ANALYSIS OF NON-PERFORMING ASSETS OF NEPALESE

COMMERCIAL BANKS

Graduate Research Project

Submitted to

MBA (Finance) Program in Management

Office of the Dean, Faculty of Management

Pokhara University

Submitted by

Shristi Acharya

Exam Roll No: 10220341

P.U. Registration No: 2010-2-22-0211

In Partial Fulfillment of the Requirements for the MBA (Finance)

Degree in Management

Kathmandu, Nepal

December 2013
 Acknowledgement

This study entitled “Analysis of Non-Performing Assets of Nepalese Commercial

Banks” has been conducted to satisfy the partial requirements for the degree of
Masters of Business Administration (Finance), Pokhara University.

I would like to extend my immense gratitude to my respected supervisor Dr. Chakra

Khadka who not only provided valuable guidance but also inspired me to carry out the
researches in the days to come. Similarly, I would like to express my gratitude to
Professor Dr. Radhe Shyam Pradhan, Academic Director of Uniglobe College, for his
timely suggestions and support. I would like to express my gratitude towards Head of
Research Dr. Niraj Baral of Uniglobe College, for his kind guidance, supervision and
inspiration during the preparation of this graduate research project. I am also thankful
to my respected teachers, Dr. Nar Bahadur Bista and Dr. Khagendra Ojha for their
precise support and instruction.

The respondents of the sample banks deserve the sincere thanks for their valuable
time and responses. I would like to acknowledge all the respondents, officials and
authors including Uniglobe staffs and my friends. I also owe great many thanks to
great many other people who helped and supported during the accomplishment of this
study.

Lastly, I would like to express my warm respect to my father Mr. Shreedhar Acharya
and mother Mrs. Meena Acharya for their affection and emotional support to pursue
further study. Despite of sincere efforts made, the chance of human error cannot be
ruined out. Therefore, I would also like to take full responsibility of any kind of
deficiency presented in the Study.

Shristi Acharya
December, 2013

i
 Certificate of Authorship

I hereby declare that this- submission of Analysis of Non-Performing Assets of

Nepalese Commercial Banks is my own work and that, to the best of my knowledge
and belief, it contains no material previously published or written by another person
nor material which to a substantial extent has been accepted for the award of any
other degree of a university or other institution of higher learning, expect where due
acknowledgement is made in the acknowledgements

………………………………….
Shristi Acharya

ii
 Table of Contents
Acknowledgement i
Certificate of Authorship ii
Table of Contents iii
List of Tables v
List of Figures vii
Executive Summary viii
Abbreviations x

CHAPTER I: INTRODUCTION 1-17

1.1. Background 1
1.2. Statement of Problem 4
1.3. Purpose of the Study 7
1.4. Significance of the Study 7
1.5. Research Hypothesis 8
1.6. Operational Definition and Assumption 8

CHAPTER II: LITERATURE REVIEW & CONCEPTUAL FRAMEWORK 18-34

2.1. Review of Literature 18
2.4. Conceptual Framework 29
2.3. Concluding Remarks 33

CHAPTER III: RESEARCH DESIGN AND METHODOLOGY 35- 45

3.1. Research Plan and Design 35
3.2. Secondary Data 35
3.2.1. Description of Samples 36
3.2.2. Data Collection Procedure and Time Frame 37
3.2.3. Method of Secondary Data Analysis 38
3.3. Primary Data 42
3.3.1. Questionnaire Design 42
3.3.2. Survey Design 42
3.3.3. Primary Data Sampling 43
3.3.4. Sampling Technique 43

iii
 3.3.5. Method of Primary Data Analysis 43
3.4. Validity and Reliability 44
3.5. Instrumentation 45

CHAPTER IV: RESULTS AND DISCUSSION 46-114

4.1. Financial Highlights and Indicators of Commercial banks 46
4.2. Analysis of Non-Performing Assets and its Determinants 57
4.3. Univariate Portfolios Formed on One-Way Sorts 59
4.4. Relationship between Non-Performing Assets and it determinants 79
4.5. Qualitative Analysis of Non-Performing Assets and its Influencing Factors 98
4.6. Concluding Remarks 112

CHAPTER V: SUMMARY AND CONCLUSION 115-122

5.1. Summary 115
5.2. Conclusion 120
5.3. Recommendations 120

REFERENCE 123
APPENDICES 127

iv
 List of Table
Details Page no.
Table 1.1: Classification of Loan 12
Table 1.2: Classification of Loan Loss Provision relating to non-banking assets 14
Table 1.3: Classification of Provising in the year of acquisition 14
Table 3.1: Population and Number of Sample Banks 36

Table 3.2: Sample Size of Commercial Banks 37

Table 3.3: Coefficient of Cronbach's Alpha 44

Table 4.1: Loan & Advances to Total Assets of sample banks 47

Table 4.2: Loan & Advances to Total Deposits of sample banks 50

Table 4.3: Non-Performing Assets to Loan & Advances of sample banks 53

Table 4.4: Return on Loan & Advances of sample banks 55

Table 4.5: Descriptive Statistics of Key Variables of Sample Banks 58

Table 4.6: Properties of Portfolios Sorted on NPL 60

Table 4.7: Properties of Portfolios Sorted on L&A to TA 62

Table 4.8: Properties of Portfolios Sorted on L&A to TD 64

Table 4.9: Properties of Portfolios Sorted on NPA to L&A 66

Table 4.10: Properties of Portfolios Sorted on RL 68

Table 4.11: Properties of Portfolios Sorted on RIR 71

Table 4.12: Properties of Portfolios Sorted on GDP 72

Table 4.13: Properties of Portfolios Sorted on INF 74

Table 4.14: Properties of Portfolios Sorted on Bank Size 76

Table 4.15: Properties of Portfolios Sorted on GL 78

Table 4.16: Correlation Coefficient between NPL and Independent Variables 80

Table 4.17: Correlation Coefficient between NPL and Independent Variables

of State Owned Banks 82

v
Table 4.18: Correlation Coefficient between NPL and Independent Variables
of Private Sector Banks 84

Table 4.19: Correlation Coefficient between NPL and Independent Variables

of Joint Venture Banks 86

Table 4.20: Estimated Relationship between NPL and Independent Variables 88

Table 4.21: Estimated Relationship between NPL and Independent Variables

of State Owned Banks 91

Table 4.22: Estimated Relationship between NPL and Independent Variables

of Private Sector Banks 94
Table 4.23: Estimated Relationship between NPL and Independent Variables
of Joint Venture Banks 97

Table 4.24: Respondents Profile 99

Table 4.25: Responses on Trend of NPA of Commercial Bank 100

Table 4.26: Responses Associated with NPA Measurement Variables 101

Table 4.27: Responses on Relationship between NPA and Bank Profitability 102

Table 4.28: Responses on Sufficiency of Bank Specific Variables and Macro-

Economic variable to Analysis the Non-Performing Assets 103

Table 4.29: Responses on JVB have Relatively Low NPA level then the Private
and Public Sectors Banks 104

Table 4.30: Responses Associated with Lower NPA is good for Shareholder 104

Table 4.31: Rank Scores on Determinants of Non-Performing Assets 105

Table 4.32: Responses for Assets becoming NPA 106

Table 4.33: Responses of Internal reasons for turning good loan into bad loans 107

Table 4.34: Responses of External reasons for turning good loan into bad loans 108

Table 4.35: Statement on Level of Agreement and Disagreement 109

vi
 List of Figure
Details Page no.

Figure 2.1: Conceptual Framework of Non-Performing Assets 32

Figure 4.1: Loan & Advances to Total Assets of sample banks 49

Figure 4.2: Loan & Advances to Total Deposits of sample banks 51

Figure 4.3: Non-Performing Assets to Loan & Advances of sample banks 54

Figure 4.4: Return on Loan & Advances of sample banks 56

vii
 Executive Summary
Non-performing assets refers to those unproductive assets of any firm that cannot be
converted into cash within specified time limit. It is the loans made by a bank or
financial company on which interest payments and principal repayment are not being
made on time. Non-performing loan has negative impact in banks growth as well as in
economic growth. In one hand it stops the interest earnings of banks and in other hand
it causes the bank to make certain percent provision (for possible loss of principle)
from the operating profit. Non-performing loan reflect the health of financial system
affecting the profitability. Hence, the impact of the internal and external determinants
of commercial bank non-performing assets is analyzed with a view to show their
impact on bank revenue and costs. This theoretical study focuses on the dependent
variable namely non-performing loans. This is followed by the internal determinants
of commercial bank.

This study investigates the analysis of non-performing assets of Nepalese commercial

banks with respect to firm specific variables and macroeconomic variable. The
specific objectives of this study were to analyze the relationship and impact of loan &
advances to total assets, loan & advances to total deposits, non-performing assets to
loan & advances, return on loan & advances, real interest rate, gross domestic product
rate, inflation rate, bank size and loan growth rate.

The research is based on primary and secondary data. The methods used for
secondary data analysis included financial analysis, and analysis by forming portfolio,
correlation analysis and regression analysis. The methods used for primary data
analysis included percentage frequency distribution, mean scores of responses to 5
point Likert scale items.

The results of from the financial analysis concluded that private banks has highest
ratio of L&A to TA and L&A to TD. State owned banks and joint venture banks has
relatively lowest ratio of L&A to TA and L&A to TD ratio. Most of the sample banks
have relatively lowest ratio of NPA to L&A except ADB, NBBL, NCC and Lumbini
bank. State owned banks and joint venture banks has highest ratio of RLA whereas,
private banks has relatively lowest ratio.

viii
The determinants of NPL are not equally applicable for all types of ownership of
banks. Some determinants like GDP, INF and RIR is common to all banks while other
determinants NPL, L&A to TA, L&A to TD, NPA to L&A, RLA and GL are not
equally significant for all banks. From the correlation coefficient and regression
analysis we can conclude that non-performing loan has negative relation with loan &
advances to total assets, loan & advances to total deposit, gross domestic product,
inflation and loan growth rate. Return on loan & advances have neutral relation with
non-performing loan. Non-performing assets to loan & advances, real interest rate,
NPL of previous year and size has positive relation with non-performing assets in
context of Nepalese commercial banks.

ix
 List of Abbreviation

AAG : Average Annual Growth

ADB : Agriculture Development Bank Limited

ANNOVA : Analysis of Variance

Assets and Enforcement of Security Interest

BOK : Bank of Kathmandu Limited

CBI : Central Bank of India

CDR : Credit to Deposit Ratio

CGR : Compound Growth Rate

CV : Coefficient of Variation

DW : Durbin Waston

EBL : Everest Bank Limited

FY : Fiscal Year

GDP : Gross Domestic Product

GL : Growth on Loan

GNPA : Gross Non-Performing Assets ratio

HBL : Himalayan Bank Limited

HDFC : Housing Development Finance Corporation

HMG : His Majesty Government

IBA : Indian Bank Association

ICICI : Industrial Credit and Investment Corporation of

IMF : International Monetary Fund

JVB : Joint Venture Banks

KBL : Kumari Bank Limited

L&A to TA / LATA : Loan & Advances to Total Assets

L&A to TD / LATD : Loan & Advances to Total Deposits

x
LBL : Laxmi Bank Limited

LGR : Linear Growth Rate

Lumbini : Lumbini Bank Limited

MBL : Machhaphuchure Bank Limited

MIS : Management Information System

NABIL : Nabil Bank Limited

NBBL : Nepal Bangladesh Bank Limited

NBL : Nepal Bank Limited

NCC : Nepal Credit and Commercial Bank Limited

NEPSE : Nepal Stock Exchange

NIBL : Nepal Investment Bank Limited

NIC : Nepal Industrial and Commercial Bank

NNPA : Net Non-Performing Assets

NPA to L&A / NPALA : Non-Performing Assets to Loan & Advances

NPA : Non-performing Assets

NPL : Non Performing Loan

NRB : Nepal Rastra Bank

NSBI : Nepal SBI Bank

NSM : Nationstar Mortgage

OLS : Ordinary Least Square

PA : Performing Loans

PNB : Punjab National Bank

PSB : Public Sector Banks

RLA : Return on Loan & Advances

RBBL : Rastriya Banijya Bank Limited

RBI : Reserve Bank of India

RIR : Real Interest Rate

xi
SBI : State Bank of India

SBL : Siddhartha Bank Limited

SCB : Scheduled Commercial Banks

SCBL : Standard Chartered Bank Limited

SD / Std. dev : Standard Deviation

SEBON : Security Board of Nepal

SIZE : Bank Size / Total Assets

SPSS : Statistical Package of Social Science

SRFAESI : Securitization and Reconstruction of Financial

Assets and Enforcement of Security Interest

SSI : Small Scale Industry

xii
 CHAPTER I
INTRODUCTION

1.1. Background of the Study

Non-performing assets refer to that portion of bank assets which is not generating cash to
bank. Accumulated loss, Non-banking assets and non-performing loan are some example
of non-performing assets. Non-performing loan is any obligation or loan in which interest
and the principal payments are more than 90 days overdue, more than 90 days worth of
interest and has been refinanced, capitalized or delayed by agreement or if payment are
less than 90 days overdue but payments are no longer anticipated (IMF, 2009). Non-
performing assets refers to those unproductive assets of any firm that cannot be converted
into cash within specified time limit. It is the loans made by a bank or financial company
on which interest payments and principal repayment are not being made on time. Non-
performing loan has negative impact in banks growth as well as in economic growth. In
one hand it stops the interest earnings of banks and in other hand it causes the bank to
make certain percent provision (for possible loss of principle) from the operating profit.
Non-performing loan reflect the health of financial system affecting the profitability.

Total assets of bank can be divided in to two parts: performing assets and non-performing
assets. Performing assets are those assets which direct generates cash to organization or
indirectly helps to generate cash of it facilitates the set ups for quality and quantity
productivity. Loan and advances is direct contributor to banks income whereas cash in
vault, balance in other bank, fixed assets and other assets are the facilitators which helps
the daily operation of bank, Performing assets and positive value to bank as well as to
Nation.

Commercial banks are the heart of the economic system. The economic progress of a
nation and development of banking is invariably interrelated. The Banking sector is an
indispensable financial service sector supporting development plans through channelizing
funds for productive purpose, intermediating flow of funds from surplus to deficit units

1
and supporting financial and economic policies of government. The importance of bank’s
stability in a developing economy is noteworthy as any distress affects the development
plans (Rajaraman and Vasishtha, 2002). The Nepalese Banking sector accounts a major
portion of financial intermediation and acknowledged as main vehicle for monetary
policy signals, credit channel and facilitator for payment systems. The stability of
banking hence is a pre-requisite for economic development and resilience against
financial crisis.

Commercial banks accept the deposits of millions of people, government and business
units. They exchange money, accept deposits, grant loan and operate commercial
transaction. Commercial banks are organized primarily for the purpose of earning profit,
the commercial bank is a handover from an earlier period when banks were
predominantly short-term financiers. Bank lower part of balance sheet consists of assets
of bank, which generally consist of some liquid assets, some short-term call money, some
investments, some fixed assets and the major portion of total assets is consist of loan and
advances.

The performance of any financial institution is greatly measured with the coverage of
NPL in that particular institution. Since the prime sources of income for the bank are
generated through income from loan and advances, increase in Non Performing Assets
may lead bank in the verge of collapse. The loan and advances which is overdue for 3
months or more should be treated as NPL (NRB Directives, 2011). NPLs reflect the
health of financial system of the bank or financial company. A Non Performing loan is
any obligation or loan in which interest and the principal payments are more than 90 days
overdue, more than 90 days worth of interest has been refinanced, capitalized or delayed
by agreement or if payments are less than 90 days overdue but payments are no longer
anticipated (IMF, 2009).

If the credit allowed by banks and financial institutions turns bad, it creates NPL. NPL
percentage is assets portfolio which shows health of a bank. The performance of any
financial institution is greatly measured with the coverage of NPL in that particular

2
institution. Since the prime sources of income for the bank are generated through income
from loan and advances, increase in non-performing assets may lead bank in the verge of
collapse. The loan and advances which is overdue for 3 months or more should be treated
as NPL (NRB Directives, 2011).

Like any other business, success of banking is assessed which is based on profit and
quality of asset it possesses. Even though bank serves social objective through its priority
sector lending, mass branch networks and employment generation, maintaining asset
quality and profitability is critical for banks survival and growth. A major threat to
banking sector is prevalence of Non-Performing Assets (NPAs). NPA represent bad
loans, the borrowers of which failed to satisfy their repayment obligations. Michael et al.,
(2006) emphasized that NPA in loan portfolio affected operational efficiency which in
turn affects profitability, liquidity and solvency position of banks. Batra, (2003) noted
that in addition to the influence on profitability, liquidity and competitive functioning,
NPA also affected the psychology of bankers in respect of their disposition of funds
towards credit delivery and credit expansion. NPA generated a vicious effect on banking
survival and growth, and if not managed properly leads to banking failures. Many
researches including Chijoriga, (2000) and Dash et al., (2010) showed the relationship
bank failures and higher NPA worldwide.

As the Banks have to meet various challenges, this study will be helpful to the
banks, in identifying and solving some of its weaknesses and problems. This study is
also important as limited studies have been carried out regarding Non-performing Assets
in Nepal. This study analyzes relation between NPA and different aspects like firm
variables and macro economic variables like Bank size, loan & advance to total assets,
Loan & Advances to total Deposit Ratio, NPA to total loan & Advances, Return on Loan
& Advances, Real interest rate, Growth rate of loan, Gross domestic product and
inflation.

3
1.2. Statement of Problem

Non-performing assets of banks are one of the biggest hurdles in the way of socio-
economic development of any country. The level of NPAs of the banking system in
Nepal is still too high. It affects the financial standing of the banks so that it is a heavy
burden to the banks. A vigorous effort has to be made by the banks to strengthen their
internal control and risk management systems and to setup early warning signals for
timely detection and action. The problem of NPAs is tied up with the issue of legal
reforms. This is an area which requires urgent consideration as the present system that
substantially delays in arriving at a legal solution of a dispute is simply not tenable. The
absence of a quick and efficient system of legal redress constitutes an important moral
hazard in the financial sector as it encourages imprudent borrowers.

Economic development of the country is directly related to the volume of investment

made and return obtained by the bank. Investment problem has become very serious
for the least developed country like Nepal. This is due to lack of sound investment policy
of commercial bank. Nepalese commercial banks have not formulated their investment
policy in an organized manner. The implementation of policy is not effective. The credit
extended by the commercial bank to agriculture and industrial sector is not satisfactory to
meet the present growing need. Nepotism and political pressure also effects the
investment decision of the commercial banks. Granting loan against insufficient deposit,
overvaluation of goods pledged, land and building mortgaged, risk averting decision
regarding loan recovery and negligence in recovery of overdue loan is some of the
basic loopholes and the result of unsound investment policy sighted in the banks.

The evidence in Nepalese banking sector showed that when Nepal Development Bank
crashed, depositors had almost lost their hard earned savings. A number of financial
institution including NSM and United Development Bank got into trouble within one
month. Heavy chunk of investment on the real estate has been cited as the major cause of
the downfall of the bank. There are lessons to learn from the biggest recession of 2007-08
that was mainly caused by reality crash following the heavy investment in this

4
unproductive sector (Sthapit, 2009). The structure of financial assets / liabilities shows
that the commercial bank alone holds more than 80 percent of the total assets and
liabilities of the financial system (NRB, 2010).

Many researchers have carried out on Non-performing Assets such as Bercoff et al.,
(2002) examine the fragility of the Argentinean Banking system over the 1993-1996
period they argue that NPLs are affected by both bank specific factors and
macroeconomic factors. Saurina (2002) reveal that real growth in GDP, rapid credit
expansion, bank size, capital ratio and market power explain variation in NPLs.
Furthermore, Jimenez and Saurina (2005) examine the Spanish banking sector from 1984
to 2003 they provide evidence that NPLs are determined by GDP growth, high real
interest rates and lenient credit terms. This study attributes the latter to disaster myopia,
herd behavior and agency problems that may entice bank managers to lend excessively
during boom periods. Meanwhile, Rajan and Dhal (2003) report that favorable
macroeconomic conditions (measured by GDP growth) and financial factors such as
maturity, cost and terms of credit, banks size, and credit orientation impact significantly
on the NPLs of commercial banks in India.

For several Sub-Saharan African countries, Fofack (2005) finds evidence that economic
growth, real exchange rate appreciation, the real interest rate, net interest margins, and
inter-bank loans are significant determinants of NPLs in these countries. The author
attributes the strong association between the macroeconomic factors and non-performing
loans to the undiversified nature of some African economies. Hu et al., (2006) analyze
the relationship between NPLs and ownership structure of commercial banks in Taiwan.
And it shows that banks with higher government ownership recorded lower non-
performing loans. Hu et al., (2006) also show that bank size is negatively related to NPLs
while diversification may not be a determinant.

Nepalese Commercial banks investment has been found to have lower productively due
to the lack of supervision regarding whether there is proper utilization of their
investment or not. Lack of farsightedness in policy formulation and absence of strong

5
commitment towards it is a major problem. The rules and regulations are only the tools of
NRB to supervise and monitor the financial institution.

Currently, the Nepalese banking sector is facing various problems. One of them, the
banking has been becoming a victim of huge Non-Performing Assets (NPAs). NPAs are
one of the serious problems faced by the commercial banks. Due to instable political
condition, insecurity and other many factors, industries of Nepal are closing down,
Lending carries credit risk, which arises from the failure of borrower to fulfill its
contractual obligation during the course of transaction. It is well known fact that the
bank and financial institution in Nepal face the problem of swelling non- performing
assets (NPAs) and issue is becoming more and more unmanageable.

Though there are above mentioned empirical evidences in the context of developed
economies, all evidence are almost non- existence in the context of Nepal. Therefore, the
study is an attempt to answer the following questions:

• What is the relationship between Non-performing Assets of Nepalese commercial

banks with respect to firm specific and macroeconomic variables?
• What are the financial highlights and indicators of state owned banks, private
sectors banks and joint venture banks of Nepal?
• What is the univariate relationship between non-performing assets and its
determinants through portfolio analysis?
• How empirical relation shows relationship between non-performing assets and its
determinants?
• What is the trend analysis of Non-Performing Assets and its determinants?
• What are the factors that affect the non-performing assets of Nepalese commercial
banks?
• What are the opinions of respondents on non-performing assets and its
influencing factors?
• How the Nepalese commercial banks have adopted appropriate measures to
control Non-performing Assets?

6
1.3. Purpose of the Study

The main objective of this study is to analysis the relation between Non-performing
Assets of Nepalese commercial banks with respect to firm specific and macroeconomic
variables. The specific objectives of the study are as follows:

• To analyze the financial highlights and indicators of state owned banks, private
sectors banks and joint venture banks of Nepal.
• To analyze the trend of Non-Performing Assets and its Determinants.
• To examine the univariate relationship between non-performing assets and its
determinants through portfolio analysis.
• To examine the relationship between non-performing assets and its determinants.
• To determine the factors that affects the non-performing assets of Nepalese
commercial banks.
• To assess the opinions on non-performing assets and its factors influencing.
• To assess whether Nepalese commercial banks adopt appropriate measures to
control Non-performing Assets or not.

1.4. Significance of the Study

This study will help to understand the functional relationship between various
explanatory variable and loan Non-performing Assets in the context of Nepal. This
research will contribute to resolve the problems stated which in turn will be very useful in
formulating NPA policies and procedures for Nepalese firms, thus, this study will be
significant in examining NPA guidelines followed and consequences on firm’s
performance. Limited researcher has been carried out regarding Non-performing Assets
practices in term of Nepal so, many of the important facts and aspects about NPA has not
been revealing yet.

The students or individual willing to do extensive study can get relevant information
about the loan loss provision and practices. Moreover this study will help to understand
the Non-performing Assets practices prevailing in Nepalese commercial banks. This

7
study will add useful information to the study of loan Non-performing Assets. This study
is also expected to be useful for financial institution and regulatory bodies in order to get
more information about determinates that effect Non-performing assets.

This research will help commercial bank to reassess their strategies to cope to get more
information about determinants that affect Non-performing Assets and also help to select
appropriate techniques suited to manage the NPAs and develop a time bound action plan
to arrest the growth of NPAs. It will help NRB to find out the degree to which policy
initiatives are responsible for NPA related decision on the parts of banks.

1.5. Research Hypothesis

The following hypothesis is tested in this study:

Null Hypothesis (H0): There is no relationship between Non-performing loan (NPL) and
its determinants (L&A to TA, L&A to TD, NPA to L&A, RLA,
RIR, GDP, INF, SIZE and GL).

Alternative Hypothesis (Ha): There is relationship between Non-performing loan (NPL)

and its determinants (L&A to TA, L&A to TD, NPA to
L&A, RLA, RIR, GDP, INF, SIZE and GL).

1.6. Operational Definitions and Assumptions

Nepal Rastra Bank being central bank of country has a great role to regularize the
economic system of country. It develops different mechanisms and introduces various
directives to monitor the financial institutions. Therefore the legal rules and provision
related to non-performing loan should also be reviewed to understand the consequences
of non-performing loan. Nepal Rastra Bank issues directives to bank as per section 79 of
the NRB Act, 2002. NRB issues directives in many aspects of bank operation while this
study is related with Non-performing assets. Directive has been issued with regard to loan

8
classification and provisions to be made for its possible loss by the institutions obtaining
licenses from Nepal Rastra Bank.

1. Classification of Loan and Advances

Effective from fiscal year 2010/11 banks shall outstanding principal amount of loan and
advances on the basis of aging. As per the directives issued by NRB, all loans and
advances shall be classified into following four categories:

a) Pass
All loan and advances the principal of which are not paid past due for a period up to 3
months shall be included in this category.

b) Sub-Standard Loan
All loan and advances the principal of which are past due for a period of more than 3
months or up to 6 months shall be included in this category.

c) Doubtful
All loans and advances the principal of which are past due for a period of more than 6
months or up to 1 year shall be included in this category.

d) Loss Loan
All loans and advances the principal of which are past due for a period of more than 1
year shall be included in this category.

2. Additional Arrangement in Respect of Pass Loan

All loans and advances extended against gold and silver, fixed deposit receipts credit
cards and security of HMG securities and NRB bond shall be included under pass
category. However, where collateral of fixed deposit receipt of HMG securities or NRB
Bonds is placed as additional security against loan for other purposes, such loans have to
be classified as required under clauses 1 to 7.

9
Renewal of working capital having one year maturity period only may be classified as
pass loan. Loans of working capital natured on which the service of interest is not regular
shall be classified on the basis of amount due period.

3. Additional Arrangement in Respect of Loss Loan

Irrespective of whether the loan is past due or not loans having any of the following
discrepancies shall be classified as “Loss” according to directives no. 2/2069.
• Securities are inadequate
• The borrower has been declared bankrupt.
• The borrower is absconding or cannot be found.
• Purchased of discounted bills are not realized within 90 days from the due
date and non fund base credit not realized within 90 days from the conversion
date.
• The credit has not been used for the purposes originally intended non
operation of project, income earn from the project/ business are not used in
prepaying loan and advances but used in other purposes, certified misuse of
credit and facilities by the supervisors and auditors in course of the
supervision.
• Owing to non-recovery, initiation as to suctioning of the collateral has passed
six months and if the recovery process is under litigation.
• Loans provided to the borrower included in the black list of credit information
center.
• Project, business is not in condition to operate or not in operation.
• Credit card loan is not written off within the 90 days from the due date.

4. Additional Arrangement in Respect of Term Loan

Team Loan means having the maturity period of more than one-year. The term loan,
classification shall be made against the entire outstanding loan on the basis of the past
due period of overdue installment of principal/ interest.

10
5. Prohibition to Recover Principal and Interest by Exceeding the Overdraft Limit
Principal and interest on loan and advances shall not be recovered by overdrawing the
borrower’s current account exceeding the limit of overdraft facility. However, this
arrangement shall not be construed as prohibitive for recovering the principal and interest
by debiting the customer’s account. Where a system of recovery of principal and interest
by debiting the customer’s account exists and recovery is made as such resulting in
overdraft, which is not settled within one month, then such overdrawn principal amount
shall also liable to be included under the outstanding loan. Such loan shall be over graded
by one step from its current classification. In respect of reorganization of interest, the
same shall be as per clauses relating to income recognition mentioned directives No.
4/061/62.

