A Case Study On

CREDIT MANAGEMENT OF SAPTAKOSHI

DEVELOPMENT LIMITED
A Project Work Report

Submitted By:
ABHINAS KUMAR SAH
TU Regd. No.: 7-2-15-3036-2020
Campus roll no- 698/077
Mobile no- 9745413728
Group: Finance
Thakur Ram Multiple Campus
Birganj, Parsa

Submitted To:
Office of Controller of Examination
Faculty of Management
Tribhuvan University
In Partial Fulfillment of the Requirements for the Degree of
BACHELOR OF BUSINESS STUDIES (BBS)
Birganj, Nepal

June, 2025
 DECLARATION

I hereby declare that the project work entitled “CREDIT MANAGEMENT OF

SAPTAKOSHI DEVELOPMENT LTD” submitted to the Faculty of Management,
Tribhuvan University, Kathmandu is an original piece of work under the supervision
of Mr. GAURI SHANKAR PANDAY faculty member, THAKUR RAM MULTIPLE
CAMPUS, Birganj, Parsa, and is submitted in partial fulfillment of the requirements
for the award of the degree of Bachelor of Business Studies (BBS). This project work
report has not been submitted to any other university or institution for the award of any
degree or diploma.

………...........

ABHINAS KUMAR SAH

June, 2025

ii
 SUPERVISOR’S RECOMMENDATION

The project work report entitled “A CASE STUDY ON CREDIT MANAGEMENT OF

SAPTAKOSHI DEVELOPMENT LTD.'' submitted by ABHINAS KUMAR SAH of
Thakur Ram Multiple Campus, Birganj, Parsa is prepared under my supervision as per
the procedure and format requirements laid by the Faculty of Management, Tribhuvan
University, as partial fulfillment of the requirements for the award of the degree of
Bachelor of Business Studies (BBS). I, therefore, recommend the project work report
for evaluation.

………………….……

Mr. GAURI SHANKAR PANDAY

JUNE, 2025

iii
 ENDORSEMENT

We hereby endorse the project work report entitled “CREDIT MANAGEMENT OF

SAPTAKOSHI DEVELOPMENT BANK LTD '' submitted by ABHINAS KUMAR
SAH of Thakur Ram Multiple Campus Birgunj. Parsa in partial fulfillment of the
requirements for award of the Bachelor of Business Studies (BBS) for external
evaluation.

……………… ……………..

Ass. Prof. Dr. LALAN DWIBEDI Mr. RANJEET PRASAD YADAV

Chairman, Research Committee Campus Chief

JUNE, 2025 JUNE, 2025

iv
 ACKNOWLEDGEMENT

This fieldwork report has been duly prepared and submitted to meet the partial
requirement of BBS program for the subject of ''Credit management of SAPTAKOSHI
DEVELOPMENT BANK LTD '' designed by faculty of management of T.U. It has
been prepared to give a summarized view of credit management of SAPTAKOSHI
DEVELOPMENT BANK of different years. So, some problems and solutions are also
presented in this report. For easier study the data has been presented by tables, graphs
and have been interpreted using some statistical methods and figures. This report tries
to focus on the credit situation of SAPTAKOSHI DEVELOPMENT BANK only.

First of all, I would like to express my sincere gratitude to my respected teacher Mr

GAURI SHANKAR PANDAY for the guidance and kind co-operation in order to
complete this report writing. During the study period, several people directly or
indirectly helped me to shape the study in this form. So, I would express my profound
gratitude and sincere appreciation to my respected teachers, dear friends and staffs of
our college.

Finally, I am very much thankful to my family and my colleagues for their continued
moral support.

ABHINAS KUMAR SAH

BBS 4th Year

Thakur Ram Multiple Campus

Birganj Parsa

v
 TABLE OF CONTENTS

Title Page.......................................................................................................................i

Declaration....................................................................................................................ii

Supervisor’s Recommendation.....................................................................................iii

Endorsement.................................................................................................................iv

Acknowledgement...........................................................................................................v

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

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

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

Abbreviations.................................................................................................................x

CHAPTER ONE: INTRODUCTION........................................................................1

1.1 Background of Study..............................................................................................1

1.2 Profile of Saptakoshi development bank……………............................................2

1.2.1 Structure of Bank..........................................................................................3

1.3 Statement of Problem............................................................................................4

1.4 Objectives of the study...........................................................................................4

1.5 Related Literature Review......................................................................................4

1.5.1 Conceptual Review......................................................................................5

1.5.2 Review of Empirical Studies........................................................................6

1.5.3 Research Gap...............................................................................................7

1.6 Research Methodology...........................................................................................8

1.6.1 Population and Sample................................................................................8

1.6.2 Sources of data.............................................................................................9

1.6.3 Data collection procedures...........................................................................9

1.6.4 Techniques of analysis...............................................................................10

1.6.5 Classification and Tabulation of Data........................................................10

vi
1.7 Limitations of Study.............................................................................................12

1.8 Chapter Plan ....................................................................................................12

CHAPTER TWO: RESULT AND ANALYSIS......................................................14

2.1 Ratio Analysis......................................................................................................14

2.1.1 Total Loans and Advance to Total Deposit (Credit to Deposit Ratio) .......14

2.1.2 Non- Performing Loan to Total Loans and Advances Ratio.....................15

2.1.3 Non-Performing Loans to Loan Loss Provision Ratio...............................16

2.1.4 Loan loss provision to Total Loans and Advances Ratio...........................18

2.1.5 Return on loans and advances ratio............................................................19

2.1.6 Interest Income on Loans and Advances Ratio..........................................21

2.1.7 Total Interest Expenses to Total Deposit and Borrowing Ratio............23

2.1.8 Capital Adequacy Ratio.............................................................................24

2.2 Secondary Data and Analysis...............................................................................26

2.3 Major Finding.......................................................................................................30

CHAPTER THREE: SUMMARY AND CONCLUSIONS....................................32

3.1 Summary..............................................................................................................32

3.2 Conclusion............................................................................................................33

REFERENCES...........................................................................................................34

APPENDIX.................................................................................................................35

LIST OF TABLES

Contents Page No.

