Analysis of non-peforming assets of Nepalese commercial banks (With reference to Nepal Bank Limited, Rastriya Banijya Bank, Nabil Bank Limited,Nepal Investment Bank Limited, Standard Chartered Bank Nepal Limited)

Abstract

Banking sector plays a key role in the economic development of a nation. In the context ofNepal, as of Mid–July 2010 statistics of NRB, Commercial Banks hold more than 76 percent ofthe total assets and liabilities of the financial system.With the increasing number of banksandother financial institutions, the banking sector has to face numerous problems and challenges.One of the major problems the banking sectorcurrently facing is the issue of non-performingasset (NPA).Proper management of NPA has always been a great challenge for the banks. Non-performing assets are those assets which do not generate any income to the banks.Thethesis titled “Analysis of Non–Performing Assets of Nepalese Commercial Banks” is conductedwith the objectiveofevaluation of the proportion of non-performing loanand the level of NPAin total assets, total deposit and total lending; the analysis of the relationship between loan andloan loss provision;and the study of the trend of the non-performing assets, loan and advances,loan loss provision of theselected commercial banks.Also the study includes the analysis ofoverall impact of NPA on profitability of the banks, the causes of NPA and the measures to beadopted to control or reduce the NPA. Various research methodologies were used for the study. Basically,research methodologies heresignifies the research design, sources of data, population and sample of data, data collectionprocedure, data collection tools and techniques employed etc. Out of the total population of 30commercial banks, five banks were taken as sample by using judgmental sampling method.Nepal Bank Limited (NBL) and Rastriya Banijya Bank (RBB) are selected from public sectorbanks and three major banks, Nabil Bank Limited (NABIL), Nepal Investment Bank Limited(NIBL) and Standard CharteredBank Nepal Limited (SCBNL) were selected from private sectorbanks. Both primaryand secondarydata have been used in the study. The data collected fromvarious sources are recorded systematically and presented in appropriate forms of tables andcharts. Appropriate mathematical, statistical, financial, graphical tools have been applied toanalyze the data. The data of five consecutive years of the five selected banks have beenanalyzed to meet the objective of the study.The researcherhas tried to analyze the comparativeposition of bank in terms of non-performing asset and its impact. NIBLhas the highest proportion of the loans and advances in the total asset structure followedby NABIL, RBB and NBL. SCBNL has the lowest loans and advances in the total assetstructure. The credit deposit ratio also showsalmost the same result.This indicates the attitude ofthe management of SCBNL which isrisk adverse. There is higher proportion of non-performingloan(asset) in the total loans and advances ofRBB, which comes around 22.25% on average,which is very much higher than the acceptable standard of minimum 10%.This forces the bankto increase the loan loss provision. But the positive sign is that non-performing loan of RBB is inthe decreasing trend.The non-performing loan in total loans and advances of NABIL,NIBLandSCBNL are 0.84%, 1.37% and 1.21% respectively which is quite less than the acceptablestandard of 10%.This is theresult ofproper and effectivemanagement ofNPL by thesebanks.The ratio of provision held to NPL of NABIL is the highest followed by SCBNL, NIBL, NBLand then RBB. Although, NBL, NABIL and NIBL have used the higher portion of their investment in the mostincome-generating asset i.e. loans and advances, the banks are unsuccessful in generatinganticipated returns as per investment. Most of the loans of these banks have become non-performing and hence it is not generating any income, instead demanded high provision forprobable loss.On the other hand, NABIL and RBBhavehigher rate of return on investment dueto proper lending and monitoring function with low cost of fund, high fee based income etc. The correlation between loans and advances and deposit shows the positive relationship in all thesampled banks. It means that when the deposit amount increases the loan and advances alsoincreases. There is negative correlation between LLP and loans and advances in NBL, RBB andSCBNL but shows the positive correlation in case of NABIL and NIBL. The correlationcoefficients are negative as the loans and advances are increasing but LLP is decreasing. Thepositive correlation in NABILand NIBL is due to decrement of non-performing loan of NBL.Amount to be provisioned depends upon the non-performing loan and its quality.Higher LLPprovision has to be madefor higher NPL.The correlation between NPA and net profit shows thepositive correlation in all the sampled banks except NBL. The trend analysis of loans and advancesshows increasing trend in all the five sampled banks.The trend analysis of non-performing assets showsdecreasing trend in all the five sampledbanks. The trend analysisof loan loss provision in NBL, RBB and SCBNL shows thedecreasing trend in the coming years. This is due to bank's recovery efforts towards reducing NPL through establishment of Recovery cell. But NABIL and NIBL have increasing trend of loan lossprovision in coming years. The trend analysis of net profit exhibits that all the sampled banksexcept NBL have increasing trend of profit in coming year. As per the NRB directives regarding loan classification and provisioning, loans and advanceshave to be categorized into four types namely pass, substandard, doubtful and loss withrespective provisioning of 1%, 25%, 50% and 100%. The loan falling under pass category isregarded as performing loanand that which falls under remaining three categories is regarded asnon-performing loan. It was found that none of the sampled banks maintained the provisionexactly as per the directives. They have maintained higher than requirement for one type of loanwhereas lower for another class of loan category.Though the loan loss provision made by bankswere not perfectly as per the directives, this was not highly unsatisfactoryandwas not theserious matter, only little attention is needed to manage LLP ofeach loan category. In the sameway, effective supervisory role of NRB is essential in this matter. Regular supervision andcontrol over the Nepalese commercial bank by NRB, whether they are implementing NRB'sdirective perfectly or not, is very important. The NPA has inverse relation with profitability and performance of the banks. Today’s bankingindustry isseverely affected by the setbackof NPA. In Nepal, the increase inNPA is especiallydue to the willful defaulters. Ironically big house and big companies are the major source ofNPA of commercial banks. They take loan misusing their reputation, connection to politicalparties and make unhealthy influence. The political instability and the political pressure forsanction of loan are also major causes.Lack of proper law and the lack of willingness in theGovernment has been the main barrier in taking action against defaulters. Governmentunwillingness to punish defaulters also plays vital role in increase of NPA in Nepal and thepolitical interference is making the acting government bodies helpless, which is one of the majorcauses of this problem. It should, however, be kept in mind that NPAs are an integral part of the business financial sectorand the players are in as they are in the business of taking risk and their earnings reflect the riskthey take. They operate in an environment, where there would be defaults as well as deteriorationin portfolio value, as market movements can never be predicted with certainty. It is in thiscontext, that countries have adopted regulatory measures and the guiding structure has been provided by the Basel guidelines.