10
CHAPTER- II
RESULTS & FINDINGS
The analysis is fully based on secondary data. In presentation section, data are
presented in terms of table and charts. The presented data are then analyzed using
different statistical tools mentioned in chapter three. At last, the results of analysis are
interpreted. Though there is no distinct line of demarcation for each section (like
presentation section, analysis section & interpretation section). The main purpose of
analyzing data is to change it from an unprocessed from to an understandable
presentation which consists of organizing, tabulating and performing the statistical
data. The presentation of data is the basic organization and classification of the data
for analysis. This is the section where, the filtered data are presented and analyzed.
This is one of the major chapters of this study because it includes detail analysis and
interpretation of data from which concrete result can be obtained. This chapter
consists of various calculation made for the analysis of credit risks of the sample
bank. To make our study effective, precise and easily understandable, this chapter is
categorized in three parts; presentation, analysis and interpretation. In this thesis
primary data, which is collected through questionnaires and personal interview with
the various staffs, are also used equally.
2. Presentation and Analysis of Data with Tables and Figures
Credit Risk Management
Financial analysis is the process of identifying the financial strength and weakness of
a firm by properly establishing relationship between the items of the financial
statements. Analysis and the interpretation of the various ratios should give
experienced, skilled analyst and a better understanding of the financial condition and
performance of the firm than they would obtain from the analysis of the financial data
alone.
Credit Deposit Ratio is calculated as total loans & advances to total deposit ratio.
Banks receive fund as deposits from the public so that to mobilize it in terms of loans
& advances to generate the interest as income. It is the ratio that measures the banks
efficiency in mobilizing deposit collected from public. In another word, CD ratio is
the fundamental parameter to ascertain fund deployment efficiency of commercial
11
banks. Greater the CD ratio implies better the mobilization of deposits and vice-versa.
Hence, higher the ratio is preferred as per the directives issued by the NRB;
commercial banks should classify their loan in terms of pass loan, substandard loan,
doubtful loan and loss loan. Hence, the loans falling in the category of substandard,
doubtful and the loss loan are considered as nonperforming loan. Increase in the NPL
results higher volume of loan loss provision and of course deduction in the banks
profit. That’s why, NPL could not only affect the banking operation but also it has
serious implication in the economic performance of the country. This ratio NPL to
total loan & advances implies the proportion of the NPL in the bank’s loan portfolio.
Meaning that, higher the ratio represents higher portion of NPL and vice-versa.
Hence, lower the ratio preferred the best.
Non-Performing Assets to Total Loans and Advances Ratio
Nonperforming assets are income-generating assets, including loans that are past due
for 90 days or more. Here, non-performing assets are cash and bank balance, Money
at call and short notice, investments, Loan and advances etc. As the ratio rise, the
institution’s credit risk grows, and institution may be failure
Table 2.1 Non-Performing Assets to Total Loans and Advances Ratio
Fiscal Year NPA Total Loans Ratio (in %)
2076/77 2,108,499,000 53,388,387,872 3.95
2077/78 2,044,310,000 63,524,487,254 3.22
2078/79 2,354,245,000 74,372,886,596 3.17
2079/80 2,308,843,000 78,508,183,082 2.94
2080/81 2,514,857,000 95,724,917,509 2.63
(Source: Annual Report from 2081)
The table 2.1 shows detail of Non-Performing Assets and Total Loans and
Advances of Global IME Bank Ltd for five consecutive years. And their ratio is
found in the third column. The ratio of GIBL is higher during fiscal year 2076/77.
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However, the ratio has drastically decreased during the fiscal year 2077/78 and
2079/80. The ratio has slightly decreased during the fiscal year 2078/79.
120,000,000,000
100,000,000,000
80,000,000,000
60,000,000,000 NPA
Total Loans
40,000,000,000
20,000,000,000
0
2076/77 2077/78 2078/79 2079/80 2080/81
Figure 2.1 Non-Performing Assets to Total Loans and Advances Ratio
The table 2.1 and figure 2.1 shows that the Non-Performing Assets to Total Loans
and Advances Ratio of Global IME Bank Ltd for five consecutive years. And their
ratio is found in the third column. The ratio of GIBL is higher during fiscal year
2076/77. However, the ratio has drastically decreased during the fiscal year 2077/78
and 2079/80. The ratio has slightly decreased during the fiscal year 2078/79.
Annual Provision for Loan Losses to Total Loans
If the loans losses come to exceed equity capital, the institutions credit risk will
overwhelm the owners’ stake in the firm and it will collapse. The ratio annual
provision for loan losses to total loans shows the risk of bank’s loan. Higher ratio
shows the more risk on credit.
