Camel Thesis

A STUDY OF CAMEL ANALYSIS OF COMMERCIAL BANKS (REFERENCE TO EVEREST BANK LTD., BANK OF KATHMANDU AND

NEPAL INDUSTRIAL AND COMMERCIAL BANK LTD.)

By:

ESHA RAI

Shanker Dev Campus

T.U. Regd. No: 7-1-3-1838-2001

Campus Roll No: 2077/063

A Thesis Submitted to:

Office of the Dean

Faculty of Management

Tribhuvan University

In partial fulfillment of the requirement for the Degree of

Master of Business Studies (M.B.S)

Kathmandu, Nepal

March, 2010

RECOMMENDATION

This is to certify that the Thesis

Submitted by:

ESHA RAI

Entitled:



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

Faculty of Management. This thesis is forwarded for examination.

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

Rita Maskey Prof. Bisheshwor Man Shrestha Prof. Dr. Kamal Deep Dhakal

Lecturer (Head of Research Department) (Campus Chief)

(Thesis Supervisor)

VIVA-VOCE SHEET

We have conducted the viva –voce of the thesis presented

by

ESHA RAI

Entitled:



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

according to the prescribed format. We recommend the thesis to

be accepted as partial fulfillment of the requirement for

Master Degree of Business Studies (M.B.S.)

Viva-Voce Committee

Head, Research Department …………………….………

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

Member (External Expert) …..………………………..

TRIBHUVAN UNIVERSITY

Faculty of Management

Shanker Dev Campus

DECLARATION

I hereby declare that the work reported in this thesis entitled “A STUDY OF CAMEL

ANALYSIS OF COMMERCIAL BANKS (REFERENCE TO EVEREST BANK

LTD., BANK OF KATHMANDU AND NEPAL INDUSTRIAL AND

COMMERCIAL BANK LTD.)” submitted to Office of the Dean, Faculty of

Management, Tribhuvan University, is my original work done in the form of partial

fulfillment of the requirement for the Master Degree in Business Studies (M.B.S.) under

the supervision of Rita Maskey, Lecturer of Shanker Dev Campus.

………………………………

ESHA RAI

Researcher

T.U. Regd. No. : 7-1-3-1838-2001

Campus Roll No. : 2077/063

TABLE OF CONTENTS

Recommendation

Viva- Voce Sheet

Declaration

Acknowledgement

Table of Contents

List of Tables

List of Figures

Abbreviations

Page No.

CHAPTER – I INTRODUCTION

1.1 Background of the Study 1

1.2 Introduction of the Organizations 3

1.3 Focus of the Study 8

1.4 Statement of the Problem 9

1.5 Objective of the Study 9

1.6 Significant of the Study 10

1.7 Limitation of the Study 10

1.8 Organization of the Study 10

CHAPTER – II REVIEW OF LITERATURE

2.1 Introdu

ction 12

2.2 Theore

tical Review 12

2.2.1 History

of Banking in Nepal 13

2.2.2 Conce

pt of Commercial Bank 15

2.2.3 Functi

ons of Commercial Banks 17

2.2.4 Conce

pt of Bank Supervision 18

2.2.5 Objecti

ves of Bank Supervision 19

2.2.6 Proces

s of Bank Supervision 19

2.2.7 Superv

isory and Monitoring System of the Nepal Rastra Bank 20

2.2.8 Conce

pt of CAMEL Banks Rating System 20

2.3 Composite of Ratings 21

2.4 Camels Components 22

2.5 Review of Previous Studies 25

2.5.1 Review of Journals and Articles 25

2.5.2 Review of Thesis 26

CHAPTER – III RESEARCH METHODOLOGY

3.1 Introduction 30

3.2 Research Design 30

3.3 Population and Sampling of Data 30

3.4 Periods Covered 30

3.5 Source of Data 30

3.6 Data Analysis Tools 31

3.6.1 Financi

al ratio analysis tools 31

3.6.1.1 Capital

Adequacy Ratio (CAR) 31

3.6.1.2 Assets Quality 32

3.6.1.3 Management 33

3.6.1.4 Earning 34

3.6.1.5 Liquidity 35

CHAPTER – IV DATA PRESENTATION AND ANALYSIS

4.1 Introduction 37

4.2 Data Presentation and Analysis 37

4.2.1 Capital

Adequacy 37

4.2.1.1 Core Capital Ratio (CCR) 41

4.2.2 Assets

Quality 44

4.2.2.1 Non-Performing loan 44

4.2.2.2 Loan Loss Coverage Ratio 47

4.2.2.3 Loan Loss Provision Ratio 50

4.2.3 Manag

ement 52

4.2.4

Earnings 56

4.2.4.1 Earning per Shares 56

4.2.4.2 Return on Equity 59

4.2.4.3 Return on Assets 61

4.2.5 Liquidi

ty 64

4.2.5.1 Cash & Bank Balance Ratio 64

4.2.5.2 Investment in Government Security Ratio (IGSR) 66

4.3 Major Findings 69

CHAPTER – V SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary 73

5.2 Conclusion 74

5.3 Recommendations 76

Bibliography

Appendices

LIST OF TABLES

Table No. Title Page No.

2.1 List of licensed Commercial Banks in Nepal 16

4.1 Capital Adequacy Ratio 39

4.2 Core Capital Ratio 42

4.3 Non-Performing Loan Ratio 45

4.4 Loan Loss Coverage Ratio 48

4.5 Loan Loss Provision Ratio 51

4.6 Management Efficiency Ratio 53

4.7 Earning per Shares 57

4.8 Return on Equity 59

4.9 Return on Assets 62

4.10 Cash & Bank Balance Ratio 64

4.11 Investment in Government Security Ratio 67

LIST OF FIGURES

Figure No. Title Page No.























CHAPTER - I

INTRODUCTION

1.9 Background of the Study

In any economy, the important of financial sector in general and banking sector in

particular cannot be undermined. Banking sector plays the significant role in overall

development of the economy in all countries. Thus it is said that the banking sector

mirrors the larger economy. It‟s linkage to all sectors makes it a proxy for what is

happening in the economy as a whole. As this aspect various financial institutions are

growing rapidly on last decades. Commercial banks are one of the vital aspects of

banking sector, which deals in process of analyzing the available resources in the needed

sector. Bank plays the intermediary role in-between surplus and deficit of financial

sector. Banks motivate people to keep their surplus money as deposits in the bank then

bank utilize that money by providing loan to these people who have deficit and need of

that fund or by investing that fund in other profitable sector.

The word „Bank‟ has been derived from the Italian word „Banco‟ which means a place

for keeping, lending and exchanging money. The bank is a financial institution, which

deals with money. It accepts deposits from individuals and organizations and grants loans

to them. It allows interest on the deposits made and charges interest on the loans granted.

Since, it accepts deposits and grants loans, it is regarded as the trader of money. Further,

it creates credit and supports for the formation of capital and hence it is regarded as

“Manufacturer of Money”.

The growth of financial sector in Nepal is much better as compare to other sectors.

Despite of conflict and political insurgency, banking and financial sector continued

growing. Numbers of banks and financial institutions are increasing day by day. Similarly

banking habit of people is also in increasing trend.

A single institution cannot fulfill all the services demanded by the customers. So,

different types of bank also emerged in the banking industry specializing in different

functions areas. There are different types of banks. Among them commercial bank is one.

Commercial banks represent a key financial intermediary because they serve all types of

surplus and deficit units. They offer deposit accounts with the size and maturity

characteristics desired by surplus units. They repackage the funds received from deposits

to provide loans of the size and maturity desired by deficit units. They have the ability to

assess the creditworthiness of deficit units that apply for loans, so that they can limit their

exposure to credit (default) risk on the loans they provide (Madura J., 1999: 506).

The commercial bank has been a vital role for economic development. Banks are

intermediaries, which mobilize funds through the prudential combination of investment

portfolio in advanced countries. Now Nepal is underdevelopment country so that joint

venture Banks are still to be realize as an essential mechanism of mobilizing interval

saving through various Banking schemes in the economy they can accumulate and collect

the capital among other prerequisite.

Commercial banks are suppliers of the finance for trade and industry as well as other

sector, which plays the vital role for economic and financial development of the country.

They help in the formulation of capital by investing the savings in productive areas.

Normally Banking facility is available in underdeveloped country (Like Nepal) is urban

area. In almost of the countries banking facilities are concentrated into urban and semi-

urban area, they wanted stay far from rural area due to lower rate of return or higher risk.

But in fact, without it, other sector of economy can not be flourished.

Banking often perceived on milestone of economy growth of any country. The Banking

history is very much old because the first systematic public Banking history or institution

goes to credit to Bank of Venice, Italy established in 1157 AD. About after 250 years of

bank of Venice establishment, other two bank founded name a as Bank of Barcelona and

bank of Genoa in 1401 and 1407 A.D. Respectively then after Bank of Amsterdam is

established in 1609 AD. The Bank of England was established in 1694 AD. But the

modern banking is started only after introducing banking Act 1883 A.D. in USA. When

the government has liberalized economy policy and democracy in the country then the

growth of commercial bank is very much. In current situation (Jan. 2010) 26 commercial

bank are operating and providing their services to customers. Nepal Rastra Bank (NRB)

is the monitoring and regulating body of financial institutions (Viz. commercial banks,

development banks and finance companies). NRB poses the directive of maintaining Rs.

2000 million on a paid up capital with in dated of 15 July 2009 AD (Kantipur daily,

20Aug.2008) which is the mandatory rule of NRB.

1.10 Introduction of the Organizations

Everest Bank Limited

Everest Bank Limited (EBL) stared its operation in 1994 with a view and objectives of

extending professionalized and efficient banking services to various segments of the

society. Its joint venture partner, Punjab National Bank (PNB), (holding 20% equity in

the bank) is the largest nationalized bank in India having 112 years of banking history.

The bank is providing customer friendly services through a network of 34 branches in

Nepal.

The bank has Authorized Capital of Rs.1,000,000,000, Issued Capital of Rs.840,620,000

and Paid up Capital of Rs.838,821,000. Out of Paid up Capital, local Nepalese Promoters

hold 50% stake in the Banks equity, while 20% of equity is contributed by joint venture

partner PNB whereas remaining 30% is held by the public. (EBL Annual report 2008/09)

EBL was one of the first bank to introduce Any Branch Banking System (ABBS) in

Nepal. It has introduced Mobil Vehicle Banking system to serve the segment deprived of

proper banking facilities through its Birtamod Branch, which is also the first of its kind.

The bank was bestowed with the “NICCI Excellence award” by Nepal India chamber of

commerce for its spectacular performance under finance sector. This bank has been

conferred with “Bank of the Year 2006” by the banker, a publication of financial times,

London.

The main and best features of this bank are:

One of the Largest Network among private sector banks spread across Nepal and all

connected with ABBS.

Strong Joint Venture Partner providing Technical Support.

Representative office in India to facilitate remittance from India.

Direct Drawing arrangement with PNB and HDFC bank India whereby instant

payment is done on presentation of the instrument.

Direct amount credit in PNB branches commented with Central Banking System

and RTGS member banks via speed remittance. More than 126 remittance payout

location in Nepal.

EBL in association with Smart Choice Technology (SCT) is providing ATM service to its

customers through more than 74 ATMs and over 850 point of sales across the country.

ATM sharing arrangement with Punjab National Bank has facilitated usage of EBL Debit

Card at more than 1000 PNB ATM outlets across the India at a nominal rate. Similarly,

Indian tourists and businessmen having PNB cards will be able to use EBL ATM, while

in Nepal.

Services that the bank is providing currently

Deposit Loan

Current Account

Saving Account

Saving premium account

Cumulative Deposit Scheme

Sunaulo Bhavishya Yojana

Unfixed Fixed Deposit Scheme

USD Account

EBL NRN Deposit

1. Retail Loan 2. Corporate Loan

Home Loan Working Capital Finance

Vehicle loan Project Finance

Education Loan Trade Finance

Future Lease Rental Consortium Finance

Professional loan

Loan Against Mortgage

Bike loan

Loan Against Life Insurance

Share loan

Tractor and Water Pump finance

Bank of Kathmandu Limited

"We make your life easier" is the slogan that Bank of Kathmandu (BOK) is renowned

for. BOK was established in 12th

March 1995 as 10th commercial bank of Nepal with the

objective to stimulating the Nepalese economy and taking it to new heights. BOK aims to

facilitate the nation's economy and to become more competitive globally. BOK is

committed to delivering quality services to the customers, generating good returns for

their shareholders, providing attractive incentive for their employees and serving the

community through stronger corporate social responsibilities. To achieve these, BOK has

been focusing on its set objectives right from the beginning. BOK was started as a joint

venture with Syam Bank of Thailand.

The bank has Authorized Capital of Rs.1,000,000,000, Issued Capital and Paid up Capital

of Rs.844,397,900. Out of Paid up Capital, 41.81% of the shares are owned by the

promoters and 58.19% of the shares are owned by the public (BOK Annual report

2008/09).

BOK takes pride in using Financial, banking application software, “The Banker”

Technology Award 2004.

In summary, the following main objectives have been focused by BOK:

To contribute to the sustainable development of the nation by mobilizing domestic

savings and channeling them into productive areas.

To use the latest banking technology to provide better, reliable and effective

services at a reasonable cost.

To facilitate trade by making financial transactions easier, faster and more reliable

through relationships with foreign banks and money transfer agencies.

To contribute to the overall socio-economic development of Nepal.

Bank of Kathmandu Limited has become a prominent name in the Nepalese banking

sector. BOK has today become a landmark in the Nepalese banking sector by being

among the few commercial banks, which is entirely managed by Nepalese professionals

and owned by the public.

Products and Services

BOK has introduced various products and services in order to facilitate the requirements

of customers.

Deposit Loan and Advances

1. Current Account

2. Saving Account

General Savings

Ladder Savings

Sajilo Bachat Yojana

Jestha Lagani Kosh (JLK)

Griha Laxmi Bachat

Hello Savings

3. Call Deposits

4. Fixed Deposit

5 Recurring Deposits

1. Corporate Credit

a. Project Finance (Term Loan)

b. Working Capital Finance

Overdraft

Demand / Short-term loan (Trade Finance)

Trust Receipt/ Importers Loan (Trade Finance)

Export Loan

Consortium Lending

2. Business Credit

a. Demand / Short-term loan (Trade Finance)

b. Trust Receipt/ Importers Loan (Trade Finance)

3. Retail Banking

a. Housing Loan

b. Vehicle Loan

Car 4 U Loan

LCV Loan/ Buses

LCV Loan/ Trucks

c. Education Loan

d. Foreign Employee Loan

e. Festivity Loan

4. Other Services

a. Safe Deposit Locker

b. ATM / Debit Card

Nepal Industrial & Commercial Bank

Nepal Industrial & Commercial Bank Limited (NIC Bank) commenced its operation on

21 July 1998 from Biratnagar. The current shareholding pattern of the Bank constitutes of

promoters holding 51% of the shares while 49% is held by general public. The bank has

Authorized Capital of Rs. 1,600,000,000, Issued Capital and Paid up Capital of Rs.