6. Letter of Credits and Guarantee

In the event of conversion of contingent liabilities of the licensed institution e.g. letter of
credit, un-matured guarantee and other contingencies, into the fund based liabilities and
required to make payment, such amount shall be classified as PASS loan up to 90 days
from the date of conversion. Such credit facility shall be classified as LOSS loan if not
realized within 90 days.

7. Loan Rescheduling and Restructuring

The term “reschedule”: means process of extending repayment period/time of credit
taken by the borrower. The term “restructuring” means process of changing the nature or
condition of loan/facility, adding or deleting of conditions and in time limit.

a. Licensed institutions may reschedule or restructure loans only upon submission of a

written plan of action by the borrower, which is resurrecting on the following
grounds. The basis of loan restructuring and rescheduling shall be enclosed with each
credit files.
• Evidence of existence of adequate loan documentation and securities.
• Licensed institution is assured on possibility of recovery of restructured or
rescheduled loan.

11
b. In addition to the submission of the written plan of Action for rescheduling or
restructuring of loan, at least 25 per cent of the accrued interest outstanding on the
date of restructuring or rescheduling should have been collected. Renewal of loan by
collecting all interest can be classified as pass loan.

c. In cases of restructuring or rescheduling of loan of an industry which is recommended

by the sick industry preliminary enquiry and recommendation committee formed
under the Nepal government, Ministry of Industry, Commerce and supply after
recovery of 15 per cent interest and completion of all necessary procedure, Provision
for loan loss at a minimum of 25 per cent will be required. However, where the loan
is restructuring or rescheduled by collecting less than 12 per cent interest, such loan
shall require loan loss provisioning on past due period basis as is applicable to all.

8. Loan Loss Provision

a. The loan has loss provisioning on the outstanding loans and advances and bills
purchased shall be provided on the basis of classification made as per the directives,
as follows:
Table 1.1
Classification of Loan
Classification of Loan Loan Loss Provision
Pass 1%
Substandard 25%
Doubtful 50%
Loss 100%
Sources: NRB Directives 2010/11

b. Provision on restructured or rescheduled loans shall make as follows:

• A minimum of 12.5 per cent provision shall be made on restructured or rescheduled
loans.
• In respect of restructuring or rescheduling of deprived sector loan and guaranteed
or insured priority sector loan. The requisite provisioning shall be only 25 per cent
of the rates.

12
 • Where the installment of principle and interest of restructured or rescheduled loan
is serviced regularly for two consecutive years? Such loan can be converted into
PASS loan.

c. Full provisioning shall be made against the uninsured priority, deprived sector loans
and small and medium scale industrial loans. However, in the case of insured loans,
the provisioning requirements will be only 25% of the rates.

d. Where the loan is extended only against personal/ corporate guarantee, a statement of
the assets and equivalent to the personal guarantee amount of the borrower not
claimable by any other shall be compulsorily obtained. Loans extended only against
personal/ corporate guarantee shall also be classified as per above and where the
loans fall under the category of pass substandard and doubtful, in addition to the
normal loan loss provision applicable to the category, an additional provision by 20
per cent point shall also be provided. Additional loan loss provision as above shall
also be provided for loans, which are partly provided by collateral of physical assets
and personal/ institutional guarantee is obtained to cover the shortfall. Classification
of such loan and advances shall be prepared separately. However such additional 20
per cent loan loss provision will not be required for loans extended to the institutions
like Nepal Oil Corporation Ltd. and Nepal Food Corporation.

9. Adjustment in Provisioning
Under the following cases, adjustment of loan loss provision is prohibited.

• The loan has been completely written off.

• In the event of repayment of installment or partial payments of loan, the loan
loss provision has to be provided as per loan classification and write back the
provisions related to the amount of repaid loans.
• Where the installment of principle of interest of restructured or rescheduled
loan is serviced regularly for two consecutive years, the loan loss provisioning
may be adjusted. However, the amount adjusted by writing back the loan loss

13
 provision cannot be used for distribution of dividend or issue bonus shares by
showing in the profit.

10. Loan Loss Provisioning Relating to Non Banking Assets

For all non- banking assets acquired by the licensed institutions where the assets were not
disposed off in three years, provisioning for loss on such non- banking assets shall be
provided at one 100% within 3 fiscal years, as follows:

Table 1.2
Classification of LLP relating to Non banking Assets
Fiscal year Provisioning for loss
FY 2065/66 33.33%
FY 2066/67 66.67%
FY 2067/68 100%
Sources: NRB Directives 2010/11

For all non banking assets required by the licensed institutions during 2065/66 and
thereafter, provisioning at 25 per cent shall be provided in the year of acquisition, and
provide as follows within subsequent 3 fiscal years:

Table 1.3
Classification of Provisioning in the year of Acquisition
Year Provision for loss
First year 50%
Second year 75%
Third year 100%
Sources: NRB Directives 2010/11

In case of disposal of the non- banking assets, the existing provision against such assets
may be adjusted in the profit and loss account in the year of sale of such assets.

14
11. Submission of Return Relating to Classification of Loan and Advances
Licensed institutions shall, as of the end of Shrawan, Poush, Chaitra and Ashadh, prepare
the statement of outstanding loan and advances classified on the basis of ageing and
submit the particulars to the bank and financial institution regulation department and
related supervision department of Nepal Rastra Bank within one month from the end of
each quarter.

Non-performing Assets dependent for this study and it overview on the relationship
between NPA and Bank size, loan & advance to total assets, Loan & Advances to total
Deposit Ratio, NPA to total loan & Advances, Return on Loan & Advances, Real interest
rate, GDP and inflation.

a. Bank Size
The size of the bank is also included as an independent variable to account for size
related economies and diseconomies of scale. The total assets of the banks are used as a
proxy for bank size. If the total assets will be high it will be good for banks for
investment.
SIZE= Total Asset

b. Loan & Advances to Total Assets

The ratio of loans and advances to total assets measures the volume of loans and
advances in the structure of total assets. Loans and Advances of commercial banks
represent the major portion in total assets. The high degree of ratio indicates the good
performance of the banks mobilizing its fund by way of lending functions. However in its
reverse side, the high degree indicates low liquidity with the bank. Loans and Advances
always carry certain degree of risk. Thus this asset of banking business is regarded as
risky assets. The low ratio indicates low productivity and high degree of safety in
liquidity and vice versa. This ratio is calculated as follows.

Loan and Advances

Loan and Advances to Total Assets =
Total Assets

15
c. Loan & Advances to Total Deposit ratio (CD ratio)
This ratio is calculated to find out how successfully the banks are utilizing their total
deposits on credit or loans and advances for profit generation purpose as loans and
advances yield high rate of return. Greater CD ratio implies the better utilization of total
deposits and better earning, however, liquidity requirements also needs due
consideration. Hence, management should always try to make better combination of risk
and return. This ratio is calculated by dividing total credit by total deposit of the bank.

Loan and Advances

Loan & Advances to total Deposit ratio /Credit Deposit Ratio =
Total Deposit

d. Non-Performing Assets to Loan & Advances

Total loan is divided into two category performing loan and non-performing loan. Non-
performing loan to total loan ratio determines the proportion of non-performing loan in
the total loan portfolio. Higher ratio implies the bad quality of assets of banks in the form
of loan and advances. Hence, lower NPL to total credit ratio is preferred. The ratio is
calculated as follows.
Non - Performing Loan
NPL to Total Loan and Advances =
Total Loan and advamces

e. Return on Loan & Advances

Net profit is the amount recovered after deducting all kinds of liabilities therefore various
ratios are calculated in relation with the net profit. Return on loan and advances ratio
indicates how efficiently the bank has employed its resources in the forms of loan and
advances. Net profit of a bank largely depends upon interest earn from loan and advances
and net profit. This ratio measures the bank's profitability with respect to loan and
advances. Higher the ratios better the performance of the bank and vice versa. This ratio
is calculated as follows.

Net Profit
Return to Loan and Advances =
Loan and Advances

16
f. Real Interest Rate
An interest rate that has been adjusted to remove the effects of inflation to reflect the real
cost of funds to the borrower, and the real yield to the lender. The real interest rate of an
investment is calculated as the amount by which the nominal interest rate is higher than
the inflation rate.
Real Interest Rate = Nominal Interest Rate - Inflation (Expected or Actual)

g. Gross Domestic product (GDP)

GDP is one the primary indicator that is used to measure the health of a country's
economic condition. A significant change in GDP, whether up or down, usually has a
significant effect on the different aspects of the economy. Change in the GDP of
Nepalese economy major factors are consumption, investment, government expenditure
and net export. However, Non-performing assets tends to be pro-cyclical that is NPA
tends to fall during periods of high GDP and rise during periods of low GDP growth
(Dash and Kabre, 2010).

h. Inflation
Inflation is a rise in the price level of goods and services in an economy over a period of
time. A high inflation rate is generally associated with high loan interest rates and
therefore generates high income. If Inflation rate are anticipated by the bank, it will be
useful and vice versa. The task of keeping the rate of inflation low and stable is usually
given to central banks. Central Banks control Inflation through the setting of interest rate,
open market operation, and through the setting of banking cash reserve requirement.

17
 CHAPTER II

LITERATURE REVIEW AND CONCEPTUAL FRAMEWORK

This chapter provides conceptual framework of the study and deals with review of
empirical studies associated with Non Performing Assets of commercial banks. It is
divided into three sections. First section presents of review of major literature, second
section presents a theoretical framework and, finally the third section presents concluding
remarks on the conceptual framework and empirical review.

2.1. Review of Literature

The study was to examine the trends of NPAs in India from various dimensions and
explains how mere recognition of the problem and self-monitoring has been able to
reduce it to a great extent Meenakshi et al., (2010). It also shows that public sector banks
in India, which function to some extent with welfare motives, have as good a record in
reducing NPAs as their counterparts in the private sector. Accounting norms have been
modified substantially and mechanisms are in place for reduction of bad loans. The
discussions with banks, however, show that such decline is mainly due to the awareness
of the problem of bad loans at the bank level. It remains true that NPA in the priority
sector is still higher than that of the non-priority sector. Within the priority sector, the
SSI’s performance is the worst. However, even this sector has shown reduction in bad
loans over time.

The study was to analyze the sensitivity of non-performing loans to macroeconomic and
bank specific factors in India Kumar Dash and Kabra (2010). It employs regression
analysis and a panel dataset covering 10 years (1998-99 to 2008-09) to examine the
relationship between non-performing loans and several key macroeconomic and bank
specific variables. The finding of the study is both bank specific and macroeconomic
factors impacts on the loan portfolios of commercial banks in India. In particular, we find
a significant positive relationship between non-performing loans and the real effective

18
exchange rate. This means that deterioration in international competitiveness of the local
economy (as reflected by an appreciation in the real effective exchange rate) may result
in higher levels of non-performing loans. It also shows that changes in real income – as
reflected by growth in real GDP – exert a significant negative effect on NPLs. We also
find that commercial banks that are aggressive and charge relatively higher interest rates
incur greater NPLs.

This study is to find out the trend of the non performing loan in Nepalese commercial
banks Shrestha (2011). the study is based on the secondary data collected from the
NEPSE, SEBON and concern websites of the sample banks and used a stratified method,
18 among the 30 commercial banks of Nepal has been selected on the basis of size, year
of operation and capital. The study also employed descriptive analysis of data to assess
the fact finding and searching adequate information about non performing loan of banks.
relevant financial ratio were calculated and studied to find out trend of the ratio of
commercial banks and to analyze the impact of the NPL on share price, the study has
applied an econometric one factor model assuming the market price of the stock as a
dependent variable and NPL an independent variable. The model is
SP= α + β NPL i + e t
Where, SP= Share price at the fiscal year closing; α= constant; β=Coefficient; NPL=Non
performing loan at period t and e t=Error term.

The major finding of the study was the commercial banks loan recovery endeavors,
making positive impact on their profits and stock prices. The study also concluded that
NPL affects the stock prices of the commercial banks to an extent. Whereas, it is also
hints at the existence of other factors that would also make their impact on the stock
prices. In particular, the study found that the real stock price of the commercial banks has
a negative association with the levels of their NPLs.

The study is to diagnostic, exploratory in nature and use of secondary data by using the
statistical tools like Averages, percentages, Mean and Standard Deviations are used to
analyze the data for “Trends & Issue of NPAS in Indian banking sector” Bhavani Prasad
and D. Veena (2011). The objective of this study was to evaluate the operational

19
performance of the SCBs in India since 2000, NPAs Trends and issues. The industry is
currently in a transition phase. The Indian Banking system, are in trouble with excessive
manpower, excessive NPAs and excessive governmental equity, while on the other hand
the private sector banks are consolidating themselves through adoption of latest
technology and systems. Which currently account for more than 78 percent of total
banking industry assets are saddled with NPAs, falling revenues from traditional sources,
lack of modern technology and a massive workforce while the new private sector banks
are forging ahead and rewriting the traditional banking business model by way of their
sheer innovation and service and adoption of modern technology. Private sector Banks
have pioneered internet banking, phone banking, anywhere banking, and mobile banking,
debit cards, Automatic Teller Machines (ATMs) and combined various other services and
integrated them into the mainstream banking arena. While New Private Sector Banks and
Foreign Banks started with clean slate and latest technologies, the Public Sector Banks
and Old Private Sector Banks had to overcome the old systems and employee resistance
and introduce the new systems and processes and norms. In spite of this the trend that
could be observed show that these Banks are putting in effort to catch up with the
competition.

To evaluate the operational performance of the selected PSBs & Private bank in India
since 2001, NPAs Trends and issues and also to analyze how efficiently Public and
Private sector banks have been managing NPA Aggarwal and Mittal (2012). For the
study, secondary data had been collected using annual, statistical tables related to banks
in India and report on currency and finance. Articles and papers relating to NPA
published in different business journals, magazines, newspaper, periodicals were studied
and data available on internet and other sources has also been used. In the present study,
various statistical tools ratio, Averages, percentages, ratio analysis, Measure of central
tendency, frequency distribution, Standard Deviations, coefficient of variation and
ANOVA test have been used to analyze and interpret the data.

Major finding of the study was Gross NPAs ratio of PNB is less and it had been reduced
over the period in comparison to SBI. On the other side as far as Private Banks are
concerned HDFC has better performance in comparison to ICICI. And also NNPAs Ratio

20
and Problem Assets ratio is reduced of PNB in PSBs & HDFC in Private sector banks.
There is more variation in GNPA & NNPA ratio of PNB while in Problem Assets ratio
ICICI has more variability. So, it is very necessary for bank to keep the level of NPA as
low as possible. Because NPA is one kind of obstacle in the success of bank and affects
the performance of banks negatively so, for that the management of NPA in bank is
necessary.

In order to investigate the relationship between NPAs and profitability of commercial

banks effect variables statistical tools like percentages, averages and regression analysis
have been used Kaur (2012). The objectives of the study was to examine the trends in
NPAs of the commercial banks in India by comparing Percentage of Gross NPAs with
Gross advances, Percentage of Net NPAs with net advances, Percentage of Gross NPAs
with gross advances, Percentage of Net NPAs with net advances, Percentage of Gross
NPAs with total assets, Percentage of Net NPAs with total assets and sector-wise NPAs,
and average NPAs of scheduled commercial banks in India. The present research work
was based on the secondary data only. The secondary data had been collected from the
various RBI Bulletins, Statistical Tables relating to Banks in India, Trend and Progress
Reports of Banking in India, Annual Reports of Commercial Banks, Banking Reports on
Currency and Finance, Banking Statistics – Basic Statistical Returns (all brought out by
the Reserve Bank of India, Mumbai).

Major finding of the study was there is an inverse relationship between the ratio of non
performing assets and profitability indicates that the banks with above average non-
performing assets have below average profitability. This confirms the hypothesis that
non-performing assets and profitability are inversely related. It is particularly so because
commercial banks are required to make provisions out of their income against NPAs as
per the norms. Therefore, a reduction in NPAs as proportion to net advances can help in
improving the profitability of commercial banks in India.

To find out the various factors responsible for the huge NPAs Kalra (2012). The primary
data was collected with a view to identifying the causes of huge NPAs. A questionnaire
was prepared and direct personal interviews and discussions with various bankers were

21
held. Secondary data, which form the base for the major part of the study, was obtained
from various sources such as various publications of RBI like RBI Bulletin, IBA
Bulletins, and Annual Reports on banking trend and progress in India, and whatever was
not available as published data was collected through the case studies of three banks.

The finding was the banks still have high rates of NPAs, despite the reduction in non-
performing loans since the initiation of liberalization. The systematic risk of high non-
performing loans is limited by the banks’ provisions and the large share of government
debts in banks’ portfolio, which together reduce reported net NPAs. The degree to which
reported NPAs measure actual NPAs depends on the quality of accounting, auditing,
regulations and supervision. The various factors responsible for an account becoming
non-performing advances include faulty selection of borrowers, faulty pre-sanction
appraisal program, delay in release of adequate and timely credit, Indian legal system,
changes in government policies, lack of proper follow-up, faulty MIS system, internal
disputes, diversion of funds, etc. Thus, NPA being an important parameter for financial
performance of banks, its reduction is necessary to improve the profitability of the banks
and to comply with the capital adequacy norms. The quality appraisal, supervision and
proper follow-up undoubtedly will assist in solving the problem.

A trend of Non-Performing Assets in Private Banks in India Srivastava and Bansal

(2012). The objective of study was to examine the magnitude and trends of NPA of
different banks in India through graphical and percentage wise method. The study was
descriptive and investigative in nature. It evaluates the NPA level in public sector banks,
private banks, foreign banks and all commercial banks. Going through the path of
objective set for the study, the relevant secondary data had been collected through various
sources like, RBI website, Trend and progress in banking various issues. The data so
collected had been tabulated and analyzed by using percentage analysis techniques. The
study also examines the trend of NPA in various banks. The findings of the study are
inconformity with the statistical tools applied as such Average and comparative
percentage analysis.

22
The public sector banks share is almost two third shares of total advances in the economy
in Indian banking industry. The study found that there is a slight improvement in the asset
quality reflected by decline in the diverse NPA percentage. But even then the quantum of
NPAs is alarming with public sector banks in India, since NPA being as an important
parameter for assessing financial performance of banks. The volume of NPAs will deter
the financial health in terms of profitability liquidity and economies of scale in operation.
The bank has to take timely action against degradation of good performing assets.

Major finding of study was Substandard Assets showed increase from 1.1 percent in
2006-07 to 2.0 percent in 2008-09 but further decrease from 1.5 percent in 2009-10 to
0.6percent in 2011-12. Doubtful Assets showed a reduction from 1.0 percent in 2006-07
to 0.9 percent in 2007-08 but further increase 1.5 percent in 2010-11 and also further
decrease to 1.2 in 2011-12. Loss Assets showed increase from 0.2 percent in 2006-07 to
0.4 percent in 2010-11 and decrease to 0.3 in 2011-12. This indicates an up and down
trend of financial soundness of private sector banks. The Sub-Standard Assets curve
represent initially up and at the midyear down and at the last year that is constant. So The
Curve is like an up-down slope curve. Public Sector Banks fail in control to Sub-Standard
Assets. The Doubtful Assets curve represents initially decrease then continuously
increase and at the last year slightly decrease. So Private Sector Banks not proper handled
to Doubtful Assets. Loss Assets curve represent up initially and at the last year, it is
slightly decreases .It means Private Sector Banks fail to control to loss Assets.

Using NPA ratios to check the proportion of NPA of different types of banks in different
categories and to analyze the past trends of NPA of Scheduled Commercial banks
Malyadri and Sirisha (2012), carried out study on “Asset Quality and Non Performing
Assets of Indian Commercial Banks”. The objective of this study was to evaluate the
efficiency in managing Non Performing Asset of different types of banks Public, Private
& Foreign banks. For the purpose of the study, data had been collected from secondary
source. The main source of information has been RBI reports. The growth of NPAs along
with its components has been tested with the help of compound annual growth rate
(CAGR). In order to have an in-depth idea of the issue, a reasonably suited period of 14
years commencing from 1996-97 to 2009-2010 has been considered.

23
The finding of the study was that the Scheduled Commercial Banks (SCBs) standard
asset is increasing every year, this proves that SCBs have succeeded in reducing NPA
over the years During 1998-99, NPAs of private sector bank witnessed significant
increase in the Gross non performing assets ratio (GNPAR). A similar trend was seen in
the case of the foreign bank group. NPAs were more noticeable in respect of new private
sector and foreign banks, which have been more active in the real estate and housing
loans segments. The hardening of interest rates might have made the repayment of loans
difficult for some borrowers, resulting in some increase in NPAs in this sector. It may be
noted that the increase in gross NPAs was more noticeable in respect of private sector
and foreign banks, which have been more active in the real estate and housing loans
segments.

An analysis of NPAs of different bank groups indicates that PSBs hold larger share of
NPAs till the year 2008. In the year 2010 the gross NPA to gross advances ratio of public
sector banks declined but that of private and foreign banks increased. At the bank group
level, the gross NPA ratio was the highest for foreign banks at end- March 2010 followed
by private sector banks. On the other hand, it was the lowest for public sector banks. The
steep rise in NPA 2008-09 & 2009 -2010 is due to poor global conditions .Public sector
banks have managed to increase the standard assets over the years. The proportion of
standard assets in Private sector banks reduced in 2008 and 2009 which was compensated
by increase in substandard and doubtful assets. Banks need to improve upon their
standard assets and reduce the sub-standard, doubtful and loss assets. Loss assets are a
big worry for the banks and hence a lot of efforts are to be made for increasing
profitability so as to compete in a global marketing environment.

A Study on the Performance of Non-Performing Assets (NPAs) of Indian Banking

During Post Millennium Period Pillai and Siraj K.K (2012). The objective of the study
was to explain how NPA performed in Indian banking, based on statistics during post-
millennium period, to study on Indian banking, classified based on ownership into SBI &
Associates, Nationalized Banks, Private Sector Banks and Foreign Banks and whether the
reduction in NPA ratios really explain efficiency of Indian banking in post-liberalization
period. The study conducted from the year ended 31st March 2001 to 31st March 2011 is

24
included. The study utilized growth rate calculating using AAG rate, correlation and
regression study to analyze the movement and significance of NPA indicators during the
period.

The finding of the study was that Non Performing Assets showed increased trend during
2000-10, but at a less pace than increase in total advances. It may be inferred from the
analysis that even though there were many measures taken by regulatory authorities and
banks to curb the alarming level of NPA in banking sector, it still poses severe threat to
the quality of asset portfolio, thereby liquidity and profitability of scheduled commercial
banks in India. NPA still remains a major concern for banks in India. Even though the
NPA indicators showed recovery of NPA during the first half of last decade, it remained
challenging in the second half of the period. The recessionary pressures faced by the
banking sector is an important reason for the growth of NPA indicators, it should be
managed to maintain a healthy and viable banking environment. The increased level of
additions to NPA remained as an area of concern as it indicates the real efficiency of
credit risk management.

Management of Non Performing Assets in Andhra Bank Prasad and Reddy (2012). The
study was to analyze the impact of NPAs on profitability of Andhra Bank as well as
Public Sector Banks. The scope of the study was limited to for a period of ten years i.e.,
from 2002-2011. The study was based on secondary data retrieved from annual reports of
Andhra Bank, Report on Trend and progress of Banking n India. The data has been
analyzed by using ratio analysis tools (Gross NPAs and Net NPAs) and statically tools
(CV, SD, CGR, LGR, and r-value). From the study it was observed that there is
tremendous decline in NPAs of Andhra Bank as well in Public Sector Banks during the
study period, even though enormous growth in advances. This was resulted with the
introduction of prudential norms. The use of technology like Core Banking Solutions will
bring change Indian Banking to manage their non-performing assets.

In an attempt to investigate the Non Performing Assets and Profitability of Commercial

Banks in India, Balasubramaniam (2012). The objective of the study was to analyze the
trend of the NPA of the banks in recent decade since 2000. This study had used ratio

25
analysis tools (Gross NPA and Net NPAs) to presents a trend analysis of NPAs followed
by a series of in depth analyses on the high level of borrowings from banking sector
indicating a buildup of sectoral credit booms in general and also raising concerns about
financial performance and operations of the borrowers and it also dwells on the impact of
restructuring of advances by banks on the basis of asset classification.

The finding of the study was NPAs, decline in fresh slippages and a sharp increase in
gross loans and advances by SCBs led to a sharp decline in the ratio of gross NPAs to
gross advances at end-March 2006. Indian banks recovered a higher amount of NPAs
during 2007-08 than that during the previous year. The SRFAESI Act has, thus, been the
most important means of recovery of NPAs. However, there has been a steady fall in the
amount of NPAs recovered under SRFAESI Act as per cent of the total amount of NPAs
involved under this channel in recent years. The level of NPAs is high with all banks
currently and the banks would be expected to bring down their NPA. This can be
achieved by good credit appraisal procedures, effective internal control systems along
with their efforts to improve asset quality in their balance sheets. Banks would make
efforts to mobilize funds in order to comply with provisioning norms and capital
adequacy requirements while meeting Basel III standards which will be brought in by
RBI shortly. However, the Capital requirements would be large considering the varied
structure of banks and financial institutions operating in the economy and their NPA
levels. The capital market environment currently prevailing in the economy would pose
problems for the capital mobilization by the banks.

The study was to analyze the impact of non-performing assets on the profitability of
banks and to evaluate the impact of non-performing assets on profitability with other
variables Shyamala (2012). The study was analytical in nature and the present study uses
the most recent available published secondary data for the years 2000-2010 compiled
from Report on Trends and Progress of Banking in India. The scope of the study was
limited to ten years data. The data has been analyzed using ratio analysis (Ratio of Gross
NPA to Gross Advances, Ratio of Net NPA to Net Advances, Ratio of Gross NPA to
Total Assets, and Ratio of Net NPA to Total Assets) and statically tools (mean, standard
deviation, coefficient of variation).

26
The finding of the study was that nationalized bank group has secured the first place and
the second place was taken by SBI and its Associates. Non-performing Asset is an
important factor in the analysis of financial performance of a bank as it results in
decreasing boundary and higher provisioning requirement for doubtful debts. The study
finally viewed that the prudential norms and other schemes has rushed banks to improve
their performance and accordingly resulted into orderly down of NPA as well as
enhancement in the financial strength of the Indian banking structure.

A Study on Management of Non Performing Assets in Priority Sector reference to Indian

Bank and Public Sector Banks (PSBs) Selvarajan & Vadivalagan (2013). The objectives
of the study was to know and study about the non-performing assets in Indian Bank,
Tamil Nadu, To find out Non Performing Assets under the Priority sector lending in
Indian Bank and Compare with Public Sector Banks (PSBs) and To make appropriate
suggestions to avoid future NPAs and to manage existing NPAs in Indian Bank. For this
study primary data and secondary data are collected. The primary data was collected from
the borrowers with the help of questionnaire. The secondary data was collected from the
annual reports of Indian Bank and Reserve Bank of India website. The data have been
tabulated comfortably with required percentage calculation and mean calculations.
Besides the loans and advances granted under priority sector, the NPA figures have also
been tabulated both for Indian Bank and the Public Sector Banks as a whole. The data so
provided helped to have an in-depth analysis about the participation of Indian Bank in
lending activities to priority sector in comparison with that of the Public Sector Banks as
a whole.

Major finding of this study was the growth of Indian Bank’s lending to Priority sector is
more than that of the Public Sector Banks as a whole. In case of NPA management, the
performance of Indian Bank is better than that of Public Sector Banks as a whole.
However, Indian Bank has slippages during the period of study in controlling of NPAs in
the early years of the decade. Indian Bank is still not comfortable in the area of NPA
management. Therefore, the management of Indian Bank must pay special attention
towards the NPA management and take appropriate steps to arrest the creation of new

27
NPAs, besides making recoveries in the existing NPAs. Timely action is essential to
ensure future growth of the Bank.

The study was to study the impact of NPA on overall performance of selected banks, to
evaluate the efficiency in managing NPA between selected banks and to make
suggestions for better NPA management in selected Banks Krupa (2013). The study had
used various ratio Analysis tools (Gross NPA Ratio, Net NPA Ratio, Problem Asset
Ratio, Capital Adequacy Ratio, Sub - Standard Assets Ratio, Doubtful Assets Ratio, Loss
Assets Ratio, Interest Income To Average Working Funds Ratio, Non-Interest Income To
Average Working Funds Ratio, Operating profit to average working fund ratio) and
statically techniques (Mean, standard deviation and T-test) are used. The study has been
carried out for a five years from 2007/08 to 2011/12. The study was based on secondary
data. The data had been collected from the published annual report of the banks. The
researcher had selected two public sector banks i.e., SBI and CBI for this comparative
study.

