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USE OF CAMEL RATIO IN PREDICTION OF FINANCIAL HEALTH OF GOVERNMENT OWNED COMMERCIAL BANKS BY Rohan Byanjankar Symbol Number: 13043/13 Registration Number: 7-2-1013-007-2013 A Summer Project Report Submitted to Faculty of Management, Tribhuvan University in the partial fulfillment of the requirements for the degree of Bachelor of Business Administration at the Sainik Awasiya Mahavidyalaya Tribhuvan University

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Page 1: Student’s Declaration - Web viewThis is to certify that the summer project entitled “Use of CAMEL ratio in Prediction of Financial Health of Government Owned ... Bachelor of Business

USE OF CAMEL RATIO IN PREDICTION OF

FINANCIAL HEALTH OF GOVERNMENT OWNED

COMMERCIAL BANKS

BY

Rohan ByanjankarSymbol Number: 13043/13

Registration Number: 7-2-1013-007-2013

A Summer Project Report Submitted to

Faculty of Management, Tribhuvan Universityin the partial fulfillment of the requirements for the degree of

Bachelor of Business Administration

at the

Sainik Awasiya Mahavidyalaya

Tribhuvan University

Sallaghari, Bhaktapur

April 2017

Page 2: Student’s Declaration - Web viewThis is to certify that the summer project entitled “Use of CAMEL ratio in Prediction of Financial Health of Government Owned ... Bachelor of Business

STUDENT’S DECLARATION

This is to certify that I have completed the Summer Project entitled “Use of CAMEL

ratio in Prediction of Financial Health of Government Owned Commercial Banks”

under the guidance of “Mr. Krishna Prasad Gwachha” in partial fulfillment of the

requirements for the degree of Bachelor of Business Administration at Faculty of

Management, Tribhuvan University. This is my original work and I have not

submitted it earlier elsewhere.

Date: 27th April 2017 Signature:

Name: Rohan Byanjankar

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CERTIFICATE FROM THE SUPERVISOR

This is to certify that the summer project entitled “Use of CAMEL ratio in Prediction

of Financial Health of Government Owned Commercial Banks” is an academic work

done by “Rohan Byanjankar” submitted in the partial fulfillment of the requirements

for the degree of Bachelor of Business Administration at Faculty of Management,

Tribhuvan University under my guidance and supervision of Krishna Prasad

Gwachha. To the best of my knowledge, the information presented by him/her in the

summer project report has not been submitted earlier. 

 

 

 

____________________

Signature of the Supervisor

Krishna Prasad Gwachha

Faculty of Finance,

Sainik Awasiya Mahavidyalaya, Sallaghari, Bhaktapur

Date: 27th April 2017

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ACKNOWLEDGEMENT

I would like to express my sincere gratitude to Sainik Awashiya Mahavidyalaya,

Sallaghari, Bhaktapur, for providing the golden opportunity to prepare a project work

on “Use of CAMEL ratio in Prediction of Financial Health of Government Owned

Commercial Banks”. The research work is a rigorous task and calls for stringent

effort. The horizon of knowledge proliferated with the exploration of facts and

figures; also it has made me aware of the contemporary banking scenario of Nepal

along with the abridged picturesque of Nepalese Banking System. Moreover, I

experience and enjoyed the difficulty in conducting research, however, I got

opportunity to hone my language, knowledge, and talent.

I am extremely thankful to Mr. Krishna Prasad Gwachha for his immeasurable

guidance, inspiration, and resource materials, without which I would not have been

able to prepare this project work being in bound of complete formality. I express my

sincere thanks to Mr. Ram Singh Budal, BBA Coordinator; SAMB for his time and

advises in managing the content of the project work. I express my sincere thanks to

our friends for their time and advises to sharpen up this study.

As learning is not just acquiring knowledge from books only but also implementing it

in real life situation. Therefore, this is the platform where we get the opportunity to

exhibit our skills, creativity etc. Such work will certainly lay the foundation stone for

us to enhance the degree of our potentiality.

I would be obliged to any suggestions and comments from the readers that will assist

in further improvement of this project work.

Rohan Byanjankar

April 2017

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TABLE OF CONTENTS

Student’s Declaration...........................................................................................................

Certificate From the Supervisor..........................................................................................

Acknowledgement..............................................................................................................

Table of Contents................................................................................................................

List of Tables......................................................................................................................

List of Figures....................................................................................................................

Abbreviations...................................................................................................................

Executive Summary............................................................................................................

CHAPTER I INTRODUCTION

1.1. Context Information........................................................................................1

1.1.1. Introduction..............................................................................................1

1.1.2. Overview of CAMELS Framework.........................................................2

1.2. Purpose of the Study........................................................................................5

1.3. Significance of the Study.................................................................................5

1.4. Limitation of the Study....................................................................................6

1.5. Literature Survey.............................................................................................6

1.6. Research Methods used for Data Collection and Analysis.............................9

1.6.1. Research Design.......................................................................................9

1.6.2. Population and Sample.............................................................................9

1.6.3. Sources of Data........................................................................................9

1.6.4. Data Processing Technique....................................................................10

CHAPTER II DATA PRESENTATION AND ANALYSIS

2.1. Organization Profile......................................................................................11

2.1.1. Rastriya Banijya Bank............................................................................11

2.1.2. Nepal Bank Limited (NBL)...................................................................11

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2.1.3. Agriculture Development Bank.............................................................12

2.2. Data Presentation...........................................................................................12

2.2.1. Capital Adequacy...................................................................................12

2.2.2. Asset Quality..........................................................................................15

2.2.3. Management Capability.........................................................................18

2.2.4. Earnings..................................................................................................21

2.2.5. Liquidity.................................................................................................24

2.3. Data Analysis.................................................................................................27

2.3.1. Analysis of Coefficient of Variation, Skewness, and Kurtosis..............28

2.3.2. Correlation Matrix..................................................................................32

2.3.3. Regression Analysis...............................................................................32

2.4. Findings and Discussion................................................................................35

2.4.1. Findings..................................................................................................35

2.4.2. Discussion..............................................................................................36

CHAPTER III CONCLUSION AND ACTION IMPLICATION

3.1. Conclusion.....................................................................................................38

3.2. Action Implications.......................................................................................39

References

Appendices

Appendix 1: Definition of Financial Terms

Appendix 2: Indicators of Each Components of CAMEL Framework

Appendix 3: Descriptive Statistical Tools Using Microsoft Excel

Appendix 4: Financial Profile of Sample Banks

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LIST OF TABLES

Table Number

Details Page Number

Table 2.1 Capital Adequacy Ratio 14

Table 2.2 Total Loans and Advances, Non-Performing Loan, and Loan Loss Provision

17

Table 2.3 Operating Expense Ratio and Asset Utilization Ratio of Sampled Banks

20

Table 2.4 ROE, ROA, and PM of sampled banks over 6 years 23

Table 2.5 Loan to deposit Ratio, Cash Reserve Ratio, and Cash and Equivalent to Total Asset ratio

26

Table 2.6 Coefficient of Variation, Skewness, and Kurtosis of indicators of components of CAMEL Framework

29

Table 2.7 Correlation Matrix showing relationship between Earnings and other indicators of CAMEL Framework

33

Table 4.1 Financial Profile of Nepal Bank Limited

Table 4.2 Financial Profile of Rastriya Banijya Bank

Table 4.3 Financial Profile of Agricultural Development Bank

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LIST OF FIGURES

Figure Number

Details Page Number

Figure 2.1 CC to RWA and CAR of Sampled Banks 14

Figure 2.2 Average CC to RWA and CAR of Sampled Banks over 6 years along with IACAR

15

Figure 2.3 NPLR and LLPR of sampled banks over 6 years 17

Figure 2.4 LLP/NPL ratio of sampled banks over 6 years 18

Figure 2.5 Operating Expenses Ratio of sampled banks over 6 years

20

Figure 2.6 Asset Utilization Ratio of sampled banks over 6 years 20

Figure 2.7 ROE and Profit Margin of sampled banks over 6 years 23

Figure 2.8 Return on Asset of Sampled banks over 6 years 24

Figure 2.9 LDR, Average LDR, and Required LDR of sampled banks over 6 years

26

Figure 2.10 Cash Reserve Ratio of sampled banks over 6 years. 27

Figure 2.11 Coefficient of Variation of CAMEL ratios of Sampled Banks over 6 Years

29

Figure 2.12 Skewness of CAMEL ratios of Sampled Banks over 6 Years

30

Figure 2.13 Kurtosis of related ratios of Sampled Banks over 6 years 31

Figure 2.14 Relationship of AUR with ROE, ROA and, PM 33

Figure 2.15 Relationship of NPL with ROE, ROA, and PM 34

Figure 2.16 Relationship of LDR with ROE, ROA, and PM 34

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ABBREVIATIONS

ADB: Asian Development Bank

ADBL: Agricultural Development Bank Limited

AUR: Asset Utilization Ratio

CAMELS: Capital Adequacy, Asset Quality, Management Capability, Earnings,

Liquidity and Sensitivity to Market

CAR: Capital Adequacy Ratio

CBNRBR: Cash Balance at NRB Ratio

CBTAR: Cash Balance to Total Asset Ratio

CBTDR: Cash Balance to Total Deposit Ratio

CCD: Credit to Core Capital cum Deposit Ratio

CCR: Core Capital to Risk Weighted Asset

CDR: Credit to Deposit Ratio

CRAR: Capital to Risk Weighted Asset Ratio

EPS: Earning Per Share

LDR: Loan to Deposit Ratio

LLP: Loan Loss Provision

LLPR: Loan Loss Provision Ratio

NBL: Nepal Bank Limited

NII: Net Interest Income

NPL: Non-Performing Loan

NPLR: Non-Performing Loan Ratio

NRB: Nepal Rastra Bank

PM: Profit Margin

RBBL: Rastriya Banijya Bank Limited

ROA: Return on Asset

ROE: Return on Equity

TA: Total Asset

TD: Total Deposit

TLA: Total Loans and Advances

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EXECUTIVE SUMMARY

In the modern era, the banking sector has proved its striking eminence; it holds a big

support to the economy of any nation chiefly because of the transactions of huge,

ever-proliferating wherewithal. Banking is a complex system and the complete study

of banking system calls for rigorous efforts in data collection, analysis, and

interpretation; however, the vested interest of a researcher lie profusely. The prime

objective of this research to use CAMEL ratio in Prediction of Financial Health of

Government Owned Commercial Banks. Three commercial banks, Nepal Bank

Limited, Rastriya Banijya Bank Limited, and Agricultural Development Bank

Limited, served as the subjects in the study designed to investigate the six years’

(2011 to 2016) financial performance of commercial banks. The study made use of

secondary obtained from Bank Supervision Report, and Banking and Financial

Statistics by Nepal Rastra Bank, and Annual Reports of concerned commercial banks.

Each of the component of CAMEL has been examined being based on corresponding

financial ratios. Capital Adequacy Ratio and Core Capital to Risk Weighted Exposure

have been examined to assess capital adequacy, and Asset Quality has been inspected

by analyzing Non-performing loan and Loan Loss Provision. Management Capability

is an qualitative aspect, and has been appraised by assessing Operating Expense Ratio

and Asset Utilization Ratio; Return on Asset, Return on Equity, and Profit Margin

have been analyzed to study the profitability. Liquidity position of sampled banks

have been gauged by perusing Loan to Deposit Ratio, Cash and Equivalent to Total

Asset, Cash and Equivalent to Total Deposit, and Cash Balance at NRB to Total

Deposit. Moreover, descriptive statistical tools such as mean, median, standard

deviation, coefficient of variation, skewness, and kurtosis have been used. The results

reveals that the current status of government owned commercial banks of Nepal is

satisfactory. Each of the indicators of components of CAMEL is evincing the positive

signal, which concludes that the overall financial scenario of government owned

commercial banks is strengthening. ROA and Profit Margin have positive relationship

with AUR and LDR, while ROE has negative relationship with both AUR and LDR.