1,140,480,000 (NIC Annual Report 2008/09).

The shares of the Bank are actively traded in Nepal Stock Exchange. Within 10 years of

commencing business, the Bank has grown rapidly with 16 branches throughout the

country while 2 more are planned to be opened this year. All branches are inter-

connected through V-Sat and are capable of providing real time on-line transactions.

It is the first commercial Bank in Nepal to get ISO 9001:2000 certifications for quality

management system. Furthermore, NIC Bank became the first Bank in Nepal to get a line

of credit by International Finance Corporation (IFC), an arm of World Bank Group under

its Global Trade Finance Program, enabling the Bank's Letter of Credit and Guarantee to

be accepted/ confirmed by more than 200 banks worldwide.

NIC Bank's organizational structure is designed to support its business goals. However, it

is flexible enough in seeking to ensure effective control, supervision, and consistency in

standards across all businesses at the same time. The organization structure is divided

into five major areas such as Consumer Banking, Business Banking, Special Assets

Management, Treasury and Liability Marketing and Transaction Banking all of which are

supported by the corporate center.

The Bank believes in continuously offering new and value added services to its

customers, with commitment to quality and value to its clients at the same time.

Accordingly, the Bank has been in the forefront in launching innovative and superior

products having unique customer friendly features with immense success.

The Bank is awarded the "Bank of the Year 2007-Nepal" by the world-renowned

financial publication of The Financial Times, U.K.-The Banker.

Product & Services

NIC has introduced various products and services in order to facilitate the requirements

of customers.

A. Deposits B. Business Banking

Current Account a. Funded Credit Facilities

Normal Savings Project Finance/Consortium Finance

Call Account Working Capital Finance

Fixed Deposit Account Overdraft / Demand Loan

NIC Business Account Trade Finance

NIC Life Saving Account Export Finance

Karmashil Bachat Khata Packing Credit/ Per- Shipment Loan

NIC Shareholder Savings Account Post-Shipment Loan

NIC Sikshya Kosh account Pledge Loan

NIC Super Deposit Margin Lending

NIC Corporate Super Account b. Non Funded Credit Facilities

Import Letter of Credit (L/C)

Bank Guarantees

D. SME Banking E. Transaction Banking

NIC Small Business Loan NIC SMS banking

NIC SME Trade & Industry Loan ATM/ Debit Card banking

NIC Ghar Subidha (NGS) Fund Transfer

NIC Sajilo Loan Purchase & Sale of Traveler‟s Cheques

NIC Auto Loan Safe Deposit Locker

NIC Education Loan Any Bank banking system

NIC Housing Loan Extended Counter Services

1.11 Focus of the Study

This research study is focused on comparing the financial condition and performance of

Everest bank Limited, Bank of Kathmandu and Nepal Industrial & Commercial bank

Limited in the framework of CAMEL by using descriptive and analytical research design.

Here we assess the bank effectiveness, efficiency and soundness through CAMEL.

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

1.12 Statement of the Problem

The overall performance of financial institutions may not reflect by financial statement,

so that major question emerges whether these are adequate to reflect the overall

performance of company. Hence, there is needed to identify the overall conditions

strengths, weakness, opportunity and threats of the banks. For these purpose, several

financial and statistical tools and techniques are developed by different experts and

financial institutions all over the world, one of them is CAMEL. This study aims to asses

the financial conditions and overall performance of sampled commercial banks in the

framework of CAMEL.

What are the capital Adequacy ratios of commercial banks?

What are the qualities of assets of banks?

What are the management qualities of the banks?

What are the earning capacities of the banks?

What is the liquidity position of commercial banks?

1.13 Objective of the Study

The main objective of the study is to examine the financial performance through CAMEL

test of selected commercial banks and compare each other. To accomplish the main

objective, specific objective of the study are:

To check the capital adequacy, assets quality, management quality and earning

capability and liquidity position of selected banks.

To asses the organization investments, social corporate responsibility and services

provided by selected commercial banks.

On the basis of comparative analysis and conclusion drawn, recommend the related

banks for the better improvement.

1.14 Significant of the Study

The study deals with different financial performance and its indicator as well as financial

viability of the banks. The study also significance lies mainly in identifying and

comparing the financial health of banks in the framework of CAMEL. This study also

provides necessary information of performance capability of their banks to the

management. It provide the real picture of performance which is beneficial to potential as

well as existing shareholders, about risk return and utilizing fund. The study is also useful

for depositors, merchant bankers as well as other stakeholders; they can identify the

overall performance of the bank. It will be helpful to those who want to conduct further

study in this field. Mainly, the purposed study will be significance for the researchers,

research group and academicians for the future in the view of review.

1.15 Limitation of the Study

Out of twenty-six commercial banks here we only consider three banks and five

fiscal years i.e. from 2004/2005 to 2008/09 for the comparative analysis of

commercial banks. So this thesis shows the trend of commercial banks but not

become whole mirror of all commercial banks.

In this tough competition, there can be other factors beside the financial factor

which effects the overall position of the bank, but all factors are not consider in this

research because off limited time.

This Study will be based on secondary data and information and by review of

relevant literatures. Thus it may bias to some extent.

1.16 Organization of the Study

The study has been organized into five chapters, each devoted to some aspect of the study

on “Comparative CAMEL Analysis of Commercial Banks". The titles of these chapters

are as follows:

Chapter: I Introduction

This chapter deals with the subject matter consisting Background, Focus of the Study,

Statement of Problem, Objectives of the Study, Significant of the Study, Limitation of the

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

Commercial Bank Limited.

Chapter: II Review of Literature

The Second Chapter, Review of literature deals with review some work analysis and

discussion already made in CAMEL Analysis.

Chapter: III Research and Methodology

This chapter includes the research methodology adopted in carrying out the present

research. It deals with Research Design, Sources of Data, Data Collection Procedure,

Data Processing, Data Analysis Tools and Limitation of the Methodology.

Chapter: IV Presentation and Analysis of Data

The fourth chapter is concerned with analytical frameworks. It includes the analysis of

Financial Statement of Everest Bank Limited, Bank of Kathmandu Limited and Nepal

Industrial & Commercial Bank Limited under the framework of CAMEL and comparing

it with the guidelines set by Nepal Rastra Bank and also to each other and overall

findings of all three banks.

Chapter: V Summary, Conclusion and Recommendations

This is the last chapter, which consists of the suggestive framework that consists with the

issues and gaps, conclusion and recommendations of the study.

CHAPTER - II

REVIEW OF LITERATURE

2.6 Introduction

Review of literature is the most important part of the study. Without clear concept on the

subject matter, the study might not be conducted with in its periphery. This section

provides current stage of the research work and guidelines or further study and helps to

avoid unnecessary duplication of research work. This chapter is focused on brief

discussion about the abstract regarding the camel analysis. In order to accomplish the

objectives of the study, the chapter includes review of relevant concepts, assumption,

books and journals as well as major findings of previous studies of the relevant field are

included in precise manner.

The purpose of review of the literature is to develop some expertise in one's area, to see

what new contribution can be made and to receive some ideas for developing a research

design. Thus, the previous studies can not be ignored, because they provide the

foundation to the present study. In other words, these have to be continuity in research.

This continuity in research is ensured by linking the present study with the past research

studies. From this, it is clear that the purpose of literature review is to find out what

researcher studies have been conducted in one's chosen field of study and what remains

to be done.

The review of literature is a crucial aspect because it denotes planning of the study. The

main purpose of literature review is to find out what works have been done in the areas of

the research problem understudy being undertaken. For review study, the researcher uses

different books, reports, journals and research studies published by various institutions,

unpublished dissertations submitted by master level students have been reviewed.

2.7 Theoretical Review

This section presents the theoretical aspect of the study, which includes the concept of

commercial bank, function of commercial bank, concept of CAMEL rating system.

2.7.1 History of Banking in Nepal

The history of modern commercial banking industry dates back to 1937 A.D. in which

year Nepal Bank Limited was incorporated. Till 1984, financial sector was closed to

private sector and foreign investors. Then the Government started to liberalize the

financial sector in the first half of 1980s.But it speeded up this process only in early

1990s.Private Sector rushed into the finance industries especially after the restoration of

democracy in 1990.Most of the commercial Banks came into operation during the decade

of 1990s.Government of any countries highly monitors and controls the finance industry

even in the liberalized market economy. Government does so due to its high gravity in

the national economy, and to build up the confidence of private sector in its financial

system. Nepal Rastra Bank (NRB) as an apex monitory authority of the country started to

monitor and control the finance industry especially at the end of the 1990s by issuing

directives to the financial institutions (FIs).It initiated the offsite and onsite supervision of

FIs to maintain their sound financial health and to build up the confidence of private

sector in the liberalized financial system and protect the interest of the investors.

Even though the specific date of the beginning of money and banking deal in Nepal is not

obvious , it is speculated that during the reign of the king Manadev, the coin “Manank”

and “Gunank”during the reign of the king Gunakamadev were in use.Historically,we find

the evidence of minted coin of Amshuverma in the 7th

century and later the coin of Jishnu

Gupta.In the beginning of eighth century, king Gunakamadev renovated the Kathmandu

city by taking loan and at the end of the same century, a merchant named Shankhadhar

had started the “New year” Nepal Sambat after freeing all the people of Kathmandu from

the debt.Sadashiva Dev in 12th

century, introduced, Silver Coins, King jayasthiti Malla,

had given the responsibility to a caste of society called “Tankadhari”while he had given

the name of the castes and their professions for the purpose of transactions of money in

the society. In the same century, copper coins were used by King Ratna Malla and the

gold coins by the last Malla King of Kathmandu Jaya Prakash Malla.

After the unification of Nepal, Prithvi Narayan Shaha the great King had used coin

Mohar in his name. An institution called “Taksar” was established in 1989 and it started

to issue the coin scientifically. In this way, we see that the coins have been in use from

the ancient time, and there was practice of taking and giving loan for the purpose of trade

and other various purposes. During the reign of Ranodip Singh, an office named

“Tejarat”was established in Katmandu in 1933(B.S.) It used to provide loans to the

government officials and the people against deposit of gold and silver. It had also

extended its branches outside Katmandu valley for giving loan. However, this office had

no right to accept deposit of public and it had no characteristics of modern banks.

Nevertheless we can say that the institutional banking system had started from then. After

having concluded a treaty with British India in 1980(B.S), Nepal could trade over Sea

freely for the diversification of trade. As a result, in 1993(1936 the draft of the company

act and banking act were prepared by forming industrial council “A Jute Mill” was

established in Biratnagar under this act and both commercial and industrial development

as well as institutional banking system had been started together at a time in Nepal.

After the establishment of Nepal Bank Limited on 30th Kartik, 1994(1938), modern

banking system started in Nepal. Nepal was influenced by the renaissance and the

industrial growth brought about by First World War. Nepal established first legation in

international level in London in 1934 for creating international relation with the various

countries. The first secretary Gunjaman Singh was posted to the legation in his alertness,

and under the international influence and the national necessity, Nepal Bank limited was

established under the Nepal Bank Act 1994(1938).It has many important functions. The

Nepal Bank Limited is the oldest bank of Nepal.

The economic and industrial development was stopped in Nepal from the Second World

War. After 2007, the banking activities of Nepal were not satisfactory due to political

instability. At first, though this bank was given the authority and responsibility of central

bank, but with the change of time, it was necessary to establish a Central Bank.

Nepal Rastra Bank was established in 2013(1957), Baisakh 14th

in Nepal. This was

established to replace the Indian Currency and to increase the usage of Nepalese notes, to

stop duel monitory system, to apply monetarism in all part of the country, to provide

issuance of notes, to bring Nepalese currency in use, to manage the monetary system

well, to keep stability of the exchange rate of Nepalese currency, to encourage national

industry by mobilizing the capital for development and to develop the banking system in

Nepal. This is the government bank. This is bank of banks.

After the establishment of Central bank other banks like Rastriya Banijya Bank,

Agricultural Development Bank was established under the initiative of the Central Bank.

After this phase, commercial banks started its operation. Those banks were opened with

joint investment. After this Development Banks, Micro financing came into existence.

Nabil Bank is the first bank established in joint investment in 2041(1984) and then Nepal

Investment Bank was established in 2042(1985). Standard Chartered Bank was

established in 2043(1987)as a joint venture between ANZ Grindlays and Nepal Bank

Limited. Himalayan bank was established as a joint venture with Habib Bank of Pakistan

in 2049(1993). Nepal SBI Bank Limited was established as a joint venture between

Employees Provident Fund and State Bank of India in 2050(1992).Nepal Bangladesh

bank was established in 2050(1993) in technical collaboration with I.F.I.C. Bank Limited

of Bangladesh. Everest Bank started its operation in 2051(1994) but it entered into joint

venture with Punjab National Bank in 1997.Bank of Kathmandu was established in

2051(1994) under joint investment with syam Bank of Thailand. Nepal Credit and

Commerce Bank was established as joint investment with leading Bank of Srilanka.

Hence there are so many commercial Banks in operation in Nepal.

2.7.2 Concept of Commercial Bank

According to the Black's Law Dictionary "Commercial Bank" means a bank authorized to

receive both demand and time deposits, to engage in trust services, to issue letter of

credit, to rent time-deposit boxes and to provide similar services.

Likewise Section 2(a) of the Commercial bank Act 2031 (1974) has defined that

"Commercial Bank" means a bank which operates currency exchanges transactions,

accepts deposits, provides loan; performs, dealing, relating of commerce except the banks

which have been specified for the co-operatives, agricultural, industry of similar other

specific objective.

So, commercial banks are the important source of institutional credit in the money

market. A commercial bank is a profit-seeking business firm, dealing in money or rather

dealing in claims to money. It is a FI that creates deposits liabilities which circulates as

money unlike the deposits of other FIs. In fact, the greater part of money supply is the

direct consequence of the profit-seeking or money-crating activities of commercial banks.

Table 2.1

List of licensed Commercial Banks in Nepal

S. No. Name Established Date

1. Nepal Bank Limited (NBL) 15 Nov,1937

2. Rastriya Banijya Bank (RBB) 23 Jan,1966

3. Nabil Bank Limited 16 July,1984

4. Nepal Investment Bank 27 Feb,1986

5. Standard Chartered Bank 30 Jan,1987

6. Himalayan Bank Limited 18 Jan,1993

7. Nepal SBI Bank Limited 7 July,1993

8. Nepal Bangladesh Bank 5 June1993

9. Everest Bank Limited 18 Oct,1994

10. Bank of Kathmandu 12 March,2005

11. Nepal Credit and Commerce Bank 14 Oct,1996

12. Lumbini Bank Limited 17 July,1998

13. NIC Bank Limited 21 June,1998

14. Machhapuchre Bank Limited 3 Dec,2000

15. Kumari bank Limited 3 April,2001

16 Laxmi Bank Limited 3 April,2002

17. Siddhartha Bank Limited 24 Dec,2002

18 Agricultural Development Bank Limited 19 Feb,1968

19. Global Bank Limited 2 Jan, 2007

20 Citizens Bank Limited 21 June, 2007

21. Prime Commercial Bank Limited 24 Sept, 2007

22. Bank of Asia Nepal Limited 12 Oct, 2007

23. Sunrise Bank Limited 12 Oct, 2007

24. Development Credit Bank Limited 23 Jan, 2001

25. Nepal Merchant Bank Limited 26 Nov, 1996

26. Kist Bank 7 May, 2009

2.7.3 Functions of Commercial Banks

Commercial banks are directly related whit the people and institution. Although these

banks are truly inspired with the objective of gaining profit, these commercial banks are

also established to, to accelerate common people's economic welfare and facility, to make

available loans to agriculture, industry and commerce and to provide the banking services

to the public and the state. The commercial banks in Nepal provide the following main

banking functions;

1. Receiving Deposits

This is the main function of commercial banks to collect savings of individuals and firms.