The findings of the study are the Gross NPA of SBI is higher than the CBI which shows
its management efficiency. Net NPA of CBI is lower than the SBI which reveals its good
position. Problem assets ratio of SBI is less in comparison to CBI. Both the Banks have
complied the capital adequacy norms of RBI. Sub-Standard Assets ratio of SBI is higher
than the CBI to a great extent. The ratio Doubtful Assets of SBI is very lower than CBI.
Interest Income both the Banks are near about the same. Non-Interest Income of SBI is
higher than CBI. Operating profit ratio of SBI is higher than CBI.

NPA involves the necessity of provisions, any increase in which bring down the overall
profitability of banks. NPA is the indicators of banking health in a country. In this present
research paper, an attempt to evaluate the operational performance of the selected two
public sector bank. In this study, it tries to analyze how efficiency public sector banks
have been managing NPA with various financial tools and techniques. All the Indian
banks are facing hard time managing their NPA.

28
Causes and Remedies for Non Performing Assets in Indian public Sector Banks with
special reference to Agricultural Development Branch, State Bank of Mysore H.S.
Shalini (2013). The objectives of the study was to know what are the difficulties faced by
our Indian farmers in paying back the borrowed amount with regular payment of interest.
Both the data collection methods and Telephonic interview method had been used to
collect sufficient information. Apart from these methods the researcher had used the chi
square analysis test with 1% level of significance in order to know whether these
variables have an effect on the nonpayment of interest. The researcher also tried to find
out whether there is any significant difference in the study.

The finding of the study was the bank's gross NPAs rose to 4.44 per cent (3.28 per cent in
FY11), while net NPA was 1.82 per cent in FY12 (1.63 per cent in FY11). Among the
sample size of 100 farmers 50 are creditworthy borrowers who pay their interest properly
and the other 50 farmers are nonperforming farmers who do not make any attempt to pay
their interest on loan thereby contributing to generation of non-performing assets which
will in turn reduce the profitability of the bank. The researcher has identifies the effect of
a set of micro economic variables like Age, Sex, Education and Marital status etc. of
Indian farmers on the management of their credit.

2.2. Conceptual Framework

Non-Performing Assets are popularly known as NPA. Commercial Banks assets are of
various types. All those assets which generate periodical income are called as
Performing Assets (PA). Those assets which do not generate periodical income are
called as Non-Performing Assets (NPA). If the customers do not repay principal amount
and interest for a certain period of time then such loans become non-performing assets
(NPA). Thus non-performing assets are basically non-performing loans.

In accordance with the different theories and models, many studies have introduced some
useful variables in the Non Performing Assets of commercial banks to shed light on key
factors that make a difference in bank NPA. Such studies are not without ambiguity
especially with regard to the measurement of the variables and the results reported

29
thereafter. However there is general agreement that NPA is a function of internal and
external factors. Meanwhile, Rajan and Dhal (2003) utilise panel regression analysis to
report that favorable macroeconomic conditions (measured by GDP growth) and financial
factors such as maturity, cost and terms of credit, banks size, and credit orientation
impact significantly on the NPLs of commercial banks in India. Fofack (2005) finds
evidence that economic growth, real exchange rate appreciation, the real interest rate, net
interest margins, and inter-bank loans are significant determinants of NPLs in these
countries. The author attributes the strong association between the macroeconomic
factors and non-performing loans to the undiversified nature of some African economies.
Hu et al., (2006) analyze the relationship between NPLs and ownership structure of
commercial banks in Taiwan with a panel dataset covering the period 1996-1999. The
study shows that banks with higher government ownership recorded lower non-
performing loans. It also shows that bank size is negatively related to NPLs while
diversification may not be a determinant.
The conceptual model proposed by Dash and Kabra (2010) has been employed as the
conceptual framework of this study. The conceptual model includes Non Performing
Loans which is used as the dependent variable and independent variables are Loan and
Advances to Total Assets, Loan and Advances to Total Deposit, Non-Performing Assets
to Loan & Advances, Return on Loan & Advances, bank size, Real Interest Rate, Growth
rate of loan, Inflation Rate, Gross Domestic Product. The relationships between non-
performing assets and its determinants have been shown in Figure 2.1.

The loans and advances to total assets measure the volume of loans and advances in the
structure of total assets. The high degree of ratio indicates the good performance of the
banks mobilizing its fund by way of lending functions. However in its reverse side, the
high degree indicates low liquidity with the bank. Loans and Advances always carry
certain degree of risk. Thus the low ratio indicates low productivity and high degree of
safety in liquidity and vice versa. This ratio is calculated to find out how successfully the
banks are utilizing their total deposits on credit or loans and advances for profit
generation purpose as loans and advances yield high rate of return. Greater CD ratio
implies the better utilization of total deposits for profit making.

30
Non-performing loan to total loan ratio determines the proportion of non-performing loan
in the total loan portfolio. Higher ratio implies the bad quality of assets of banks in the
form of loan and advances. Hence, lower NPL to total credit ratio is preferred. Return on
loan and advances ratio indicates how efficiently the bank has employed its resources in
the forms of loan and advances. Net profit of a bank largely depends upon interest earn
from loan and advances and net profit. This ratio measures the bank's profitability with
respect to loan and advances. Higher the ratios better the performance of the bank and
vice versa.

Similarly, bank size is another important explanatory variable that affects the Non
Performing Assets of commercial banks. The impact of bank size on NPLs appears to be
mixed. For instance, some studies report a negative association between NPLs and bank
size. According to some studies, there is inverse relationship, means that large banks have
better risk management strategies that usually translate into more superior loan portfolios
then their smaller counterparts. There are also studies which provide evidence of a
positive association between NPLs and bank size. In this study bank size is calculated by
using total asset from bank’s balance sheet.

The impact of real interest rates on NPLs is extensively documented in the literature. In
fact, several studies report that high real interest rate is positively related to this variable
we construct this variable by subtracting the annual inflation rate from the weighted
average lending rate of each bank. Excessive lending by commercial banks is often
identified as an important determinant of NPLs.
Figure 2.1
Conceptual Framework of Non Performing Assets

31
 Independent Variable Dependent Variable

Loan & Advances to

Total Assets

Loan & Advances to

Total Deposit

Non-Performing Assets
to Loan & Advances

Return on Loan and

Advances
Non Performing Loan
Real Interest Rate

Gross Domestic Product

Inflation

Bank Size

Loan Growth rate

Non Performing Loan of

Previous year

The existing literature provides evidence that suggests a strong association between NPLs
and several macroeconomic factors. Macroeconomic factors which the literature proposes
as important determinants are Real GDP and Inflation. There is negative relationship
between the growth in real GDP and NPLs. The relationship is strong positive growth in
real GDP usually translates into more income which improves the debt servicing capacity
of borrower which in turn contributes to lower non-performing loans. Conversely, when
there is a slowdown in the economy (low or negative GDP growth) the level of NPLs
should increase. There is positive relationship between the inflation rate and non-

32
performing loans. Inflation is responsible for the rapid erosion of commercial banks’
equity and consequently higher credit risk in the Indian banking sectors.

2.3. Concluding Remarks

The studies of Non Performing Assets of Commercial Banks arises conflict especially
between developed and less developed countries and many researchers have been carried
out in context of the developed countries however almost all variable of the effect of
NPA are still to be explored. Small economies are still to adopt different researcher
which explore the relationship of NPA with Loan and Advances to Total Assets, Loan
and Advances to Total Deposit, Non-Performing Assets to Loan & Advances, Return on
Loan & Advances, bank size, Real Interest Rate, Growth rate of loan, Inflation Rate,
Gross Domestic Product. It also clarifies that there is requirement of the researcher on
Non-performing assets in context of Underdeveloped and small economies like Nepal.
So, it is very much required to study in the context of Nepal whether the with Loan and
Advances, bank size, Real Interest rate, Growth rate of Loans, Inflation and GDP growth
rate influences Non Performing Assets of the commercial banks.

Few studies have been conducted on Non-performing Assets of the commercial banks in
Nepal. Such studies were based on smaller sample (mainly two or three) banks to show
the Non Performing Assets of commercial bank. Even though those studies showed that
there is possibility to conduct a meaningful analysis of NPA, some issues are not dealt
sufficiently. In most of the studies, the econometric methodology was not adequately
described which implies that the estimates obtained may be biased and inconsistent.
Finally, most of the studies were all based on quantitative analysis this study somehow
presents some analyze related with qualitative analysis. Thus, this study has attempted to
deal with some of the major issues that have been untouched by the previous studies.
What is the relationship between Non-performing Assets of Nepalese commercial banks
with respect to firm specific and macroeconomic variables? What are the financial
highlights and indicators of state owned banks, private sectors banks and joint venture
banks of Nepal? What is the univariate relationship between non-performing assets and
its determinants through portfolio analysis? How empirical relation shows relationship

33
between non-performing assets and its determinants? What is the trend analysis of Non-
Performing Assets and its determinants? What are the factors that affect the non-
performing assets of Nepalese commercial banks? What are the opinions of respondents
on non-performing assets and its influencing factors? How the Nepalese commercial
banks have adopted appropriate measures to control Non-performing Assets? Many more
unanswered questions are still hovering in the Nepalese banking field. Thus, to address
such unanswered question there is requirement of the fresh research to be conducted on
above mentioned various issues. Further studies can extend and provide more in-depth
result on Non-performing Assets practices on commercial bank of Nepal.

34
 CHAPTER III
RESEARCH METHODOLOGY

Research Methodology is a way to systematically solve the research problem. It may be

understood as a science of studying how research is done scientifically. In this research
the various sequential steps that are generally adopted by the researcher, studying
research problem among with certain objectives in view are studied. A research
methodology helps us to find out accuracy, validity and suitability. Research is a
systematic inquiry of any particular topic and methodology is the method of doing
research in a well manner. Hence research methodology is the systematic study of
research problem that solves them with some logical evidence. The research methodology
adopted in the present study as discussed as below

3.1. Research Design and Plan

This study has employed descriptive research design to describe, measure, compare, and
classify the Non-performing Assets of Nepalese commercial banks. The analytical and
descriptive research design has been adopted for fact-finding and searching adequate
information about factors affecting NPA of commercial bank. This study comprises 18
commercial banks consisting 180 observations during fiscal year 2002 to 2011. With
respect to firm specific variables and macro economics variable such as Loan &
Advances, Bank size, real interest rate, GDP and inflation. The research aims to identify
determinants of Non-performing assets (dependent variable) explanatory variable include
loan & advance to total assets, Loan & Advances to total Deposit Ratio, NPA to total
loan & Advances, Return on Loan & Advances, Growth rate of loans, and GDP growth
rate. This design has been employed to analyze the opinions of respondents such as bank
regulator, banker with respect to determine factors affecting Non-performing assets in
commercial bank of Nepal.

3.2. Secondary Data

This study is primarily based on the analysis of secondary data. This study has used panel
data to analyze the relationship between the Non-Performing Assets and factors

35
influencing it. The data for firm specific variables and economic variables includes Loan
& Advances, Bank size, real interest rate, GDP and inflation. The secondary data also
puts an insight into the financial highlights to the sample commercial banks through loan
& advance to total assets, Loan & Advances to total Deposit Ratio, NPA to total loan &
Advances, Return on Loan & Advances ratio. Overall, the period covered in study with
respect to firm specific variables and economic variables ranges from fiscal year 2002 to
2011.

3.2.1. Description of the Sample

A number of commercial banks have been set up in the different parts of the country. Till
date 32 commercial banks are operating in Nepal, all of them are considered as
population. For our study 18 commercial banks have been taken covering the period of
2002-2011. As a carefully chosen sample can be used to represent the population, the
sample reflects the characteristics of the population from which it is drawn. The
systematic random sampling method has been used for the study. The banks are selected
on the basis of availability of market and firm specific financial information of at least
eight continuous years from the fiscal year 2002 to 2011. The proportion of sample banks
and the number of observations are presented in the following Table 3.1.

Table 3.1
Population and Number of Sample Bank
Population Sample Number of Observation
S.N. Section (N) (n) % (ns)
1. Domestic Private 22 8 36.36 80
Bank
2. Joint Venture Bank 7 7 100 70
3. State-owned Bank 3 3 100 30
Total 32 18 56.25% 180
Source: Banking and Financial Statistics (2011), NRB

Table 3.1 shows the population and sample of the study along with their respective
number of observations that represents different banks. The overall sample represents

36
56.25 percent of the population. Altogether there are 180 observations for these 18
sample banks.

3.2.2. Data Collection Procedure and Time Frame

The secondary data is employed in order to analyze the form of relationship and between
Non-performing Assets and the factors affecting it. Furthermore, predictive strength of
such factors is also assessed using secondary data.

Table 3.2
Sample Size of Commercial Banks
Banks Sample Study Period Observation
Nepal Bank Limited 1 2002-2011 10
RastriyaBanijya Bank 1 2002-2011 10
Agriculture Development Bank 1 2002-2011 10
Nabil Bank Limited 1 2002-2011 10
Standard Chartered Bank 1 2002-2011 10
Himalayan Bank Limited 1 2002-2011 10
Nepal SBI Bank Limited 1 2002-2011 10
Everest Bank Limited 1 2002-2011 10
Nepal Bangladesh Bank Limited 1 2002-2011 10
Nepal Investment Bank Limited 1 2002-2011 10
Bank of Kathmandu Limited 1 2002-2011 10
Nepal Industrial and Commercial Bank 1 2002-2011 10
Nepal Credit and Commerce Bank Limited 1 2002-2011 10
Kumari Bank Limited 1 2002-2011 10
Lumbini Bank Limited 1 2002-2011 10
Laxmi Bank Limited 1 2002-2011 10
Siddhartha Bank Limited 1 2002-2011 10
Machhapuchchhre Bank Limited 1 2002-2011 10
Total 18 180
Source: Field Survey, 2013

Table 3.2 shows the sample size of commercial bank for this study. The study has been
basically designed to understand the Non-performing Assets of Nepalese banking

37
industry. Data are collected from different sources includes annual reports of respective
banks, Nepal Rastra Bank official sites, central bureau of statistics, security board of
Nepal and others, ministry of finance, Nepal stock exchange, professional associations
and different publications and online database 18 banks are taken for the study purpose.

3.2.3. Method of Secondary Data Analysis

The method of secondary data analysis in this study consists of regression models
includes several statistical test of significance. The study uses the descriptive statistics,
financial analysis, and portfolio along with statistical test of significance such as F-test, t-
test and Adjusted R2. Details of models and statistical test of significance are also dealt in
this section.

a. Descriptive Statistics

This study has used the summary of descriptive statistics associated with dependent and
independent variables of sample firm to explain the cross-sectional characteristics of
these variables during the sample period. The descriptive statistics such as mean, standard
deviations, minimum and maximum values of the variables such as ratio of loan &
advances to total assets, ratio of loan & advances to total deposits, non-performing assets
to loan & advances, return on loan & advances, growth rate of loan, real interest rate,
bank size, gross domestic product, growth, inflation rate have been used to describe the
characteristics of sample during the period.

Arithmetic Means (average)

Arithmetic mean is also called ‘the mean’ or ‘average’ as most popular and widely used
measure of central tendency. Arithmetic Mean is statistical constants which enables us to
comprehend in a single effort of the whole. Arithmetic mean represents the entire data by
a single value. It provides the gist and gives the birds’ eye view of the huge mass of a
widely numerical data. It is calculated as:

1 n
X = ∑ Xi
n i =1

38
 Where:
X = mean value or arithmetic mean
n

∑X
i =1
i
= sum of the observation
n = number of observation

Standard Deviation (S.D)

Standard deviation (represented by the symbol sigma, σ) shows how much variation or
dispersion exists from the average or expected value. A low standard deviation indicates
that the data points tend to be very close to the mean whereas high standard deviation
indicates that the data points are spread out over a large range of values. It is calculated
as:
S.D= √(x-µ)²
n-1

Correlation Coefficient (r)

Correlation may be defined as the degree of linear relationship existing between two or
more variables. These variables are said to be correlated when the change in the value of
one results change in another variable. Correlation is categorized three types. They are
Simple, Partial and Multiple correlations. Correlation may be positive, negative or zero.
Correlation can be classified as linear or non- linear. Here, we study simple correlation
only. In simple correlation the effect of others is not included rather these are taken as
constant considering them to have no serious effect on the dependent. The Formula is

NΣX1X2 - (Σ X1)(Σ X2)

rx1x2 =
[NΣX12 - (ΣX1) 2] [NΣ X22 - (Σ X2) 2]

Where, ‘X’ denotes Non-performing loan ratio, ‘Y’ denotes loan & advances to total
assets, loan & assets to total deposits, non-performing assets to loan & advances, return
on loan & advances, real interest rate, bank size, inflation and gross domestic product.
Similarly ‘n’ denotes the total number of observations for the variables mentioned above.

39
b. Financial Analysis

Financial analysis is one of the most common ways of analyzing financial data.
Analyzing financial data is carried out through calculating the ratios from the data to
compare against those of other firms or against the firm’s own historical performance.
Financial analyst often focuses on the income statement, balance sheet, and cash flow
statement. Different ratios are calculated for the financial analysis purpose. The technique
of ratio analysis is the part of the whole process of analysis of financial statement of any
business and industrial company especially to tame output and credit decision. The ratios
which are going to be used are as follows:

• Loan & advance to total assets

• Loan & Advances to total Deposit Ratio
• NPA to total loan & Advances
• Return on Loan & Advances

c. Specification of Model

The econometric models employed in this study intends to analyze the relationship
between NPA and the firm specific explanatory variables and Macro economics variable
such as bank size, real interest rate, annual growth rate in loan, loan & advance to total
assets ratio, loan & advance to total deposit ratio, return on loan and advances, non-
performing assets to loan & advances, GDP, inflation and previous year non-performing
loan.

NPL it = a0 + a1 SIZE it + a2 RIR it + a3 ∆GL it + a4 LATA it +a5 LATD it+ a6 RLA it + a7

NPALA it + a8 GDP it + a9INF it + a10NPL it-1 + uit

Where,
i=1,2,3....
t=1,2,3....
NPL= Non Performing Loan
SIZE = Bank Size

40
RIR = Real Interest Rate
∆GL = Change on Growth Rate of Loans
LATA= Ratio of Loan & Advances to Total Assets
LATD=Ratio of Loan & Advances to Total Deposits
RLA=Return on Loan & Advances
NPALA= Non Performing Assets to Loan & Advances
GDP = Gross Domestic Product
INF = Inflation Rate
NPLt-1 = Non Performing Loan of Previous Year
uit = Error Terms
a0=Intercept in NPL Model
a1, a2, a3, a4, a5, a6, a7, a8, a9 =Regression Coefficients

In the models, secondary data are processed and analyzed using computer software that is
EXCEL and SPSS program. The Pearson correlation technique, multiple correlation and
regression model have been used for the study in order to show the relationship between
the dependent variable and independent variables, association of strength between these
variables and to show the extent of the influence of the independent variables on the
dependent variable. Pearson correlation coefficient is also used to investigate the
correlation between the variables at 5 percent and 10 percent level of significance.

d. Analysis of Portfolios Formed

Secondary data analyze are also based on the analysis of portfolios formed on firm size,
real interest rate, annual growth rate of loans, loan- assets ratio, GDP and inflation. For
the purpose of sorting of portfolios, 180 observations of all sample firms over the period
from 2002 through 2011 have been grouped into three equal percentile groups of
portfolios. The portfolios have been formed on the basis of bank size, real interest rate,
annual growth rate of loans, loan-assets ratio, gross domestic product and inflation. At
each sort, the properties of Non-performing Loan have been observed and analyzed with
respect to the movement in variables on the basis of mean value and standard deviation.

41
3.3. Primary Data

This study is also based on primary sources of data. The questionnaire survey has been
conducted to record the opinions, perceptions, and characteristics of managers and
executives in terms of Non-Performing Assets of commercial banks. The survey has been
basically designed to understand the opinion of respondents as how they perceive the
factors affecting Non-Performing Assets of the commercial banks in Nepal.

3.3.1. Questionnaire Design

The questionnaires contain total of 24 questions of mixed type options such as personal
information, five point Liker scale items, and open-end options. First part questions are
about personal information of the respondents such as name, age, gender, and academic
qualification. Next part of the questionnaire consists of multiple choice options in which
respondents are asked to tick in an appropriate option in relation to the satisfaction of the
customers. Similarly, next question is designed in a 5 point Likert scale type to identify
the degree of agreement or disagreement of respondents in relation to the operations,
banking facilities, location, years of experience etc. Finally, open-end question is
included to obtain write-in comments of customers about the improvement area of the
bank. The questionnaire survey will be conducted to record the opinions and perceptions
of at least 50 managers and executives regarding the Non-performing assets in Nepalese
commercial banks. Questionnaires are prepared for the survey of 50 respondents that are
asked to the managers and executives of sampled commercial banks.

3.3.2. Survey Design

The primary source of data include the personal interview and questionnaire administered
to the sample bank which is done by personal visit to the respective banks and
distributing the questionnaire to the managers and executives of the respective sampled
commercial banks.

42
3.3.3. Primary Data Sampling

The total population for this research is managers and executives of the commercial bank
within Kathmandu Valley. The respondents have been categorized according to the
consideration of their primary bank where they have been working as a Managers or
executives of respective Banks. Total of 50 respondents are taken for the research
purpose.

3.3.4. Sampling Technique

As it is difficult to access the responses from all the commercial banks, this study has
used probability stratified sampling method to categorize sample banks in three strata and
they are State-owned bank, joint venture banks (JVB) and private bank (PB). After
divided into three strata, joint venture banks are included in the study that makes the
number of sample of joint venture banks is 7 while domestic private banks are also
included in the sample that makes the number of sample of domestic private banks is 8
and number of sample of state-owned banks are 3 which are included in the study.
Likewise, for primary survey the selection of sample respondents have been conducted
using systematic random sampling of the bank branches.

3.3.5. Method of Primary Data Analysis

This study is also based on primary sources of data. The questionnaire survey has been
conducted to record the opinions, perceptions, and characteristics of managers and
executives in terms of Non-performing Assets of commercial banks. The survey has been
basically designed to understand the opinion of respondents as how they perceive the
factors affecting Non-performing Assets of the commercial banks in Nepal.

The primary data analysis has been carried out on the basis of responses derived from
questionnaire survey. For analysis of data SPSS and excel has been used. The methods
used for primary data analysis includes percentage frequency distribution, and median
scores of responses to 5 point Likert scale items. Likewise the reliability and validity
(Cronbach’s Alpha) of the data are also tested to find out the strength of each scale. As
stated in this chapter, questionnaire has been used to obtain the response regarding
43
profitability trend in Nepal. Questionnaire contains responses based on multiple choices,
yes / no questions, Likert scale items. Likert scale items present as strongly disagree = 1,
disagree = 2, don’t know = 3, agree = 4 and strongly agree = 5. Similarly, some of the
open questions are provided to obtain a view of the respondents. 5-point Likert scale
items uses weighted mean which has been used to identify the most and least preferred
factors to analyze the degree of agreement or disagreement with respect to given
statements.

3.4. Validity and Reliability

The reliability of the study is measured and confirmed by testing both consistency and
stability of the respondents’ response. Consistency indicates how well the items
measuring a concept hang together as a set. Statistically, cronbach’s alpha is reliability
coefficient that indicates how well the items in a set are reliable and valid. Cronbach’s
alpha is computed in items of the average inter correlations among the items measuring
the concept. The closer Cronbach’s alpha is to 1, the higher the internal consistency and
reliability of the study. After the collection of data through questionnaire, the reliability
was tested and validity of all the data and the result was found reliable and valid. Table
3.3 present coefficient of cronbach’s alpha:

Table 3.3
Coefficient of Cronbach’s Alpha
Cronbach's Alpha Cronbach's Alpha Based on N of Items
Standardized Items
.802 .781 50

In the table 3.3 showed that the instrument was both reliable and valid with Cronbach’s
Alpha based on standardized items i.e. 0.781 which indicates that 78 percent data are
reliable and 22 percent data are error.

44
3.5. Instrumentation

This study is based on both primary and secondary data. The secondary sources of data
have been employed to determine the Non-performing Assets with sample of commercial
banks in Nepal. The primary sources of data have been employed to obtain bank
executives opinion towards NPA trend of Nepalese commercial banks. To collect data
from primary sources, questionnaire has been used to record the opinions with respect to
determinants of Non-performing Assets. The survey has been basically designed to
understand the opinions of respondents as how they perceive the determinants affecting
NPA in Nepalese commercial banks. A questionnaire is prepared to survey the responses
of managers and executives. It contained around 24 questions of mixed nature. A sample
of questionnaire is presented in appendix F. A number of steps were followed to identify
such a group of respondents.

Collected data are managed, analyzed and presented in proper table and formats. These
data are interpreted and explained wherever necessary. Data are collected then processed
using the Statistical Package of Social Science (SPSS) computer software. The function
of SPSS helps researcher to analyze the result of the questionnaire and then to interpreted
the major findings.

45
 CHAPTER IV
RESULTS AND DISCUSSION

This chapter provides systematic presentation and analysis of primary and secondary data
to deal with the various issues related to the Non-performing assets. Various statistical
and econometric models described in pervious chapter have been used for this purpose.
This section is divided into three parts. The first section deals with the presentation and
analysis of the Non-performing assets of commercial banks based on secondary data
extracted from annual reports of respected banks. The second section deals with the
primary data collected from respondents who are the managers and executives of the
respective sample banks in order to analyze the Non-performing assets of commercial
banks. Finally, the third section discusses on the concluding remarks associated with
findings from the data analysis.

4.1. Financial Highlights and Indicators of Commercial Banks

This section fulfills the first objective of this study. There are literally hundreds of useful
financial ratios that can be used to evaluate Non-performing assets of commercial banks.
However, in most instances, a few basic ratios can help identify the level of Non
Performing Assets of commercial banks. This subsection presents the L&A to TA, L&A
to TD, NPA to L&A and RLA of the sample commercial banks.

Loan & Advances to Total Assets

The ratio of loans and advances to total assets measures the volume of loans and
advances in the structure of total assets. The high degree of ratio indicates the good
performance of the banks mobilizing its fund by way of lending functions. The low ratio
indicates low productivity and high degree of safety in liquidity and vice versa. The data
below on Table 4.1 shows Loan & Advances to total Assets of commercial banks for ten
years which have been divided into three section and they are Stated Owned Banks, Joint
Venture Banks and Private sectors banks.

