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Chapter-1

INTRODUCTION

1.1 ORIGIN AND BACKGROUND OF BANK

There are different opinions on the origin of the bank. Some people trace
its origin to the word "bank" i.e. derived from the Italian word "BANKO"
which means a counter tables or bench used by medieval money
exchangers. Oxford dictionary defines bank as "an establishment of the
custody of money".

A bank is one, who is the ordinary course of his business, receives
money, which he pays by honoring cheques of person from whom or
whose account he receives it.

The origin of modern banking began to develop between 12th and 16th
century in Italy. The first bank was "Bank of Venice", established in 1157
A.D. The second bank was "Bank of Barcelona" of Spain, established in
1401A.D. After this "Bank of Gonea" was established in 1407A.D. The
first central bank was "Bank of England" established in 1844 A.D.

History tells us that it was the merchant banker who first evolved the
system of banking by trading in commodities than money. Their trading
activities required the remittance of money from one place to another.
For this, they issued different documents as the near substitute of money,
called drafts of hundis in modern days.

According to Indian Banking Regulation Act, 1949, the term banking has
been defined as accepting for the purpose of lending or investment of
deposits of money from the public, repayable on demand or otherwise,
with draw able by cheques, drafts order. So, we can say main objectives
of commercial bank is to mobilize ideal resources in productive sector
collected from scattered sources generating handsome profit. Indian
Banking Regulation Act, 1949 section 5(b), defines banking as according
for the purpose of lending or investment, of deposits of money from
public, repayable on demand or otherwise and withdrawal by cheques,
drafts, and order of otherwise.
A bank is organization whose principal operation is concern with the
accumulation of the temporary idle money of general public for the
purpose if advancing to other for the expenditure.

Under section (1) of the Indian banking companies' act 1949; a banking
company is defined as any companies, which transacts the business of
banking.

1.1.1 INTRODUCTION OF BANK

Bank is the financial institution that deals with monetary transaction.
The main function of the bank is to accept deposits and to advance loans.
Banks are also called 'JOINT STOCK BANK' because they are organized
in same manner as a joint stock company. Banks usually advance long-
term, medium- term and short-term loan to the customer.

A bank is a saving mobilization institution, which is established under
the law for dealing with monetary transactions. It accepts deposits of
money from those having saving and grant the loan to the needy person,
businessman and industrialist, against security deposits by charging
interest at some fixed rate percent per annum. Besides this, it is also
involved in agency services, for instance remitting and collecting cash on
behalf of its clients, opening bank draft and letter of credit facilities and
underwriting shares.

Banks collects deposits from the public and lends it to the investors from
which both borrower and depositor get benefited, i.e. depositor get
return in the form of interest on their deposit and borrower can improve
his/her business performance with the borrowed money while the bank
gets spread to earn profit.

Bank also supports the economic growth of the country. Bank can also be
termed as "An intermediary", which bridges the gap between the saver
of the fund and the user of the fund. Nowadays these banks provide
financial as well as non-financial services. The bank is directly or
indirectly associated with all the people in day-to-day transaction. Some
of the definitions of the bank are quoted below for more clarity of its
meaning.

"Banks is an establishment for the custody of the money received from or
in behalf of its customers. Its essential duty is to pay their drafts on it; its
profits arise from its use of the money left unemployed by them." -The
Oxford Dictionary

"A bank is an institution which trades in money and establishment of
deposits, custody and issue of money as also for making loans, discount
and facilitating the transmission of remittances from one place to
another." -Prof. Webster

Banks helps people a great deal in saving. There are certain risks
involved in keeping the money at home such as thief; dacoit's etc. Bank
provides security to the people by keeping people's money safely. It not
only accepts deposits but also even provides loan to different people in
case of necessity. It even provide loan in trade, commerce and industrial
sector. The development of any country to large extent is possible only
with the development of trade, commerce and industry thus helping in
development of the country itself. So, we can say that any financial
institution dealing with money is bank or commercial bank.

Today, the performance of bank signifies how important it is for business,
economic development of the country, development of the manpower etc.
there are number of functions that have to be performed by the bank,
therefore, according to there functions they are classified into different
categories. In Nepal too we have different sectors of economy for e.g.
commercial bank, agriculture bank, development bank etc.

A bank of banker is a company or person carrying on the business of
receiving money and collecting draft for customer, subject to the
obligation of cheque drawn upon then from time to time by the customer
to the extent of the amount available on their current account.

1.1.2 BANKING IN NEPAL

The development of commercial bank has become the basis for
measuring the level of economic development of nation. Bank was an
unknown subject prior to establishment of Nepal Bank Ltd. (NBL) in
1973 A.D. Establishment of NBL was first step toward organized banking
in Nepal. Organized banking history of Nepal is not more than half a
century till yet where as Western countries has centuries old banking
history.
Although organized banking was started only from 1973 A.D., banking
activities in the form of lending & borrowing were existed among people
even before 8th century.

Nepal Bank Ltd. was first organized bank in Nepal. The process was
followed by Rastriya Banijya Bank founded in 2022 B.S. NABIL was the
first joint venture bank of Nepal. More Joint Venture Banks (JVBs) were
come to existence after the imitation of government policy of economic
liberalization & privatization in 2049 B.S. The JVBS came in to existence
to accelerate the pace of economic development & financial system of
nation.

The first development bank established in Nepal was Nepal Industrial
Development Corporation (NIDC) in 1959 with the objective of providing
financial assistance for the modernization & expansion of the old
industrial unit & providing technical & financial assistance to new
industrial unit in the private sector. Agricultural development bank was
established in 1968 under the ADB act 1967 to cater the processing need
of agricultural sector.

1.1.3 COMMERCIAL BANK IN NEPAL

Bank can be categorized into different types on the basis of its functions
and objectives. The word "bank'' will always be synonyms with the
commercial bank and its functions. For most of the bank in world it is
established for the view of development of trade, industry & commerce.

In fact commercial bank is the oldest bank in the banking history of the
world. In Nepal, Nepal Bank Ltd is the first modern system of bank. Only
5 banks came into existence until 2048. Now, the number of Commercial
Bank has been reached to 25.

According to commercial act 2031 B.S. 'A commercial bank is that bank
which exchange money, accepts deposit, grant loan & perform banking
function".

Commercial bank are the heart of our financial system, they hold the
deposit of million of person, Government & business units. They make
fund available through their lending & investing activities. They play an
important role in economic development of a country. Proper
mobilization of financial, physical and human resource available in the
country can be possible through commercial bank.

But in Nepal, proper mobilization itself has become major problem due
to lack of banking habits among the people of the nation.

Commercial bank may play an important role for the development of all
sectors, resources of commercial banks are increasing yearly, but they
have been not able to utilize them in proper way due to high loan rates,
Margin rates and rigid policy as regards to security.

In the 5 year plan, the government has fixed the target to open one
commercial bank branches for every 30 thousand people & provide
maximum banking facilities to the people of Nepal.

"A commercial bank refers to such type of bank which deals in money
exchange, accepting deposits, advancing loans and other commercial
transactions except some special functions done by other specified banks
such as cooperative, agricultural and industrial banks." -Nepal
Commercial Bank Act 2031B.S.

1.1.4 FUNCTIONS OF COMMERCIAL BANKS

Commercial banks are established as a joint stock company with a view
to earn profit. These banks are regarded as the heart of modern
economy. It is because they mobilize resources by collecting deposits and
channalizing those resources to productive sectors by granting loans.
They act as a bridge between the depositor and loan taker. So, it is an
agent between savers and investors. Basically, commercial bank works
for the development of industry, trade, commerce and agriculture.

1.1.4.1 Major Functions of Commercial Banks
Major functions of commercial banks are as follows

1 Accepting deposits:

Receiving deposits from the public is the first function of commercial
banks. For the benefits and convenience of the deposits, it has opened
different accounts for making deposits, they are:
a Current account:
This kind of account is specially opened for those person and
institutions needing cash frequently. Depositors can deposit and
withdraw any amount of money any day without prior
information. But no interest is provided to such accounts, only
security is provided.

b Saving account:
The low-income people and those not needing to draw money
frequently deposit their money in saving account. The money
deposited in this account can be withdrawn up to a stipulated
amount. Certain percentage of interest is also provided in such
account.

c Fixed account:
In this kind of account, a depositor has to deposit his money to
the fixed period of time i.e. 6 months, 1 year, and 2 years and
above. The amount deposited cannot be withdrawn before the
fixed period, but comparatively high interest is offered in this
account. However, the depositor can take loan from the bank
against the security of fixed deposit receipt.

2. Granting loans:

This is next important function of commercial bank. It provides loan to
general public, institutions, business houses etc. against the securities
of gold, silver, government and non-government securities, land and
building etc. The bank charges interest on full amount of loan, which
is a bit higher compared to interest provided on deposits. Banks grant
short-term as well as long-term credit.

3. Discounting of bills:

Bank provides loans by discounting bills such as the bill of exchange,
promissory notes of the businessmen so as to facilitate their business.
Bank charges some interest for providing such service.

4. Dealing with foreign exchanges:
Banks exchange the foreign currency of customer. They make
available the foreign exchange needed by individuals and traders and
charge fee for this service. This service is provided with the consent
of the central bank.

5. Agency services:

It provides agencies to its customers in various ways such as:
a Collection of credit instruments.
b Income receiving and payment.
c Purchase and sell of securities.
d Issue letter of credit.
e Remittance of money.

6. Cash management services:

Banks offer cash management services to their business customers.
Under this, a bank agrees to handle cash collections and
disbursements for a business firm and to invest any temporary cash
surpluses in short term bearing securities and loans until the cash is
needed to pay bills.

7. Security brokerage:

Bank deal in securities, execute buy and sell orders for security
trading customers. This is referred to as security brokerage services.
Banks involve in marketing of new securities to raise funds for
corporations and other institutions.

8. Offering mutual funds and annuities:

Bank provides investments products such as mutual fund accounts
and annuities. These products offer the prospect of higher yields than
are available on conventional bank deposits.

9. Merchant banking services:

These services include temporary purchase of corporate stock to aid the
launching of a new business venture or to support the expansion of an
existing company.

1.2 INTRODUCTION OF MACHHAPUCHCHHRE BANK LIMITED
(MBL)
Machhapuchchhre Bank Limited (MBL), located in the foothills of
Machhapuchchhre Mountain in the picturesque town of Pokhara, is a
first commercial bank to initiate banking service from the western region
of the country. The name "Machhapuchchhre" means fishtail delivered
from a Himalayan Peak in Pokhara resembling the tail of a fish. It started
its banking service since October 2000 in its own building with a well
built three storied building with sufficient parking space and electronic
surveillance system.

MBL was registered in 2054, Falgun 4 as per the requirement of
Company Act 2053, following the rules and regulations of the Office of
Company Registrar. MBL is being operated as an "A" category
Commercial Bank since 17th Aswin, 2057 B.S. with the approval of Nepal
Rastra Bank (NRB). All the functions and operations of MBL are guided
by the Commercial Bank Act, 2031. MBL has been established with the
investment of well known Nepalese citizens, Industrialists and business
persons to fulfill the needs of advanced, modern and qualitative banking
services.

The bank rightly perceived tremendous business potentials outside
Kathmandu. Thus, in a very short span of time, it expanded its branches
in Damauli, Bhiarahawa, Birgunj, Mahendrapul (Pokhara), Ram Bazar
(Pokhara), Jomsom, Bagar (Pokhara), and Banepa. With year of
experience in other parts of the country, the bank then started full
fledged banking operation in Kathmandu from October 2004. The bank
aims to serve both the urban and the rural areas.

The bank came into existence on a core philosophy that its success is
directly correlated to ensure the personal and professional success of its
customers. It has always gone as extra mile to meet and exceed
customer's expectation after all they have the motto of “SERVICE WITH
PERSONAL TOUCH". By living this philosophy the bank has developed
mutually beneficial relationship with the individual across the kingdom
and majority of diplomatic mission, INGOs, NGOs, public limited, public
sector and private companies.

The snapshot view regarding MBL according to its Prospectus is as
follows:
1 Name of the Company : Machhapuchchhre Bank Limited (MBL)
2 Registered Office: The registered office of the bank is situated in
Gandaki zone, Kaski district, Pokhara Sub-Metropolitan city, ward
no.9. Its Corporate Office is situated in Ramshahpath, Putalisadak,
Kathmandu.
3 Operation Centers: The central operation center of this bank is
situated in Gandaki zone, Kaski district, Pokhara Sub-metropolitan
city. The branches, sub-branches and other required offices can be
established with the approval of Nepal Rastra Bank (NRB).

1.2.1 Mission and Objective of MBL
Machhapuchchhre Bank Ltd. (MBL) strives to facilitate its customer
needs by delivering the best services in combination with the latest
technologies and the best international practices.

The dawn of the new millennium has heralded widespread changes in
the way financial services are delivered and financial markets operate. In
the light of this fact, Machhapuchchhre Bank Limited (MBL) seeks to
identify and exploit the financial opportunities through proper
channeling of technology into services and products it offers to the
benefit of its customer, the community and the country at large.

1.2.2 The Corporate conducts followed by MBL
In achieving its corporate objective in pursuit of its corporate mission
and vision, MBL will:
 comply with all relevant legislation, codes of conduct and
standards of good corporate citizenship in Nepal while maintaining
full autonomy in the management of its operations;
 conduct its operations in an open and transparent manner;
 put local resources to work for local development, serving the
rural community and its aspirations;
 strive consistently to provide improved products and services to its
clients at reasonable cost, using modern banking, information and
communication technology in the most appropriate form to its
clients needs;
 be vigorous in building reputation for professionalism, competitive
pricing, reliability and quality of service and innovation;
 operate in accordance with best banking practice, acting with
financial prudence and keeping in mind the need to balance
profitability with asset preservation and liquidity and to safeguard
depositor's funds;
 work together with its employees to develop their capabilities to
contribute to achievement of the bank's objectives, promoting
excellence, rewarding achievement and providing them the
opportunity to share in the bank's success;
 ensure that its activities contribute to the environmental stability
and overall improvement of living standards in Nepal; and
 Judge the bank's success against the measures that include
profitability, portfolio quality in terms of minimal arrears and non-
performing loans, portfolio worth, total deposits, geographic
outreach and public image.

1.2.3 Technology of MBL
Machhapuchchhre Bank Limited (MBL) has the most sophisticated
GLOBUS banking software enabling it to provide modern Banking
facilities like Tele Banking, Internet Banking, Point of Sale services, ATM
facilities, SWIFT facility and many more.

The sophisticated communication technology has interlinked all its
branches to the centralized database system and has enabled the bank to
provide Anywhere Banking facilities to all its valued customers.

The Bank has always believed in innovation and has always focused on
its technology advantage for the customers’ benefits.