Table 2. 1: Loans and Advances to Total Deposit Ratio..............................................14

Table 2.2: Non-Performing Loan to Total Loans and Advances Ratio......................15
Table 2.3: Non-Performing Loan to Loan Loss Provision Ratio.................................16
Table 2.4Loan Loss Provision to Total Loans and Advances Ratio...........................18
Table 2.5: Return on loans and advances ratio............................................................20

vii
Table 2. 6: Interest Income to Loans and advances.....................................................21
Table 2.7: Total Interest paid to Total Deposit and Borrowing Ratio.........................23
Table 2. 8: Capital Adequacy Ratio.............................................................................25
Table 2. 9: Model Employed by the Banks to identify Credit Worthiness of
Customer ......................................................................................................................
Table 2. 10: Response on fulfillment of Capital Adequacy requirement.....................27
Table 2. 11: Response on Credit Risk Policy as a part of Company-wide Capital
Management Strategy..................................................................................................

LIST OF FIGURES

Contents Page No.

Figure 2.1: Loans and Advances to Total Deposit Ratio.............................................15

Figure 2.2: Non- Performing Loan to Total Loans and Advances Ratio.....................16
Figure 2.3: Non-Performing Loan to Loan Loss Provision Ratio................................17
Figure 2.4: Loan Loss Provision to Total Loans and Advance Ratio..........................19
Figure 2.5: Return on loans and advances ratio...........................................................21
Figure 2. 6: Interest Income on Loans and Advance...................................................22
Figure 2.7: Total Interest paid to Total Deposit and Borrowing Ratio (%).................24
Figure 2. 8: Capital Adequacy Ratio............................................................................26
Figure 2. 9: Model Employed by the Banks to identify Credit Worthiness of
customer.......................................................................................................................
Figure 2. 10: Response on fulfillment of Capital Adequacy requirement...................28
Figure 2. 11: Response on Credit Risk Policy as a part of Company-wide Capital
Management Strategy...................................................................................................28
Figure 2. 12: Capital Reserve Maintained on and offBalance Sheet Risks................29

viii
 ABBREVIATIONS

% ; Percentage

A. D ; Anno Domini

B.C ; Before Christ

B. S ; Bikram Sambat

F/Y: ; Fiscal Year

No. : Number

NP : Non performing loans

NRB ; Nepal Rastra Bank

REG. NO. : Registration Number

Rs. : Rupees

SEC : Section

ix
 1

CHAPTER ONE INTRODUCTION

1.1 Background of Study

Credit management is the process of deciding which customers to extend credit to and
evaluating those customers' creditworthiness over time. It involves setting credit limits
for customers, monitoring customer payments and collections, and assessing the risks
associated with extending credit to customers. Due to the fact that banks use huge
amount of external financial sources in their business models (amount of these sources
reached more than 95 %), it is necessary to adjust this area by some legislative
framework. This legislative framework consisting primarily of the regulatory
agreements of Basel III sets legal rules which govern the capital adequacy of banks.
Therefore following rules have to be followed for establishing of the effective loans
portfolio of commercial banks Next aim was to show possibilities how to potential
mitigates capital requirements in the case of transition on sophisticated methods of
credit risk management. The problem of credit management, as well as carrying out a
quantitative assessment and analysis of the credit and rating of borrowers, is relevant to
all banks involved in lending to individuals and legal entities. In general, when
commercial banks grant loans to individuals and legal entities, the credit involved is
characterized by the following quantitative parameters: risk as the probability of the
borrower’s failure to repay the loan; acceptable risk; average risk; possible losses given
loan default; the average value of losses; the maximum allowable losses; the number of
loans given by the bank; the possible number of different loans the bank can give; the
number of problem loans.

The importance of credit risk management in banks is due to its ability in affecting the
banks financial performance, existence and growth. In the words of the Basel
Committee (1999), increases in credit risk raise the marginal cost of debt and equity,
which in turn increase the cost of funds for the bank. Further, credit extension enhances
the ability of investors to exploit desired profitable ventures and is an avenue through
which banks create credit (Kargi, 2011)
 2

1.2 Profile of SAPTAKOSHI DEVELOPMENT BANK

Saptakoshi Development Bank Limited is established under Bank and

Financial Institution Act 2063, and licensed by Nepal Rastra Bank as a Regional
“Kha” level financial institution (Development Bank) with Operating area of
Morang, Ilam, Panchthar,Jhapa,Sunsari ,Dhankuta districts.

The Bank has its Head Office at Dhankuta – 7, Dhankuta and its Corporate office
is located at Mainroad Biratnagar-7, Morang. The promoters of Saptakoshi
Development Bank include successful businessman, traders, social workers and
professionals having long experience in banking sectors. Saptakoshi
Development Bank is equipped with modern technologies and it is providing fast
and quality service to the valued customers. Due to the immense support, belief
and help, Saptakoshi Development Bank is rapidly extending its services.
SKDBL provides mobile banking through the Saptakoshi Smart app, allowing
customers to manage their accounts and perform various transactions from their
mobile devices. They offer gold loans against gold and gold ornaments,
providing customers with an option to access funds.
Its main objective is to provide reliable, trustworthy, efficient and quality banking
services to the general public, business community and other beneficiaries with
healthy competition in the banking sectors for the development of the nation
under the free economy policy of the Nepal government.
The Bank is committed for good corporate governance practices and banking
activities with prudent banking culture. It has been offering various products and
services for its customer with competitive rate in market. It has been able to
provide diversified service (Modern Banking, Limited Banking and
Microfinance) backed by the latest technology.
Shareholding patterns:
General public = 49%
Promoters share = 51 %
Capital structure:
Authorized Capital: RS 1.000,000,000
 3

Issued and paidup capital: Rs. 834,338,50

1.2.1 Structure of Bank

BOD

Internal Audit CEO

Chief Risk
officer

Government HRM Group Consumer Operation and Chief

Relation Group Banking Group IT Group Financial
officer

Chief Operation
Officer

Accounts Client
Service

Monitoring
and Sales and Corporate Wealth
trading Finance Management
Trade
Processing and
Operations
Support Control

IT
 4

1.3 Statement of Problem

This report will give answer to the following questions:

• How sound is the credit collecting operation of Saptakoshi development bank ?