46
 Table: 4.1
Loan & Advances to Total Assets of sample banks (2002 to 2011)
(In percentage)
Fiscal year
Banks 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Average Std Dev
State owned banks
NBL 20.02 20.11 17.47 27.16 28.17 31.51 28.17 13.50 14.41 14.32 21.48 6.38
RBBL 27.32 24.04 38.17 36.69 37.56 39.78 38.11 35.97 45.39 40.22 36.33 5.91
ADB 84.38 77.68 72.51 70.55 71.42 70.02 62.92 62.71 58.17 55.18 68.55 8.46
Mean 43.91 40.61 42.71 44.80 45.71 47.10 43.07 37.40 39.32 36.57
Std Dev 35.24 32.17 27.80 22.80 22.75 20.27 17.90 24.64 22.50 20.67
Joint Venture Banks
NABIL 46.83 48.91 61.60 57.87 57.04 57.54 62.89 61.96 65.42 65.83 58.59 6.12
NIBL 64.03 53.79 62.22 59.90 62.65 69.45 68.37 70.36 70.42 63.32 64.45 5.05
SCBN 27.12 28.31 37.98 34.67 36.73 41.15 33.70 39.68 42.06 46.97 36.84 5.83
HBL 42.82 48.27 44.66 49.70 50.71 53.90 63.05 65.50 67.54 64.32 55.05 8.76
NBBL 60.74 60.66 58.65 55.17 60.78 58.12 56.04 62.32 60.36 51.22 58.41 3.21
NSBI 59.06 60.94 60.06 58.51 68.05 70.48 48.94 45.94 46.36 45.03 56.34 8.80
EBL 60.96 61.24 64.61 61.41 63.75 67.55 64.70 66.59 67.17 64.34 64.23 2.31
Mean 51.65 51.73 55.68 53.89 57.10 59.74 56.81 58.91 59.90 57.29
Std Dev 13.42 11.74 10.17 9.30 10.52 10.47 12.03 11.49 11.21 9.15
Private Banks
BOK 24.39 59.46 59.98 59.12 64.46 70.32 71.46 71.23 70.56 65.14 61.61 13.28
Kumari 70.52 66.42 75.17 76.49 74.92 75.43 78.72 71.95 71.38 70.09 73.11 3.48
Laxmi 70.05 67.04 69.77 80.73 75.01 76.26 72.42 69.49 70.50 63.30 71.46 4.67
NIC 59.93 60.05 62.76 64.10 76.56 73.92 72.95 62.69 67.60 67.41 66.80 5.64
SB 72.10 80.74 82.96 79.65 78.23 80.01 74.54 73.04 75.33 68.35 76.49 4.33
NCC 62.02 64.13 68.73 72.24 61.42 53.61 64.76 62.65 66.61 66.92 64.31 4.75
Lumbini 70.97 68.29 70.47 70.06 67.32 72.98 66.02 68.92 69.23 69.57 69.38 1.85
MBL 61.01 72.29 78.39 66.91 65.95 69.15 71.56 69.10 72.83 64.06 69.13 4.71
Mean 61.37 67.30 71.03 71.16 70.48 71.46 71.55 68.63 70.50 66.85
Std Dev 15.75 6.88 7.66 7.63 6.39 7.98 4.47 3.95 2.79 2.50
Grand
54.68 56.80 60.34 60.05 61.15 62.84 61.07 59.65 61.18 58.09
Average
Grand
18.90 17.28 16.40 15.18 14.37 14.00 14.61 15.81 15.27 14.16
Std Dev
Source: Bank Supervision Report, 2011

From the table 4.1 illustrates the loans and advances to total assets of all the selected
commercial banks. On the basis to findings, for stated owned bank ADB has highest
loans and advances to total assets of 66.55 percent in an average with comparative higher
standard deviation of 8.46 percent. On the other hand, NBL and RBBL has lower ratio of
loans and advances to total assets i.e., 21.48 percent and 36.33 percent respectively.
Hence among the three banks, ADB has the highest proportion of loans and advances in
the total asset structure followed by NBL and then RBBL. This infers that RBBL has the

47
lowest degree of investment in risky assets. The management of RBBL is risk averse as
they have invested higher proportion of their asset in risk free.

Similarly, from joint venture bank NIB and EBL have higher loans and advances to total
assets of 64.45 percent and 64.23 percent in an average which implies this bank has good
performance of the banks mobilization of fund by way of lending functions and high
productivity with having higher degree of risky. On the other hand, SCBN has lower ratio
of loans and advances to total assets i.e., 36.84 percent which implies SCBN ratio
indicates that the management of SCBN is risk averse as they have invested higher
proportion of their asset in risk free low productivity and high degree of safety in
liquidity. On the other hand most of the bank’s average return falls under category of 55
percent to 59 percent.

From the private bank SBL have higher loans and advances to total assets of 76.49
percent in an average which implies this bank has good performance of the banks
mobilization of fund by way of lending functions and high productivity with having
higher degree of risky. On the other hand, BOK has lower ratio of loans and advances to
total assets i.e, 61.6 percent which implies BOK ratio indicates low productivity and high
degree of safety in liquidity. On the other hand most of the bank’s average return falls
under category of 64.31 percent to 71.5 percent.

In other hand, average loans and advances to total assets of state owned Bank was highest
in the year 2007(47.10 percent) and lowest in the year 2011(36.57 percent). Similarly,
joint venture banks and private banks was highest in the year 2010(59.90 percent) and in
the year 2008(71.55 percent) and lowest in the year 2002 with 51.65 percent and 61.37
percent and average loans and advances to total assets of all commercial bank was
highest in the year 2007 (62.84 percent) and lowest in the year 2002 (54.68 percent).

The Loan & Advances to Total Assets of Nepalese Commercial banks for year 2002 to
2011 can also be analyzed with the help of Figure 4.1. Figure 4.1 shows that the Loan &
Advances to Total Assets of Nepalese commercial banks was in increasing trend from
year 2002 to 2004 and decreases in 2005 but again increases to 2007. In 2007 Loan &

48
Advances to Total Assets of Nepalese commercial banks was highest then other year.
After 2007 to 2011 L&A to TA is in fluctuating trend. So from the figure it has been
observed that in year 2007 from the proportion of Loan & Advances to total Assets has
highest ratio.

Figure 4.1
Loan & Advances to Total Assets of Commercial banks (2002 to 2011)

63
62
61
60
59
58
57
56
55
54
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Bank Supervision Report, 2011

Loan & Advances to Total Deposits

This ratio is calculated to find out how successfully the banks are utilizing their total
deposits on credit or loans and advances for profit generation purpose as loans and
advances yield high rate of return. Greater CD ratio implies the better utilization of total
deposits and better earning. The data below on table 4.2 shows Loan & Advances to total
Deposits of commercial banks for ten years which have been divided into three section
and they are Stated Owned Banks, Joint Venture Banks and Private sectors banks.

From the table 4.2 for Stated Owned Bank ADB has highest Loan & Advances to Total
Deposit ratio of 89.92 percent and NBL has lowest Loan & Advances to Total Deposit
ratio of 23.24 percent and also has lower standard deviation of 6.36 percent. So, ADB has
greater average L&A to TD ratio which implies ADB have been ahead in utilizing
depositor’s money on loans and advances with the objective to earn profit. NBL has very
low investment in the form of loans and advances the management of NBL is risk averse
as they have invested higher proportion of their deposit in risk free.

49
 Table: 4.2
Loan & Advances to Total Deposits of sample banks (2002 to 2011)
(In percentage)
Fiscal year
Banks Std.
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Average
Dev
Stated Owned Banks
NBL 22.77 24.85 22.87 27.23 28.34 31.68 29.64 13.80 16.19 14.97 23.24 6.36
RBBL 29.64 26.50 31.22 31.68 34.34 32.95 38.42 44.09 49.87 46.08 36.48 7.80
ADB 86.35 80.22 83.13 84.03 84.07 93.97 91.79 104.32 100.19 91.11 89.92 7.86
Mean 46.25 43.86 45.74 47.65 48.92 52.87 53.28 54.07 55.42 50.72
Std Dev 34.89 31.50 32.65 31.59 30.59 35.60 33.63 46.08 42.27 38.28
Joint Venture Banks
NABIL 57.68 58.01 72.57 66.79 66.60 66.94 73.87 69.63 76.53 75.61 68.42 6.65
NIBL 72.86 61.87 71.04 67.50 70.59 78.36 77.61 80.48 81.96 73.03 73.53 6.21
SCBN 30.37 31.63 43.55 38.75 42.61 46.12 38.14 45.35 48.49 54.43 41.94 7.42
HBL 47.61 54.30 50.14 55.27 56.57 61.23 71.49 74.39 77.14 73.26 62.14 10.96
NBBL 68.50 67.53 64.23 49.64 46.60 50.15 67.06 77.69 73.43 60.93 62.58 10.59
NSBI 68.51 71.46 71.80 69.32 82.66 88.32 54.12 50.09 50.37 49.01 65.57 14.07
EBL 73.32 72.97 75.45 71.01 75.13 76.49 71.68 74.61 75.51 71.81 73.80 1.90
Mean 59.83 59.68 64.11 59.75 62.97 66.80 64.85 67.47 69.06 65.44
Std Dev 15.94 14.14 12.42 12.19 14.89 15.42 13.95 13.96 13.67 10.60
Private Banks
BOK 29.43 72.94 66.12 69.23 75.87 78.71 81.00 82.03 83.11 75.28 71.37 15.73
Kumari 83.79 75.90 89.18 88.71 84.58 88.73 92.89 84.70 86.11 80.12 85.47 4.89
Laxmi 111.04 102.92 87.10 94.56 84.57 88.68 82.96 80.52 83.06 72.17 88.76 11.35
NIC 76.95 69.20 75.49 75.93 88.81 86.09 87.80 79.73 81.19 77.98 79.92 6.18
SB 158.99 119.55 104.42 96.71 93.92 91.60 84.07 82.46 85.21 77.91 99.48 24.19
NCC 69.80 71.34 81.73 70.14 57.04 60.35 75.14 73.86 80.68 75.48 71.56 7.90
Lumbini 82.49 78.90 78.58 62.34 63.75 78.71 77.32 88.55 90.24 89.85 79.07 9.78
MBL 82.31 90.51 90.60 76.88 75.25 77.84 80.25 77.09 89.76 72.41 81.29 6.75
Mean 86.85 85.16 84.15 79.31 77.97 81.34 82.68 81.12 84.92 77.65
Std Dev 36.89 17.92 11.49 12.62 12.60 10.02 5.69 4.50 3.62 5.64
Grand
69.58 68.37 69.96 66.43 67.29 70.94 70.85 71.30 73.84 68.41
Average
Grand
32.69 24.27 21.13 19.85 19.36 19.75 18.71 20.75 20.21 18.01
Std.Dev
Source: Bank Supervision Report, 2011

Among the joint venture banks EBL has highest Loan & Advances to Total Deposit ratio
of 73.80 percent and have lowest standard deviation of 1.90 percent. NIBL is ranked in
second position having average ratio of 73.53 percent and NBBL and HBL has lowest
Loan & Advances to Total Deposit ratio of 62.14 percent and 62.58 percent with
comparatively higher standard deviation of 10.59 percent and 10.9 percent. So, EBL and

50
NIBL have greater average L&A to TD ratio which implies the better utilization of total
deposit with objectives of better earning.

Similarly, from private banks Siddhartha bank limited has highest average CD ratio of
99.48 percent which implies that SBL has better utilization of total deposit and have
better earning. BOK and NIC have the lowest average Loan & Advances to Total Deposit
ratio of 71.37 percent and 71.56 percent.

In other hand, average loans and advances to total Deposit of state owned Bank was
highest in the year 2010(55.42 percent) and lowest in the year 2003(46.83 percent).
Similarly, joint venture banks and private banks was highest in the year 2010(69.06
percent) and in the year 2002(86.85 percent) and lowest in the year 2003 & 2011 with
59.68 percent and 77.65 percent and Loan & Advances to Total Deposit ratio of all
commercial bank was highest in year 2010 (73.84 percent) and was lowest in year 2005
(66.43 percent) most of the bank’s average return falls under category of 79 percent to 89
percent.

The Loan & Advances to Total Deposit of Nepalese Commercial banks for year 2002 to
2011 can also be analyzed with the help of Figure 4.2.

Figure: 4.2
Loan & Advances to Total Deposits of Commercial banks (2002 to 2011)
74
73
72
71
70
69
68
67
66
65
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Bank Supervision Report, 2011

51
The figure 4.2 shows that the Loan & Advances to Total Deposits of Nepalese
commercial banks was in fluctuating trend from year 2002 to 2006 but again increases to
2007 and again in year 2008 it decrease and from year 2009 to 2011 Loan & Advances to
Total Deposit is in fluctuating trend. In 2005 Loan & Advances to Total Deposits of
Nepalese commercial banks has a lowest ratio then other year and in year 2010 Loan &
Advances to Total Deposits of Nepalese commercial banks has highest ratio then in other
year.

Non-Performing Assets to Loans & Advances

Non-performing loan to total loan ratio determines the proportion of non-performing loan
in the total loan portfolio. Higher ratio implies the bad quality of assets of banks in the
form of loan and advances. Hence, lower NPL to total credit ratio is preferred. The data
below on table 4.3 shows Non-performing Assets to Loan & Advances ratio of
commercial banks for ten years which have been divided into three section and they are
Stated Owned Banks, Joint Venture Banks and Private sectors banks.

From the above table 4.3 for the stated owned bank NBL and RBBL has lowest average
Non-performing Assets to Loan & Advances ratio of 0.25 percent and 0.77 percent which
implies the good quality of assets of the banks is preferred. Whereas, ADB has higher
Non-performing Assets to Loan & Advances ratio of 5.78 percent which state that the
banks has bad quality of Assets in the form of Loan & Advances.

From the joint venture banks NBBL has the highest Non-performing Assets to Loan &
Advances ratio of 9.94 percent and the other bank’s has the lowest Non-performing
Assets to Loan & Advances ratio falls under the category of 0.46 percent to 1.16 percent
which implies the good quality of Assets of banks in the form of Loan & Advances.

Similarly, for the private banks LBL and NCC has the highest Non-performing Assets to
Loan & Advances ratio of 5.41 percent and 3.82 percent and the other bank’s has the
lowest Non-performing Assets to Loan & Advances ratio falls under the category of 0.40
percent to 1.41 percent which implies the good quality of Assets of banks in the form of
Loan & Advances.

52
In other hand, average loans and advances to total assets of state owned Bank was highest
in the year 2009(3.53 percent) and lowest in the year 2005 & 2006(0.71 percent).
Similarly, joint venture banks and private banks was highest in the year 2006(5.30
percent) and in the year 2005(6.16 percent) and lowest in the year 2010 & 2011 with 0.86
percent and 0.62 percent and Non Performing Assets to Loan & Advances ratio of all
commercial bank was highest in year 2005 (4.75 percent) and was lowest in year 2008
(1.09 percent).

Table: 4.3
Non-Performing Assets to Loans & Advances of sample banks (2002 to 2011)
(In percentage)
Fiscal year
Banks Std.
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Average
Dev
State Owned Banks
NBL 0.04 0.35 0.36 0.53 0.35 0.51 0.41 0.48 0.45 1.06 0.46 0.25
RBBL 2.03 1.65 0.45 0.99 0.53 0.30 0.28 2.48 1.49 1.45 1.16 0.77
ADB 7.40 6.36 6.65 0.60 1.24 8.75 6.70 7.62 7.27 5.25 5.78 2.72
Mean 3.16 2.79 2.48 0.71 0.71 3.19 2.46 3.53 3.07 2.59
Std Dev 3.81 3.16 3.61 0.25 0.47 4.82 3.67 3.68 3.67 2.31
Joint Venture Banks
NABIL 0.00 0.01 2.30 0.03 0.09 0.30 0.17 1.10 0.29 0.99 0.53 0.74
NIBL 0.53 1.28 1.39 0.81 0.75 0.50 0.46 0.23 0.65 1.79 0.84 0.49
SCBN 0.04 0.35 0.36 0.53 0.35 0.51 0.41 0.48 0.45 1.06 0.46 0.25
HBL 2.03 1.65 0.45 0.99 0.53 0.30 0.28 2.48 1.49 1.45 1.16 0.77
NBBL 3.61 4.63 11.62 29.14 34.08 6.95 4.23 1.90 2.58 0.69 9.94 11.87
NSBI 1.88 2.31 3.11 1.92 0.63 0.47 0.27 0.36 0.22 0.30 1.15 1.06
EBL 0.93 1.43 1.17 0.72 0.66 0.54 0.39 0.28 0.32 0.70 0.71 0.37
Mean 1.29 1.67 2.91 4.88 5.30 1.37 0.89 0.98 0.86 1.00
Std Dev 1.31 1.52 3.96 10.71 12.70 2.46 1.48 0.89 0.88 0.50
Private Banks
BOK 4.55 1.79 2.26 1.08 0.87 0.31 0.23 0.72 0.87 0.51 1.32 1.30
Kumari 0.80 0.47 0.74 0.38 0.28 0.56 0.39 0.09 0.78 1.06 0.55 0.29
Laxmi 0.85 0.56 0.69 0.37 0.35 0.38 0.31 0.20 0.09 0.19 0.40 0.24
NIC 2.21 1.20 0.42 0.92 0.42 0.23 0.29 0.14 0.23 0.29 0.63 0.65
SB 1.01 1.15 0.00 0.43 0.33 0.51 0.30 0.39 0.23 0.77 0.51 0.36
NCC 1.25 2.92 3.06 16.86 5.58 3.71 1.09 1.51 0.76 1.44 3.82 4.82
Lumbini 0.00 2.46 9.58 28.67 5.67 3.67 1.33 1.30 0.72 0.70 5.41 8.68
MBL 0.44 0.64 0.45 0.57 2.21 3.06 2.07 2.34 2.29 0.05 1.41 1.08
Mean 1.39 1.40 2.15 6.16 1.96 1.55 0.75 0.84 0.75 0.62
Std Dev 1.43 0.91 3.18 10.73 2.35 1.61 0.68 0.81 0.69 0.47
Grand
1.64 1.73 2.50 4.75 3.05 1.75 1.09 1.34 1.18 1.10
Average
Grand
1.91 1.61 3.37 9.58 7.92 2.53 1.72 1.78 1.68 1.14
Std.Dev
Source: Bank Supervision Report, 2011

53
The Non-Performing Assets to Loans & Advances of Nepalese Commercial banks for
year 2002 to 2011 can also be analyzed with the help of Figure 4.3

Figure: 4.3
Non-Performing Assets to Loans & Advances of sample banks (2002 to 2011)

5.5
5
4.5
4
3.5
3
2.5
2
1.5
1
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Bank Supervision Report, 2011

From the figure 4.3 it shows that the Non-Performing Assets to Loans & Advances of
Nepalese commercial banks was in increasing trend from year 2002 to 2005 and started
to decreases in year 2008 but again slightly increases in 2009 and again in year 2010 and
2011 it decrease. In 2005 Non-Performing Assets to Loans & Advances of Nepalese
commercial banks has highest ratio then in other year and in year 2008 Non-Performing
Assets to Loans & Advances of Nepalese commercial banks has lowest ratio then other
year.

Return on Loans & Advances

Return on loan and advances ratio indicates how efficiently the bank has employed its
resources in the forms of loan and advances. Net profit of a bank largely depends upon
interest earn from loan and advances and net profit. This ratio measures the bank’s
profitability with respect to loan and advances. Higher the ratios better the performance
of the bank and vice versa. The data below on table 4.4 shows Return on Loans &
Advances ratio of commercial banks for ten years which have been divided into three
section and they are Stated Owned Banks, Joint Venture Banks and Private sectors banks.

54
From the table 4.4 for stated owned bank NBL has higher average ratio of Return on
Loans & Advances of 6.33 percent which implies the better performance of the bank
because it measure the bank’s profitability with respect to loans & advances. Similarly,
RBBL and ADB has lowest average ratio of Return on Loans & Advances.

Table: 4.4
Return on Loans & Advances of sample banks (2002 to 2011)
(In percentage)
Fiscal year
Banks Std.
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Average
Dev
State Owned Banks
NBL -3.16 8.00 21.05 12.37 2.05 1.81 6.67 7.37 5.06 2.10 6.33 6.71
RBBL -41.43 9.60 9.85 10.88 9.33 8.34 7.35 6.65 4.77 3.58 2.89 15.74
ADB -0.25 -0.25 -0.35 2.88 3.88 2.19 3.24 5.59 6.86 4.72 2.85 2.54
Mean -14.95 5.78 10.18 8.71 5.09 4.11 5.75 6.53 5.57 3.47
Std Dev 22.98 5.29 10.70 5.10 3.79 3.67 2.20 0.90 1.13 1.31
Joint Venture Banks
NABIL 5.37 5.56 4.90 4.92 4.34 3.49 3.74 3.53 3.53 4.08 4.34 0.79
NIBL 2.02 2.14 2.29 2.74 2.90 2.58 2.49 3.14 2.86 2.50 2.57 0.35
SCBN 8.90 8.03 6.40 7.37 6.59 5.97 7.49 6.81 6.07 5.97 6.96 0.98
HBL 2.12 2.20 2.61 3.12 2.89 3.26 3.04 1.82 2.83 2.74 2.66 0.47
NBBL 0.99 0.03 -9.62 -27.82 -24.08 10.93 32.19 13.08 -1.63 7.84 0.19 17.76
NSBI 1.09 1.18 0.92 1.53 2.69 2.05 2.09 2.24 2.17 1.84 1.78 0.58
EBL 1.92 2.44 2.24 2.42 2.17 2.46 2.67 3.02 2.37 4.34 2.60 0.68
Mean 3.20 3.08 1.39 -0.82 -0.36 4.39 7.67 4.80 2.60 4.19
Std Dev 2.91 2.76 5.20 12.06 10.57 3.16 10.96 3.99 2.28 2.12
Private Banks
BOK 4.52 2.26 2.36 2.79 2.79 2.90 3.15 3.06 3.46 3.23 3.05 0.64
Kumari 0.59 1.33 1.57 1.50 1.91 1.54 1.79 2.14 1.72 1.56 1.57 0.41
Laxmi 0.13 0.60 1.00 0.84 1.02 1.24 1.42 2.25 2.47 2.16 1.31 0.76
NIC 1.07 1.92 2.41 1.45 1.77 2.16 2.32 3.53 4.74 2.27 2.36 1.06
SB 0.21 1.13 2.73 1.72 1.53 1.53 1.63 1.45 1.69 1.63 1.53 0.62
NCC 2.73 0.08 -0.10 -12.27 -3.13 11.29 6.06 5.30 2.50 1.43 1.39 6.23
Lumbini 3.65 0.63 -6.21 -27.01 5.01 7.30 6.67 5.95 6.38 2.81 0.52 10.47
MBL 1.05 1.87 1.68 2.21 1.08 0.98 0.98 0.51 0.06 0.24 1.07 0.69
Mean 1.74 1.23 0.68 -3.60 1.50 3.62 3.00 3.02 2.88 1.92
Std Dev 1.67 0.76 2.93 10.67 2.27 3.71 2.18 1.86 1.97 0.92
Grand
-0.47 2.71 2.54 -0.46 1.37 4.00 5.28 4.30 3.22 3.06
Average
Grand
10.54 3.00 6.25 10.99 6.85 3.30 7.05 2.98 2.18 1.82
Std.Dev
Source: Bank Supervision Report, 2011

55
From the Joint venture bank SCBN has higher average ratio of Return on Loans &
Advances of 6.96 percent which implies the better performance of the bank because it
measure the bank’s profitability with respect to loans & advances. NBBL has lowest
average ratio of Return on Loans & Advances which mean the bank is not performing
well.

BOK of private bank has higher average ratio of Return on Loans & Advances of 3.05
percent which implies the better performance of the bank because it measure the bank’s
profitability with respect to loans & advances. LBL has lowest average ratio of Return on
Loans & Advances.

In other hand, average of Return on loans and advances of state owned Bank was highest
in the year 2004(10.18 percent) and lowest in the year 2002(-14.95 percent). Similarly,
joint venture banks and private banks was highest in the year 2008(7.67 percent) and in
the year 2007(3.62 percent)and lowest in the year 2005 with -0.82 percent and -3.60
percent and Return on Loan & Advances ratio of all commercial bank was highest in year
2007 (4 percent) and was lowest in year 2002 (-0.47 percent).

The Return on Loans & Advances of Nepalese Commercial banks for year 2002 to 2011
can also be analyzed with the help of Figure 4.4.

Figure: 4.4
Return on Loans & Advances of sample banks (2002 to 2011)

0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
-1

Source: Bank Supervision Report, 2011

56
From the figure 4.4 it shows that the Return on Loans & Advances of Nepalese
commercial banks was in negative trend in year 2002 and 2005. In year 2002 the RLA is
in negative trend and in 2003 it increase but in year 2004 it slightly decrease and again in
2005 it is in negative trend and then in year 2006 to 2008 it was in increasing trend. In
year 2008 it has a highest ratio of Return on Loans & Advances of Nepalese commercial
banks.

4.2. Analysis of Non-Performing Assets and its Determinants

As this study has employed descriptive research design, among others, descriptive
statistics have been used to describe the characteristics of Non-Performing Loan, Loan &
Advances to Total Assets, Loan & Advances to Total Deposit, Non-performing Assets to
Loan & Advance, Return on Loan & Advances, Real Interest Rate, Gross Domestic
Product, Inflation, Bank Size and Growth of Loan during the study period. The
descriptive statistics used in this study consists of mean, median, standard deviation, and
minimum and maximum values associated with variables under consideration. Table 4.5
summarizes the descriptive statistics of variables used in this study during the period
2002 through 2011 associated with 18 sample banks.

Table 4.6 indicates that firm differs significantly in terms of NPL. NPL has minimum
value of 0 to maximum 60.47 with a mean of 7.4243 and standard deviation of 11.799.
The firms also differ in terms of their Loan & Advances to Total Assets with average
value 59.58 ratios with minimum to maximum range of 13.5 to 84.38 respectively, and
standard deviation of 15.441. The ratio of loans and advances to total assets measures the
volume of loans and advances in the structure of total assets. The high degree of ratio
indicates the good performance of the banks mobilizing its fund by way of lending
functions. The low ratio indicates low productivity and high degree of safety in liquidity
and vice versa.

Loan & Advances to Total Deposit ratio is calculated to find out how successfully the
banks are utilizing their total deposits on credit or loans and advances for profit
generation purpose as loans and advances yield high rate of return. Greater CD ratio

57
implies the better utilization of total deposits and better earning so, Loan & Advances to
Total Deposit ratio has mean value of 69.70 and standard deviation of 21.39 with
minimum to maximum range of 13.8 to 158.99. Non-performing Assets to Loan &
Advances range from minimum value of 0 to 34.08 maximum values with average value
of 2.18 and standard deviation of 4.458. Higher Non-performing loan to total loan ratio
implies the bad quality of assets of banks in the form of loan and advances. Hence, lower
NPL to total credit ratio is preferred.

Table 4.5
Description Statistics of key Variable of 18 Sample Banks (2002-2011)

This table shows descriptive statistics- mean, median, standard deviation, minimum and maximum values- of key
variables associated with 18 sample banks with 180 observations for the period 2002/03 through 2010/11. NPL refers
to Non-Performing Loans, L&A to TA refers to Loan and Advances to Total Assets, L&A to TD refers to Loan and
Advances to Total Deposits, NPA to L&A refers to Non-Performing Assets to Loan and Advances, RLA is return on
Loan and Advances, RIR is Real Interest Rate, GDP is Gross Domestic Product, INF refers to Inflation, Size refers to
Bank Size, GL is the Growth of Loans and NPLt-1 refers to ratio of NPL of previous year.
Unit Minimum Maximum Mean Std. Deviation
NPL (%) 0 60.47 7.42 11.80
L&A to TA (%) 13.5 84.38 59.59 15.44
L&A to TD (%) 13.8 158.99 69.70 21.40
NPA to L&A (%) 0 34.08 2.19 4.46
RLA (%) -41.43 32.19 2.55 6.46
RIR (%) -6.82 4.22 0.009 3.83
GDP (%) 2.8 5.8 4.03 0.78
INF (%) 4 12.6 7.28 2.59
SIZE (Billion) 1.1 100.56 25.03 18.85
GL (%) -0.61 5.25 0.25 0.48
NPLt-1 (%) 0 60.47 7.41 11.81

Return on Loan and Advances ratio measures the bank's profitability with respect to loan
and advances. Higher the ratios better the performance of the bank and vice versa so
mean value of Return on Loan and Advances ratio is 2.55 and standard deviation of 6.459
with minimum to maximum range of negative -41.43 to positive 32.19. The value of RIR
from minimum value -6.82 to maximum value 4.22 with average value of 0.0090 and
standard deviation of 3.833. GDP ratio has mean value of 4.03 and standard deviation of
0.783 with minimum to maximum range of 2.8 to 5.8. In this study firm size is also
determine which range from minimum to maximum of 1.1 to 100.56 with average of
25.0322 and standard deviation of 18.851. Growth loan of the sample firms during the

58
period has been recorded at -0.61 percent with minimum to maximum positive value of
5.25 percent. Average of GL of the sample bank is 0.2542 percent with standard
deviation of 0.478 percent. Inflation ratio has mean value of 7.28 percent and standard
deviation 2.595 percent with minimum to maximum range of 4 percent to 12.6 percent. In
case of NPLt-1 the mean value is 7.41 and standard deviation is 11.81 percent with
minimum to maximum range of 0 percent to 60.47 percent.