1.2.4 CSR (Corporate Social Responsibility) followed by MBL
MBL is concerned with CSR so, it is expending its business in socially
responsible way and adopting policies of helping society. MBL is actively
contributing to Natural Disaster Fund and participating in social
activities organized by Nepal Bankers Association and various
federations of industry and commerce. MBL is also helping the cultural
and musical activity by sponsoring HITS FM’s National Award Ceremony.
MBL has installed-ATM facilities at various locations in such a manner to
enable physically challenged people use these modern facilities with
ease.
Organizational Chart of Machhapuchchhre Bank Limited (MBL)

Board of Directors

Credit Committee Audit Committee

Recruitment Company Secretary Internal Audit
Department
Committee

Chief Executive Officer (CEO)Share
Department

Deputy General Manager (DGM)

Information Technology Finance & Branches Admin Card Credit
Planning & HRD Department Department

Credit Operation

Credit Administration

Fig. No. 1.1 Organizational Chart of Machhapuchchhre Bank Limited (MBL)

1.2.5 Share Capital Structure of MBL
The issued and paid-up capital of the Bank as on the fiscal year 2006/07
is

Rs.821,651,300. As per the guidelines of Nepal Rastra Bank, the paid-up
capital of all banks should be raised to Rs. 2 billion by the end of the
fiscal year 2012/13 A.D. To meet this requirement MBL has distributed
its Right Shares in the ratios of 10:6, which would now increase its
capital by 60% to Rs. 1,314,642,000. The following table shows the
overall share capital structure after the issuance of its Right shares on
FY 2007/08.
Table No.1.1 Share Capital Structure of MBL
S. Particulars Amount (Rs.)
No.
1. Authorized Capital 2,000,000,000
20,000,000 equity shares @ Rs.100
2. Issued Capital 1,314,642,000
13,146,420 equity shares @ Rs. 100
3. Paid-up Capital 1,314,642,000
13,146,420 equity shares @ Rs. 100

Table No. 1.2 The Ownership Percentage of share capital of MBL
after the issuance of Right share on FY 2007/08.
Grou Types of No. of Paid-up Ownership
p Shareholders Common Amount Percentage
Equity (%)
A Promoter 9,202,494 920,249,4 70
Shareholders 00
B Public 3,943,926 394,392,6 30
Shareholders 00
(Including
employees)
Total 13,146,420 1,314,642, 100
000
Source: Prospectus for Issuance of Right Share of MBL

Fig. No. 1.2 Ownership % of Share Capital of MBL

1.2.5.1 Structure of Board of Directors (BOD) of MBL
The BOD is the Apex body of the institution. It formulates policies and
provides guidelines to the management. As per the provision of Article of
Association (AOA) (in Article 8 of MBL), there is a BOD consisting 8
members.
Table No. 1.3 The composition of the members in BOD
S.N Types of Directors Numbers of
o. Directors
1. Elected or appointed with mutual consent 5
among 'A' Class Promoter Shareholders.
2. Elected among 'B' class Public 2
Shareholders.
3. Appointed by BOD from the approved list 1
of Specialist Directors listed by Nepal
Rastra Bank (NRB)
Total No. of Directors 8

The tenure (working period) of the directors is for 4 years.

1.2.5.2 Eligibilities to be the member of BOD

i The member must have the ownership of at least 100 share of the
Bank.

ii The member having such shares should not have kept or permitted
those shares mortgaged in any conditions.

iii The provision of 100 shares is not compulsorily applicable to the
Specialist Directors (appointed from the approved list of Nepal
Rastra Bank) and to the director appointed by the foreign banks or
financial institutions which have certain investment in the Bank.

Table No. 1.4 Principal indicators of MBL in the previous 5
years
Particulars Indicato Fiscal Year
rs 2002/03 2003/04 2004/05 2005/06 2006/07
Book Net Worth Rs. 501,705, 554,221, 637,739, 931,091, 1,000,264,
898 843 384 357 635
Total Shares Number 5,441,74 5,500,00 5,500,00 7,150,00 8,216,513
0 0 0 0
Total Employees Number 75.00 85.00 137.00 196.00 234.00
Productivity per Rs. 204.10 549.29 619.49 683.66 316.61
Staff
Book value per Rs. 92.20 100.77 115.95 130.22 121.74
Share
As shown in the indicator table above, all of the indicators are in
increasing trend which shows the favorable figures for MBL.

1.2.6 Marketing strategies followed by MBL

i 24-hours services:

People in abroad can depend in MBL facility due to its 24hour service
provision. Even if there is a public holiday, the service will be rendered
to the customer smoothly. Hence, the customer can enjoy any type of
service at any time.
ii Providing statement:

Statement is much essential to have the full proof of amount deposited or
issued. Thus, analyzing this factor, MBL has also made provision of
providing statements for the customers as a proof. So, people are very
much confident of the service and always deal with MACHHAPUCHHRE
for any transaction.

iii Tele Banking facility:

MBL has also provided its customers the Tele-banking facility. For
different services, customers do not have to deal personally instead they
can even get their work done just by contacting with the MBL
representative on telephone. Customers can use this convenience to
inquire account balance, lodge request for new cheque books and
statement and place standing instructions. So, this facility has also
attracted customers towards MBL as they can also save their time.

iv Incentive to the Representative:

Anyone wants the return for the work performed by him or her. So, MBL
has also facilitated its representative's different types of returns for their
hard work. Analyzing this fact, MBL provides incentives to its
representatives so as to motivate them. This provision has in turn
influenced them work more for the bank.

v Providing Gift Items:

To increase the volume of transaction, it's very essential to increase the
customers. So, MBL has the provision of giving small gift item for the
clients like calendar, cards according to the occasions etc. This in turn
has influenced to deal with MBL.

vi Banner of Machhapuchchhre Bank:

To make aware of the services provided by the Bank, various banner of
MACHHAPUCHCHHRE are being used as the advertisement. Many
people are also influenced towards the bank due to the effective
advertisements.

1.2.7 Future Plans of MBL
i The Bank (MBL) will continue its selective, qualitative and diverse
loan disbursement policies.
ii The Bank will continue its deposit policy to reduce dependency on
corporate deposit by encouraging and increasing personal deposit
with focus on saving deposit.
iii Giving due priority to fund management and international trade,
bank would continue to improve on capacity and effectiveness and
adopt changes reflecting modern era and to improve on efficiency.
iv In future the bank will be bringing out new products to cater the
needs of its customers.
v To recover promptly from possible disaster with minimum loss of
time and data, the implementation of Disaster Recovery System
will be continued with the focus on improving and upgrading the
use of modern technologies.
vi The locker facilities will be expanded to all of its branches.
vii Ever increasing number of Nepalese working abroad had been
beneficial to banks due to huge inward remittance and bank has
given priority tap into these remittances by increasing its
international network.
viii Gradually, the bank will be providing banking services from its own
premises which will enhance the image of the bank.
ix The Bank (MBL) has policy of opening new branches in the area
where there is scope for banking services. The bank is studying
feasibility of opening branches in Western Region.

1.2.8 The possible risk factors associated with the performance
of MBL.
a The risk concerned with the massive competition due to the
emerging trend of new banks and financial institution.
b The risk associated with the issuance of non-funded services like
letter of credit (L.C), guarantee paper etc.
c The risk due to the changes in interest rates and other
fluctuations as per NRB directives.
d The possible risk due to the political and economic instability.
e The probable economic risk due to the failure in loan recovery in
time.
f The risk due to the narrower scope of loan and investment.
g The risk factors concerned with the fluctuation in the condition
of stock markets.
h The risk associated with the effects of worldwide recession in
Nepalese markets.
i The risk due to the fluctuation in foreign exchange rates

The bank has adopted specific policies to get rid of all of the mentioned
risk factors. Although these risks are not reducible to the management,
the timely adjustments will some extent preserve bank from possible
losses.

To reduce the risk of bad debt in loan advances and investment, the bank
has managed loan loss provision, exchange equalization fund, general
reserve, contingent reserve etc. The management of MBL is fully
committed in reducing possible losses due to such risk by proper human
resource and technology management.

1.3 INTRODUCTION TO LOAN MANAGEMENT

The main source of income and asset for any financial institution is
granting of loan. Loan simply is the amount taken by the borrower from
the lender. This is also an important service given by bank apart from
accepting deposits from the customers. The bank provides loan to the
people under different terms and conditions for different productive
purposes. The accumulation and utilization of deposits play a vital role in
the size of the loan being granted. The bank tends to gain the profit
utilizing its capital in seasonal sectors. So, the bank provides loan for its
own benefit and to offer its services to people.

One of the universally accepted indicators of health of the banking sector
is the level of Non-Performing Loan (NPL). Given this fact, Nepalese
banks seem to be in critical position due to having a higher level of NPL.
Average NPL level of the commercial banking industry is 8.94 percent as
on Mid-January,2008, which is nearly couple of times over the
internationally accepted level of 5 percent. Although NPL of the banking
sector has been declining gradually, it still leaves a lot to be desired.
High level of NPL is not a matter of concern only for the public sector
banks i.e. Nepal Bank Limited, Rastriya Banijya Bank and Agricultural
Development Bank Limited, it is equally alarming for some of the private
sector banks like Lumbini Bank, Nepal Bangladesh Bank, and Nepal
Credit and Commerce Bank etc. Out of the 25 commercial banks, NPL of
six commercial banks is more than the international benchmark.

Table No.1.5 The status of Non-Performance Loan (NPL) of
Commercial banks in the last 6 years
Years Mid-July Mid-
January
200 200 200 200 200 2007 200
3 4 5 6 7 8
NPL to Total Gross Loan 28. 22. 18. 13. 10. 14.0
8.94
(in %) 68 77 79 45 56 8

Source: Banking and Financial Statistics, NRB (Mid-Jan,
2008)

The data above shows the status of NPL in Nepalese Commercial
banking industry, which is relatively in decreasing trend except in Mid-
January, 2007.the decreasing figure is considered favorable to the
banking industry which implies the improvement and consciousness in
loan management. Although the NPL figure must be decreased further to
meet minimum international NPL level of 5%.

The quality of loan has a direct bearing on the bank’s financial health.
The banks are required to develop reserves and provision in accordance
to the quality of loans. A rapidly deteriorating loan portfolio is huge drain
on the bank’s profitability and subsequently on the capital adequacy. This
has the potential to erode the bank’s capital in no time. Thus, the quality
of loan is arguably the key determinant of bank’s financial health.

The analysis of credit standards play significant role in loan
management. Credit standards refer to the strength and
creditworthiness a customer must exhibit in order to qualify for loan. The
firm’s credit standards are applicable to determine which customers
qualify for the regular credit terms and how much loan each customer
should receive. The major factors considered when setting credit
standards relate to the likelihood that a given customer will pay slowly or
perhaps even end up as a bad debt loss. Determining the loan quality or
credit worthiness of a customer probably is the most difficult part of loan
management. Setting loan standards implicitly requires a measurement
of loan quality which is defined in terms of the probability estimate for a
given customer is for the most part a subjective judgment.

Thus, every bank should disbursed loan on more productive areas on
reasonable interest rates and other facilities so that the borrowers can
repay on time which will help in decreasing the outstanding and the
outstanding may not also excess the maturity time and won’t be NPL.
Hence, the bank can earn profit and remain sustainable which will
certainly develop the economic condition and infrastructures of the
nation through loan management.

1.3.1 Different loan products offered by MBL to its customers
Machhapuchchhre Bank Limited (MBL) provides various types of loan
and advances designed to suit the varied requirements of Industrialists,
Business Houses, Professionals, entrepreneurs and individuals. Such
loan products are designed aiming to mobilize lending from people from
all walks of life in urban as well as rural areas. However for most of the
loan products the urban areas are set as the focal area considering the
earning pattern, saving capacity, saving habit , rapid urbanization and
tendency of people to acquire higher status in the cities. The deprived
sector loan has assisted the bank to acquire its corporate objective of
serving deprived sectors of the country and contribute for its
development.
Some of the important and popular loan products offered by MBL are
described below:
a Personal Loan
The basic objective of this type loan is to facilitate the individuals
with high net worth. Reputed persons in the society and
professionals to meet this personal/social obligation (to meet any
kind of personnel expenses) prefer it. In such loan, the borrower is
not compelled to disclose the purpose of borrowing. This product
exposure in the banks lending portfolio should not exceed 10% of
the banks total loan and advances. Similarly, the products exposure
to individual customer (including members of undivided family) will
not exceed NPR 100 million. This loan is available to the borrower
in the form of overdraft or terminating loan as per the choice of the
borrower to suit its requirement and repayment.
For this loan no prepayment change has been imposed for early
settlement of the loan.

b) Privilege Loan

The basic purpose of this type of loan is to finance land purchase,
building construction/renovation, have finishing/furnishing,
vehicles purchase (private), children education, meeting social/
family obligation, vacation tour, medical treatment of the family
member etc. The target segment for such loan is the employees of
the entities where the bank has salary management agreement.
This product is categorized into two categories:
i Personal draft: This can be renewed annually upon
satisfactory performance. Overdraft can be available for all
purpose (except clarity stated speculative transactions).

ii Personal term Loan: This loan can be repaid in agreed
installments and terminating in the agreed period (expiry
date).

In this loan, total product portfolio (outstanding) not to exceed 10%
of the banks total outstanding loans at any point of time. The
limitation for per borrower exposure is Rs. 0.10 million. No
prepayment charge has been set for the early settlement of this type
of loan.

b Machhapuchchhre mortgage loan (MML)

This is the retail type loan product targeted to all individuals and
business enterprises. The basic objectives of this product are to
facilitate its target group to borrow against acceptable collateral
and to increase the dependable retail lending volume of the bank.
The product exposure in the banks risk assets should not exceed
10% of the banks risk assets measured at every quarterly rests.
Any deviation to this shall have to be approved/ ratified by the
Board of the bank. Likewise, the product exposure to individual
customer/ group shall be limited to NPR 0.5 million in minimum to
NPR 100 million in the maximum for such MML, pre payment is
made from our source and 3% on the prepaid amount shall be
charged if the loan is prepaid by the way of swapping transfer to
other Bank/ financial institutions. A commitment charge of 1% on
the unutilized amount of loan shall be levied if the overdraft limit is
utilized below 70%.

c Educational Loan

Education loan is targeted to the students for higher study in the
country as well as Abroad. Higher study means any course/ study
after 12 classes. The basic purpose of this types of loan is to finance
educational expenses of the students (such as admission fee, tuition
fee, health insurance expenses, travel expenses, library and reading
materials expenses, security deposit and other related expenses)

The product is divided into two types of loan:

i The utilization of approved loan limit is certain.

ii The utilization of approved loan limit is no t certain ( has
potential of cash or cash equivalent security rather than real
state security)
This products exposure to be limit as follows:
a Total portfolio not to exceed 5% of the banks total outstanding
loans. (to be reviewed in the quarterly basis)

b Per borrower exposure not to exceed Rs. 5 million

Any deviation to the above exposure should be approved by the
board of the bank.

