Sector Wise and Product Wise Credit Concentration of Nepalese Commercial Banks and its Relation with Profitability

Abstract

In the context of Nepal, commercial banks play the major role as it holds the major portion of the financial system. Lending is the most important source of revenue for any commercial bank and credit being the crucial part of bank is exposed to various type of risk. One of the major dimensions of credit risk is over exposure in particular sector. In management more risk mean more return. Thus it is very important to analyze the credit concentration and its relation with profitability.

This research seeks to examine sector wise and product wise credit concentration during 2070/71 to 2074/75. Secondary data published by the commercial banks, NRB and Central Bureau of Statistics of Nepal are the major sources of data. This is a census study. Statistical techniques such as mean, standard deviation and variation and HHI index are used. Both analytical and descriptive research design are used.

From the entire study, it was found that commercial banks are concentrated on lending in wholesaler and retailer, manufacturing and construction sector out of 15 sectors. In product, loan is concentrated on demand and working capital loan, overdraft loan and term loan out of 11 products. Only those three sectors and products cover more than 50 percent of loans. NRB has directed banks to lend in productive sector however the banks have excessive lending to the unproductive sector. Lending to productive sector such as agriculture and hydropower is low due to collateral based lending, low credit demand from this sector and monitoring problem in this sector.

Thus, the governing body should strictly implement the rule as the negligence of few banks can have adverse effect on the credit concentration of entire banking system. The board of director need to play a vital role in granting as well as managing the credit risk by formulating overall strategies whereas senior management if responsible for implementing the bank’s credit risk management strategies. Every bank need to develop credit policies guidelines, product papers and internal rating system that outline bank’s view of business development. The existing methods to control credit concentration are not sufficient and need to implement new tools in measurement.