4.3. Univariate Portfolios Formed on One-Way Sorts

This section fulfills the third objective of the study. This section attempts to examine
univariate relation between profitability and its determinants. Properties of profitability
with respect to firm specific variables have been analyzed in this subsection by forming
three equal percentiles portfolios based on one-way sorts of capital adequacy ratio, bank
size, credit to deposit ratio, non performing loan ratio, and cost efficiency ratio. The
characteristics of average returns and standard deviations associated with each of these
univariate sorts of portfolios are described below.

i. Properties of Portfolios Sorted on Non-performing Loans

In an attempt to describe the characteristics of movement in Non-performing Loans and
other firm specific variables and economic variables with respect to Non-performing
Loans, three equal percentile groups of portfolios were formed on Non-performing Loans
(NPL). The descriptive statistics (mean and standard deviation) associated with each of
these three portfolio groups corresponding to each of the firm specific variables and
economic variables are reported in Table 4.6.

Table 4.6 presents portfolios sorted by NPL. The banks with high NPL have higher NPA
to L&A and SIZE. The NPA to L&A and SIZE increases with increase in NPL when it
moves from lowest percentile group, portfolio 1 to the highest percentile group portfolio
3. The NPA to L&A and SIZE on lowest NPL portfolio is 0.76 percent and 23.69 billion
respectively, it shows a clear pattern of increment with NPL that reaches to maximum
6.96 percent and 34.51 billion in highest NPL portfolio. The results indicate that firms
with higher level of Non-Performing Assets ratio have larger Non-Performing Assets to

59
Loan & Advances ratio and Firm Size ratio. On the other hand, variability in NPL as
measured by standard deviation also shows consistent pattern from lower quintile NPL
sorted portfolio to higher quintile NPL sorted portfolios. It also shows that RIR is also in
increasing trend with NPL from lowest percentile group, portfolio 1 to the highest
percentile group portfolio 3 but NPL as measured by standard deviation shows
inconsistent pattern from lower quintile NPL sorted portfolio to higher quintile NPL
sorted portfolios but RIR is less variable for the largest NPL framework than for the
smallest.

Table 4.6
Properties of Portfolios Sorted on Non-performing Loans

1 (lower or lowest) 2 3(higher)

Portfolio base of portfolio
<2.60 2.60-31.4 >31.4
1.11 10.16 48.99
NPL (%)
(0.74) (7.27) (10.92)
65.78 55.19 33.63
L&A to TA (%)
(10.85) (15.53) (16.30)
77.89 64.28 31.81
L&A to TD (%)
(16.90) (20.83) (9.98)
0.76 3.33 6.96
NPA to L&A (%)
(1.06) (5.06) (11.09)
2.58 2.79 0.18
RLA (%)
(1.63) (7.14) (20.12)
-0.36 0.26 1.61
RIR (%)
(3.88) (3.84) (2.87)
4.07 3.99 3.90
GDP (%)
(0.79) (0.76) (0.89)
7.73 6.97 5.22
INF (%)
(2.62) (2.53) (1.36)
23.69 25.53 34.51
SIZE (Billion)
(15.91) (22.05) (15.25)
0.36 0.16 -0.00
GL (%)
(0.59) (0.29) (0.18)
N 87 78 09
(Note: The reported figures are mean value of the portfolio sorted on non-performing asset and figure in
parenthesis are standard deviation of the portfolio).

Similarly, table 4.6 also indicates the pattern of movement of L&A to TA and L&A to
TD with respect to NPL ratio. The L&A to TA and L&A to TD ratio decrease with the

60
increase in NPL. The L&A to TA and L&A to TD ratio on the lowest NPL portfolio is
65.78 and 77.89 percent which declines to 33.63 and 31.81 percent on the highest NPL
portfolio. RLA ratio also shows the movement in opposite direction with NPL. The RLA
in low NPL portfolio is equal to 2.58 percent, which has been decreased to 0.18 percent
in the highest NPL portfolio. GDP, INF and GL ratio also shows the movement in
opposite direction with NPL. The GDP, INF and GL in low NPL portfolio is equal to
4.07, 7.73 and 0.36 respectively which have decreased to 3.90, 5.22 and –0 respectively
in the highest NPL portfolio.

The result shows that NPA to L&A, SIZE and RIR increases with increase in NPL which
indicates that firm size is in higher trend with highest NPL portfolio but higher ratio of
NPA to L&A implies the bad quality of assets of commercial banks in the form of Loan
and Advances. Other bank specific variable L&A to TA, L&A to TD, RLA and GL
decrease with increase in NPL which indicates that commercial bank's profitability with
respect to loan and advances decrease with increase NPL and also have low productivity
and high degree of safety in liquidity and decreasing L&A to TD ratio implies the bank
are not properly utilizing its total deposits for better earning. Economic variable GDP and
INF also decrease with increase in NPL which indicates Non-performing assets tends to
be pro-cyclical that is NPA tends to fall during periods of high GDP and rise during
periods of low GDP growth (Dash and Kabre, 2010). The task of keeping the rate of
inflation low and stable is usually given to central banks. Central Banks control Inflation
through the setting of interest rate, open market operation, and through the setting of
banking cash reserve requirement.

ii. Properties of Portfolios Sorted on Loan & Advance to Total Assets

In an attempt to describe the characteristics of movement in Non-performing Assets and
other firm specific variables with respect to Loan & Advance to Total Assets, three equal
percentile groups of portfolios were formed on Loan & Advance to Total Assets (L&A to
TA). The descriptive statistics (mean and standard deviation) associated with each of
these three portfolio groups corresponding to each of the firm specific variables are
reported in Table 4.7.

61
 Table 4.7
Properties of Portfolios Sorted on Loan & Advance to Total Assets

Portfolios 1(Lower or Smallest) 2 3(High or Lowest)

Bases of portfolio <59.90 59.90-69 >69

41.86 64.15 73.37

L&A to TA (%)
(13.40) (2.65) (3.84)

12.94 5.22 4.03

NPL (%)
(16.57) (7.24) (6.92)

47.40 75.10 87.41

L&A to TD (%)
(18.07) (8.08) (13.02)

NPA to 2.36 2.07 2.14

(%)
L&A (4.40) (4.36) (4.69)

4.39 2.18 1.01

RLA (%)
(9.17) (3.98) (4.60)

0.16 -0.38 0.28

RIR (%)
(3.83) (4.02) (3.64)

4.08 3.91 4.12

GDP (%)
(0.80) (0.63) (0.91)

7.07 7.25 7.53

INF (%)
(2.49) (2.73) (2.57)

35.43 22.30 17.01

SIZE (Billion)
(20.00) (18.02) (12.78)
0.25
0.15 0.38
GL (%) (0.28)
(0.31) (0.72)

60 64 56
N
(Note: The reported figures are mean value of the portfolio sorted on loan & advances to total assets and figure in
parenthesis are standard deviation of the portfolio).

Table 4.7 presents portfolios sorted by L&A to TA. NPL decrease with increase in L&A
to TA when it moves from lowest percentile group, portfolio 1 to the highest percentile
group portfolio 3. The NPL on lowest L&A to TA portfolio is 12.94 percent and 4.03 on
highest L&A to TA portfolio which indicates that increment in the volume of loans and
advances in the structure of total assets the volume of NPL ratio is in decreasing trend.

62
L&A to TD increase with increase in L&A to TA when it moves from lowest percentile
group to the highest percentile group portfolio. The L&A to TD is 47.40 percent on
lowest L&A to TA and 87.41 percent in highest L&A to TA portfolio which shows that
increment in the volume of loans and advances in the structure of total assets the volume
of L&A to TD ratio implies the better utilization of total deposits and better earning,
however, liquidity requirements also needs due consideration.

NPA to L&A decrease with increase in L&A to TA from 2.36 percent to 2.14 percent
from lowest to highest L&A to TA portfolio which means that commercial banks have
good quality of assets in the form of loan and advances. RLA also decrease with increase
in L&A to TA from lowest portfolio 4.39 percent to highest portfolio 1.01 percent which
indicate the bank's profitability with respect to loan and advances decrease.

GL and INF increase with increase in L&A to TA when it moves from lowest percentile
group to the highest percentile group portfolio. The GL and INF is 0.15 percent and 7.07
percent on lowest L&A to TA and 0.38 percent and 7.53 percent in highest L&A to TA
portfolio. The firm sizes also decrease with increase in L&A to TA from lowest portfolio
of L&A to TA is 35.43 billion to highest portfolio L&A to TA is 17.01 billion.

On the other hand, variability in RIR and GDP shows inconsistent pattern from lower
quintile L&A to TA sorted portfolios to higher quintile L&A to TA sorted portfolios. In
the lowest quintile portfolio of RIR sorted from L&A to TA is 0.16 percent then decrease
to -0.38 percent and increase to 0.28 percent respectively and for GDP from lowest
quintile to highest quintile is 4.08 percent, 3.91 percent and 4.12 percent respectively.

iii. Properties of Portfolios Sorted on Loan & Advance to Total Deposit

In an attempt to describe the characteristics of movement in Non-performing Assets and
other firm specific variables with respect to Loan & Advance to Total Deposit, three
equal percentile groups of portfolios were formed on Loan & Advance to Deposit (L&A
to TD). The descriptive statistics (mean and standard deviation) associated with each of

63
these three portfolio groups corresponding to each of the firm specific variables are
reported in Table 4.8.

Table 4.8
Properties of Portfolios Sorted on Loan & Advances to Total Deposits

Portfolios 1(Lower or Smallest) 2 3(High or Lowest)

Bases of portfolio <67 67-81 >81

44.45 74.56 90.72

L&A to TD (%)
(14.73) (3.71) (12.42)

14.78 4.37 3.54

NPL (%)
(17.47) (5.24) (5.21)

41.50 64.87 72.20

L&A to TA (%)
(13.98) (4.05) (5.74)

NPA to 3.39 1.73 1.49

(%)
L&A (7.02) (2.39) (2.32)

2.85 2.61 2.16

RLA (%)
(10.24) (4.54) (1.64)

0.41 -0.11 -0.27

RIR (%)
(3.65) (3.92) (3.94)

4.01 4.10 3.96

GDP (%)
(0.87) (0.68) (0.82)

6.89 7.48 7.43

INF (%)
(2.39) (2.73) (2.62)
34.26 22.35 18.59
SIZE (Billion)
(20.09) (16.71) (16.53)
0.09 0.26 0.43
GL (%)
(0.19) (0.30) (0.76)
N 57 71 52
(Note: The reported figures are mean value of the portfolio sorted on loan & advances to total deposits and
figure in parenthesis are standard deviation of the portfolio).

Table 4.8 presents portfolios sorted by L&A to TD. NPL decrease with increase in L&A
to TD when it moves from lowest percentile group, portfolio 1 to the highest percentile
group portfolio 3. The NPL on lowest L&A to TD portfolio is 14.78 percent and 3.54 on
highest L&A to TD portfolio which indicates that increment in the ratio of L&A to TD

64
implies the better utilization of total deposits and better earning and the NPL ratio is in
decreasing trend.

L&A to TA increase with increase in L&A to TD when it moves from lowest percentile
group to the highest percentile group portfolio. The L&A to TA is 41.59 percent on
lowest L&A to TD and 72.20 percent in highest L&A to TD portfolio which implies the
better utilization of total deposits and better earning, however, liquidity requirements also
needs due consideration and also shows that increment in the volume of loans and
advances in the structure of total assets.

NPA to L&A decrease with increase in L&A to TD from 3.39 percent to 1.49 percent
from lowest to highest L&A to TA portfolio which means that commercial banks have
good quality of assets in the form of loan and advances. RLA also decrease with increase
in L&A to TD from lowest portfolio 2.85 percent to highest portfolio 2.16 percent which
indicate the bank's profitability with respect to loan and advances decrease. GL increases
with increase in L&A to TD when it moves from lowest percentile group to the highest
percentile group portfolio. The GL is 0.09 percent on lowest L&A to TA and 0.43 percent
in highest L&A to TA portfolio. The firm sizes also decrease with increase in L&A to TD
from lowest portfolio of L&A to TD is 34.26 billion to highest portfolio L&A to TD is
18.59 billion.

On the other hand, variability in INF shows no consistent pattern from lower quintile
L&A to TD sorted portfolios to higher quintile L&A to TA sorted portfolios. In the
lowest quintile portfolio of INF sorted from L&A to TA is 6.89 percent then increase to
7.48 percent and decrease to 7.43 percent respectively. RIR and GDP decrease with
increase in L&A to TD from lower quintile to higher quintile from lowest portfolio of
L&A to TD is 0.41 percent and -0.27 percent to highest portfolio of L&A to TD is 4.01
percent and 3.96 percent respectively.

iv. Properties of Portfolios Sorted on Non-Performing Assets to Loan and Advances

In an attempt to describe the characteristics of movement in Non-performing Assets and
other firm specific variables with respect to Non-Performing Assets to Loan & Advance,

65
three equal percentile groups of portfolios were formed Non -Performing Assets to Loan
& Advance (NPA to L&A). The descriptive statistics (mean and standard deviation)
associated with each of these three portfolio groups corresponding to each of the firm
specific variables are reported in Table 4.9.

Table 4.9
Properties of Portfolios Sorted on Non-Performing Assets to Loan & Advances

Portfolios 1(Lower or Smallest) 2 3(High or Lowest)

Bases of portfolio <0.57 0.57-2 >2

NPA to 0.31 1.09 6.47

(%)
L&A (0.16) (0.39) (7.16)

4.10 5.45 5.45

NPL (%)
(11.41) (7.91) (7.91)

60.16 60.63 57.35

L&A to TA (%)
(16.98) (12.62) (16.36)

70.05 72.89 65.00

L&A to TD (%)
(20.72) (21.37) (22.08)

3.19 3.33 0.64

RLA (%)
(2.23) (2.38) (11.92)

0.05 -0.56 0.82

RIR (%)
(3.53) (4.33) (3.43)

4.13 3.95 3.97

GDP (%)
(0.86) (0.60) (0.86)

7.76 7.15 6.73

INF (%)
(2.79) (2.34) (2.56)

25.49 25.91 23.22

SIZE (Billion)
(14.93) (22.83) (18.95)
0.29 0.35 0.08
GL (%)
(0.28) (0.73) (0.18)
N 69 61 47
(Note: The reported figures are mean value of the portfolio sorted on non-performing assets to loan & advances and
figure in parenthesis are standard deviation of the portfolio).

Table 4.9 presents portfolios sorted by NPA to L&A. NPL increase with increase in NPA
to L&A when it moves from lowest percentile group, portfolio 1 to the highest percentile

66
group portfolio 3. The NPL on lowest NPA to L&A portfolio is 4.10 percent and 5.45
percent on highest NPA to L&A portfolio which indicates that increment in the ratio of
L&A to TD implies the better utilization of total deposits and better earning but NPL is
also in increasing trends.

L&A to TA decrease with increase in NPA to L&A when it moves from lowest percentile
group to the highest percentile group portfolio. The L&A to TA is 60.16 percent on
lowest NPA to L&A and 57.35 percent in highest NPA to L&A portfolio. L&A to TD,
RLA and SIZE also decrease with increase in NPA to L&A when it moves from lowest
percentile group to the highest percentile group portfolio. The L&A to TD, RLA and
SIZE is 70.05 percent, 3.19 percent and 25.49 billion on lowest NPA to L&A and 65
percent, 0.64 percent and 23.22 billion in highest NPA to L&A portfolio. The standard
deviation of the L&A to TD and RLA are in increasing trend from lowest percentile to
highest percentile and the standard deviation of SIZE is in fluctuating from lower to
highest percentile.

On the other hand, variability in RIR and GL shows no consistent pattern from lower
quintile to higher quintile. In the lowest quintile portfolio of RIR sorted from NPA to
L&A is 0.05 percent then decrease to -0.56 percent and increase to 0.82 percent
respectively and for GL from lowest quintile to highest quintile is 0.29 percent, 0.35
percent and 0.08 percent respectively and the standard deviation is also in fluctuating
trend from lowest to highest percentile. This kind of result seems to be contradictory to
negative relation between NPA to L&A to RIR and GL. GDP and INF also decrease with
increase in NPA to L&A when it moves from lowest percentile group, portfolio 1 to the
highest percentile group portfolio 3. The GDP and INF on the lowest portfolio of NPA to
L&A in 4.13 percent and 7.76 percent and on the highest portfolio of NPA to L&A are
3.97 percent and 6.73 percent respectively.

v. Properties of Portfolios Sorted on Return on Loan & Advances

In an attempt to describe the characteristics of movement in Non-performing Assets and
other firm specific variables with respect to Return on Loan & Advances, three equal

67
percentile groups of portfolios were formed on Return on Loan & Advances (RLA). The
descriptive statistics (mean and standard deviation) associated with each of these three
portfolio groups corresponding to each of the firm specific variables are reported in Table
4.10.
Table 4.10
Properties of Portfolios Sorted on Return on Loan & Advances

Portfolios 1(Lower or Smallest) 2 3(High or Lowest)

Bases of portfolio <1.80 1.80-3.50 >3.50

-1.86 2.50 7.28

RLA (%)
(8.34) (0.43) (4.57)

8.38 3.48 11.22

NPL (%)
(13.54) (4.31) (14.50)

68.09 61.67 48.08

L&A to TA (%)
(10.97) (11.63) (16.73)

80.06 71.75 56.27

L&A to TD (%)
(19.24) (15.44) (23.05)

NPA to 3.96 0.99 1.76

(%)
L&A (7.16) (1.36) (2.04)

0.44 -0.09 -0.32

RIR (%)
(3.73) (3.88) (3.91)

3.90 4.11 4.07

GDP (%)
(0.73) (0.85) (0.75)

6.52 7.46 7.87

INF (%)
(2.45) (2.55) (2.65)
13.12 27.29 34.83
SIZE (Billion)
(9.26) (16.22) (22.57)
0.37 0.26 0.13
GL (%)
(0.75) (0.30) (0.18)
N 58 67 55
(Note: The reported figures are mean value of the portfolio sorted on return on loan & advances and figure
in parenthesis are standard deviation of the portfolio).

Table 4.10 presents portfolios sorted by RLA. Firm SIZE and INF increase with increase
in RLA when it moves from lowest percentile group, portfolio 1 to the highest percentile
group portfolio 3. The SIZE and INF on lowest percentile sorted by RLA is 13.12 billion

68
and 6.52 percent and on highest percentile sorted by RLA is 34.83 billion and 7.87
percent respectively. The standard deviation of SIZE and INF also increase with increase
in standard deviation of RLA from 9.26 billion to 22.57 billion and 2.45 percent to 2.65
percent. NPL and GDP shows inconsistent pattern of relationship with return on loan &
advances. The NPL in smallest RLA is 8.38 percent which has been decreased to 3.48
percent and in portfolio 2 which is again increased to 11.22 percent in portfolio 3.

The GDP in smallest RLA is 3.90 percent which has been increased to 4.11 percent in
portfolio 2 which is again decrease to 4.07 percent in portfolio 3. The standard deviation
of NPL and GDP shows inconsistent pattern of relationship with standard deviation of
return on loan & advances. The other bank specific variable L&A to TA, L&A to TD,
NPA to L&A, RIR and GL also decrease with increase in RLA. The L&A to TA, L&A to
TD, NPA to L&A, RIR and GL on lowest percentile sorted by RLA is 68.09 percent,
80.06 percent, 3.96 percent, 0.44 percent and 0.37 percent and on highest percentile
sorted by RLA are 48.08 percent, 56.27 percent, 1.76 percent, -0.32 percent and 0.13
percent respectively.

Table 4.10 shows that even increasing in RLA the commercial banks are not properly
mobilizing its fund by way of lending functions and have low productivity and high
degree of safety in liquidity and the banks are not utilizing their total deposits on credit or
loans and advances for profit generation purpose as loans and advances yield high rate of
return. NPA to L&A ratio determines the proportion of non-performing loan in the total
loan portfolio and lower NPL to total credit ratio is preferred. An interest rate that has
been adjusted to remove the effects of inflation to reflect the real cost of funds to the
borrower, and the real yield to the lender. GL is also in decreasing trend due to decrease
in Loan & Advances to Total Deposits.

vi. Properties of Portfolios Sorted on Real Interest Rate

In an attempt to describe the characteristics of movement in Non-performing Assets and

other firm specific variables with respect to Real Interest Rate, three equal percentile
groups of portfolios were formed on Real Interest Rate (RIR). The descriptive statistics

69
(mean and standard deviation) associated with each of these three portfolio groups
corresponding to each of the firm specific variables are reported in Table 4.11.

Table 4.11 presents portfolios sorted by RIR. Firm NPL and NPA to L&A increase with
increase in RIR when it moves from lowest percentile group, portfolio 1 to the highest
percentile group portfolio 3. The NPL and NPA to L&A on lowest percentile sorted by
RIR is 5.70 percent and 1.49 percent and on highest percentile sorted by RIR is 10.68
percent and 3.94 percent respectively. The standard deviation of NPL and NPA to L&A
also increase with increase in standard deviation of RIR from 10.46 percent to 13.91
percent and 2.18 percent to 7.12 percent.

L&A to TA also increase with increase in RIR. The L&A to TA on lowest percentile
sorted by RIR is 58.76 percent and on highest percentile sorted by RIR is 60.20 percent.
The standard deviation of L&A to TA decreases with increase in standard deviation of
RIR from 15.73 percent to 15.58 percent. RLA, GDP and GL shows inconsistent pattern
of relationship with Real Interest Rate. The RLA in smallest RIR is 2.77 percent which
has been increase to 3.10 percent in portfolio 2 and again decreased to 1.04 percent in
portfolio 3. GDP and GL in Smallest RIR is 4.03 percent and 0.25 percent which have
been increase to 4.33 percent and 0.27 percent in portfolio 2 and again decreased to 3.45
percent and 0.24 percent in portfolio 3. The standard deviation of RLA and GDP also
shows inconsistent pattern of relationship with RIR and the standard deviation of GL is in
decreasing trend with decrease in standard deviation of RIR.

L&A to TD, INF and SIZE decrease with increase in RIR. The L&A to TD, INF and
SIZE are on lowest percentile sorted by RIR is 70.67 percent, 8.53 percent and 31 billion
and on highest percentile sorted by RIR is 68.19 percent, 6.25 percent and 16.53 billion.
The standard deviation of L&A to TD, INF and SIZE also decrease with decrease in the
standard deviation of RIR. It shows that increase in RIR tends to decrease in L&A to TD,
INF and SIZE because Real interest rate that has been adjusted to remove the effects of
inflation to reflect the real cost of funds to the borrower, and the real yield to the lender.

70
 Table 4.11
Properties of Portfolios Sorted on Real Interest Rate

Portfolios 1(Lower or Smallest) 2 3(High or Lowest)

Bases of portfolio <0.90 0.90-2.75 >2.75

-3.94 1.87 4.19

RIR (%)
(2.90) (0.69) (0.03)

5.70 7.52 10.68

NPL (%)
(10.46) (11.74) (13.91)

58.76 60.11 60.20

L&A to TA (%)
(15.73) (15.26) (15.58)

70.67 69.48 68.19

L&A to TD (%)
(22.79) (20.74) (20.29)

NPA to 1.49 2.00 3.94

(%)
L&A (2.18) (4.28) (7.12)

2.77 3.10 1.04

RLA (%)
(6.69) (4.41) (8.94)

4.03 4.33 3.45

GDP (%)
(0.34) (1.07) (0.25)

8.53 6.55 6.25

INF (%)
(2.94) (2.03) (1.77)
31.00 23.31 16.53
SIZE (Billion)
(21.75) (16.68) (11.84)
0.25 0.27 0.24
GL (%)
(0.65) (0.35) (0.24)
N 72 72 36
(Note: The reported figures are mean value of the portfolio sorted on real interest rate and figure in
parenthesis are standard deviation of the portfolio).

vii. Properties of Portfolios Sorted on Gross Domestic Product

In an attempt to describe the characteristics of movement in Non-performing Assets and
other econometric variables with respect to Gross Domestic Product, three equal
percentile groups of portfolios were formed on Domestic Product (GDP). The descriptive
statistics (mean and standard deviation) associated with each of these three portfolio
groups corresponding to each of the firm specific variables are reported in Table 4.12.

71
 Table 4.12
Properties of Portfolios Sorted on Gross Domestic Product

Portfolios 1(Lower or Smallest) 2 3(High or Lowest)

Bases of portfolio <3.8 3.8-4.3 >4.3

3.23 3.95 4.93

GDP (%)
(0.37) (0.21) (0.62)

10.31 5.75 6.77

NPL (%)
(13.39) (10.49) (11.43)

60.51 59.15 59.24

L&A to TA (%)
(15.06) (16.11) (15.16)

67.89 71.39 69.24

L&A to TD (%)
(19.80) (23.30) (20.48)

3.69 1.51 1.59

NPA to L&A (%)
(7.32) (2.26) (1.85)

1.15 3.08 3.26

RLA (%)
(8.24) (6.83) (2.78)

3.31 -1.81 -0.87

RIR (%)
(1.26) (3.48) (3.93)

6.13 9.13 5.97

INF (%)
(1.45) (2.85) (1.42)
(Billion)
17.69 28.73 27.43
SIZE
(12.23) (19.74) (21.20)
(%)
0.23 0.24 0.30
GL
(0.23) (0.66) (0.37)
N 54 72 54

(Note: The reported figures are mean value of the portfolio sorted on gross domestic product and figure in
parenthesis are standard deviation of the portfolio).

Table 4.12 presents portfolios sorted by GDP, RLA and GL increase with increase in RIR
when it moves from lowest percentile group, portfolio 1 to the highest percentile group
portfolio 3. The RLA and GL on lowest percentile sorted by GDP is 1.15 percent and
0.23 percent and on highest percentile sorted by GDP is 3.26 percent and 0.30 percent
respectively and other bank specific variables decrease with increase in GDP because
GDP is the one primary indicator that is used to measure the health of a country's
economic condition. A significant change in GDP, whether up or down, usually has a

72
significant effect on the different aspects of the economy. The L&A to TA decrease with
increase in GDP from each percentile group. The value of L&A to TA on lowest
percentile sort by GDP is 60.51 percent and on highest percentile sort by GDP is 59.24
percent.

L&A to TD, INF and SIZE shows inconsistent pattern of relationship with GDP. The
L&A to TD in smallest GDP is 67.89 percent which has been increase to 71.39 percent in
portfolio 2 and again decreased to 69.24 percent in portfolio 3. INF and SIZE in Smallest
GDP is 6.13 percent and 17.69 billion which have been increase to 9.13 percent and
28.73 billion in portfolio 2 and again decreased to 5.97 percent and 27.43 billion in
portfolio 3. NPL, NPA to L&A and RIR decrease with increase in GDP. The NPL, NPA
to L&A and RIR are on lowest percentile sorted by GDP is 10.31 percent, 3.69 percent
and 3.31 percent and on highest percentile sorted by GDP is 6.77 percent, 1.59 percent
and -0.87 percent. Hence, Non-performing assets tends to be pro-cyclical that is NPA
tends to fall during periods of high GDP and rise during periods of low GDP growth
(Dash and Kabre, 2010).

viii. Properties of Portfolios Sorted on Inflation

In an attempt to describe the characteristics of movement in Non-performing Assets and
econometric variables with respect to Inflation, three equal percentile groups of portfolios
were formed on Inflation (INF). The descriptive statistics (mean and standard deviation)
associated with each of these three portfolio groups corresponding to each of the firm
specific variables are reported in Table 4.13.

Table 4.13 presents portfolios sorted by INF. L&A to TA, RLA and SIZE increase with
increase in INF when it moves from lowest percentile group, portfolio 1 to the highest
percentile group portfolio 3. The L&A to TA and RLA on lowest percentile sorted by
INF is 57.27 percent and 1.59 percent and on highest percentile sorted by INF is 60.63
percent and 4.27 percent respectively. The value of firm SIZE in the lowest percentile of
INF is 14.58 billion and on highest percentile is 33.90 billion. The standard deviation of

73
SIZE also increases with increase in standard deviation of INF. A high inflation rate is
generally associated with high loan interest rates and therefore generates high income.

