In the beginning of eighth century, king Gunakamadev renovated the Kathmandu city by taking loan and at the end of the same century, a merchant named Shankhadhar had started the New year Nepal Sambat after freeing all the people of Kathmandu from the debt.Sadashiva Dev in 12th century, introduced, Silver Coins, King jayasthiti Malla, had given the responsibility to a caste of society called Tankadhariwhile he had given the name of the castes and their professions for the purpose of transactions of money in the society. In the same century, copper coins were used by King Ratna Malla and the gold coins by the last Malla King of Kathmandu Jaya Prakash Malla.

After the unification of Nepal, Prithvi Narayan Shaha the great King had used coin Mohar in his name. An institution called Taksar was established in 1989 and it started

to issue the coin scientifically. In this way, we see that the coins have been in use from the ancient time, and there was practice of taking and giving loan for the purpose of trade and other various purposes. During the reign of Ranodip Singh, an office named Tejaratwas established in Katmandu in 1933(B.S.) It used to provide loans to the government officials and the people against deposit of gold and silver. It had also extended its branches outside Katmandu valley for giving loan. However, this office had no right to accept deposit of public and it had no characteristics of modern banks. Nevertheless we can say that the institutional banking system had started from then. After having concluded a treaty with British India in 1980(B.S), Nepal could trade over Sea freely for the diversification of trade. As a result, in 1993(1936 the draft of the company act and banking act were prepared by forming industrial council A Jute Mill was established in Biratnagar under this act and both commercial and industrial development as well as institutional banking system had been started together at a time in Nepal.

After the establishment of Nepal Bank Limited on 30th Kartik, 1994(1938), modern banking system started in Nepal. Nepal was influenced by the renaissance and the industrial growth brought about by First World War. Nepal established first legation in international level in London in 1934 for creating international relation with the various countries. The first secretary Gunjaman Singh was posted to the legation in his alertness, and under the international influence and the national necessity, Nepal Bank limited was established under the Nepal Bank Act 1994(1938).It has many important functions. The Nepal Bank Limited is the oldest bank of Nepal.

The economic and industrial development was stopped in Nepal from the Second World War. After 2007, the banking activities of Nepal were not satisfactory due to political instability. At first, though this bank was given the authority and responsibility of central bank, but with the change of time, it was necessary to establish a Central Bank. Nepal Rastra Bank was established in 2013(1957), Baisakh 14 th in Nepal. This was established to replace the Indian Currency and to increase the usage of Nepalese notes, to stop duel monitory system, to apply monetarism in all part of the country, to provide

issuance of notes, to bring Nepalese currency in use, to manage the monetary system well, to keep stability of the exchange rate of Nepalese currency, to encourage national industry by mobilizing the capital for development and to develop the banking system in Nepal. This is the government bank. This is bank of banks.

After the establishment of Central bank other banks like Rastriya Banijya Bank, Agricultural Development Bank was established under the initiative of the Central Bank. After this phase, commercial banks started its operation. Those banks were opened with joint investment. After this Development Banks, Micro financing came into existence.

Nabil Bank is the first bank established in joint investment in 2041(1984) and then Nepal Investment Bank was established in 2042(1985). Standard Chartered Bank was established in 2043(1987)as a joint venture between ANZ Grindlays and Nepal Bank Limited. Himalayan bank was established as a joint venture with Habib Bank of Pakistan in 2049(1993). Nepal SBI Bank Limited was established as a joint venture between Employees Provident Fund and State Bank of India in 2050(1992).Nepal Bangladesh bank was established in 2050(1993) in technical collaboration with I.F.I.C. Bank Limited of Bangladesh. Everest Bank started its operation in 2051(1994) but it entered into joint venture with Punjab National Bank in 1997.Bank of Kathmandu was established in 2051(1994) under joint investment with syam Bank of Thailand. Nepal Credit and Commerce Bank was established as joint investment with leading Bank of Srilanka. Hence there are so many commercial Banks in operation in Nepal.

2.7.2 Concept of Commercial Bank According to the Black's Law Dictionary "Commercial Bank" means a bank authorized to receive both demand and time deposits, to engage in trust services, to issue letter of credit, to rent time-deposit boxes and to provide similar services.

Likewise Section 2(a) of the Commercial bank Act 2031 (1974) has defined that "Commercial Bank" means a bank which operates currency exchanges transactions, accepts deposits, provides loan; performs, dealing, relating of commerce except the banks

which have been specified for the co-operatives, agricultural, industry of similar other specific objective. So, commercial banks are the important source of institutional credit in the money market. A commercial bank is a profit-seeking business firm, dealing in money or rather dealing in claims to money. It is a FI that creates deposits liabilities which circulates as money unlike the deposits of other FIs. In fact, the greater part of money supply is the direct consequence of the profit-seeking or money-crating activities of commercial banks. Table 2.1 List of licensed Commercial Banks in Nepal S. No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16 17. 18 19. 20 21. 22. 23. 24. 25. 26. Name Nepal Bank Limited (NBL) Rastriya Banijya Bank (RBB) Nabil Bank Limited Nepal Investment Bank Standard Chartered Bank Himalayan Bank Limited Nepal SBI Bank Limited Nepal Bangladesh Bank Everest Bank Limited Bank of Kathmandu Nepal Credit and Commerce Bank Lumbini Bank Limited NIC Bank Limited Machhapuchre Bank Limited Kumari bank Limited Laxmi Bank Limited Siddhartha Bank Limited Agricultural Development Bank Limited Global Bank Limited Citizens Bank Limited Prime Commercial Bank Limited Bank of Asia Nepal Limited Sunrise Bank Limited Development Credit Bank Limited Nepal Merchant Bank Limited Kist Bank Established Date 15 Nov,1937 23 Jan,1966 16 July,1984 27 Feb,1986 30 Jan,1987 18 Jan,1993 7 July,1993 5 June1993 18 Oct,1994 12 March,2005 14 Oct,1996 17 July,1998 21 June,1998 3 Dec,2000 3 April,2001 3 April,2002 24 Dec,2002 19 Feb,1968 2 Jan, 2007 21 June, 2007 24 Sept, 2007 12 Oct, 2007 12 Oct, 2007 23 Jan, 2001 26 Nov, 1996 7 May, 2009

2.7.3 Functions of Commercial Banks Commercial banks are directly related whit the people and institution. Although these banks are truly inspired with the objective of gaining profit, these commercial banks are also established to, to accelerate common people's economic welfare and facility, to make available loans to agriculture, industry and commerce and to provide the banking services to the public and the state. The commercial banks in Nepal provide the following main banking functions; 1. Receiving Deposits This is the main function of commercial banks to collect savings of individuals and firms. They offer different types of deposits for the facility of the customers. i. Current Account or Demand Deposits Any amount can be withdrawn from this account any time without any notice. No interest is allowed on this type of account. ii. Saving Account In this account the bank pays interest relatively at low rate to the depositors. Depositors are allowed to withdraw their money by cheque up to a limited amount. iii. Fixed Deposit A bank accepts fixed or time deposits from savers who do not need money for a stipulated period from 6 months to longer periods ranging up to 10 years or more. Amount cannot be withdrawn before the fixed future date in this type of deposit. High interest is allowed in fixed deposit which is different according to period. 2. Advancing Loans This is the important function of the commercial bank. Credit is given to the people in different ways. a. Making Loans There are three types of loans given to borrowers.

i. Short Term Loans These loans are advanced for the period of six months to one year. High Interest rate is charged on this type of accounts. ii. Medium Term Loans Loans from one to five years are called medium term loans. iii Long Term Loans Loans which are advanced for the period, more than ten years are long term loans. b. Bank Overdraft Banks allows their trustful customers to draw more than the deposit they have in the Bank. Bank charges interest on overdraft. c. Cash Credit Bank also gives credit against immovable property and interest is charged by the bank. d. Discounting of Bills This is income source of bank to discount bills of exchange. They charge nominal Interest and discount only reputed and clear bills of exchange. 2.7.4 Concept of Bank Supervision There is no theoretically proven system or standard textbook blueprint for the structure and process of regulating and supervising financial institution, including banks. In fact, arrangements for banking regulation and supervision differ considerably from country to country. Apart from the differences in political structure, the most important factors that account for the differences in regulatory and supervision approaches include the general complexity and state of development of the financial system, the number, size and concentration of banking instructions, the relative openness of the demotic financial system, the nature and extent of public discloser of bank, financial position and availability of technology and human recourses for regulation and supervision. However, an impact framework for the regulation and supervision of the banks can be found in the

core principles for effective banking supervision issued by the Basel Committee on banking Supervision in 1977. The frame work can be interpreted as comprising four distinct yet complementary sets of arrangement.

2.7.5 Objectives of Bank Supervision With the respect of the supervisory arrangements the core principles describe what could be termed a "cradle to grave" approach covering potential problem that may emerge in the future on account of the current risk profile of the banking institution, overall, supervisory risk assessment and early warning systems assist in Systematical assessment of banking institution within a formalized framework both at a time of on-site examination and in between examinations through off-site monitoring. Identification of institution and areas within institutions where problems exist or are likely to emerge. Prioritization of bank examinations for optimal allocation of supervisory resources and pre-examination planning. Initiation of warranted and timely action by the supervisory.

2.7.6 Process of Bank Supervision On going banking supervision consists of a differentiated mix of off- site monitoring procedures and on site examinations. Off site monitoring is the minimum tool for ongoing supervision. Supervisory authorities do not have the mandate or resources to carry out periodic on site examinations. The process involves analyzing and reviewing periodic financial and other information received by the supervisor relating to banks activities. Supervisor typically subject regulated banks to reporting requirements covering, for insurance, balance sheet and profit and loss statement, business profile, loans and investments, liability, capital and liquidity levels. Loan loss provision, etc during on-site examination, supervision make an overall assignment of a banking institution on the promises of the organization.

2.7.7 Supervisory and Monitoring System of the Nepal Rastra Bank Principally, the central bank has the liability and obligation to maintain fair and healthy environment of the economic activities of the nation. For it the necessary acts, rule and regulation are enacted and development. Thus, the act of checking weather the related officials and banks have honestly complied with the policy, regulation and supervisions enacted by the controlled financial system, it self is called inspection. As a central bank, the Nepal Rastra Bank has been discharging such serious and sensitive task.

Before the establishment of Nepal Rastra Bank, the function of inspection and supervision used to be carried out by the officials by His Majesty of the Government of auditor general. This practiced was contributing until the enactment of the commercial bank act 2020BS. After the introduction of this act, the function of inspection and supervision for the commercial bank was given to the Nepal Rstra Bank and this right was more strengthened by the Nepal Rastra Bank act and the introducing of the commercial bank act 1974. The Nepal Rastra Bank has been discharging the task of inspection for the fiscal year 2025/26BS.

The system if inspection and supervision of the banking and the non banking financial institution is to be followed on a certain slandered norms. In this regards, the bank for international settlement has formulated an important standard, which is called CAMEL system. The evaluation of financial institutions is done on the basic of it. In the case of Nepal, the Nepal Rastra Bank adopting this system has made in the main basis of the one site and off site supervision.

2.7.8 Concept of CAMEL Banks Rating System The acronym "CAMEL" is revised in January 1997, the uniform financial institution rating system, which is commonly referred at as that camel rating system. For purpose of this rating system, the term financial institution refers those insured depository institution whose primary federal supervisory agency is represented on the FFIEC. The agency comprising the FFIEC the board of governors of the federal reserve system (FRB) the federal deposit insurance corporation, the national credit union administration the office

of the controller of the currency and the office of the thrift supervision. The term financial institution includes federally supervised commercial banks, savings and loan associations, mutual savings banks and credit unions.

Capital adequacy, Assets quality, Management efficiency, Earnings and Liquidity. A sixth component, a bank's sensitively to market risk was added in 1997; hence the acronym was changed to CAMEL.

The camel rating system is subjective beach marks for each component are provided, but they are guidelines only and presents essential foundations upon which the composite rating is based. They do not eliminate consideration of the other patient's factors by the examinant. The uniform rating system provides the ground work for necessary supervisory response and helps institutions supervised by all three us supervisors to be reasonably compared and evaluated. Rating are assigned for each component in addition to the over all rating of a banks financial condition. The ratings are assigned on a scale from 1 to 5. The camel ratings are commonly viewed as a summary measures of the private bank supervisory information gathered by examiners regarding banks overall financial conditions, although they also reflect available public information.