They offer different types of deposits for the facility of the customers.

i. Current Account or Demand Deposits

Any amount can be withdrawn from this account any time without any notice. No interest

is allowed on this type of account.

ii. Saving Account

In this account the bank pays interest relatively at low rate to the depositors. Depositors

are allowed to withdraw their money by cheque up to a limited amount.

iii. Fixed Deposit

A bank accepts fixed or time deposits from savers who do not need money for a

stipulated period from 6 months to longer periods ranging up to 10 years or more.

Amount cannot be withdrawn before the fixed future date in this type of deposit. High

interest is allowed in fixed deposit which is different according to period.

2. Advancing Loans

This is the important function of the commercial bank. Credit is given to the people in

different ways.

a. Making Loans

There are three types of loans given to borrowers.

http://www.blurtit.com/q764912.html



i. Short Term Loans

These loans are advanced for the period of six months to one year. High Interest rate is

charged on this type of accounts.

ii. Medium Term Loans

Loans from one to five years are called medium term loans.

iii Long Term Loans

Loans which are advanced for the period, more than ten years are long term loans.

b. Bank Overdraft

Banks allows their trustful customers to draw more than the deposit they have in

the Bank. Bank charges interest on overdraft.

c. Cash Credit

Bank also gives credit against immovable property and interest is charged by the

bank.

d. Discounting of Bills

This is income source of bank to discount bills of exchange. They charge nominal

Interest and discount only reputed and clear bills of exchange.

2.7.4 Concept of Bank Supervision

There is no theoretically proven system or standard textbook blueprint for the structure

and process of regulating and supervising financial institution, including banks. In fact,

arrangements for banking regulation and supervision differ considerably from country to

country. Apart from the differences in political structure, the most important factors that

account for the differences in regulatory and supervision approaches include the general

complexity and state of development of the financial system, the number, size and

concentration of banking instructions, the relative openness of the demotic financial

system, the nature and extent of public discloser of bank, financial position and

availability of technology and human recourses for regulation and supervision. However,

an impact framework for the regulation and supervision of the banks can be found in the



core principles for effective banking supervision issued by the Basel Committee on

banking Supervision in 1977. The frame work can be interpreted as comprising four

distinct yet complementary sets of arrangement.

2.7.5 Objectives of Bank Supervision

With the respect of the supervisory arrangements the core principles describe what could

be termed a "cradle to grave" approach covering potential problem that may emerge in

the future on account of the current risk profile of the banking institution, overall,

supervisory risk assessment and early warning systems assist in

Systematical assessment of banking institution within a formalized framework both

at a time of on-site examination and in between examinations through off-site

monitoring.

Identification of institution and areas within institutions where problems exist or are

likely to emerge.

Prioritization of bank examinations for optimal allocation of supervisory resources

and pre-examination planning.

Initiation of warranted and timely action by the supervisory.

2.7.6 Process of Bank Supervision

On going banking supervision consists of a differentiated mix of offsite monitoring

procedures and on site examinations. Off site monitoring is the minimum tool for

ongoing supervision. Supervisory authorities do not have the mandate or resources to

carry out periodic on site examinations. The process involves analyzing and reviewing

periodic financial and other information received by the supervisor relating to banks

activities. Supervisor typically subject regulated banks to reporting requirements

covering, for insurance, balance sheet and profit and loss statement, business profile,

loans and investments, liability, capital and liquidity levels. Loan loss provision, etc

during on-site examination, supervision make an overall assignment of a banking

institution on the promises of the organization.

2.7.7 Supervisory and Monitoring System of the Nepal Rastra Bank

Principally, the central bank has the liability and obligation to maintain fair and healthy

environment of the economic activities of the nation. For it the necessary acts, rule and

regulation are enacted and development. Thus, the act of checking weather the related

officials and banks have honestly complied with the policy, regulation and supervisions

enacted by the controlled financial system, it self is called inspection. As a central bank,

the Nepal Rastra Bank has been discharging such serious and sensitive task.

Before the establishment of Nepal Rastra Bank, the function of inspection and

supervision used to be carried out by the officials by His Majesty of the Government of

auditor general. This practiced was contributing until the enactment of the commercial

bank act 2020BS. After the introduction of this act, the function of inspection and

supervision for the commercial bank was given to the Nepal Rstra Bank and this right

was more strengthened by the Nepal Rastra Bank act and the introducing of the

commercial bank act 1974. The Nepal Rastra Bank has been discharging the task of

inspection for the fiscal year 2025/26BS.

The system if inspection and supervision of the banking and the non banking financial

institution is to be followed on a certain slandered norms. In this regards, the bank for

international settlement has formulated an important standard, which is called CAMEL

system. The evaluation of financial institutions is done on the basic of it. In the case of

Nepal, the Nepal Rastra Bank adopting this system has made in the main basis of the one

site and off site supervision.

2.7.8 Concept of CAMEL Banks Rating System

The acronym "CAMEL" is revised in January 1997, the uniform financial institution

rating system, which is commonly referred at as that camel rating system. For purpose of

this rating system, the term financial institution refers those insured depository institution

whose primary federal supervisory agency is represented on the FFIEC. The agency

comprising the FFIEC the board of governors of the federal reserve system (FRB) the

federal deposit insurance corporation, the national credit union administration the office

of the controller of the currency and the office of the thrift supervision. The term

financial institution includes federally supervised commercial banks, savings and loan

associations, mutual savings banks and credit unions.

Capital adequacy, Assets quality, Management efficiency, Earnings and Liquidity. A

sixth component, a bank's sensitively to market risk was added in 1997; hence the

acronym was changed to CAMEL.

The camel rating system is subjective beach marks for each component are provided, but

they are guidelines only and presents essential foundations upon which the composite

rating is based. They do not eliminate consideration of the other patient's factors by the

examinant. The uniform rating system provides the ground work for necessary

supervisory response and helps institutions supervised by all three us supervisors to be

reasonably compared and evaluated. Rating are assigned for each component in addition

to the over all rating of a banks financial condition. The ratings are assigned on a scale

from 1 to 5. The camel ratings are commonly viewed as a summary measures of the

private bank supervisory information gathered by examiners regarding banks overall

financial conditions, although they also reflect available public information.

During on site bank supervisor gating private information. Such as details on problem

loans, with which to evaluate banks financial conditions and to monitors its compliance

with laws and regulatory polices. A key product of such an exam in a supervisory rating

of banks overall conditions commonly referred at as a CAMELS rating.

In Nepal, the NRB plays the supervisory role for evaluating banks financial condition

through rating the banks in accordance to CAMELS is still a myth.

2.8 Composite of Ratings

Composite ratings are based on a careful evolution of an institution's managerial,

operational, and financial and compliance performance. The six key composites used to

access an institution's financial condition and operations are: capital adequacy ratio, assist

quality, management capability, earning quantity and quality, the adequacy of liquidity

and sensitivity to market risk. The rating scale ranges from 1 to 5 with a rating of 1

including; the strangest performance and risk management practices relatives to the

institutions size, complexity and risk profile; and the profile; and the level of least

supervisory concern. A 5 rating includes; the most critically deficient level of

performance; inadequate risk management practices relatives to the institutions size,

complexity and risk profile and the greatest supervisory concern. (www.google.com)

2.9 Camels Components

Each of the components rating descriptions is divided in the three sections; and

introductory paragraph; a list of the principle evaluation factors that related to that

components; and a brief description of each numerical rating for the components. Some

of the evaluation factors are reiterated under one or more of the other components to

reinforce the interrelationship between components. The listing of evaluation factors for

each component's rating is in no particular order of importance.

A. Capital Adequacy Ratio

A financial institution is expected to maintain capital commensurate with the nature and

extents of risks to the institution and the ability of management to identify, measure,

monitor and control these risks. The effect of credit, market and other risks on the

institution's financial conditions should be considered when evaluating the adequacy of

capital. The types and quantity of risk inherent in institution's activities will determine the

extent to which it may be necessary to maintain capital at levels above required

regulatory minimums to properly reflect the potentially adverse consequences that these

risks may have on the institution's capital. The capital adequacy of an institution's related

based upon, but not limited to an assessment of the following evaluation factors.

1. Size of the bank

2. Volume of inferior quality assets

3. Bank's growth experience, plan and prospects

4. Quality of capital retained earnings

5. Access to capital markets

B. Assets Quality

Commercial banks collect funds in the form of capital, deposit etc. It mobilizes these

funds to generate certain returns by giving loans to the users of money to invest in

various alternatives. A significant part of the banks income is through its lending

activities. There are basically two types of loans - advances and loss provisions:

1. Performing loans:

All good loans and overdue for below 90 days.

2. Non Performing loans:

Sub- standard-loans overdue by more than 3 months up to 6 months.

Doubtful-loans overdue by more than 6 months up to 1 year

Bad-loans overdue by more than 1 year.

C. Management

The success of any institution depends on the competency of its management. In fact, the

management not only makes suitable policy and the business plans but also implements

them for the short term and the long term interests, which helps to achieve aimed

objectives of bank and financial institution's. It is evaluated by checking the effectiveness

of the board of directors, the management, manpower and the officials, operating

expenditure, customer's relation with the officials and institution, management

information system, organization and working method, internal control system, power

concentration, monitoring, decision making process, policies.

An institution can take a desire momentum only when the management is capable of

strong and long term vision. For the proper and efficient management, the banks have to

possess the following qualities:

1. Structure of management team should be perfect.

2. Qualitative manpower and its productivity.

3. Good relationship between customers and organization.

4. Adequate management expenses.

5. Internal management system should be perfect.

6. Fair decision making capability.

7. Proper communication system.

8. Working environment should be perfect.

D. Earnings

Earnings are the ultimate result of any business. Generally, if the earnings are good then

that business is running well. Similarly the aggregate performance of the bank reflects

from its earnings. An analysis of the earnings ration helps the management, investors and

creditors to know the performance of the bank. They can get information regarding their

interest. The following ratios help the management and other stakeholders to know about

the earning policy of the respective banks:

1. Return on Equity (ROE)

2. Return on Assets (ROA)

3. Earning pre Share (EPS)

It measures the profit available to the equity shareholders as per share basis i.e. the

amount that they can get on each share held. In other words, this ratio measures the

earnings available to equity shareholders on a per share basis.

E. Liquidity

Simply, liquidity means short- run solvency of a firm. It reflects the short term financial

strength of banks. Bank does not provide all deposit at loan and advances. The certain

percentage of deposit should be kept in bank in the form of cash. It the bank will keep

greater deposit in cash, it losses the opportunity cost. Similarly, if bank keeps low amount

in deposit, it could not be able to pay depositors on the time of requirement.

Liquidity can be measured in following ways:

1. Cash Reserve Ratio

2. Cash & Bank Balance Ratio

3. Investment Government Securities

2.10 Review of Previous Studies

National and international journals, exports views, review of previous research and study

are covered in research review.

2.5.1 Review of Journals and Articles

Berger and Davies evaluated the impact of CAMEL rating changes on the parent

holding company's stock price. They separated stock price changes into two component a

'private information' effect (which identified the public's awareness of new information

discovered by examiners), and a 'regulatory discipline' effect which valued a regulators'

presumed ability to force a bank to changes its behavior). Berger and Davies' empirical

results provided only weak evidence of a regulatory discipline effect, but they found a

strong private information effect. However, the information effect applied only to

CAMEL downgrades, which tend to precede stock prices declines. Berger and Davies

found no movement in the stock price following a CAMEL upgrade.

Hirtle and Lopez examine the usefulness of the past CAMEL rating in assessing banks

current conditions. They find that, condition on current public information, the private

supervisory information contained in the past CAMEL rating provides further insight into

bank current conditions as summarized by current CAMEL ratings. The authors find that,

over the period from 1989 to 1995 the private supervisory information during the last on-

site exam remains useful with respect to the current condition of the bankfor up to 6 to 12

quarters. The overall conclusion drawn from academic studies is that private supervisory

information, as summarized by CAMELS ratings, is clearly useful in the supervisory

monitoring of bank conditions.

Dhungana Bhisma argues CAMEL rating system plays key role for bank supervision.

According to him, The NRB as a central bank has the important task of regulating &

supervising the banking system of Nepal. NRB assess the overall strength of the banking

system as well as the safety and soundness of each individual bank and financial

institution, In order to discharge this role. To help in this endeavor, a uniform rating

system for all banks and financial institution has been used. Under this modality,

supervisors assign individual numerical rating to the key areas of Capital, Assets,

Management, Earnings, liquidity and sensitivity to the market risk (CAMELS) as well as

assigning an overall composite rating to each banking institution. In this way, the NRB

has been able to categorized banks and financial institutions into group based on their

overall strength, quality and operating soundness. The rating system known as CAMEL

has served as a supervisory tool to help identify those banks that are having problems and

require increased supervision. To date, early warning signals are drawn are drawn &

monitored from the CAMEL rating through on-site inspection and CAMEL rating

through offsite supervision.

Pant Radish argued that after 2010, there will be new international entrants in the

market, we must remain very competitive, and we have to operate at international

standards. However, he does not think we need to fear. He believed combined capital of

all Nepalese commercial banks would not even equal to the capital of a small bank in

developed countries. It somehow, Nepal is able to capitalize on the growth of China and

India, there is no turning back for the banking sector. There will be opportunities for all

types of banks. So, we need to work together to address the challenges of that WTO."

2008 was an extraordinarily tumultuous year, full of shocks & surprises. None of us have

even quite seen the scale of dislocation & disruption in financial market that we have

experienced this year. To put things in perspective, there has been more volatility in the

US equity market in the three month since Lehman went bankrupt in the mid- September,

than in the previous 45 years put together,. Moreover, with the disappearance or effective

nationalization of several major players, and the demise of the US broke, dealer model,

the global industry has changed fundamentally & irreversibly.

2.5.2 Review of Thesis

Shrestha, M.D. (2003), in his study of “Capital Adequacy Norms for Commercial

Banks and its impact of Bank of Kathmandu and Himalayan Bank Ltd.”, has concluded

that BOK and HBL are found to be successful to comply with requirement of capital

adequacy norms. The CD ratio of HBL is very much low which needs to be improved

immediately and CD ratio of BOK is satisfactory. Although, the banks are successful to

meet the capital adequacy requirement as per NRB directive.