Table 4.13
Properties of Portfolios Sorted on Inflation

Portfolios 1(Lower or Smallest) 2 3(High or Lowest)

Bases of portfolio <5.00 5.00-8.00 >8.00

4.40 6.95 10.60

Inflation (%)
(0.30) (0.77) (1.43)

11.13 7.49 3.64

NPL (%)
(16.77) (10.19) (4.59)

57.27 60.53 60.63

L&A to TA (%)
(17.38) (14.23) (14.96)

69.30 68.27 71.99

L&A to TD (%)
(25.99) (18.92) (19.58)

NPA to 2.19 2.89 1.24

(%)
L&A (2.88) (6.37) (1.69)

1.59 1.99 4.27

RLA (%)
(7.29) (6.82) (4.59)

1.31 0.09 -1.40

RIR (%)
(3.15) (3.90) (3.95)

3.80 4.23 4.00

GDP (%)
(0.49) (1.12) (0.22)
14.58 26.22 33.90
SIZE (Billion)
(12.46) (19.08) (19.08)
0.42 0.21 0.15
GL (%)
(0.82) (0.17) (0.16)
N 54 72 54
(Note: The reported figures are mean value of the portfolio sorted on inflation and figure in parenthesis are
standard deviation of the portfolio).

NPL, RIR and GL decrease with increase in INF. The value of NPL, RIR and GL on the
lowest percentile sorted by INF are 11.13 percent, 1.31 percent and 0.42 percent and on
highest percentile sorted by INF are 3.64 percent, -1.40 percent and 0.15 percent. The

74
standard deviation of NPL and GL also decrease with increase in standard deviation of
INF and standard deviation of RIR increase with increase in standard deviation of INF.

L&A to TD, NPA to TD and GDP shows inconsistent pattern of relationship with INF.
The L&A to TD in smallest INF is 69.30 percent which has been decrease to 68.27
percent in portfolio 2 and again increase to 71.99 percent in portfolio 3. NPA to L&A and
GDP in Smallest INF is 2.19 percent and 3.80 percent which have been increase to 2.89
percent and 4.23 in portfolio 2 and again decreased to 1.24 percent and 4 percent in
portfolio 3.

The standard deviation of L&A to TD, NPA to TD and GDP also shows inconsistent
pattern of relationship with INF. The standard deviation of L&A to TD in smallest INF is
25.99 percent which has been decrease to 18.92 percent in portfolio 2 and again increase
to 19.58 percent in portfolio 3. NPA to L&A and GDP in Smallest INF is 2.88 percent
and 0.49 percent which have been increase to 6.37 percent and 1.12 percent in portfolio 2
and again decreased to 1.69 percent and 0.22 percent in portfolio 3. The task of keeping
the rate of inflation low and stable is usually given to central banks. Central Banks
control Inflation through the setting of interest rate, open market operation, and through
the setting of banking cash reserve requirement.

ix. Properties of Portfolios Sorted on Bank Size

In an attempt to describe the characteristics of movement in Non-performing Assets and
other firm specific variables with respect to Bank Size, three equal percentile groups of
portfolios were formed on Bank Size (SIZE). The descriptive statistics (mean and
standard deviation) associated with each of these three portfolio groups corresponding to
each of the firm specific variables are reported in Table 4.14.

Table 4.14 presents portfolios sorted by SIZE. RLA, GDP and INF increase with increase
in Bank SIZE when it moves from lowest percentile group, portfolio 1 to the highest
percentile group portfolio 3. The GDP and INF on lowest percentile sorted by INF is 3.87
percent and 6.12 percent and on highest percentile sorted by SIZE is 4.18 percent and
8.36 percent respectively. The value of RLA in the lowest percentile of INF is 1.20

75
percent and on highest percentile is 3.91 percent. The standard deviation of RLA, GDP
and INF decreases with increase in standard deviation of INF.

Table 4.14
Properties of Portfolios Sorted on Bank Size

Portfolios 1(Lower or Smallest) 2 3(High or Lowest)

Bases of portfolio <14 14-30 >30

8.15 21.57 48.52

SIZE (Billion)
(3.37) (4.28) (13.61)

7.60 2.67 11.81

NPL (%)
(9.30) (3.21) (17.02)

66.31 62.57 48.68

L&A to TA (%)
(8.86) (12.99) (17.91)

78.66 72.17 56.63

L&A to TD (%)
(17.64) (15.12) (24.36)

NPA to 3.37 0.99 1.93

(%)
L&A (6.54) (1.44) (2.67)

1.20 2.83 3.91

RLA (%)
(7.89) (2.18) (7.08)

1.31 -0.56 -1.00

RIR (%)
(3.04) (4.09) (4.05)

3.87 4.07 4.18

GDP (%)
(0.79) (0.76) (0.78)
6.12 7.60 8.36
INF (%)
(2.21) (2.58) (2.52)
0.41 0.18 0.13
GL (%)
(0.73) (0.13) (0.15)
N 68 55 57
(Note: The reported figures are mean value of the portfolio sorted on bank size and figure in parenthesis
are standard deviation of the portfolio).

L&A to TA, L&A to TD and RIR decrease with the increase in Bank Size (SIZE) when it
moves from lowest percentile group, portfolio 1 to the highest percentile group portfolio
3. The L&A to TA, L&A to TD and RIR on lowest percentile sorted by SIZE is 66.31
percent, 78.66 percent and 1.31 percent and on highest percentile sorted by SIZE is 48.68

76
percent, 56.63 percent and -1 percent respectively. The standard deviation of L&A to TA
increase with increase in SIZE and L&A to TD and RIR decreases with increase in
standard deviation of SIZE.

NPA to L&A and GL also decrease with increase in bank size (SIZE). The value of NPA
to L&A and GL on lowest percentile sorted by SIZE is 3.37 percent and 0.41 percent and
on highest percentile sorted by SIZE is 1.93 percent and 0.13 percent respectively. The
standard deviation of NPA to L&A and GL decrease with increase in SIZE and on the
other hands NPL shows inconsistent pattern of relationship with SIZE. The NPL in
smallest SIZE is 7.60 percent which has been decrease to 2.67 percent in portfolio 2 and
again increase to 11.81 percent in portfolio 3. The standard deviation on NPL also shows
the inconsistent pattern with increase in Bank SIZE when it moves from lowest percentile
group, portfolio 1 to the highest percentile group portfolio 3.

x. Properties of Portfolios Sorted on Loan Growth Rate

In an attempt to describe the characteristics of movement in Non-performing Assets and
other firm specific variables with respect to Growth on Loan, three equal percentile
groups of portfolios were formed on Loan Growth rate (GL). The descriptive statistics
(mean and standard deviation) associated with each of these three portfolio groups
corresponding to each of the firm specific variables are reported in Table 4.15.

Table 4.15 presents portfolios sorted by GL. L&A to TD increase with increase in GL
when it moves from lowest percentile group, portfolio 1 to the highest percentile group
portfolio 3. The L&A to TD on lowest percentile sorted by GL is 64.61 percent and on
highest percentile sorted by GL is 81.02 percent respectively. The standard deviation of
L&A to TD decreases with increase in standard deviation of GL. NPL, L&A to TA and
NPA to L&A decreases with increase in GL. The value of NPL, L&A to TA and NPA to
L&A on lowest percentile sorted by GL is 13.24 percent, 54.59 percent and 4.98 percent
and on highest percentile sorted by GL is 2.31 percent, 67.69percent and 0.72 percent
respectively. The standard deviation of NPL, L&A to TA and NPA to L&A decrease with
increase in GL.

77
 Table 4.15
Properties of Portfolios Sorted on Loan Growth Rate

Portfolios 1(Lower or Smallest) 2 3(High or Lowest)

Bases of portfolio <0.090 0.090-0.30 >0.30

-0.03 0.19 0.73

GL (%)
(0.15) (0.06) (0.83)

13.24 6.82 2.31

NPL (%)
(17.24) (9.72) (3.05)

54.59 58.54 67.69

L&A to TA (%)
(18.42) (14.00) (11.83)

64.61 67.34 81.02

L&A to TD (%)
(27.44) (18.15) (16.85)

NPA to 4.98 1.48 0.72

(%)
L&A (7.97) (1.68) (0.56)

-0.04 4.02 2.00

RLA (%)
(11.05) (4.01) (1.32)

-0.97 -0.03 1.21

RIR (%)
(4.26) (3.91) (2.75)

3.87 4.09 4.07

GDP (%)
(0.46) (0.82) (0.95)
7.16 7.59 6.67
INF (%)
(2.58) (2.45) (2.87)
25.91 28.87 14.93
SIZE (Billion)
(17.25) (20.05) (13.59)
N 43 95 40
(Note: The reported figures are mean value of the portfolio sorted on loan growth rate and figure in
parenthesis are standard deviation of the portfolio).

RLA, RIR, GDP, INF and SIZE shows inconsistent pattern of relationship with GL. The
RLA in smallest GL is -0.04 percent which has been increase to 4.02 percent and again
decrease to 2 percent. The value of RIR in smallest GL is -0.97 percent which has been
decrease to -0.03 percent in portfolio 2 and again increase to 1.21 percent in portfolio 3.
The standard deviation on RLA and RIR decreases with increase in GL when it moves
from lowest percentile group, portfolio 1 to the highest percentile group portfolio 3. The

78
value of GDP on the lowest portfolio sorted by GL is 3.87 percent which has been
increase to 4.09 percent and again decrease to 4.07 percent. INF and SIZE in the smallest
GL is 7.16 percent and 25.91 billion which has been increase to 7.59 percent and 28.87
billion and again decrease to 6.67 percent and 14.93 billion. The standard deviation of
INF and SIZE also shows inconsistent pattern of relationship with increasing standard
deviation GL from lowest percentile group, portfolio 1 to the highest percentile group
portfolio 3.

4.4. Relationship between Non-performing Assets and it Determinants

This section fulfill fourth objective of the study. The empirical relationship includes
correlation analysis and regression analysis of Non-performing Assets. Correlation
analysis has been done in order to investigate the relationship between NPA and other
control variables. Non-performing Loan has been used as the dependent variable
measuring the NPA of sample banks while Loan and Advances to Total Assets, Loan and
Advances to Total Deposits, Non-performing Assets to Loan and Advances, Return on
Loan and Advances, Real Interest Rate, Gross Domestic product, Inflation, Bank Size,
Growth of Loan ratio and NPL of previous year has been used as the control variables
which may greatly affect the Non-performing Assets of the bank. The multiple regression
analysis has been done in order to investigate the determinants of Non-performing Assets
of the sample banks. Non-performing Loan has been used as the dependent variable
measuring the Non-performing Assets of sample banks while Loan and Advances to
Total Assets, Loan and Advances to Total Deposits, Non-performing Assets to Loan and
Advances, Return on Loan and Advances, Real Interest Rate, Gross Domestic product,
Inflation, Bank Size and Growth of Loan ratio has been used as the control variables
which may greatly affect the Non-performing Assets of the bank.

a. Correlation Analysis of NPL of Nepalese Commercial Banks

To understand the empirical validity of the models, the study has considered the
correlations between NPL and each of the explanatory variables. Table 4.16 reports the
correlations between the variables under study.

79
 Table 4.16
Correlation Coefficient between NPL and Independent Variables of
Nepalese Commercial Banks
This table reveals the Pearson correlation coefficients between different pairs of firm specific variables. NPL, L&A to
TA, L&A to TD, NPA to L&A, RLA, RIR, GDP, INF, SIZE, GL and NPLt-1 are as defined in the Table 4.17. The
correlation coefficients are based on the data on NPL, L&A to TA, L&A to TD, NPA to L&A, RLA, RIR, GDP, INF,
SIZE, GL and NPLt-1 from 18 sample banks with 180 observations for the period 2002 through 2011. t-test is used to
test the significance percent level ‘*’ sign indicates that correlation is significant at 1 percent level, ‘**’ sign indicates
that correlation is significant at 5 percent level and ‘***’ indicates that correlation is significant at 10 percent level.

L&A L&A NPA to

NPL to TA to TD L&A RLA RIR GDP INF SIZE GL NPLt-1

NPL 1.00 -0.45 -0.5 0.45 -0.19* 0.15** -0.1*** -0.221 0.11*** -0.210 0.76*

L&A to 1.00 0.90 -0.003 -0.20 0.03 0.06 0.07 -0.462 0.24 -0.42*
TA

L&A to 1.00 -0.12*** -0.1*** -0.04 0.03 0.04 -0.4 0.33 -0.45*
TD

NPA to 1.00 -0.644 0.15** -0.11*** -0.07 -0.1 -0.2 0.27*

L&A

RLA 1.00 -0.03 0.12** 0.16* 0.18* 0.04 0.25*

RIR 1.00 -0.16* -0.21 -0.34 0.057 0.24*

GDP 1.00 0.07 0.16* 0.01 -0.02

INF 1.00 0.35 -0.18 -0.09

SIZE 1.00 -0.25 * 0.14**

GL 1.00 -0.13**

NPLt-1 1.00

From the table 4.16 reveals NPL is positively and significantly correlated with NPA to
L&A, RIR, SIZE and NPLt-1 having 0.454, 0.152, 0.112 and 0.76 coefficients
respectively. The result also show the NPL is negatively and significantly correlated with
L&A to TA, L&A to TD, RLA, GDP, INF, SIZE and GL with the coefficient of -0.449, -
0.491, -0.188, -0.100, -0.221, -0.210 respectively. L&A to TA have a positive correlation
with L&A to TD, RIR, GDP, INF and GL and their coefficients are 0.904, 0.029, 0.015,
0.070 and 0.236 respectively. The result also shows L&A to TA is negatively and
significantly correlated with NPA to L&A, RLA, SIZE and NPLt-1 with the coefficient of
-0.003, -0.199, -0.462 and -0.417 respectively.

80
L&A to TD have a positive correlation with GDP, INF, GL and have a negative and
significant correlation with NPA to L&A, RLA, RIR, SIZE and NPLt-1 with the
coefficient of -0.115, -0.099, -0.042, -0.399 and -0.451 respectively. NPA to L&A have a
positive and significant correlation with RIR and NPLt-1 with 0.146 and 0.272 correlation
and have a negative correlation with RLA, GDP, INF, SIZE and GL with their coefficient
of -0.644, -0.107, -0.069, -0.095 and -0.198 respectively and have highly significant with
GDP. RLA have a positive and significant correlation with GDP, INF, SIZE, GL and
NPLt-1 with coefficient of 0.120, 0.156, 0.182, 0.036 and 0.251 respectively and have a
negative correlation with RIR of -0.025 coefficients.

RIR have a negative and significant correlation with GDP, INF and SIZE with
coefficient of -0.163, -0.209 and -0.339 respectively and positively and significant with
NPLt-1 with coefficient of 0.242 and also only positively correlated with GL with 0.057.
GDP have a positive and significant correlation with INF, SIZE & GL with 0.073, 0.160
and 0.013 coefficient. INF also has a positive correlation with SIZE and GL with
coefficient of 0.348 and 0.175. SIZE has also positively and significantly correlation with
GL and NPLt-1 with 0.253 and 0.140 coefficients. Similarly GL, SIZE, INF, GDP are
positively correlated with each other while they are negatively correlated with RIR and
NPL but NPLt-1 is negatively and significantly correlated.

b. Correlation Analysis of NPL of State Owned Banks

To understand the empirical validity of the models, the study has considered the
correlations between NPL and each of the explanatory variables. Table 4.17 reports the
correlations between the variables under study.

From the table 4.17 reveals NPL is positively and significantly correlated with RIR
having 0.30 coefficients. The result also show the NPL is negatively and significantly
correlated with L&A to TA, L&A to TD, INF and SIZE with the coefficient of -0.41, -
0.42, -0.54 and -0.25 respectively and negatively correlated with NPA to L&A, RLA,
GDP and GL with the coefficient of-0.11, -0.16, -0.22, -0.15 respectively and NPLt-1 is

81
positively correlated with the coefficient of 0.60. L&A to TA have a positive correlation
with L&A to TD, NPA to L&A, RIR and GL and their coefficients are 0.92, 0.45, 0.07
and 0.17 respectively. The result also shows L&A to TA is negatively and significantly
correlated with RLA, GDP, INF, SIZE and NPLt-1 with the coefficient of -0.09, -0.01, -
0.04, -0.2 and -0.37.

Table 4.17
Correlation Coefficient between NPL and Independent Variables of
State Owned Banks
This table reveals the Pearson correlation coefficients between different pairs of firm specific variables. NPL, L&A to
TA, L&A to TD, NPA to L&A, RLA, RIR, GDP, INF, SIZE, GL and NPLt-1 are as defined in the Table 4.17. The
correlation coefficients are based on the data on NPL, L&A to TA, L&A to TD, NPA to L&A, RLA, RIR, GDP, INF,
SIZE, GL and NPLt-1 from 18 sample banks with 180 observations for the period 2002 through 2011. t-test is used to
test the significance percent level ‘*’ sign indicates that correlation is significant at 1 percent level, ‘**’ sign indicates
that correlation is significant at 5 percent level and ‘***’ indicates that correlation is significant at 10 percent level.

NPA
L&A to L&A t0 to
NPL TA TD L&A RLA RIR GDP INF SIZE GL NPLt-1

NPL 1.00 -0.41* -0.42* -0.11 -0.16 0.30** -0.22 -0.54* -0.25*** -0.15 0.60

L&A to 1.00 0.92 0.45 -0.09 0.07 -0.01 -0.04 -0.2 0.17 -0.32**
TA

L&A to 1.00 0.51* -0.07 -0.06 0.04 0.10 -0.04 0.1 -0.37**
TD

NPA to 1.00 -0.57 -0.1 0.10 -0.03 -0.21 -0.15 -0.3***

L&A

RLA 1.00 0.3** -0.04 0.2 0.11 0.21 0.5*

RIR 1.00 -0.16 -0.21 -0.54* -0.10 0.55*

GDP 1.00 0.1 0.24 0.04 -0.14

INF 1.00 0.46* 0.083 -0.3***

SIZE 1.00 0.229*** -0.165

GL 1.00 0.161

NPLt-1 1.00

L&A to TD have a positive correlation with NPA to L&A, GDP, INF, GL and have a
negative and significant correlation with RLA, RIR, SIZE and NPLt-1 with the coefficient

82
of -0.070, -0.056, -0.041 and -0.298 respectively. NPA to L&A have a positive and
significant correlation with NPLt-1 and only positive correlation with GDP and have a
negative correlation with RLA, RIR, INF, SIZE and GL with their coefficient of -0.574, -
0.100, -0.034, -0.209 and -0.146. RLA have a positive and significant correlation with
RIR, INF, SIZE, GL and NPLt-1 with coefficient of 0.295, 0.187, 0.111, 0.213 and 0.546
respectively and have a negative correlation with GDP of -0.040 coefficients.

RIR have a negative and significant correlation with GDP, INF, SIZE and GL with
coefficient of -0.163, -0.209, -0.538 and -0.101 respectively. GDP have a positive
correlation with INF, SIZE & GL with 0.073, 0.240 and 0.036 coefficient and have a
negative and significant correlation with NPLt-1 with -0.284 coefficients. INF also has a
positive and significant correlation with SIZE and GL with coefficient of 0.458 and
0.083. SIZE has also positively and significantly correlation with GL with 0.219
coefficient. Similarly GL, SIZE, INF, GDP and NPLt-1 are positively correlated with each
other while they are negatively correlated with RIR and NPL.

c. Correlation Analysis of NPL of Private Sector Banks

To understand the empirical validity of the models, the study has considered the
correlations between NPL and each of the explanatory variables. Table 4.18 reports the
correlations between the variables under study.

From the table 4.18 reveals NPL is positively and significantly correlated with NPA to
L&A, RIR having 0.727 and 0.164 coefficients. The result also show the NPL is
negatively and significantly correlated with L&A to TA, L&A to TD, RLA, GDP, INF,
SIZE and GL with the coefficient of -0.264, -0.457, -0.437, -0.069, -0.188, -0.358 and -
0.188 respectively. L&A to TA have a positively and significantly correlation with L&A
to TD, RIR, INF, SIZE and GL with their coefficients of 0.671, 0.150, 0.172, 0.042 and
0.164 respectively. The result also shows L&A to TA is negatively and significantly
correlated with NPA to L&A, RLA, GDP and NPLt-1 with the coefficient of -0.113, -
0.158, -0.012 and -0.242.

83
 Table 4.18
Correlation Coefficient between NPL and Independent Variables of
Private sector Banks
This table reveals the Pearson correlation coefficients between different pairs of firm specific variables. NPL, L&A to
TA, L&A to TD, NPA to L&A, RLA, RIR, GDP, INF, SIZE, GL and NPLt-1 are as defined in the Table 4.17. The
correlation coefficients are based on the data on NPL, L&A to TA, L&A to TD, NPA to L&A, RLA, RIR, GDP, INF,
SIZE, GL and NPLt-1 from 18 sample banks with 180 observations for the period 2002 through 2011. t-test is used to
test the significance percent level ‘*’ sign indicates that correlation is significant at 1 percent level, ‘**’ sign indicates
that correlation is significant at 5 percent level and ‘***’ indicates that correlation is significant at 10 percent level.

L&A L&A NPA to

NPL to TA to TD L&A RLA RIR GDP INF SIZE GL NPLt-1

NPL 1.00 -0.26* -0.46* 0.73* -0.44* 0.16*** -0.069 -0.20*** -0.36* -0.20* * 0.70

L&A to 1.00 0.67* -0.11 -0.16*** 0.15*** -0.012 0.172*** 0.042 0.164*** -0.24**
TA

L&A to 1.00 -0.31* 0.040 -0.17 -0.01 -0.04 -0.11 0.36 -0.40*
TD

NPA to 1.00 -0.83* 0.219* -0.100 -0.06 -0.25* -0.20*** 0.40*

L&A

1.00 -0.20** 0.19** 0.114 0.16*** 0.011 0.009

RLA

RIR 1.00 -0.16* ** -0.21** -0.52* 0.08 0.22**

GDP 1.00 0.07 0.26* -0.02 0.02

INF 1.00 0.60 -0.30* -0.02

SIZE 1.00 -0.34* -0.3*

GL 1.00 -0.08

NPLt-1 1.00

L&A to TD have a positive correlation with RLA and GL of 0.040 and 0.361 coefficient
and also have a negative and significant correlation with NPA to L&A, RIR, GDP, INF,
SIZE and NPLt-1 with the coefficient of -0.312, -0.17, -0.005, -0.043, -0.108 and -0.371
respectively. NPA to L&A have a positive and significant correlation with NPLt-1 with
0.404 coefficient and only positive correlation with RIR and have a negative correlation
with RLA, GDP, INF, SIZE and GL with their coefficient of -0.826, -0.100, -0.058, -

84
0.253 and -0.154 respectively. RLA have a positive and significant correlation with GDP,
INF, SIZE and GL with coefficient of 0.186, 0.114, 0.158 and 0.011 respectively and
have a negative and significant correlation with RIR of -0.201 coefficients.

RIR have a positive and significant correlation with GL and NPLt-1 of 0.082 and 0.215
coefficient and RIR also have a negative and significant correlation with GDP, INF and
SIZE with coefficient of -0.163, -0.209 and -0.515 respectively. GDP have a positive and
significant correlation with INF and SIZE with 0.073 and 0.255 coefficients and also
have a negative correlation with GL of -0.016 coefficients. INF also has a positive
correlation with SIZE of 0.578 coefficients and also has a negative and significant
correlation with GL and only has a negative correlation with NPLt-1 of -0.282 and -0.02
coefficients. SIZE is also negative correlation with GL with -0.342 coefficients and
negatively and significantly correlated with NPLt-1 of -0.286 coefficients. Similarly GL is
positive correlated with L&A to TA, L&A to TD, RLA and RIR. In other hand GL is
negatively correlated with NPL, NPA to L&A, GDP, INF, SIZE and NPLt-1.

e. Correlation Analysis of NPL of Joint Venture Bank

To understand the empirical validity of the models, the study has considered the
correlations between NPL and each of the explanatory variables. Table 4.19 reports the
correlations between the variables under study.

From the above table 4.19 reveals NPL is positively correlated with L&A to TA, NPA to
L&A, RIR having 0.019, 0.839, 0.117 coefficients respectively and highly positive and
significant with NPLt-1 of 0.832 coefficient. The result also show the NPL is negatively
and significantly correlated with L&A to TD, RLA, GDP, INF, SIZE and GL with the
coefficient of -0.203, -0.417, -0.094, -0.135, -0.469 and -0.424 respectively. L&A to TA
have a positively and significantly correlation with L&A to TD, NPA to L&A, GDP,
INF, SIZE and GL with their coefficients of 0.9460, 0.078, 0.074, 0.149, 0.096 and 0.205
respectively. The result also shows L&A to TA is negatively and significantly correlated
with RLA and RIR with the coefficient of -0.200 and -0.077.

85
 Table 4.19
Correlation Coefficient between NPL and Independent Variables of
Joint Venture Banks
This table reveals the Pearson correlation coefficients between different pairs of firm specific variables. NPL, L&A to
TA, L&A to TD, NPA to L&A, RLA, RIR, GDP, INF, SIZE, GL and NPLt-1 are as defined in the Table 4.17. The
correlation coefficients are based on the data on NPL, L&A to TA, L&A to TD, NPA to L&A, RLA, RIR, GDP, INF,
SIZE, GL and NPLt-1 from 18 sample banks with 180 observations for the period 2002 through 2011. t-test is used to
test the significance percent level ‘*’ sign indicates that correlation is significant at 1 percent level, ‘**’ sign indicates
that correlation is significant at 5 percent level and ‘***’ indicates that correlation is significant at 10 percent level.

L&A L&A to NPA to

NPL to TA TD L&A RLA RIR GDP INF SIZE GL NPLt-1

1.00 0.02 -0.20** 0.84 -0.42 0.12 -0.10 -0.14 -0.47 -0.42 0.83
NPL

L&A to 1.00 0.946 0.08 -0.20** -0.07 0.07 0.15 0.10 0.21** 0.01
TA

L&A to 1.00 -0.17*** -0.01 -0.101 0.07 0.13 0.10 0.28* 0.16***
TD

NPA to 1.00 -0.72 0.16*** -0.17*** -0.10 -0.31* -0.45 0.60*

L&A

1.00 -0.10 0.20*** 0.2*** 0.11 0.31* -0.02

RLA

RIR 1.00 -0.20*** -0.21** -0.50 0.08 0.17***

1.00 0.07 0.23* 0.14 0.04

GDP

1.00 0.52 -0.03 -0.03

INF

SIZE 1.00 -0.08 -0.45

GL 1.00 -0.22*

NPLt-1 1.00

L&A to TD have a positive and significant correlation with GDP, INF, SIZE and GL of
0.072, 0.134, 0.098 and 0.284 coefficient and also have a negative and significant
correlation with NPA to L&A, RLA, RIR and NPLt-1 with the coefficient of -0.174, -
0.008, -0.101 and -0.158 respectively. NPA to L&A have a positive correlation and
significant with RIR and NPLt-1 and also have a negative and significant correlation with

86
RLA, GDP, INF, SIZE and GL with their coefficient of -0.721, -0.174, -0.091, -0.308 and
-0.453 respectively. RLA have a positive and significant correlation with GDP, INF,
SIZE and GL with coefficient of 0.188, 0.189, 0.111 and 0.308 respectively and have a
negative and significant correlation with RIR and NPLt-1 of -0.101 and -0.016
coefficients.