During on site bank supervisor gating private information. Such as details on problem loans, with which to evaluate banks financial conditions and to monitors its compliance with laws and regulatory polices. A key product of such an exam in a supervisory rating of banks overall conditions commonly referred at as a CAMELS rating.

In Nepal, the NRB plays the supervisory role for evaluating banks financial condition through rating the banks in accordance to CAMELS is still a myth.

2.8

Composite of Ratings

Composite ratings are based on a careful evolution of an institution's managerial, operational, and financial and compliance performance. The six key composites used to access an institution's financial condition and operations are: capital adequacy ratio, assist

quality, management capability, earning quantity and quality, the adequacy of liquidity and sensitivity to market risk. The rating scale ranges from 1 to 5 with a rating of 1 including; the strangest performance and risk management practices relatives to the institutions size, complexity and risk profile; and the profile; and the level of least supervisory concern. A 5 rating includes; the most critically deficient level of performance; inadequate risk management practices relatives to the institutions size, complexity and risk profile and the greatest supervisory concern. (www.google.com)

2.9

Camels Components

Each of the components rating descriptions is divided in the three sections; and introductory paragraph; a list of the principle evaluation factors that related to that components; and a brief description of each numerical rating for the components. Some of the evaluation factors are reiterated under one or more of the other components to reinforce the interrelationship between components. The listing of evaluation factors for each component's rating is in no particular order of importance.

A. Capital Adequacy Ratio A financial institution is expected to maintain capital commensurate with the nature and extents of risks to the institution and the ability of management to identify, measure, monitor and control these risks. The effect of credit, market and other risks on the institution's financial conditions should be considered when evaluating the adequacy of capital. The types and quantity of risk inherent in institution's activities will determine the extent to which it may be necessary to maintain capital at levels above required regulatory minimums to properly reflect the potentially adverse consequences that these risks may have on the institution's capital. The capital adequacy of an institution's related based upon, but not limited to an assessment of the following evaluation factors. 1. Size of the bank 2. Volume of inferior quality assets 3. Bank's growth experience, plan and prospects 4. Quality of capital retained earnings 5. Access to capital markets

B. Assets Quality Commercial banks collect funds in the form of capital, deposit etc. It mobilizes these funds to generate certain returns by giving loans to the users of money to invest in various alternatives. A significant part of the banks income is through its lending activities. There are basically two types of loans - advances and loss provisions: 1. Performing loans: All good loans and overdue for below 90 days. 2. Non Performing loans: Sub- standard-loans overdue by more than 3 months up to 6 months. Doubtful-loans overdue by more than 6 months up to 1 year Bad-loans overdue by more than 1 year.

C. Management The success of any institution depends on the competency of its management. In fact, the management not only makes suitable policy and the business plans but also implements them for the short term and the long term interests, which helps to achieve aimed objectives of bank and financial institution's. It is evaluated by checking the effectiveness of the board of directors, the management, manpower and the officials, operating expenditure, customer's relation with the officials and institution, management information system, organization and working method, internal control system, power concentration, monitoring, decision making process, policies.

An institution can take a desire momentum only when the management is capable of strong and long term vision. For the proper and efficient management, the banks have to possess the following qualities: 1. Structure of management team should be perfect. 2. Qualitative manpower and its productivity. 3. Good relationship between customers and organization. 4. Adequate management expenses. 5. Internal management system should be perfect. 6. Fair decision making capability.

7. Proper communication system. 8. Working environment should be perfect.

D. Earnings Earnings are the ultimate result of any business. Generally, if the earnings are good then that business is running well. Similarly the aggregate performance of the bank reflects from its earnings. An analysis of the earnings ration helps the management, investors and creditors to know the performance of the bank. They can get information regarding their interest. The following ratios help the management and other stakeholders to know about the earning policy of the respective banks: 1. Return on Equity (ROE) 2. Return on Assets (ROA) 3. Earning pre Share (EPS)

It measures the profit available to the equity shareholders as per share basis i.e. the amount that they can get on each share held. In other words, this ratio measures the earnings available to equity shareholders on a per share basis.

E. Liquidity Simply, liquidity means short- run solvency of a firm. It reflects the short term financial strength of banks. Bank does not provide all deposit at loan and advances. The certain percentage of deposit should be kept in bank in the form of cash. It the bank will keep greater deposit in cash, it losses the opportunity cost. Similarly, if bank keeps low amount in deposit, it could not be able to pay depositors on the time of requirement. Liquidity can be measured in following ways: 1. Cash Reserve Ratio 2. Cash & Bank Balance Ratio 3. Investment Government Securities

2.10 Review of Previous Studies National and international journals, exports views, review of previous research and study are covered in research review.

2.5.1 Review of Journals and Articles Berger and Davies evaluated the impact of CAMEL rating changes on the parent holding company's stock price. They separated stock price changes into two component a 'private information' effect (which identified the public's awareness of new information discovered by examiners), and a 'regulatory discipline' effect which valued a regulators' presumed ability to force a bank to changes its behavior). Berger and Davies' empirical results provided only weak evidence of a regulatory discipline effect, but they found a strong private information effect. However, the information effect applied only to CAMEL downgrades, which tend to precede stock prices declines. Berger and Davies found no movement in the stock price following a CAMEL upgrade.

Hirtle and Lopez examine the usefulness of the past CAMEL rating in assessing banks current conditions. They find that, condition on current public information, the private supervisory information contained in the past CAMEL rating provides further insight into bank current conditions as summarized by current CAMEL ratings. The authors find that, over the period from 1989 to 1995 the private supervisory information during the last onsite exam remains useful with respect to the current condition of the bankfor up to 6 to 12 quarters. The overall conclusion drawn from academic studies is that private supervisory information, as summarized by CAMELS ratings, is clearly useful in the supervisory monitoring of bank conditions.

Dhungana Bhisma argues CAMEL rating system plays key role for bank supervision. According to him, The NRB as a central bank has the important task of regulating & supervising the banking system of Nepal. NRB assess the overall strength of the banking system as well as the safety and soundness of each individual bank and financial institution, In order to discharge this role. To help in this endeavor, a uniform rating system for all banks and financial institution has been used. Under this modality,

supervisors assign individual numerical rating to the key areas of Capital, Assets, Management, Earnings, liquidity and sensitivity to the market risk (CAMELS) as well as assigning an overall composite rating to each banking institution. In this way, the NRB has been able to categorized banks and financial institutions into group based on their overall strength, quality and operating soundness. The rating system known as CAMEL has served as a supervisory tool to help identify those banks that are having problems and require increased supervision. To date, early warning signals are drawn are drawn & monitored from the CAMEL rating through on-site inspection and CAMEL rating through offsite supervision.

Pant Radish argued that after 2010, there will be new international entrants in the market, we must remain very competitive, and we have to operate at international standards. However, he does not think we need to fear. He believed combined capital of all Nepalese commercial banks would not even equal to the capital of a small bank in developed countries. It somehow, Nepal is able to capitalize on the growth of China and India, there is no turning back for the banking sector. There will be opportunities for all types of banks. So, we need to work together to address the challenges of that WTO." 2008 was an extraordinarily tumultuous year, full of shocks & surprises. None of us have even quite seen the scale of dislocation & disruption in financial market that we have experienced this year. To put things in perspective, there has been more volatility in the US equity market in the three month since Lehman went bankrupt in the mid- September, than in the previous 45 years put together,. Moreover, with the disappearance or effective nationalization of several major players, and the demise of the US broke, dealer model, the global industry has changed fundamentally & irreversibly.

2.5.2 Review of Thesis Shrestha, M.D. (2003), in his study of Capital Adequacy Norms for Commercial Banks and its impact of Bank of Kathmandu and Himalayan Bank Ltd., has concluded that BOK and HBL are found to be successful to comply with requirement of capital adequacy norms. The CD ratio of HBL is very much low which needs to be improved

immediately and CD ratio of BOK is satisfactory. Although, the banks are successful to meet the capital adequacy requirement as per NRB directive.

Bhandari, K.R. (2006) conduct a study on "Financial performance Analysis of Himalayan Bank Limited in the Framework of CAMEL". The basic objective of the study was to analyze the financial performance of Himalayan Bank Limited through CAMEL framework. He had used secondary data for the period of six years from 1999 to 2004. The study revealed the adequate capital of the bank. The non-performing loan was in decreasing trend, which shows the improvement of the bank. The bank is still with better return which is proved by its better ROE; however it is in decreasing trend. The decreasing trend of net interest margin shows management slack monitoring over the banks earning assets. The liquid fund to total deposit ratio is above the industrial average ratio. NRB balance and cash in vault to total deposit ratios are below the industrial average ratio during the study period.

Sharma, S. (2007) performed a study on "Financial Performance Analysis of Nepal SBI Bank Ltd., In the Frame work of CAMEL." The main objective of the study is to analyze the financial performance of Nepal SBI bank Ltd. Through CAMEL framework, the study was based on secondary data covering the six years from 2001 to 2006. The researcher conducts the financial tools to analyze the six years data. He concluded That Nepal SBI bank Ltd. Was well capitalized and complying with directives of NRB. The bank has maintained satisfactory level of past due loan on total loan except 2001. Earning per employees of the bank was found quite high. Net interest margin of the bank was found satisfactory. Further the liquidity position of the bank was found sound. Poudel, R. (2007) carried out A study on comparative analysis of financial performance between Himalayan Bank and Standard Charted Bank the basic objectives of that study was provided comparative financial performance of SBCNL and HBL. Only five fiscal years financial performance beginning from 1995/96 through 2000/2001were analyzed. In this study financial and statistical tools were used to evaluate the performance of banks. In financial tools liquidity, activity, profitability, structural and income and

expenditures ratios. Further, the research used the method of least square to find our the tend of different financial indicators he found that the performance of SCBNL is better than that of HBL.

Chand, K.B. (2007) conducted "Financial Performance Analysis (CAMEL - Test) of Selected CBs (Nabil, NIBL &SCBL)" the main objective of the study is comparative analysis of commercial banks through the frame work of CAMEL. He did her study covering five FY (2001 to 2005) on the basis primary as well as secondary data. Some financial and statistical tools and techniques are applied to evaluate the performance of selected joint venture banks. On his study, except 2001, SCBL had highest CAR among these selected CBs where Nabil is moderate in all time. In the case of NIBL in 2001 it had highest CAR among them and then after it went behind and getting second and some year third position in CAR. Here Chand gave first rank to SCBL for maintain highest CAR. In case of Assets quality in average study show the Nabil performance is much better than other and SCBL and NIBL follows Nabil respectively. Chand study shows the factors affecting the management efficiency and effectiveness. Bank management quality model was also presented in his study. As per earning concern SCBL leads other two banks and tough fight between Nabil and NIBL. For comparative analysis of liquidity part which compare, it is found that NIBL secures first position for percentage of cash balance and percentage of balance with bank and SCBL scores first position for investment in government securities. Nabil is a little bit take risk and invest less in government securities as compare to other two banks. All banks are maintaining the benchmark of the NRB on case of CRR.

Bhusal, M. (2008) carried out a research study on " Financial Performance Analysis of Commercial Banks in Nepal the Frame Work of CAMEL ( A Comparative Study of Kumari Bank and Machhapuchchhre Bank", with the fundamental objective to analyze and compare the financial performance of KBL and MBL in the frame work of CAMEL from FY 2058/59 to 2062/63. with the help of both secondary as well as primary data, she conducted her study by applying Some financial and statistical tools and techniques. Her study shows both banks are maintaining CAR as per rule of NRB and the trend of CAR is

decreasing. Both banks are in much satisfactory level in the case of assets management. Increasing profit of both banks shows the good sign but it is not enough to compete with other established banks. According to her study, Profits are also not enough to meet benchmark set by the World Bank. In the case of liquidly both banks are not properly maintaining the rule of NRB. In her overall analysis there is tough competition between KBL and MBL and both are in the phase of improvement.

Singh, R. B. (2008) conducted "A Study of CAMEL Analysis of Commercial Banks" i.e. SCBNL, HBL & Nabil Bank. The objective of that study was to evaluate the capital adequacy ratio, to analyze assets quality and to absorb the liquidity position of these banks. He used ration analysis and statistical tools to covered five years analysis. On the basis of Mr. Singh's analysis, SCBNL is on the top and NABIL followed by HBL.