Further, the result evinces that ROE, ROA and Profit Margin have positive

relationship with Non-performing loan. Lastly, the result evinces that NPLR and LDR

have consistency over study years, while indicators of capital adequacy have high

inconsistency.

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CHAPTER I

INTRODUCTION

1.1. Context Information

1.1.1. Introduction

Financial Institutions have become one of the indispensable components of economy

of every nation. The proper financial system is the utmost requirement for the smooth

functioning of an economy. Among myriad financial institutions, commercial banks

make up the largest group of depository institutions measured by asset size.

“Commercial Banks are those banks that sell deposits and make loan to businesses

and individuals. Commercial banks are the largest deposit holders, and they are the

largest source of loans to consumer, and corporate.” (Rose & Hudgins, 2010)

The history of financial system of Nepal began in 1937 with the establishment of the

Nepal Bank Ltd. as the first commercial bank of Nepal with the joint ownership of

government and general public; Nepal Rastra Bank was established after 19 years

since the establishment of the first commercial bank. A decade after the establishment

of NRB, Rastriya Banijya Bank, a commercial bank under the ownership of

Government Nepal was established (Nepal Rastra Bank, 2015). NRB had adopted

standardized approach of Basel II in its simplified form- the simplified standardized

approach. NRB's traditional supervision methodology was based on compliance check

and CAMELS (Capital Adequacy, Asset Quality, Management competence, Earning,

Liquidity, and Sensitivity to Market Risk) ratings (Nepal Rastra Bank, 2015).

Nepalese economy is still in embryonic stage and struggling to blossom. The

remittance based Nepalese economy has about twenty-eight commercial banks, which

is deemed as not a favorable state by financial experts and economists. The health

check of commercial banks in Nepal has been the matter of concern for almost all

Nepalese people as commercial banks are the largest amongst the depository

institutions, with market capitalization of Rs. 1467.152 Billion, which is 50.82 percent

of total market capitalization (Rawal & Sapkota, 2016-17). Among twenty-eight

commercial banks in Nepal, three commercial banks are fully or partially owned by

Government of Nepal. The financial soundness of government owned commercial

bank in Nepal is the primary concern of the research report. All the commercial banks

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in Nepal are under surveillance of Nepal Rastra Bank, the central bank of Nepal.

NRB, the apex body of all banking and financial institutions, has recently adopted

principles of BASEL III accord, which clearly states that the financial soundness of

every commercial bank must be measured under CAMELS rating system (Nepal

Rastra Bank, 2015), however, Nepal Rastra Bank had been conducting financial

analysis under CAEL, that is, Capital Adequacy, Asset Quality, Earning and Liquidity

(Baral, 2005).

The financial soundness of government owned-giant commercial banks of Nepal is

the matter of concern for every individual, domestic and foreign corporation, and

Nepal Government itself. Hence, the health checkup of these three commercial banks

has been carried out by examining Capital adequacy, Asset quality, Management

quality, Earning, and Liquidity (CAMEL rating).

1.1.2. Overview of CAMELS Framework

Basel Committee on Banking Supervision, committee of the banks for international

settlements, an institution that promotes financial and monetary cooperation among

the world’s central banks (Encyclopedia Britannica, 2015). CAMELS rating system,

which consist of Capital adequacy, Asset Quality, Management Capability, Earnings

and Liquidity, has been recommended by Basel Committee on Banking Settlement as

the standard rating criteria for assessing a financial institution. However, the sixth

component, sensitivity (S) was added to CAMEL in 1995, which refers to sensitivity

to market risk and addresses interest rate risk. Most of the world’s central banks and

monetary institutions are using the CAMELS framework to assess the health of

financial institutions.

1.1.2.1. Capital Adequacy

CAMELS framework is widely regarded as the unabridged tool for assessing the

financial health of a financial institution. The six components of CAMELS framework

namely; capital adequacy, asset quality, management capability, earnings, and

liquidity are the focal points that reflects the degree of soundness of a financial

institution. The first component, capital adequacy that refers to the statutory minimum

reserves of capital a bank or other financial institutions must have available. Capital

adequacy determines how well the financial institution can manage with shocks to

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their balance sheet (Asian Development Bank, 2002). Hence, the capital adequacy

tracks the Capital Adequacy Ratio (CAR), which is a measure of a bank’s capital,

expressed as the percentage of a bank’s risk weighted asset. The capital adequacy

ratio takes into account the most important financial risks- foreign exchange risk,

credit risk and interest rate risk. The capital adequacy ratio is important from the view

point of solvency of bank as higher CAR denotes the ability of financial institution to

manage shocks with balance sheet resulted from untoward events which arise as a

result of credit risk as well as market risk, also foreign exchange risk (Baral, 2005).

Leverage ratio can be used to measure the capital adequacy of the bank and financial

institutions. Leverage ratio is calculated by dividing book value of core capital by

book value of total assets, which must be greater than 3 percent according to Basel III.

Leverage Ratio=CoreCapitalTotal Asset

≥ 3%

As per the directive of Nepal Rastra Bank, Capital Adequacy Ratio must be

maintained 11%; further, NRB has strictly directed all commercial banks that the

amount of the supplementary capital should not be in excess to the amount of the core

capital (Nepal Rastra Bank, 2015).

1.1.2.2. Asset Quality

Assets refers to the valuable rights owned by the company or financial institution, and

is the major component of balance sheet (Oxford Learner's Dictionary, 2017). Asset

of a company generates revenue in the form of interest or rent or any other form of

income such as interest on investment, interest on loan (housing loan, auto loan,

corporate loan, agriculture loan) (Kiyosaki, 2011). The asset side of financial

institutions is largely populated by Loans and advances, which occupies 64.84 percent

of total asset (Nepal Rastra Bank, 2015). Good loans are the most profitable asset of

every bank and financial institution (Rose & Hudgins, 2010). The quality of asset

determines the degree of credit risk exposure of a financial institution. Some of the

measures to indicate the quality of asset held by Financial Institutions are loan

concentration by industry, region borrower, and portfolio quality; pattern of cash

flow, loan-loss provision ratio, loan loss ratio, reserve ratio, and check and balance of

loans (Asian Development Bank, 2002).

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1.1.2.3. Management Capability

Management assessment determines whether an institution is able to properly react to

financial stress (Asian Development Bank, 2015). This component rating is reflected

by the management's capability to point out, measure, look after, and control risks of

the institution's daily activities. It covers the management's ability to ensure the safe

operation of the institution as they comply with the necessary and applicable internal

and external regulations (Asian Development Bank, 2002). Management Capability

refers to how well the management of the financial institutions is utilizing its

resources. It is concerned with deposit and credit marketing. The business strategy of

a bank is the key determinant of management capability of a bank or any

organization. A bank with strong management has high asset utilization rate, less

operating expense ratio, high earnings per employee.

1.1.2.4. Earning

Healthy financial institutions have high earning capability other things remain

constant. Profitability is the major determinant of smooth operation of financial

institutions; however, high profitability reflects excessive risk taking by financial

institution (Saunders & Cornett, 2007). Return on Asset, Return on Equity, Net

Interest Income (NII), and Earning per Share (EPS) are major four tools used to assess

profitability of financial institutions. NRB uses return on total assets as an indicator of

profitability of a commercial bank. It also uses interest income, net interest income,

non-interest income, operating income, and net profit to evaluate the profitability of a

commercial bank (Nepal Rastra Bank, 2015).

1.1.2.5. Liquidity

One of the most important tasks the management of any financial institutions faces

ensuring adequate liquidity at all times, no matter what emergencies may appear. A

financial firm is considered to be liquid if it has ready access to immediate spendable

funds at reasonable cost at precisely the time those funds are needed (Rose &

Hudgins, 2010). In case of commercial banks, first type of liquidity risk arises when

depositors of commercial banks seek to withdraw their money and the second type

does when commitment holders want to exercise the commitments recorded off the

balance sheet (Baral, 2005). NRB uses Credit to Deposit ratio, cash and equivalent to

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total asset ratio, and cash and equivalent to total deposit ratio to measure the liquidity

position of commercial banks (Nepal Rastra Bank, 2015). However, Commercial

banks prefer Credit to Core Capital cum Deposit (CCD) ratio to Credit to Deposit

ratio.

1.1.2.6. Sensitivity

Sensitivity refers to the degree of responsiveness of asset and liabilities of a financial

asset towards changes in interest rate (Baral, 2005). The sixth component of

CAMELS, sensitivity measures market risk, more specifically interest rate risk.

Commercial banks all around the world are involved in borrowing and lending,

transaction of foreign exchange, use of derivatives instruments and so on (Rawal &

Sapkota, 2016-17). All above mentioned commercial bank activities are subject to

either interest rate risk or foreign exchange rate risk or price risk. The high degree of

sensitivity reflects the hazardous health of financial institutions and vice-versa.

Interest rate risk, price risk, and foreign exchange risk are the major risk associated

with sensitivity (Asian Development Bank, 2015).

1.2. Purpose of the Study

The major purpose of the study is to examine financial health of Government Owned

Commercial Banks through CAMEL analysis. The specific purposes of this study are

as follows:

To examine the financial performance of Government Owned Commercial Banks

To demonstrate the current financial status of Government Owned Commercial

Banks

1.3. Significance of the Study

Commercial banks are the dominant depository financial institutions all over the

world (Saunders & Cornett, 2007). The gravity of the rationale of sound financial

sector has increased tremendously after the international financial upheaval of 2008

ensuing global economic recession (Baral, 2005). Health of a financial institution is a

function of multiple factors such as quality of assets, liquidity position, capital base,

market sensitivity, and earnings. All these factors are associated with the specific risk

exposure of a financial institution such as credit risk, interest rate risk and so on.

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Financial Performance of Commercial Banks of Nepal has been one of the most

preferred topics by myriad researchers; but majority of the study were conducted at

Joint Venture Banks (Baral, 2005) and Domestic Private Banks (Basnet, 2008;

Bhandari, 2010). There has not been any significant study concentrating on the overall

performance of government owned commercial banks of Nepal. The report provides

basic picturesque of the government owned commercial banks of Nepal. This study

scrutinizes each component of CAMEL by using the corresponding financial ratios to

determine the overall performance of these banks. This report has made use of

statistical tools such as regression, and correlation to depict the relationship between

profitability, and other elements of CAMEL framework. Therefore, the report makes

clear presentation on impact of other elements of CAMEL framework on profitability

of government owned commercial banks, and signifies the differences in the findings

of the different studies. Consequently, the report will be fruitful for all the concerned

parties such as shareholders, creditors, depositors and other stakeholders of these

banks; moreover, the sampled commercial banks are the cradle of Nepalese Banking

System, as a result, the study of overall performance of these banks is the matter of

concern for every individual, business, and government of Nepal itself.

1.4. Limitation of the Study

The proposed study has limitation on its part, which are as follows:

The study represents abridged scenario of government owned commercial banks

of Nepal.

The report has only covered certain major financial ratios that defines each

component of CAMEL.