Bhandari, K.R. (2006) conduct a study on "Financial performance Analysis of

Himalayan Bank Limited in the Framework of CAMEL". The basic objective of the study

was to analyze the financial performance of Himalayan Bank Limited through CAMEL

framework. He had used secondary data for the period of six years from 1999 to 2004.

The study revealed the adequate capital of the bank. The non-performing loan was in

decreasing trend, which shows the improvement of the bank. The bank is still with better

return which is proved by its better ROE; however it is in decreasing trend. The

decreasing trend of net interest margin shows management slack monitoring over the

banks earning assets. The liquid fund to total deposit ratio is above the industrial average

ratio. NRB balance and cash in vault to total deposit ratios are below the industrial

average ratio during the study period.

Sharma, S. (2007) performed a study on "Financial Performance Analysis of Nepal SBI

Bank Ltd., In the Frame work of CAMEL." The main objective of the study is to analyze

the financial performance of Nepal SBI bank Ltd. Through CAMEL framework, the

study was based on secondary data covering the six years from 2001 to 2006. The

researcher conducts the financial tools to analyze the six years data. He concluded That

Nepal SBI bank Ltd. Was well capitalized and complying with directives of NRB. The

bank has maintained satisfactory level of past due loan on total loan except 2001. Earning

per employees of the bank was found quite high. Net interest margin of the bank was

found satisfactory. Further the liquidity position of the bank was found sound.

Poudel, R. (2007) carried out “A study on comparative analysis of financial performance

between Himalayan Bank and Standard Charted Bank” the basic objectives of that study

was provided comparative financial performance of SBCNL and HBL. Only five fiscal

years financial performance beginning from 1995/96 through 2000/2001were analyzed.

In this study financial and statistical tools were used to evaluate the performance of

banks. In financial tools liquidity, activity, profitability, structural and income and

expenditures ratios. Further, the research used the method of least square to find our the

tend of different financial indicators he found that the performance of SCBNL is better

than that of HBL.

Chand, K.B. (2007) conducted "Financial Performance Analysis (CAMEL - Test) of

Selected CBs (Nabil, NIBL &SCBL)" the main objective of the study is comparative

analysis of commercial banks through the frame work of CAMEL. He did her study

covering five FY (2001 to 2005) on the basis primary as well as secondary data. Some

financial and statistical tools and techniques are applied to evaluate the performance of

selected joint venture banks. On his study, except 2001, SCBL had highest CAR among

these selected CBs where Nabil is moderate in all time. In the case of NIBL in 2001 it

had highest CAR among them and then after it went behind and getting second and some

year third position in CAR. Here Chand gave first rank to SCBL for maintain highest

CAR. In case of Assets quality in average study show the Nabil performance is much

better than other and SCBL and NIBL follows Nabil respectively. Chand study shows the

factors affecting the management efficiency and effectiveness. Bank management quality

model was also presented in his study. As per earning concern SCBL leads other two

banks and tough fight between Nabil and NIBL. For comparative analysis of liquidity

part which compare, it is found that NIBL secures first position for percentage of cash

balance and percentage of balance with bank and SCBL scores first position for

investment in government securities. Nabil is a little bit take risk and invest less in

government securities as compare to other two banks. All banks are maintaining the

benchmark of the NRB on case of CRR.

Bhusal, M. (2008) carried out a research study on " Financial Performance Analysis of

Commercial Banks in Nepal the Frame Work of CAMEL ( A Comparative Study of

Kumari Bank and Machhapuchchhre Bank", with the fundamental objective to analyze

and compare the financial performance of KBL and MBL in the frame work of CAMEL

from FY 2058/59 to 2062/63. with the help of both secondary as well as primary data, she

conducted her study by applying Some financial and statistical tools and techniques. Her

study shows both banks are maintaining CAR as per rule of NRB and the trend of CAR is

decreasing. Both banks are in much satisfactory level in the case of assets management.

Increasing profit of both banks shows the good sign but it is not enough to compete with

other established banks. According to her study, Profits are also not enough to meet

benchmark set by the World Bank. In the case of liquidly both banks are not properly

maintaining the rule of NRB. In her overall analysis there is tough competition between

KBL and MBL and both are in the phase of improvement.

Singh, R. B. (2008) conducted "A Study of CAMEL Analysis of Commercial Banks" i.e.

SCBNL, HBL & Nabil Bank. The objective of that study was to evaluate the capital

adequacy ratio, to analyze assets quality and to absorb the liquidity position of these

banks. He used ration analysis and statistical tools to covered five years analysis. On the

basis of Mr. Singh's analysis, SCBNL is on the top and NABIL followed by HBL.

CHAPTER - III

RESEARCH METHODOLOGY

3.7 Introduction

Research methodology describes the methods and process applied in the entire study. In

other words, research methodology is a systematic process to approach any research

problem and explore it objectively. Hence this chapter includes research design, Source

of Data, population and samples, Data collection tools and Data Analysis tools.

3.8 Research Design

To fulfill the objectives of the study certain research design in essential so the analysis of

this study is based on the nature of data and tools for analysis. To fulfill the objectives of

the study it emphasized on historical as well as descriptive and exploratory.

3.9 Population and Sampling of Data

The total number of commercial bank represent as the total population for the purpose of

this study. Hence, the population consists of twenty-six commercial banks. Out of the

total population three private sector commercial banks are used as samples. These are

Everest bank Limited, Bank of Kathmandu and Nepal Industrial & Commercial bank

Limited

3.10 Periods Covered

To do this research work Five Years Annual Report have been taken of respective banks

which are published by the bank after audit to the general public. It covers the fiscal year

of 2004/05 to 2008/09.

3.11 Source of Data

This research study is basically based on secondary data. The required data for the study

will be collected in followings ways:

Library research study

Internet, home pages and related links visit.

Directives of NRB

Annual reports of the Everest bank Limited, Bank of Kathmandu and Nepal

Industrial & Commercial bank Limited

The other sources will be articles, previous study on related topic, published articles

of different authors and journals.

3.12 Data Analysis Tools

3.6.2 Financial ratio analysis tools

The financial analysis tools are used to determine the performance of the banks in the

frame work CAMEL components. These ratios are categorized in accordance of the

CAMEL components. Following categories of key ratio are used to analyze the relevant

components in terms of CAMEL.

3.6.1.1 Capital Adequacy Ratio (CAR)

Commercial bank holds adequate capital depending on their requirement. Capital

adequacy ratio is a measure of the amount of a bank's capital as a percentage of its risk

weighted credit exposure. Nepal Rastra Bank (NRB) which recommends minimum CAR

of 11% and 5.5% of Core Capital Ratio (CCR).

Total Capital Fund

Capital Adequacy Ration (CAR) = × 100%

Total Risk Weighted Assets

(Minimum requirement as per NRB Directive is 11%)

Total Core Capital Fund

Core Capital Ratio (CCR) = × 100%


(Minimum requirement as per NRB Directive is 5.5%)

Where,

Total Capital Fund = Core Capital + Supplementary Capital

Total Risk Weighted Assets = On Balance Sheet Risk Weighted Items + Off Balance

Sheet Risk Weighted Items

3.6.1.2 Assets Quality

Commercial banks collect funds in the form of capital, deposit etc. It mobilizes these

funds to generate certain returns by giving loans to the users of money to invest in

various alternatives. A significant part of the banks income is through its lending

activities. There are basically two types of loans and advances.

1 Performing Loans

Loan on which payments of interest and principal are less than 90days past due called

performing loan.

2 Non Performing Loans (NPL)

A loan is non-performing when payments of interest and principal are past due by 90

days or more, or at least 90 days of interest payments have been capitalized, refinanced or

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

good reasons to doubt that payments will be made in full.

Sub Standard Loan

All loans and advances that are past due for a period of 3 months to 6 months shall be

included in this category. Those are classified as non-performing loan.

Doubtful Loan

All loans and advances, which are past due for a period of 6 months to one year, shall be

included in this category. Those are non performing loan.

Bad/ Loss Loan

All loans and advances, which are past due for a period of more than one year, shall be

included in this category. Those are classified as nonperforming loan.

Classification of loans Provision required

Good 1%

Sub-standard 25%

Doubtful 50%

Bad loans 100%

Total Non-Performing loan

Non-performing Loan Ratio = × 100%

Total Loan & Advances

Where,

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

Total Loan & Advances = Total Performing Loan + Total Non Performing Loan

Total Loan Loss Provision (LLP)

Loan Loss Coverage Ratio = ×100%


Where,

Total Loan Loss Provision (LLP) = Provision on (Pass Loan + Restructured Loan + Sub

Standard Loan + Doubtful Loan + Bad Loan)



Loan Loss Provision Ratio = × 100%


Where,




3.6.1.3 Management

Management is the arrangement of various things in a systematic manner for the

achievement of organizational goal. An institution can take a desired goal only when the

management is capable, which is of strong and long-term vision. For the achievement of

the goal of the bank within certain period of time proper and efficient management is

required, for which the banks should have the following qualities:

Qualitative Human resource management

Adequate management expenses

Perfect structure of management team.

Fair decision making capability.

Use of modern Information Technology and proper communication system

Perfect working environment

Internal management system and relationship between customer and organization.

Management analysis can be done by using following formula;

Net Profit after Tax

Management Efficiency Ratio (MER) =

Total No. of Staffs

3.6.1.4 Earning

Earning means excess of revenue over cost, so excess revenue earned by any organization

in the course of operation is known as profit. It is the ultimate result of any business.

Generally, if the earnings are good then that business is running well. Similarly the

aggregate performance of the bank reflects from its earnings. Earning is the ultimate

result of any business. Generally, higher earnings reflect better financial position.

Similarly the aggregate performance of the bank reflects from its earnings.

Following ratios depicts the earning position of EBL, BOK & NIC.


Earning per Shares (EPS) =

No. of outstanding Shares

Net Income after Tax

Return on Equity (ROE) = × 100%

Total Shareholders‟ fund


Return on Assets (ROA) = × 100%

Total Assets

3.6.1.5 Liquidity

Liquidity is the state of owning things of value that can easily be exchanged for cash.

Liquidity is the term which denotes the ability of an organization to meet its financial

obligation or debts in cash in time. Such an organization has assets which can be

converted into cash and without any loss at their conversion through the maintenance of

certain reserves and provision. Liquidity reflects the short term financial strength of the

banks. Bank does not provide all its deposit at loans and advances, but certain percentage

is kept as liquidity in the bank itself or elsewhere.

Basically bank measures liquidity through three methods. They are as follows;

Cash Reserve Ratio (CRR)

It is the minimum amount of reserves a bank must hold in the form account balance with

NRB. This ratio ensures minimum level of the bank‟s first line of defense in meeting

depositor‟s obligations. It is the mandatory reserve that the commercial bank has to keep

in the form of cash in their account in NRB for depositors‟ assurance and safety of bank

which also reflects the bank‟s goodwill. As per the regulation made by NRB, Cash

Reserve Ration is to be maintained 5.5% on average of total deposits of bank on weekly

basis. It is calculated as

Cash Balance in NRB

Cash Reserve Ratio =

Local Currency Deposit – Margin Deposit

Since, we cannot find the daily deposit amount in annual report and also cannot access it,

we cannot find cash reserve ration and compare it as mandatory set by NRB of 5.5% on

average of total deposit of bank on weekly basis. So, it will give false information or

mislead to others if we calculate it on the figure that is given on year ending Balance

Sheet.

Cash and Bank Balance Ratio (CBR)

The ratio measures the bank ability to meet immediate obligation. So, optimum balance

should maintain in order to meet their paying obligation. Further, this ratio is employed to

measure whether bank‟s cash balance is sufficient to cover unexpected demand made by

the depositors. It is calculated as follows

Cash & Bank Balance

Cash & Bank Balance Ratio =

Total Deposit

Investment in Government Security Ratio (IGSR)

Government securities are known as risk free assets, which are easily converted into cash

to meet the short term obligation. That‟s why every commercial bank has to invest their

certain amount in government securities. This ratio calculated as

Investment in Govt. Security

Investment in Govt. Security Ratio = × 100%

Total Deposit

CHAPTER – IV

DATA PRESENTATION AND ANALYSIS

4.4 Introduction

This chapter deals with the presentation and analysis of data collected from different

sources with the focus on the camel components. As stated in the theoretical prescription,

the financial performance analysis of Everest Bank Limited, Bank of Kathmandu and

Nepal Industrial and Commercial Bank Limited are concentrated in the five components

of camel i.e. Capital Adequacy, Assets Quality, Management Quality, Earning Quality

and Liquidity. The data collected from annual reports of respective banks have bee

analyzed with the application of camel.

4.5 Data Presentation and Analysis

The data collected from different sources has been defined and documented in Excel

tables, which are further processed to analyze and arrived at the findings on the financial

conditions of above mentioned banks in terms of Camel Analysis. The major findings of

the study on financial performance of EBL, BOK and NIC are also described on each

section and part of CAMEL Analysis.

4.5.1 Capital Adequacy

Capital Adequacy is a measure of an FI‟s financial strength, in particular its ability to

cushion operational and abnormal losses. Minimum capital adequacy ratios have been

designed to ensure banks can absorb a reasonable level of losses before becoming

insolvent. The higher the capital adequacy ratios a bank has, the greater the level of

unexpected losses it can absorb before becoming insolvent. An FI should have adequate

capital to support its risk assets in accordance with the risk-weighted capital ratio

framework. It has become recognized that capital adequacy more appropriately relates to

asset structure than to the volume of liabilities. Risk Weighted Assets, Core Capital and

Supplementary Capital are major figures used to calculate Capital Adequacy Ratio.

In the context of Nepal, NRB has assigned following weight for following Assets of

Banks.

0% Risk Weight Asset

Cash in Hand, Gold (Tradable), Balance with Nepal Rastra Bank, Investment in

Government Bonds, Investment in NRB Bonds, Loan against own Fixed Deposit Receipt,

Loan against Government Bonds, accrued Interest on Government and Bills for

Collection.


Forward Foreign Exchange Contract


Balance with domestic Licensed Banks & Financial Institutions, Loan against other

Banks F.D. receipt, Balance with Foreign Banks, Money at Call, Loan against Guarantee

of International Rated Banks, Investments on International Rated Banks, L/C (Below 6

months maturity) and Guarantee against International Bank Guarantee


L/C (Over 6 months maturity), Bid Bonds and Performance Bond


Investments on Share, Debenture & Bonds, Other Investments, Loan, Advances & Bills

Purchase/Discount, Fixed Assets, Other Assets, Net Other Interest Receivable (Gross Int.

Receivable – Interest receivable on Govt. Bonds - Interest Suspense) , Financial

Guarantee, Other Guarantee, Irrevocable Loan Commitment, Contingent Liability for Tax

and Other Contingent Liability.