CHAPTER - III
RESEARCH METHODOLOGY
3.7 Introduction

Research methodology describes the methods and process applied in the entire study. In other words, research methodology is a systematic process to approach any research problem and explore it objectively. Hence this chapter includes research design, Source of Data, population and samples, Data collection tools and Data Analysis tools. 3.8 Research Design

To fulfill the objectives of the study certain research design in essential so the analysis of this study is based on the nature of data and tools for analysis. To fulfill the objectives of the study it emphasized on historical as well as descriptive and exploratory. 3.9 Population and Sampling of Data

The total number of commercial bank represent as the total population for the purpose of this study. Hence, the population consists of twenty-six commercial banks. Out of the total population three private sector commercial banks are used as samples. These are Everest bank Limited, Bank of Kathmandu and Nepal Industrial & Commercial bank Limited 3.10 Periods Covered To do this research work Five Years Annual Report have been taken of respective banks which are published by the bank after audit to the general public. It covers the fiscal year of 2004/05 to 2008/09. 3.11 Source of Data This research study is basically based on secondary data. The required data for the study will be collected in followings ways: Library research study Internet, home pages and related links visit.

Directives of NRB Annual reports of the Everest bank Limited, Bank of Kathmandu and Nepal Industrial & Commercial bank Limited The other sources will be articles, previous study on related topic, published articles of different authors and journals. 3.12 Data Analysis Tools 3.6.2 Financial ratio analysis tools The financial analysis tools are used to determine the performance of the banks in the frame work CAMEL components. These ratios are categorized in accordance of the CAMEL components. Following categories of key ratio are used to analyze the relevant components in terms of CAMEL. 3.6.1.1 Capital Adequacy Ratio (CAR) Commercial bank holds adequate capital depending on their requirement. Capital adequacy ratio is a measure of the amount of a bank's capital as a percentage of its risk weighted credit exposure. Nepal Rastra Bank (NRB) which recommends minimum CAR of 11% and 5.5% of Core Capital Ratio (CCR).

Total Capital Fund Capital Adequacy Ration (CAR) = Total Risk Weighted Assets (Minimum requirement as per NRB Directive is 11%) 100%

Total Core Capital Fund Core Capital Ratio (CCR) = Total Risk Weighted Assets (Minimum requirement as per NRB Directive is 5.5%) Where, Total Capital Fund = Core Capital + Supplementary Capital Total Risk Weighted Assets = On Balance Sheet Risk Weighted Items + Off Balance Sheet Risk Weighted Items 100%

3.6.1.2 Assets Quality Commercial banks collect funds in the form of capital, deposit etc. It mobilizes these funds to generate certain returns by giving loans to the users of money to invest in various alternatives. A significant part of the banks income is through its lending activities. There are basically two types of loans and advances. 1 Performing Loans

Loan on which payments of interest and principal are less than 90days past due called performing loan. 2 Non Performing Loans (NPL)

A loan is non-performing when payments of interest and principal are past due by 90 days or more, or at least 90 days of interest payments have been capitalized, refinanced or delayed by agreement, or payments are less than 90 days overdue, but there are other good reasons to doubt that payments will be made in full. Sub Standard Loan All loans and advances that are past due for a period of 3 months to 6 months shall be included in this category. Those are classified as non-performing loan. Doubtful Loan All loans and advances, which are past due for a period of 6 months to one year, shall be included in this category. Those are non performing loan. Bad/ Loss Loan All loans and advances, which are past due for a period of more than one year, shall be included in this category. Those are classified as nonperforming loan. Classification of loans Good Sub-standard Doubtful Bad loans Provision required 1% 25% 50% 100%

Total Non-Performing loan Non-performing Loan Ratio = Total Loan & Advances Where, Total Non-Performing loan (NPL) = Sub Standard Loan + Doubtful Loan + Bad Loan Total Loan & Advances = Total Performing Loan + Total Non Performing Loan 100%

Total Loan Loss Provision (LLP) Loan Loss Coverage Ratio = Total Non-Performing loan Where, Total Loan Loss Provision (LLP) = Provision on (Pass Loan + Restructured Loan + Sub Standard Loan + Doubtful Loan + Bad Loan) Total Non-Performing loan (NPL) = Sub Standard Loan + Doubtful Loan + Bad Loan 100%

Total Loan Loss Provision (LLP) Loan Loss Provision Ratio = Total Loan & Advances Where, Total Loan Loss Provision (LLP) = Provision on (Pass Loan + Restructured Loan + Sub Standard Loan + Doubtful Loan + Bad Loan) Total Loan & Advances = Total Performing Loan + Total Non Performing Loan 100%

3.6.1.3 Management Management is the arrangement of various things in a systematic manner for the achievement of organizational goal. An institution can take a desired goal only when the management is capable, which is of strong and long-term vision. For the achievement of the goal of the bank within certain period of time proper and efficient management is required, for which the banks should have the following qualities: Qualitative Human resource management Adequate management expenses

Perfect structure of management team. Fair decision making capability. Use of modern Information Technology and proper communication system Perfect working environment Internal management system and relationship between customer and organization.

Management analysis can be done by using following formula; Net Profit after Tax Management Efficiency Ratio (MER) = Total No. of Staffs 3.6.1.4 Earning Earning means excess of revenue over cost, so excess revenue earned by any organization in the course of operation is known as profit. It is the ultimate result of any business. Generally, if the earnings are good then that business is running well. Similarly the aggregate performance of the bank reflects from its earnings. Earning is the ultimate result of any business. Generally, higher earnings reflect better financial position. Similarly the aggregate performance of the bank reflects from its earnings. Following ratios depicts the earning position of EBL, BOK & NIC.

Net Profit after Tax Earning per Shares (EPS) = No. of outstanding Shares

Net Income after Tax Return on Equity (ROE) = Total Shareholders fund Net Income after Tax Return on Assets (ROA) = Total Assets 100% 100%

3.6.1.5 Liquidity Liquidity is the state of owning things of value that can easily be exchanged for cash. Liquidity is the term which denotes the ability of an organization to meet its financial obligation or debts in cash in time. Such an organization has assets which can be converted into cash and without any loss at their conversion through the maintenance of certain reserves and provision. Liquidity reflects the short term financial strength of the banks. Bank does not provide all its deposit at loans and advances, but certain percentage is kept as liquidity in the bank itself or elsewhere.

Basically bank measures liquidity through three methods. They are as follows; Cash Reserve Ratio (CRR) It is the minimum amount of reserves a bank must hold in the form account balance with NRB. This ratio ensures minimum level of the banks first line of defense in meeting depositors obligations. It is the mandatory reserve that the commercial bank has to keep in the form of cash in their account in NRB for depositors assurance and safety of bank which also reflects the banks goodwill. As per the regulation made by NRB, Cash Reserve Ration is to be maintained 5.5% on average of total deposits of bank on weekly basis. It is calculated as

Cash Balance in NRB Cash Reserve Ratio = Local Currency Deposit Margin Deposit Since, we cannot find the daily deposit amount in annual report and also cannot access it, we cannot find cash reserve ration and compare it as mandatory set by NRB of 5.5% on average of total deposit of bank on weekly basis. So, it will give false information or mislead to others if we calculate it on the figure that is given on year ending Balance Sheet.

Cash and Bank Balance Ratio (CBR) The ratio measures the bank ability to meet immediate obligation. So, optimum balance should maintain in order to meet their paying obligation. Further, this ratio is employed to

measure whether banks cash balance is sufficient to cover unexpected demand made by the depositors. It is calculated as follows

Cash & Bank Balance Cash & Bank Balance Ratio = Total Deposit Investment in Government Security Ratio (IGSR) Government securities are known as risk free assets, which are easily converted into cash to meet the short term obligation. Thats why every commercial bank has to invest their certain amount in government securities. This ratio calculated as

Investment in Govt. Security Investment in Govt. Security Ratio = Total Deposit 100%

CHAPTER IV
DATA PRESENTATION AND ANALYSIS
4.4 Introduction

This chapter deals with the presentation and analysis of data collected from different sources with the focus on the camel components. As stated in the theoretical prescription, the financial performance analysis of Everest Bank Limited, Bank of Kathmandu and Nepal Industrial and Commercial Bank Limited are concentrated in the five components of camel i.e. Capital Adequacy, Assets Quality, Management Quality, Earning Quality and Liquidity. The data collected from annual reports of respective banks have bee analyzed with the application of camel. 4.5 Data Presentation and Analysis

The data collected from different sources has been defined and documented in Excel tables, which are further processed to analyze and arrived at the findings on the financial conditions of above mentioned banks in terms of Camel Analysis. The major findings of the study on financial performance of EBL, BOK and NIC are also described on each section and part of CAMEL Analysis. 4.5.1 Capital Adequacy Capital Adequacy is a measure of an FIs financial strength, in particular its ability to cushion operational and abnormal losses. Minimum capital adequacy ratios have been designed to ensure banks can absorb a reasonable level of losses before becoming insolvent. The higher the capital adequacy ratios a bank has, the greater the level of unexpected losses it can absorb before becoming insolvent. An FI should have adequate capital to support its risk assets in accordance with the risk-weighted capital ratio framework. It has become recognized that capital adequacy more appropriately relates to asset structure than to the volume of liabilities. Risk Weighted Assets, Core Capital and Supplementary Capital are major figures used to calculate Capital Adequacy Ratio. In the context of Nepal, NRB has assigned following weight for following Assets of Banks.

0% Risk Weight Asset Cash in Hand, Gold (Tradable), Balance with Nepal Rastra Bank, Investment in Government Bonds, Investment in NRB Bonds, Loan against own Fixed Deposit Receipt, Loan against Government Bonds, accrued Interest on Government and Bills for Collection.

10% Risk Weight Asset Forward Foreign Exchange Contract

20% Risk Weight Asset Balance with domestic Licensed Banks & Financial Institutions, Loan against other Banks F.D. receipt, Balance with Foreign Banks, Money at Call, Loan against Guarantee of International Rated Banks, Investments on International Rated Banks, L/C (Below 6 months maturity) and Guarantee against International Bank Guarantee

50% Risk Weight Asset L/C (Over 6 months maturity), Bid Bonds and Performance Bond

100% Risk Weight Asset Investments on Share, Debenture & Bonds, Other Investments, Loan, Advances & Bills Purchase/Discount, Fixed Assets, Other Assets, Net Other Interest Receivable (Gross Int. Receivable Interest receivable on Govt. Bonds - Interest Suspense) , Financial Guarantee, Other Guarantee, Irrevocable Loan Commitment, Contingent Liability for Tax and Other Contingent Liability.

Capital Adequacy ratio calculated as follows: Total Capital Fund Capital Adequacy Ration (CAR) = Total Risk Weighted Assets Table 4.1 is the observed Capital Adequacy Ratio during the study period in numerical terms which is presented below: X 100%

Table 4.1 Capital Adequacy Ratio Fiscal Year Total Capital Fund 1,247,562,000 2004/05 EBL 763,528,243 BOK 730,985,785 NIC 1,391,339,000 2005/06 EBL 1,100,797,467 BOK 1,036,838,663 NIC 1,676,115,000 2006/07 EBL 1,265,828,177 BOK 1,208,607,803 NIC 2,406,056,000 2007/08 EBL 1,635,235,217 BOK 1,615,719,466 NIC 2,703,870,000 2008/09 EBL 2,005,695,528 BOK 1,954,934,793 NIC (Sources: Appendix 3, 4 & 5) Banks Total Risk Weighted Assets 9,195,588,000 6,936,942,398 5,499,435,330 11,291,137,000 7,583,653,036 7,656,131,091 14,976,737,000 10,226,193,976 9,905,036,012 21,039,879,000 13,702,369,666 12,321,131,296 24,131,922,000 16,025,037,210 15,741,613,929 Capital Adequacy Ratio 13.57 11.01 13.29 12.32 14.52 13.54 11.19 12.38 12.20 11.44 11.93 13.11 11.20 12.52 12.42

Figure 4.1 is a bar diagram which represents the above tabulated numerical data which helps to compare the Capital adequacy Ratio among three banks. Figure 4.1 Capital Adequacy Ratio
16 14 12 10 8 6 4 2 2004/05 2005/06 2006/07
Years
EBL BOK NIC

CAR in %

2007/08

2008/09

As shown in the table 4.1 and figure 4.1, the Capital Adequacy Ratio of EBL of 13.57% is the highest and BOK of 11.01% is the lowest in FY 2004/05; BOK of 14.52% is the highest and EBL of 12.32% is lowest in FY 2005/06; BOK of 13.38% is the highest and EBL of 11.19% is lowest in FY 2006/07; NIC of 13.11% is in highest position and EBL of 11.44% is the lowest position in FY 2007/08;BOK of 12.52% is the highest and EBL of 11.20% is the lowest in the FY 2008/09 among three banks. Furthermore figure 4.2 helps to find out the trend of three banks Core Capital Ratio over the last five years period. Figure 4.2 Capital Adequacy Ratio
16 14 12

CAR in %

10 8 6 4 2 2004/05 2005/06 2006/07 Years 2007/08 2008/09

EBL BOK NIC

Figure 4.2 is the trend analysis of three banks over the five years study period. As shown in the figure Capital Adequacy Ratio of EBL started by 13.57% in 2004/05, decreased in FY 2005/06 and 2006/07 thereafter increased in 2007/08, again decreased in FY 2008/09 and reached to 11.20% in FY 2008/09. Overall, Capital Adequacy Ratio of EBL decreased.