Table 2.2 Annual provision for loan losses to total loans
Loan Loss
Fiscal Year Total Loan Ratio (in %)
Provision
2076/77 2,315,104,000 53,388,387,872 4.34
2077/78 2,193,056,000 63,524,487,254 3.45
2078/79 2,354,245,000 74,372,886,596 3.17
2079/80 2,447,075,000 78,508,183,082 3.12
13
2080/81 2,514,857,000 95,724,917,509 2.63
(Source: Annual Report from 2081)
The table 2.2 shows that the Annual provisions for loan losses to total loans loan. The
ratio annual provision for loan losses to total loans shows the risk of bank’s loan.
Higher ratio shows the more risk on credit. The ratio of total loan loss provision to
total loan has remained slightly less during the previous years. The ratio has been
gradually decreasing since past consecutive five years.
120,000,000,000
100,000,000,000
80,000,000,000
Amounts
60,000,000,000
Loan Loss Provision
Total Loan
40,000,000,000
20,000,000,000
0
2076/77 2077/78 2078/79 2079/80 2080/81
Fiscal Year
Figure 2.2 Annual provisions for loan losses to total loans loan
The table 2.2 and figure 2.2 shows that the Annual provisions for loan losses to total
loans loan. The ratio annual provision for loan losses to total loans shows the risk of
bank’s loan. Higher ratio shows the more risk on credit. The ratio of total loan loss
provision to total loan has remained slightly more during the previous years. The
ration has been gradually decreasing since past consecutive five years.
Market risk Management
Market risk refers to the risk to a bank resulting from movements in market prices, in
particular, changes in interest rates, foreign exchange rates, and equity and
commodity prices. Market risk is defined as the risk of losses in on and off balance
sheet positions arising from movements in market prices.
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Market risk and specific risk make up the two major categories of investment risk.
The most common types of market risks include interest rate risk, equity risk,
currency risk and commodity risk.
Publicly traded companies in the United States are required by the Securities and
Exchange Commission (SEC) to disclose how their productivity and results may be
linked to the performance of the financial markets. This requirement is meant to detail
a Bank's exposure to financial risk. For example, a Bank providing derivative
investments or foreign exchange futures may be more exposed to financial risk than
companies that do not provide these types of investments. This information helps
investors and traders make decisions based on their own risk management rules.
In contrast to market risk, specific risk or "unsystematic risk" is tied directly to the
performance of a particular security and can be protected against through investment
diversification. One example of unsystematic risk is a Bank declaring bankruptcy,
thereby making its stock worthless to investors.
Risk and Return Ratio
Risk and Return analysis is also called Net Profit to Loan and Advance Ratio. Return
on loan and advances ratio indicates how efficiently the bank has utilized its resources
in the form of loan and advances to generate good return. It measures the earning
capacity of a commercial bank. This ratio is calculated by dividing net profit by loan
and advances.
Table 2.3 Net Profit to Loan and Advance Ratios
Loan and
Fiscal Year Net Profit Ratio (in %)
Advance
2076/77 483,848,520 50,970,857,910 0.95
2077/78 2,882,978,165 61,250,072,485 4.71
2078/79 3117893760 71,745,887,800 4.35
2079/80 3,215,681,985 76,152,980,082 4.22
2080/81 2,596,736,045 92,421,637,259 2.81
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(Source: Annual Report from 2081)
The table 2.3 shows net profit to loan and advances ratio. The ratio is highest in the
fiscal year 2077/78. The bank is utilizing its deposit effectively. The ratio ranges from
2-4 % which indicates consistency in bank’s profit in regard to its loan and advances.
100,000,000,000
90,000,000,000
80,000,000,000
70,000,000,000
60,000,000,000
Amounts
50,000,000,000
Net Profit
40,000,000,000
Loan and advance
30,000,000,000
20,000,000,000
10,000,000,000
0
2076/77 2077/78 2078/79 2079/80 2080/81
Fiscal Year
Figure 2.3 Net Profit to Loan and Advances Ratio
The table 2.3 and figure 2.3 shows net profit to loan and advances ratio. The ratio is
highest in the fiscal year 2077/78. The bank is utilizing its deposit effectively. The
ratio ranges from 2-4 % which indicates consistency in bank’s profit in regard to its
loan and advances.
Liquidity Risk Management
It is the applicable to measure the ability of the firms to meet short term obligations.