RIR have a positive and significant correlation with GL and NPLt-1 of 0.075 and 0.173
coefficients and RIR also have a negative and significant correlation with GDP, INF and
SIZE with coefficient of -0.163, -0.209 and -0.495 respectively. GDP have a positive and
significant correlation with INF, SIZE and GL with 0.073, 0.232 and 0.138 coefficient.
INF also has a positive correlation with SIZE of 0.524 coefficients and also has a
negative and significant correlation with GL of -0.031 coefficients. SIZE is also negative
correlation with GL with -0.078 coefficients. Similarly GL is positive correlated with
L&A to TA, L&A to TD, RLA and RIR. In other hand GL is negatively correlated with
NPL, NPA to L&A, GDP, INF and SIZE and negatively and significantly correlated with
NPLt-1.

e. Regressions Analysis of NPL of Nepalese Commercial Banks

In the first model of the multiple regression analysis of NPL of Nepalese Commercial
Banks for 18 sample banks with 180 Observations (2002-2011). Non-Performing Loan
(NPL) has been used as the proxy for the banks NPA. Whereas, Loan & Advances to
Total Assets, Loan & Advances to Total Deposits, Non-Performing Assets to Loan &
Advances, Return on Loan & Advances, Growth of loan ratio has been used as the
explanatory variables. To better understand the empirical validity of the models described
in the previous section and the effect of RIR, SIZE, GDP, INF, NPLt-1 and other factors
on the dependent variable NPL, coefficient of regressions are described via multiple
regressions. The analyses help to gauge the incremental explanatory power of the various
factors. The regression results Loan & Advances to Total Assets, Loan & Advances to
Total Deposits, Non-Performing Assets to Loan & Advances, Return on Loan &
Advances, Loan growth ratio, RIR, SIZE, GDP and INF are presented in table 4.20.

87
 Table 4.20
Estimated Relationship between NPL and Independent Variables of
Nepalese Commercial Banks

NPL it = a0 + a1 SIZE it + a2 RIR it + a3 ∆GL it + a4 LATA it +a5 LATD it+ a6 RLA it + a7 NPALA it +
a8 GDP it + a9INF it + a10NPLit-1+u it
The dependent variable (NPL) refer to Non-Performing Assets, explanatory variables include the Loan & Advances to
Total Asset(LATA / L&A to TA), Loan & Advances to Total Deposits(LATD / L&A to TD), Non-Performing Assets to
Loan & Advances(NPALA / NPA to L&A), Return on Loan & Advances(RLA), Growth of loan ratio(GL), Real interest
rate(RIR), Bank Size or Total Assets(SIZE), Gross Domestic Product(GDP), Inflation(INF), NPL of previous
year(NPLt-1) and error term(u). t-test is used to test the significance level. Figures in the parenthesis represent the p-
value of the respective regression coefficient. ‘*’ sign indicates that correlation is significant at 1 percent level, ‘**’
indicates that correlation is significant at 5 percent level and ‘***’ indicates that correlation is significant at 10
percent.

Explanatory Variables Estimates

(Constant)
17.81
-0.17**
L&A to TA
(0.020)
0.026
L&A to TD
(0.620)
-0.225
NPA to L&A
(0.263)
-0.855*
RLA
(0.000)
-0.194
RIR
(0.129)
-0.483
GDP
(0.395)
-0.374***
INF
(0.053)
-0.012
SIZE
(0.704)
-2.073**
GL
(0.041)
0.823*
NPLt-1
(0.000)
R2 0.776
Adjusted R2 0.763
DW 1.597
P-value 0.000
Number of Observation 180

88
The OLS regression based on equation are estimated and the results are reported in table
4.20. The table reveals that coefficient between L&A to TA and NPL is negative and
significant (-0.170). While Sinkey and Greenwalt (1991) concluded positive associations
reflect that banks which are high risk takers are likely to incur greater levels of NPLs.
L&A to TD is positive and insignificant (0.026). The ratio of L&A to TD ratio is lower
than 1, the bank relied on its own deposits to make loans to its customers, without any
outside borrowing. If, on the other hand, the ratio is greater than 1, the bank borrowed
money which it reloaned at higher rates, rather than relying entirely on its own deposits.
Banks may not be earning an optimal return if the ratio is too low. If the ratio is too high,
the banks might not have enough liquidity to cover any unforeseen funding requirements
which indicates that NPL tends to low with the increase in credit to deposit ratio. Credit
to deposit ratio is taken as proxy of liquidity to measure liquidity of banks. Lower the
credit to deposit ratio higher would be the liquidity of the banks. So in short the finding
suggests that highly liquid banks tend to be low NPL and highly profitable.

NPL to L&A is negative and insignificant (-0.225). The high ratio of NPL to L&A
implies the bad quality of Assets of banks in the form of L&A. Low NPL to L&A ratio is
preferred. There is negative and highly significant relationship between RLA to NPL.
This ratio measures the bank's profitability with respect to loan and advances. Higher the
ratios better the performance of the bank. The coefficient of RIR is negative and
insignificant (-0.194). Sinkey and Greenwalt, (1991), Fofack (2005), and Jimenez and
Saurina (2005) concluded that when a commercial bank increases its real interest rates
this may translate immediately into higher non-performing loans.

GDP is also negative and insignificant (-0.483). An improvement in the real economy is
likely to see an instantaneous reduction in the non-performing loan portfolios of
commercial banks. Relationship between inflation and non-performing loans is negative
and highly significant (-0.374). This means that high inflation in the current period
should see a reduction in the level of NPLs in the banking sector.

89
The variable SIZE is negative and insignificant (-0.012). This evidence which is
inconsistent with previous studies Rajan and Dhal (2003), Salas and Saurina (2002) and
Hu et al., (2006) concluded that large banks are not necessarily more effective in
screening loan customers when compared to their smaller counterparts. Growth in loans
and advances exhibits a fairly negative and significant relationship with nonperforming
loans which means that commercial banks which extend relatively higher levels of credit
are likely to incur lower non-performing loans. NPLt-1 shows the positive and significant
relation with NPL.

Furthermore, Table 4.20 also presents the empirical result for NPL of Nepalese
Commercial Banks. The empirical result shows that explanatory power of regression
equation mentioned by R square, which is 77.6 percent this means that 77.6 percent of
NPL can be predicted from L&A to TA, L&A to TD, NPA to L&A, RLA, RIR, GDP,
INF, SIZE, GL and NPLt-1. Adjusted R2 is 0.763 and it means that the total value in the
dependent variable is explained by this equation. This implies explanatory power of
model. Additionally, overall significance of the model is 0.000 which is highly
significant at 1 percent level of significance.

f. Regressions Analysis of NPL of State Owned Banks

In the second model of the multiple regression analysis of NPL on Stated Owned Banks
for 3 sample banks with 30 Observations (2002-2011). Non-Performing Loan (NPL) has
been used as the proxy for the banks NPA. Whereas, Loan & Advances to Total Assets,
Loan & Advances to Total Deposits, Non-Performing Assets to Loan & Advances,
Return on Loan & Advances, Growth of loan ratio has been used as the explanatory
variables. To better understand the empirical validity of the models described in the
previous section and the effect of RIR, SIZE, GDP, INF, NPLt-1 and other factors on the
dependent variable NPL, coefficient of regressions are described via multiple regressions.
The analyses help to gauge the incremental explanatory power of the various factors. The
regression results Loan & Advances to Total Assets, Loan & Advances to Total Deposits,
Non-Performing Assets to Loan & Advances, Return on Loan & Advances, Growth of
loan ratio, RIR, SIZE, GDP and INF are presented in Table 4.21.

90
 Table 4.21
Estimated Relationship between NPL and Independent Variables of
State Owned Banks

NPL it = a0 + a1 SIZE it + a2 RIR it + a3 ∆GL it + a4 LATA it +a5 LATD it+ a6 RLA it + a7 NPALA it + a8 GDP it
+ a9INF it + a10NPLit-1+u it
The dependent variable (NPL) refer to Non-Performing Assets, explanatory variables include the Loan & Advances to
Total Asset(LATA / L&A to TA), Loan & Advances to Total Deposits(LATD / L&A to TD), Non-Performing Assets to
Loan & Advances(NPALA / NPA to L&A), Return on Loan & Advances(RLA), Growth of loan ratio(GL), Real interest
rate(RIR), Bank Size or Total Assets(SIZE), Gross Domestic Product(GDP), Inflation(INF), NPL of previous
year(NPLt-1) and error term(u). t-test is used to test the significance level. Figures in the parenthesis represent the p-
value of the respective regression coefficient. ‘*’ sign indicates that correlation is significant at 1 percent level, ‘**’
indicates that correlation is significant at 5 percent level and ‘***’ indicates that correlation is significant at 10
percent.

Explanatory Variables Estimates

(Constant) 52.158
-0.65***
L&A to TA
(0.054)
0.40***
L&A to TD
(0.087)
-1.57
NPA to L&A
(0.134)
-1.262*
RLA
(0.002)
0.351
RIR
(0.674)
-2.689
GDP
(0.328)
-2.071**
INF
(0.056)
-0.027
SIZE
(0.879)
-7.785
GL
(0.608)
0.697*
NPLt-1
(0.001)
R2 0.795
2
Adjusted R 0.667
DW 1.575
P-value 0.000
Number of Observation 30

The OLS regression based on equation are estimated and the results are reported in table
4.21. The table reveals that coefficient between L&A to TA and NPL is negative and

91
significant (-0.645). While positive Coefficient reflect that banks which are high risk
takers are likely to incur greater levels of NPL. L&A to TD is positive and significant
(0.400) and it is less than 1 which indicates that NPL tends to low with the increase in
credit to deposit ratio. Credit to deposit ratio is taken as proxy of liquidity to measure
liquidity of banks. Lower the credit to deposit ratio higher would be the liquidity of the
banks. So in short the finding suggests that highly liquid banks tend to be low NPL and
highly profitable.

NPL to L&A is negative and insignificant (-1.571). The high ratio of NPL to L&A
implies the bad quality of Assets of banks in the form of L&A. Low NPL to L&A ration
is preferred. There is negative and significant relationship between RLA to NPL. This
ratio measures the bank's profitability with respect to loan and advances. Higher the
ratios better the performance of the bank. The coefficient of RIR is positive and
insignificant (0.351) which indicates that there is association between the real interest
rate variable and NPLs. Sinkey and Greenwalt, (1991), Fofack (2005), and Jimenez and
Saurina (2005) concluded that when a commercial bank increases its real interest rates
this may translate immediately into higher non-performing loans.

GDP is also negative and insignificant (-2.689). An improvement in the real economy is
likely to see an instantaneous reduction in the non-performing loan portfolios of
commercial banks. Relationship between inflation and non-performing loans is negative
and significant (-2.071). This means that high inflation in the current period should see a
reduction in the level of NPLs in the banking sector.

The variable SIZE is negative and insignificant (-0.027). This evidence which is
inconsistent with previous studies Rajan and Dhal (2003), Salas and Saurina (2002) and
Hu et al., (2006) concluded that large banks are not necessarily more effective in
screening loan customers when compared to their smaller counterparts. Growth in loans
ratio (GL) exhibits a negative and insignificant relationship with nonperforming loans.
NPLt-1 is positive and significantly relationship with NPL.

92
Furthermore, Table 4.21 also presents the empirical result for NPL of Nepalese
Commercial Banks. The empirical result shows that explanatory power of regression
equation mentioned by R square, which is 79.5 percent this means that 79.5 percent of
NPL can be predicted from L&A to TA, L&A to TD, NPA to L&A, RLA, RIR, GDP,
INF, SIZE, GL and NPLt-1. Adjusted R2 is 0.667 and it means that the total value in the
dependent variable is explained by this equation. This implies explanatory power of
model. Additionally, overall significance of the model is 0.000 which is highly
significant at 1 percent level of significance.

g. Regressions Analysis of NPL of Private Banks

In the third model of the multiple regression analysis of NPL on Private sector Banks for
8 sample banks with 80 Observations (2002-2011). Non-Performing Loan (NPL) has
been used as the proxy for the banks NPA. Whereas, Loan & Advances to Total Assets,
Loan & Advances to Total Deposits, Non-Performing Assets to Loan & Advances,
Return on Loan & Advances, Growth of loan ratio has been used as the explanatory
variables. To better understand the empirical validity of the models described in the
previous section and the effect of RIR, SIZE, GDP, INF, NPLt-1 and other factors on the
dependent variable NPL, coefficient of regressions are described via multiple regressions.
The analyses help to gauge the incremental explanatory power of the various factors. The
regression results Loan & Advances to Total Assets, Loan & Advances to Total Deposits,
Non-Performing Assets to Loan & Advances, Return on Loan & Advances, Growth of
loan ratio, RIR, SIZE, GDP and INF are presented in Table 4.22.

The OLS regression based on equation are estimated and the results are reported in table
4.22. The table reveals that coefficient between L&A TO TA and NPL is positive but
insignificant (0.063). While Sinkey and Greenwalt (1991) concluded positive
associations reflect that banks which are high risk takers are likely to incur greater levels
of NPLs. L&A to TD is negative and significant (-0.099) and less than 1 which indicates
that NPL tends to low with the increase in credit to deposit ratio. Lower the credit to
deposit ratio higher would be the liquidity of the banks. So in short the finding suggests
that highly liquid banks tend to be low NPL and highly profitable.

93
 Table 4.22
Estimated Relationship between NPL and Independent Variables of
Private Banks

NPL it = a0 + a1 SIZE it + a2 RIR it + a3 ∆GL it + a4 LATA it +a5 LATD it+ a6 RLA it + a7 NPALA it + a8 GDP it
+ a9INF it +a10NPLit-1+ u it
The dependent variable (NPL) refer to Non-Performing Assets, explanatory variables include the Loan & Advances to
Total Asset(LATA / L&A to TA), Loan & Advances to Total Deposits(LATD / L&A to TD), Non-Performing Assets to
Loan & Advances(NPALA / NPA to L&A), Return on Loan & Advances(RLA), Growth of loan ratio(GL), Real interest
rate(RIR), Bank Size or Total Assets(SIZE), Gross Domestic Product(GDP), Inflation(INF), NPL of previous
year(NPLt-1) and error term(u). t-test is used to test the significance level. Figures in the parenthesis represent the p-
value of the respective regression coefficient. ‘*’ sign indicates that correlation is significant at 1 percent level, ‘**’
indicates that correlation is significant at 5 percent level and ‘***’ indicates that correlation is significant at 10
percent.

Explanatory Variables Estimates

(Constant) 9.701
0.063
L&A to TA
(0.416)
-0.099**
L&A to TD
(0.019)
0.495
NPA to L&A
(0.107)
-0.283
RLA
(0.268)
-0.313**
RIR
(0.012)
0.154
GDP
(0.765)
-0.194
INF
(0.320)
-0.218**
SIZE
(0.012)
-1.285***
GL
(0.055)
0.476*
NPLt-1
(0.000)
R2 0.791
2
Adjusted R 0.760
DW 2.228
P-value 0.000
Number of Observation 80

94
NPL to L&A is positive and insignificant (0.495). The high ratio of NPL to L&A implies
the bad quality of Assets of banks in the form of L&A. Low NPL to L&A ration is
preferred. There is negative and insignificant relationship between RLA to NPL. This
ratio measures the bank's profitability with respect to loan and advances. Higher the
ratios better the performance of the bank. The coefficient of RIR is negative and
significant (-0.313) which indicates that there is association between the real interest rate
variable and NPLs. Sinkey and Greenwalt, (1991), Fofack (2005), and Jimenez and
Saurina (2005) concluded that when a commercial bank increases its real interest rates
this may translate immediately into higher non-performing loans.

GDP is also positive but insignificant (0.154) which means an improvement in the real
economy is likely to see an instantaneous reduction in the non-performing loan portfolios
of commercial banks. Relationship between inflation and non-performing loans is
negative and insignificant (-0.194). This means that high inflation in the current period
should see a reduction in the level of NPLs in the banking sector.

The variable SIZE is negative but significant (-0.218).This evidence which is inconsistent
with previous studies Rajan and Dhal (2003), Salas and Saurina (2002) and Hu et al.,
(2006) concluded that large banks are not necessarily more effective in screening loan
customers when compared to their smaller counterparts. Growth in loans and advances
exhibits a fairly strong negative (-1.285) and significant relationship with nonperforming
loans which means that commercial banks which extend relatively higher levels of credit
are likely to incur lower non-performing loans. NPLt-1 is positive and highly significant
with NPL.

Furthermore, Table 4.22 also presents the empirical result for NPL of Nepalese
Commercial Banks. The empirical result shows that explanatory power of regression
equation mentioned by R square, which is 79.1 percent this means that 79.1 percent of
NPL can be predicted from L&A to TA, L&A to TD, NPA to L&A, RLA, RIR, GDP,
INF, SIZE, GL and NPLt-1. Adjusted R2 is 0.76 and it means that the total value in the
dependent variable is explained by this equation. This implies explanatory power of
model. Additionally, overall significance of the model is 0.000 which is highly
significant at 1 percent level of significance.

95
h. Regressions Analysis of NPL of Joint Venture Banks

In the fourth model of the multiple regression analysis of NPL on Joint Venture Banks
for 7 sample banks with 70 Observations (2002-2011). Non-Performing Loan (NPL) has
been used as the proxy for the banks NPA. Whereas, Loan & Advances to Total Assets,
Loan & Advances to Total Deposits, Non-Performing Assets to Loan & Advances,
Return on Loan & Advances, Growth of loan ratio has been used as the explanatory
variables. To better understand the empirical validity of the models described in the
previous section and the effect of RIR, SIZE, GDP, INF, NPLt-1 and other factors on the
dependent variable NPL, coefficient of regressions are described via multiple regressions.
The analyses help to gauge the incremental explanatory power of the various factors. The
regression results Loan & Advances to Total Assets, Loan & Advances to Total Deposits,
Non-Performing Assets to Loan & Advances, Return on Loan & Advances, Growth of
loan ratio, RIR, SIZE, GDP and INF are presented in Table 4.23.

The OLS regression based on equation are estimated and the results are reported in below
Table 4.23. The table reveals that coefficient between L&A to TA and NPL is positive
and significant (0.386). While Sinkey and Greenwalt (1991) concluded positive
associations reflect that banks which are high risk takers are likely to incur greater levels
of NPLs. L&A to TD is negative and significant (-0.311) and lower than 1 which
indicates that NPL tends to low with the increase in credit to deposit ratio. Credit to
deposit ratio is taken as proxy of liquidity to measure liquidity of banks. Lower the credit
to deposit ratio higher would be the liquidity of the banks. So in short the finding
suggests that highly liquid banks tend to be low NPL and highly profitable.

NPL to L&A is positive and significant (0.365). The high ratio of NPL to L&A implies
the bad quality of Assets of banks in the form of L&A. Low NPL to L&A ratio is
preferred. There is negative relationship between RLA to NPL. This ratio measures the
bank's profitability with respect to loan and advances. Higher the ratios better the
performance of the bank. The coefficient of RIR is negative and significant (-0.273).
Sinkey and Greenwalt, (1991), Fofack (2005), and Jimenez and Saurina (2005) concluded

96
that when a commercial bank increases its real interest rates this may translate
immediately into higher non-performing loans.

Table 4.23
Estimated Relationship between NPL and Independent Variables of
Joint Venture Banks

NPL it = a0 + a1 SIZE it + a2 RIR it + a3 ∆GL it + a4 LATA it +a5 LATD it+ a6 RLA it + a7 NPALA it + a8 GDP it
+ a9INF it + a10NPLit-1+u it
The dependent variable (NPL) refer to Non-Performing Assets, explanatory variables include the Loan & Advances to
Total Asset(LATA / L&A to TA), Loan & Advances to Total Deposits(LATD / L&A to TD), Non-Performing Assets to
Loan & Advances(NPALA / NPA to L&A), Return on Loan & Advances(RLA), Growth of loan ratio(GL), Real interest
rate(RIR), Bank Size or Total Assets(SIZE), Gross Domestic Product(GDP), Inflation(INF), NPL of previous
year(NPLt-1) and error term(u). t-test is used to test the significance level. Figures in the parenthesis represent the p-
value of the respective regression coefficient. ‘*’ sign indicates that correlation is significant at 1 percent level, ‘**’
indicates that correlation is significant at 5 percent level and ‘***’ indicates that correlation is significant at 10
percent.

Explanatory Variables Estimates

(Constant) 4.885
0.386**
L&A to TA
(0.023)
-0.311**
L&A to TD
(0.019)
0.368**
NPA to L&A
(0.025)
-0.058
RLA
(0.575)
-0.273*
RIR
(0.003)
-0.003
GDP
(0.995)
0.030
INF
(0.831)
-0.121*
SIZE
(0.000)
-6.175*
GL
(0.003)
0.453*
NPLt-1
(0.000)
R2 0.916
2
Adjusted R 0.901
DW 2.562
P-value 0.000
Number of Observation 70

97
GDP is also negative and insignificant (-0.003) which means an improvement in the real
economy is likely to see an instantaneous reduction in the non-performing loan portfolios
of commercial banks. Relationship between inflation and non-performing loans is
negative and highly significant (-0.121).which indicates that high inflation for the
commercial banks to incur higher non performing loans. Apart from the mixed effects
that inflation appears to exert on NPLs the coefficients of the inflation variables are not
statistically significant in our regression model.

The variable SIZE is negative and significant (-0.003). This result shows consistent with
previous studies Rajan and Dhal (2003), Salas and Saurina (2002) and Hu et al., (2006)
concluded that large banks are not necessarily more effective in screening loan customers
when compared to their smaller counterparts. Growth in loans and advances exhibits a
positive and significant relationship with nonperforming loans which means that
commercial banks which extend relatively higher levels of credit are likely to incur lower
non-performing loans. NPLt-1 is positively and highly significantly relationship with NPL.

Furthermore, Table 4.23 also presents the empirical result for NPL of Nepalese
Commercial Banks. The empirical result shows that explanatory power of regression
equation mentioned by R square, which is 91.60 percent this means that 91.60 percent of
NPL can be predicted from L&A to TA, L&A to TD, NPA to L&A, RLA, RIR, GDP,
INF, SIZE, GL and NPLt-1. Adjusted R2 is 0.901 and it means that the total value in the
dependent variable is explained by this equation. This implies explanatory power of
model. Additionally, overall significance of the model is 0.000 which is highly
significant.

4.5. Qualitative Analysis of Non-Performing Assets and its Influencing Factors

This section reports the results of questionnaire survey conducted among chief executive
officer, branch managers and senior officer of 18 sampled Nepalese commercial banks.
Questionnaire survey was designed to understand the views of the respondents in relation
to determinants of Non-Performing Assets in Nepal. A set of questionnaire including

98
‘yes’/‘no’ types, multiple choices, rankings, and likert scales type of questions are
provided.

4.5.1. Profile of the Respondents

The respondent profile is represented in Table 4.24. It reveals characteristics of sample

employees on the basis of level of gender, age group, academic qualification and years of
professional experience.

Table 4.24
Respondents Profile

Respondents' Character Number(N) Percentage (%)

Gender:
Male 35 70
Female 15 30
Total 50 100
Department worked
Credit 34 68
Audit and compliance 12 24
Other 04 8
Total 50 100
Last Academic Qualification:
Intermediate 0 0
Bachelors 30 60
Masters and above 20 40
Total 50 100
Professional Experience(in years):
1- 5 years 30 60
6-10 years 13 26
15-Above 07 14
Total 50 100
Position of Respondents:
Senior Assistant 10 20
Officer 32 64
Manager 8 16
Total 50 100
Source: Field Survey, 2013

Survey reveals the personal characteristics of respondents combined on the basis of

gender, age group and years of professional experience, academic qualification and the
position of respondents. Among the respondents 70 percent are male and 30 percent are

99
female. From the 50 respondents 20 percent are senior assistance, 64 percent are officer
and 8 percent are manager. Regarding department worked 68 percent represents credit
administration department, 24 percent represents audit department and 8 percent
represent other department like customer service department and other. 60 percent of
total respondents have 1 to 5 years professional experience, 26 percent have 6-10 years of
experience and 14 percent have more than 15 years of experience. The employees who
have completed intermediate are 0 percent which informs the banking industry needs
high degree professional executives so 60 percent have bachelors degree and 40 percent
have masters and above degree.

4.5.2. Trend of Non-Performing Assets of Commercial Bank

Non-performing assets refer to that portion of bank assets which is not generating cash to
bank. The trend of Non-Performing Assets of the commercial banks may be increasing,
decreasing or may be stable.

Table 4.25
Responses on Trend of Non-Performing Assets of Commercial Bank
Options Number of Respondents Percentage

Increasing 17 34

Decreasing 26 52

Stable 7 14

Total 50 100
Source: Field Survey, 2013

The table 4.25 shows the responses on trend of Non-Performing Assets of Commercial
banks. The respondents were asked whether the trend of Non-Performing Assets of
commercial banks are increasing decreasing or is stable. According to respondents, 34
percent of respondents said that Non-Performing Assets is in increasing trend. Whereas,
52 percent of the maximum respondent said that Non-Performing Assets of commercial
banks in Nepal are decreasing and 14 percent of the respondents said that Non-
Performing Assets of commercial banks are stable respectively. The finding reveals that

100
the Non-Performing Assets of commercial Banks in Nepal is in decreasing trend as
maximum respondents accepted that Non-Performing Assets of commercial banks is
decreasing.

4.5.3. Non-Performing Assets Measurement Variables

Non-performing assets refers to those unproductive assets of any firm that cannot be
converted into cash within specified time limit. A large number of ratios can be used in
order to measure the bank’s Non-performing assets like NPA to L&A, NPA to TA and
others. The following table shows the responses on the best options to measure the Non-
performing assets of Banks.

Table 4.26
Responses Associated with Non-Performing Assets Measurement Variables
Options Number of Respondents Percentage

Loan & Advances to total Assets 0 0

Non-Performing Assets to Loan & Advances 28 56

Non-Performing Assets to total Assets 9 18

Return of Loan & Advances 13 26

All of them 0 0

Total 50 100
Source: Field Survey, 2013

Table 4.26 shows the response on “variables used to measure the Non-Performing Assets
of banks”. The survey indicates that majority of (56 percent) respondent accepted that
Non-Performing Assets to Loan & Advances is used to measure the Non-Performing
Assets of Banks. Whereas, 26 percent of respondents said Return of Loan & Advances
are used to measure the Non-Performing Assets of commercial banks and 18 percent
accepted Non-Performing Assets to Total Assets are used to measure the Non-Performing
Assets of commercial banks. The results said that most used variables to measure the
Non-Performing Assets of banks are Non-Performing Assets to Loan & Advances (NPA
to L&A).

101
4.5.4. Relation between Non-Performing Assets and bank Profitability

The relationship between Non-Performing Assets and profitability of bank is very close.
The table below shows the response on “relationship between Non-Performing Assets
and Profitability.” The options includes ‘Yes’/‘No’/‘Not sure’. ‘Yes’ refers to agree with
the statement, ‘No’ refers to disagree with statements and ‘Not Sure’ refers to no idea or
reserve with the statements.

Table 4.27
Responses on Relation between Non-Performing Assets and bank Profitability
Options Number of Respondents Percentage

Yes 50 100

No 0 0

Not sure 0 0

Total 50 100
Source: Field Survey, 2013

Table 4.27 exhibits the responses on “relationship between Non-Performing Assets and
bank Profitability” The survey indicates that 100 percent of respondents accept that Non-
Performing Assets of commercial bank affect the bank profitability.

4.5.5. Sufficiency of firm specific variables and economics variable to analyze the
Non-Performing Assets

The firm specific variables and economics variable are used to determine the Non-
Performing Assets of the bank and they are firm size, real interest rate, loan growth rate,
GDP and inflation. The table below shows the responses associated with “whether or not
firm specific variables and economics variable are sufficient to determine the Non-
Performing Assets of banks.” The options includes ‘Yes’/‘No’/‘Not sure’. ‘Yes’ refers to
agree with the statement, ‘No’ refers to disagree with statements and ‘Not sure’ refers to
no idea or reserve with the statements.

102
 Table 4.28
Responses on Sufficiency of Bank Specific Variables and economics variable to analyze the Non-
Performing Assets

Options Number of Respondents Percentage

Yes 19 38

No 22 44

Not sure 9 18

Total 50 100
Source: Field Survey, 2013

Table 4.28 exhibits the responses of firm specific variables and economics variable are
sufficient to determine the Non-Performing Assets of banks. According to the survey, 44
percent of respondents accepted that specific variables and economics variable are not
sufficient to determine the profitability of bank. Whereas, 38 percent of respondents
accepted that specific variables and economics variable is sufficient to determine the
profitability of banks while 18 percent of the respondents are unsure about the firm
specific variables and economics variable to determine the Non-Performing Assets of
bank. The findings suggest that firm specific variables and economics variable are not
sufficient to determine the Non-Performing Assets of banks.