• What is the degree of non-performing loan to the total loan given by Saptakoshi
development bank?
• What is the degree of loan loss provision to total loans and advances given by
Saptakoshi development bank?

1.4 Objectives of the Study

The objectives of this study are as follows:

• To analyze the total credit situation of the bank

• To analyze the uncollectable or non-performing loan of the bank.
• To analyze loan loss provision to total loans and advances ratio.

1.5 Related Literature Review

A Literature review is a summary and analysis of current knowledge about a particular

topic or areas of inquiry. In other words, the analysis of previous studies for knowing
the research in detail is known as literature review. After selecting the topic of the
research, the researcher should study different journals, periodicals, newspapers,
published or unpublished bibliographies, books etc. to collect or gather the information
about the selected topic of the research. This process of studying different educational
materials is known as a review of the literature.

Literature review in every research acts as the foundation of the base of the research.
Review of literature gives the framework of the research process. Review of literature
facilitates to find out what research studies have been done in one’s chosen field, this
case is credit management of Saptakoshi development bank. This chapter focuses on
 5

previous researches done and the sources from which knowledge about the related topic
is gained.

Some definitions of literature review given by various authors are given in the points
below:

“Review of literature means reviewing research studies of other relevant preposition in

the related area of the study so that all part studies, their conclusions and deficiencies
may be known and further research can be concluded.” (Pantta & Wolf, 1999).

“A literature review uses as its database reports of primary or original scholarship, and
does not report new primary scholarship itself. The primary reports used in the literature
may be verbal, but in the vast majority of cases reports are written documents. The
types of scholarship may be empirical, theoretical, critical/analytic, or methodological
in nature. Second a literature review seeks to describe, summarize, evaluate, clarify
and/or integrate the content of primary reports” (Cooper, 1988).

“The review of relevant literature is nearly always a standard chapter of a thesis or

dissertation. The review forms an important chapter in a thesis where its purpose is to
provide the background to and justification for the research undertaken. Bruce, who has
published widely on the1 topic of the literature review, has identified six elements of a
literature review. These elements comprise a list; a search; a survey; a vehicle for
learning; a research facilitator; and a report” (Bruce, 1994).

1.5.1 Conceptual review

Credit management is one of the most important activities in any company and cannot
be overlooked by any economic enterprise engaged in credit irrespective of its business
nature. It is the process to ensure that customers will pay for the products delivered or
the services rendered. Myers and Brealey (2003) describe credit management as
methods and strategies adopted by a firm to ensure that they maintain an optimal level
of credit and its effective management.

It is an aspect of financial management involving credit analysis, credit rating, credit

classification and credit reporting. Nelson (2002) views credit management as simply
the means by which an entity manages its credit sales. It is a prerequisite for any entity
 6

dealing with credit transactions since it is impossible to have a zero credit or default
risk.

1.5.2 Review of empirical studies

Khan (2008) illustrates that credit risk is one of the most vital risks for any commercial
bank. Credit risk arises from non-performance by a borrower. It may arise from either
an inability or an unwillingness to perform in the recommitment contracted manner.
The real risk from credit is the deviation of portfolio performance from its expected
value. The credit risk of a bank is also effect the book value of a bank. The more credit
of a particular is in risk, the more probability of a bank to be insolvent.

Owojori (2011) highlighted that available statistics from the liquidated banks clearly
showed that inability to collect loans and advances extended to customers and directors
or companies related to directors/managers was a major contributor to the distress of
the liquidated banks. At the height of the distress in 2007, when 60 out of the 115
operating banks were distressed, the ratio of the distressed banks’ nonperforming loans
and leases to their total loans and leases was 67%. The ratio deteriorated to 79% in
2008; to 82% in 2009; and by December 2010, the licenses of 35 of the distressed banks
had been revoked. In 2011, only one bank (Peak Merchant Bank) was closed. No other
bank was closed in the year 2011. Therefore, the number of banking licenses revoked
by the CBN since 1994 remained at 36 until January 2010.

Moti (2012) argue that intelligent and effective management of credit lines is a key
requirement for effective credit management. Furthermore, to minimize the risk of bad
debt and over-reserving, banks ought to have greater insight into important factors like,
customer financial strength, credit score history and changing payment patterns

Andrianova (2013) studied the bank’s decisions about granting, or refusing to grant, a
loan, about the interest rate, and about the level of loan default provisioning will depend
on the accuracy of risk recognition and assessment. The accuracy of risk factor
assessments is evaluated relative to the number of errors in the recognition of "bad" and
"good" loans (i.e. borrowers) and their average number. The accuracy of risk factor
assessments is determined in a similar manner when loans are classified into more than
two classes. Furthermore, the stability of risk assessment methodologies is
characterized by the property of statistical methods known as robustness. Different
 7

methodologies of risk assessment, or one and the same methodology used with different
algorithms, yield dissimilar classifications of loans into "good" and "bad". The
application of different methodologies may result in the categorization of one and the
same loan as either “good” or “bad”. Such instability in loan classification may affect
the assessment of 20% of total number of loans.

Karki (2015) examined the impact of credit risk on the profitability of Nepalese banks.
Findings from the study revealed that credit risk management has a significant impact
on the profitability of Nepalese banks. Hence, they opined that banks’ profitability is
inversely influenced by the levels of loans and advances, nonperforming loans and
deposits thereby exposing them to great risk of illiquidity and distress. Although, some
considerable amount of literature exists on the interaction between finance and credit
management on banks liquidity position, however, the same is not true in developing
economies like Nepal where there is a relatively dearth in literature in this area, coupled
with the huge institutional differences between Nigeria and other developed economies.