The study has not examined the sixth component of CAMELS, sensitivity to

market.

The study is only based on six year’s data from 2011 to 2016.

Simple statistical tools have been used to describe and interpret the data.

1.5. Literature Survey

Literature survey is a process of systematic, meticulous and critical summary of the

published literature in the field of concerned research. A literature review (or

overview) is a summary and analysis of current knowledge about a particular topic or

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area of enquiry (Zikmund, Babin, Carr, & Griffin, 2009). A survey of research

articles, financial reports, and newspaper articles has been carried out to discover

what other researches have been already done in the corresponding research topic.

Baral (2005) has evaluated the financial health of joint venture banks in the

framework of CAMEL. Multiple financial ratios have been examined such as capital

adequacy ratio, asset utilization ratio, return on asset, return on equity, profit margin,

credit to deposit ratio, Cash and equivalent to total deposit ratio and so on. Three joint

venture commercial banks have been evaluated along with their comparative study.

Baral found that the joint venture commercial banks are well capitalized but their

capital base relative to the risk-weighted assets is not strong. Quality of assets of joint

venture banks on the average is satisfactory. Nonperforming assets of all joint venture

banks under study are far below the aggregate percentage of nonperforming assets of

commercial banks. Both indicators—operating expenses ratio and earning per

employee—of management quality of joint venture banks are above the industry

average during the study period. Earning/profitability indicators—ROE, ROA and

PM—show that financial health of joint venture banks is not so weak. In general,

earning performance of joint venture banks, as indicated by ROA, is fair. Liquidity

indicators of joint venture banks show that they have stored high level of liquidity and

are not facing the liquidity deficit problem, instead, they are facing the high liquidity

problem (Baral, 2005).

Narasimhan and Goel (2013) have analyzed the capital adequacy and the leverage of

the four Indian Banks and have attempted to correlate it with their growth. This report

analyses the performance of the top Indian banks, both private and public sector for

the period FY 2008 – 2012, the years since the last world recession. The report

attempts to demonstrate that the Indian banks exhibit stability in such times of crisis

due to their capital structure and regulatory environment. The study analyzes the

capital adequacy ratio and the Debt to Equity ratio of these four banks in the Indian

scenario: ICICI, Axis Bank, HDFC and SBI. The study tries to compare the capital

adequacy ratios and debt to equity ratios of these banks, and see how the successfully

banks have managed to survive the recession with the help of their capital structure

and reserves. The report reveals that the Capital adequacy of these banks has been

between 10 and 20 percent most of the time. A capital adequacy in this range seems to

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be a safe and optimum yet, neither being so low that there is a problem in case of a

recession, and not being so high as to hamper growth. There is an increasing trend in

the capital adequacy moving forward in the years 2008-2012. Further, there is a wide

range of fluctuation in the Debt to equity ratios of the banks. ICICI bank has the

lowest debt to equity with a value of around four, while the other private sector banks

have kept it at around 8 or 9. SBI has one of the highest debts to equity ratios of

around 12, showing that it leverages the most to expand business. In general, the

banking sector as such is known to have a higher Debt to equity ratio than the

manufacturing sector companies do. Lastly, there is a positive correlation between the

earnings per share of a bank and its debt to equity ratio. ICICI, with one of the lowest

debt to equity ratios, has relatively lower earnings per share as compared to the rest.

Axis bank and HDFC have moderately good earnings with a moderate debt to equity

ratio. SBI, in contrast has leveraged a lot with a debt to equity ratio of around 12,

since they have the support of government reserves (Narasimha & Goel, 2013).

Sheefeni (2015) has assessed the bank-specific determinants for non-performing loans

in commercial banks in Namibia. The study employed time-series econometric

techniques of unit root, co-integration, and impulse response functions and forecast

error variance decomposition on the quarterly data covering the period 2001 to 2014.

Two models were estimated in which return on assets and return on equity were

alternating as profitability measures, among other variables that explain non-

performing loans. The results reveal that return on assets, return on equity, loan to

total asset ratio, log of total assets are the main determinants of nonperforming loans.

In specific terms, there was negative relationship between non-performing loans and

return on assets as well as return on equity (Sheefeni, 2015). Furthermore, a positive

relationship between non-performing loans and loan to total asset ratio was found.

Lastly, the results revealed a positive relationship between non-performing loans and

log of total assets.

Adebisi and Matthew (2015) studied the impact of non-performing loans on firms’

profitability of banks in Nigeria. The increased incidence of non-performing loans

(NPL) in Nigerian bank generated the current literature on quality of banks

profitability. Though, there have been reforms in the banking industry to ensure

effective financial institutions, the banks shareholders’ funds are affected by the non-

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performing loans. This study made use of secondary data obtained from the Annual

Report and Statement of Accounts of the NDIC for a period of seven (7) years (2006-

2012). Data were analyzed using the regression statistical tools. Adebisi and Matthew

revealed that there is no relationship between the Non-Performing Loans (NPL) and

Return on Assets (ROA) of Nigerian Banks. This means that the asset values of the

firms are not affected by the level of NPL. The shareholders wealth maximization is

affected as second result showed that there is a relationship between the Non-

performing Loan (NPL) and Return on Equity (ROE) of Nigerian Banks. The research

recommended that the banks should ensure that the banks customer has viable means

of repaying the loan, which should be monitored to ensure efficiency (Adebisi &

Matthew, 2015).

1.6. Research Methods used for Data Collection and Analysis

Research methodology refers to the process of collecting, processing, analyzing and

presenting the facts and figures in the understandable manner. The research is

primarily focused on the health checkup of Government Owned Commercial Banks of

Nepal. So, the research methodologies and necessary tools that contribute in

examining the overall performance of the commercial bank has been used.

1.6.1. Research Design

“Research design is a master plan specifying the methods and procedures for

collecting and analyzing the needed information” (Zikmund, Babin, Carr, & Griffin,

2009). Descriptive research design is the most apposite research design for conducting

this research as it seeks accumulate facts and portray the profile of each Government

Owned Banks in the framework of CAMEL.

1.6.2. Population and Sample

This study examines the financial performance of government owned commercial

banks of Nepal based on CAMEL framework over the period of 6 years (2011 to

2016). Currently, there are 28 commercial banks in Nepal, out of which, Government

of Nepal, wholly or partially, owns three commercial banks: Nepal Bank Limited

(NBL), Rastriya Banijya Bank Limited (RBBL), and Agricultural Development Bank

Limited (ADBL). Therefore, the study examines entire population, and the study

years spans over 6 years (2011 to 2016).

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1.6.3. Sources of Data

The report encompasses a wide range of data that has been collected from various

sources. Secondary data has only been used in preparing the report. For preserving the

veracity of report, the necessary data have been collected from the audited reports of

concerned bank, financial report by Nepal Rastra Bank, and articles published in

National Daily.

The secondary data used in this report are as follows:

Journals (Journal of Nepalese Business Studies)

Articles from national newspapers

Bank Supervision Report by Nepal Rastra Bank

Bank and Financial Statistics by Nepal Rastra Bank

1.6.4. Data Processing Technique

1.6.4.1. Tabulation and Diagrammatic Representation of Data

To preserve the understandability of the data, the data have been classified and

presented in tables in order to make easy for viewers to make understand, and analyze

the data presented in the report. Data presented in table is more understandable in

comparison to data in paragraph. More interestingly, same data presented

diagrammatically provides more vivid presentation to the viewers than tabulation. So,

various diagrams such as bar diagram, line chart etc. have been used to give a vivid

presentation of data.

1.6.4.2. Statistical and Financial Tools

Descriptive statistics refers to statistics, which summarize and describe the data in a

simple and understandable manner (Zikmund, Babin, Carr, & Griffin, 2009).

Descriptive Statistical tools used in this report includes mean, median, standard

deviation, coefficient of variation, skew-ness, and kurtosis.

Financial tools depict the health of bank and financial institutions. Some of the major

financial ratios used to indicate each component of CAMEL framework are as

follows: Core Capital to Risk Weighted Asset (CCR) and Capital Adequacy Ratio

(CAR) represent Capital Adequacy. Nonperforming Asset Ratio (NPLR), Loan Loss

Provision Ratio (LLPR) appraise Asset Quality. Asset Utilization Ratio (AUR) and

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Operating Expenses Ratio (OER) assess Management Capability. Return on Asset

(ROA), Return on Equity (ROE) and Profit Margin (PM) are the indicators of

Profitability. Loan to Deposit Ratio (LDR), Cash and Equivalent to Total Asset Ratio

(CETAR), Cash and Equivalent to Total Deposit Ratio (CETDR), and Cash Balance

at NRB to Total Deposit Ratio (CBNRBR) reveal Liquidity Position.

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CHAPTER II

DATA PRESENTATION AND ANALYSIS

2.1. Organization Profile

2.1.1. Rastriya Banijya Bank

Rastriya Banijya Bank Limited (RBBL) was established on January 23, 1966 (10th

Magh, 2022 B.S.). It is one of the pioneering bank in the nation with the history of

half century. Earlier constituted under RBB act 2021 with the full ownership of the

government of Nepal, the Bank has been running under Bank and Financial Institute

Act (BAFIA) and Company Act (CA) 2063 at present. The Bank licensed by NRB as

an 'A' class commercial Bank of the country, has grown up as an indispensable

component of the Nepalese economy. RBBL has been a key player in Nepalese

banking sector and has established as the pillar for the development of banking in

Nepal. RBBL has contributed in the monetization of the economy eradicating the

system of dual currency in the market, initiating preliminary financial literacy,

helping in flourish of industrial, commercial and financial sector of the nation. RBBL

has currently employed 2600 employees and has made stringent effort to provide

banking services to its customers all across the nation through 170 branches, 17

counters and 28 branchless banking and 72 ATMs. (Rastriya Banijya Bank Limited,

2017)

2.1.2. Nepal Bank Limited (NBL)

Nepal Bank Limited, the pioneering bank of Nepal was established in November 15,

1937 A.D (Kartik, 30, 1994). It was formed under the principle of Joint venture (Joint

venture between government and general public). NBL's authorized capital was Rs.

10 million and issued capital Rs. 2.5 million of which paid-up capital was Rs. 842

thousand with 10 shareholders. The bank has been providing banking through its

branch offices in the different geographical locations of the country. NBL has been

licensed by NRB as a 'A' class commercial Bank of the country and is one of the

renowned bank of Nepal with more than one hundred branches all across Nepal. NBL

has currently employed 2356 employees (as per May 3, 2016) all across its one

hundred and twenty-six computerized branches located in different districts of Nepal.

(Nepal Bank Limited, 2017)

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2.1.3. Agriculture Development Bank

Agricultural Development Bank Limited (ADBL) is an autonomous organization

largely owned by Government of Nepal. The bank has been working as a premier

rural credit institution since the last three decades, contributing a more than 67 percent

of institutional credit supply in the country. Hence, rural finance is the principal

operational area of ADBL. Furthermore, the bank has also been involved in

commercial banking operations since 1984. The enactment of Bank and Financial

Institution Act (BAFIA) abolished all Acts related to financial institutions including

the ADBN Act, 1967. In line with the BAFIA, ADBL has been incorporated as a

public limited company on July 14, 2005. Thus, ADBL operates as an "A" category

financial Institution under the legal framework of BAFIA and the Company Act,

2053. (Agricultural Development Bank Limited, 2017)

2.2. Data Presentation

2.2.1. Capital Adequacy

Capital Adequacy ratio is one of the most significant financial tools that measures the

bank’s capital in terms of its risk-weighted exposure. Nepal Rastra Bank puts regular

surveillance on capital adequacy of banks and financial institutions; especially

commercial banks are under strict monitoring of Nepal Rastra Bank. The New Capital

Adequacy Framework requires the banks to maintain minimum capital requirements.