As name denotes the liquidity refers to the ratio between liquid assets and liability.
The ability of firm to meet its obligation in the short term is known as liquidity. It
reflects the short-term financial strength of the business. In order to ensure short term
solvency, the Bank must maintain adequate liquidity. But liquidity ratio must be
optimum. If the Bank maintain unnecessary high liquidity ratio then it may adversely
affect in the profitability of the Bank, which can lose the opportunity to earn high
profit, means everybody knows that investing all assets in safe liquid assets doesn’t
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have a good return. As well as, high liquidity may unnecessarily tie up in the current
assets.
Liquidity Risk Ratios
High ratio indicates the liquidity position is good. Low ratio indicates the liquidity
risk is high i.e. there is liquidity problem. To overcome the liquidity problem, the
financial institution can increase a bank’s cash and readily marketable assets, such as
government securities, or using long term liabilities to fund the bank’s operations.
This ratio is low if funds are kept idle as cash and bank balance but this reduces
profitability. When the bank makes loan, its profitability as well as risk will be
increase. Thus, higher liquidity ratio indicates less profitable return and vice-versa.
Table 2.4 Liquidity Risk Ratios
Cash and
Fiscal Year Government Total Assets Ratio (in %)
securities
2076/77 19,466,132,000 88,211,085,964 22.07
2077/78 22,349,774,491 103,479,534,057 21.60
2078/79 14,429,342,957 112,057,149,438 12.88
2079/80 18,508,483,315 133,467,201,000 12.49
2080/81 23,637,095,168 171,515,645,958 13.78
(Source: Annual Report from 2081)
The table 2.4 shows the liquidity ratio of Global IME Bank Ltd from the fiscal year
2076/77 to 2080/81. Higher liquidity ratio shows good position of liquidity. The
liquidity position has been consistent during the five fiscal years. The liquidity
position has been highest during the fiscal year 2076/77 and has been decreasing till
2079/80. However, it has slightly increased during the fiscal year 2080/81.
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200,000,000,000
180,000,000,000
160,000,000,000
140,000,000,000
120,000,000,000
Amounts
100,000,000,000
Cash & Gov. Securities
80,000,000,000
Total Assets
60,000,000,000
40,000,000,000
20,000,000,000
0
2076/77 2077/78 2078/79 2079/80 2080/81
Fiscal Year
Figure 2.4 Liquidity Risk Ratio
The table 2.4 and figure 2.4 shows the liquidity ratio of Global IME Bank Ltd from
the fiscal year 2076/77 to 2080/81. Higher liquidity ratio shows good position of
liquidity. The liquidity position has been consistent during the five fiscal years. The
liquidity position has been highest during the fiscal year 2076/77 and has been
decreasing till 2079/80. However, it has slightly increased during the fiscal year
2080/81.
Loan and Advances to Total Deposit Ratio
The core banking function is to mobilize the funds obtained from the depositors to
borrowers and earn profit and loan and advances to total deposit ratio, often called
Credit Deposit Ratio (CD ratio), is the fundamental parameter to ascertain fund
deployment efficiency of commercial bank. In other words, this ratio is calculated to
find out how successfully the banks are utilizing their total deposits on credit or loans
and advances for profit generating purposes as loans and advances yield high rate of
return. Greater CD ratio implies the better utilization of total deposits and better
earning, however, liquidity requirements also needs due consideration. Hence, 70-
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80% ratio is considered as appropriate. This ratio is calculated by dividing total credit
by total deposits.
Table 2.5 Loan and Advances to Total Deposit Ratio
Fiscal Year Loan and advances Total Deposit Ratio (in %)
2076/77 50,970,857,910 77,998,775,919 65.35
2077/78 61,250,072,485 89,410,018,773 68.50
2078/79 71,745,887,800 93,944,014,252 76.37
2079/80 76,152,980,082 99,540,726,000 76.50
2080/81 92,421,637,259 117,200,788,938 78.86
(Source: Annual Report from 2081)
The table 2.5 shows the loan and advances to total deposit ratio of GIBL. The ratio
has increased significantly in the recent fiscal year. The ratio has increased
continuously during the fiscal year 2076/77, 2077/78, 2078/79, 2079/80 and 2080/81.
140,000,000,000
120,000,000,000
100,000,000,000
80,000,000,000
Amounts
60,000,000,000 Loan and advance
total deposit
40,000,000,000
20,000,000,000
0
2076/77 2077/78 2078/79 2079/80 2080/81
Fiscal year
Figure 2.5 The Loan and Advances to Total Deposit Ratio
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The table 2.5 and figure 2.5 shows the loan and advances to total deposit ratio of
GIBL. The ratio has increased significantly in the recent fiscal year. The ratio has
increased continuously during the fiscal year 2076/77, 2077/78, 2078/79, 2079/80 and
2080/81.