Sindani (2016) studied on “Bank Insolvency and The Problem of Non-performing loans
from Micro Finance Sector in Kenya” found out that credit terms formulated by the
microfinance institutions do affect loan performance; the involvement of credit officers
and customers in formulating credit terms affects loan performance. Interest rates
charged had a negative effect on the performance of the loans, the higher the interest
rates the lower the loan performance. Credit risk controls adopted by microfinance
institutions have an effect on loan performance, credit insurance, signing of covenants
with customers, diversification of loans, credit rating of customers, reports on financial
conditions, refrain from further borrowing had an effect on loan performance.
Collection policies adopted by microfinance institution had an effect on loan
performance, stringent policy had a great impact on loan performance, and the lenient
policy had an effect but was not as great as that of stringent policy.
 8

1.5.3 Research gap

After reviewing various studies related to credit, investment, fund mobilizing and
financial performance, it has been noticed that studies are focusing on policies
implemented by banks for their financial performance rather than giving focus to actual
credit position and non-performing loans of the bank. Hence, the gap of ignoring actual
credit position and non-performing loan of the bank has been addressed in this study.

1.6 Research Methodology

The research methodology is the process of arriving to the solution of the problems
through planned and systematic dealing with the collection, analysis and interpretation
of facts and figures.

As the research entirely consider about the “Credit Management of Saptakoshi

Development Bank”, the main purpose of this study is to show credit and its utilization
in Nabil with its financial positions, collection and uses of funds, its prospects and its
position in context of Nepal as well as to recommend suggestions for its improvement.
Those research methodologies have been used which proves helpful to analyze credit
management.

For purpose of achieving the objectives, the following methodology is used. The data
has been collected by acquiring various kinds’ reports, bulletins and journals from the
organization.
As this study focuses on finding out the actual data relating to credit management of
Saptakoshi development bank and analyzing them, this research can be concluded as
analytical and descriptive research.

The study report is based mostly on secondary information of Nabil. In addition to this,
reference has been made in library consult, class lectures, books related to banking,
financial management and accounting during the preparation of this study.

1.6.1 Population and sample

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1.6.1.1 Population. Population is also known as universe; it is every available

information or data from which sample is drawn out. Population is the whole
universe of data from which the sampling frame is drawn out in order to select the
sample. In other words, it also refers to the collection of the whole unit that
researchers are interested in knowing about them. In the case of this report total
twenty-seven commercial banks can be considered as population.

1.6.1.2 Sample . A sample is some elements of the population which help to draw
out conclusion about the entire population. In other words, the sample is a miniature
picture or cross section of the entire group from which sample regarding the
research is taken.

In the case of this research Saptakoshi development bank has been taken as sample
as it will be very impracticable and difficult to study all banks at once.

Now in the context of credit of Saptakoshi development bank ltd, among available
data, previous data of only five years F/Y (2080/81 -2080/81) has been taken as
sample as it is hard to analyze all previous data all at once.

1.6.2 Sources of data

1.6.2.1 Secondary data. The data which are collected from some published or
unpublished sources are known as secondary data. These types of data are collected
from the secondary source; such sources may be the field of study of some other
places or published articles.

The major portion of this report contains the secondary data from the following
sources:

Annual report of Saptakoshi development bank F/Y (2080/81-2080/81)

Reports of Nepal Rastra Bank (F/Y (2080/81 -2080/81)

 10

1.6.3 Data collection procedure

As previously said, this Research data is mainly collected from secondary sources of
data. The data collection procedure is relatively simple. Internal sources of data such
as Annual reports, Interim performance report are collected from the official website of
the respective commercial bank which is www.nabilbank.com

The external data are collected from the journals and articles published in the
newspapers and internet. Annual report of NRB is also collected from the website of
Nepal Rastra bank.

1.6.4 Techniques of analysis

The data collected from the above stated sources has been classified tabulated and
interpreted for easier study.

1.6.5 Classification and tabulation of data

The data collected are classified tabulated and arranged in a manner to make it easily
understandable with the use of tables in a chronological order. After classification the
data is tabulated.

Diagrammatic Representation of Data

Various diagrams are used to present the data more clearly. The diagrams used are as
follows:

• Bar Diagram
• Line graph

1.6.5.1 Financial tools.

a. Total Loans to Total Deposit Ratio The loan to deposit ratio (LDR) is used to
assess a bank’s liquidity by comparing a bank’s total loans to its total deposit
for the same period. It is expressed as a percentage.
 11

The formula for LDR is:

LDR = Total Loans/Total Deposit
b. Non-Performing Loans to Total Loans Ratio,

This ratio is calculated by the formula:

Non-Performing Loans to Total Loans Ratio = Non-performing loan /Total loan

c. Loan Loss Provision to Non-Performing Loan Ratio,

The ratio is calculated by the formula
Loan Loss Provision to Non-Performing Loan Ratio = Loan Loss Provision/
Nonperforming loan

d. Loan Loss Provision to Total Loans Ratio, The

ratio is calculated by the formula:
Loan Loss Provision to Total Loans Ratio = Loan Loss Provision /Total loan

e. Return on Loan and Advances Ratio,

The ratio is calculated by the formula
Return on Loan and Advances Ratio = NPAT/ Loans and Advance*100

f. Interest Income on Loans and Advances Ratio

The ratio is calculated by the formula
Interest Income on Loans and Advances Ratio = Interest Income/Loans and
Advance

g. Total Interest Expenses to Total Deposit and Borrowing Ratio

The ratio is calculated by the formula

Total Interest Expenses to Total Deposit and Borrowing Ratio = Total Interest
Expenses/ Total Deposit and Borrowing

h. Capital Adequacy Ratio

Capital Adequacy is used to describe the adequacy of capital resources of the bank in
the relation to the risk associated with its operations.
 12

The commercial banks are required to maintained 11% of Capital Adequacy in form of
5.5% in core capital and supplementary capital is to be maintained.

Capital Adequacy Ratio = [(core capital+ supplementary capital)/total Risk weighted

assets]*100

i. Risk Weighted Assets

The risk-weighted value of category of assets is determined by multiplying the nominal
value of the category as per the balance sheet with the risk weight assigned thereto.