Similarly, BOK is starting with11.01% in FY 2004/05, then increases in 2005/06 after that decreases in FY 2006/07 and 2007/08but at the end slightly increases and reached to 12.52% in FY 2008/09. Overall Capital Adequacy Ratio of BOK also is in decreasing trend.

Likewise, Capital Adequacy Ratio of NIC stares with 13.29% in FY 2004/05 and slightly increases in 2005/06 after that decreases in FY 2006/07 and again increases in FY 2007/08 and 2008/09 and reached to 12.42%. This also shows the decreasing trend in overall.

4.2.1.1 Core Capital Ratio (CCR) Core Capital measures a banks financial strength from a regulators point of view. In the context of Nepal Core or Primary Capital includes Paid-up Capital, Share Premium, Non redeemable Preference Share, General Reserve Fund, Cumulative Profit/ loss, Capital Redemption Reserve, Capital Adjustment Fund/ Proposed Bonus Share and other Free Reserve. Amount of the goodwill, Fictitious Assets, Investment in excess of prescribe limit specified by NRB, and investment in security of companies with financial interest is deducted from the sum of all elements of the primary capital to arrive at the core capital. It is calculated as follows:

Total Core Capital Fund Core Capital Ratio (CCR) = Total Risk Weighted Assets Table 4.2 is the observed Core Capital Ratio during the study period in numerical terms which is presented below: 100%

Table 4.2 Core Capital Ratio Fiscal Year 2004/05 Banks EBL BOK NIC EBL BOK NIC EBL BOK NIC EBL BOK NIC EBL BOK NIC Core Capital Fund 816,793,000 694,351,456 680,142,550 927,550,000 811,917,204 761,128,967 1,171,133,000 953,263,195 911,806,552 1,900,859,000 1,310,851,552 1,293,750,759 1,981,579,000 1,683,588,123 1,649,007,425 Total Risk Weighted Assets 9,195,588,000 6,936,942,398 5,499,435,330 11,291,137,000 7,583,653,036 7,656,131,091 14,976,737,000 10,226,193,976 9,905,036,012 21,039,879,000 13,702,369,666 12,321,131,296 24,131,922,000 16,025,037,210 15,741,613,929 Core Capital Ratio 8.88 10.01 12.37 8.21 10.71 9.94 7.82 9.32 9.21 9.03 9.57 10.50 8.21 10.51 10.48

2005/06

2006/07

2007/08

2008/09

(Sources: Appendix 3, 4 & 5) Figure 4.3 is a bar diagram which represents the above tabulated numerical data which helps to compare the Core Capital Ratio among three banks. Figure: 4.3 Core Capital Ratio

14 12 10

CCR in %

8 6 4 2 2004/05 2005/06 2006/07 Years 2007/08 2008/09

EBL BOK NIC

As shown in the table 4.2 and Figure 4.3, the Core Capital Ratio of NIC of 12.37% is the highest and EBL of 8.88% is the lowest in FY 2004/05; BOK of 10.71% is the highest and EBL of 8.21% is lowest in FY 2005/06; BOK of 9.32% is the highest and EBL of 7.82% is lowest in FY 2006/07; NIC of 10.50% is highest and EBL of 9.03% is the lowest in FY 2007/08; BOK of 10.51% is the highest and EBL of 8.21% is the lowest in the FY 2008/09 among three banks. Furthermore figure 4.4 helps to find out the trend of three banks Core Capital Ratio over the last five years period.

Figure 4.4 Core Capital Ratio


14 12

CCR in %

10 8 6 4 2 2004/05 2005/06 2006/07 Years 2007/08 2008/09


EBL BOK NIC

Figure 4.4 is the trend analysis of three banks over the five years study period. As shown in the figure Core Capital Ratio of EBL started by 8.88% in FY 2004/05, decreased there after till 2006/07 and increases in FY 2007/08, again decreased in FY 2008/09 and reached to 8.21% in FY 2008/09. Overall, Core Capital Ratio of EBL decreases.

Similarly, Core Capital Ratio of BOK started with 10.01% in FY 2004/05, then increases in 2005/06 after that decreases in FY 2006/07, increased There after till FY 2008/09 and reached to 10.51% in the FY 2008/09. Overall Core Capital Ratio of BOK also is in increasing trend. Likewise, Core Capital Ratio of NIC stared with 12.37% in FY 2004/05, decreases in FY 2005/06 and 2006/07 after that increases in FY 2007/08 and again decreases in FY 2008/09 and reached to 10.48%. This also shows the decreasing trend in overall.

4.5.2 Assets Quality Commercial bank holds their assets in the form of liquid assets like cash and bank balance and short term investment etc. Through this lending bank generated interest. Assets quality ratio is also known as activity ratio as well as turnover ratio be converted in to cash and equivalent to cash. This is only profit if the bank is efficient enough to earn profit. For identifying the assets quality we need to calculate three ratios. They are:

4.2.2.1 Non-Performing loan Non-Performing loan refers to those loans which are not paying its Principle + Interest in time or overdue more than three months. So, it consists of Sub-standard loan, Doubtful loan and Bad Loan. The non-performing loan ratio indicated the relationship between non-performing loan and total loan, it measures the proportion of non-performing loan in total loan and advance. Higher non-performing loan ratio indicates that the banks assets are not doing well or the loan department is not so conscious while passing loan. So, lower ratio will be perferred regarding Non-erforming Loan Ratio. The ratio is determined by using the given model.

Total Non-Performing loan

Non-performing Loan Ratio = Total Loan & Advances Where,

100%

Total Non-Performing loan (NPL) = Sub Standard Loan + Doubtful Loan + Bad Loan Total Loan & Advances = Total Performing Loan + Total Non Performing Loan

Table 4.3 is the observed Non-Performing Loan Ratio of three banks during the study period in numerical terms which is presented below:

Fiscal Year 2004/05

Banks EBL

Table 4.3 Non-Performing Loan Ratio Total Non Total Loan & Performing loan Advances 128,807,745 7,900,090,271 6,182,045,019 4,909,355,200 10,136,254,448 7,488,700,923 6,902,123,944 14,082,686,087 9,694,101,954 9,128,649,206 18,836,431,762 12,747,721,603 11,465,334,005 24,366,195,740 14,945,719,764 13,915,850,035

Non Performing Loan Ratio 1.63 4.99 3.78 1.27 2.72 2.60 0.80 2.51 1.11 0.67 1.86 0.86 0.48 1.27 0.93

308,506,039 BOK 185,430,811 NIC 129,235,790 2005/06 EBL 203,624,470 BOK 179,554,435 NIC 113,178,936 2006/07 EBL 243,296,250 BOK 101,140,201 NIC 126,639,038 2007/08 EBL 236,898,850 BOK 98,167,144 NIC 117,985,232 2008/09 EBL 190,315,657 BOK 129,178,432 NIC (Sources: Appendix 3, 4 & 5)

Figure 4.5 is a bar diagram which represents the above tabulated numerical data which helps to compare the Non-Performing Ratio among three banks. Figure 4.5

Non-Performing Loan Ratio

6 5

NPL in %

4 3 2 1 2004/05 2005/06 2006/07 Years 2007/08 2008/09


EBL BOK NIC

As shown in the table 4.3 and figure 4.5, the Non-Performing Loan Ratio of BOK of 4.99% is the highest and EBL of 1.63% is the lowest in FY 2004/05; BOK of 2.72% is the highest and EBL of 1.27% is lowest in FY 2005/06; BOK of 2.51% is the highest and EBL of 0.80% is lowest in FY 2006/07; BOK of 1.86% is highest and EBL of 0.67% is the lowest in FY 2007/08; BOK of 1.27% is the highest and EBL of 0.48% is the lowest in the FY 2008/09 among three banks. Furthermore figure 4.6 helps to find out the trend of three banks Non-Performing Loan Ratio over the last five years period. Figure 4.6 Non-Performing Loan Ratio
6 5

NPL in %

4 3 2 1 2004/05 2005/06 2006/07 Ye ars 2007/08 2008/09


EBL BOK NIC

Figure 4.6 is the trend analysis of three banks over the five years study period. As shown in the figure Non-Performing Loan Ratio of EBL started by 1.63% in FY 2004/05 and there after continuously decreased till FY 2008/09 and reached to 0.48% . So, trend analysis shows that EBL is able to decrease its non performing loan continuously which is good sign of bank. Similarly, Non-Performing Loan Ratio of BOK started with 4.99% in FY 2004/05 and continuously decreased till FY 2008/09 and reached to 1.27%. Its also good sign for BOK. Likewise, Non-Performing Loan Ratio of NIC stared with 3.78% in FY 2004/05. NonPerforming Loan Ratio of NIC is also in decreasing trend and reached to 0.93% in FY 2008/09. 4.2.2.2 Loan Loss Coverage Ratio Loan Loss Coverage Ratio is the relationship between Total Loan Loss Provision and Total Non Performing Loan. It measures the proportion of Total Loan Los Provision in relation to Total Non Performing Loan. Out of the Total non Performing if some loans becomes bad or default then that loss to the bank is covered from the Loan Loss Provision Fund. So, from that point of view, higher the loan loss coverage ratio is better for the banks. The ratio is determined by using the given model:

Total Loan Loss Provision (LLP) Loan Loss Coverage Ratio = Total Non-Performing loan Where, Total Loan Loss Provision (LLP) = Provision on (Pass Loan + Restructured Loan + Sub Standard Loan + Doubtful Loan + Bad Loan) Total Non-Performing loan (NPL) = Sub Standard Loan + Doubtful Loan + Bad Loan X 100%

Table 4.4 is the observed Loan Loss Coverage Ratio of three banks during the study period in numerical terms which is presented below:

Table 4.4 Loan Loss Coverage Ratio Fiscal Year Total Loan Loss Provision 281,418,795 2004/05 EBL 269,465,548 BOK 197,642,899 NIC 334,946,772 2005/06 EBL 229,618,344 BOK 246,159,924 NIC 418,604,423 2006/07 EBL 294,774,337 BOK 187,251,555 NIC 497,346,200 2007/08 EBL 285,084,062 BOK 200,655,909 NIC 226,816,062 2008/09 EBL 298,422,777 BOK 236,456,256 NIC (Sources: Appendix 3, 4 & 5) Banks Total NPL 128,807,745 308,506,039 185,430,811 129,235,790 203,624,470 179,554,435 113,178,936 243,296,250 101,140,201 126,639,038 236,898,850 98,167,144 117,985,232 190,315,657 129,178,432 Loan Loss Coverage Ratio 218.48 87.35 106.59 259.17 112.77 137.09 369.86 121.16 185.14 392.73 120.34 204.40 192.24 156.80 183.05

Chart 4.7 is a bar diagram which represents the above tabulated numerical data which helps to compare the Loan Loss Coverage Ratio among three banks. Figure 4.7