Operational Risk Management
One possible management response is to improve the efficiency of the organization in
managing its resource. This may mean installing new labor saving machinery (such as
computer and automated tellers) to increase the productivity of employees in
processing transactions .it may also mean a conscious decision to expand the overall
size of the organization tom take advantage of any remaining economies of scale.
Operating Expense Ratio (Operational Risk)
Increased efficiency is indicated by how well expenses are controlled relative to
revenues and how productive each employee is in terms of revenues and income
generated, assets managed, and accounts handled Increasing operating expense ratio
shows the management is unable to control the operating expenses and vice versa.
Table 2.6 Operating Expense Ratio
Fiscal Year Operating Expense Operating Revenue Ratio (in %)
2076/77 3,010,092,972 3,865,802,951 77.86%
2077/78 2,873,106,601 5,329,323,673 53.91%
2078/79 3,026,683,639 6,696,105,748 45.20%
2079/80 2,757,737,269 7,520,179,000 36.67%
2080/81 2,749,565,000 7,736,715,790 35.54%
(Source: Annual Report from 2081)
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The table 2.6 shows the operating expense ratio. The operating expense ratio has been
decreasing. Though the revenue has been increasing, the expense has been decreasing
more than proportionately thereby increasing the expense ratio. It shows that
management is able to control the operating expenses and to increase the revenue as
compared with expenses. From this trend, in future, the banks profit will be increase
and finally it will affect the net profit and dividend of GIBL
9,000,000,000
8,000,000,000
7,000,000,000
6,000,000,000
5,000,000,000
Amounts
4,000,000,000 Operating Expenses
Operating revenue
3,000,000,000
2,000,000,000
1,000,000,000
0
2076/77 2077/78 2078/79 2079/80 2080/81
Fiscal year
Figure 2.6 Operating Expense Ratio
The table 2.6 and figure 2.6 shows the operating expense ratio. The operating expense
ratio has been decreasing. Though the revenue has been increasing, the expense has
been decreasing more than proportionately thereby increasing the expense ratio. It
shows that management is able to control the operating expenses and to increase the
revenue as compared with expenses. From this trend, in future, the banks profit will
be increase and finally it will affect the net profit and dividend of GIBL.
Primary Data Analysis
We prepared a list of questionnaire and asked regarding it to some of the staff of
Global IME Bank Ltd. On the basis of their answers we derived following results:
Question 1. Are there mechanisms to identify and react to changes that can have a
dramatic and pervasive effect on the entity, and may demand the attention of senior
management?
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Yes; Number of staff; 6; 6%
To some extent; Number
of staff; 34; 34%
No; Number of staff; 60;
60%
Yes No To some extent Number of staff
As per our survey, 60% of people expressed disagreement, 34% expressed agreement
and rest 6% were not sure and were agreeing on some extent.
Question 2. Do controls exist for approving decisions regarding financing alternatives
and accounting principles, practices, and methods?
Number of staff
To some extent; Number of
staff; 35; 35%
Yes; Number of staff; 60; 60%
No; Number of staff; 5; 5%
Yes No To some extent
As per our survey, 60% of people expressed agreement, 35% expressed agreement
and rest 5% were not sure and were agreeing on some extent.
Question 3. Has management identified and analyzed departmental risks relating to
circumstances such as:
a. Changes in the operating environment?
b. New personnel?
c. New or revamped information systems?
d. Restructurings?
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To some extent; Yes; Number of staff;
Number of staff; 20; 15; 15%
20%
No; Number of staff; 65; 65%
Yes No To some extent Number of staff
As per our survey, 65% of people expressed disagreement, 15% expressed agreement
and rest 20% were not sure and were agreeing on some extent.
2.2. Major Findings
Having completed the basic analysis required for this study, the final and the most
important task of the researcher is to enlist the findings. This will give meaning to the
desired result. A comprehensive summary of the major findings of this study is
presented below. The major findings of the study derived from the analysis of
financial data of GIBL are given below.
i. From annual provision for loan losses to total loan ratios of GIBL, the ratio
has been increasing continuously so we can conclude that GIBL has higher
credit risk.
ii. Operating expenses ratio shows how effectively bank expenses are controlled
related to revenues. The operating expense ratio is less than 100% which
indicates that GIBL is earning operating profit i.e. the operating revenues are
higher than operating expense.
iii. Liquidity ratio of GIBL has been consistent during the past five fiscal years.