1.6.5.2 Statistical tools. The statistical tools used for data analysis are:

a. Mean
A mean is the average value or the sum of all the observation divided by the number of
observations and it is given by the following formula:

∑X
Mean (X) = n

b. Standard Deviation(SD)
The measurement of the slatterns of the mass of the figures in a series about an average
is known as dispersion. The standard deviation measures the absolute dispersion.
Means a high degree of uniformity of the observations as well as homogeneity of the
series, a large standard deviation means just the opposite. In this study standard
deviation of different ratios are calculated as under:
2

Standard = Deviation (

where,

∑(X−X) 2
= Sum of square of deviation from mean n = No. of observations

∑X =Summation of the values

N= No. of Observation
 13

c. Coefficient of Variation(CV)

Times coefficient of SD is called of variation. It is denoted by C. V. Thus,

Formula,
S. D.
C.V =
X

1.7 Limitations of the Study

Limitations of this study are as follows:

➢ This study covers limited dimensions of the subject matter.
➢ This study uses only ratio analysis as a technique for analysis of credit
management by Saptakoshi development bank
➢ This study covers only five fiscal years’ historical data of Saptakoshi
development bank Limited.

1.8 Chapter Plan

This study is organized in three chapters:

Chapter I: Introduction
The first chapter of this study includes general background, statement of problems,
objectives of the study, significance of the study, research methodology, review of
literature Limitations of the Study and Organization of the Study.

Chapter II: Results and Analysis

The chapter deals with presentation of the data using appropriate tables and figures and
their interpretation.

Chapter III: Summary and Conclusion

This chapter includes the brief sketch of the study, conclusion and implications of the
study.
 14

CHAPTER TWO RESULT AND ANALYSIS

2.1 Ratio Analysis

2.1.1 Total loans and advance to total deposit (credit to deposit ratio)

As per NRB this ratio must be kept 80% or below. The ratio is below:

Table 2. 1: Total Loans and Advance to Total Deposit (Credit to Deposit Ratio)

(Amount in Rs.’000)

Year Total Loan and Advance Total Deposit Ratio

2076/77 56,203,077 75,388,790 74.55%

2077/78 67,161,671 104,237,910 64.43%

2078/79 77,730,402 110,267,271 70.49%

2079/80 91,491,252 118,896,156 76.95%

2080/81 100,773,771 134,571,083 74.88%

Mean 72.26%

S.D 4.96

C.V% 6.86

Source: Annual Report of Saptakoshi development bank ltd (Appendix).

Table 2.1, shows that Saptakoshi development bank ltd has every year been lending its
money staying in the safe side. As per NRB directives all the bank should not exceed
more than eighty percentages of its total deposit, after economic recession suffered
worldwide as they were investing more money in the real state same scenario was in
our country as well, as to protect from same NRB published unified directives 2067,
starting that who has cross the limit should reduce to 80%.
 15

Loans and Advances to Total Deposit Ratio

78 76.95
76 74.55 74.88
74
72 70.49
70
68
SDBL
66 64.43
64
62
60
58
2076/77 2077/78 2078/79 2079/80 2080/81
Years

Figure 2.1: Loans and Advances to Total Deposit Ratio.

Figure 2.1, shows that loans and advances to total deposits of the Saptakoshi
development bank ltd, which is fluctuating over five years. The higher ratio is 76.95%
in the FY 2079/80. The lowest ratio is 64.43% in the FY 2077/78. The analysis shows
that the bank is mobilizing its total deposits in loan and advances adequately.

2.1.2 Non- performing loan to total loans and advances ratio

Higher the ratio implies the bad quality of assets of banks in the form of loans and
advances. Hence the lower NPL to credit ratio is preferred. Table 2.2: Non-
Performing Loan to Total Loans and Advances Ratio
(Amount in Rs. ‘000)
Year Non-Performing Loans & Advances Ratio
Loan
2076/77 1,256,075 54,691,648 2.29%
2077/78 1,220,819 65,501,925 1.86%
2078/79 8,890,354 76,106,016 11.68%
2079/80 7,280,590 89,877,125 8.10%
2080/81 8,175,012 100,773,771 8.11%
Mean 6.408
S.D. 4.218
C.V.% 65.82
Source: Annual Report of Saptakoshi development bank ltd (appendix).
 16

Table 2.2, the highest ratio is 11.56% in FY 2077/78 and the lowest ratio is 1.86 in the
F/Y2080/81. Their mean is 6.408.

Non- Performing Loan to Total Loans and Advances Ratio

14

12

10

SDBL
6

0
2076/77 2077/78 2078/79 2079/80 2080/81
Year

Figure 2.2: Non- Performing Loan to Total Loans and Advances Ratio
From figure, we can understand higher the non-performance loan less the profit the
bank get. As we can see from the data above it has fluctuating ratio every year. The
highest ratio is 11.68% in the fiscal year 2078/79 And the lowest ratio is 1.68% in
FY2077/78.

2.1.3 Non- performing loans to loan loss provision ratio

Loan loss provision is the compulsion factor in lending practices and non–performing
loan is the evil factor in banks. If they are high, then they will decrease the amount of
profit which the bank target to receive.

Table 2.3: Loan to Loan Loss Provision Ratio Non-Performing

(Amount in Rs.’000)

Year Non-Performing Loans Loan Loss Provision Ratio

 17

2076/77 1,256,075 53,984,408 2.32%

2077/78 1,220,819 65,940,851 1.85%

2078/79 8,890,354 76,841,366 11.56%

2079/80 7,280,590 90,768,819 8.02%

2080/81 8,175,012 111,784,235 7.31%

Mean 6.212

SD 4.100

CV% 0.66

Source: Annual Report of NABIL

Table 2.3 loss loan provision is the compulsory part of the bank since they maintained
at least 1% as a provision from the outstanding balance of any type of loan. the non-
performing loan holds only the portion of loan loss provision amount.

Non-Performing Loan to Loan Loss Provision Ratio

14

12

10

0
2076/77 2077/78 2078/79 2079/80 2080/81
Year

Figure 2.3: Non-Performing Loan to Loan Loss Provision Ratio

Figure 2.3 shows that in the bank ratio is in decreasing trend till 2076/77 and increases
in the FY 2078/79 then decreasing in increase rate in the FY 2079/80 as well as in
2080/81. The highest and lowest ratio are 11.56% and 1.85% respectively.
 18

2.1.4 Loan loss provision to total loans and advances ratio

Loan loss provision is the summation of provision made against all type of loan as per
the NRB directives. Loan loss provision, in the fact is the cushion against future
contingency created by the default of the profit loss A/c and definitely decreases the
profit of the bank.