As per the framework, commercial banks need to maintain at least 6 percent Tier I

capital and 10 percent Total Capital (Tier I & Tier II). The minimum capital adequacy

requirements are based on risk-weighted exposures (RWE) of the banks. The capital

adequacy ratios of banks are monitored on monthly basis. The average Capital

Adequacy Ratio of the commercial banks in the review year is 12.03 percent. (Nepal

Rastra Bank, 2014)

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Table 2.1

Capital Adequacy Ratio

Fiscal Year Bank CC to

RWA CARAverage

CC to RWA

Average CAR IAR

2011

NBL (9.66) (9.66)

(5.54) (4.08) 10.59RBBL (22.52) (22.52)

ADBL 15.55 19.95

2012

NBL (5.82) (5.82)

(0.31) 1.03 11.50RBBL (9.35) (9.35)

ADBL 14.25 18.25

2013

NBL - -

5.54 6.94 12.26RBBL 1.51 2.94

ADBL 15.10 17.89

2014

NBL 4.63 5.26

7.03 8.68 12.03RBBL 3.66 5.60

ADBL 12.79 15.17

2015

NBL 6.61 7.80

9.07 10.23 11.55RBBL 9.91 10.34

ADBL 10.69 12.55

2016

NBL 7.72 9.11

RBBL 10.73 11.20

ADBL 10.94 12.84 9.80 11.05 11.89

Source: Bank Supervision Report, 2015; Banking and Financial Statistics, 2015

The capital adequacy of three government owned commercial banks of Nepal from

2011 to 2016 has been presented in the table 2.1. The core capital to risk weighted

exposure has also been presented along with capital adequacy ratio. The yearly

average core capital to risk weighted assets and yearly average capital adequacy ratio

has been presented in table 2.1. Moreover, the Industry Average Ratio (IAR) has also

been annexed in the table 2.1 for clear comparison.

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NBL

RBBL

ADBL

NBL

RBBL

ADBL

NBL

RBBL

ADBL

NBL

RBBL

ADBL

NBL

RBBL

ADBL

NBL

RBBL

ADBL

2011 2012 2013 2014 2015 2016

(25.00) (20.00) (15.00) (10.00)

(5.00) -

5.00 10.00 15.00 20.00 25.00

Capital Adequacy Ratio

CC to RWA CARRequired CAR Required CC to RWA

Figure 2.1: CC to RWA and CAR of Sampled Banks

In figures 2.1, CC to RWA and CAR of individual banks in each years has been

presented in the bar diagram. On 2011, two out of three commercial banks are under-

capitalized as their CC to RWA and CAR is negative, that is below, 6 percent, and 10

percent respectively, while agricultural development bank is well capitalized as it has

maintained the standard by NRB (Bank Supervision Report, 2014). Nepal Bank

Limited in undercapitalized in 2012 to 2016, while Rastriya Banijya Bank has been

well capitalized since 2015 onwards. However, Agricultural Development Bank has

maintained CC to RWA and CAR during the surveyed years.

2011 2012 2013 2014 2015 2016

(10.00)

(5.00)

-

5.00

10.00

15.00

Average CC to RWA, CAR, and IACAR

Average CC to RWA Average CAR IARRequired CAR Required CC to RWA

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Figure 2.2: Average CC to RWA and CAR of Sampled Banks over 6 years along with

IACAR

The figure 2.2 provides vivid presentation of average CC to RWA and CAR of

sampled commercial banks in a particular year along with Industry Average Capital

Adequacy Ratio (IACAR) of corresponding years. The government owned

commercial banks have maintained standard CC to RWA and CAR since 2015

onwards; nevertheless, the IACAR is higher in the study years in comparison to

average CC to RWA and CAR of sampled banks.

2.2.2. Asset Quality

Asset quality ratios give a picture of the deposit-taker’s asset composition, and show

vulnerabilities in terms of potential losses from nonperforming loans and risks from

lack of diversification; asset quality overviews non-performing loans to total gross

loans, and sectoral distribution of loans to total loans (Asian Development Bank,

2015). Asset quality encompasses non-performing loan (NPL), loan loss provision

(LLP), LLP to NPL ratio, and NPL to Gross Loan. It is obvious from the theoretical

prescription that the performance of commercial banks largely depends on the quality

of assets held by them, and quality of the assets relies on the financial health of their

borrowers. (Jha & Hui, 2012)

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Table 2.2

Total Loans and Advances, Non-Performing Loan, and Loan Loss Provision

Fiscal Year Bank TLA NPL LLP NPLR LLPR LLP/NPL Average NPLR Average LLPR Average LLP/NPL

2011NBL 26,709.9 1,410.7 36.4 5.3 0.1 2.6

8.8 2.9 28.2RBBL 36,866.1 4,024.6 419.5 10.9 1.1 10.4ADBL 34,459.9 3,491.5 2,504.0 10.1 7.3 71.7

2012NBL 29,698.9 1,731.6 252.1 5.8 0.9 14.6

6.8 2.6 36.0RBBL 40,448.4 2,940.4 639.3 7.3 1.6 21.7ADBL 39,393.1 2,880.6 2,067.9 7.3 5.3 71.8

2013NBL 37,855.3 1,714.8 364.3 4.5 1.0 21.2

5.4 1.3 22.3RBBL 49,044.9 2,604.8 349.7 5.3 0.7 13.4ADBL 49,770.5 3,211.5 1,033.4 6.5 2.1 32.2

2014NBL 41,196.0 2,397.5 252.1 5.8 0.6 10.5

5.2 0.9 18.6RBBL 60,854.9 2,402.8 638.9 4.0 1.1 26.6ADBL 57,505.3 3,332.5 620.0 5.8 1.1 18.6

2015NBL 53,374.5 2,069.6 442.6 3.9 0.8 21.4

4.1 1.1 26.9RBBL 75,836.5 2,562.0 790.8 3.4 1.0 30.9ADBL 66,601.1 3,269.7 930.1 4.9 1.4 28.4

2016NBL 55,131.9 2,122.6 175.3 3.9 0.3 8.3

3.9 0.8 19.3RBBL 85,470.4 3,376.1 1,056.9 4.0 1.2 31.3ADBL 79,751.9 3,070.4 562.0 3.9 0.7 18.3

Mean 51,109.4 2,700.8 729.7 5.7 1.6 25.2 5.7 1.6 25.2Median 49,770.5 2,700.8 620.0 5.3 1.1 21.4Skewness 0.5 (0.1) 1.7 1.2 2.4 1.6Kurtosis (0.5) (0.7) 3.2 1.5 6.4 2.8

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Source: Bank Supervision Report, 2015; Banking and Financial Statistics, 2015; Annual Report of Sampled Banks, 2016

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In the table 2.2, an aggregate picture of asset quality of sampled banks has been

presented. Loan and advances is the major component of bank’s asset. The asset side

of financial institutions is largely populated by Loans and advances, which occupies

64.84 percent of total asset (Nepal Rastra Bank, 2015). Mean, median, standard

deviation, coefficient of variance, skewness, and kurtosis of aggregate data of TLA,

NPL, LLP, and LLP/NPL has been calculated. ROA of sampled banks over sampled

years is more volatile as its coefficient of variance is highest, that is, 111.2. NPL of

sampled banks over sampled years is negatively skewed, while TLA, LLP, NPLR,

and LLPR is positively skewed. TLA and NPL of sampled banks over sampled years

has kurtosis less than 0.263, so the data has platykurtic distribution. LLP, NPLR,

LLPR, and LLP/NPL have kurtosis more than 0.263, so the data has leptokurtic

distribution.

NB

L

RB

BL

AD

BL

NB

L

RB

BL

AD

BL

NB

L

RB

BL

AD

BL

NB

L

RB

BL

AD

BL

NB

L

RB

BL

AD

BL

NB

L

RB

BL

AD

BL

2011 2012 2013 2014 2015 2016

- 2.0 4.0 6.0 8.0

10.0 12.0

NPLR and LLPR

NPAR LLPR

Bank / Year

NPL

R a

nd L

LPR

Figure 2.3: NPLR and LLPR of sampled banks over 6 years

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NB

L

RB

BL

AD

BL

NB

L

RB

BL

AD

BL

NB

L

RB

BL

AD

BL

NB

L

RB

BL

AD

BL

NB

L

RB

BL

AD

BL

NB

L

RB

BL

AD

BL

2011 2012 2013 2014 2015 2016

- 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0

LLP/NPL

Bank / Year

LLP/

NPL

Figure 2.4: LLP/NPL ratio of sampled banks over 6 years

In Figure 2.3 and Figure 2.4, line charts have been presented for the graphical

representation of Non-Performing Loan ratio, Loan Loss Provision Ratio and

LLP/NPL. In the year 2011, NPLR of RBBL is much higher than rest two banks, but

LLPR of ADBL is much greater in comparison to NBL and RBBL. Similarly, the

LLPR of ADBL is significant in 2012. Consequently, the LLP/NPL of ADBL is

distinctly higher than of NBL and RBBL in two consecutive years. In 2013 to 2016,

there is no such deviation in NPLR and LLPR; as a result, there is certain consistency

in LLP/NPL over latter four years.

2.2.3. Management Capability

Management capability in Banking and Financial Institutions is nothing new, as such

a process has been ongoing for some time with varying degrees of success among

those institutions benefiting from the use of available resources. Strengthening

management capability is a continuous process that must envisage a role for

shareholders, funding agencies and regulators (Blackman, 2001). It is primarily a

qualitative factor applicable to individual institutions. Several indicators, however,

can jointly serve as an indicator of management soundness. Expenses ratio, earning

per employee, cost per loan, average loan size and cost per unit of money lent can be

used as a proxy of the management quality (Baral, 2005).

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Table 2.3

Operating Expense Ratio and Asset Utilization Ratio of Sampled Banks

Fiscal Year Bank TOR TOE NOI TA OER AUR

2011

NBL 2,673.5 2,452.9 220.6 55,700.1 91.8 4.8

RBBL 3,199.5 2,363.1 836.4 94,646.7 73.9 3.4

ADBL 4,568.7 5,091.0 (522.4) 66,668.3 111.4 6.9

2012

NBL 2,345.7 2,556.2 (210.4) 61,071.9 109.0 3.8

RBBL 3,093.2 2,677.9 415.3 107,478.3 86.6 2.9

ADBL 4,719.6 7,011.6 (2,292.0) 79,256.5 148.6 6.0

2013

NBL 3,092.0 2,731.0 361.0 77,171.2 88.3 4.0

RBBL 4,038.5 3,486.3 552.2 115,351.6 86.3 3.5

ADBL 5,282.1 4,610.8 671.3 92,584.3 87.3 5.7

2014

NBL 3,356.5 3,362.5 (5.9) 83,311.1 100.2 4.0

RBBL 4,706.1 3,721.0 985.1 130,046.9 79.1 3.6

ADBL 5,426.8 4,610.8 816.0 108,375.5 85.0 5.0

2015

NBL 3,935.6 3,480.0 455.6 90,309.2 88.4 4.4

RBBL 5,563.3 4,106.1 1,457.2 150,571.5 73.8 3.7

ADBL 6,338.6 4,623.7 1,714.9 119,614.3 72.9 5.3

2016

NBL 2,144.6 1,501.0 643.7 91,365.1 70.0 2.3

RBBL 6,590.7 4,519.9 2,070.7 174,626.6 68.6 3.8

ADBL 7,349.2 4,668.2 2,681.0 112,709.8 63.5 6.5

Mean 4,356.90 3,754.10 602.79 100,603.27 88.03 4.42

Median 4,303.59 3,603.65 597.92 93,615.50 86.45 4.02Skewness 0.331 0.539 -0.600 0.727 1.557 0.447Kurtosis -0.761 0.922 2.534 0.708 3.988 -0.478

Source: Bank Supervision Report, 2015; Banking and Financial Statistics, 2015;

Annual Report of Sampled Banks, 2016

Management capability of a bank is the quantities measure of banks performance that

overviews how efficiently bank’s management and its entire team is utilizing the

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available resources to provide better financial services to customers ensuing higher

operating revenue, and profit. In the table 2.3, Operating Expense Ratio (OER), and

Asset Utilization Ratio (AUR) are the indicators of management capability. The

higher OER is reflects management incapability in minimizing cost while the higher

AUR evinces better management practice and competence.