Commitment fee 1% of the unutilized amount is charged if the
loan is not utilized as per the initially given draw down schedule.
However, if the loan is not utilized due to any receipt of visa by
the student, the commitment fee will not be recharged.

The interest rate for all of the loan products is decided and applied by
ALCO (Asset – Liability Committee) of the bank from time to time.

Based on the principles, terms and conditions of above mentioned loan
products, other loan products have also been offered by MBL for the
following purposes:

Table No. 1.6 Types of loan provided by MBL with its purposes
Types of Loan Purposes
1.Commercial loan To open shops, department store, etc
2. Hire purchase loan To purchase vehicles, machine,
equipment & tools
3. Home loan To construct home or purchase of land
4.Contract & demand loan For contracting purpose
5. Overdraft loan For any feasible purpose as
categorized by Bank
6. Personal loan For any personal use as categorized by
the Bank
7.Loan against Fixed To withdraw amount from fixed deposit
Deposit Receipt (FDR) a/c before maturity

1.3.2 The eligibility criteria to get the facility of products
offered by MBL
a In case of individuals, the applicant must be at least 21 years of
age and the loan must be terminable before the applicant reaches
the age of 60 years. This age limit is 16 to 58 years for educational
loan.

b In case of business enterprises, the firm / company must be
registered with the legitimate authority of Government of Nepal
(GON)

c The individuals applicant can be a salaried /self employed and
should be a resident of Nepal.

d The income of generator shall also be considered for the loan
repayment if the generator is family member or close family
member of applicant
e The income of applicant/ generator shall be at least 1.50 times of
the repayable amount in case of term loan and two times of interest
payable in case of overdraft..

Other criteria:

f At least 8 feet wide mort able access road to the collateral is
required however in the areas like Asan, Indrachowk, Mangal
bazar etc where commercial value of the building is very high the
requirement as to the 8 feet wide road may be waived by the
approving authority.

g Land has to be free of Guthi and Mohi.

h Land has to be free from set backs like high tension, rivers etc. as
per prevalent provision in credit policy guidelines.

i Land has to be owned by the applicant of co- applicant of their
undivided family members.

j Collaterals security of cities/ areas where the bank has branch
office is acceptable, on top of that, collateral from major cities are
also acceptable where branch of the bank is not available.

1.3.3 The causes of possible risks in advancing the loan

i Abnormal decline in price of security during the tenure of the
loan.

ii Weak monitoring and fallow up of the bank.

iii Destruction of the real estate collateral due to natural
calamity.

iv Seizure of the property by the government due to reasons not
envisaged at the time of loan approval.

v The possession over the collateral, industries situation may
be difficult or restricted or limited to court order.
vi Demise of the borrower may deteriorate/slow down the
recovery.

vii Borrower being out of job or discontinuation of income or
change in economic situation of the country may deteriorate/
slow the down the recovery.

viii Change in government or government policy or imposition of
economic sanction or war etc may have impact to the
borrower / recovery.

1.3.4 Loan disbursement procedures followed by MBL
MBL grants loan to various industry, corporation as well as individuals
against the security. Principal amount should be repaid within the
maturity date as agreed along with interest accrued and loan service
charge. The bank follows the following procedure to advance loan.

The Loan Disbursment Procedures followed by MBL

Interaction with customer or
conducting the interview
Feasibility study and If unfavorable to bank Rejected
site visit

If favorable to bank

Application form fill up
up

Credit Analysis (5C’s
If unfavorable to bank
analysis and CIC report)

If favorable
Fig. No.1.3 Loan to bank
Disbursement Procedure

Credit Appraisal from
(CAF) preparation
If proposal canceled by the
authority
If proposal accepted

Collateral valuation by the
authorization valuators

Documentation and
Legal procedures

Loan Disbursement

Fallow Up
1 Interaction with customer or conducting the interview

The first procedure in loan advancement is interview. In this step, the
bank officials discuss with the clients or party, who reaches bank for
asking loan. The interviewer should attempt to gain as much information
as possible and should use a checklist to try to assure that as many
questions as possible are answered during the initial interview. This
should be done in friendly and positive manner.

Frequently asked questions during the interview are as follows:
 What is the purpose of the loan?
 How much loan amount is required?
 What is the source of repayment?
 When shall the loan be repaid?
 If the loan is for an already established business, the questions
may be about the history of business, competition, threats and
opportunity faced by the bank/firms, etc.
2 Feasibility study and site visit.

After the sufficient enquiry, if the loan draws down is required
against Real estate security then the concerned staff goes for initial
site visit. The general study on the security and the analysis on the
overall requirement or eligibility criteria are made. If all the
requirements regarding collateral and security are meeting then
the customer is allowed to fill up the application for the concerned
loan. If the feasibility study and site visit is found to be unfavorable
to ban, then his request for loan is rejected.

3 Application form fill up

After the interview and site visit, if credit officials are satisfied and if they think that the
loan request meets the bank’s criteria, they request for the
application for processing the applicant’s request. The application
should be accompanied with the following documents:

 Amount purpose

 Documents of Real Estate security:
a Lal purja, Tiro Tireko Rasid, char killa certificate, land map
or blue print map.

b Copy of building naksa pass ( from VDC or municipality)

 Family details of borrower and guarantors.

 Identification of documents of borrowers and
guarantors( citizenship certificate or passport) and PP size
photograph

 Recommendation letters from ward office.

 Copy of map of home and certificate of permission letters.

 Statement of income source for the payment of loan.

 Copy of registration certificate, income tax clearance
certificate, PAN certificate incase of firms and companies

 Photocopy of current fiscal year’s permission letter for
renewal and registration certificate

 Scheme of income & expenditure, profit/loss account and
balance sheet statement of two years along with audited
report of account

 Partnership deed for partnership firm and other documents

 Along with these documents, the education loan application
requires some additional documents as mentioned below:

i Copy of mark sheets/ testimonials of the students ( SLC
and Onwards)

ii Copies of offer letter/ admission confirmation letter issued by
the college/ university ( including I-20 and similar documents)

iii Copy of course expenditure details issued by college/
university.
After receiving all documents from customers, banks starts
analysis of the project from its feasibility study report and
site visiting.

4 Credit Analysis

The bank analyzes the 5 C’s of credit (character, capacity, condition,
capital and collateral) for lending procedure.
 Character: Character is the personal traits of borrower, which is
very essential for lending decision. Serious purpose, truthfulness in
answering the queries, responsibility and seriousness in making all
efforts to repay loan make up what a lending official call the
character. The bank should study whether the person has good
character with intentions to pay loan or not, whether he is a person
of criminal nature or not, whether a creditor has filed a petition
against him in the court for recovery of debt or not. This C is the
most important C’s of credit because a dishonest borrower always
finds a way to avoid the restrictions imposed through the loan
agreement. No further credit analysis is made if the lending official
feels the borrower lacks character.
 Capacity: Capacity is being used in the following two senses:
o Legal capacity to borrow money- Under this banks see
whether the borrower posses legal capacity to borrow money.
o Capacity to generate enough income to repay loan through
liquidation of assets- Under this the quality of management is
assessed. For short term loans, loan is expected to be repaid
through liquidation of assets. In long term loans, the loan is
repaid from the cash flow generated from the operation of
permanent assets.
 Condition: Condition refers to the general economic condition
beyond the control of the borrower. This is basically security,
political and social conditions under which the business has to
operate. Loan is given to the borrower if lending official feels
general condition is favorable for that type of business.
 Collateral: Loan is given if the lender is satisfied that the borrower
can repay money from the cash flow generated from operating
activities. However, the finance company wants to ensure that their
loan is repaid even in case of default. In such cases, the lender asks
for additional securities. Collateral can be fixed in nature for
example: land building, machinery or working capital like
inventories and account-receivable.
 Capital: Capital refers to net worth of the borrower. This is covered
under capacity above which analyzing the leverage ratio. Leverage
ratio will be high if borrower has low capital. A company gives loan
only when it finds leverage ratio acceptable or if the borrower has
enough capital.

One of the major sources of analyzing the customer is the CIC (Credit
Information Centre) Report. CIC is a bureau (Center) works as a part of
NRB and provides information about multiple banking declarations of
any customers with their three generation particulars (tin puste
Biwaran) to any financial institution as per NRB directions. The CIC
facilitates to find whether the concerned customer is lack listed or not
and whether he is taking credit facilitates with other institutions or not.
If CIC report and other aspects of credit analysis indicate unfavourableness to the bank then the
customer’s proposal is rejected.

5) Credit Appraisal Form (CAF) preparation.

CAF refers to the proposal made by the concerned credit staff in the
process of disbursement of the loan to get approval from higher
authority. The decision regarding loan advancement is made by the CEO
or approving authority with the help of CAF.

CAF consist of following details:-
 Purpose of CAF

 Borrower’s information (Name, address, citizenship, occupation
disposable income, borrowings with other banks etc.

 Credit limits details (facility limits, purpose D: E (debt equity) ratio,
purposed loan re-payment, interest or charges details etc.)

 Incomes from the relationship (interest fee, processing fee etc.)

 General background of the borrow
 Borrower’s repayment capacity analysis.

 Security to the credit limits (security types, description, fair market
value (FMV), DV

(Distress Value) etc

 Justification of the facility (sufficiency of security to cover loan
amount guarantee, insurance etc)

 Reporting of the exposure (location of land, accessibility to road,
value of exposure) etc.

 CIC reports and multiple banking declaration

 Waiver concession (if any)

After the thorough study and analysis of CAF, the approved authority can
accept or cancel the proposal. If it is cancelled then the information of
rejection is given to the customer.

6) Security valuation by the approved valuators:-

After the approval of certain loan authority by the approved authority,
the customer is informed for the final security valuation with approved
valuators. After getting official request by the bank the group of
engineers (or valuators) go for valuation and submit the valuation report
to the bank.

The valuation report consists of the methodology for valuation, rates,
details of the property owner, details of the property, four boundaries of
the land, probabilities of future expansion and improvement, legal
aspects of the property, location map and measurement of land area etc
The legal and supplementary documents to be attached in the valuation
report are:-
 Copy of the title deed certificate i.e. Lalpurja
 Copy of the citizenship certificate of the client and property
owner.
 Copy of the transfer deed of the ownership i.e. Likhat
 Copy of the four boundaries i.e. Char Killa certified by
concern authority
 Attested government survey map i.e. blue print
 Trace map of the plot wherever the plot is not clear in the
blue print
 Latest malpot payment receipt
 Naksha pass certificate and lecture drawings for the building
 Clear location map of the property
 Photo graphs of the property
 Copy of firm company’s registration certificates(if applicable)
7) Documentation & legal procedures
After the final valuation of the security, the legal transformations of the
securities papers are prepared. The major security documents or papers
to be prepared by the bank are:
 Credit facilities later (CFL)
 Loan deed signed by the borrower
 Promissory needs signed by the borrowers/ guarantors
 Personal guarantee signed by the guarantors
 Letter of the set-off
 Letter of continuity
 Copy of citizenship / passport of borrower & guarantors
 Insurance policy of the building , covering all major risks
 Registered mortgage of land & building as applicable (mortgage
deed)
 Sahamat ( Letter of consent) of collateral owner/legal heirs
 Valuation report of the collateral
 Letter of agreement
 Manjurinama of the land owner
 Other securities documents ( based on other forms of security) as
per Credit Guidelines Policy (CGP)

8) Loan disbursement

Based on the approval made by the final authority, the loan amount is
disbursed gradually as per the request made by the borrower. Credit
Facility Letter (CFL) is provided to the customer while disbursing the
loan amount, which contains the terms and principle amount along with
the EMI (Equal Monthly Instalment) schedule.

The EMI schedule shows the equal amount to be paid in an equal
interval of time period by the borrower.

The EMI amount is calculated using the formula below:-

EMI = (loan amount * Interest) *(1+Interest)n /((1+Interest)n -1)

Where,
Interest = (% rate/12)
n= loan period in months.

9) Collection, monitoring and follow up

After loan disbursement, the concern of bank should be on the collection
of principle and interest amount. Inability of customer to repay the loan
brings credit risk to the bank. The regular follow up process makes the
loan recovery effective and ensure timely recovery. The recovery
producer and follow-up are primarily triggered by the aging of overdue
loans.

For the standardization of follow-up process MBL has classified following
actions to be taken based on the ageing of the over due as bellow:-
Ageing of overdue Action to be taken
 30 days Telephone calls to be made to the
customer.
 45 days Subsequent follow-up on telephone and
compulsory customer visit.
 60 days A first written notice (letter A) to be given
to the customer to clear dues immediately
 75 days Reminder of follow-up on telephone
 90 days Written reminder (letter B) for immediate
payment
 130 days A formal recall notice giving 35 days
ultimatum (letter C) and threat of legal
action
After that period Legal courses of action for recovery of loan

1.3.5 The terms and conditions set by the Bank for lending
The terms and conditions followed by MBL for lending are as follow:
1) Require to maintain an operating account with bank to operate
applicant’s transaction.
2) The applicants are required to submit financial statement of their
firm on semi-annual basis, within one month of the end of every
sixth month and when demanded by bank.
3) The rate of interest, commission and other charges offered are
subject to change as per NRB or as per bank’s management
requirement, without any prior notice.
4) 3% penal interest shall be applied on overdue loan as per bank’s
policy.
5) The bank reserves right to conduct periodic inspection with or
without prior notice to access customer’s overall status.
6) In course of regularizing customer’s limit or for any other reason if
his operating account is overdrawn, customer will be charged
interest on this overdrawn sum as per the rules of bank.
7) The bank reserves the right to callback amends the above
mentioned facilities at its discretion and to call on first demand all
amounts overdrawn with 30 days prior notice.
8) Entire properties provided as collateral securities have to be
adequately insured with insurance co-acceptable to bank with
banker’s clause in favor.
9) Any material changes in the firm shall be reported to the bank
within 7 days of such changes.
10) The bank at its discretion may allow withdrawal of the unused
portion of the approved loan after expiry of this offer against the
commitment fee.
11) If any terms and conditions are violated, the facility will be default.
12) Customers are required to submit a stock position on a quarterly
basis.
13) Customer should submit the following documents: internal loan
commitment paper, mortgage deed, personal guarantee insurance
policy etc.
14) If the customers wish to continue/renew/restructure the
aforementioned facilities upon maturity, they should apply for the
same 30 days prior to loan maturity.
15) This offer letter will be automatically cancelled in the event of non-
completion of all legal requirements concerning security
arrangement within the stipulated time mentioned in this offer
letter.

1.3.6 Renewal of Loan
It is discretionary right of the Bank whether to renew a loan or not. But
once a loan is provided to the debtor by the bank, the relation between
the bank and debtor will be established. From such relation both parties
can be benefited. The borrower can invest in the trade, business and
industry from the borrowed loan and the bank can earn the interest or
profit from the lending. The terms and condition of the loan are
determined by the deed of loan. The debtor cannot breach the deed; if
the debtor breaches the deed the bank may not renew the loan contract.
Until the bank believes the debtor, the bank will not renew the loan. The
creation of terms and conditions for renewal of loan not depends on the
activities of the debtor.