Table 2.4: Loan loss provision to total loans and Advance Ratio

(Amount in Rs.’000)

Year Loan Loss Provision Loans and Advances Ratio

2076/77 53,984,408 54,691,648 0.987

2077/78 65,940,851 65,501,925 1.006

2078/79 76,841,366 76,106,016 1.009

2079/80 90,768,819 89,877,127 1.010

2080/81 111,784,235 100,773,771 1.109

Mean 1.0242

SD 0.048

C.V% 4.68

Source: Annual Report of Saptakoshi development bank ltd (appendix)

Table 2.4 shows the loan loss provisions to total loans and advances of Saptakoshi
development bank Ltd. Of five years i.e. from 2080/81 to 2080/81. The ratio of SDBL
is 0.987%, 1.006%, 1.009%, 1.010% and 1.109% for 2076/77, 2077/78, 2078/79,
2079/80 and 2080/81 respectively. The average ratio is 1.0242%, standard deviation is
0.048% and C.V. is 4.68%.

According to NRB provisioning loan of each types due up to 3 months (1 day- 90 days
is categorized (pass/performing category) the provisioning for 1% of outstanding loan
amount, 3 months to 6 months (91 days- 180 days) due loan is categorized (substandard
 19

category) the provisioning for 25 % outstanding loan amount. Similarly, 6 months to 1

year (181days-365 days) due loan need to be provisioned under (doubtful category) for
50% of outstanding loan amount and for more than 1-year loan due 100% of
outstanding balance is provisioned under (bad category) to loan loss provision.

Loan Loss Provision to Total Loans and Advance Ratio

1.12
1.1
1.08
1.06
1.04
SDBL
1.02
1
0.98
0.96
0.94
0.92
2076/77 2077/78 2078/79 2079/80 2080/81

Figure 2.4: Loan Loss Provision to Total Loans and Advance Ratio
Figure 2.4 shows the loan loss ratio has increasing trend. It has higher ratio 1.109% in
FY 2080/81 and lowest ratio is 0.987 in FY2076/77. Higher ratio of loan loss provision
doesn’t sound good and lower ratio represents better performance of the bank.

2.1.5 Return on loans and advances ratio

Net profit refers to that profit which is obtained after all types of deduction like
employee bonus, tax, provision etc. Higher the ratio better is the performance of the
bank. This ratio is calculated by dividing net profit of the bank by total loan and
advances.

Table 2.5: Return on loans and advances ratio

(Amount in Rs. ‘000)
 20

Year NPAT loans and advance Ratio

2076/77 2,331,446 54,691,648 4.26%

2077/78 2,093,813 65,501,925 3.20%

2078/79 2,819,333 76,106,016 3.70%

2079/80 3,613,200 89,877,127 4.02%

2080/81 4,021,317 100,773,771 3.99%

Mean 3.834

SD 0.406

C.V% 10.58

Source: Annual Report of Saptakoshi development bank ltd (appendix)

Table 2.5 shows that return on loans and advances ratio are 4.26%, 3.20%, 3.70%,
4.02% and 3.99% for 2076/77, 2077/78, 2078/79 , 2079/80 and 2080/81 respectively.
The mean ratio is 3.834%, standard deviation is 0.406% and C.V. is 10.58%.

Return on loans and advances ratio

4.5
4
3.5
3
2.5
2 SDBL
1.5
1
0.5
0
2076/77 2077/78 2078/79 2079/80 2080/81
Year

Figure 2.5: Return on loans and advances ratio

 21

Figure 2.5 clearly shows the ratio of return on loan and advance of Saptakoshi
development bankLtd is fluctuating trend. In five-year study period, it takes highest
ratio 4.26% in the fiscal year 2076/77 and lowest ratio of 3.20% in fiscal year
2077/78.

2.1.6 Interest income on loans and advances ratio

Interest income to loan and advance ratio is defined as the ratio of total interest income
to total loan and advance. This ratio measures the percentage of total interest of total
interest income against total loan and advance. A high ratio indicates higher income on
total loan and advances.

Table 2. 6: Interest Income on Loans and Advance

(Amounts in Rs. ‘000)

Year Interest income Loans and Advances Ratio

2076/77 5,636,158 54,691,684 10.30%

2077/78 5,762,345 65,501,925 8.79%

2078/79 6,155,660 76,106,016 8.08%

2079/80 8,065,591 89,877,127 8.97%

2080/81 11,386,498 100,773,771 11.30%

Mean 9.488

SD 1.292

C.V% 13.61

Source: Annual Report of Saptakoshi development bankltd (appendix)

 22

Table 2.6 shows that interest income on loans and advance ratio are 10.30%, 8.79%,
8.08%, 8.79% and 11.30% for 2076/77, 2077/78, 2078/79 , 2079/80 and 2080/81
respectively. The mean ratio is 9.488%, standard deviation is 1.292% and C.V. is
13.61%.

Interest Income on Loans and Advance

12

10

0
2076/77 2077/78 2078/79 2079/80 2080/81
Year

Figure 2. 6: Interest Income on Loans and Advance

Figure 2.6 shows the mean interest income ratio of five years of SAPTAKOSHI
DEVELOPMENT ltd is 11.30. Interest income is directly proportional to loans and
advances. If loan and advances increased, then interest income also increased and vice
versa. In case of Saptakoshi development bank ltd., comparing the data of five-year
interest income is first decreasing and then increasing.