NB

L

RB

BL

AD

BL

NB

L

RB

BL

AD

BL

NB

L

RB

BL

AD

BL

NB

L

RB

BL

AD

BL

NB

L

RB

BL

AD

BL

NB

L

RB

BL

AD

BL

2011 2012 2013 2014 2015 2016

-

40.0

80.0

120.0

160.0

Operating Expenses Ratio

OER

Bank/Year

Ope

ratin

g Ex

pens

e R

atio

Figure 2.5: Operating Expenses Ratio of sampled banks over 6 years

NB

LR

BB

LA

DB

LN

BL

RB

BL

AD

BL

NB

LR

BB

LA

DB

LN

BL

RB

BL

AD

BL

NB

LR

BB

LA

DB

LN

BL

RB

BL

AD

BL

2011 2012 2013 2014 2015 2016

- 2.0 4.0 6.0 8.0

Asset Utilization Ratio

AUR

Bank / Year

Ass

et U

tiliz

atio

n R

atio

Figure 2.6: Asset Utilization Ratio of sampled banks over 6 years

In figure 2.5 and figure 2.6, the Operating Expenses Ratio (OER) and Asset

Utilization Ratio (AUR) has been presented respectively. The operating expenses

ratio of sampled banks is not extremely fluctuating over 6 years as the curve formed

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in figure 7 is almost straight; in reference to table 2-3, the coefficient of variance of

OER is the lowest, that is, 22.148, which evinces that OER is consistent over study

years. however, OER above 100 is not desirable condition for a bank, so NBL and

ADBL had frightening situation during 2011, 2012, and 2013. More specifically,

ADBL had more alarming figure in 2012 with OER almost 150 percent. In 2015 and

2016, the OER of all sampled banks is below 100, which evinces that the sampled

banks are improving in management of resources.

The Asset Utilization Ratio of ADBL is higher than other sampled banks over all

study years (2011-2016). This indicates that ADBL is making better mobilization and

utilization of its available resources. ADBL has provided financial services to almost

all districts of Nepal through its 264 branches (Nepal Rastra Bank, 2015). From 2011

to 2016, the Asset Utilization Ratio of RBBL is least in first five consecutive years

amongst the sampled banks because of high concentration of asset in RBBL and it has

higher NPL in 2011 and 2016. Moreover, the AUR of NBL has eroded in 2016 due to

disbursement of loans in unproductive sector, which eventually reduced its capability

of further lending in latter phase of 2016.

2.2.4. Earnings

Earnings and profitability ratios assess the efficiency of deposit-takers in using their

assets (return on assets) and capital (return on equity), and ability to generate interest

income (interest margin to gross income) and minimize administrative costs

(noninterest expenses to gross income) (Asian Development Bank, 2015).

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Table 2.4

ROE, ROA, and PM of sampled banks over 6 years

Fiscal

YearBank NI TOR SE TA ROE ROA PM

2011

NBL 383.44 2,673.46 380.40 55,700.10 100.7984 0.6884 14.3424

RBBL 1,759.26 3,199.50 1,172.30 94,646.70 150.0687 1.8588 54.9854

ADBL 2,365.48 4,568.66 9,474.30 66,668.30 24.9674 3.5481 51.7762

2012

NBL 176.36 2,345.74 1,772.80 61,071.90 9.9482 0.2888 7.5184

RBBL 1,446.21 3,093.17 1,172.30 107,478.30 123.3652 1.3456 46.7549

ADBL 1,861.03 4,719.63 9,474.30 79,256.50 19.6429 2.3481 39.4317

2013

NBL 791.51 3,091.98 3,716.40 77,171.20 21.2976 1.0256 25.5987

RBBL 1,310.12 4,038.52 8,589.00 115,351.60 15.2534 1.1358 32.4405

ADBL 2,259.95 5,282.10 9,636.80 92,584.30 23.4512 2.441 42.785

2014

NBL 716.96 3,356.51 6,465.00 83,311.10 11.0898 0.8606 21.3603

RBBL 1,733.39 4,706.06 8,589.00 130,046.90 20.1815 1.3329 36.8332

ADBL 1,509.46 5,426.77 9,636.80 108,375.50 15.6635 1.3928 27.8151

2015

NBL 526.12 3,935.59 6,465.00 90,309.20 8.138 0.5826 13.3683

RBBL 4,637.28 5,563.30 8,589.00 150,571.50 53.991 3.0798 83.3549

ADBL 1,876.19 6,338.63 9,860.80 119,614.30 19.0268 1.5685 29.5993

2016

NBL 1,048.19 2,144.63 6,465.00 91,365.06 16.2133 1.1473 48.8751

RBBL 5,549.93 6,590.66 8,588.97 174,626.56 64.6169 3.1782 84.209

ADBL 6,180.64 7,349.25 10,374.40 112,709.83 59.5759 5.4837 84.099

Average 2,007.31 4,356.90 6,690.14 100,603.27 42.07 1.85 41.40

Median 1,621.43 4,303.59 8,588.99 93,615.50 20.74 1.37 38.13

Skewness 1.372 0.331 -0.766 0.727 1.440 1.298 0.623Kurtosis 1.488 -0.761 -0.892 0.708 1.544 2.236 -0.263

Source: Bank Supervision Report, 2015; Banking and Financial Statistics, 2015;

Annual Report of Sampled Banks, 2016

In the table 2.4, Return on Asset (ROA), Return on Equity (ROE), and Profit Margin

(PM) have been calculated by using the concept of financial ratios. ROE is a measure

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of profitability that calculates how many dollars of profit a company generates with

each dollar of shareholders’ equity. The ROE of NBL and RBBL is over 100 percent

in 2011 and ROE of RBBL has exceeded 100 percent in the following year too. The

ROE has drastically decreased in the following years due to increase in shareholder’s

equity, which has to be mandatorily increased to Rs. 8 billion by the end of 2074 B.S.

ROA of ADBL is highest among the sampled banks in all sampled years except in

2015.

NBL RBBL ADBL NBL RBBL ADBL NBL RBBL ADBL NBL RBBL ADBL NBL RBBL ADBL NBL RBBL ADBL2011 2012 2013 2014 2015 2016

0

20

40

60

80

100

120

140

160

ROE and PM of Sampled Banks

ROE PM

Figure 2.7: ROE and Profit Margin of sampled banks over 6 years

In the figure 2.7, ROE and Profit Margin have been presented. The ROE of NBL and

RBBL is higher in 2011; the ROE of RBBL is still high in 2012, while ROE of NBL

drastically declined. ROE of sampled banks in 2013 and 2014 has eroded, and in 2015

and 2016, the ROE of RBBL have revived; also, ROE of ADBL has increased in

2016. Similarly, the profit margin of sampled banks during former four years is lower,

but in 2015 and 2016, the profit margin of all sampled banks have increased.

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NB

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NB

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2011 2012 2013 2014 2015 2016

0123456

ROA

ROA

Year/Bank

Ret

urn

on A

sset

Figure 2.8: Return on Asset of Sampled banks over 6 years

Figure 2.8 presents the return on asset of sampled banks over 6 years from 2011 to

2016. The ROA is has followed a pattern, that is, ROA of ADBL is greater than of

RBBL and ROA of RBBL is greater than NBL except in 2015. In 2015, ROA of

RBBL is greater than ADBL, and NBL has least ROA over sampled years.

2.2.5. Liquidity

Liquidity indicators describe the deposit-takers’ ability to meet sudden demand for

cash (Asian Development Bank, 2015). The risk that a sudden surge in liability

withdrawals may require an FI to liquidate assets in a very short period of time and at

less than fair market prices. Liquidity risk arises when an FI’s liability holders, such

as depositors or insurance policyholders, demand immediate cash for the financial

claims they hold with an FI or when holders of off-balance-sheet loan commitments

(or credit lines) suddenly exercise their right to borrow (draw down their loan

commitments). (Saunders & Cornett, 2007).

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Table 2.5

Loan to deposit Ratio, Cash Reserve Ratio, and Cash and Equivalent to Total Asset ratio

Fiscal Year

Bank TA TLA CE CBNRB TD LDR CETAR CETDR CBNRBR Average LDR

2011NBL 55,700.10 26,709.90 10,837.9

78,171.00 46,804.20 57.0673 19.4577 23.156 17.4578

69.0424RBBL 94,646.70 36,866.10 6,907.31 4,813.50 73,924.10 49.8702 7.298 9.3438 6.5114ADBL 66,668.30 34,459.92 4,808.95 2,534.50 34,394.63 100.1898 7.2133 13.9817 7.3689

2012NBL 61,071.90 29,698.86 14,468.0

98,569.80 56,042.60 52.9934 23.6903 25.8162 15.2916

63.3936RBBL 107,478.30

40,448.40 19,262.92

16,333.60 87,775.00 46.0819 17.9226 21.9458 18.6085ADBL 79,256.50 39,393.10 6,285.18 3,340.70 43,238.99 91.1055 7.9302 14.5359 7.7261

2013NBL 77,171.20 37,855.28 14,184.2

110,411.80 62,988.90 60.0983 18.3802 22.5186 16.5296

68.4776RBBL 115,351.60

49,044.90 3,085.09 11,573.20 91,093.90 53.8399 2.6745 3.3867 12.7047ADBL 92,584.30 49,770.46 9,524.00 6,278.70 54,397.15 91.4946 10.2868 17.5083 11.5423

2014NBL 83,311.10 41,195.99 6,659.56 2,919.00 69,341.20 59.4105 7.9936 9.604 4.2096

67.8325RBBL 130,046.90

60,854.90 3,658.93 20,969.90 107,270.10 56.7305 2.8135 3.4109 19.5487ADBL 108,375.5

057,505.27 3,976.21 4,005.40 65,828.33 87.3564 3.6689 6.0403 6.0846

2015NBL 90,309.20 53,374.54 3,593.77 4,692.17 78,007.20 68.4226 3.9794 4.607 6.015

72.0185RBBL 150,571.50

75,836.50 4,454.43 18,096.10 124,221.70 61.0493 2.9583 3.5859 14.5676ADBL 119,614.3

066,601.12 11,338.8

46,335.73 76,921.30 86.5835 9.4795 14.7408 8.2366

2016NBL 91,365.06 55,131.92 9,263.97 4,973.70 80,220.82 68.7252 10.1395 11.5481 6.2

72.8585RBBL 174,626.56

85,470.37 31,599.99

19,000.91 146,207.63 58.4582 18.0958 21.6131 12.9958ADBL 112,709.8

379,751.86 10,453.6

16,335.73 87,263.50 91.392 9.2748 11.9794 7.2605

Mean 100,603.27

51,109.41 9,686.83 8,853.08 76,996.74 68.94 10.18 13.30 11.05 68.94Median 93,615.50 49,407.68 8,085.64 6,335.73 75,422.70 60.57 8.63 12.98 9.89

Skewness 0.79 0.59 1.94 0.97 0.88 0.54 0.70 0.16 0.35Kurtosis 0.71 (0.54) 4.69 (0.38) 0.96 (1.30) (0.66) (1.26) (1.39)

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Source: Bank Supervision Report, 2015; Banking and Financial Statistics, 2015; Annual Report of Sampled Banks, 2016

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Table 2.5 depicts LDR, CETAR, CETDR, and CBNRBR, the indicators of liquidity

position of sampled banks over 6 years. In addition, mean, median, skewness, and

kurtosis have been calculated to describe the characteristics of data.