For the renewal of the loan the debtor should fill the application form.
There may or may not be the printed form for the renewal of loan. If
there is the printed one then it should be filled properly. If there is not
printed one the debtor should write the application in the plain paper
and present to the bank. After presenting the application for renewal,
the bank moves the process ahead. The bank studies the debtor file
presented in the bank. In addition to it, the bank may make field visit too
if it feels necessary. Before giving the final decision of renewal of the
loan, it should pay attention to the following internal and legal matters:
 Whether the application of the debtor for the renewal of the loan is
as per the law or not.
 Whether it is against the policy and instruction given by the
Central bank.
 Whether the bank’s own regulations, memorandum, article of
association and policy permit to renew the loan for the debtor’s
industry and business or not.
 Whether there is liquidity in the bank to renew the loan of debtor
or not.
 Whether any difficult situation has risen to the bank to renew the
loan or not.
 Whether there exits any problem to renew the loan or not.

In this way, after studying and analyzing above mentioned matters, the
bank makes a deep study on the debtor’s activities to give final decision
for the renew of the loan. The bank evaluates the following activities
related with the debtor’s performance:
 Whether there are reasonable causes and rounds of debtor to
renew the loan or not.
 Whether the financial record of debtor’s company and business is
related with the company act and other concerned regulation and
legislation and based on the principal of account or not.
 Whether the loan was properly used or utilized in the purpose for
which the debtor had taken the loan or not.
 Whether the debtor had paid the installment of the interest and
principal from time to time to the bank or not.
 Whether the debtor has got benefit from the loan he took from the
bank or not.
 Whether there will be great loss to the bank from the renewal of
loan or not.
 Whether there will be some difficulties to recover the loan with the
interest after the renewal of the loan or not.
 Whether the policy and the direction given by the bank from time
to time is followed by the debtor or not.
 Whether the debtor has submitted the statement showing the real
picture of his transaction or not.
 Whether there is condition which warrants extra security to renew
the loan of the debtor or not.

After evaluating the above subject matters, the bank finally make the
decision regarding the renewal of loan.

1.4 OBJECTIVES OF STUDY
The main objective of this study is to scrutinize the lending behavior of
MBL into multiple sectors. The specific objectives of this study are:
 To analyze the different types of loans provided by MBL.
 To evaluate the terms and conditions for lending.
 To find out procedure of loan advancement and renewal of loan.
 To analyze the sector-wise loan.
 To evaluate the trend of loan disbursement, interest collection and
NPL in the past 5 years.
 To find out the degree of correlation of the interest rate, deposit
and NPL with loan disbursement.
 To recommend MBL for its advancement and strength to overcome
the competitive global challenges.

1.5. METHODOLOGY AND TOOLS USED
1.5.1. Research Design
Research design is the plan, structure and strategy of investigations
conceived so as to obtain answers to the research questions and to
control the variances. It is the arrangement of conditions for collection
and analysis of data. To achieve the objective of this study, descriptive
and analytical research design has been used. Historical data are
collected from MBL of over five years and analyzed them based on the
statistical and financial tools.

1.5.2. Population and Sample
The population refers to the industries of the same nature and its
services and products in general. Thus, the total commercial banks
constitute the population of the data. According to update data there are
altogether 25 commercial banks, which is the population concerned with
the study and the bank under study constitutes the sample for the study.
Thus, among 25 commercial banks, Machhapuchchhre Bank Limited
(MBL) is taken under the study due to its broad services on credit
facilities and other social welfare programs which help in the
mobilization of the funds of the Bank.

1.5.3. Sources of Data
This study has been conducted through two sources of data: primary
source and secondary source:

a) Primary source: As a primary source of data, the researcher
consulted and interviewed the staffs and concerned persons related with
his topic during eight weeks of internship as well as some information
through his practical knowledge is also included in this report.
b) Secondary source: This study is mostly based on the secondary data.
As a secondary data during an internship the researcher has collected
various published data from MBL such as Annual Reports, Booklets,
Product papers etc. as well as surfing its website (www.machbank.com)
on internet and collecting various publications and statistics from NRB
supported the researcher to prepare this report. After the collection of
the data from various sources, these are tabulated and presented in
appropriate chart and graph, which is an important tool of this study.

1.5.4. Data Collection Method
Data collection is the main aspect of any project work. Without an
appropriate data no project work can be done. Only collecting the data is
not enough, accurate and appropriate data should be collected. The data
collection must be done in proper order to ensure the financial
performance of MBL. The data collection of this project is done by
visiting MBL, interacting with its staffs, consulting the books and surfing
the net.

1.5.5. Tools used for Analysis
Analysis of financial data is most important in the research design
because it determines the financial strengths and weaknesses of the
organization. Thus, in this report the researcher has tabulated the data
concerned with the loan management and presented it in various chart
and graph. The ratio analysis of various aspects concerned with loan
disbursement and the Karl Pearson’s Correlation coefficient between
loan, deposit and interest has been used for the study. Similarly, the
researcher has used Trend Line to predict loan disbursement interest
income and NPL in near future with the help of available data. The
statistical and financial tools, which have been used in this report, are
dealt as follows:

1.5.5.1. Ratio Analysis
Ratio analysis is one of the important financial tools through which the
performance of the financial institution can be analyzed. It measures the
relationship between any two variables. As the study is concerned with
loan management, the following ratios are considered to be calculated in
order to find the relationship between them.
1) Ratio of Credit to Deposit (C/D Ratio)
Loan/credit is the main source of income for the bank but to disburse
loan there need capital to the bank and that capital are fulfilled by the
customers’ deposit. The bank utilizes customers’ deposit in customers’
welfare through loan disbursement. So this C/D ratio shows how much
credit is disbursed through the collected deposit. As well as this C/D
ratio shows the effectiveness of any financial institution. It is calculated
by using following formula:

Credit to Deposit Ratio =Credit/Deposit *100

2) Ratio of loan recovery (collection) to loan disbursement
The ratio of loan recovery (collection) to loan disbursement shows that
how much principal the bank recovers from the loan disbursement after
the maturity period. For the sustainability, the bank should recover its
loan as much as possible. The ratio can be calculated using the formula:

Loan recovery (collection) to Loan Ratio = Collection/Loan *100

3 Ratio of interest expenses to interest income
Interest is the income earned by the bank through disbursing loan and in
case of deposit; it is expenses to the Bank. The Bank will collect its loan
more than which it was disbursed with the interest added. So, interest
income is the major source of income to the bank and interest expenses
is also crucial factor to be considered. This ratio measures the
percentage of interest expenses based on interest income. Lower the
interest expenses to interest income ratio, the bank is considered more
efficient and effective in the loan management.

The formula used to calculate this ratio is:
Interest expenses to Interest income Ratio = Interest expenses/ Interest
income*100

4 Ratio of loan loss provision to Total Assets
Defaults in loans are one of the major risks faced by financial
institutions. The profits and equity amount must be sufficient enough to
cover the probable defaults. The financial institutions can afford to make
loans that are individually risky as long as the default rate for the group
of loans is predictable. The loan loss provision to total assets ratio
measures the credit quality of the Bank. Higher the ratio shows the Bank
is moving toward more risky loans than before. The formula used to
calculate this ratio is:

Loan loss provision to Total Assets Ratio = Loan loss provision/ Total
Assets *100

5 Ratio of Interest income from loan and advances to Total
Interest income
This ratio shows the contribution (interest income) of loan and advances
in total interest earning. Higher the ratio, better the interest income
trend with the loan is reflected. The formula to calculate this ratio is:

Interest income from loan and advances to Total interest income =
interest income from loan and advances/Total interest income *100

6 Net profit to Loan and advances Ratio
This ratio is one of the measures used to calculate the profitability of any
institution. Net profit to loan and advances ratio measures the net profit
as the percentage of loans and advances amount. Higher the ratio, better
or improving the performance of Bank is indicated.
The formula for this ratio calculation is:
Net profit to Loan and advances Ratio = Net profit/ Loans and advances
*100

7 Non-Performing Loan (NPL) to Total loans Ratio
Non-Performing Loan (NPL) refers to the ideal or unproductive types of
loan amount that has been disbursed. So, the NPL to total loans ratio
indicates NPL as the percentage of total loans. Lower the ratio shows
higher efficiency and strength in the loan mobilization process.

The formula to calculate this ratio is:
NPL to Total loans Ratio = Non-Performing Loan/ Total Loan*100

2 Statistical Analysis
1) Correlation Coefficient
Two variables are said to have “correlation”, when they are so related
that the change in the value of one variable is accompanied by the
change in the value of the other. One of the widely used mathematical
methods of calculating the correlation coefficient between two variables
is Karl Pearson’s correlation coefficient (r). The value of correlation
coefficient lies between -1 and +1.When the value of r = 1, there is
perfect positive correlation between the two variables. When the value of
r = - 1, there is perfect negative correlation between the two variables.
When the value of r = 0 then the variables are uncorrelated. Nearer the
value of r to +1, closer will be the relationship between the variables,
nearer the value of r to 0 lesser will be the relationship. It is one type of
statistical tool. The following correlation coefficients are found as
concerned with the study:
1) Correlation Coefficient between loan disbursement and interest rate
2) Correlation Coefficient between loan disbursement and deposit
3) Correlation Coefficient between loan and NPL

The formula used for correlation coefficient is:
 uv   u  v
n
r =
n u 2  ( u ) 2 n  v 2  ( v ) 2

2) Mean
Mean is one of the important tools of measuring the central tendency. It
is a single value within the range of data, which represents a group of
individual values in a single and concise manner and concentrates in the
middle of the distribution. The calculation of arithmetic mean is based on
the following formula:

x x
Mean ( ) =
n
Where,
x = individual data or observation
n = total number of observation

3) Standard Deviation (σ)
Standard Deviation (SD) is often powerful and helpful measure of
dispersion. SD has been used in this report as a tool in order to measure
the size of deviations from the average value of given range of data. SD
is the positive square root of the average of the square of the deviations
of the measurements from their means.

The standard deviation of a set of n numbers X1, X2 ...Xn is given by
SD (σ) = √1/n ∑(X-X)2
Where,
X = Arithmetic Mean

4) Coefficient of Variance (CV)
Coefficient of Variance is a relative measure of dispersion based on
standard deviation. In this report, coefficient of variance has been used
in order to compare the variability between two sets of data. Coefficient
of Variance is often abbreviated as CV and is defined as:
CV = σ / X * 100

5) Trend Line
It is the statistical method of time series in which least square method is
used to find the trend between variables through out the given year as
well as through this method forecasting can also been done. The trend
line has been used for:
1 Estimation of Loan
2 Estimation of Interest income
3 Estimation of Non-Performing Loan (NPL)

For this, following conditions are assumed: Let the trend line between
the dependent variable be y and independent variable be x (i.e. time) be
y  xy  x
represented by: y = a +bx, where a = /n and b = / 2

6 ASSUMPTIONS / LIMITATIONS OF THE STUDY
This report has been prepared to analyze the overall figure of loan
management in Nepalese Commercial Banking System taking MBL as a
base. This report contains the information based on facts but there
consists some limitations as follows:
 This report has been prepared for the partial fulfillment of BBA
8th semester Internship report as prescribed by Purbanchal
University.
 This study has been made depending mostly on the personal
experience, available published secondary data and direct
interview with MBL staffs.
 The report is concerned with the data of F.Y. 2003/04 to 2006/07
from Annual Reports of MBL and data up to Mid-January, 2008
from NRB publications.
 While calculating the trend values the data of mid- July of a
particular year is considered as the data of that year. For e.g.
mid- July 2003 is indicated as Year 2003 and so forth for
calculation convenience.
 Due to limited time frame, other satisfactory information could
not be included.
 Banking and Financial Statistics for Mid- July, 2008 has not been
published by NRB till the report preparation date. So, financial
data up to Mid- January, 2008 has been included for study.
 There may be little variance in the data provided in Annual
Reports of MBL and the same published by NRB due to the
adjustment issues.

1.7 CHAPTER PLAN

This study has been classified in three chapters. Chapter one covers the
backgrounds and introduction of the organization and subject matter,
chapter two includes presentation and analysis of data and major
findings and last chapter includes conclusions and recommendations.

In chapter one, brief introduction of banking industry, literature review,
process of loan advancement, objectives of study, research methodology
and tools used, assumptions and limitations of the study have been
included.
In chapter two, it includes various aspects of loan management,
presentation and analysis of data in the form of table and graph and
major findings on the basis of data analysis.

In chapter three, the conclusions and recommendations to MBL on the
basis of major findings has been presented.

In the closing part, the bibliography and some additional information
about commercial banks and MBL have been attached as the appendices.
Chapter Two
DATA PRESENTATION AND ANALYSIS

In this chapter, the collected data through research are analyzed and
presented in actual form i.e. in the form of table and chart. Unless and
until the collected data are presented and analyzed in proper way, this
project is meaningless. So, this part is very much important which gives
the proper identification of the project.

This chapter covers the main portion of the study where the actual study
of findings is being done. The collected data are analyzed by various
means of tools and trends. In this part, all the data are presented as
specify in the Annual Reports of MBL for FY 2003/04 to 2006/07 and
Banking and Financial Statistics (Mid-January, 2008), published by NRB.

Similarly for the analysis, following financial and statistical tools are
used:
 Ratio Analysis
 Karl Pearson’s Correlation Coefficient, and
 Trend Line Using Least Square Method
 Graphical figures

2.1. Loan Management of MBL
MBL is serving wide sectors in urban and rural areas providing loans in
different forms since its establishment in October, 2000. With this loan
advancement, the bank is generation additions to its profit with the
various charges and income in the form of processing fee, documentation
charge, interest etc. From the starting of its operation, MBL has shown
its higher efficiency and effectiveness in loan management with the
advancement in loan disbursement and interest income.