2.1.7 Total interest expenses to total deposit and borrowing ratio

Interest paid to total deposit and borrowing ratio is defined as the ratio of total of total
interest paid to total deposit and borrowing. This ratio measures the percentage of the
total interest expenses against total deposits and borrowing. A high ratio indicates
higher expenses on total deposit and borrowing.
 23

Table 2.7: Total Interest paid to Total Deposit and Borrowing Ratio (%)
(Amount in Rs 000’)

Year Interest Paid Deposit and Borrowing Ratio

2076/77 1,939,745 75,388,790 2.57%

2077/78 2,236,281 104,237,910 2.14%

2078/79 1,829,689 110,267,271 1.65%

2079/80 2,606,090 118,896,156 2.20%

2080/81 5,082,712 134,571,083 3.77%

Mean 2.466

SD 2.446

C.V% 99.18

Source: Annual Report of Saptakoshi development bankLtd (Appendix)

Total Interest paid to Total Deposit and Borrowing Ratio (%)

4

3.5

2.5

1.5

0.5

0
2076/77 2077/78 2078/79 2079/80 2080/81
Year
 24

Figure 2.7: Total Interest paid to Total Deposit and Borrowing Ratio (%)

Figure 2.7, we can see that Saptakoshi development bankLtd. have able to maintained
total interest paid to total deposit and borrowing ratio. It has its highest ratio of 3.77.in
fiscal year 2080/81 and lowest ratio of 1.65% in fiscal year 2077/78.
2.1.8 Capital adequacy ratio

The capital adequacy ratio (CAR) is a measure of a bank’s capital. It is expressed as a

percentage of a bank’s risk weighted credit exposures. Also known as capital- to-risk
weighted assets ratio (CRAR), it is used to protect depositors and promote the stability
and efficiency of financial system around the world. Two types of capital are measured:

• Tier one capital which can absorb losses without a bank being required to
cease trading
• Tier two capital which can absorb losses in the event of a winding –up and
so provides a lesser degree of protection to depositors.
Capital Adequacy is to maintain sufficient capital fund in consideration with total risk
weight exposure.

Table 2. 8: Capital Adequacy Ratio (%)

(Amount in Rs. ‘000)

Year Total Capital Fund Risk Weighted Exposure Ratio

2076/77 8,302,904 73,854,239 11.24%

2077/78 10,154,456 87,766,260 11.56%

2078/79 12,203,614 104,039,643 11.72%

2079/80 14,752,688 118,827,902 12.40%

2080/81 18,710,876 143,877,440 13.00%

Mean 11.984

SD 0.70
 25

C.V% 5.84

Source: Annual Report of Saptakoshi development bank ltd (appendix)

Table 2.8 shows that Saptakoshi development bank Ltd has been meeting minimum
required capital adequacy. However, as we discussed earlier that bank and financial
institutions are only meeting minimum standards, if they truly want to minimize risk
and have sound financials then they have to go beyond the expectations of the NRB.
In above figure, we can see sample banks ratio are hovering around the required
minimum criteria posed by NRB i.e. 11%. The higher the capital adequacy ratio, the
higher the level of protection available to depositors. Saptakoshi development bank Ltd
is able to maintain higher capital adequacy ratio on 2080/81.

Capital Adequacy Ratio

13.5
13
12.5
12
11.5 SDBL

11
10.5
10
2076/77 2077/78 2078/79 2078/79 2080/81
Year

Figure 2. 8: Capital Adequacy Ratio

Figure 2.8 shows the capital adequacy ratio of Saptakoshi development bankof five
years from 2076/77 to 2080/81. This ratio is in increasing trend and it has fulfilled the
capital adequacy requirement as required by NRB Regulation.

2.2 Secondary Data and Analysis

Table 2. 9: Question No 1
SN Credit worthiness Frequency %
 26

1 Credit Portfolio View 3 15

2 Equity Based Approach 10 50
3 Rating Based Approach 7 35
Total 20 100
Table 2.9, reveals the significant indicator of credit worthiness of SAPTAKOSHI
DEVELOPMENT ltd between credit portfolio view, equity based approach, rating
based approach. 10 out of 20 respondents are in the favor of equity based approach.7
out of 20 respondents are in the favor of rating based approach.3 7 out of 20 respondents
are in the favor of credit portfolio view. As per the response, equity based approach is
more significant than other approach.

1. Which of the below model are employed by the banks to identify credit worthiness
of customer?

Question No 1
Credit Portfolio View Equity Based Approach Rating based approach

15 %

35 %

50 %

Figure 2. 9: Model Employed by the Banks to identify Credit Worthiness of customer

Figure 2.9, reveals the credit worthiness of Saptakoshi development bank Limited. The
highest percentage is 50% of equity based approach and lowest percentage is 15% of
credit portfolio view. It means that equity based approach is employed by the bank to
identify credit worthiness of customer.

Table 2. 10 Question No 2

SN Response Minimum Credit Off balance

 27

1 Yes 15 17 10

2 No 5 3 10

Total 20 20 20

In the above table, reveals positive response regarding the question. The respondent of
Saptakoshi development bank Ltd indicated in the favor of “yes” rather than “no”.
a. Is the minimum capital asset ratio requirement risk weighted in line with the base
II guidelines?

Question No 2a
yes No

25 %

75%

Figure 2. 10: Response on fulfillment of Capital Adequacy requirement

In the diagram, 75% says “yes” ,25 % say “no”. It represents that there is minimum
capital assets ratio of Saptakoshi development bank ltd.

b. Is credit risk policy part of the company –wide capital management strategy?
 28

Question No 2b
Yes NO

15 %

85 %

Figure 2. 11: Response on Credit Risk Policy as a part of Company-wide Capital

Management Strategy.
In the diagram, 85% says “yes”, 15% says “no”. It represents that there is credit risk
policy part of the company –wide capital management Strategy.

c. Is adequate capital reserve maintained on off –balance sheet risks?

Question No 2c
Yes No

40%

60 %

Figure 2. 12: Capital Reserve Maintained on and offBalance Sheet Risks.

In the diagram, 60% says yes, 40% says No. It represents that there is adequate capital
reserve maintained on off –balance sheet risks.

Table 2. 11 Question No. 3

 29

SN Risk Management Frequency

1 Reporting regular, formal basis 10

2 Continuous Management Reporting 9
3 Not reported at all 1

Total 20

Table, reveals the risk management of Saptakoshi development bank ltd between
reporting regular, continuous management reporting, not reported at all. Highest
frequency is 10 of reporting regular and the lowest frequency is 1 of not reported at all.