Capital Adequacy ratio calculated as follows:

Total Capital Fund

Capital Adequacy Ration (CAR) = X 100%


Table 4.1 is the observed Capital Adequacy Ratio during the study period in numerical

terms which is presented below:

Table 4.1

Capital Adequacy Ratio

Fiscal Year Banks Total Capital

Fund

Total Risk

Weighted Assets

Capital

Adequacy Ratio

2004/05 EBL 1,247,562,000 9,195,588,000 13.57

BOK 763,528,243 6,936,942,398 11.01

NIC 730,985,785 5,499,435,330 13.29

2005/06 EBL 1,391,339,000 11,291,137,000 12.32

BOK 1,100,797,467 7,583,653,036 14.52

NIC 1,036,838,663 7,656,131,091 13.54

2006/07 EBL 1,676,115,000 14,976,737,000 11.19

BOK 1,265,828,177 10,226,193,976 12.38

NIC 1,208,607,803 9,905,036,012 12.20

2007/08 EBL 2,406,056,000 21,039,879,000 11.44

BOK 1,635,235,217 13,702,369,666 11.93

NIC 1,615,719,466 12,321,131,296 13.11

2008/09 EBL 2,703,870,000 24,131,922,000 11.20

BOK 2,005,695,528 16,025,037,210 12.52

NIC 1,954,934,793 15,741,613,929 12.42

(Sources: Appendix 3, 4 & 5)

Figure 4.1 is a bar diagram which represents the above tabulated numerical data which

helps to compare the Capital adequacy Ratio among three banks.

Figure 4.1


-

2

4

6

8

10

12

14

16

2004/05 2005/06 2006/07 2007/08 2008/09

Years

CA

R in

%

EBL

BOK

NIC

As shown in the table 4.1 and figure 4.1, the Capital Adequacy Ratio of EBL of 13.57%

is the highest and BOK of 11.01% is the lowest in FY 2004/05; BOK of 14.52% is the

highest and EBL of 12.32% is lowest in FY 2005/06; BOK of 13.38% is the highest and

EBL of 11.19% is lowest in FY 2006/07; NIC of 13.11% is in highest position and EBL

of 11.44% is the lowest position in FY 2007/08;BOK of 12.52% is the highest and EBL

of 11.20% is the lowest in the FY 2008/09 among three banks. Furthermore figure 4.2

helps to find out the trend of three banks Core Capital Ratio over the last five years

period.

Figure 4.2


-

2

4

6

8

10

12

14

16

2004/05 2005/06 2006/07 2007/08 2008/09

Years

CA

R i

n % EBL

BOK

NIC

Figure 4.2 is the trend analysis of three banks over the five years study period. As shown

in the figure Capital Adequacy Ratio of EBL started by 13.57% in 2004/05, decreased in

FY 2005/06 and 2006/07 thereafter increased in 2007/08, again decreased in FY 2008/09

and reached to 11.20% in FY 2008/09. Overall, Capital Adequacy Ratio of EBL

decreased.

Similarly, BOK is starting with11.01% in FY 2004/05, then increases in 2005/06 after

that decreases in FY 2006/07 and 2007/08but at the end slightly increases and reached to

12.52% in FY 2008/09. Overall Capital Adequacy Ratio of BOK also is in decreasing

trend.

Likewise, Capital Adequacy Ratio of NIC stares with 13.29% in FY 2004/05 and slightly

increases in 2005/06 after that decreases in FY 2006/07 and again increases in FY

2007/08 and 2008/09 and reached to 12.42%. This also shows the decreasing trend in

overall.

4.2.1.1 Core Capital Ratio (CCR)

Core Capital measures a bank‟s financial strength from a regulator‟s point of view. In the

context of Nepal Core or Primary Capital includes Paid-up Capital, Share Premium, Non

redeemable Preference Share, General Reserve Fund, Cumulative Profit/ loss, Capital

Redemption Reserve, Capital Adjustment Fund/ Proposed Bonus Share and other Free

Reserve. Amount of the goodwill, Fictitious Assets, Investment in excess of prescribe

limit specified by NRB, and investment in security of companies with financial interest is

deducted from the sum of all elements of the primary capital to arrive at the core capital.

It is calculated as follows:

Total Core Capital Fund

Core Capital Ratio (CCR) = ×100%


Table 4.2 is the observed Core Capital Ratio during the study period in numerical terms

which is presented below:

Table 4.2

Core Capital Ratio

Fiscal Year Banks Core Capital

Fund

Total Risk

Weighted Assets

Core Capital

Ratio

2004/05 EBL 816,793,000 9,195,588,000 8.88

BOK 694,351,456 6,936,942,398 10.01

NIC 680,142,550 5,499,435,330 12.37

2005/06 EBL 927,550,000 11,291,137,000 8.21

BOK 811,917,204 7,583,653,036 10.71

NIC 761,128,967 7,656,131,091 9.94

2006/07 EBL 1,171,133,000 14,976,737,000 7.82

BOK 953,263,195 10,226,193,976 9.32

NIC 911,806,552 9,905,036,012 9.21

2007/08 EBL 1,900,859,000 21,039,879,000 9.03

BOK 1,310,851,552 13,702,369,666 9.57

NIC 1,293,750,759 12,321,131,296 10.50

2008/09 EBL 1,981,579,000 24,131,922,000 8.21

BOK 1,683,588,123 16,025,037,210 10.51

NIC 1,649,007,425 15,741,613,929 10.48



helps to compare the Core Capital Ratio among three banks.

Figure: 4.3

Core Capital Ratio

-

2

4

6

8

10

12

14

2004/05 2005/06 2006/07 2007/08 2008/09

Years

CC

R in

%

EBL

BOK

NIC

As shown in the table 4.2 and Figure 4.3, the Core Capital Ratio of NIC of 12.37% is the

highest and EBL of 8.88% is the lowest in FY 2004/05; BOK of 10.71% is the highest

and EBL of 8.21% is lowest in FY 2005/06; BOK of 9.32% is the highest and EBL of

7.82% is lowest in FY 2006/07; NIC of 10.50% is highest and EBL of 9.03% is the

lowest in FY 2007/08; BOK of 10.51% is the highest and EBL of 8.21% is the lowest in

the FY 2008/09 among three banks. Furthermore figure 4.4 helps to find out the trend of

three banks Core Capital Ratio over the last five years period.

Figure 4.4

Core Capital Ratio

-

2

4

6

8

10

12

14

2004/05 2005/06 2006/07 2007/08 2008/09

Years

CC

R in

%

EBL

BOK

NIC


in the figure Core Capital Ratio of EBL started by 8.88% in FY 2004/05, decreased there

after till 2006/07 and increases in FY 2007/08, again decreased in FY 2008/09 and

reached to 8.21% in FY 2008/09. Overall, Core Capital Ratio of EBL decreases.

Similarly, Core Capital Ratio of BOK started with 10.01% in FY 2004/05, then increases

in 2005/06 after that decreases in FY 2006/07, increased There after till FY 2008/09 and

reached to 10.51% in the FY 2008/09. Overall Core Capital Ratio of BOK also is in

increasing trend.

Likewise, Core Capital Ratio of NIC stared with 12.37% in FY 2004/05, decreases in FY

2005/06 and 2006/07 after that increases in FY 2007/08 and again decreases in FY

2008/09 and reached to 10.48%. This also shows the decreasing trend in overall.

4.5.2 Assets Quality

Commercial bank holds their assets in the form of liquid assets like cash and bank

balance and short term investment etc. Through this lending bank generated interest.

Assets quality ratio is also known as activity ratio as well as turnover ratio be converted

in to cash and equivalent to cash. This is only profit if the bank is efficient enough to earn

profit. For identifying the assets quality we need to calculate three ratios. They are:

4.2.2.1 Non-Performing loan

Non-Performing loan refers to those loans which are not paying its Principle + Interest in

time or overdue more than three months. So, it consists of Sub-standard loan, Doubtful

loan and Bad Loan. The non-performing loan ratio indicated the relationship between

non-performing loan and total loan, it measures the proportion of non-performing loan in

total loan and advance. Higher non-performing loan ratio indicates that the bank‟s assets

are not doing well or the loan department is not so conscious while passing loan. So,

lower ratio will be perferred regarding Non-erforming Loan Ratio. The ratio is

determined by using the given model.


Non-performing Loan Ratio = × 100%


Where,



Table 4.3 is the observed Non-Performing Loan Ratio of three banks during the study

period in numerical terms which is presented below:

Table 4.3

Non-Performing Loan Ratio

Fiscal

Year

Banks Total Non

Performing loan

Total Loan &

Advances

Non Performing

Loan Ratio

2004/05 EBL 128,807,745 7,900,090,271 1.63

BOK 308,506,039 6,182,045,019 4.99

NIC 185,430,811 4,909,355,200 3.78

2005/06 EBL 129,235,790 10,136,254,448 1.27

BOK 203,624,470 7,488,700,923 2.72

NIC 179,554,435 6,902,123,944 2.60

2006/07 EBL 113,178,936 14,082,686,087 0.80

BOK 243,296,250 9,694,101,954 2.51

NIC 101,140,201 9,128,649,206 1.11

2007/08 EBL 126,639,038 18,836,431,762 0.67

BOK 236,898,850 12,747,721,603 1.86

NIC 98,167,144 11,465,334,005 0.86

2008/09 EBL 117,985,232 24,366,195,740 0.48

BOK 190,315,657 14,945,719,764 1.27

NIC 129,178,432 13,915,850,035 0.93



helps to compare the Non-Performing Ratio among three banks.

Figure 4.5


-

1

2

3

4

5

6

2004/05 2005/06 2006/07 2007/08 2008/09

Years

NP

L in

%

EBL

BOK

NIC

As shown in the table 4.3 and figure 4.5, the Non-Performing Loan Ratio of BOK of

4.99% is the highest and EBL of 1.63% is the lowest in FY 2004/05; BOK of 2.72% is

the highest and EBL of 1.27% is lowest in FY 2005/06; BOK of 2.51% is the highest and

EBL of 0.80% is lowest in FY 2006/07; BOK of 1.86% is highest and EBL of 0.67% is

the lowest in FY 2007/08; BOK of 1.27% is the highest and EBL of 0.48% is the lowest

in the FY 2008/09 among three banks. Furthermore figure 4.6 helps to find out the trend

of three banks Non-Performing Loan Ratio over the last five years period.

Figure 4.6


-

1

2

3

4

5

6

2004/05 2005/06 2006/07 2007/08 2008/09

Years

NP

L in

%

EBL

BOK

NIC


in the figure Non-Performing Loan Ratio of EBL started by 1.63% in FY 2004/05 and

there after continuously decreased till FY 2008/09 and reached to 0.48% . So, trend

analysis shows that EBL is able to decrease its non performing loan continuously which

is good sign of bank.

Similarly, Non-Performing Loan Ratio of BOK started with 4.99% in FY 2004/05 and

continuously decreased till FY 2008/09 and reached to 1.27%. It‟s also good sign for

BOK.

Likewise, Non-Performing Loan Ratio of NIC stared with 3.78% in FY 2004/05. Non-

Performing Loan Ratio of NIC is also in decreasing trend and reached to 0.93% in FY

2008/09.

4.2.2.2 Loan Loss Coverage Ratio

Loan Loss Coverage Ratio is the relationship between Total Loan Loss Provision and

Total Non Performing Loan. It measures the proportion of Total Loan Los Provision in

relation to Total Non Performing Loan. Out of the Total non Performing if some loans

becomes bad or default then that loss to the bank is covered from the Loan Loss

Provision Fund. So, from that point of view, higher the loan loss coverage ratio is better

for the banks. The ratio is determined by using the given model:


Loan Loss Coverage Ratio = X 100%


Where,




Table 4.4 is the observed Loan Loss Coverage Ratio of three banks during the study


Table 4.4

Loan Loss Coverage Ratio

Fiscal Year Banks Total Loan Loss

Provision

Total NPL Loan Loss

Coverage Ratio

2004/05 EBL 281,418,795 128,807,745 218.48

BOK 269,465,548 308,506,039 87.35

NIC 197,642,899 185,430,811 106.59

2005/06 EBL 334,946,772 129,235,790 259.17

BOK 229,618,344 203,624,470 112.77

NIC 246,159,924 179,554,435 137.09

2006/07 EBL 418,604,423 113,178,936 369.86

BOK 294,774,337 243,296,250 121.16

NIC 187,251,555 101,140,201 185.14

2007/08 EBL 497,346,200 126,639,038 392.73

BOK 285,084,062 236,898,850 120.34

NIC 200,655,909 98,167,144 204.40

2008/09 EBL 226,816,062 117,985,232 192.24

BOK 298,422,777 190,315,657 156.80

NIC 236,456,256 129,178,432 183.05


Chart 4.7 is a bar diagram which represents the above tabulated numerical data which

helps to compare the Loan Loss Coverage Ratio among three banks.

Figure 4.7


-

50

100

150

200

250

300

350

400

450

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

LL

C in

%

EBL

BOK

NIC

As shown in the table 4.4 and figure 4.7, the Loan Loss Coverage Ratio of EBL of

218.48% is the highest and BOK of 87.35% is the lowest in FY 2004/05; EBL of

259.17% is the highest and BOK of 112.77% is lowest in FY 2005/06; EBL of 369.86%

is the highest and BOK of lowest is 121.16% in FY 2006/07; EBL of 392.73% is highest

and BOK of 120.34% is the lowest in FY 2007/08; EBL of 192.24% is the highest and

BOK of 156.8% is the lowest in the FY 2008/09 among three banks. Furthermore figure

4.8 helps to find out the trend of three banks Loan Loss Coverage Ratio over the last five

years period.

Figure 4.8


-

50

100

150

200

250

300

350

400

450

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

LL

C in

%

EBL

BOK

NIC


in the figure Loan Loss Coverage Ratio of EBL started by 218.48% in FY 2004/05 and

after that continuously increased till 2007/08 and reached to 392.73% in FY 2007/08 but

in the FY 2008/09decreased to 192.24%.

Similarly, Loan Loss Coverage Ratio of BOK started with 87.35% in FY 2004/05 and

continuously increased up to 121.16% in FY 2006/07 after that decreases to 120.34% in

FY 2007/08 and then increased to 156.80% in FY 2008/09.

Likewise, Loan Loss Coverage Ratio of NIC stared with 106.59% in FY 2004/05 after

that continuously increases up to 204.40% in FY 2007/08and the decreases to 183.05% in

FY 2008/09.

4.2.2.3 Loan Loss Provision Ratio

Loan loss provision is the sum of amount that banks are required to set or kept for

potential loan loss. Loan loss provision is deductible expenses. It is deducted from

interest income. It is a provision set by a bank to cover unpredictable loss caused due to

default of the loan amount. This ratio shows how much the bank needs to set the

provision to cover the loss of default loan in the future from the loan released by the

bank. Lower the loan loss provision significant that the bank has higher volume of good

loan and higher non-performing loan. Loan loss provision is the whole amount of

provision set aside to cover the loss then LLP to NPL as NPL is lower we can say that

quality of loan is better. But if LLP to TL is higher hen we can say that the quality of loan

is good but at least we are in safe position as it has more provision for losses from loan.