Loan Loss Coverage Ratio


450 400 350 300 250 200 150 100 50 2004/05 2005/06 2006/07 Years 2007/08 2008/09

LLC in %

EBL BOK NIC

As shown in the table 4.4 and figure 4.7, the Loan Loss Coverage Ratio of EBL of 218.48% is the highest and BOK of 87.35% is the lowest in FY 2004/05; EBL of 259.17% is the highest and BOK of 112.77% is lowest in FY 2005/06; EBL of 369.86% is the highest and BOK of lowest is 121.16% in FY 2006/07; EBL of 392.73% is highest and BOK of 120.34% is the lowest in FY 2007/08; EBL of 192.24% is the highest and BOK of 156.8% is the lowest in the FY 2008/09 among three banks. Furthermore figure 4.8 helps to find out the trend of three banks Loan Loss Coverage Ratio over the last five years period. Figure 4.8 Loan Loss Coverage Ratio
450 400 350 300 250 200 150 100 50 2004/05 2005/06 2006/07 Years 2007/08 2008/09

LLC in %

EBL BOK NIC

Figure 4.8 is the trend analysis of three banks over the five years study period. As shown in the figure Loan Loss Coverage Ratio of EBL started by 218.48% in FY 2004/05 and after that continuously increased till 2007/08 and reached to 392.73% in FY 2007/08 but in the FY 2008/09decreased to 192.24%. Similarly, Loan Loss Coverage Ratio of BOK started with 87.35% in FY 2004/05 and continuously increased up to 121.16% in FY 2006/07 after that decreases to 120.34% in FY 2007/08 and then increased to 156.80% in FY 2008/09. Likewise, Loan Loss Coverage Ratio of NIC stared with 106.59% in FY 2004/05 after that continuously increases up to 204.40% in FY 2007/08and the decreases to 183.05% in FY 2008/09. 4.2.2.3 Loan Loss Provision Ratio Loan loss provision is the sum of amount that banks are required to set or kept for potential loan loss. Loan loss provision is deductible expenses. It is deducted from interest income. It is a provision set by a bank to cover unpredictable loss caused due to default of the loan amount. This ratio shows how much the bank needs to set the provision to cover the loss of default loan in the future from the loan released by the bank. Lower the loan loss provision significant that the bank has higher volume of good loan and higher non-performing loan. Loan loss provision is the whole amount of provision set aside to cover the loss then LLP to NPL as NPL is lower we can say that quality of loan is better. But if LLP to TL is higher hen we can say that the quality of loan is good but at least we are in safe position as it has more provision for losses from loan. LLP can calculate as follows: Total Loan Loss Provision (LLP) Loan Loss Provision Ratio = Total Loan & Advances Where, Total Loan Loss Provision (LLP) = Provision on (Pass Loan + Restructured Loan + Sub Standard Loan + Doubtful Loan + Bad Loan) Total Loan & Advances = Total Performing Loan + Total Non Performing Loan 100%

Table 4.5 is the observed Loan Loss Coverage Ratio of three banks during the study period in numerical terms which is presented below:

Table 4.5 Loan Loss Provision Ratio Fiscal Year Total Loan Loss Provision 281,418,795 2004/05 EBL 269,465,548 BOK 197,642,899 NIC 334,946,772 2005/06 EBL 229,618,344 BOK 246,159,924 NIC 418,604,423 2006/07 EBL 294,774,337 BOK 187,251,555 NIC 497,346,200 2007/08 EBL 285,084,062 BOK 200,655,909 NIC 226,816,062 2008/09 EBL 298,422,777 BOK 236,456,256 NIC (Sources: Appendix 3, 4 & 5) Banks Total Loan & Advances 7,900,090,271 6,182,045,019 4,909,355,200 10,136,254,448 7,488,700,923 6,902,123,944 14,082,686,087 9,694,101,954 9,128,649,206 18,836,431,762 12,747,721,603 11,465,334,005 24,366,195,740 14,945,719,764 13,915,850,035 Loan Loss Provision Ratio 3.56 4.36 4.03 3.30 3.07 3.57 2.97 3.04 2.05 2.64 2.24 1.75 0.93 2.00 1.70

Chart 4.9 is a bar diagram which represents the above tabulated numerical data which helps to compare the Loan Loss Provision Ratio among three banks. Figure 4.9 Loan Loss Provision Ratio

5 5 4 4 3 3 2 2 1 1 2004/05 2005/06 2006/07 Years 2007/08 2008/09

LLP in %

EBL BOK NIC

As shown in the table 4.5 and figure 4.9, the Loan Loss Provision Ratio of BOK of 4.36% is the highest and EBL of 3.56% is the lowest in FY 2004/05; NIC of 3.57% is the highest and BOK of 3.07% is lowest in FY 2005/06; BOK of 3.04% is the highest and NIC of 2.05% is lowest in FY 2006/07; EBL of 2.64% is highest and NIC of 1.75% is the lowest in FY 2007/08; BOK of 2% is the highest and EBL of 0.93% is the lowest in the FY 2008/09 among three banks. Furthermore figure 4.10 helps to find out the trend of three banks Loan Loss Provision Ratio over the last five years period. Figure 4.10 Loan Loss Provision Ratio
5 5 4 4 3 3 2 2 1 1 2004/05 2005/06 2006/07 Years 2007/08 2008/09

LLP in %

EBL BOK NIC

Figure 4.10 is the trend analysis of three banks over the five years study period. As shown in the figure Loan Loss Provision Ratio of EBL started from 3.56% in FY 2004/05 and after that continuously decreasing trend till 2008/09 and reached to 0.93%. Similarly, Loan Loss Provision Ratio of BOK started with 4.36% in FY 2004/05. BOK has also decreasing trend of LLP and its maintained 2% in FY 2008/09. Likewise, Loan Loss Provision Ratio of NIC stared with 4.03% in FY 2004/05 and then decreases till FY 2008/09. Minimum LLP of NIC is 1.7% in FY 2008/09. 4.5.3 Management The success of any institution depends on the competency of its management. In fact, the management not only makes suitable policy and the business plans but also implements them for the short term and the long term interests, which helps to achieve aimed objectives of bank and financial institution's. It is evaluated by checking the effectiveness of the board of directors, the management, manpower and the officials, operating expenditure, customer's relation with the officials and institution, management information system, organization and working method, internal control system, power concentration, monitoring, decision making process, policies.

Management analysis can be done by using following formula;

Net Profit after Tax Management Efficiency Ratio (MER) = Total No. of Staffs Table 4.6 is the observed Management Efficiency Ratio of three banks during the study period in numerical terms which is presented below:

Table 4.6 Management Efficiency Ratio Fiscal Year 2004/05 Banks EBL Net Profit After Tax 168,214,611 Total no. of Staffs 257 Management Efficiency Ratio 654,532

139,529,721 BOK 113,755,734 NIC 237,290,936 2005/06 EBL 202,440,627 BOK 96,587,674 NIC 296,409,281 2006/07 EBL 262,386,980 BOK 158,475,051 NIC 451,218,613 2007/08 EBL 361,496,879 BOK 243,058,040 NIC 638,732,757 2008/09 EBL 461,734,911 BOK 317,434,138 NIC (Sources: Appendix 3, 4 & 5)

171 157 306 177 166 393 179 189 449 390 232 531 489 270

815,963 724,559 775,461 1,143,732 581,853 754,222 1,465,849 838,492 1,004,941 926,915 1,047,664 1,202,887 944,243 1,175,682

Figure 4.11 is a bar diagram which represents the above tabulated numerical data which helps to compare the Management Efficiency Ratio among three banks.

Figure 4.11 Management Efficiency Ratio


1600000 1400000 1200000 1000000
EBL BOK NIC

MER

800000 600000 400000 200000 0 2004/05 2005/06 2006/07 Years 2007/08 2008/09

As shown in the table 4.6 and figure 4.11, the Management Efficiency Ratio of BOK of Rs.815963.00 is the highest and EBL of Rs.654532.00 is the lowest in FY 2004/05; BOK

of Rs.1143732.00 is the highest and NIC of Rs.581853.00 is lowest in FY 2005/06; BOK of Rs.1465849.00 is the highest and EBL of Rs.754222.00 is lowest in FY 2006/07; NIC of Rs.1047664.00 is highest and BOK of Rs.926915.00 is the lowest in FY 2007/08; EBL of Rs.1202887.00 is the highest and BOK of Rs.944243.00 is the lowest in the FY 2008/09 among three banks. Furthermore figure 4.12 helps to find out the trend of three banks Management Efficiency Ratio over the last five years period.

Figure 4.12 Management Efficiency Ratio


1,600,000 1,400,000 1,200,000 1,000,000
EBL BOK NIC

MER

800,000 600,000 400,000 200,000 2004/05 2005/06 2006/07 2007/08 2008/09 Ye ars

Chart 4.12 is the trend analysis of three banks over the five years study period. As shown in the figure Management Efficiency Ratio of EBL started by Rs.654532.00 in FY 2004/05, increased in FY 2005/06 and decreases in FY 2006/07, again increased till FY 2008/09 and reached to Rs.1202887.00. Overall, Management Efficiency Ratio of EBL increases.

Similarly, Management Efficiency Ratio of BOK started with Rs.815963.00 in FY 2004/05, then increases till FY 2006/07 after that decreases in FY 2007/08 and again increased in FY 2008/09 and reached to Rs.944243.00. Overall, Management Efficiency Ratio of BOK also is in decreasing trend.

Likewise, Management Efficiency Ratio of NIC stared with Rs.724559.00 in FY 2004/05, decreases in FY 2005/06 after that increases till in FY 2008/09. This shows the increasing trend in overall.

4.5.4 Earnings Earning means excess of revenue over cost, so excess revenue earned by any organization in the course of operation is known as profit. It is the ultimate result of any business. Generally, if the earnings are good then that business is running well. Similarly the aggregate performance of the bank reflects from its earnings. Earning is the ultimate result of any business. Generally, higher earnings reflect better financial position. Similarly the aggregate performance of the bank reflects from its earnings. Following ratios depicts the earning position.

4.2.4.1 Earning per Shares Earning per share is generally considered to be the single most important variable in determining a shares price. It is the portion of a companys profit allocated to each outstanding share of common stock. An important aspect of EPS that is often ignored is the capital that is required to generate the earnings (net income) in the calculation. Two companies could generate the same EPS number, but one could do so with less equity (investment)-that company would be more efficient at using its capital to generate income and, all other things being equal would be a better company. Following is the expression of earning per share: Net Profit after Tax Earning per Shares (EPS) = No. of outstanding Shares Table 4.7 is the observed Earning per Shares of three banks during the study period in numerical terms which is presented below:

Table 4.7 Earning per Shares Fiscal Year 2004/05 Banks Net Profit After Tax 168,214,611 139,529,721 113,755,734 237,290,936 202,440,627 96,587,674 296,409,281 262,386,980 158,475,051 451,218,613 361,496,879 243,058,040 638,732,757 461,734,911 317,434,138 No. of Share Outstanding 3,150,000 4,635,809 5,000,000 3,780,000 4,635,809 6,600,000 3,780,000 6,031,413 6,600,000 4,914,000 6,031,413 9,438,771 6,388,210 8,443,979 11,404,800 EPS 53.40 30.10 22.75 62.78 43.67 14.63 78.42 43.50 24.01 91.82 59.94 25.75 99.99 54.68 27.83

EBL BOK NIC 2005/06 EBL BOK NIC 2006/07 EBL BOK NIC 2007/08 EBL BOK NIC 2008/09 EBL BOK NIC (Sources: Appendix 3, 4 & 5)

Chart 4.13 is a bar diagram which represents the above tabulated numerical data which helps to compare the Earning Per Shares among three banks. Figure 4.13 Earning per Shares

120 100 80
EBL BOK NIC

EPS

60 40 20 2004/05 2005/06 2006/07 Ye ars 2007/08 2008/09

As shown in the table 4.7 and figure 4.13, the Earning per Shares of EBL of Rs.53.40 is the highest and NIC of Rs.22.75 is the lowest in FY 2004/05; EBL of Rs.62.78 is the highest and NIC of Rs.14.63 is lowest in FY 2005/06; EBL of Rs.78.42 is the highest and NIC of Rs.24.01 is lowest in FY 2006/07; EBL of Rs.91.82 is highest and NIC of Rs.25.75 is the lowest in FY 2007/08; EBL of Rs.99.99 is the highest and NIC of Rs.27.83 is the lowest in the FY 2008/09 among three banks. Furthermore figure 4.14 helps to find out the trend of three banks Earning per Shares over the last five years period. Figure 4.14 Earning per Shares
120 100 80
EBL BOK NIC

EPS

60 40 20 2004/05 2005/06 2006/07 Years 2007/08 2008/09

Figure 4.14 is the trend analysis of three banks over the five years study period. As shown in the figure earning per Shares of EBL started by Rs.53.40 in FY 2004/05, increasing there after till FY 2008/09 and reached to Rs.99.99 in FY 2008/09. Overall earning per Shares of BOK also is in increasing trend

Similarly, Earning per Shares of BOK started with Rs.30.10 in FY 2004/05, then increases in FY 2005/06 after that decreases in FY 2006/07, increased There after till FY 2007/08 and again decreased in FY 2008/09 and reached to Rs.54.68 in the FY 2008/09. Overall earning per Shares of BOK also is in increasing trend. Likewise, earning per Shares of NIC stared with Rs.22.75 in FY 2004/05, decreases in FY 2005/06 and after that increases till in FY 2008/09 and reached to Rs.27.83. This also shows the slightly increasing trend in overall.