Despite of poor economic growth, there has been increase in
incorporation and operation of Bank and Financial Institutions due to
which the banking business along with the loan management has become
more challenging and more competitive. On the other hand, political
instability, continual closures/ strikes in the industrial and transport
sector has led to an increased risk in deposit and loan management.
Out of the total loans and advances provided by the financial system,
around 80% is served by the Commercial Banks, out of which MBL has
disbursed around 3.36% of loan to the public in various forms in FY
2006/07.
2.2 Financial Ratio Analysis
2.2.1 Loan disbursement and recovery analysis

The snapshot figure regarding loan disbursement, loan recovery,
principal and interest written off in the past 4 fiscal years is shown
below:

Table No. 2.1 Loan disbursement and recovery analysis
Rs. in million
Particulars Fiscal Years
2003/ 2004/0 2005/0 2006/0
04 5 6 7
Loan disbursement 5711. 17494. 7437.7 9810.3
80 10 0 0
Loan recovery 4896. 14969. 6454.6 8546.2
30 60 0 6
Principal written off 0.00 0.30 1.50 14.32
Interest written off 0.054 0.20 2.50 0.00
95
Loan disbursement growth - 206.28 (57.5) 32
rate (In %)
Loan recovery to loan 85.72 85.57 86.78 87.12
disbursement Ratio

Source: Annual Reports of MBL from FY 2003/04 to FY
2006/07

(Note: the figures in parenthesis indicate negative value)
Loan Disbursement and Recov ery Analysis for
FY 2003/04 to FY 2006/07

20000
18000
16000
14000
12000
10000 Loan disbursement Loan recov ery
Rs. (in million)
8000
6000
4000
2000
0
2003/04 2004/05 2005/06 2006/07

Fiscal Years

Fig. No.2.1 Loan disbursement and recovery analysis

As shown in the table and figure, the total loan disbursement amount in
FY 2003/04 was Rs. 5711.80 million. In FY 2004/05, the loan amount
increased to 17494.10 million with the tremendous growth by 206.28%,
which was due to the increased lending trend in various productive
private sectors (i.e. construction, services and trading sectors etc.). But
in FY 2005/06, the loan disbursement declined by 57.5% to Rs. 7437.70
million. This serious decline in loan disbursement was due to the
emergence of large numbers of financial institutions providing the
greater threats to MBL. But in FY 2006/07, the loan disbursement
increased by 32% in comparison to FY 2005/06, which indicates the
improving trend in loan management.
The principal and interest written off amount dictates the amount to be
deducted out of the respective title considering it as uncollectible or bad
debt. The principal written off figures in FY 2004/05, FY 2005/06 and FY
2006/07 are Rs. 0.3 million, Rs. 1.5 million, Rs. 14.32 million. The
increasing trend of principal written off shows the lack of efficiency and
effectiveness in loan disbursement and collection.

The interest written off in FY 2003/04 was Rs. 0.05495 million which
reached to Rs. 0.2 million with the growth rate of 264%, which reflect
the weak policies followed by the bank in terms of loan recovery. Again
the interest of 2.5 million is written off in FY 2005/06, which is greater
by the amount of Rs. 2.3 million in comparison to FY 2004/05. But in FY
2006/07, the interest written off was at the level of zero, which reflects
the greater improvement in strategic decision in terms of loan
management.

Fig. No. 2.2 Loan recovery to loan disbursement ratio

As the figure above indicates the loan recovery to loan disbursement
ratio was 85.72% in FY 2003/04 which indicates that about 85.72% of
loan amount was recovered in that FY. This ratio remained at 85.57%,
86.78%, and 87.12% respectively in the FY 2004/05, FY 2005/06 and FY
2006/07. This increasing trend in loan recovery to loan disbursement
suggests the improving loan management policies.
2.2.2 Weighted average interest rate spread Analysis
Table No. 2.2 weighted average interest rate spread Analysis

Fiscal Year Average Interest Average Interest Average
(FY) Rates on Loan and Rates on Interest Rate
Advances (in %) Deposits (in %) Spread (in %)
2003/04 7.87 4.09 3.78
2004/05 6.90 3.26 3.64
2005/06 6.99 3.60 3.39
2006/07 7.47 4.10 3.37
Mean Rate 7.31 3.763 3.545
Standard 0.3904 0.3536 0.1724
Deviation
(S.D.)
Coefficient of 5.34% 9.397% 4.863%
variance (CV)

Source: Annual Reports of MBL from FY 2003/04 to FY 2006/07

Fig. No.2.3 weighted average interest rate analysis

There are various loan products and deposit schemes offered by MBL,
these products and schemes have been weighted considering its
durability, feasibility and profitability. The weighted average interest rate
was 7.87% in FY 2003/04 which slightly decreased and reached to 6.90%
and 6.99% in FY 2004/05 and FY 2005/06 respectively. Such decline in
loan and advances is to attract customers from larger sectors. This loan
rate reached to 7.47% in FY 2006/07 with the increment in deposit rate.
In this way, the weighted average interest rate in loans and advances
shows the fluctuating trend with the standard deviation of 0.3904 from
its mean value.

The average interest rate in deposit was 4.09% in FY 2003/04 which
decreased in FY 2004/05 to 3.26% and again increased to 3.60% in FY
2005/06. This rate reached 4.10% in FY 2006/07. Even the average
deposit interest rate shows the fluctuating trend with mean value 3.763
which is nearly 50% of the mean interest on loan. Average rate on
deposit has the standard deviation of 0.3536 meaning that the average
rates on deposits are deviated by 35.36% from its mean value.

Since, the Coefficient of variance (CV) of average deposit rates is higher
than that of average loan rates; the average deposit rates are more
variable and less consistent in comparison to average loan rates.

The average interest spread is calculated by decreasing average interest
rate on deposit from the average rate on loan. Such interest spread was
3.78% in FY 2003/04 then remained at the level of 3.64%, 3.39% and
3.37% respectively for FY 2004/05, FY2005/06 and FY 2006/07. Such
spread has the standard deviation of 0.1724 and CV 4.863% reflecting
the more consistency in spread rates in comparison to both the rates in
loans and deposits.

2.2.3 Credit to Deposit ratio analysis

Table No.2.3 Credit to Deposit ratio analysis

Rs. In million
Fiscal Year Total Credit Total Deposit Credit to
Credit growt Deposit growth Deposit
(Rs.) h (Rs.) (in %) Ratio (in
(in %) %)
2002/03 1494.10 - 1778.70 - 84
2003/04 2541.70 70.12 2754.60 54.87 92.27
2004/05 5051.40 98.74 5586.50 102.81 90.42
2005/06 6033.40 19.44 7893.30 41.30 76.44
2006/07 7281.30 20.68 9475.00 20.04 76.85
Mid- January 8040.60 10.43 9327.40 (1.56) 86.20
2008
Mean 43.88 43.50 84.37
Standard 43.28 35.31 6.08
Deviation
(SD)
Coefficient of 98.63 81.17 7.21
Variance (CV)

Source: Banking and Financial Statistics, Mid- January, 2008, Nepal
Rastra Bank

Note: the figures in parenthesis indicate negative value

Fig. No, 2.4 Credit to Deposit ratio analysis

As indicated in the table and figure above, the total credit or loan of MBL
was Rs.1494.10 million in FY 2002/03. The credit amount increased by
70.12% and reached to Rs.2541.70 in FY 2003/04. Then with the
fluctuating trend, credit grew by 98.74%, 19.44% and 20.68% in the FY
2004/05, FY 2005/06 and FY 2006/07 respectively in comparison to the
respective previous fiscal years. But the growth rate in credit remained
at 10.43% in Mid-January, 2008. The mean credit growth rate in the past
5 years is 43.88% with the standard deviation of 43.28% in growth rate.

Where as, the deposit was Rs.1778.70 million in FY 2002/03 which grew
by 54.87%, 102.81%, 41.30% and 20.04% respectively in the FY 2003/04,
FY 2004/05, FY 2005/06 and FY 2006/07 in comparison to its respective
previous years. The total deposit decreased by 1.56% in Mid-January,
2008 to Rs.9327.40 million from Rs.9475 million. The mean deposit
growth rate is at 43.50% with the Standard deviation of 35.31%. The CV
of the growth rate of credit (i.e. 98.63%) is higher than the CV of the
deposit growth rate (i.e. 81.17%). So, there is more dispersion in the
growth rate of credit than in the growth rate of deposit.

The Credit to Deposit ratio as shown in the table and figure was 84% in
FY 2002/03 indicating 84% of credit is served with the amount of deposit
collection. This ratio remained at 92.27% and 90.42% respectively in FY
2003/04 and FY 2004/05. This ratio then decreased to 76.44% in FY
2005/06 and again increased to 76.85% in FY 2006/07. But in Mid-
January, 2008, this C/D ratio reached at 86.20% with the growth rate of
12.17% in comparison to FY 2006/07.

The increasing Credit to Deposit ratio indicates the efficiency of the
management to be able to utilize the deposit collection through credit
disbursement.
2.2.4 Non Performing Loan (NPL) Status of Machhapuchchhre Bank
Limited (MBL)

Table No.2.4 Non Performing Loan (NPL) Status of
Machhapuchchhre Bank Limited (MBL)
Rs. in million
Fiscal Total Loan NPL NPL NPL to Total
Year Gross growth growth Gross Loan (In
Loan rate (in %) rate (in %) %)
2002/0 1495.86 - 31.1 - 2.08
3 0
2003/0 2540.79 70 24.9 (19.68) 0.98
4 8
2004/0 5130.22 102 19.8 (20.50) 0.39
5 6
2005/0 6146.57 19.81 16.9 (14.80) 0.28
6 2
2006/0 7319.90 19.09 85.1 403.30 1.16
7 6
Mid- 8186.00 11.83 137. 63.87 1.67
Jan.200 00
8
Mean 5136.56 52.5 1.093
0

Source: Banking and Financial Statistics, Mid- January, 2008, Nepal
Rastra Bank

Note: The figures in parenthesis indicate negative value
Fig. No.2.5 NPL to total gross loan ratio analysis

As shown in the table and figure above, the total gross loan was Rs.
1495.86 million in FY 2002/03, which gradually increased in fluctuating
rate till mid- January, 2008. In the FY 2003/04 and FY 2004/05 the gross
loan amount increased by 70% and 102% respectively in comparison to
its respective previous years. The growth rate of loan in FY 2004/05 is
the highest till date. From FY 2005/06 to Mid-January, 2008; the gross
loan amount grew in decreasing rate by 19.81%, 19.09% and 11.83% in
FY 2005/06, FY 2006/07 and Mid-January, 2008 respectively. The mean
or average amount of gross loan remained at Rs. 5136.56 million in the
last 6 years.

The NPL was Rs. 31.10 million in FY 2002/03 which gradually decreased
by 19.68%, 20.50% and 14.80% in FY 2003/04, FY 2004/05 and FY
2005/06 respectively in comparison to its respective previous years.
Such decreasing trend in NPL is favorable to the Bank. But in FY
2006/07, the NPL increased by 403.30% to Rs. 85.16 million from 16.92
million. Again the NPL increased by 63.87% in Mid-January, 2008, which
shows the continuous deficiency of management in credit decision. The
average amount of NPL remained Rs. 52.50 million in the past 6 years.

The NPL to total gross loan ratio of MBL was 2.08% in FY 2002/03,
which indicates about 2.08% of gross loan amount has been converted to
non-performing types of loan in that FY. This ratio continuously
decreased to 0.98%, 0.39% and 0.28% in FY 2003/04, FY 2004/05, and
FY 2005/06 respectively, which reflects the improvement of decision
making pattern of management in loan disbursement. In FY 2006/07,
NPL to gross loan ratio increased to 1.16% from 0.28%. In Mid- January,
2008, this ratio turned up to 1.67%. Although, this ratio in Mid-January,
2008 is less than the same in FY 2002/03, the more effort of the credit
management is required to reduce this ratio as far as possible.

2.2.5 Interest Expenses to Interest Income Ratio Analysis

Table No. 2.5 Interest Expenses to Interest Income Ratio Analysis

Rs. in million
Fiscal Year Interest Interest Income Interest
Expenses Expenses to
Amou Growth Amou Growth Interest
nt Rate (in nt Rate (in Income Ratio
%) %) (in %)
2002/03 76.16 - 139.0 - 54.78
4
2003/04 113.5 49.13% 215.2 54.78% 52.78
8 1
2004/05 187.0 64.67 381.9 77.47 48.97
3 3
2005/06 288.6 54.34 563.3 47.50 51.24
6 6
2006/07 397.7 37.78 694.4 23.27 57.27
2 8
Mean 212.6 51.48 398.8 50.76 53.01
3 0
Standard 117.5 207.8
Deviation 8 3
CV 55.29 52.11
% %

Source: Annual Reports of MBL from FY 2002/03 to FY 2006/07
Fig. No. 2.6 Interest Expenses to Interest Income Ratio Analysis

The interest expenses to interest income ratio denotes the percentage of
interest expenses covered by interest income in a particular year. As
shown in the table and figure above, the interest expenses amount is
increasing in a fluctuating trend with the mean amount of Rs.212.63
million from FY 2002/03, FY 2006/07. in FY 2002/03, interest expenses of
MBL was Rs. 76.16 million which increased with the average growth rate
of 51.48% in the past 5 years and reached to Rs.397.72 million in FY
2006/07.

The trend of interest income also shows the increasing pattern in
fluctuating growth rate. Interest income was Rs. 139.04 million in FY
2002/03, which increased with the growth rate of 54.78%, 77.47%,
47.50% and 23.27% in the FY 2003/04, FY 2004/05, FY 2005/06 and FY
2006/07 in comparison to its respective previous years. The average
interest income amount is Rs. 398.80 million which is 87.56% greater
than the average interest expenses. This shows the sufficiency of interest
income to cover interest expenses.

The interest expenses to interest income ratio was 54.78% in FY
2002/03. This ratio shows the fluctuating trend with the average of
53.01%, which reflects that in average 53.01% of interest expenses can
be covered by the interest income. The standard deviation of interest
expenses is Rs. 117.58 million and the same of interest income is Rs.
207.83 million. The CV of interest expenses is 55.29%, which is more
than that of interest income i.e. 52.11%. This reflects that there is more
variability in the interest expenses in comparison to interest income of
MBL.
2.2.6 Interest on loans and advances to total interest income ratio
Analysis
Table No. 2.6 Interest on loans and advances to total interest income
ratio Analysis
Rs. in million
Fiscal Year Interest on Total Interest on loan and
loans and interest advances to total interest
advances income income Ratio (in %)
2002/03 125.18 139.04 90.03
2003/04 199.92 215.21 92.89
2004/05 196.83 381.93 51.54
2005/06 325.96 563.36 57.86
2006/07 365.81 694.48 52.67
Mid- 321.60 358.70 89.66
January,
2008
Mean 255.88 392.12 72.44
SD 86.62 190.312 18.55
CV 33.85% 48.53% 25.61%

Source: Annual Reports of MBL from FY 2002/03to FY 2006/07 &
Banking Statistics, 2008, NRB

Fig. No. 2.7 Interest on loans and advances and total interest income
Analysis

As the table and figure above, the total interest income shows the
increasing trend with the increment in the contribution of loan and
advances. The total interest income reached at the top level in FY
2006/07 with Rs. 694.48 million. Till the mid-January, 2008, the total
interest income is Rs.358.70 million with 89.66% contribution of loan
and advances.

The interest on loan and advances to total interest income ratio is shown
in the figure below for further description:

Fig. No. 2.8 Interest on loans to total interest income ratio Analysis

As the table and figure shows the interest on loan to total interest
income ratio is 90.03% in FY 2002/03, this reflects that 90.03% of
interest was earned only by the loan and advances. This ratio changes in
fluctuating trend with 92.89%, 51.54%, 57.86%, 57.67% and 89.66%
respectively in FY 2003/04, FY 2004/05, FY 2005/06, FY 2006/07 and
mid-January, 2008.