LLP can calculate as follows:


Loan Loss Provision Ratio = × 100%


Where,




Table 4.5 is the observed Loan Loss Coverage Ratio of three banks during the study


Table 4.5

Loan Loss Provision Ratio

Fiscal Year Banks Total Loan Loss

Provision

Total Loan &

Advances

Loan Loss

Provision Ratio

2004/05 EBL 281,418,795 7,900,090,271 3.56

BOK 269,465,548 6,182,045,019 4.36

NIC 197,642,899 4,909,355,200 4.03

2005/06 EBL 334,946,772 10,136,254,448 3.30

BOK 229,618,344 7,488,700,923 3.07

NIC 246,159,924 6,902,123,944 3.57

2006/07 EBL 418,604,423 14,082,686,087 2.97

BOK 294,774,337 9,694,101,954 3.04

NIC 187,251,555 9,128,649,206 2.05

2007/08 EBL 497,346,200 18,836,431,762 2.64

BOK 285,084,062 12,747,721,603 2.24

NIC 200,655,909 11,465,334,005 1.75

2008/09 EBL 226,816,062 24,366,195,740 0.93

BOK 298,422,777 14,945,719,764 2.00

NIC 236,456,256 13,915,850,035 1.70



helps to compare the Loan Loss Provision Ratio among three banks.

Figure 4.9


-

1

1

2

2

3

3

4

4

5

5

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

LL

P in

%

EBL

BOK

NIC

As shown in the table 4.5 and figure 4.9, the Loan Loss Provision Ratio of BOK of

4.36% is the highest and EBL of 3.56% is the lowest in FY 2004/05; NIC of 3.57% is the

highest and BOK of 3.07% is lowest in FY 2005/06; BOK of 3.04% is the highest and

NIC of 2.05% is lowest in FY 2006/07; EBL of 2.64% is highest and NIC of 1.75% is the

lowest in FY 2007/08; BOK of 2% is the highest and EBL of 0.93% is the lowest in the

FY 2008/09 among three banks. Furthermore figure 4.10 helps to find out the trend of

three banks Loan Loss Provision Ratio over the last five years period.

Figure 4.10


-

1

1

2

2

3

3

4

4

5

5

2004/05 2005/06 2006/07 2007/08 2008/09

Years

LL

P in

%

EBL

BOK

NIC

Figure 4.10 is the trend analysis of three banks over the five years study period. As

shown in the figure Loan Loss Provision Ratio of EBL started from 3.56% in FY 2004/05

and after that continuously decreasing trend till 2008/09 and reached to 0.93%. Similarly,

Loan Loss Provision Ratio of BOK started with 4.36% in FY 2004/05. BOK has also

decreasing trend of LLP and its maintained 2% in FY 2008/09.

Likewise, Loan Loss Provision Ratio of NIC stared with 4.03% in FY 2004/05 and then

decreases till FY 2008/09. Minimum LLP of NIC is 1.7% in FY 2008/09.

4.5.3 Management

The success of any institution depends on the competency of its management. In fact, the

management not only makes suitable policy and the business plans but also implements

them for the short term and the long term interests, which helps to achieve aimed

objectives of bank and financial institution's. It is evaluated by checking the effectiveness

of the board of directors, the management, manpower and the officials, operating

expenditure, customer's relation with the officials and institution, management

information system, organization and working method, internal control system, power

concentration, monitoring, decision making process, policies.

Management analysis can be done by using following formula;


Management Efficiency Ratio (MER) =

Total No. of Staffs

Table 4.6 is the observed Management Efficiency Ratio of three banks during the study


Table 4.6

Management Efficiency Ratio

Fiscal

Year

Banks Net Profit

After Tax

Total no. of

Staffs

Management

Efficiency Ratio

2004/05 EBL 168,214,611 257 654,532

BOK 139,529,721 171 815,963

NIC 113,755,734 157 724,559

2005/06 EBL 237,290,936 306 775,461

BOK 202,440,627 177 1,143,732

NIC 96,587,674 166 581,853

2006/07 EBL 296,409,281 393 754,222

BOK 262,386,980 179 1,465,849

NIC 158,475,051 189 838,492

2007/08 EBL 451,218,613 449 1,004,941

BOK 361,496,879 390 926,915

NIC 243,058,040 232 1,047,664

2008/09 EBL 638,732,757 531 1,202,887

BOK 461,734,911 489 944,243

NIC 317,434,138 270 1,175,682



helps to compare the Management Efficiency Ratio among three banks.

Figure 4.11


0

200000

400000

600000

800000

1000000

1200000

1400000

1600000

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

ME

R

EBL

BOK

NIC

As shown in the table 4.6 and figure 4.11, the Management Efficiency Ratio of BOK of

Rs.815963.00 is the highest and EBL of Rs.654532.00 is the lowest in FY 2004/05; BOK

of Rs.1143732.00 is the highest and NIC of Rs.581853.00 is lowest in FY 2005/06; BOK

of Rs.1465849.00 is the highest and EBL of Rs.754222.00 is lowest in FY 2006/07; NIC

of Rs.1047664.00 is highest and BOK of Rs.926915.00 is the lowest in FY 2007/08; EBL

of Rs.1202887.00 is the highest and BOK of Rs.944243.00 is the lowest in the FY

2008/09 among three banks. Furthermore figure 4.12 helps to find out the trend of three

banks Management Efficiency Ratio over the last five years period.

Figure 4.12


-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

2004/05 2005/06 2006/07 2007/08 2008/09

Years

ME

R

EBL

BOK

NIC

Chart 4.12 is the trend analysis of three banks over the five years study period. As shown

in the figure Management Efficiency Ratio of EBL started by Rs.654532.00 in FY

2004/05, increased in FY 2005/06 and decreases in FY 2006/07, again increased till FY

2008/09 and reached to Rs.1202887.00. Overall, Management Efficiency Ratio of EBL

increases.

Similarly, Management Efficiency Ratio of BOK started with Rs.815963.00 in FY

2004/05, then increases till FY 2006/07 after that decreases in FY 2007/08 and again

increased in FY 2008/09 and reached to Rs.944243.00. Overall, Management Efficiency

Ratio of BOK also is in decreasing trend.

Likewise, Management Efficiency Ratio of NIC stared with Rs.724559.00 in FY

2004/05, decreases in FY 2005/06 after that increases till in FY 2008/09. This shows the

increasing trend in overall.

4.5.4 Earnings

Earning means excess of revenue over cost, so excess revenue earned by any organization

in the course of operation is known as profit. It is the ultimate result of any business.

Generally, if the earnings are good then that business is running well. Similarly the

aggregate performance of the bank reflects from its earnings. Earning is the ultimate

result of any business. Generally, higher earnings reflect better financial position.

Similarly the aggregate performance of the bank reflects from its earnings. Following

ratios depicts the earning position.

4.2.4.1 Earning per Shares

Earning per share is generally considered to be the single most important variable in

determining a share‟s price. It is the portion of a company‟s profit allocated to each

outstanding share of common stock. An important aspect of EPS that is often ignored is

the capital that is required to generate the earnings (net income) in the calculation. Two

companies could generate the same EPS number, but one could do so with less equity

(investment)-that company would be more efficient at using its capital to generate income

and, all other things being equal would be a “better” company. Following is the

expression of earning per share:


Earning per Shares (EPS) =

No. of outstanding Shares

Table 4.7 is the observed Earning per Shares of three banks during the study period in

numerical terms which is presented below:

Table 4.7

Earning per Shares

Fiscal

Year

Banks Net Profit

After Tax

No. of Share

Outstanding

EPS

2004/05 EBL 168,214,611 3,150,000 53.40

BOK 139,529,721 4,635,809 30.10

NIC 113,755,734 5,000,000 22.75

2005/06 EBL 237,290,936 3,780,000 62.78

BOK 202,440,627 4,635,809 43.67

NIC 96,587,674 6,600,000 14.63

2006/07 EBL 296,409,281 3,780,000 78.42

BOK 262,386,980 6,031,413 43.50

NIC 158,475,051 6,600,000 24.01

2007/08 EBL 451,218,613 4,914,000 91.82

BOK 361,496,879 6,031,413 59.94

NIC 243,058,040 9,438,771 25.75

2008/09 EBL 638,732,757 6,388,210 99.99

BOK 461,734,911 8,443,979 54.68

NIC 317,434,138 11,404,800 27.83



helps to compare the Earning Per Shares among three banks.

Figure 4.13

Earning per Shares

-

20

40

60

80

100

120

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

EP

S

EBL

BOK

NIC

As shown in the table 4.7 and figure 4.13, the Earning per Shares of EBL of Rs.53.40 is

the highest and NIC of Rs.22.75 is the lowest in FY 2004/05; EBL of Rs.62.78 is the

highest and NIC of Rs.14.63 is lowest in FY 2005/06; EBL of Rs.78.42 is the highest and

NIC of Rs.24.01 is lowest in FY 2006/07; EBL of Rs.91.82 is highest and NIC of

Rs.25.75 is the lowest in FY 2007/08; EBL of Rs.99.99 is the highest and NIC of

Rs.27.83 is the lowest in the FY 2008/09 among three banks. Furthermore figure 4.14

helps to find out the trend of three banks Earning per Shares over the last five years

period.

Figure 4.14

Earning per Shares

-

20

40

60

80

100

120

2004/05 2005/06 2006/07 2007/08 2008/09

Years

EP

S

EBL

BOK

NIC


shown in the figure earning per Shares of EBL started by Rs.53.40 in FY 2004/05,

increasing there after till FY 2008/09 and reached to Rs.99.99 in FY 2008/09. Overall

earning per Shares of BOK also is in increasing trend

Similarly, Earning per Shares of BOK started with Rs.30.10 in FY 2004/05, then

increases in FY 2005/06 after that decreases in FY 2006/07, increased There after till FY

2007/08 and again decreased in FY 2008/09 and reached to Rs.54.68 in the FY 2008/09.

Overall earning per Shares of BOK also is in increasing trend.

Likewise, earning per Shares of NIC stared with Rs.22.75 in FY 2004/05, decreases in

FY 2005/06 and after that increases till in FY 2008/09 and reached to Rs.27.83. This also

shows the slightly increasing trend in overall.

4.2.4.2 Return on Equity

This ratio denotes how much of the shareholders' fund is mobilized towards earning

profit. The higher the ratio the better it is for the bank. It is calculated as follows:


Return on Equity (ROE) = X 100%

Total Shareholders‟ fund

Table 4.8 is the observed Return on Equity of three banks during the study period in


Table 4.8

Return on Equity

Fiscal

Year

Banks Net Profit

After Tax

Total Shareholders'

Fund

ROE

2004/05 EBL 168,214,611 832,617,365 20.20

BOK 139,529,721 763,528,243 18.27

NIC 113,755,734 730,985,785 15.56

2005/06 EBL 237,290,936 1,391,339,000 17.05

BOK 202,440,627 1,100,797,467 18.39

NIC 96,587,674 1,036,838,663 9.32

2006/07 EBL 296,409,281 1,676,116,000 17.68

BOK 262,386,980 1,290,124,103 20.34

NIC 158,475,051 1,209,113,613 13.11

2007/08 EBL 451,218,613 2,406,056,000 18.75

BOK 361,496,879 1,635,235,217 22.11

NIC 243,058,040 1,615,719,466 15.04

2008/09 EBL 638,732,757 2,703,870,000 23.62

BOK 461,734,911 2,005,695,528 23.02

NIC 317,434,138 1,954,934,793 16.24


Figure 4.15.a is a bar diagram which represents the above tabulated numerical data which

helps to compare the Return on Equity among three banks.

Figure 4.15

Return on Equity

-

5

10

15

20

25

2004/05 2005/06 2006/07 2007/08 2008/09

Years

RO

E

EBL

BOK

NIC

As shown in the table 4.8 and figure 4.15, the Return on Equity of EBL of 53.40% is the

highest and NIC of 22.75% is the lowest in FY 2004/05; EBL of 63.78% is the highest

and NIC of 14.63%is lowest in FY 2005/06; EBL of 78.42% is the highest and NIC of

24.01% is lowest in FY 2006/07; EBL of 91.82% is the highest and NIC of 25.75% is the

lowest in FY 2007/08; EBL of 99.99% is the highest and NIC of 27.83% is the lowest in

the FY 2008/09 among three banks. Furthermore figure 4.16 helps to find out the trend of

three banks Return on Equity over the last five years period.

Figure 4.16

Return on Equity

-

5

10

15

20

25

2004/05 2005/06 2006/07 2007/08 2008/09

Years

RO

E

EBL

BOK

NIC


shown in the figure Return on Equity of EBL started by 20.20% in FY 2004/05,

decreased in FY 2006/07 and increases in FY 2007/08 to FY 2008/09 and reached to

23.62% in FY 2008/09. Overall, Return on Equity of EBL increases.

Similarly, Return on Equity of BOK started with 18.27% in FY 2004/05, then increases

till FY 2008/09 and reached to 23.02% in the FY 2008/09. Overall, Return on Equity of

BOK also is in increasing trend.

Likewise, Return on Equity of NIC stared with 15.56% in FY 2004/05, decreases in FY

2005/06 and after that increases till FY 2008/09 and reached to 16.24%. This also shows

the increasing trend in overall.

4.2.4.3 Return on Assets

The term ROA is return on total assets. Major assets of banks are loan and advances,

ROA reveals how efficiently the total recourses have been utilized and measured the

return on assets productive sectors that can generate profit for the banks. Higher ROA

shows the better utilization and management on the assets and extend profit level. This

ratio depicts how efficiently a bank is utilizing and mobilizing its assets to generate

profit. It is calculated as follows:


Return on Assets (ROA) = × 100%

Total Assets

Table 4.9 is the observed Return on Assets of three banks during the study period in


Table 4.9

Return on Assets

Fiscal

Year

Banks Net Profit

After Tax

Total Assets ROA

2004/05 EBL 168,214,611 11,732,516,418 1.43

BOK 139,529,721 9,888,533,138 1.41

NIC 113,755,734 7,510,396,565 1.51

2005/06 EBL 237,290,936 15,959,284,687 1.49

BOK 202,440,627 12,278,329,302 1.65

NIC 96,587,674 10,383,601,708 0.93

2006/07 EBL 296,409,281 21,432,574,300 1.38

BOK 262,386,980 14,581,394,916 1.80

NIC 158,475,051 11,678,834,055 1.36

2007/08 EBL 451,218,613 27,149,342,884 1.66

BOK 361,496,879 17,721,925,187 2.04

NIC 243,058,040 15,238,736,314 1.60

2008/09 EBL 638,732,757 36,916,848,654 1.73

BOK 461,734,911 20,496,005,483 2.25

NIC 317,434,138 18,750,633,197 1.69



helps to compare the Return on Assets among three banks.

Figure 4.17

Return on Assets

-

0.50

1.00

1.50

2.00

2.50

2004/05 2005/06 2006/07 2007/08 2008/09

Years

RO

A

EBL

BOK

NIC

As shown in the table 4.9 and figure 4.17, the Return on Assets of NIC of 1.51% is the

highest and BOK of 1.41% is the lowest in FY 2004/05; BOK of 1.65% is the highest and

NIC of 0.93% is lowest in FY 2005/06; BOK of 1.80% is the highest and NIC of 1.36%

is lowest in FY 2006/07; BOK of 2.04% is highest and NIC of 1.60% is the lowest in FY

2007/08; BOK of 2.25% is the highest and NIC of 1.69% is the lowest in the FY 2008/09

among three banks. Furthermore figure 4.18 helps to find out the trend of three banks

Return on Assets over the last five years period.