4.2.4.2 Return on Equity This ratio denotes how much of the shareholders' fund is mobilized towards earning profit. The higher the ratio the better it is for the bank. It is calculated as follows:

Net Income after Tax Return on Equity (ROE) = Total Shareholders fund Table 4.8 is the observed Return on Equity of three banks during the study period in numerical terms which is presented below: Table 4.8 Return on Equity Fiscal Year 2004/05 Banks EBL BOK NIC EBL BOK Net Profit After Tax 168,214,611 139,529,721 113,755,734 237,290,936 202,440,627 Total Shareholders' Fund 832,617,365 763,528,243 730,985,785 1,391,339,000 1,100,797,467 ROE 20.20 18.27 15.56 17.05 18.39 X 100%

2005/06

96,587,674 NIC 296,409,281 2006/07 EBL 262,386,980 BOK 158,475,051 NIC 451,218,613 2007/08 EBL 361,496,879 BOK 243,058,040 NIC 638,732,757 2008/09 EBL 461,734,911 BOK 317,434,138 NIC (Sources: Appendix 3, 4 & 5)

1,036,838,663 1,676,116,000 1,290,124,103 1,209,113,613 2,406,056,000 1,635,235,217 1,615,719,466 2,703,870,000 2,005,695,528 1,954,934,793

9.32 17.68 20.34 13.11 18.75 22.11 15.04 23.62 23.02 16.24

Figure 4.15.a is a bar diagram which represents the above tabulated numerical data which helps to compare the Return on Equity among three banks. Figure 4.15 Return on Equity
25 20 15 10 5 2004/05 2005/06 2006/07 Ye ars 2007/08 2008/09
EBL BOK NIC

As shown in the table 4.8 and figure 4.15, the Return on Equity of EBL of 53.40% is the highest and NIC of 22.75% is the lowest in FY 2004/05; EBL of 63.78% is the highest and NIC of 14.63%is lowest in FY 2005/06; EBL of 78.42% is the highest and NIC of 24.01% is lowest in FY 2006/07; EBL of 91.82% is the highest and NIC of 25.75% is the lowest in FY 2007/08; EBL of 99.99% is the highest and NIC of 27.83% is the lowest in the FY 2008/09 among three banks. Furthermore figure 4.16 helps to find out the trend of three banks Return on Equity over the last five years period.

ROE

Figure 4.16 Return on Equity


25 20

ROE

15 10 5 2004/05 2005/06 2006/07 Ye ars 2007/08 2008/09

EBL BOK NIC

Figure 4.16 is the trend analysis of three banks over the five years study period. As shown in the figure Return on Equity of EBL started by 20.20% in FY 2004/05, decreased in FY 2006/07 and increases in FY 2007/08 to FY 2008/09 and reached to 23.62% in FY 2008/09. Overall, Return on Equity of EBL increases.

Similarly, Return on Equity of BOK started with 18.27% in FY 2004/05, then increases till FY 2008/09 and reached to 23.02% in the FY 2008/09. Overall, Return on Equity of BOK also is in increasing trend.

Likewise, Return on Equity of NIC stared with 15.56% in FY 2004/05, decreases in FY 2005/06 and after that increases till FY 2008/09 and reached to 16.24%. This also shows the increasing trend in overall.

4.2.4.3 Return on Assets The term ROA is return on total assets. Major assets of banks are loan and advances, ROA reveals how efficiently the total recourses have been utilized and measured the return on assets productive sectors that can generate profit for the banks. Higher ROA shows the better utilization and management on the assets and extend profit level. This ratio depicts how efficiently a bank is utilizing and mobilizing its assets to generate profit. It is calculated as follows:

Net Income after Tax Return on Assets (ROA) = Total Assets Table 4.9 is the observed Return on Assets of three banks during the study period in numerical terms which is presented below: 100%

Table 4.9 Return on Assets Fiscal Year 2004/05 Banks Net Profit After Tax 168,214,611 139,529,721 113,755,734 237,290,936 202,440,627 96,587,674 296,409,281 262,386,980 158,475,051 451,218,613 361,496,879 243,058,040 638,732,757 461,734,911 317,434,138 Total Assets 11,732,516,418 9,888,533,138 7,510,396,565 15,959,284,687 12,278,329,302 10,383,601,708 21,432,574,300 14,581,394,916 11,678,834,055 27,149,342,884 17,721,925,187 15,238,736,314 36,916,848,654 20,496,005,483 18,750,633,197 ROA 1.43 1.41 1.51 1.49 1.65 0.93 1.38 1.80 1.36 1.66 2.04 1.60 1.73 2.25 1.69

EBL BOK NIC 2005/06 EBL BOK NIC 2006/07 EBL BOK NIC 2007/08 EBL BOK NIC 2008/09 EBL BOK NIC (Sources: Appendix 3, 4 & 5)

Figure 4.17 is a bar diagram which represents the above tabulated numerical data which helps to compare the Return on Assets among three banks. Figure 4.17 Return on Assets

2.50 2.00

ROA

1.50 1.00 0.50 2004/05 2005/06 2006/07 Years 2007/08 2008/09

EBL BOK NIC

As shown in the table 4.9 and figure 4.17, the Return on Assets of NIC of 1.51% is the highest and BOK of 1.41% is the lowest in FY 2004/05; BOK of 1.65% is the highest and NIC of 0.93% is lowest in FY 2005/06; BOK of 1.80% is the highest and NIC of 1.36% is lowest in FY 2006/07; BOK of 2.04% is highest and NIC of 1.60% is the lowest in FY 2007/08; BOK of 2.25% is the highest and NIC of 1.69% is the lowest in the FY 2008/09 among three banks. Furthermore figure 4.18 helps to find out the trend of three banks Return on Assets over the last five years period. Figure 4.18 Return on Assets
2.50 2.00

ROA

1.50 1.00 0.50 2004/05 2005/06 2006/07 Years 2007/08 2008/09

EBL BOK NIC

Figure 4.18 is the trend analysis of three banks over the five years study period. As shown in the figure Return on Assets of EBL started by 1.43% in FY 2004/05, increased

there after in the FY 2005/06 and decreases in FY 2006/07 and then increased in FY 2007/08 and in FY 2008/09 and reached to 2.25% in FY 2008/09. Overall, Return on Assets of EBL increases. Similarly, Return on Assets of BOK started with 1.41% in FY 2004/05, then increases till FY 2008/09 and reached to 2.25% in the FY 2008/09. Overall, Return on Assets of BOK also is in increasing trend. Likewise, Return on Assets of NIC stared with 1.51% in FY 2004/05, decreases in FY 2005/06 and after that increases till in FY 2008/09 and reached to 1.69%. This also shows the increasing trend in overall. 4.5.5 Liquidity Simply, liquidity means short- run solvency of a firm. It reflects the short term financial strength of banks. Bank does not provide all deposit at loan and advances. The certain percentage of deposit should be kept in bank in the form of cash. It the bank will keep greater deposit in cash, it losses the opportunity cost. Similarly, if bank keeps low amount in deposit, it could not be able to pay depositors on the time of requirement. Liquidity can be measured in following ways: 4.2.5.1 Cash & Bank Balance Ratio A Higher ratio shows higher liquidity and great ability of the bank to meet unexpected demand made by the depositor. On the country lower ratio indicates that banks might face liquidity crunch while paying its obligations. It is calculated as follows: Cash & Bank Balance Cash & Bank Balance Ratio = Total Deposit Table 4.10 is the observed Return on Assets of three banks during the study period in numerical terms which is presented below: Table 4.10 Cash & Bank Balance Ratio Cash & Bank Balance Total Deposit Cash & Bank Balance Ratio 1,049,989,208 10,097,690,989 10.40 740,520,482 8,975,780,868 8.25

Fiscal Year 2004/05

Banks EBL BOK

1,010,386,565 NIC 1,552,967,494 2005/06 EBL 728,697,092 BOK 749,139,079 NIC 2,391,420,594 2006/07 EBL 1,315,903,941 BOK 599,758,632 NIC 2,667,971,831 2007/08 EBL 1,440,466,943 BOK 1,192,348,786 NIC 6,164,371,163 2008/09 EBL 1,889,174,230 BOK 1,461,150,549 NIC (Sources: Appendix 3, 4 & 5)

6,241,378,160 13,802,444,988 10,485,359,239 8,765,950,638 18,186,253,541 12,388,927,294 10,068,230,869 23,976,298,535 15,833,737,799 13,084,688,672 33,322,946,246 18,083,980,266 15,579,930,904

16.19 11.25 6.95 8.55 13.15 10.62 5.96 11.13 9.10 9.11 18.50 10.45 9.38

Figure 4.19 is a bar diagram which represents the above tabulated numerical data which helps to compare the Cash & Bank Balance Ratio among three banks.

Figure 4.19 Cash & Bank Balance Ratio


20 18 16 14 12 10 8 6 4 2 2004/05 2005/06 2006/07 Years 2007/08 2008/09

CBBR

EBL BOK NIC

As shown in the table 4.10 and figure 4.19, the Cash & Bank Balance Ratio of NIC of 16.19% is the highest and BOK of 8.25% is the lowest in FY 2004/05; EBL of 11.25% is the highest and BOK of 6.95% is lowest in FY 2005/06; EBL of 13.15% is the highest

and NIC of 5.96% is lowest in FY 2006/07; EBL of 11.13% is highest and BOK of 9.10% is the lowest in FY 2007/08; EBL of 18.50% is the highest and NIC of 9.38% is the lowest in the FY 2008/09 among three banks. Furthermore figure 4.20 helps to find out the trend of three banks Cash & Bank Balance Ratio over the last five years period.

Figure 4.20 Cash & Bank Balance Ratio


20 18 16 14 12 10 8 6 4 2 2004/05 2005/06 2006/07 Years 2007/08 2008/09

CBBR

EBL BOK NIC

Figure 4.20 is the trend analysis of three banks over the five years study period. As shown in the figure Cash & Bank Balance Ratio of EBL started by 10.40% in FY 2004/05, increased there after till 2006/07 and decreases in FY 2007/08, again increased in FY 2008/09 and reached to 18.50% in FY 2008/09. Overall, Cash & Bank Balance Ratio of EBL increases.

Similarly, Cash & Bank Balance Ratio of BOK started with 8.25% in FY 2004/05, then decreases in 2005/06 after that increases in FY 2006/07 and again decreased in FY 2007/08, increases in FY 2008/09 and reached to 10.51%. Overall Cash & Bank Balance Ratio of BOK is slightly increasing.

Likewise, Cash & Bank Balance Ratio of NIC stared with 16.19% in FY 2004/05, decreases in FY 2005/06 and 2006/07 after that increases in FY 2007/08 and 2008/09 and reached to 9.38%. This also shows the decreasing trend in overall.