NB

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2011 2012 2013 2014 2015 2016

020406080

100120

LDR, Average LDR, and Required LDR of Sampled Banks

LDR Average LDR Required LDR

Year/Bank

LDR

, Ave

rage

LD

R, a

nd R

equi

red

LDR

Figure 2.9: LDR, Average LDR, and Required LDR of sampled banks over 6

years

In figure 2.9, the LDR, Average LDR, and Required LDR of sampled banks over 6

years has been presented. Loan to Deposit Ratio is one of the major indicators of

liquidity. The higher loan to deposit ratio indicates that bank has less liquid assets. As

per the directive of Nepal Rastra Bank, commercial banks have to maintain LDR less

than 80 percent. The LDR of NBL, and RBBL has been maintained under 80 percent

throughout the sample periods, however, the LDR of ADBL withstands above 80

percent from 2011 to 2016.

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2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6

Cash Reserve Ratio

CBNRBR Required CBNRB

Year/Bank

CB

NR

BR

Figure 2.10: Cash Reserve Ratio of sampled banks over 6 years.

Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits of

customers, which commercial banks have to hold as reserves either in cash or as

deposits with the central bank. In the figure 2.10, cash reserve ratio of sampled banks

over 6 years has been presented. All the sampled banks over 6 years’ period have

maintained minimum CRR except in 2014. In 2014, the CRR of NBL is 4.2096

percent, which is below 6 percent requirement. Hence, the CRR of sampled banks is

satisfactory over sampled period.

2.3. Data Analysis

In the above section, the presentation of data of sampled banks over 6 years (2011 to

2016) has been presented in tables, bar diagram, and line graph. The diagrammatic

presentation of tabular data has been done for the vivid presentation of facts and

figures. The presentation of data is rudimentarily necessary for proper data

visualization. The data presentation is essential for accurate data analysis and

interpretation.

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2.3.1. Analysis of Coefficient of Variation, Skewness, and Kurtosis

Table 2.6

Coefficient of Variation, Skewness, and Kurtosis of indicators of components of

CAMEL Framework

CAMELCapital Asset Quality Management

CCR CAR NPLR LLPR LLP/NPL OER AURAverage 3.96 5.34 5.69 1.57 25.22 88.03 4.42Median 7.17 8.46 5.31 1.05 21.39 86.45 4.02

SD 10.26 11.27 2.06 1.75 18.38 19.50 1.21CV 258.99 211.11 36.24 111.25 72.90 22.15 27.42

Skewness -0.99 -0.83 1.24 2.37 1.57 1.56 0.45Kurtosis 0.67 0.30 1.49 6.44 2.84 3.99 -0.48

CAMELEarnings Liquidity

ROA PM LDR CETAR CETDR CBNRBRAverage 1.85 41.40 68.94 10.18 13.30 11.05Median 1.37 38.13 60.57 8.63 12.98 9.89

SD 1.27 23.02 16.88 6.37 7.29 4.86CV 68.39 55.61 24.49 62.57 54.85 44.00

Skewness 1.30 0.62 0.54 0.70 0.16 0.35Kurtosis 2.24 -0.26 -1.30 -0.66 -1.26 -1.39

Coefficient of Variation is a measure of relative variability that expresses standard

deviation as a percentage of the mean (Mann & Lacke, 2010). Coefficient of

Variation is unit less, so it provides basis for comparison among various variables.

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2.3.1.1. Analysis of Coefficient of Variation

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Capital Ad-equacy

Asset Quality Management Quality

Earnings Liquidity

- 50.00

100.00 150.00 200.00 250.00 300.00

Coefficient of Variation of related ratios of Sampled Banks over 6 years

CAMEL Related Ratios

Coe

ffici

ent o

f Var

iatio

n

Figure 2.11: Coefficient of Variation of CAMEL ratios of Sampled Banks over 6 Years

In the figure 2.11, C.V. of CAMEL ratios of sampled banks over 6 years have been presented in line chart. The capital adequacy ratios are highly

fluctuating over 6 years, while fluctuation is minimum in ratios representing management quality. The spread of data representing liquidity of

sampled banks over 6 years is low. Among profitability ratio, ROE is more volatile than ROA, and Profit Margin. ROE is more volatile due to

increment in shareholder’s equity.

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2.3.1.2. Analysis of Skewness

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Capital Ad-equacy

Asset Quality Management Quality

Earnings Liquidity (1.50) (1.00) (0.50)

- 0.50 1.00 1.50 2.00 2.50 3.00

Skewness of related ratios of Sampled Banks over 6 years

CAMEL Related Ratios

Skew

ness

of R

elat

ed R

atio

s

Figure 2.12: Skewness of CAMEL ratios of Sampled Banks over 6 Years

In the figure 2.12, skew-ness of CAMEL ratios of sampled banks over 6 years have been presented in line chart. Capital Adequacy ratios are

negatively skewed, while skew-ness of remaining elements of CAMEL rating is positively skewed. The asset quality ratios and earnings ratios

have high positive skew-ness.

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2.3.1.3. Analysis of Kurtosis

Measure of Kurtosis is one of the descriptive statistical measures, which is used to measure the flatness or peakedness of the curve drawn from

the frequency distribution (Sthapit, Yadav, Khanal, & Baidar, 2014).

CC

to R

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Capital Ad-equacy

Asset Quality Management Quality

Earnings Liquidity

(2.00) (1.00)

- 1.00 2.00 3.00 4.00 5.00 6.00 7.00

Kurtosis of related ratios of Sampled Banks over 6 years

CAMEL Related Ratios

Kur

tosi

s of R

elat

ed R

atio

s

Figure 2.13: Kurtosis of related ratios of Sampled Banks over 6 years

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Figure 2.13 depicts kurtosis of related ratios of sampled banks over 6 years. The kurtosis of LLPR is higher, which denotes that the curve formed

from frequency distribution is more peaked. The kurtosis less than 0.263 has platykurtic distribution, which means that the curve formed from

the

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frequency distribution is flat. Indicators of Liquidity positions have platykurtic

distribution, while indicators of asset quality have leptokurtic distribution.

2.3.2. Correlation Matrix

Correlation is a statistical measure that indicates the extent to which two or more

variables fluctuate together. A positive correlation indicates the extent to which those

variables increase or decrease in parallel; a negative correlation indicates the extent to

which one variable increases as the other decreases.

Table 2.7

Correlation Matrix showing relationship between Earnings and other indicators

of CAMEL Framework

  CAR AUR NPL LLP LDR CBNRBR

ROE -0.6584 -0.2231 0.306008 -0.1525 -0.4166 0.242154

ROA 0.46794 0.56452 0.560087 0.50853 0.5374 -0.206506

PM 0.25362 0.07313 0.547211 0.3033 0.14965 -0.048537

In the table 2.7, the correlation between components of Earnings and other indicators

of CAMEL framework have been presented. ROE has negative correlation with CAR,

AUR, LLP and LDR, which indicates that ROE increases when these components

decreases and vice-versa. ROE has high negative correlation with CAR in comparison

to other components. ROA has positive correlation with all above components except

CBNBR. ROA has high correlation with AUR and NPL. Similarly, Profit Margin has

positive correlation with CAR, AUR, NPL, LLP, and LDR. Profit Margin has high

positive correlation with NPL.

2.3.3. Regression Analysis

Regression is a statistical measure used in finance, investing and other disciplines that

attempts to determine the strength of the relationship between one dependent variable

(usually denoted by Y) and a series of other changing variables (known as

independent variables).

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Figure 2.14: Relationship of AUR with ROE, ROA and, PM

Figure 2.14 depicts the relationship of AUR with ROE, ROA, and PM. ROE has

negative relationship with AUR, while ROA and PM have positive relationship with

AUR, which is presented in the figure by linear line; upward sloping line represents

positive relationship, and downward sloping line represents negative relationship.

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Figure 2.15: Relationship of NPL with ROE, ROA, and PM

Figure 2.16: Relationship of LDR with ROE, ROA, and PM

In Figure 2.15 and Figure 2.16, ROA, ROE, and PM (indicators of profitability) are

dependent variables, and NPL, and LDR (indicators of Asset Quality and Liquidity

respectively) are independent variables. The downward sloping lines in each diagram

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represents negative relationship between two variables. In contrary, the upward

sloping lines in each diagram denotes positive relationship between two variables.

The degree of flatness and steepness reflects the degree of responsiveness of

dependent variable to the change in independent variable.

2.4. Findings and Discussion

2.4.1. Findings

The report is based on the evaluation of government owned commercial banks under

the framework of CAMEL. Multiple financial ratios have been used on the basis of

requirement that represents the components of CAMEL. Some of the major findings

of the report are as follows:

The Capital Adequacy Ratio of Sampled Banks are increasing year by year.

ADBL is well capitalized from 2011 to 2016; RBBL has maintained capital

adequacy ratio above 10 percent since 2015 onwards and is well capitalized since

then. NBL is under-capitalized over entire study years. In 2016, it has capital

adequacy of 9.11 percent, which is still not up to the standard of 10 percent. The

average capital adequacy of sampled banks in 2016 is 11.05 percent, while the

industry average capital adequacy ratio is 11.89 percent, which is slightly higher

than of sampled banks.

Loans and Advances occupy the significant portion of bank’s asset. The asset side

of sampled banks is also populated by loans and advances and occupies about 60

percent of total asset in 2016. RBBL has the least portion of loans and advances

amongst the sampled banks, with an average of 44.20 percent of total asset

occupied by loans and advances. Moreover, Non-Performing Loan Ratio and Loan

Loss Provision Ratio of NBL is less than other two banks during sampled years.

The Average NPLR of sampled banks over 6 years is 5.7 percent.

Operating Expense Ratio and Asset Utilization Ratio have represented

management capability of the sampled banks. The Operating Expense Ratio of

ADBL is significantly high in 2012 due to increase in interest expenses. The

average operating expense ratio of sampled banks over 6 years is 88.03 percent.

ADBL has higher asset utilization ratio than other two sampled banks over all

study years. The asset utilization ratio of RBBL is the least among sampled banks

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as it has less portion of total asset on loans and advances. The average asset

utilization ratio of sampled banks over 6 years is 4.42 percent.

ROE, ROA, and Profit Margin have been used as the major indicators of

profitability. The ROE of RBBL is excessively high in 2011 and 2012, and

suddenly decreased in 2013 and 2014. This is due to addition to shareholder’s

equity, however, RBBL maintained satisfactory ROE in latter two years as its net

income increased. The ROE of NBL was high in 2011, and ADBL has

consistency in ROE.