The mean value of interest on loan is Rs. 255.88 million and the same on
total interest income is Rs. 392.12 million which results the mean value
of interest on loan to total interest income ratio to be 72.44%.

The Standard deviation (SD) on interest on loan is Rs. 86.62 million; the
SD on total interest income is Rs.190.312 million which means the data
given are deviated with their respective mean values by their respective
SD. The SD on interest on loan to total interest ratio is 18.55% showing
18.55% of dispersion in the ratio values than its mean value.
The CV on total interest income is the highest (i.e. 48.53%) among the
CVs of interest on loan (i.e. 33.85%) and interest on loan to total interest
ratio (i.e. 25.61%). So, the interest income data is more variable and the
calculated ratio is more consistent in comparison to the remaining two
sets of data.
2. 2.7 Loan loss provision to total assets ratio analysis
Table No. 2.7 Loan loss provision to total assets ratio analysis
Rs. (in million)
Fiscal Loan Provision Total Assets Loan loss
Year loss growth assets growth provision to
provision rate rate (in total assets
(in %) %) ratio
(in %)
2002/0 31.70 - 2399.8 - 1.32
3 6
2003/0 47.68 50.41 3448.6 43.70 1.38
4 3
2004/0 66.79 40.08 6456.4 87.22 1.03
5 6
2005/0 78.15 17.01 9069.8 40.48 0.86
6 3
2006/0 190.05 143.19 10807. 19.16 1.76
7 62

Source: Annual Reports of MBL from FY 2002/03 to FY
2006/07

Fig. No. 2.9 Loan loss provision to total assets ratio analysis

The loan loss provision to total assets ratio measures the loan loss
provision as the percentage of total assets. This shows the credit quality
of a particular financial institution. As presented in the table above, the
loan loss provision was Rs.31.70 million in FY 2002/03, which increases
in fluctuating growth rates by 50.41% in FY 2003/04, 40.08% in FY
2004/05, 17.01% in FY 2005/06 and 143.19% in FY 2006/07. The total
assets of MBL was Rs.2399.86 million in FY 2002/03, which also
increased in fluctuating growth rates with the highest % in FY2004/05 by
87.22% and by the lowest rate of 19.16% in FY 2006/07.

The loan loss provision to total assets ratio also shows the fluctuating
trend. This ratio was 1.32% in FY 2002/03 and remained 1.38%, 1.03%,
0.86% and 1.76% respectively in FY 2003/04, FY 2004/05, FY 2005/06
and FY 2006/07. Lower the loan loss provision to total assets ratio, better
or improving the confidence of management in loan recovery is seen. The
highest provision to total assets ratio of 1.76% in FY 2006/07 indicates
that the management of MBL is taking the conservative approach in
credit quality management by provisioning the higher amount for loan
losses.

2.2.8 Net Profit to Loans and Advances Ratio Analysis
Table No.2.8 Net Profit to Loans and Advances Ratio Analysis
Rs. (in Million)
Fiscal Net Net profit Loan and Loans and Net profit
Year profit growth Advances advances to loans
rate (in growth rate and
%) (in %) advances
ratio
2002/03 15.31 - 1494.10 - 1.025
2003/04 46.69 204.96 2541.70 70.16 1.837
2004/05 84.87 81.77 5051.40 98.74 1.680
2005/06 134.0 57.89 6033.40 19.44 2.221
0
2006/07 74.09 (44.71) 7281.30 20.68 1.018
Mid- 135.6 83.02 8040.60 10.43 1.686
January, 0
2008

Source: Banking and Financial Statistics, Mid- January, 2008, Nepal
Rastra Bank
Fig. No. 2.10 Net Profit to Loans and Advances Ratio Analysis

The loan and advances play major role in interest income generation and
such income determines the net profit to the Bank. As shown in the table
and figure above, the net profit was Rs. 15.31 million in FY 2002/03,
which continued to increase by 204.96%, 81.77% and 57.89% in FY
2003/04, FY2004/05 and FY 2005/06 respectively. But the net profit
decreased by 44.71% in FY 2006/07 to Rs.74.09 million from Rs.134
million. Again, net profit increased by 83.02% in mid-January, 2008 to Rs.
135.60 million.

The loan and advances amount also shows the growing trend with
fluctuating growth rate. The highest growth rate in loan was 98.74% in
FY 2004/05. In mid-January, 2008 the loans and advances grew by
10.43% to Rs. 8040.60 million from Rs. 7281.30 million in FY 2006/07.
The net profit to loans and advances ratio was 1.025% in FY 2002/03,
which grew to 1.837% in FY 2003/04 and decreased to 1.68% in FY
2004/05.

Net profit to loans and advances remained the highest level of 2.221% in
FY 2005/06 but this ratio decreases to 1.018% in FY 2006/07 which is
due to the emergence of financial institutions as the competitors of MBL.
In mid- January, 2008, the net profit to loan ratio increased slightly to
1.686% showing the favorable trend to MBL.

2.3 Loan Portfolio Management
The 1990 Nobel Prize winner Professors Harry Markowitz and William F.
Sharpe has developed Portfolio Theory in which they forwarded their
view as portfolio management means don’t put all your eggs in one
basket. This means portfolio is the major tools of eliminating the
investment risks. Thus the investor has to invest their resources in
multiple sectors so as to make their investment risk free as much as
possible.

Regarding with above view MBL has also managed Loan Portfolio
Management. As loan transaction is the main concern of the bank, loan
portfolio is the main source of income or asset of the bank. But if loan
asset is inactive or non-performing then it will be the large source of risk
to the bank. Because non-performing loan does not generate income thus
the bank has to maintain separate provision fund for non-performing
loan from the revenue generated by performing/active loan. This will
negatively affect the profitability of the bank. So, for the sustainability
and durability and to manage performing loan and to control the non-
performing loan, the bank has invested in multiple sectors such as
government enterprises, private sectors, financial sectors etc from FY
2006/07. Although, it’s main focus is on private sectors.

MBL is accepting diverse types of securities as collateral such as
movable or immovable assets, guarantee of local banks, Fixed Deposit
Receipt (FDR) personal guarantee etc. under the principle on loan
portfolio management.
2.3.1 Credit provided to different sectors by MBL in FY 2002/03 to
mid- January, 2008
Table No.2.9 Credit provided to different sectors by MBL in FY
2002/03 to mid- January, 2008
Rs. (in million)
Fiscal Year Sectors Total loan and
Government Private Financial advances
Enterprises sectors Institutions
2002/03 0.00 1494.10 0.00 1494.10
2003/04 0.00 2541.70 0.00 2541.70
2004/05 0.00 5051.40 0.00 5051.40
2005/06 0.00 6033.40 0.00 6033.40
2006/07 334 6325.00 622.20 7281.30
Mid- 67 7580 394.30 8040.60
January,
2008
Mean 66.83 4837.6 169.42 5073.75

Source: Banking and Financial Statistics, Mid- January, 2008, Nepal
Rastra Bank

Fig. No. 2.11 Analysis of total loans & advances and loans to the
private sectors

As shown in the table and figure above MBL has dispersed loan only to
private sectors till FY 2005/06. After FY 2006/07, MBL has started
disbursing loan to reputed government enterprises and financial
institutions. The average loan disbursement for government enterprises
in the past 6 years is Rs. 66.83 million. The mean loan disbursed for
private sectors is Rs. 4837.60 million and the same for financial
institutions is Rs. 169.42 million. The average loan amount remained to
be Rs.5073.75 million for the last 6 years.

Table No.2.10 Ratio Analysis on the credit to different sectors by
MBL for FY 2006/07 and Mid- January, 2008
Ratios (in %) Fiscal Year
2006/ Mid- January, 2008
07
Credit to Government Enterprises to 4.590 0.833
Total credit
Credit to Private sectors to Total 86.87 94.272
credit 0
Credit to Financial institution to Total 8.545 4.904
credit
Total (in %) 100 100
Source: Banking and Financial Statistics, Mid- January, 2008, Nepal
Rastra Bank

Fig. No. 2.12 Ratio analysis on the credit to different sectors

The credit to government enterprises to total credit ratio remained to be
4.59% in FY 2006/07 and 0.833% in mid- January, 2008. This decrease is
due to the insecurity in the government enterprises with the continuous
political interruptions. The credit to private sectors to total credit ratio
was 100% for FY 2002/03 to FY 2005/06. This ratio remained to 86.87%
and 94.272% for FY 2006/07 and Mid- January, 2008.
The credit to financial institution to total credit ratio remained at 8.545%
and 4.904% in FY 2006/07 and mid- January, 2008. The preference of
MBL is to the private sectors due to higher range of loan security. But
MBL should expand its range and sectors of loan and investment to get
competed in this competitive banking sector.

2.3.2 Deprived Sector Loan Statement of MBL as on Mid-Jan. 2008
Table No. 2.11 Deprived Sector Loan Statement of MBL as on Mid-
Jan. 2008
S.N Deprived Sector Rs. (In % contribution of
o. Loans million) loan to
Title deprived sectors
1. Direct Investment 0.30 0.1212
-Agriculture
2. Indirect 247.20 99.8788
Investment
3. Total 247.50 100
Source: Banking and Financial Statistics, Mid- January, 2008, Nepal
Rastra Bank

Fig. No.2.13 Deprived Sector Loan analysis of MBL as on Mid-Jan.
2008

MBL has disbursed around Rs. 247.50 million in deprived sector in mid-
January, 2008. As presented in the table above, MBL has disbursed Rs.
0.30 million loans as direct investment for agricultural sector, which is
about 0.12% of the total loan disbursed for deprived sector whereas MBL
has disbursed Rs. 247.20 million as indirect investment in deprived
sector which is around 99.88% of the total loan disbursed for deprived
sector.

Except these, MBL should disbursed loan in other sectors (like domestic
industries, services, power sectors etc.) as direct investment to increase
its profitability with its maximum effort.

2.3.3 Sector Wise Loans and Advances Analysis of Machhapuchchhre
Bank Limited (MBL) as on Mid-Jan. 2008

Table No. 2.12 Sector Wise Loans and Advances Analysis of
Machhapuchchhre Bank Limited (MBL) as on Mid-Jan. 2008
S.N Sectors Rs. in % contribution
o. million of loan
1. Production 1515.4 18.523
2. Construction 602.7 7.367
3. Metal Productions and M/C 714.0 8.727
4. Communications and Public 847.4 10.358
services
5. Wholesaler and Retailers 1637.7 20.018
6. Finance, insurance and fixed 632.6 7.732
assets
7. Service industries 641.6 7.842
8. Other sectors 1589.70 19.43
Total 8181.1 100
Source: Banking and Financial Statistics, Mid- January, 2008, Nepal
Rastra Bank
Fig. No.2.14 Sector Wise Loans and Advances Analysis of MBL as on
Mid-Jan. 2008

As shown in the table and figure above, MBL has provided its loan
facilities to different sectors like production, construction,
transportation, public services, wholesalers, retailers, finance, insurance
and other sectors. As on mid- January, 2008 around 20.018% of loan has
been disbursed to wholesaler and retailers which is the highest % of loan
disbursed in a particular sector. About 18.52% of loan has been
disbursed for production sector. Around 10.36% loan for communication
and public services, 8.73% loan for metal production, 7.84% for service
industries, 7.73% for finance and insurance, 7.36% for construction and
19.43% to other sectors like agriculture, mining, transportation,
consumable loan etc. has been disbursed in mid-January, 2008.
The trend of increased loan on wholesaler and retailer, production,
communication is supposed to be increased in coming years due to the
higher credit security and higher demand for loan in such sectors.
2.3.4 Accrued interest on loan to Total interest on loan ratio Analysis
of MBL for FY 2002/03 to FY 2006/07
Table No. 2.13 Accrued interest on loan to Total interest on loan
ratio Analysis of MBL for FY 2002/03 to FY 2006/07
Rs. (in Million)
Fiscal Accrued Total Accrued interest on loan to
Year interest on interest on total interest on loan ratio
loan loan (in %)
2002/0 11.68 125.18 9.33
3
2003/0 14.53 199.92 7.27
4
2004/0 26.03 196.83 13.22
5
2005/0 48.56 325.96 14.90
6
2006/0 48.16 365.81 13.17
7
Mean 29.79 242.74 11.58
SD 15.90 89.26 2.824
CV 33.37% 36.77% 24.39%
Source: Annual Reports of MBL from FY 2002/03 to FY 2006/07
Fig. No.2.15 Accrued interest on loan to interest on loan ratio
Analysis from FY 2002/03 to FY 2006/07

Accrued interest on loan to total interest on loan ratio measures the
outstanding interest on loan as the percentage of total interest on loan.
As shown in the table and figure above, the accrued interest on loan is in
increasing trend with mean value of Rs. 29.79 million in the last 5 years.
The trend of total interest on loan is fluctuating with the mean of Rs.
242.74 million. The accrued interest on loan to total interest on loan
ratio shows the fluctuating trend with the highest % of 14.90% in of
interest on loan was outstanding in FY 2005/06. Higher this ratio
indicates the greater credit risk of uncollectible interest and principal in
future.

The CV of the accrued interest on loan is 53.37%, which is the highest
among other two sets of data; hence this data has higher variability. The
CV of accrued interest to total interest on loan ratio is 24.39%, which
shows more consistency in this ratio data in comparison to other given
sets of data.
2.3.5 Security-wise loans and advances provided by MBL from FY
2002/03 to FY 2006/07
Table No. 2.14 Security-wise loans and advances provided by MBL
from FY 2002/03 to FY 2006/07
Rs. (in million)
Security types Fiscal Year Average Average
2002/0 2003/ 2004/ 2005/ 2006/ value weight of
3 04 05 06 07 security (%)
Movable/Immov 1210.2 2193. 4139. 5151. 6510. 3840.9 84.83
able Assets 3 84 37 20 13 5
Guarantee of 109.75 72.24 103.5 159.1 378.3 164.60 3.64
local Licensed 2 7 0
Institution
Fixed Deposit 1.83 0.60 17.89 123.8 229.9 74.83 1.65
Receipts (FDR) 3 8
Government - - 4.42 2.46 - 1.38 0.031
Bonds
Personal 0.067 0.05 0.03 - 184.6 36.95 0.816
Guarantee 0
Other securities 173.99 274.0 865.0 709.9 23.00 409.19 9.04
6 0 0
Total loans and 1495.8 2540. 5130. 6146. 7326. 4527.90 100
advances 67 79 23 56 01

Source: Annual Reports of MBL from FY 2002/03 to FY 2006/07

Fig. No.2.16 Security-wise loans and advances in average provided by
MBL in FY 2002/03 to FY 2006/07
As shown in the table and figure above, MBL is accepting different
securities as its collateral while disbursing loan in different sectors. In
the past 5 years, the trend of accepting movable and immovable assets is
increasing with the average contribution of 84.83% out of total
securities. In average 3.64% of security in the form of guarantee of local
licensed institution has been accepted in the past 5 years by MBL. The
fixed deposit receipt (FDR) has been accepted as the security in average
1.65% of total average security in the past 5 years. The government
bonds and personal guarantee contain 0.031% and 0.816% of average
weight respectively in the past 5 years. In average 9.04% of other
securities has been accepted as the collateral by MBL in the past. The
average weight carried by movable and immovable assets is the highest
among all due to its reliability, acceptability and legal supports.