4.2.5.2 Investment in Government Security Ratio (IGSR) Government securities are known as risk free assets, which are easily converted into cash to meet the short term obligation. Thats why every commercial bank has to invest their certain amount in government securities. This ratio calculated as:

Investment in Govt. Security Investment in Govt. Security Ratio = Total Deposit Table 4.11 is the observed Investment in Government Security Ratio of three banks during the study period in numerical terms which is presented below: 100%

Table 4.11 Investment in Government Security Ratio Total Investment in Govt. Security 2,100,289,702 2004/05 EBL 2,146,619,488 BOK 1,194,313,877 NIC 3,548,616,968 2005/06 EBL 2,658,369,057 BOK 1,756,585,150 NIC 4,704,632,426 2006/07 EBL 2,332,041,251 BOK 1,104,060,515 NIC 4,821,604,740 2007/08 EBL 2,113,223,115 BOK 1,545,375,347 NIC 5,146,045,773 2008/09 EBL 1,744,976,571 BOK 2,195,003,685 NIC (Sources: Appendix 3, 4 & 5) Fiscal Year Banks Total Deposit Investment in Govt. Security Ratio 20.80 23.92 19.14 25.71 25.35 20.04 25.87 18.82 10.97 20.11 13.35 11.81 15.44 9.65 14.09

10,097,690,989 8,975,780,868 6,241,378,160 13,802,444,988 10,485,359,239 8,765,950,638 18,186,253,541 12,388,927,294 10,068,230,869 23,976,298,535 15,833,737,799 13,084,688,672 33,322,946,246 18,083,980,266 15,579,930,904

Figure 4.21 is a bar diagram which represents the above tabulated numerical data which helps to compare the Investment in Government Security Ratio among three banks.

Figure 4.21 Investment in Government Security Ratio


30 25 20
EBL BOK NIC

IGSR

15 10 5 2004/05 2005/06 2006/07 Years 2007/08 2008/09

As shown in the table 4.11 and figure 4.21, the Investment in Government Security Ratio of BOK of 23.92% is the highest and NIC of 19.14% is the lowest in FY 2004/05; BOK of 25.35% is the highest and NIC of 20.04% is lowest in FY 2005/06; EBL of 25.87% is the highest and NIC of 10.97% is lowest in FY 2006/07; EBL of 20.11% is highest and NIC of 11.81% is the lowest in FY 2007/08; EBL of 15.44% is the highest and BOK of 9.65% is the lowest in the FY 2008/09 among three banks. Furthermore figure 4.22 helps to find out the trend of three banks Investment in Government Security Ratio over the last five years period. Figure 4.22 Investment in Government Security Ratio

30 25 20
EBL BOK NIC

IGSR

15 10 5 2004/05 2005/06 2006/07 Years 2007/08 2008/09

Figure 4.22 is the trend analysis of three banks over the five years study period. As shown in the figure Investment in Government Security Ratio of EBL started by 20.80% in FY 2004/05, increased there after till FY 2006/07 and decreases in FY 2007/08, again decreased in FY 2008/09 and reached to 15.44%. Overall, Investment in Government Security Ratio of EBL decreases.

Similarly, Investment in Government Security Ratio of BOK started with 23.92% in FY 2004/05, then increases in 2005/06 after that decreases till FY 2008/09 and reached to 9.65% in the FY 2008/09. Overall Investment in Government Security Ratio of BOK also is in decreasing trend.

Likewise, Investment in Government Security Ratio of NIC stared with 19.14% in FY 2004/05, increases in FY 2005/06 and after that decreases in FY 2006/07 and again increases till in FY 2008/09 and reached to 14.09%. This is fluctuating trend in overall.

4.6 Major Findings The major findings of the study of CAMEL Analysis of Everest Bank Ltd, Bank of Kathmandu and Nepal Industrial and commercial Bank Ltd are as follows:

Total Capital Adequacy ratios (CAR) of EBL were 13.57% to 11.20% during the review period. It was in decreasing trend. The ratio of 13.57% was maximum in FY

2004/05 and ratio of 11.20% was minimum in FY 2008/09. The Capital Adequacy ratios of BOK in the review period were 11.01%, 14.52%, 12.38%, 11.93% and 12.52%. The ratio of 14.52% was highest in FY 2005/06 and the ratio of 11.01% was lowest in 2004/05. In the same way, the capital adequacy ratios of NIC were 13.29%, 13.54%, 12.20%, 13.11% and 12.42%. The highest ratio was 13.54% in FY 2005/06 and lowest was 12.20% in FY 2006/07. In general, all three banks were able to maintain CAR as per NRB standard during the study period i.e. 11%.

The Core Capital Ratio (CCR) of EBL in fluctuating trend. The highest CCR was 9.03% in FY 2007/08 and lowest ratio was 7.82% in 2006/07. However, the bank was able to maintain more then 5.5% above the NRB requirement during study period. The ratios of BOK were 10.01%, 10.71%. 9.32%, 9.57% and 10.51% and highest ratio was 1071% in FY 2005/06 and lowest was 9.32% in FY 2006/07. The BOK also success to maintain NRB requirement. As same way, the maximum CCR of NIC was 12.37% in FY 2004/05 and minimum was 9.21% in FY 2006/07. However, it is judged that all banks were maintain more CCR than NRB has Prescribed.

Non Performing Loan Ratios were in decreasing over the study period, it means the banks were able to collect the loans. The ratio of BOK was greater than other two banks i.e. 1.27% in FY 2008/09. It seems that BOK has high non performing loan as compare to other banks. Where, the EBL bank has lowest non performing loan ratio i.e. 0.48% in FY 2008/09 which show that EBL has maintained its loan and advance most efficiently and effectively.

Loan loss coverage ratios of EBL was 218.48% in FY 2004/05 and it was increasing up to 392.73% in FY 2007/08 and then decreased to 192.24% in FY 2008/09. BOK has also increasing trend of loan loss coverage ratio up to FY 2006/07 and slightly decreased in FY 2007/08 and again increased in FY 2008/09. NIC has also increasing loan loss coverage ratio but its decreased in 2008/09. Over all, BOK has lowest loan loss coverage ratio as compare to other two banks. And

EBL has highest loan loss coverage ratio which shows the better financial position. The loan loss provision has been maintained for NPL and has been increasing which is good sign.

The loan loss provision ratios of all three banks were in decreasing trend. As per the FY 2008/09, EBL has the lowest loan loss provision ratio which indicates that the EBL has better quality loan and BOK has highest ratio which means BOK has not enough good loan the year as compare to other banks.

Total management efficiency ratios (MER) of EBL were Rs.654532.00 to Rs.1202887.00 during the review period. The ratio of Rs.1202887.00 was maximum in FY 2008/09 and ratio of Rs.654532.00 was minimum in FY 2004/05. The highest management efficiency ratio of BOK was Rs.1465849.00 and lowest was Rs.815963.00 in FY 2006/07 and FY 2004/058. In the same way, the management efficiency ratios of NIC were increasing trend. The highest ratio was Rs.1175682.00 in FY 2008/09 and lowest was Rs.581853.00 in FY 2005/06. As per the latest data i.e. 2008/09 EBL has the highest MER i.e. Rs.1202887.00.

When net profit of bank is high, the Earning per share (EPS) of the bank will also be high which shows the bank is in good condition. EPS of EBL is in increasing trend and in FY 2008/09 EBL has highest EPS which shows that the bank is in best position compare to other banks. This is the good sign to shareholders. EPS of BOK is in fluctuating trend and NIC has also fluctuating EPS during the study period. In overall, EBL is in good position as per EPS.

The return on equity consists of ratio between net profit after tax and equity. The ratio of EBL is fluctuating trend. ROE of EBL was decreased in 2005/06 and then increasing. ROE of BOK is in increasing trend which is better for shareholders. NIC has also fluctuating ROE which decreased in 2005/06. A return on equity calculates to see the profitability of the owners investment. Higher ratio shows that

profitability of owners investment is increasing. As compare to other banks BOK has highest ROE in FY 2008/09.

Return on assets (ROA) comprises net profit after tax and total assets. It shows the percentage of return that a firm gets from the total assets. It shows how well the firm is doing. Here in the study EBL and NIC has fluctuating ROA but BOK has increasing trend of ROA.

The Cash and bank balance ratio of EBL fluctuated over the period. First three year the cash and bank balance ratio increased and then decreased in FY 2007/08, after that increased in FY 2008/09 and reached to 18.50%. BOK has also fluctuated Cash and Bank balance ratio and maintained 10.45% in FY 2008/09. In the same way, NIC has also fluctuated ratio. The ratio was decreasing from FY 2004/05 to FY 2006/07 and after that the ratios were increasing in FY 2007/08 and in FY 2008/09.

The Investment in government security ratio (IGSR) of EBL is fluctuating in the course of the study period. EBL has maximum IGSR of 25.87% in FY 2006/07 and minimum IGSR of 15.44% in FY 2008/09. Now, BOK has highest IGSR of 25.35% in FY 2005/06 and lowest of 9.65% in FY 2008/09. In the same way, highest IGSR of NIC is 20.04% in FY 2005/05 and lowest of 10.97% in FY 2006/07. From comparative analysis of new data i.e. 2008/09, we can see that EBL has maximum and NIC has minimum IGSR.

CHAPTER - V
SUMMARY, CONCLUSION AND RECOMMENDATIONS
This chapter includes three aspects of the study- summary, conclusion and recommendations. The first aspect summarizing the whole study, the second draws the conclusion and the last but not he least recommendations.

5.1 Summary The study was conducted with the objective to analyze and compare the financial performances of Everest Bank Ltd. (EBL), Bank of Kathmandu (BOK) and Nepal Industrial and Commercial Bank Ltd. (NIC) in the framework of CAMEL over the five years period from FY 2004/05 to 2008/09. The study is based on the secondary data. For the analysis of EBL, BOK and NIC are used as the major sources of data out of 26 commercial banks. CAMEL is a common method for analyzing the health of individual institution, to quantify the performance and the financial condition of the firm. It was designed by regulatory authorities and this study scrutinizes the financial performance of EBL, BOK and NIC as regards to CAMEL i.e. Capital Adequacy, Assets Quality, Management Earning and Liquidity. The analysis of financial statement is done to obtain a better sight into the banks position and performance. The various financial and statistical tools have been used in this study to get the meaningful result and to meet the research objectives.

During the research the areas that formed part of the conceptual review were; historical development of financial system and evolution of commercial banks in Nepal, concept of commercial banks, function of commercial banks and components of CAMEL. Besides these, reviews of various theses were carried out under research review. The analysis has been made to compare the companys ratios with NRB and international standard. The banks are successful to maintain Capital Adequacy Ratio as per NRB standard i.e. 11%. As per current data BOK has highest CAR. It means, BOK has higher

internal sources and comparatively strong financial position and security to depositors as compare to others. Similarly EBL, BOK and NIC bank are able to maintain the Core Capital Ratio as per prescribed by NRB of 5.5%. The highest CCR shows the protection and security to creditors and depositors and financial soundness of the company.

The lower non performing loan ratio reflects the good performance of the banks in mobilizing loan and advance. EBL has lower NPL ratio, it indicates the better proportion of performing loans and risk of default (credit) than BOK and NIC. NPL ratio is in decreasing trend where is the loan loss coverage ratio of bank is increasing in each year. In the same way, loan loss provision ration is decreasing. Lower LLP ratio is better for the banks. EBL has lower LLP ratio as compare to BOK and NIC.

The management efficiency ratio (MER) indicates the better operation of the bank and better profitability. MER is fluctuation over the study period. EBL has highest MER, it indicates the better operation management and better printability of EBL.

EPS of all three banks are in increasing trend but EBL has highest EPS than other two banks. The ROE of all banks are in increasing trend with fluctuation. Similarly, ROA of EBL and NIC are in increasing trend with fluctuation but BOK has increasing trend of ROA.

The higher cash and bank balance ratio and Investment in Government Security ratio of EBL indicates that the liquidity position of EBL is strong than other two banks.

5.2 Conclusion Based on the findings, following conclusions have drawn as the concluding framework of the study on CAMEL analysis. 1. Capital Adequacy Ratio (CAR) reveals that the bank is running with the adequate capital and the capital fund of the bank is sound and sufficient to meet the banking operation as per the NRB standard. CAR of all banks is above the NRB standard.

2. Core Capital Ratio (CCR) measured in terms of core capital to risk weighted assets is as per NRB standard. It means the bank is using adequate amount of the internal sources or core capital is past five years. In this point of view the bank is financially sound and strong.

3. The decreasing trend of non-performing loans ratio helps to conclude that the bank is aware of non performing loans and adopting the appropriate policies to manage this problem and to increase the quality of assets.