There is negative relationship between ROA and Non-Performing Loan of

Government Owned Commercial Banks of Nepal.

Loan to Deposit Ratio, Cash and Equivalent to Total Asset Ratio, Cash and

Equivalent to Total Deposit Ratio, and Cash at NRB Ratio have been used as the

indicators of liquidity position of sampled banks. The loan to deposit ratio of

ADBL is over 80 percent of Total Deposit in all study years. The average loan to

deposit ratio of sampled banks over 6 years is 68.94 percent; the loan to deposit

ratio of sampled banks is highest in 2016, that is, 72.86 percent of total deposit.

All the sampled banks have maintained Cash Reserve Ratio of 6 percent as per the

directive by Nepal Rastra Bank; however, NBL failed to do so in 2014 with the

shortfall of cash balance at NRB by about 1.8 percent. The average cash reserve

ratio of sampled banks during study period stands at 11.05 percent.

The performance of sampled banks as a whole is improving. All the indicators of

CAMEL framework reflect positive symbol in the performance of the sampled

banks.

The net income of Rastriya Banijya Bank has drastically increased in 2015 due to

increase in non-operating income and extra-ordinary income.

2.4.2. Discussion

The report represents abridged scenario of sampled banks. Thus, other researchers can

conduct research on sensitivity to market, which studies the impact of change in

interest rates, and inflation on the performance of a financial institution. Moreover,

the report has only covered certain major ratios that defines each component of

CAMEL. Operating expense ratio and Asset Utilization Ratio has only been used to

depict the picture of management capability; earning per employee, cost per loan,

average loan size, and cost per unit of money lent can be used as proxy of

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management capability. Similarly, profitability or earnings performance of the

financial institution can be represented by interest spread ratio, earning spread ratio,

The result of this study reveals that there is positive relationship between ROA and

Non-performing loan; nevertheless, Sheefeni (2015) concluded that ROA and Non-

performing loan have negative relation; interestingly Adebisi and Matthew (2015)

revealed that there is no relationship between ROA and Non-performing loan. Hence,

three research evinced three different relationship between ROA, and Non-performing

loan. Thus, further study can be made to clarify the exact realtionhsip between ROA

and Non-performing loan. Furthermore, there is no significant relationship between

ROE and Non-performing Loan (Adebisi & Matthew, 2015); nonetheless, there is

positive relationship between Non-performing Loan and ROE of government owned

commercial banks of Nepal. Hence, the contradiction in the findings is the matter of

concern. Theoretically, Profit Margin should have negative correlation between Non-

Performing Loan and Loan Loss Provision, but the study evinced that Profit Margin

has positive relationship with NPL and LLP. ROE has negative relationship with

AUR and LDR, which contradicts with theory. Therefore, further-extensive study can

be done to depict the true relationship between profitability indicators and non-

performing loan.

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CHAPTER III

CONCLUSION AND ACTION IMPLICATION

3.1. Conclusion

The performance of government owned commercial banks has been analyzed on the

basis of CAMEL rating. The financial ratios that indicates respective components of

CAMEL framework has been used to assess overall performance of bank. The overall

scenario of government owned commercial banks was not satisfactory during 2011

and 2012, as two of the government banks (NBL and RBBL) were extremely under-

capitalized. Moreover, Loan loss Provision to Non-Performing Loan Ratio of ADBL

was at critical level during 2011 and 2012, which indicates that there is excess in bad

loans. The management capability of sampled banks seems to be less effective as the

average operating expenses ratios over 6 years is 88.03 percent, which indicates that

only 11.07 percent of total operating revenue is remained after deducting total

operating expenses. The profitability and earnings of sampled banks is over 6 years is

positive; ROE of RBBL is higher than of other two banks. The average profit margin

of sampled banks over 6 years is 41.40 percent, which represents that the government

owned commercial banks are performing well and the performance is being better.

The liquidity position of sampled banks has been examined by assessing LDR, and

CRR. The loan deposit ratio or credit deposit ratio of ADBL has surpassed the 80

percent limit in entire 6 years, but NBL and RBBL have maintain CD ratio below 80

percent. The average CD ratio of sampled banks over 6 years is 68.94 percent. The

CRR of sampled banks from 2011 to 2016 is above 6 percent except in 2014, where

NBL failed to maintain 6 percent CRR. The average CRR of sampled bank over 6

years is 11.05 percent. The current status of government owned commercial banks of

Nepal is strengthening. The performance of government owned commercial banks of

Nepal is improving. The capital adequacy ratio of government owned commercial

banks is strengthening; however, Nepal Bank is struggling to maintain 10 percent

minimum capital requirement. All the components of CAMEL framework have been

scrutinized and the indicator of each components of CAMEL ratings is examined in

accordance to the statuary requirement as well as industry average.

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3.2. Action Implications

CAMELS rating system is the financial supervisory rating system developed to assess

bank’s overall condition. The report is concentrated on the performance of

government owned commercial banks of Nepal based on the framework of CAMEL.

Most of the study based on commercial banks have studied joint venture banks (Baral,

2005) and domestic private banks (Bhandari, 2010; Basnet, 2008); however, this

study investigates on overall performance of government owned commercial of Nepal

in the light of CAMEL framework. Some of the major implications of this study have

been presented in following points.

The capital base of sampled banks in the latter study years is improving, however,

Nepal Bank Limited has weak capital base. Well capitalization is the clamant

requirement of strong banking base, so there is urgency to formulate stringent

policy to maintain strong capital base. So, Nepal Bank Limited should

immediately focus on maintaining strong capital base.

The report provides multi-dimensional analysis on the performance of the sampled

banks. The project evaluates the capital adequacy, asset quality, liquidity,

profitability, and management capability of government owned commercial banks.

Therefore, the project can be more informative for the concerned parties such as

shareholders, depositors, lenders, employees, and other stakeholders of these

banks.

This study will be helpful for the management committee of sampled banks in

making plans and policies stressing on the problematic segment of banking

operation. The operating expense ratio is in the problematic stage, thus bank’s

management should curb unnecessary acquisition of non-earning assets such as

buildings, land, and should reduce excessive lending on non-productive sectors.

The loan to deposit ratio of sampled banks on an average complies with the

directive of Nepal Rastra Bank; however, one of the sampled banks, ADBL, needs

quick assessment in curtailing loan to deposit ratio for liquidity management.

ADBL should suspend its lending activities for a time being and formulate strict

lending and collection policy so that it can maintain loan to deposit ratio as per the

directive of NRB.

ADBL has higher loan loss provision, which reflects higher possibility of loan

default. Thus, credit department of ADBL must be prudent in making better

54

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lending decision by properly assessing the 5C’s: Character, Collateral, Capital,

Capacity, and Condition.

Unlike ADBL, Rastriya Banijya Bank should adopt aggressive lending policy in

order to increase the operating income. Its asset utilization ratio is less due to

lower LDR. The credit department must focus on easy loan access to the

customers while maintaining proper assessment system as hasty lending policy

might be proven virulent for overall banking operation.

55

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REFERENCES

Adebisi, D. J., & Matthew, O. B. (2015). The impact of non-performing loans on firm

profitability: A focus on the Nigerian Banking Industry. American Research

Journal of Business and Management, 1(4).

Agricultural Development Bank Limited. (2017). Brief profile: Agricultural

Development Bank. Retrieved from

http://www.adbl.gov.np/adbl_brief_profile.html

Asian Development Bank. (2002). Guidelines for the financial governance and

management of investment projects financed by ADB. Manila.

Asian Development Bank. (2015). Financial soundness indicators for financial sector

stability. Mandaluyong: Creative Commons Attribution 3.0 IGO.

Baral, J. (2005). Health check-up of commercial banks in the framework of

CAMELS: A case study of joint venture banks in Nepal. Journal of Nepalese

Business Studies, 41-55.

Basnet, P. R. (2008). Profitability and solvency position of Nabil Bank Limited.

(Unpublished Bachelors Report). Tribhuvan University, Kathmandu, Nepal.

Bhandari, M. (2010). A comparative financial perfromance analysis of Himalayan

Bank Ltd. and Everest Bank Ltd. (Unpublished Master's Thesis). Trubhuvan

University, Kathmandu, Nepal.

Blackman, P. A. (2001, 06 1). Strengthening management capability in development

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df

Gautam, R. (2016, June). The determinants of banks liquidity: Empirical evidence on

Nepalese Commercial Banks. The Batuk: Journal of Interdisciplinary Studies,

2(2).

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Jha, S., & Hui, X. (2012, 06 27). A comparison of financial performance of

commercial banks: A case study of Nepal. African Journal of Business

Management, 6(25), 7601-7611. Retrieved from

http://www.academicjournals.org/AJBM

Kiyosaki, R. T. (2011). Rich dad poor dad. Plata Publishing.

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Mann, P. S., & Lacke, C. J. (2010). Introductory statistics. Hoboken, New Jersey:

John Wiley & Sons.

Narasimha, V., & Goel, M. (2013). Capital adequacy and its relevance to the Indian

Banking Sector: A study of four Indian Banks. International Research

Journal of Social Sciences, 2(11), 1-5.

Nepal Bank Limited. (2017). Bank overview: Nepal Bank Limited. Retrieved from

http://www.nepalbank.com.np/bankoverview/introduction.php

Nepal Rastra Bank. (2011). Bank supervision report. Kathmandu: Bank Supervision

Department, Nepal Rastra Bank.

Nepal Rastra Bank. (2014). Bank supervision report. kathmandu: Bank Supervision

Department, Nepal Rastra Bank.

Nepal Rastra Bank. (2015). Bank supervision report. Kathmandu: Bank Supervision

Department, Nepal Rastra Bank.

Nepal Rastra Bank. (2015). Banking and financial statistics. Kathmandu: Bank and

Financial Institution Regulation Department, Nepal Rastra Bank.

Oxford Learner's Dictionary. (2017). Retrieved from Oxford Learner's Dictionary:

www.oxfordlearnersdictionaries.com

Rastriya Banijya Bank Limited. (2017). Introduction: Rastriya Banijya Bank Limted

(RBBL). Retrieved from https://www.rbb.com.np/intro.php

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Rawal, D., & Sapkota, C. K. (2016-17). Commercial bank management. In D. Rawal,

& C. K. Sapkota, Commercial Bank Management (p. 15). Kathmandu:

Samjhana Publication.

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Delhi: McGraw-Hill International.

Saunders, A., & Cornett, M. M. (2007). Financial institutions management: A risk

management approach. New York: McGraw-Hill Irwin.

Sheefeni, J. P. (2015). Evaluating the impact of bank specific determinants of non-

performing loans in Namibia. Journal of Emerging Issues in Economics,

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Sthapit, A. B., Yadav, R. P., Khanal, S. P., & Baidar, P. (2014). Business statistics.

Kathmandu: Asmita Publication.

Zikmund, W. G., Babin, B. J., Carr, J. C., & Griffin, M. (2009). Business research

methods. South-Western Cengage Learning.

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APPENDICES

1.7. Appendix 1: Definition of Financial Terms

Asset Utilization Ratio: Asset Utilization is a ratio used to determine how well a

company is using its available assets to generate a profit. The asset utilization

ratio calculates the total revenue earned for every rupee of assets a company owns. 

BASEL III: Basel III is a comprehensive set of reform measures, developed by

the Basel Committee on Banking Supervision, to strengthen the regulation,

supervision and risk management of the banking sector.