2.3.6 Summary of concentration of Exposure (risk) of MBL on Loans
and advances

Table No.2.15 Summary of concentration of Exposure (risk) of MBL
on Loans and advances
Amount (in Million)
Fiscal Total amount on Loan, Highest Highest % of
Year Advances and Bills Exposure to a Exposure to a
Purchased single unit single unit
2003/0 2540.96 316.79 12.47
4
2004/0 5130.22 342.92 6.68
5
2005/0 61465.73 1720.32 2.80
6
2006/0 7319.939 250.00 3.42
7

Source: Annual Reports of MBL from FY 2003/04 to FY 2006/07
Fig. No. 2.17 analysis of the highest % exposure to a single unit of
MBL in FY 2003/04 to 2006/07

The table and figure above shows the summary of risks concentrated in
an individual, firm, institution and single sector based on Balance Sheet
transaction of the Bank. For the measurement of credit risk, exposure
analysis plays a major role. As shown in the table and figure, the total
amount of loans, advances and bills purchased was Rs. 2540.96 million in
FY 2003/04.

The highest exposure to a single unit in that FY was Rs. 316.79 million
which was 12.47% of total loan balance. In the same way, the highest
percentage of exposure to a single unit was 6.68% in FY 2004/05, 2.80%
in FY 2005/06 and 3.42% in FY 2006/07. The highest exposure in the last
4 years is 12.47% in FY 2003/04, which shows more credit risk to MBL in
that particular FY. The lowest exposure percentage in last fiscal years
was 2.80% in FY 2005/06, which shows comparatively lower credit risk
to MBL. The Bank should be more concerned on disbursing loan in
diverse sectors under the portfolio management approach by reducing
exposure risk only to a single unit.

2.4 Statistical Analysis
2.4.1 Correlation Coefficient between Average interest on loan
and loan disbursement
By using Karl Pearson’s correlation coefficient formula, the correlation
between loan and average interest on loan for F.Y. (2003/04 to 2006/07)
is made. For that let the average interest rate on loan be ‘x’ (independent
variable) and loan amount be ‘y’ (dependent variable) and no. of F.Y
denoted by ‘n’ is 4. The table is constructed as per the Karl Pearson’s
correlation coefficient formula which as shown below:

Table 2.16 Correlation Coefficient between Average Interest on
Loan and Loan Disbursements

Rs. in million
FY Average Loan u = x- v = y-B u2 v2 uv
interest (y) A (B=5051
rate on (A .40)
loan (x) =6.90)
2003/ 0.97 -2509.70 0.9409 6298594. -
04 2541. 09 2434.4
7.87 70 1
2004/ 5051. 0.00 0.00 0.00 0.00 0.00
05 6.90 40
2005/ 6033. 0.09 982.00 0.0081 964324.0 88.38
06 6.99 40 0
2006/ 7281. 0.57 2229.90 0.3249 49724540 1271.0
07 7.47 30 .10 43
v u 2 v 2  uv
= = = = =
Object 3

1.63 702.20 1.2739 12235372 -1074.
.10 99
The above calculation of correlation is based on assumed mean method.
Where, A = assumed mean for x = 6.90
B = assumed mean for y = 5051.40

Now, calculation of correlation coefficient by using Karl Pearson’s
correlation coefficient

we have,
 uv   u  v
n
r =
n u 2  ( u ) 2 n v 2  ( v ) 2

= 4* (-1074.99) – 1.63 * 702.2
√ 4*1.2739-(1.63)2 √ 4*12235372.10-(702.20)2

= -5444.546

√ 2.4387 √ 48448403.56

= - 5444.546

1.562 * 6960.49

= -0.5008

Interpretation:

The correlation between average interest rate on loan and the loan
amount in the past 4 years is -0.5008, which is between the value -1 and
+1. The ‘-ve’ sign in the correlation indicates the negative correlation
between interest rate on loan and loan. The figure r = -0.5008 indicates
that if the interest rate on loan increases by 1% then the demand for loan
will decrease by 0.50% and vice versa.

2.4.2 Correlation Coefficient between Total deposit and Loan
For the calculation of the correlation between deposit and loan (credit),
let the total deposit be ‘x’ (independent variable) and total loan amount
be ‘y’ (dependent variable). The number of years i.e. ‘n’ is 5.

The correlation between deposit and credit is calculated below under
assumed mean method:
Table 2.17 Correlation Coefficient between Total deposit and
Total Loan
Rs. in million
Total Total u = x- A v = y-B u2 v2 uv
depo Loan ( A=5586. (B=5051
sit (y) 50) .40)
(x)
1778. 1494. -3807.80 -3557.30 1449934 1265438 1354548
70 10 0.84 3.29 6.94
2754. 2541. -2831.90 -2509.70 8019657. 6298594. 7107219.
60 70 61 09 43
5586. 5051. 0.00 0.00 0.00 0.00 0.00
50 40
7893. 6033. 2306.80 982.00
5321326. 964324.0 2265277.
30 40 24 0 60
9475. 7281.3888.50 2229.90 1512043 4972454. 8670966.
00 30 2.25 01 15
u v u 2 v 2  uv
= = = = =
-444.4 -2855.10 4296075 2488975 3158895
6. 5.3 0.12
94 9
The above calculation of correlation is based on assumed mean method.
Where, A = assumed mean for x = 5586.50
B = assumed mean for y = 5051.40

Now, calculation of correlation coefficient by using Karl Pearson’s
correlation coefficient

Formula:
We have,
 uv   u  v
n
r =
n  u 2  ( u ) 2 n  v 2  ( v ) 2

= 5* 31588950.12 - (-444.40) (-2855.10)

√ 5 * 42960756.94 - (-444.4) 2 √ 5 * 24889755.39 - (-
2
2855.10)

= 156675944.20
14649.45 * 10784.12

= 0.9917

Interpretation
The correlation between deposit and credit (loan) is 0.9917 which is
between -1 and +1 and closer to +1. So, there is highly positive
correlation between deposit and loan. The correlation figure r = 0.9917
indicates that if the deposit amount increases by 1% then the total loan
amount will also increase by 0.9917% and vice versa.

2.4.3 Correlation Coefficient between Loan and Non Performing
Loan (NPL)
For the calculation of the correlation between loan and Non Performing
Loan (NPL), let the loan amount be ‘x’ (independent variable) and the
NPL amount be ‘y’ (dependent variable) and no. of items denoted by ‘n’
is 5. The table constructed as per the Karl Pearson’s correlation
coefficient formula is shown below:

Table 2.18: Correlation Coefficient between Loan amount and
Non-Performing Loan (NPL)

Rs. in million
Loan NPL u = x- A v = y-B u2 v2 uv
(x) (y) (A (B=19.
=5051.40) 86)
-3557.30 11.24 1265438 126.33 -
1494. 31.1 3.29 76 39984.05
10 0 2
-2509.70 5.12 6298594. 26.214 -
2541. 24.9 09 4 12849.66
70 8 4
5051. 19.8 0.00 0.00 0.00 0.00 0.00
40 6
6033. 16.9 982.00 -2.94 964324.0 8.6436 -2887.08
40 2 0
7281. 85.1 2229.90 65.30 4972454. 4264.0 145612.4
30 6 01 9 7
u v u 2 v 2  uv
= = = = =
-2855.10 78.72 2488975 4425.2 89891.67
5. 8 4
39 6
The above calculation of correlation is based on assumed mean method.

Where, A = assumed mean for x = 5051.40
B = assumed mean for y = 19.86

Now, calculation of correlation coefficient by using Karl Pearson’s
formula as below:

we have,
 uv   u  v
n
r =
n  u 2  ( u ) 2 n  v 2  ( v) 2

= 5 * 89891.674 – (-2855.10) * 78.72

√ 5 * 24889755.39 – (-2855.10)2 √ 5 * 4425.286 -
(78.72) 2

= 674211.842

10784.11707 * 126.2124859

= 0.4953

Interpretation
There is positive correlation between the loan and NPL amount. The
correlation between loan and NPL is calculated to be 0.4953, which is
between -1 and +1. The value r = 0.4953 implies that if the loan
disbursement increases by 1%, the NPL also increases by 0.4953% i.e.
almost by half more than the previous data.

2.4.4 Estimation of Loan
For the estimation of loan for the year 2008 and 2009, the trend line
using least square method has been used in which year is represented by
‘x’ and loan by ‘y’. Since, the given number of year in the table is odd i.e.
5 so year ‘2005’ is taken as base and is subtracted from all the given
year in 3rd column and the result is squared in 4 th column and multiplied
in 5th column. Using trend line equation, the trend values for each year
are found out and also forecast the trend for additional two years.
Table 2.19 Estimation of Loan Using Trend Line Least Square
Method

Rs. in million
Year (X) Loan (y) x =X-2005 x 2
xy

2003 1494.10 -2 4 -2988.20
2004 2541.70 -1 1 -2541.70
2005 5051.40 0 0 0
2006 6033.40 1 1 6033.40
2007 7281.30 2 4 14562.60

y x x  xy
= =0 2
=10 =15066.
22401.90 10

x y x
Here, =0, =22401.90, 2
=10,

 xy
=15066.10, n=5

We have the trend line equation i.e.

Yc = a + bx

Where,

Yc = Value of Y computed from the relationship for a given x

a = Parameter that determines the distance of the line directly above or
below the origin

b = Slope of the line i.e. the change in Y per unit change in x

x y
Since, =0, a= /n = 22401.90 / 5= 4480.38 and

 xy  x 2
b= / =15066.10 / 10 = 1506.61
According to the trend line equation, the trend values are calculated
below:

Trend values:
When x = -2, Yc = 4480.38 + 1506.61 * (-2) = 1467.16
x = -1, Yc = 4480.38 + 1506.61 * (-1) = 2973.77
x = 0, Yc = 4480.38 + 1506.61 * 0 =
4480.38
x = 1, Yc = 4480.38 + 1506.61 * 1 =
5986.99
x = 2, Yc = 4480.38 + 1506.61 * 2 = 7493.60

The actual and trend values of Loan from year 2003 to 2007 are shown in
the figure below:

Fig. No. 2.18 Actual and trend values of loan
For the estimation of Loan in 2008,
x = 2008 - 2005 = 3
Now, Loan in 2008 (Yc) = 4480.38 + 1506.61 * 3 = 9000.21
For the estimation of Loan in 2009,
X = 2009 – 2005 = 4
Now, Loan in 2009 (Yc) = 4480.38 + 1506.61 * 4 = 10506.82

Interpretation:
Since the value of ‘b’ in the trend equation is ‘+ve’, the loan
disbursement amount is expected to be increased in the coming years.
From the above trend values calculation, we can estimate the increment
in the loan disbursement in the year 2008 and 2009 to Rs. 9000.21
million and Rs. 10506.82 million respectively. This increment in loan
disbursement shows that MBL will gradually increase its credit services
to its clients to fulfill their desired transactions and through this; the
Bank can earn interest and other income improving the economic
condition of its clients as well as the nation.

2.4.5 Estimation of interest income
For the estimation of interest income for the year 2008 and 2009, the
trend line using least square method has been used in which year is
represented by ‘x’ and interest income by ‘y’. Year ‘2005’ is taken as
base and is subtracted from all the given year in 3 rd column and the
result is squared in 4th column and multiplied in 5th column. Using trend
line equation, the trend values for each year are found out and also
forecasted the trend for additional two years.
Table 2.20 Estimation of Interest income Using Trend Line Least
Square Method

Rs. in million
Yea Interest x =X- x 2
xy
r income(y) 2005
(X)
200 139.04 -2 4 -278.08
3
200 215.21 -1 1 -215.21
4
200 381.93 0 0 0
5
200 563.36 1 1 563.36
6
200 694.48 2 4 694.48
7
y x x  xy
= 1994.02 =0 2
=10 = 764.55

x y x
Here, =0, =1994.02, 2
=10,

 xy
=764.55, n=5

We have the trend line equation i.e.

Yc = a + bx

x y
Since, =0, a = /n = 1994.02 / 5= 398.80 and

 xy  x 2
b= / =764.55 / 10 = 76.455

According to the trend line equation, the trend values are calculated
below:

Trend values:
When x = -2, Yc = 398.80 + 76.455 * (-2) = 245.89
x = -1, Yc = 398.80 + 76.455 * (-1) = 322.345
x = 0, Yc = 398.80 + 76.455 * 0 = 398.80
x = 1, Yc = 398.80 + 76.455 * 1 =
476.255
x = 2, Yc = 398.80 + 76.455 * 2 = 551.71

For the estimation of interest income in 2008,
x = 2008 - 2005 = 3
Now, estimated interest income in 2008 (Yc) = 398.80 + 76.455 * 3 =
628.165
For the estimation of interest income in 2009,
x = 2009 – 2005 = 4

Now, estimated interest income in 2009 (Yc) = 398.80 + 76.455 * 4 =
704.62

Interpretation:

Since the value of ‘b’ in the trend equation is ‘+ve’, the interest income
shows increasing trend in the coming years. As per the calculation, the
estimated interest income for 2008 and 2009 are Rs. 628.165 million and
Rs. 704.62 million respectively. This increasing trend in interest income
may motivate the bank to additional further investment in the productive
fields from which it can earn the income and be able to generate profit in
future.

2.4.6 Estimation of Non-Performing Loan (NPL)
For the estimation of NPL for the year 2008 and 2009, the trend line
under least square method has been used. In the calculation, the year is
represented by ‘x’ and NPL by ‘y’. Using trend line equation, the trend
values for each year are found out taking 2005 as the base year and the
forecasting for additional two years has also been made.

Table 2.21 Estimation of NPL Using Trend Line
Rs. in million
Year NPL (y) x =X- x 2
xy
(X) 2005
2003 31.10 -2 4 -62.20
2004 24.98 -1 1 -24.98
2005 19.86 0 0 0
2006 16.92 1 1 16.92
2007 85.16 2 4 170.32
y x x2  xy
= =0 = 10 =100.06
178.02

x y x2
Here, =0, =178.02 =10,

 xy
=100.06, n=5

We have the trend line equation i.e.