4. The increasing trend of loan loss coverage ratio shows that the banks are taking appropriate recovery policy.

5. The decreasing trend of loan loss provision ratio indicates that the quality of loans becoming upgrading year by year. It seems that amount of non performing loans and possibility of default in future is decreasing.

6. The management efficiency ratio depicts efficiencies and productivity as a result of well managed of human resources in terms of profitability. 7. The increasing trend of EPS depicts that the return flowing to the banks owner is increasing. This tendency reflects the strength of the share in the market is also increasing. 8. The increasing trend of ROE shows that the rate of return flowing to the banks shareholders is upgrading year by year.

9. The increasing trend of ROA concludes that the net income for each unit of assets of the bank is increasing. This shows that the capability of the management to converting the banks assts into net earning is increasing.

10. The cash and bank balance to total deposit ratio of all banks are in fluctuating trend but EBL has the highest among three banks. Similarly, investment in government security ratio of all banks are also in fluctuating trend and in this case also, EBL has highest ratio, EBL presents itself as most secured from the liquidation risk among all three banks.

5.3 Recommendations The following recommendations are made based on the conclusions as suggestion to overcome the weakness as regard to financial performance of Everest Bank Limited (EBL), Bank of Kathmandu (BOK) and Nepal Industrial and Commercial Bank (NIC).

1. Capital Adequacy Ratio and Core Capital Ratio of all banks are as per NRB standard over the review period but are in fluctuating trend. So recommendation is provided and maintain stable if possible increase core capital fund to increase Capital Adequacy Ratio and Core Capital Ratio.

2. The assets quality ratio of all banks are in satisfactory level and being better each year. So, the recommendation is to maintain non performing loan ratio as lower as possible and try to give additional attention in recovering the doubtful and loss loan in future and try to increase its performing loan ratio.

3. The management efficiency ratio of EBL and NIC seems to be satisfactory as compare to BOK. So, the recommendation is that the BOK should increase Net Profit after Tax and should not appoint extra employee in organization.

4. The earning quality ratios of banks like EPS, ROE and ROA are in increasing trend. So, all banks recommended that to increase more profit of the bank should minimized its operating cost by increasing the operating efficiency of its employees.

5. Liquid assets of the commercial banks play an important role to meet the day to day and short term obligation. if liquid assets of the banks are not maintained properly then there is a high probability of banks going to liquidation. The liquidity ratio of EBL seems to be satisfactory among three banks but BOK and NIC should be careful and try to increase liquidity position by increasing Cash and Bank Balance Ratio and Investment in Government Security Ratio

BIBLIOGRAPHY
Books Adhikari, N.K. & Shrestha, P. (2063). A Text Book on Corporate Finance. Kathmandu: Khushbu Prakasan Pvt. Ltd. Barealy, R. & Stewart M. (2000). Principle of Corporate Finance. India: Tata McGraw Hill Publishing Company Limited, Brigham, E. & Houston, J. (2000). Fundamental of Financial Management, 3rd edition. New York: Harcourt College Publishers. Brigham, E.F. & Gaspenski, L.C. (1985). Financial Management, Theory and Practice. New York: The Dryden Press. Cheney, J.M. & Moses, E.A. (1993). Fundamental of Investment. St.Paul: West Publishing Co. Encyclopedia, The World Book, America: Grolier Incorporated. Madura, J. (1999). Financial Institutions and Markets. New Delhi: Akash Press. Thapa, K. (2060). Corporate Financial Management, Theory and Practice. Kathmandu: Khanal Books and Stationary. Thapa, K., Bhattrai, R., & Basnet, D. (2006). Investment: Theory and Solution. Kathmandu: Asmita Books Publishers and Distributors. Weston, J.F. & Copeland, J.F. (1992). Managerial Finance. Chicago: The Dryden Press.

Journals and Publications Berger, A.N., & Davies, S.M. (1994). The Information Content of Bank Examinations. Journal of Financial Services Research. Dhungana, B.R. Problem Bank Identification, Correction & Resolution Mechanism in Nepal. 53rd Anniversary Special Issue. Hirtle, B.J. & Lopez, J.A. (1999). Supervisory Information and the Frequency of Bank Examination. Federal Reserve Bank of New York, Economic Policy Review. Jha, Resta (2009) Troubled Global Economy-Cause and Concern, The Boss. Pant Radish, Nepal Newbiz, Feb. 2006.

Thesis Bhandari, K.R. (2006). The Financial Performance of Himalayan Bank Ltd. in the Framework of CAMEL. An Unpublished Master Degree Thesis submitted to Faculty of Management, T.U. Bhusal, M. (2008). Financial Performance Analysis of commercial banks In Nepal the Frame work of CAMEL (A Comparative Study of Kumari Bank and

Machhapuchchhre Bank.

An Unpublished Master Degree Thesis submitted to

Faculty of Management, T.U. Chand, K.B. (2007). Financial Performance Analysis (CAMEL - Test) of Selected CBs (Nabil, NIBL &SCBL). An Unpublished Master Degree Thesis submitted to Faculty of Management, T.U. Poudel, R. (2007). A Study on Comparative Analysis of Financial Performance Between Himalayan Bank and Standard Charted Bank. An Unpublished Master Degree Thesis submitted to Faculty of Management, T.U. Sharma, S.R. (2007). Financial Performance Analysis of Nepal SBI Bank Ltd. In the Frame work of CAMEL. An Unpublished Master Degree Thesis submitted to Faculty of Management, T.U. Shrestha M.D. (2003). Capital Adequacy Norms for Commercial Banks and its Impact of Bank (Himalayan Bank Ltd). An Unpublished Master Degree Thesis submitted to Faculty of Management, T.U. Singh, R.B. (2008). A Study of CAMEL Analysis of Commercial banks (SCBNL, HBL & Nabil Bank). An Unpublished Master Degree Thesis submitted to Faculty of Management, T.U. Websites www.bok.com.np www.everstbankltd.com www.google.com www.googlescholar.com www.nicbank.com.np www.nrb.org.np

Appendix 1 Share Capital of 2008/09


Capital Authorized Capital Issued Capital Paid Up Capital EBL 1,000,000,000 840,620,000 838,821,000 BOK 1,000,000,000 844,397,900 844,397,900 NIC 1,600,000,000 1,140,480,000 1,140,480,000

Sources: Annual Report of EBL, BOK and NIC of Fiscal year 2008/09

Appendix 2 Share Capital and Shareholding of 2008/09


Share ownership particulars A. Promoters 1.1 Nepal Government 1.2 Foreign Institutions 1.3 A Class Licensed institutions 1.4 Other Licensed Institutions 1.5 Other Institutions 1.6 Individual 1.7 Others B. General Public C. Joint Partner Punjab National Bank, India Total EBL Amount in % % Rs. 50 321,235,140 41.81 BOK Amount in Rs. 353,036,900 NIC Amount in Rs. 581,644,800

% 51

9.34 40.66

59,696,190

2.2

18,593,400 334,443,500 491,361,000 51 49 581,644,800 558,835,200

261538950 39.61

30 189,091,780 58.19 20 128,494,080 100 638,821,000 100

844,397,900 100 1,140,480,000

Sources: Annual Report of EBL, BOK and NIC of Fiscal year 2008/09

Appendix 3 Everest Bank Limited


2004/05 Total Capital Fund Core Capital Fund Total Risk Weighted Assets Total Non Performin g loan Total Loan & Advances Total Loan Loss Provision Net Profit After Tax Total Sharehold ers' Fund Total Assets Cash & Bank Balance Total Deposit Total Investmen t in Govt. Security No. of Share outst1,247,562,000 2005/06 1,391,339,000 2006/07 1,676,115,000 2007/08 2,406,056,000 2008/09 2,703,870,000

816,793,000

927,550,000

1,171,133,000

1,900,859,000

1,981,579,000

9,195,588,000

11,291,137,000

14,976,737,000

21,039,879,000

24,131,922,000

128,807,745

129,235,790

113,178,936

126,639,038

117,985,232

7,900,090,271

10,136,254,448

14,082,686,087

18,836,431,762

24,366,195,740

281,418,795 168,214,611 832,617,365 11,732,516,418 1,049,989,208 10,097,690,989

334,946,772 237,290,936 1,391,339,000 15,959,284,687 1,552,967,494 13,802,444,988

418,604,423 296,409,281 1,676,116,000 21,432,574,300 2,391,420,594 18,186,253,541

497,346,200 451,218,613 2,406,056,000 27,149,342,884 2,667,971,831 23,976,298,535

226,816,062 638,732,757 2,703,870,000 36,916,848,654 6,164,371,163 33,322,946,246

2,100,289,702

3,548,616,968

4,704,632,426

4,821,604,740

5,146,045,773

3,150,000

3,780,000

3,780,000

4,914,000

6,388,210

anding Total no. of Staffs

257

306

393

449

531

Sources: Annual Report of EBL of Fiscal year 2004/05 to 2008/09

Appendix 4 Bank of Kathmandu


2004/05 Total Capital Fund Core Capital Fund Total Risk Weighted Assets Total Non Performing loan Total Loan & Advances Total Loan Loss Provision Net Profit After Tax Total Shareholder s' Fund Total Assets Cash & Bank Balance Total Deposit Total Investment in Govt. Security 763,528,243 694,351,456 6,936,942,398 2005/06 1,100,797,467 811,917,204 7,583,653,036 2006/07 1,265,828,177 953,263,195 10,226,193,976 2007/08 1,635,235,217 1,310,851,552 13,702,369,666 2008/09 2,005,695,528 1,683,588,123 16,025,037,210

308,506,039 6,182,045,019 269,465,548 139,529,721 763,528,243 9,888,533,138 740,520,482 8,975,780,868

203,624,470 7,488,700,923 229,618,344 202,440,627 1,100,797,467 12,278,329,302 728,697,092 10,485,359,239

243,296,250 9,694,101,954 294,774,337 262,386,980 1,290,124,103 14,581,394,916 1,315,903,941 12,388,927,294

236,898,850 12,747,721,603 285,084,062 361,496,879 1,635,235,217 17,721,925,187 1,440,466,943 15,833,737,799

190,315,657 14,945,719,764 298,422,777 461,734,911 2,005,695,528 20,496,005,483 1,889,174,230 18,083,980,266

2,146,619,488

2,658,369,057

2,332,041,251

2,113,223,115

1,744,976,571

No. of Share outstanding Total no. of Staffs

4,635,809 171

4,635,809 177

6,031,413 179

6,031,413 390

8,443,979 489

Sources: Annual Report of BOK of Fiscal year 2004/05 to 2008/09

Appendix 5 Nepal Industrial and Commercial Bank Limited


2004/05 Total Capital Fund Core Capital Fund Total Risk Weighted Assets Total Non Performin g loan Total Loan & Advances Total Loan Loss Provision Net Profit After Tax Total Sharehold ers' Fund Total Assets Cash & Bank Balance 730,985,785 2005/06 1,036,838,663 2006/07 1,208,607,803 2007/08 1,615,719,466 2008/09 1,954,934,793

680,142,550

761,128,967

911,806,552

1,293,750,759

1,649,007,425

5,499,435,330

7,656,131,091

9,905,036,012

12,321,131,296 15,741,613,929

185,430,811

179,554,435

101,140,201

98,167,144

129,178,432

4,909,355,200

6,902,123,944

9,128,649,206

11,465,334,005 13,915,850,035

197,642,899 113,755,734 730,985,785 7,510,396,565 1,010,386,565

246,159,924 96,587,674 1,036,838,663 10,383,601,708 749,139,079

187,251,555 158,475,051 1,209,113,613 11,678,834,055 599,758,632

200,655,909 243,058,040 1,615,719,466

236,456,256 317,434,138 1,954,934,793

15,238,736,314 18,750,633,197 1,192,348,786 1,461,150,549

Total Deposit Total Investmen t in Govt. Security No. of Share outstanding Total no. of Staffs

6,241,378,160

8,765,950,638

10,068,230,869

13,084,688,672 15,579,930,904

1,194,313,877

1,756,585,150

1,104,060,515

1,545,375,347

2,195,003,685

5,000,000

6,600,000

6,600,000

9,438,771

11,404,800

157

166

189

232

270

Sources: Annual Report of NIC of Fiscal year 2004/05 to 2008/09