Figure 4.18

Return on Assets

-

0.50

1.00

1.50

2.00

2.50

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

RO

A

EBL

BOK

NIC


shown in the figure Return on Assets of EBL started by 1.43% in FY 2004/05, increased

there after in the FY 2005/06 and decreases in FY 2006/07 and then increased in FY

2007/08 and in FY 2008/09 and reached to 2.25% in FY 2008/09. Overall, Return on

Assets of EBL increases.

Similarly, Return on Assets of BOK started with 1.41% in FY 2004/05, then increases till

FY 2008/09 and reached to 2.25% in the FY 2008/09. Overall, Return on Assets of BOK

also is in increasing trend.

Likewise, Return on Assets of NIC stared with 1.51% in FY 2004/05, decreases in FY

2005/06 and after that increases till in FY 2008/09 and reached to 1.69%. This also shows

the increasing trend in overall.

4.5.5 Liquidity

Simply, liquidity means short- run solvency of a firm. It reflects the short term financial

strength of banks. Bank does not provide all deposit at loan and advances. The certain

percentage of deposit should be kept in bank in the form of cash. It the bank will keep

greater deposit in cash, it losses the opportunity cost. Similarly, if bank keeps low amount

in deposit, it could not be able to pay depositors on the time of requirement.

Liquidity can be measured in following ways:

4.2.5.1 Cash & Bank Balance Ratio

A Higher ratio shows higher liquidity and great ability of the bank to meet unexpected

demand made by the depositor. On the country lower ratio indicates that banks might

face liquidity crunch while paying its obligations. It is calculated as follows:

Cash & Bank Balance

Cash & Bank Balance Ratio =

Total Deposit

Table 4.10 is the observed Return on Assets of three banks during the study period in


Table 4.10

Cash & Bank Balance Ratio

Fiscal Year Banks Cash & Bank Balance Total Deposit Cash & Bank Balance Ratio

2004/05 EBL 1,049,989,208 10,097,690,989 10.40

BOK 740,520,482 8,975,780,868 8.25

NIC 1,010,386,565 6,241,378,160 16.19

2005/06 EBL 1,552,967,494 13,802,444,988 11.25

BOK 728,697,092 10,485,359,239 6.95

NIC 749,139,079 8,765,950,638 8.55

2006/07 EBL 2,391,420,594 18,186,253,541 13.15

BOK 1,315,903,941 12,388,927,294 10.62

NIC 599,758,632 10,068,230,869 5.96

2007/08 EBL 2,667,971,831 23,976,298,535 11.13

BOK 1,440,466,943 15,833,737,799 9.10

NIC 1,192,348,786 13,084,688,672 9.11

2008/09 EBL 6,164,371,163 33,322,946,246 18.50

BOK 1,889,174,230 18,083,980,266 10.45

NIC 1,461,150,549 15,579,930,904 9.38



helps to compare the Cash & Bank Balance Ratio among three banks.

Figure 4.19


-

2

4

6

8

10

12

14

16

18

20

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

CB

BR

EBL

BOK

NIC

As shown in the table 4.10 and figure 4.19, the Cash & Bank Balance Ratio of NIC of

16.19% is the highest and BOK of 8.25% is the lowest in FY 2004/05; EBL of 11.25% is

the highest and BOK of 6.95% is lowest in FY 2005/06; EBL of 13.15% is the highest

and NIC of 5.96% is lowest in FY 2006/07; EBL of 11.13% is highest and BOK of

9.10% is the lowest in FY 2007/08; EBL of 18.50% is the highest and NIC of 9.38% is

the lowest in the FY 2008/09 among three banks. Furthermore figure 4.20 helps to find

out the trend of three banks Cash & Bank Balance Ratio over the last five years period.

Figure 4.20


-

2

4

6

8

10

12

14

16

18

20

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

CB

BR EBL

BOK

NIC


shown in the figure Cash & Bank Balance Ratio of EBL started by 10.40% in FY

2004/05, increased there after till 2006/07 and decreases in FY 2007/08, again increased

in FY 2008/09 and reached to 18.50% in FY 2008/09. Overall, Cash & Bank Balance

Ratio of EBL increases.

Similarly, Cash & Bank Balance Ratio of BOK started with 8.25% in FY 2004/05, then

decreases in 2005/06 after that increases in FY 2006/07 and again decreased in FY

2007/08, increases in FY 2008/09 and reached to 10.51%. Overall Cash & Bank Balance

Ratio of BOK is slightly increasing.

Likewise, Cash & Bank Balance Ratio of NIC stared with 16.19% in FY 2004/05,

decreases in FY 2005/06 and 2006/07 after that increases in FY 2007/08 and 2008/09 and

reached to 9.38%. This also shows the decreasing trend in overall.

4.2.5.2 Investment in Government Security Ratio (IGSR)

Government securities are known as risk free assets, which are easily converted into cash

to meet the short term obligation. That‟s why every commercial bank has to invest their

certain amount in government securities. This ratio calculated as:

Investment in Govt. Security

Investment in Govt. Security Ratio = × 100%

Total Deposit

Table 4.11 is the observed Investment in Government Security Ratio of three banks

during the study period in numerical terms which is presented below:

Table 4.11

Investment in Government Security Ratio

Fiscal

Year

Banks Total

Investment in

Govt. Security

Total Deposit Investment in

Govt. Security

Ratio

2004/05 EBL 2,100,289,702 10,097,690,989 20.80

BOK 2,146,619,488 8,975,780,868 23.92

NIC 1,194,313,877 6,241,378,160 19.14

2005/06 EBL 3,548,616,968 13,802,444,988 25.71

BOK 2,658,369,057 10,485,359,239 25.35

NIC 1,756,585,150 8,765,950,638 20.04

2006/07 EBL 4,704,632,426 18,186,253,541 25.87

BOK 2,332,041,251 12,388,927,294 18.82

NIC 1,104,060,515 10,068,230,869 10.97

2007/08 EBL 4,821,604,740 23,976,298,535 20.11

BOK 2,113,223,115 15,833,737,799 13.35

NIC 1,545,375,347 13,084,688,672 11.81

2008/09 EBL 5,146,045,773 33,322,946,246 15.44

BOK 1,744,976,571 18,083,980,266 9.65

NIC 2,195,003,685 15,579,930,904 14.09



helps to compare the Investment in Government Security Ratio among three banks.

Figure 4.21


-

5

10

15

20

25

30

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

IGS

R

EBL

BOK

NIC

As shown in the table 4.11 and figure 4.21, the Investment in Government Security Ratio

of BOK of 23.92% is the highest and NIC of 19.14% is the lowest in FY 2004/05; BOK

of 25.35% is the highest and NIC of 20.04% is lowest in FY 2005/06; EBL of 25.87% is

the highest and NIC of 10.97% is lowest in FY 2006/07; EBL of 20.11% is highest and

NIC of 11.81% is the lowest in FY 2007/08; EBL of 15.44% is the highest and BOK of

9.65% is the lowest in the FY 2008/09 among three banks. Furthermore figure 4.22 helps

to find out the trend of three banks Investment in Government Security Ratio over the last

five years period.

Figure 4.22


-

5

10

15

20

25

30

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

IGS

R

EBL

BOK

NIC


shown in the figure Investment in Government Security Ratio of EBL started by 20.80%

in FY 2004/05, increased there after till FY 2006/07 and decreases in FY 2007/08, again

decreased in FY 2008/09 and reached to 15.44%. Overall, Investment in Government

Security Ratio of EBL decreases.

Similarly, Investment in Government Security Ratio of BOK started with 23.92% in FY

2004/05, then increases in 2005/06 after that decreases till FY 2008/09 and reached to

9.65% in the FY 2008/09. Overall Investment in Government Security Ratio of BOK also

is in decreasing trend.

Likewise, Investment in Government Security Ratio of NIC stared with 19.14% in FY

2004/05, increases in FY 2005/06 and after that decreases in FY 2006/07 and again

increases till in FY 2008/09 and reached to 14.09%. This is fluctuating trend in overall.

4.6 Major Findings

The major findings of the study of CAMEL Analysis of Everest Bank Ltd, Bank of

Kathmandu and Nepal Industrial and commercial Bank Ltd are as follows:

Total Capital Adequacy ratios (CAR) of EBL were 13.57% to 11.20% during the

review period. It was in decreasing trend. The ratio of 13.57% was maximum in FY

2004/05 and ratio of 11.20% was minimum in FY 2008/09. The Capital Adequacy

ratios of BOK in the review period were 11.01%, 14.52%, 12.38%, 11.93% and

12.52%. The ratio of 14.52% was highest in FY 2005/06 and the ratio of 11.01%

was lowest in 2004/05. In the same way, the capital adequacy ratios of NIC were

13.29%, 13.54%, 12.20%, 13.11% and 12.42%. The highest ratio was 13.54% in

FY 2005/06 and lowest was 12.20% in FY 2006/07. In general, all three banks were

able to maintain CAR as per NRB standard during the study period i.e. 11%.

The Core Capital Ratio (CCR) of EBL in fluctuating trend. The highest CCR was

9.03% in FY 2007/08 and lowest ratio was 7.82% in 2006/07. However, the bank

was able to maintain more then 5.5% above the NRB requirement during study

period. The ratios of BOK were 10.01%, 10.71%. 9.32%, 9.57% and 10.51% and

highest ratio was 1071% in FY 2005/06 and lowest was 9.32% in FY 2006/07. The

BOK also success to maintain NRB requirement. As same way, the maximum CCR

of NIC was 12.37% in FY 2004/05 and minimum was 9.21% in FY 2006/07.

However, it is judged that all banks were maintain more CCR than NRB has

Prescribed.

Non Performing Loan Ratios were in decreasing over the study period, it means the

banks were able to collect the loans. The ratio of BOK was greater than other two

banks i.e. 1.27% in FY 2008/09. It seems that BOK has high non performing loan

as compare to other banks. Where, the EBL bank has lowest non performing loan

ratio i.e. 0.48% in FY 2008/09 which show that EBL has maintained its loan and

advance most efficiently and effectively.

Loan loss coverage ratios of EBL was 218.48% in FY 2004/05 and it was

increasing up to 392.73% in FY 2007/08 and then decreased to 192.24% in FY

2008/09. BOK has also increasing trend of loan loss coverage ratio up to FY

2006/07 and slightly decreased in FY 2007/08 and again increased in FY 2008/09.

NIC has also increasing loan loss coverage ratio but its decreased in 2008/09. Over

all, BOK has lowest loan loss coverage ratio as compare to other two banks. And

EBL has highest loan loss coverage ratio which shows the better financial position.

The loan loss provision has been maintained for NPL and has been increasing

which is good sign.

The loan loss provision ratios of all three banks were in decreasing trend. As per the

FY 2008/09, EBL has the lowest loan loss provision ratio which indicates that the

EBL has better quality loan and BOK has highest ratio which means BOK has not

enough good loan the year as compare to other banks.

Total management efficiency ratios (MER) of EBL were Rs.654532.00 to

Rs.1202887.00 during the review period. The ratio of Rs.1202887.00 was

maximum in FY 2008/09 and ratio of Rs.654532.00 was minimum in FY 2004/05.

The highest management efficiency ratio of BOK was Rs.1465849.00 and lowest

was Rs.815963.00 in FY 2006/07 and FY 2004/058. In the same way, the

management efficiency ratios of NIC were increasing trend. The highest ratio was

Rs.1175682.00 in FY 2008/09 and lowest was Rs.581853.00 in FY 2005/06. As per

the latest data i.e. 2008/09 EBL has the highest MER i.e. Rs.1202887.00.

When net profit of bank is high, the Earning per share (EPS) of the bank will also

be high which shows the bank is in good condition. EPS of EBL is in increasing

trend and in FY 2008/09 EBL has highest EPS which shows that the bank is in best

position compare to other banks. This is the good sign to shareholders. EPS of BOK

is in fluctuating trend and NIC has also fluctuating EPS during the study period. In

overall, EBL is in good position as per EPS.

The return on equity consists of ratio between net profit after tax and equity. The

ratio of EBL is fluctuating trend. ROE of EBL was decreased in 2005/06 and then

increasing. ROE of BOK is in increasing trend which is better for shareholders‟.

NIC has also fluctuating ROE which decreased in 2005/06. A return on equity

calculates to see the profitability of the owners‟ investment. Higher ratio shows that

profitability of owners‟ investment is increasing. As compare to other banks BOK

has highest ROE in FY 2008/09.

Return on assets (ROA) comprises net profit after tax and total assets. It shows the

percentage of return that a firm gets from the total assets. It shows how well the

firm is doing. Here in the study EBL and NIC has fluctuating ROA but BOK has

increasing trend of ROA.

The Cash and bank balance ratio of EBL fluctuated over the period. First three year

the cash and bank balance ratio increased and then decreased in FY 2007/08, after

that increased in FY 2008/09 and reached to 18.50%. BOK has also fluctuated Cash

and Bank balance ratio and maintained 10.45% in FY 2008/09. In the same way,

NIC has also fluctuated ratio. The ratio was decreasing from FY 2004/05 to FY

2006/07 and after that the ratios were increasing in FY 2007/08 and in FY 2008/09.

The Investment in government security ratio (IGSR) of EBL is fluctuating in the

course of the study period. EBL has maximum IGSR of 25.87% in FY 2006/07 and

minimum IGSR of 15.44% in FY 2008/09. Now, BOK has highest IGSR of 25.35%

in FY 2005/06 and lowest of 9.65% in FY 2008/09. In the same way, highest IGSR

of NIC is 20.04% in FY 2005/05 and lowest of 10.97% in FY 2006/07. From

comparative analysis of new data i.e. 2008/09, we can see that EBL has maximum

and NIC has minimum IGSR.

CHAPTER - V

SUMMARY, CONCLUSION AND RECOMMENDATIONS

This chapter includes three aspects of the study- summary, conclusion and

recommendations. The first aspect summarizing the whole study, the second draws the

conclusion and the last but not he least recommendations.

5.1 Summary

The study was conducted with the objective to analyze and compare the financial

performances of Everest Bank Ltd. (EBL), Bank of Kathmandu (BOK) and Nepal

Industrial and Commercial Bank Ltd. (NIC) in the framework of CAMEL over the five

years period from FY 2004/05 to 2008/09. The study is based on the secondary data. For

the analysis of EBL, BOK and NIC are used as the major sources of data out of 26

commercial banks. CAMEL is a common method for analyzing the health of individual

institution, to quantify the performance and the financial condition of the firm. It was

designed by regulatory authorities and this study scrutinizes the financial performance of

EBL, BOK and NIC as regards to CAMEL i.e. Capital Adequacy, Assets Quality,

Management Earning and Liquidity. The analysis of financial statement is done to obtain

a better sight into the bank‟s position and performance. The various financial and

statistical tools have been used in this study to get the meaningful result and to meet the

research objectives.