There is no significant difference in the consecutive years. The liquidity
position of GIBL is satisfactory
iv. Loan &advances to Total Deposit ratio shows how successfully the banks are
utilizing their total deposits on credit or loans and advances for generating
profit. The ratio has been consistent during the past five fiscal years. The ratio
shows that bank has been utilizing the deposit effectively.
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CHAPTER-III
SUMMARY AND CONCLUSION
This chapter includes summary conclusion & recommendation of the study. The final
and most important task of the researchers is to enlist fact-findings of the study and
give suggestion for further improvement. The analysis is performed with the help of
financial tools and statistical tools. The analysis is associated with comparison and
interpretation. Under financial analysis, various financial ratios related to the risk
management are used and under statistical analysis, some relevant statistical tools are
used.
3.1. Summary
The data collections from various sources are recorded systematically and presented.
Appropriate statistical and financial tools have been applied to analyze the data. The
data of five consecutive years of the bank has been analyzed to meet the objective of
the study. The major risk in GIBL is associated with credit decision as the proportion
of credit risk on total risk is high.
Non-performing assets to total loans and advances ratio shows credit risk of Bank.
Higher ratio of non-performing assets to total loan shows that bank’s earnings and
capital may be at risk. The ratio has been fluctuating in the past five year. However,
the ratio has been mostly increasing threatening the earnings and capital of Global
IME Bank.
Similarly, annual provision for loan losses to total loan also shows the credit risk.
Higher ratio shows more credit risk. The ratio has been increasing continuously since
past five fiscal years. The credit risk of the bank mainly arises due to non-payment of
loan by borrowers, poor appraisal of borrowers of financial condition and collateral.
Poor tracking of borrowers and improper diversification of lending across industries
also result in higher credit risk in commercial banks. From before few years ago
GIBL are victims from non-payment of loan but they are rapidly decreasing their bad
debt.
The analysis of operating risk shows that both banks have the same sort of operation
risk, which includes mainly transactional risk(such as cash shortage, settlement risk
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and document risk) money laundering and system risk. Cash shortage, which arises
due to overpayment by the teller than the requested amount is taken as regular
phenomenon. In GIBL, there exists a provision of teller risk fund to safeguard the loss
against the cash shortage. The daily transaction list are checked and verified by the
compliance department to ensure proper transaction has been made. Likewise,
document risk arises due to transaction against the counterfeit documents .GIBL has
well defined know your customer policy for preventing the money laundering.
Furthermore, operating ratio of GIBL is decreasing as per the analysis of data of past
five years.
The liquidity risk of banks is mainly studied by analyzing such as Liquidity ratio,
Loan and advance to total deposit ratio. Higher liquidity ratio indicates liquidation
position is good but higher liquidity ratio indicates less profitable return and vice
versa. The liquidity ratio of GIBL has remained around 10% to 30%, Loan and
advance to total deposit ratio is calculated to find out how successfully the banks are
utilizing their total deposits on credit. Greater ratio shows better utilization of total
deposit and better earning.70% to 80% is appropriate. It is around 76% for the latest
year.
3.2. Conclusion
Nepal bank ltd. has been majorly facing banking risks such as credit risk, liquidity
risk, operational risk and market risk. Among these risks, credit risk has the major
impact on banking industry, which is more than 60% of total risk. Because the credit
risk Non-Performing Loan (NPL) of bank will increase .With the increase in NPL, the
loan loss provisioning will also increase simultaneously leading to decrease profit.
The decrease in profit results in low dividend to shareholder and bonus to employees.
In credit risk, single sector concentration is main problem in both banks.
Similarly, poor management of asset and liabilities bank may face the liquidity risk,
Interest risk and Operational risk. Similarly, tactfully dealing with market interest
movement by adjusting the interest sensitive asset and liabilities banks can minimize
the Market Risk. If banks have superior management team, long-term strategy & plan
then banks may face the different risk arises from market and within the bank. For
proper management of such risk bank have own set of policies and practices, which is
consistence with NRB guidelines. For credit risk management, banks have credit
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policies guidelines. Similarly, NPL is regularly monitored by both banks on regular
and provisioning is done on quarterly basis by categorizing the loan as per NRB
guidelines. In regard to operational risk, the major steps are taking to reduce it. For
this both banks have preparing and implementing the differential operational
guidelines and policies. Most of these policies are prepared as per NRB guideline.