3. Which of the following best describe the way credit risk management is reported
within your organization?

Question No 3
Regular Continuous Not report at all

5%

50 %
45 %

In the diagram, reveals the best way of credit risk management is reporting takes places
on a regular, formal basis and worst reporting is not at all.
 30

2.3 Major Finding

From the above analysis of credit risks, following major finding have been obtained:

• The average loans and advances to total deposit ratio of 72.26% reveals that every
year its lending is in the safe side because as per NRB directives all the bank should
not exceed more than eighty percentage of its total deposit , after economic
recession suffered worldwide as they were investing more money in the real state
same scenario was in our country as well ,as to protect from same NRB published
unified directives 2067 , starting that who has cross the limit should reduce to 80%.
So it has maintained liquidity position is somehow in good condition
• High non- performing loan of 6.408% in average, indicates lower credibility of the
borrowers. This means, there has been some inefficiency in the lending, which has
resulted in non-payment of interest and principal by the borrower.
• The non-performing loan holds only small portion of loan loss provision amount
which is better for the profitability of the bank.

• The average loan loss provision to total loans and advances ratio of 1.0242% is not
that high so it represents better performance of the bank.
• The average return on loans and advances ratio is 3.834% which is not high enough
so it means the performance of bank is not that satisfactory.
• The average interest income to loans and advances ratio is 9.488%. It has its highest
ratio of 11.30%.in fiscal year 2080/81 and lowest ratio of 8.08% in fiscal year
2077/78. High ratio indicates higher income on total loans and advances.
• The average interest paid to total deposit and borrowing ratio is 2.466%. It has its
highest ratio of 3.77.in fiscal year 2080/81 and lowest ratio of 1.65% in fiscal year
2077/78. The higher ratio indicates higher expenses on total deposit and borrowing.
• The average capital adequacy ratio of 11.984% represents that the bank has
maintained capital as per requirement of NRB Directives i.e. minimum 11%.
• Credit risk is one of the most important risks that a manager should deal on. Dealing
with it required extensive knowledge and experiences. Lack of systematic and
through credit processing is also the major source of the credit risk in these banks.
The problems in credit processing include lack of through credit assessment,
 31

absence of testing and validation of new lending techniques, subjective decision

making by senior management, lack of effective credit review process, failure to
monitor borrowers or collateral values, and failure of banks to take sufficient
accounts of business cycle effects etc.
• As per the primary data collected from the questionnaire, equity based approach is
more significant approach to identify credit worthiness of the customer, the
minimum capital asset requirement is risk weighted in line with the base II
guidelines, the credit policy is part of company-wide capital management strategy
and the capital reserve maintained on and off Balance sheet risks. It also reveals the
best way of credit risk management is reporting takes places on a regular than
formal basis or reporting is not at all basis.
CHAPTER THREE SUMMARY AND CONCLUSIONS
3

3.1 Summary

Banks are always faced with different types of risks that may have a potentially negative
effect on their business. Risk –taking is an inherent element of banking and, indeed,
profits are in part the reward for successful risk taking in business. On the other hand,
excessive and poorly managed risk can lead to losses and thus endanger the safety of a
banks depositor. Risks are considered warranted when they are understandable,
measurable, controllable and within a banks capacity to readily withstand adverse
results. Sound risk management systems enable managers of banks to take risks
knowingly, reduce risks where appropriate and strive to prepare for a future, which by
its nature cannot be predicted.

For the analysis of the data various financial ratios, average, trend analysis, correlation
coefficient graph and tables were used to obtain a clear performance of the bank. A
trend analysis was used to forecasting the future trend of bank’s performance and
correlation analysis was used to investigation the relationship between different
variable. The financial and statistical analyses are summary as below

The loan and advances to total deposit ratio of Saptakoshi development bank ltd in an
average of 2.906% of the study period. The analysis shows that the bank is mobilizing
 32

its total deposit in loan and advance adequately and it has efficiently utilized its total
deposit for loan and advances. Higher ratio reveals that it is efficient to utilize the
financial resources in productive sectors.

Loan loss provision ratio of Saptakoshi development bank ltd is an average of 32% in
the study period. It means loan loss provision of bank is in decreasing trend and which
shows that the bank is able to maintain the good ratio of loan loss provision.

The liquidity position of this bank is satisfactory but there is inefficiency in lending.
The profitability position and overall performance is good. As per the primary data
collected from the questionnaire, equitybased approach is more significant
approach to identify credit worthiness of the customer, the minimum capital asset
requirement is risk weighted in line with the base II guidelines, the credit policy is
part of company-wide capital management strategy and the capital reserve
maintained on and offbalance sheet risks. It also reveals the best way of credit risk
management is reporting takes places on a regular than formal basis or reporting is
not at all basis.

3.2 Conclusion

The analysis concludes that a bank uses various credit management technique, method,
tools etc. and assessment modules to handle credit risks faced by them, moreover they
occupy one common objective that is to lessen the amount of the loan default which is
principal cause of the bank failure in the short and Long term planning in concern with
credit.

Some of the conclusion of the study are as below:

➢ The study showed that profitability ratio is in fluctuating trend which indicates
the bank is not in good condition.
➢ The study showed that the credit allocation by the bank to the Nepalese
economy has been on a rising trend for the last seven years. However, this
laudable credit expansion drive is being threatened by increases in
nonperforming loan.
 33

REFERENCES

Websites:

Saptakoshi development bankLTD. (2080/81-2076/78); Annual report available

www.google.com
www.investopedia.com
www.gartner.com
www.accountingtools.com
www.corporatefinanceinstitute.com
www.cleartax.in
www.researchguides.ben.edu previously prepared research reports, magazines,
books, journals, websites etc.
www.nrb.or.np
www.merolagani.com
www.wikipedia.org
smartwealthpro.com sharesansar.com
Gibson and Boyer "Financial Management Analysis’’ CBI publishing Co.inc
Boston 1979p189. J.F Weston and E.F Bringham "Managerial Finance" lllionis
Rryden press 1978-150.
 34

APPENDIX