During the research the areas that formed part of the conceptual review were; historical

development of financial system and evolution of commercial banks in Nepal, concept of

commercial banks, function of commercial banks and components of CAMEL. Besides

these, reviews of various theses were carried out under research review.

The analysis has been made to compare the company‟s ratios with NRB and international

standard. The banks are successful to maintain Capital Adequacy Ratio as per NRB

standard i.e. 11%. As per current data BOK has highest CAR. It means, BOK has higher

internal sources and comparatively strong financial position and security to depositors as

compare to others. Similarly EBL, BOK and NIC bank are able to maintain the Core

Capital Ratio as per prescribed by NRB of 5.5%. The highest CCR shows the protection

and security to creditors and depositors and financial soundness of the company.

The lower non performing loan ratio reflects the good performance of the banks in

mobilizing loan and advance. EBL has lower NPL ratio, it indicates the better proportion

of performing loans and risk of default (credit) than BOK and NIC. NPL ratio is in

decreasing trend where is the loan loss coverage ratio of bank is increasing in each year.

In the same way, loan loss provision ration is decreasing. Lower LLP ratio is better for

the banks. EBL has lower LLP ratio as compare to BOK and NIC.

The management efficiency ratio (MER) indicates the better operation of the bank and

better profitability. MER is fluctuation over the study period. EBL has highest MER, it

indicates the better operation management and better printability of EBL.

EPS of all three banks are in increasing trend but EBL has highest EPS than other two

banks. The ROE of all banks are in increasing trend with fluctuation. Similarly, ROA of

EBL and NIC are in increasing trend with fluctuation but BOK has increasing trend of

ROA.

The higher cash and bank balance ratio and Investment in Government Security ratio of

EBL indicates that the liquidity position of EBL is strong than other two banks.

5.2 Conclusion

Based on the findings, following conclusions have drawn as the concluding framework of

the study on CAMEL analysis.

1. Capital Adequacy Ratio (CAR) reveals that the bank is running with the adequate

capital and the capital fund of the bank is sound and sufficient to meet the banking

operation as per the NRB standard. CAR of all banks is above the NRB standard.

2. Core Capital Ratio (CCR) measured in terms of core capital to risk weighted assets

is as per NRB standard. It means the bank is using adequate amount of the internal

sources or core capital is past five years. In this point of view the bank is financially

sound and strong.

3. The decreasing trend of non-performing loans ratio helps to conclude that the bank

is aware of non performing loans and adopting the appropriate policies to manage

this problem and to increase the quality of assets.

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

appropriate recovery policy.

5. The decreasing trend of loan loss provision ratio indicates that the quality of loans

becoming upgrading year by year. It seems that amount of non performing loans

and possibility of default in future is decreasing.

6. The management efficiency ratio depicts efficiencies and productivity as a result of

well managed of human resources in terms of profitability.

7. The increasing trend of EPS depicts that the return flowing to the bank‟s owner is

increasing. This tendency reflects the strength of the share in the market is also

increasing.

8. The increasing trend of ROE shows that the rate of return flowing to the bank‟s

shareholders is upgrading year by year.

9. The increasing trend of ROA concludes that the net income for each unit of assets

of the bank is increasing. This shows that the capability of the management to

converting the bank‟s assts into net earning is increasing.

10. The cash and bank balance to total deposit ratio of all banks are in fluctuating trend

but EBL has the highest among three banks. Similarly, investment in government

security ratio of all banks are also in fluctuating trend and in this case also, EBL has

highest ratio, EBL presents itself as most secured from the liquidation risk among

all three banks.

5.3 Recommendations

The following recommendations are made based on the conclusions as suggestion to

overcome the weakness as regard to financial performance of Everest Bank Limited

(EBL), Bank of Kathmandu (BOK) and Nepal Industrial and Commercial Bank (NIC).

1. Capital Adequacy Ratio and Core Capital Ratio of all banks are as per NRB

standard over the review period but are in fluctuating trend. So recommendation is

provided and maintain stable if possible increase core capital fund to increase

Capital Adequacy Ratio and Core Capital Ratio.

2. The assets quality ratio of all banks are in satisfactory level and being better each

year. So, the recommendation is to maintain non performing loan ratio as lower as

possible and try to give additional attention in recovering the doubtful and loss loan

in future and try to increase its performing loan ratio.

3. The management efficiency ratio of EBL and NIC seems to be satisfactory as

compare to BOK. So, the recommendation is that the BOK should increase Net

Profit after Tax and should not appoint extra employee in organization.

4. The earning quality ratios of banks like EPS, ROE and ROA are in increasing trend.

So, all banks recommended that to increase more profit of the bank should

minimized its operating cost by increasing the operating efficiency of its

employees.

5. Liquid assets of the commercial banks play an important role to meet the day to day

and short term obligation. if liquid assets of the banks are not maintained properly

then there is a high probability of banks going to liquidation. The liquidity ratio of

EBL seems to be satisfactory among three banks but BOK and NIC should be

careful and try to increase liquidity position by increasing Cash and Bank Balance

Ratio and Investment in Government Security Ratio

BIBLIOGRAPHY

Books

Adhikari, N.K. & Shrestha, P. (2063). A Text Book on Corporate Finance. Kathmandu:

Khushbu Prakasan Pvt. Ltd.

Barealy, R. & Stewart M. (2000). Principle of Corporate Finance. India: Tata McGraw -

Hill Publishing Company Limited,

Brigham, E. & Houston, J. (2000). Fundamental of Financial Management, 3rd

edition.

New York: Harcourt College Publishers.

Brigham, E.F. & Gaspenski, L.C. (1985). Financial Management, Theory and Practice.

New York: The Dryden Press.

Cheney, J.M. & Moses, E.A. (1993). Fundamental of Investment. St.Paul: West

Publishing Co. Encyclopedia, The World Book, America: Grolier Incorporated.

Madura, J. (1999). Financial Institutions and Markets. New Delhi: Akash Press.

Thapa, K. (2060). Corporate Financial Management, Theory and Practice. Kathmandu:

Khanal Books and Stationary.

Thapa, K., Bhattrai, R., & Basnet, D. (2006). Investment: Theory and Solution.

Kathmandu: Asmita Books Publishers and Distributors.

Weston, J.F. & Copeland, J.F. (1992). Managerial Finance. Chicago: The Dryden Press.

Journals and Publications

Berger, A.N., & Davies, S.M. (1994). The Information Content of Bank Examinations.

Journal of Financial Services Research.

Dhungana, B.R. Problem Bank Identification, Correction & Resolution Mechanism in

Nepal. 53rd

Anniversary Special Issue.

Hirtle, B.J. & Lopez, J.A. (1999). Supervisory Information and the Frequency of Bank

Examination. Federal Reserve Bank of New York, Economic Policy Review.

Jha, Resta (2009) Troubled Global Economy-Cause and Concern, The Boss.

Pant Radish, Nepal Newbiz, Feb. 2006.

Thesis

Bhandari, K.R. (2006). The Financial Performance of Himalayan Bank Ltd. in the

Framework of CAMEL. An Unpublished Master Degree Thesis submitted to Faculty

of Management, T.U.

Bhusal, M. (2008). Financial Performance Analysis of commercial banks In Nepal the

Frame work of CAMEL (A Comparative Study of Kumari Bank and

Machhapuchchhre Bank. An Unpublished Master Degree Thesis submitted to

Faculty of Management, T.U.

Chand, K.B. (2007). Financial Performance Analysis (CAMEL - Test) of Selected CBs

(Nabil, NIBL &SCBL). An Unpublished Master Degree Thesis submitted to Faculty

of Management, T.U.

Poudel, R. (2007). A Study on Comparative Analysis of Financial Performance Between

Himalayan Bank and Standard Charted Bank. An Unpublished Master Degree Thesis

submitted to Faculty of Management, T.U.

Sharma, S.R. (2007). Financial Performance Analysis of Nepal SBI Bank Ltd. In the

Frame work of CAMEL. An Unpublished Master Degree Thesis submitted to Faculty

of Management, T.U.

Shrestha M.D. (2003). Capital Adequacy Norms for Commercial Banks and its Impact of

Bank (Himalayan Bank Ltd). An Unpublished Master Degree Thesis submitted to

Faculty of Management, T.U.

Singh, R.B. (2008). A Study of CAMEL Analysis of Commercial banks (SCBNL, HBL &

Nabil Bank). An Unpublished Master Degree Thesis submitted to Faculty of

Management, T.U.

Websites

www.bok.com.np

www.everstbankltd.com

www.google.com

www.googlescholar.com

www.nicbank.com.np

www.nrb.org.np

http://www.bok.com.np/

http://www.everstbankltd.com/

http://www.google.com/

http://www.googlescholar.com/

http://www.nicbank.com.np/

http://www.nrb.org.np/

Appendix – 1

Share Capital of 2008/09

Capital EBL BOK NIC

Authorized Capital 1,000,000,000 1,000,000,000 1,600,000,000

Issued Capital 840,620,000 844,397,900 1,140,480,000

Paid Up Capital 838,821,000 844,397,900 1,140,480,000

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

Appendix – 2

Share Capital and Shareholding of 2008/09

Share ownership

particulars

EBL BOK NIC

% Amount in

Rs. %

Amount in

Rs. %

Amount in

Rs.

A. Promoters 50 321,235,140 41.81 353,036,900 51 581,644,800

1.1 Nepal

Government

1.2 Foreign

Institutions

1.3 „A‟ Class

Licensed

institutions

1.4 Other Licensed

Institutions

1.5 Other

Institutions 9.34 59,696,190 2.2 18,593,400

1.6 Individual 40.66 261538950 39.61 334,443,500 51 581,644,800

1.7 Others

B. General Public 30 189,091,780 58.19 491,361,000 49 558,835,200

C. Joint Partner

Punjab National

Bank, India

20 128,494,080

Total 100 638,821,000 100 844,397,900 100 1,140,480,000

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

Appendix – 3

Everest Bank Limited

2004/05 2005/06 2006/07 2007/08 2008/09

Total

Capital

Fund

1,247,562,000 1,391,339,000 1,676,115,000 2,406,056,000 2,703,870,000

Core

Capital

Fund

816,793,000 927,550,000 1,171,133,000 1,900,859,000 1,981,579,000

Total Risk

Weighted

Assets

9,195,588,000 11,291,137,000 14,976,737,000 21,039,879,000 24,131,922,000

Total Non

Performin

g loan

128,807,745 129,235,790 113,178,936 126,639,038 117,985,232

Total

Loan &

Advances

7,900,090,271 10,136,254,448 14,082,686,087 18,836,431,762 24,366,195,740

Total

Loan Loss

Provision

281,418,795 334,946,772 418,604,423 497,346,200 226,816,062

Net Profit

After Tax 168,214,611 237,290,936 296,409,281 451,218,613 638,732,757

Total

Sharehold

ers' Fund

832,617,365 1,391,339,000 1,676,116,000 2,406,056,000 2,703,870,000

Total

Assets 11,732,516,418 15,959,284,687 21,432,574,300 27,149,342,884 36,916,848,654

Cash &

Bank

Balance

1,049,989,208 1,552,967,494 2,391,420,594 2,667,971,831 6,164,371,163

Total

Deposit 10,097,690,989 13,802,444,988 18,186,253,541 23,976,298,535 33,322,946,246

Total

Investmen

t in Govt.

Security

2,100,289,702 3,548,616,968 4,704,632,426 4,821,604,740 5,146,045,773

No. of

Share

outst-

3,150,000 3,780,000 3,780,000 4,914,000 6,388,210

anding

Total no.

of Staffs 257 306 393 449 531

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

Appendix – 4

Bank of Kathmandu

2004/05 2005/06 2006/07 2007/08 2008/09

Total

Capital

Fund

763,528,243 1,100,797,467 1,265,828,177 1,635,235,217 2,005,695,528

Core Capital

Fund 694,351,456 811,917,204 953,263,195 1,310,851,552 1,683,588,123

Total Risk

Weighted

Assets

6,936,942,398 7,583,653,036 10,226,193,976 13,702,369,666 16,025,037,210

Total Non

Performing

loan

308,506,039 203,624,470 243,296,250 236,898,850 190,315,657

Total Loan

& Advances 6,182,045,019 7,488,700,923 9,694,101,954 12,747,721,603 14,945,719,764

Total Loan

Loss

Provision

269,465,548 229,618,344 294,774,337 285,084,062 298,422,777

Net Profit

After Tax 139,529,721 202,440,627 262,386,980 361,496,879 461,734,911

Total

Shareholder

s' Fund

763,528,243 1,100,797,467 1,290,124,103 1,635,235,217 2,005,695,528

Total Assets 9,888,533,138 12,278,329,302 14,581,394,916 17,721,925,187 20,496,005,483

Cash &

Bank

Balance

740,520,482 728,697,092 1,315,903,941 1,440,466,943 1,889,174,230

Total

Deposit 8,975,780,868 10,485,359,239 12,388,927,294 15,833,737,799 18,083,980,266

Total

Investment

in Govt.

Security

2,146,619,488 2,658,369,057 2,332,041,251 2,113,223,115 1,744,976,571

No. of Share

outst-

anding

4,635,809 4,635,809 6,031,413 6,031,413 8,443,979

Total no. of

Staffs 171 177 179 390 489

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

Appendix – 5

Nepal Industrial and Commercial Bank Limited

2004/05 2005/06 2006/07 2007/08 2008/09

Total

Capital

Fund

730,985,785 1,036,838,663 1,208,607,803 1,615,719,466 1,954,934,793

Core

Capital

Fund

680,142,550 761,128,967 911,806,552 1,293,750,759 1,649,007,425

Total Risk

Weighted

Assets

5,499,435,330 7,656,131,091 9,905,036,012 12,321,131,296 15,741,613,929

Total Non

Performin

g loan

185,430,811 179,554,435 101,140,201 98,167,144 129,178,432

Total

Loan &

Advances

4,909,355,200 6,902,123,944 9,128,649,206 11,465,334,005 13,915,850,035

Total

Loan Loss

Provision

197,642,899 246,159,924 187,251,555 200,655,909 236,456,256

Net Profit

After Tax 113,755,734 96,587,674 158,475,051 243,058,040 317,434,138

Total

Sharehold

ers' Fund

730,985,785 1,036,838,663 1,209,113,613 1,615,719,466 1,954,934,793

Total

Assets 7,510,396,565 10,383,601,708 11,678,834,055 15,238,736,314 18,750,633,197

Cash &

Bank

Balance

1,010,386,565 749,139,079 599,758,632 1,192,348,786 1,461,150,549

Total

Deposit 6,241,378,160 8,765,950,638 10,068,230,869 13,084,688,672 15,579,930,904

Total

Investmen

t in Govt.

Security

1,194,313,877 1,756,585,150 1,104,060,515 1,545,375,347 2,195,003,685

No. of

Share

outst-

anding

5,000,000 6,600,000 6,600,000 9,438,771 11,404,800

Total no.

of Staffs 157 166 189 232 270

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

Camel Thesis

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