Yc = a + bx

x y
Since, =0, a = /n = 178.02 / 5= 35.604 and

 xy  x 2
b= / = 100.06 / 10 = 10.006

According to the trend line equation, the trend values are calculated
below:
Trend values:
When x = -2, Yc = 35.604 + 10.006 * (-2) = 15.592
x = -1, Yc = 35.604 + 10.006 * (-1) = 25.598
x = 0, Yc = 35.604 + 10.006 * 0 = 35.604
x = 1, Yc = 35.604 + 10.006 * 1 = 45.61
x = 2, Yc = 35.604 + 10.006 * 2 = 55.616

For the estimation of NPL in 2008,

x = 2008 - 2005 = 3

Now, estimated NPL in 2008 (Yc) = 35.604 + 10.006 * 3 = 65.622

For the estimation of NPL in 2009,

x = 2009 – 2005 = 4

Now, estimated NPL in 2009 (Yc) = 35.604 + 10.006 * 4 = 75.628

Interpretation:
Since the value of ‘b’ in the trend equation is ‘+ve’, the NPL is estimated
to be increased in the coming years, which is not the better sign for the
Bank. Based on the calculation, it is estimated that in 2008, the NPL will
reach at Rs. 65.622 million and in 2009; NPL is estimated to be Rs.
75.628 million. MBL must be concerned on reducing this NPL growth by
advancing the loan to productive and performing sectors with the
adequate investigation in future.

2.5 SWOT Analysis of Machhapuchchhre Bank Limited (MBL)
SWOT analysis is a very useful tool in generating strategic alternatives.
This is an important analytical tool applicable at the corporate level or
business unit and frequently appears in marketing plans. The major
Strengths, Weaknesses, Opportunities and Threats of MBL are described
below:

STRENGTHS
i MBL has good network system in the nation thus helping the
customers to transact through bank from place to place. MBL has
altogether 23 branches spread all over the country.
ii MBL is playing a vital role for the development of the country
mainly in providing loan to promote entrepreneurship and by
providing employment opportunities to the people.
iii MBL also provides short term financing, deprived sector loans to
decrease the poverty in the country. It is performing as the major
commercial bank to provide its services in Jomsom and other urban
areas.
iv MBL is equipped with latest technologies. It is providing the good
remuneration and other benefits to its staffs. Thus, the service of
the bank is prompt and accurate.
v MBL deals both in foreign and local currencies.

WEAKNESSES
i Because of the many branches there is the heavy operation cost,
administrative expenses, salary etc.
ii Weak financial position in comparison to other competitive
commercial banks.
iii Higher interest rate on loan.
iv The market position of the bank is not rigid and strong.
v Higher number of formalities in loan disbursement and other
services.

OPPORTUNITIES
i MBL is getting recognized in Nepalese and foreign market. So, the
customers favor this Bank and the Bank is able to get the sufficient
deposits and request for different loan products.
ii Existing 24 hours banking and tele-banking, e-banking, SMS
banking services has secured its scope in larger areas.
iii Demand for its products in remote areas is also increasing and
Bank is also capable to expand its branches in different remote
locations.
iv Remittance services can be fruitful and have larger scope because
the economy of our country depends up on remittance.
v The policy of NRB rules and regulations always give confidence to
the banking sector to uplift the economy of the nation.
THREATS
i Economic condition of the country is very poor.
ii The political instability has reduced the market of the bank.
iii There is increasing number of competitors. Now, there are around
25 commercial banks, more than 58 development banks and
around 80 finance companies.

2.6 Major findings
The loan advancement is one of the major income sources of the Bank.
The data related with loan, interest, NPL etc. are major aspects that can
affect the profitability of the bank at large. In the 2 nd chapter all these
relevant data are presented and analyzed. Based on these analyses, the
major findings of the data related to loans and advances by MBL are as
follow:
i Loan recovery to loan disbursement ratio is in increasing trend,
which reflect the efficient policies followed by loan management
team of MBL.
ii The weighted average interest rate on loan and advances is 7.31%;
the same on deposit is 3.76% which resulted the average interest
rate spread to be 3.55%, which is lesser in comparison to the same
by other commercial banks.
iii The credit to deposit ratio shows the fluctuating trend but
increasing probability which is favorable to MBL.
iv The increasing NPL to total gross loan ratio of MBL in unfavorable
for the Bank.
v In average, interest expenses are 53.01% of the total interest
income which is quite satisfactory.
vi Based on the interest data from FY 2002/03 to mid-January, 2008,
in average 72.44% of interest is earned by loan and advances.
vii Loan loss provision to total assets ratio is in increasing trend
showing conservative approach in loan management.
viii About 94% of total loan has been disbursed for private sector by
MBL in mid-January, 2008.
ix MBL has disbursed 20.02% loan to the wholesale and retailing
sectors, which is the highest percentage of loan to any single
sector.
x MBL has disbursed about Rs. 247.50 million for deprived sector
loan in mid-January, 2008.
xi MBL has accepted in average 84.83% of movable and immovable
security as collateral in the past fiscal years.
xii In average, 11.58% of interest on loan remained accrued in the
past 5 years.
xiii The correlation between loan and average interest on loan is found
negatively correlated with r = -0.5008, the correlation between
loan and deposit in MBL is 0.9917 and the same of loan and NPL is
found to be0.4953.
xiv With the trend value analysis, the loan amount is estimated to be
Rs. 9000.21 million in 2008 and Rs. 10506.82 in 2009. The interest
income is estimated to be Rs. 628.165 million in 2008 and
Rs.704.62 million in 2009. The NPL is estimated to be Rs.65.622
million in 2008 and Rs. 75.628 million in 2009.
Chapter Three
CONCLUSION AND RECOMMENDATIONS

3.1. CONCLUSION
MBL is established with the purpose of serving as large customers as
possible in this competitive banking arena. Various services, facilities
and products have been offered by MBL to its different ranges of
customers. Out of those services and products, loan and advances is one
of the major product category which is important but risky and analytical
type products which serve around 80% of interest income to the financial
institutions. With the view of attracting a large and different ranges of
customers toward its loan products, it has implemented various policies
and strategies to develop the lending program and as far as it is able to
fulfill its objectives and target. Thus, with this view the above two
chapters are drawn in which chapter two is related with the performance
of MBL in credit or loan management.

On the basis of presentation and analysis of data and major findings we
can draw the following conclusions:

1 Out of the total loans and advances provided by the financial
system, around 80% is served by the Commercial Banks, out of
which MBL has disbursed around 3.36% of loan to the public in
various forms in FY 2006/07.

2 In FY 2004/05, the loan disbursement amount increased to
17494.10 million with the tremendous growth by 206.28% than FY
2005/06, which was due to the increased lending trend in various
productive private sectors i.e. construction, services and trading
sectors etc. But in FY 2005/06, the loan disbursement declined by
57.5% to Rs. 7437.70 million.

This serious decline in loan disbursement was due to the
emergence of large numbers of financial institutions providing the
greater threats to MBL. But in FY 2006/07, the loan disbursement
increased by 32% in comparison to FY 2005/06, which indicates the
improving trend in loan management.
3 The loan recovery to loan disbursement ratio was 85.72% in FY
2003/04 which indicates that about 85.72% of loan amount was
recovered in that FY. This ratio remained at 85.57%, 86.78%, and
87.12% respectively in the FY 2004/05, FY 2005/06 and FY
2006/07. This increasing trend in loan recovery to loan
disbursement suggests the improving loan management policies.

4 The principal written off figures in FY 2004/05, FY 2005/06 and FY
2006/07 are Rs. 0.3 million, Rs. 1.5 million, Rs. 14.32 million. The
increasing trend of principal written off shows the lack of efficiency
and effectiveness in loan disbursement and collection.

5 The weighted average interest spread was 3.78% in FY 2003/04,
3.64%, 3.39% and 3.37% respectively in FY 2004/05, FY2005/06
and FY 2006/07, which shows fluctuating trend and lower spread in
comparison to other commercial banks.

6 The Credit to Deposit ratio was 84% in FY 2002/03 indicating 84%
of credit is served with the amount of deposit collection. This ratio
remained at 92.27%, 90.42%, 76.44% and 76.85% in FY 2003/04,
FY 2004/05, FY 2005/06 and FY 2006/07 respectively. But in Mid-
January, 2008, this C/D ratio reached at 86.20% which indicates the
efficiency of the management to be able to utilize the deposit
collection through credit disbursement.

7 The NPL to total gross loan ratio of MBL was 2.08% in FY 2002/03,
which indicates about 2.08% of gross loan amount has been
converted to non-performing types of loan. This ratio continuously
decreased up to FY2005/06, which reflects the improvement of
decision making pattern of management in loan disbursement. In
FY 2006/07, NPL to gross loan ratio increased to 1.16% from
0.28%. In Mid- January, 2008, this ratio turned up to 1.67%, which
indicates that more effort of the credit management is required to
reduce this ratio as far as possible.

8 The interest expenses to interest income ratio shows the
fluctuating trend with the average of 53.01%, which reflects that in
average 53.01% of interest expenses can be covered by the interest
income. The CV of interest expenses is 55.29%, which is more than
that of interest income i.e. 52.11%. This reflects that there is more
variability in the interest expenses in comparison to interest
income of MBL.

9 The Standard Deviation on interest on loan to total interest ratio is
18.55% showing 18.55% of dispersion in the ratio values than its
mean value. The CV on total interest income is the highest (i.e.
48.53%) among the CVs of interest on loan (i.e. 33.85%) and
interest on loan to total interest ratio (i.e. 25.61%). So, the interest
income data is more variable and the calculated ratio is more
consistent in comparison to the remaining two sets of data.

10 The loan loss provision to total assets ratio shows the fluctuating
trend with the highest % of 1.76% in FY 2006/07 which indicates
that the management of MBL is taking the conservative approach
in credit quality management by provisioning the higher amount
for loan losses.

11 The credit to private sector to total credit ratio is 94.272% of total
loan in mid-January, 2008 which is higher in comparison to other
sectors due to higher range of loan security.

12 As on mid- January, 2008 around 20.018% of loan has been
disbursed to wholesaler and retailers which is the highest % of loan
disbursed in a particular sector. About 18.52% of loan production,
10.36% for communication and public services, 8.73% for metal
production, 7.84% for service industries, 7.73% for finance and
insurance, 7.36% for construction and 19.43% to other sectors like
agriculture, mining, transportation, consumable loan etc. has been
disbursed in mid-January, 2008.

13 MBL has disbursed Rs. 0.30 million loans as direct investment and
Rs. 247.20 million as indirect investment in deprived sector in as
on mid- January, 2008.

14 The average weight carried by movable and immovable assets as
the security in MBL is 84.83% in past 5 years, which is the highest
% among all other securities due to its reliability, acceptability and
legal supports.
15 Accrued interest on loan to total interest on loan ratio shows the
fluctuating trend with the CV of 24.39% which reflects the
existence of credit risk to MBL.

16 The highest exposure to a single unit in FY 2003/04 was Rs. 316.79
million which was 12.47% of total loan balance which shows more
credit risk to MBL in that particular FY. The lowest exposure
percentage in last fiscal years was 2.80% in FY 2005/06, which
shows comparatively lower credit risk to MBL. The Bank should be
more concerned on disbursing loan in diverse sectors under the
portfolio management approach by reducing exposure risk to a
single unit.

17 The correlation between loan and average interest on loan is found
negative with r = -0.5008 which indicates that if the interest rate
on loan increases by 1% then the demand for loan will decrease by
0.50% and vice versa. The correlation between loan and deposit of
MBL is 0.9917 which is favorable and the correlation of loan and
NPL is found to be 0.4953 which is unfavorable to the Bank

18 With the trend value analysis, the loan amount is estimated to be
Rs. 9000.21 million in 2008 and Rs. 10506.82 in 2009. The interest
income is estimated to be Rs. 628.165 million in 2008 and
Rs.704.62 million in 2009. The NPL is estimated to be Rs.65.622
million in 2008 and Rs. 75.628 million in 2009. Out of which the
increasing trend of NPL is unfavorable to the Bank.

3.2 RECOMMENDATIONS
Although MBL is performing its internal activities well and has come in
the competitive market, the following recommendations are suggested
on the basis of observation and analysis of data:

i The loan recovery to loan disbursement ratio is quite
unsatisfactory, the principal and interest written-off amounts of the
Bank is also quite higher, which must be reduced to its minimal
level by advancing the loan to the secured sectors with adequate
investigations.
ii The weighted average interest rate spread is only 3.54% in the last
5 years; it should be increased with the increment on the sectors of
loan and investment in the more productive sectors to compete
with the global banking competition.

iii The NPL to total gross loan ratios of MBL is increasing which
shows the inefficiency of the Bank in loan management. So, the
employees must be trained, motivated and guided for the strategic
management on credit functioning.

iv The increased loan loss provision to total assets ratio shows more
conservative approaches have been taken by MBL, which should be
minimized and Bank should be more confident on its loan
mobilization.

v Now, MBL is only concentrated on disbursing a larger portion of its
loan to the private sectors, which must be scattered by investing in
other profitable government enterprises and financial institutions.
MBL should adopt the portfolio management approach in credit
functioning by disbursing loan in diverse sectors beyond its current
areas.

vi The deprived sector loan invested by MBL is only Rs. 247.50
million as on mid-January, 2008, which should be increased in the
coming days to serve the deprived sectors along with generating
more income with diversified sectors.

vii MBL should reduce the exposure or risk of loan by not advancing a
larger portion of loan to a single sector, individual, firm and
institution.

viii MBL is now in the growing and learning stage of banking, so, the
management team of MBL must be concerned on earning well
recognition in the market by following various attractive policies by
comparatively reducing its interest rate on loan and slightly
increasing interest rate on deposit or any other policies which can
make its name and logo familiar to all the current and potential
customers.
ix The source for the loan disbursement is deposits. Thus, the bank
should attract a larger number of customers by providing various
unique and attractive schemes, policies, services; facilities etc,
which can attract more deposits from public and hence can be
utilized and mobilized in the productive sectors for the
sustainability and profitability of the Bank.

x MBL needs to play a leading role in terms of providing debt
measures focused mainly on postponement of repayment
schedules, providing concessionary loans or providing various
schemes to replace the loss by Non-Performing Loan (NPL).

xi Though the bank operates in various parts of the country, it should
outreach its services also to the rural and undeveloped parts of the
country with the sustainable and viable credit policy to attract a
different portion of customers.

xii The main problem MBL is facing now a days, is its outstanding and
overdue loan so the bank should properly implement the credit
policy and time to time inspect or monitor the field as well as
control the activities of its clients.

xiii The Bank should be quite standardized in terms of following world
wide accepted rules, regulations and mechanism for Credit
management, deposit mobilization, remittance collection etc. by
providing sufficient training, further study facilities and other
motivating tools to its employees.

xiv The bank should follow modern credit rating mechanism i.e.
‘CAMEL’ (Capital Adequacy, Asset Quality, Management, Earning
Quality and Liquidity). This methodology will certainly benefit the
Bank.

xv In order to get rid of the credit and any other types of risks, the
Bank should be service oriented, environmental adaptive, skilled
personnel holder, excellent management and outstanding
performance; all aspects are directed toward the goal attainment
with the benefit to its clients, shareholders and customers.