Capital Adequacy Ratio: Capital Adequacy Ratio is the ratio of bank’s capital to its

risk. It is expressed as a percentage of a bank’s risk weighted credit exposures. It is

also known as Capital to Risk weighted Asset Ratio.

Cash and Equivalent to Total Asset Ratio: Cash and equivalent to Total Asset

Ratio measures the amount of liquid asset held by the bank with respect to Total

Asset. Higher the cash and equivalent to total asset ratio, higher the liquidity of bank.

Cash and Equivalent to Total Deposit Ratio: Cash and equivalent to Total Deposit

Ratio measures the amount of liquid asset held by the bank with respect to Total

Deposit. Higher the cash and equivalent to total deposit ratio, higher the liquidity of

bank.

Cash Balance at NRB to Total Deposit Ratio: Cash Balance at NRB to Total

Deposit Ratio is a specified minimum fraction of the total deposits of customers,

which commercial banks have to hold as reserves either in cash or as deposits with the

central bank. It is also known as Cash Reserve Ratio.

Core Capital to Risk Weighted Asset: Core Capital to Risk Weighted Asset is the

comparison between a banking firm’s core equity capital to risk weighted aseets. It is

also known as Tier 1 capital ratio. Tier 1 capital includes equity capital, retained

earnings, share premium, and perpetual non-cumulative preferred stock less goodwill

and other fictitious assets.

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Earnings per Share: Earnings per share (EPS) is the portion of a company's profit

allocated to each outstanding share of common stock. Earnings per share serves as an

indicator of a company's profitability.

Loan loss provision ratio: Loan loss provision ratio is an indicator of how protected

a bank is against future losses. Loan Loss Provision Ratio is expressed as the

percentage of bank’s total loan and advances.

Loan to Deposit Ratio: Loan-to-deposit ratio (LTD) is a commonly used statistic for

assessing a bank's liquidity by dividing the bank's total loans by its total deposits.  It is

a commonly used statistic for assessing a bank's liquidity.

Net interest income: Net interest income is the difference between the revenue that is

generated from a bank's assets and the expenses associated with paying out its

liabilities.

Non-Performing Loan ratio: Non-Performing Loan Ratio is a measure of the overall

quality of bank’s loan book. NPL are those assets for which interest is overdue for

more than 90 days.

Operating Expenses Ratio: Operating expense ratio (OER) is a measure of what

it costs to operate a piece of property compared to the income that the property brings

in. An operating expense ratio describes a property's operating expense compared to

the income it generates.

Profit Margin: Profit margin is expressed as a percentage and, in effect, measure

how much out of every dollar of sales a company actually keeps in earnings

Return on Asset: Return on Asset indicates how profitable a company is relative to

its total assets. The return on assets (ROA) ratio illustrates how well management is

employing the company's total assets to make a profit.

Return on Equity: Return on equity (ROE) is a measure of profitability that

calculates how many dollars of profit a company generates with each dollar of

shareholders' equity. eturn on equity (ROE) is a measure of the profitability of a

business in relation to the book value of shareholder equity.

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1.8. Appendix 2: Indicators of Each Components of CAMEL Framework

1. Capital Adequacy

1.1. Core Capital Ratio (CCR)

CCR= CCRWA

Where,

CC = Core Capital

RWA = Risk Weighted Assets

1.2. Capital Adequacy Ratio (CAR)

CAR=Tier 1+Tier 2RWA

2. Asset Quality

2.1. Non-Performing Loan Ratio (NPLR)

NPLR=NPLTLA

Where,

NPL = Non-performing Loan

TLA = Total Loan and Advances

2.2. Loan Loss Provision Ratio

LLPR= LLPTLA

Where,

LLP = Loan Loss Provision

3. Management Capability

3.1. Operating Expenses Ratio (OER)

OER=TOETOR

Where,

TOE = Total Operating Expenses

TOR = Total Operating Revenue

3.2. Asset Utilization Ratio (AUR)

AUR=TORTA

Where,

TA = Total Assets

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4. Earnings Performance

4.1. Return on Equity (ROE)

ROE= ¿SE

Where,

NI = Net Income

SE = Shareholder’s Equity

4.2. Return on Assets (ROA)

ROA= ¿TA

4.3. Profit Margin (PM)

PM= ¿TOR

5. Liquidity Position

5.1. Loan to Deposit Ratio (LDR)

LDR=TLATD

Where,

TD = Total Deposit

5.2. Cash and Equivalent to Total Asset Ratio (CETAR)

CETAR=CETA

Where,

CE = Cash and Equivalent

5.3. Cash and Equivalent to Total Deposit Ratio (CETDR)

CETDR=CETD

5.4. Cash Balance with NRB to Total Deposit Ratio (CBNRBR)

CBNRBR=Cash Balance with NRBTD

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1.9. Appendix 3: Descriptive Statistical Tools Using Microsoft Excel

Microsoft excel has been used to calculate mean, median, standard deviation,

coefficient of variation, skewness, and kurtosis.

Excel formulae used to calculate above mentioned statistical tools are as follows:

1. Mean

¿ Average( [number 1 ] [ number 2 ] [ number 3 ] …)

2. Median

¿ Median([ number 1 ] [ number 2 ] [ number 3 ] …)

3. Standard Deviation

¿ Stdev .P( [number 1 ] [ number 2 ] [ number 3 ] …)

4. Coefficient of Variation

Coefficient of Variation=Standard Deviationmean

× 100 %

5. Skewness

¿ Skew .P( [number 1 ] [ number 2 ] [ number 3 ] …)

6. Kurtosis

¿ Kurt ( [number 1 ] [ number 2 ] [ number 3 ] …)

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1.10. Appendix 4: Financial Profile of Sample Banks

Table 4.1

Financial Profile of Nepal Bank Limited

SN Nepal Bank Limited (In Rs. Million) 2011 2012 2013 2014 2015 2016A

1 Net Interest Income* 2,277.95 1,854.02 2,521.93 2,823.58 3,316.46 1,810.36

2 Total Operating Income* 2,673.46 2,345.74 3,091.98 3,356.51 3,935.59 2,144.63

3 Total Operating Expenses* 2,452.90 2,556.17 2,730.97 3,362.45 3,479.96 1,500.97

4 Operating Profit* 220.56 (210.43) 361.00 (5.95) 455.63 643.66

5 Net Income * 383.44 176.36 791.51 716.96 526.12 1,048.19

6 Loans and Advances** 26,709.90 29,698.86 37,855.28 41,195.99 53,374.54 55,131.92

7 Loan Loss Provision* 36.37 252.06 364.34 252.05 442.62 175.28

8 Non-performing loan** 1,410.73 1,731.63 1,714.84 2,397.48 2,069.64 2,122.58

9 Cash Balance* 10,837.97 14,063.69 14,184.21 6,659.56 3,593.77 9,263.97

10 Cash Balance with NRB** 8,171.00 8,569.80 10,411.80 2,919.00 4,692 4,973.70

11 Balance With Other Banks** 656.3 404.4 432.1 558.7 811.1 859.77

12 Deposits** 46,804.20 56,042.60 62,988.90 69,341.20 78,007.20 80,220.82

13 Total Asset** 55,700.10 61,071.90 77,171.20 83,311.10 90,309.20 91,365.06

14 Shareholder's Equity** 380.40 1,772.80 3,716.40 6,465.00 6,465.00 6,465.00

15 Total Capital Fund** (4,607.70) (3,084.10) (964.20) 2,630.10 3,347.10 3,514.46

Source: * Bank Supervision Report, 2015; ** Banking and Financial Statistics, 2015; A Annual Report of Nepal Bank Limited

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Table 4.2

Financial Profile of Rastriya Banijya Bank

SN Rastriya Banijya Bank (In Rs. Million) 2011 2012 2013 2014 2015 2016A

1 Net Interest Income* 2,603.62 2,354.40 3,287.12 3,890.89 4,595.26 5,549.93

2 Total Operating Income* 3,199.50 3,093.17 4,038.52 4,706.06 5,563.30 6,590.66

3 Total Operating Expenses* 2,363.06 2,677.92 3,486.35 3,720.96 4,106.12 4,519.94

4 Operating Profit* 836.44 415.25 552.17 985.10 1,457.18 2,070.72

5 Net Income* 1,759.26 1,446.21 1,310.12 1,733.39 4,637.28 2,648.47

6 Loans and Advances** 36,866.10 40,448.40 49,044.90 60,854.90 75,836.50 85,470.37

7 Loan Loss Provision* 419.48 639.25 349.73 638.95 790.77 1,056.90

8 Non-performing loan** 4,024.60 2,940.40 2,604.80 2,402.80 2,562.00 3,376.08

9 Cash Balance* 6,907.31 19,262.92 2,400.66 2,940.80 3,830.59 31,599.99

10 Cash Balance with NRB** 4813.5 16333.6 11573.2 20969.9 18096.1 19,000.91

11 Balance With Other Banks** 479.00 584.20 684.42 718.13 623.84 661.27

12 Deposits** 73,924.10 87,775.00 91,093.90 107,270.10 124,221.70 146,207.63

13 Total Asset** 94,646.70 107,478.30 115,351.60 130,046.90 150,571.50 174,626.56

14 Shareholder's Equity** 1,172.30 1,172.30 8,589.00 8,589.00 8,589.00 8,588.97

15 Total Capital Fund** (7,422.90) (2,313.20) 2,503.50 1,272.50 2,386.60 2,505.93

Source: * Bank Supervision Report, 2015; ** Banking and Financial Statistics, 2015; A Annual Report of Nepal Bank Limited

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Table 4.3

Financial Profile of Agricultural Development Bank

SN ADBL (In Rs. million) 2011 2012 2013 2014 2015 2016

1 Net Interest Income* 3,984.70 4,115.03 4,611.59 4,592.30 5,217.35 6,180.64

2 Total Operating Income* 4,568.66 4,719.63 5,282.10 5,426.77 6,338.63 7,349.25

3 Total Operating Expenses* 5,091.04 7,011.63 3,947.08 4,610.76 4,623.71 4,668.22

4 Operating Profit* (522.37) (2,292.00) 1,335.03 816.01 1,714.92 2,681.03

5 Net Income* 2,365.48 1,861.03 2,259.95 1,509.46 1,876.19 2,577.23

6 Loans and Advances* 34,459.92 39,393.10 49,770.46 57,505.27 66,601.12 79,751.86

7 Loan Loss Provision* 2,504.03 2,067.86 1,033.44 619.95 930.05 561.96

8 Non-performing Loan** 3,491.50 2,880.60 3,211.50 3,332.50 3,269.70 3,070.45

9 Cash Balance* 4,808.95 6,285.18 9,524.00 2,693.41 11,338.84 10,453.61

10 Cash Balance with NRB** 2534.5 3340.7 6278.7 4005.4 5977.1 6,335.73

11 Balance With Other Banks** 689.8 844.5 851.3 1282.8 1175.1 1,233.86

12 Deposits* 34,394.63 43,238.99 54,397.15 65,828.33 76,921.30 87,263.50

13 Total Asset** 66,668.30 79,256.50 92,584.30 108,375.50 119,614.30 112,709.83

14 Shareholder's Equity** 9,474.30 9,474.30 9,636.80 9,636.80 9,860.80 10,374.40

15 Total Capital Fund** 10,903.50 12,462.50 13,135.10 14,222.90 12,958.80 14,312.00

Source: * Bank Supervision Report, 2015; ** Banking and Financial Statistics, 2015; A Annual Report of ADBL

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