4.5.6. Joint venture banks have relatively low NPA level then the private and
public sectors banks

The table below shows the response on “Joint venture banks have relatively low NPA
level then the private and public sectors banks.” The options includes ‘Yes’/‘No’/‘Not
sure’. ‘Yes’ refers to agree with the statement, ‘No’ refers to disagree with statements and
‘Not Sure’ refers to no idea or reserve with the statements.

Table 4.29 illustrates the responses on “Joint venture banks have relatively low NPA
level then the private and public sectors banks”. The survey confirms that the majority of
respondents (54 percent) accept the statement that Joint venture banks have relatively low
NPA level then the private and public sectors banks. 16 percent do not believe that higher
Joint venture banks have relatively low NPA level then the private and public sectors

103
banks while 30 percent of respondents are unsure that whether or not Joint venture banks
have relatively low NPA level then the private and public sectors banks.

Table 4.29
Responses on Joint venture banks have relatively low NPA level then the private and public sectors
banks
Options Number of Respondents Percentage
Yes 27 54
No 8 16
Not sure 15 30

Total 50 100
Source: Field Survey, 2013

4.5.7. Relationship between Non-Performing Assets and Bank Shareholder

Non-Performing Assets and shareholders welfare has a close relation or not because non-
performing assets has a close relation with bank profitability and the profitable bank
distributes dividend and right share to their shareholders. The table below shows the
responses on “relationship between non-performing assets and bank shareholder.” The
options includes ‘Yes’/‘No’/‘Not sure’. ‘Yes’ refers to agree with the statement, ‘No’
refers to disagree with statements and ‘Not sure’ refers to no idea or reserve with the
statements.

Table 4.30
Responses Associated with Lower Non-Performing Assets is good for Shareholder
Options Number of Respondents Percentage

Yes 35 70

No 10 20

Not sure 5 10

Total 50 100
Source: Field Survey, 2013

Table 4.30 illustrates the responses on “relationship between non-performing assets and
bank shareholder”. The survey confirms that the majority of respondents (70 percent)

104
accept the statement that lower non-performing assets are good for bank shareholder.
Fairley, 20 percent do not believe that higher lower non-performing assets are good for
bank shareholder while 10 percent of respondents are unsure that whether or not higher
lower non-performing assets are good for bank shareholder. The findings depicts that
lower non-performing assets are good for bank shareholder.

4.5.8. Factors Affecting Non-Performing Assets

There are many factors that affect the non-performing assets of commercial bank. The
factor considered to be important to determine the non-performing asset may not be that
important to other. In addition, degree to which every executive respond to such factors
affecting the bank non-performing assets also differs.

The results in Table 4.31 confirms that respondents feel GDP as the most important
factors that most affect the Non-Performing Assets of commercial banks of Nepal,
followed by loan growth rate. Loan growth rate is considered to be the second most
important factors that affect the Non-Performing Assets by respondents. Real interest rate
is another crucial aspect that affects the Non-Performing Assets of banks while the
respondents think that firm size and inflation have mild effect in Non-Performing Assets
of Nepalese commercial banks.

Table 4.31
Rank Scores on Determinants of Non-Performing Assets
Rank
Determinants of Non-Performing Assets Median
1 2 3 4 5

Firm size 3 4 20 13 10 3

Loan growth rate 29 15 6 0 0 1

Real interest rate 20 17 9 4 0 2

Inflation 0 0 6 18 26 5

GDP 18 28 4 0 0 2
Source: Field Survey, 2013

105
4.5.9. Reasons for Assets becoming Non-Performing Assets

There are many reasons that turn assets into non-performing assets of commercial bank.
The factor considered to be important to find the non-performing assets may not be that
important to other. In addition, degree to which every executive respond to such factors
affecting Assets becoming Non-Performing Assets also differs.

Table 4.32
Responses for Assets becoming Non-Performing Assets
Options Number of Respondents Percentage

Manager deficiencies during work 14 28

Lack of knowledge of the area of handling 4 8

Lack of timely actions 7 14

Lack of adequate efforts for recovery 5 10

Lack of proper verification of the genuine
20 40
purpose of Loan & Advances
Total 50 100
Source: Field Survey, 2013

The results in Table 4.32 confirms that respondents feel Lack of proper verification of the
genuine purpose of Loan & Advances as the most important factors influencing on the
assets turning non-performing assets in commercial banks of Nepal, followed by manager
deficiencies during work. Manager deficiencies during work are considered to be the
second most important reasons for assets turning non-performing assets by respondents.
Lack of timely actions is another crucial aspect that affects the assets turning non-
performing assets of banks while the respondents think that lack of adequate efforts for
recovery and lack of knowledge of the area of handling of the credit will affects the assets
turning non-performing assets of banks. However, lack of knowledge of the area of
handling is the factors that have mild effect in the assets turning non-performing assets of
commercial banks.

106
4.5.10. Internal reasons for turning good loan into bad loan

There are many internal reasons that turn good loan into bad loan of commercial bank.
The factor considered to be important to find the internal reasons for turning good loan
into bad loan may not be that important to other. In addition, degree to which every
executive respond to such factors affecting for turning good loan into bad loan also
differs.

Table 4.33
Responses of internal reasons for turning good loan into bad loan

Options Number of Respondents Percentage

Defective lending process 7 14

Inappropriate technology 5 10

Poor credit appraisal system 27 54

Managerial deficiencies 9 18

All of above 2 4

Total 50 100
Source: Field Survey, 2013

The results in Table 4.33 confirms that respondents feel poor credit appraisal system as
the most important factors influencing on turning good loan into bad loan of the
commercial banks, followed by manager deficiencies. Manager deficiencies are
considered to be the second most important reasons for turning good loan into bad loan of
the commercial banks by respondents. Defective lending process is another crucial aspect
that affects the turning good loan into bad loan of banks. While the respondents think that
inappropriate technology have mild effect in turning good loan into bad loan of banks and
all of the above reason have very low effect for internal reasons that turn good loan into
bad loan of commercial bank.

4.5.11. External reasons for turning good loan into bad loan

There are many external reasons that turn good loan into bad loan of commercial bank.
The factor considered to be important to find the external reasons for turning good loan

107
into bad loan may not be that important to other. In addition, degree to which every
executive respond to such factors affecting for turning good loan into bad loan also
differs.

Table 4.34
Responses of external reasons for turning good loan into bad loan

Options Number of Respondents Percentage

Willful defaults 13 26

Industrial Sickness 11 22

Lack of demand 7 14

Change on Govt. policies 7 14

All of above 12 24

Total 50 100
Source: Field Survey, 2013

The results in Table 4.34 confirms that respondents feel poor credit appraisal system
Willful defaults as the most important factors influencing on turning good loan into bad
loan of the commercial banks, followed by “All of above”. All of the above reasons are
considered to be the second most important reasons for turning good loan into bad loan of
the commercial banks by respondents. Industrial sickness is another crucial aspect that
affects the turning good loan into bad loan of banks. While the respondents think that
lack of demand and change on govt. policies have mild effect in turning good loan into
bad loan of the commercial banks.

4.5.12. Statement on Level of Agreement and Disagreement

Preferences of the respondents on the statements regarding analysis of Non-Performing

Assets are presented in Table 4.35. The Table 4.35 demonstrates the results of
preferences of respondents on 5 point likert scale items of 50 employees associated with
18 sample banks. The number indicates the total response recorded for particular
question. In addition, mean value of the responses have also been reported in order to
find out the overall rank of the statements.

108
 Table 4.35
Statement on Level of Agreement and Disagreement
Strongly Strongly
Disagree Agree
Statement representing observation on
Median
determinants of Non-Performing Assets
1 2 3 4 5

It is widely accepted that the percentage of non-

performing loans (NPLs) is often associated with 0 0 10 15 25
4.5
bank failures and financial crises in both (20%) (30%) (50%)
developing and developed countries.
Rapid credit growth is often associated with higher 0 0 4 26 20
4
NPLs. (8%) (52%) (40%)
Return on Loan & Advances ratio indicates how
0 6 10 21 13
efficiently the bank has employed its resources in 4
(12%) (20%) (42%) (26%)
the forms of loan and advances.
Higher degree of ratio shows the strong positive
3 4 24 15 4
relationship between NPLs and Loans & Advances 3
(6%) (8%) (48%) (30%) (8%)
to Total Assets.
Both bank specific and macroeconomic factors
0 8 16 26
impacts on the loan portfolios of commercial 0 5
(16%) (32%) (52%)
banks.
Greater CD ratio implies the better utilization of
3 4 16 12 15
total deposits and better earning. 4
(6%) (8%) (32%) (24%) (30%)

There is significant relationship between NPL and 5 10 18 10 7

3
Real interest rate of the bank. (10%) (20%) (36%) (20%) (14%)
Higher the Non Performing Assets higher would be
2 3 10 15 20
the credit risk and hence Lower would be the 4
(4%) (6%) (20%) (30%) (40%)
profitability.
7 43
Lower NPL to total credit ratio is preferred. 0 0 0 5
(14%) (86%)
Banks would improve NPA level by improving
screening and monitoring of credit risk and such 0 0 6 28 16
4
policies involve the forecasting of future level of (12%) (56%) (32%)
risk.
The effect of the Bank Size has been proved to be
positive to a certain extent. However, for banks that 5 8 10 19 8
4
become extremely large, the effect of size could be (10%) (16%) (20%) (38%) (16%)
negative due to bureaucratic and other reasons.
Non-performing assets tends to be pro-cyclical that
2 7 10 12 19
is NPA tends to fall during periods of high GDP 4
(4%) (14%) (20%) (24%) (38%)
and rise during periods of low GDP growth.
The Non-performing assets of commercial banks in
Nepal is not as good as expected due to corruption,
4 7 8 13 18
high intervention of government, lack of proper 4
(8%) (14%) (16%) (26%) (36%)
policy and higher lending to the non productive
sectors
Source: Field Survey, 2013

Table 4.35 has attempted to analyze the level of satisfaction and dissatisfaction on
various statements related to the Non-Performing Assets of commercial banks. For this
purpose the 5 point likert scale was designed where 1 indicates strong disagreement and 5

109
represents strong agreement. Median, Mode and Percentage have been computed to
analyze various statements related to Non-Performing Assets of commercial banks.

From the table 4.35, among the total respondent 80 percent tend to agree with the
statement that “the percentage of non-performing loans (NPLs) is often associated with
bank failures and financial crises in both developing and developed countries” and the
median value is 4.5 which stated that above statement is highly agreed by the
respondents. With the median value 4 the statement “Rapid credit growth is often
associated with higher NPLs” is agreed by 92 percent.

However, 68 percent of the respondent agreed with the “Return on Loan & Advances
ratio indicates how efficiently the bank has employed its resources in the forms of loan
and advances” having 4 median value. The respondents were asked to give their opinion
on the statement that “Higher degree of ratio shows the strong positive relationship
between NPLs and Loans & Advances to Total Assets” and only 38 percent of
respondent has agreed on this statement and 62 percent of respondent does not agreed
with the statement but having 3 median values.

On the statement of “Both bank specific and macroeconomic factors impacts on the loan
portfolios of commercial banks” is agreed by 84 percent of respondent with maximum 5
median values. Only 54 percent of respondent have agreed on “Greater CD ratio implies
the better utilization of total deposits and better earning” and 46 percent of respondent
does not agreed on the statement that they believe greater CD ration does not implies the
better utilization of total deposits and better earning. The median value of the statement is
4. The statement “there is significant relationship between NPL and Real interest rate of
the bank” is agreed by 34 percent of respondents and remaining respondents does not
agreed upon the statement with minimum median value of 3. A 70 percent of the
respondents have agreed upon the statement that “higher the Non Performing Assets
higher would be the credit risk and hence Lower would be the profitability” with 4
median value which stated that above statement is agreed.

A 100 percent of the respondent is agreed upon the statement that “Lower NPL to total
credit ratio is preferred” with highest median value of 5 which also shows the statement

110
is 100 percent agreed. 88 percent of the respondents have agreed upon the statement that
“banks would improve NPA level by improving screening and monitoring of credit risk
and such policies involve the forecasting of future level of risk” with 4 median value. The
statement “the effect of the bank size has been proved to be positive to a certain extent.

However, for banks that become extremely large, the effect of size could be negative due
to bureaucratic and other reasons” have median value of 4 which indicate that the above
statement is agreed by only 54 percent of the respondents. 62 percent of the respondents
have agreed upon the statement that “Non-performing assets tends to be pro-cyclical that
is NPA tends to fall during periods of high GDP and rise during periods of low GDP
growth” with 4 median value. The statement “the non-performing assets of commercial
banks in Nepal is not as good as expected due to corruption, high intervention of
government, lack of proper policy and higher lending to the non productive sectors” have
been agreed upon by 62 percent of respondents with 4 median value.

4.5.13. Analysis of write- in Comments of the Respondents

This study has also attempted to understand the open view of respondent about non-
performing assets of Nepalese commercial banks. For this purpose, respondents were
asked to provide a write- in comment on what they think of non-performing assets
practices in Nepal. On the basis of the analysis of those write-in comments, some of the
major views are pointed outs as follows.

• Non-Performing Assets has an impact on bank performance. The higher the NPA
level, the higher the negative impact due to having to make higher provision for
real estate and crusher industry loans.
• Though current practice of LLP as per Basel II (Simplified standard approach) is
sufficient in Nepalese context in term of mitigation of credit risk because LLP
practice prudently reflects the actual health of the financial institution.
• NRB must encourage the banks to adopt prudent practices for LLP based on the
performance of Loan plus internal risk grading as well instead of adjustment
purpose of bottom-line of financial account.

111
 • Bank may do risk grading of customer and according to the risk grade may
provision account. However the weaker banks seem manipulating the data and
hiding exact NPA to show them healthy. The regulators must pay more attention
to this aspect.

4.6. Concluding Remark

This study supports the findings and theories of the previous study. On the basis of
financial highlights, for stated owned bank ADB, for joint venture bank NIB and EBL
and for private banks SBL has highest loans and advances to total assets which conclude
they has good performance of the banks mobilization of fund by way of lending functions
and high productivity with having higher degree of risky. As well as, ADB, EBL and
SBL has highest CD ratio which implies the better utilization of total deposit and better
earning. NBL and RBBL from state owned bank has lowest average Non-performing
Assets to Loan & Advances which implies the good quality of assets of the banks and
from joint venture and private banks except from NBBL, LBL and NCC bank other
banks have lowest average Non-performing Assets to Loan & Advances. NBL has higher
average ratio of Return on Loans & Advances which implies the better performance of
the bank because it measure the bank’s profitability with respect to loans & advances and
from joint venture bank SCBN has higher average ratio of Return on Loans & Advances
and BOK of private bank has higher average ratio of Return on Loans & Advances.

The descriptive analysis was also conducted to analyze the trend of major indictors of
non-performing assets and its determinants. The descriptive statistics i.e. mean value,
maximum, and minimum value of NPL, L&A to TA, L&A to TD, NPA to L&A, RLA,
RIR, GDP, INF, SIZE, GL and NPLt-1. So the alternative hypothesis (Ha) of the study is
also accepted because there is relationship between Non-performing loan (NPL) and its
determinants (L&A to TA, L&A to TD, NPA to L&A, RLA, RIR, GDP, INF, SIZE, GL
and NPLt-1).

This study has also conducted the portfolio, correlation and the regression analysis to find
the relationship between the non-performing assets and the explanatory variables. The
results consistently demonstrated that NPA to L&A, SIZE and RIR increases with

112
increase in NPL which indicates that firm size is in higher trend with highest NPL
portfolio but higher ratio of NPA to L&A implies the bad quality of assets of commercial
banks in the form of Loan and Advances. Other bank specific variable L&A to TA, L&A
to TD, RLA and GL decrease with increase in NPL which indicates that commercial
bank's profitability with respect to loan and advances decrease with increase NPL and
also have low productivity and high degree of safety in liquidity and decreasing CD ratio
implies the bank are not better utilizing its total deposits for better earning. Economic
variable GDP and INF also decrease with increase in NPL which indicates Non-
performing assets tends to be pro-cyclical that is NPA tends to fall during periods of high
GDP and rise during periods of low GDP growth (Dash and Kabre, 2010). The task of
keeping the rate of inflation low and stable is usually given to central banks. Central
Banks control Inflation through the setting of interest rate, open market operation, and
through the setting of banking cash reserve requirement.

In correlation of 18 sample commercial banks have positively and significantly correlated

relationship between NPL to NPA to L&A, RIR, SIZE and NPLt-1. The result also show
the NPL is negatively and significantly correlated with L&A to TA, L&A to TD, RLA,
GDP, INF, SIZE and GL. NPL is positively and significantly correlated with RIR having
0.303 coefficients. For the state owned banks NPL is positively and significantly
correlated with RIR. The result also show the NPL is negatively and significantly
correlated with L&A to TA, L&A to TD, INF and SIZE and negatively correlated with
NPA to L&A, RLA, GDP and GL. NPLt-1 is positively correlated. For the private banks
NPL is positively and significantly correlated with NPA to L&A and RIR. The result also
show the NPL is negatively and significantly correlated with L&A to TA, L&A to TD,
RLA, GDP, INF, SIZE and GL. NPLt-1 is positively correlated. From the joint venture
banks NPL is positively correlated with L&A to TA, NPA to L&A, RIR and highly
positive and significant with NPLt-1. The result also show the NPL is negatively and
significantly correlated with L&A to TD and negatively correlated with RLA, GDP, INF,
SIZE and GL.

The multiple regressions the coefficient of 3 sample of state owned bank have negative
but significant relation between L&A to TA and NPL. L&A to TD, RIR, SIZE and GL is

113
positive but insignificant relationship with NPL. NPLt-1 shows the positive and significant
relation with NPL. There is negative and insignificant relationship between NPL to L&A,
RLA, GDP, INF and NPL. From the joint venture banks that coefficient between L&A to
TA, NPL to L&A and NPL is positive but insignificant. The coefficient between L&A to
TD, INF and GL is negative and insignificant. There is positive and significant
relationship between RLA, NPLt-1 to NPL. The coefficient of RIR, SIZE is negative and
significant with NPL and GDP is positive but insignificant with NPL. The private banks
coefficient between L&A to TA, NPL to L&A, GDP, INF and NPL is positive but
insignificant. NPLt-1 is positive and highly significant with NPL. The coefficient between
L&A to TD, RIR, SIZE and GL is negative and insignificant with NPL.

Finally, according to primary survey of data, the opinions of different managers regarding
non-performing assets and the factors influencing it differ significantly. All the issues
raised in the statement of problems are addressed by this study. Among the reviewed
literatures, findings and conclusions, some results of this study also supported the
previous findings and conclusions and some are contradicted. To sum up, most of the
findings in this study are not consistent with many of the studies conducted in big and
developed market context around the globe. Therefore, it is worthwhile to note that
nature of data and the specification of the models may themselves be responsible for the
differences in results. Hence, conclusions drawn should be interpreted within these
limitations.

114
 CHAPTER V
SUMMARY AND CONCLUSIONS

5.1. Summary

Non-Performing Assets ensure level of protection for expected losses. The intention of
non-performing assets is the anticipation of the expected losses by adjusting the book
value of the non-performing loan. NPL reflect not only the probability of default, but also
the amount the lender can recover in case of default.

This study aimed to investigate the determinants of Non-performing Assets of Nepalese

commercial banks with respect to firm specific and macroeconomic variables. The
specific objectives of the study were: i) to analyze the financial highlights and indicators
of commercial banks; ii) to assess the trends of the major indicators of non-performing
assets and its determinants; iii) to examine the univariate relationship between non-
performing assets and its determinants through portfolio analysis; iv) to examine the
empirical relationship between non-performing assets and its determinants; v) to assess
the opinions on non-performing assets and factors influencing it; vi) to assess whether
Nepalese commercial banks adopted appropriate measures to control Non-performing
Assets or not.

This study is based on the analysis of secondary data and primary data. The data for firm
specific variables and macro specific variable including non-performing loans, loan &
advances to total assets, loan & advances to total deposits, non-performing assets to loan
& advances, return on loan & advances, real interest rate, loan growth rate, bank size,
GDP and inflation have been obtained from financial statements of the sample firms
recorded in the database of Nepal Stock Exchange (NEPSE) Limited and banking and
financial statistics of NRB. The firm specific data have been derived from various issues
of financial statements of selected banks. There are 180 observations of 18 sample banks
for the period of 2002 to 2011. Moreover, the primary survey has been basically designed
to understand the opinions of respondents as how they perceive the determinant affecting
non-performing assets of Nepalese commercial banks. A set of questionnaires was

115
prepared to survey the responses of bankers and regulators. A set of questionnaires
contained total of 24 questions of mixed type options such as personal information, five
point Likert scale items, multiple choice question and open ended question.

The methods of data analysis used in the study includes financial analysis, descriptive
statistics, correlation analysis, portfolio analysis and panel regression analysis to
understand the relationship between the bank’s non-performing assets and factors
affecting it. Different statistical tests of significance for validation of model such as F-test
and t-test have been employed to ensure the significance of overall model and individual
variables. The primary data analysis includes percentage, frequency distribution and
means scores of responses to likert scale items.

Major Findings

The major findings of this study are as follows:

1. The L&A to TA of state owned banks and joint venture banks have low ratio but
private banks has highest loans and advances to total assets ratio. The L&A to TD
ratio of state owned banks and private has higher degree of L&A to TD ratio and
joint venture banks has lowest degree of L&A to TD ratio.

2. The NPA to L&A ratio of ADB, NBBL, NCC and Lumbini bank have highest
average ratio of Non-performing Assets to Loan & Advances. NBBL have
maximum highest degree of Non-performing Assets to Loan & Advances ratio.
Other banks such as NBL, SCBN and Laxmi bank have lowest average Non-
performing Assets to Loan & Advances.

3. The return on Loan and Advances ratio found that NBL, SCBN, NABIL and
BOK has higher average ratio of Return on Loans & Advances. NBBL, Lumbini
bank, MBL and Laxmi bank has lowest average ratio of Return on Loans &
Advances.

116
4. The NPA to L&A, RIR and SIZE increases with increase in NPL when it moves
from lowest percentile group, portfolio to the highest percentile group portfolio.
L&A to TA, L&A to TD, GDP, INF and GL ratio decreases with increase in the
NPL and RLA shows inconsistent pattern from lower quintile to higher quintile
with increase in the NPL.

5. Correlation analysis of NPLs of Nepalese commercial banks shows positive and

statistically significant correlations with RIR, SIZE and NPLt-1 having 0.15, 0.11
and 0.76 coefficients and significant at 5 percent, 10 percent and 1 percent
respectively. NPA to L&A is only positively correlation with NPL. Return on
Loan & Advances and GDP shows negative and statistically significant
correlations with NPLs and L&A to TA, L&A to TD, INF and GL shows negative
correlation with NPLs.

6. In case of regression specification of non-performing assets of Nepalese

commercial banks reveals that NPLs shows positive relationship with L&A to
TD. NPLt-1 shows the positive and highly significant relationship. L&A to TA,
RLA, INF and GL shows negative and significant relation with NPLs. The
adjusted R2 of regression of Nepalese commercial banks is 76.30 percent with
highly significant. It also shows NPA to L&A, RIR, GDP and SIZE is negatively
and significantly related with NPLs.

7. Regression analysis of state owned bank of Nepal shows that L&A to TD and
NPLt-1 shows positive and significant relation with NPLs and RIR shows positive
relation with NPLs. L&A to TA, RLA and INF is negatively and significant with
NPLs. NPA to L&A, GDP, SIZE and GL show the negative relation with NPLs.
The adjusted R2 of regression of state owned banks is 66.70 percent and highly
significant.

8. Private bank of Nepal shows positive relation with L&A to TA, NPA to L&A and
GDP with NPLs. The adjusted R2 of regression of private banks is 76 percent.
RLA and INF have negative relation with NPLs. L&A to TD, RIR, SIZE and GL

117
 have negatively and significant relation with NPLs and NPLt-1 is positive and
highly significant.

9. Regression analysis of joint venture bank of Nepal shows that NPLs have positive
and significant relation with L&A to TA, NPA to L&A and NPLt-1 and have
negative and significant relation with L&A to TD, RIR, SIZE and GL. The
adjusted R2 is 90.1 percent of joint venture bank of Nepal. RLA and GDP have a
negative relation and INF has a positive relation with NPL.

10. The result in regression specification of non-performing assets of Nepalese

commercial banks reveals the changes without using lagged variable and after
using the lagged variable there has been improvement in R2 and adjusted R2. It has
been increase from 44.80 percent to 77.60 percent and 41.90 percent to 76.30
percent. (See appendix A and appendix E).

11. The relationship between NPL and variable also changes like; RLA was positive
but insignificant but after using the lagged variable RLA is negative and highly
significant. NPA to L&A was positive and highly significant but after using the
lagged variable it is negative and insignificant. Likewise, L&A to TA and GL was
also negative and insignificant but after the lagged variable it is negative and
significant. (See appendix A and appendix E).

12. Primary survey asserted majority (52 percent) of respondents felt that level of
non-performing assets is decreasing in context of Nepalese commercial banks and
100 percent of the respondents believe that non-performing assets will affect the
bank profitability. 54 percent of respondent say that joint venture banks have
relatively low NPA level then private and public sectors banks.

13. With respect to the best option to measure the non-performing assets of banks, 56
percent respondents were in favor of non-performing assets to loan & advances.
The important factors affecting non-performing assets in order of their respective

118
 rank are loan growth rate, GDP, real interest rate, firm size and inflation as most
important factor to least important factor.

14. The survey result shows that the bank specific variables and economics variables
are not sufficient to analyze the non-performing assets of the banks but 52 percent
of the respondent has strongly agree with that both bank specific variables and
economics variables impacts on loan portfolio of commercial banks.

15. Based on the survey result that 40 percent of the respondent says that the reasons
for assets becoming non-performing assets is due to lack of proper verification of
the genuine purpose of loan & advances. 54 percent of respondents say that poor
credit appraisal system is the main internal reasons for turning good loan into bad
loan and 26 percent of respondents say that willful defaults are the external
reasons that causes for NPA.

16. A 50 percent of respondents accepted that the percentage of NPLs is often

associated with bank failures and financial crises in both developing and
developed countries. 40 percentage of respondent strongly agreed on the
statement that higher the non-performing assets higher would be the credit risk
and hence lower would be the profitability.

17. A 36 percent of respondent strongly agreed upon on the statement that NPA of
commercial banks in Nepal is not good as expected due to corruption, high
intervention of government, lack of proper policy and higher lending to non
productive sectors.

18. Most of the respondents are also neutral on many statements like 24 percent of
respondents are neutral on statement that high degree of ratio shows the strong
positive relationship between NPLs and Loans & Advances to Total Assets. 32
percent of respondents are also neutral on greater CD ratio implies the better
utilization of total deposits and better earning and 36 percent of respondents are

119
 also neutral on the statement that there is significant relationship between NPL
and RIR of the banks.

5.2. Conclusion

The major conclusion of this study is that non-performing loan, loan & advances to total
assets, loan & advances to total deposit, non-performing assets to loan & advances, return
on loan & advances, real interest rate, loan growth rate, bank size explain non-performing
assets of Nepalese commercial banks. Private banks has highest ratio of L&A to TA and
L&A to TD. State owned banks and joint venture banks has relatively lowest ratio of
L&A to TA and L&A to TD ratio. Most of the sample banks have relatively lowest ratio
of NPA to L&A except ADB, NBBL, NCC and Lumbini bank. State owned banks and
joint venture banks has highest ratio of RLA whereas, private banks has relatively lowest
ratio.

The determinants of NPL are not equally applicable for all types of ownership of banks.
Some determinants like GDP, INF, NPLt-1 and RIR is common to all banks while other
determinants NPL, L&A to TA, L&A to TD, NPA to L&A, RLA and GL are not equally
significant for all banks. From the correlation coefficient and regression analysis we can
conclude that non-performing loan has negative relation with loan & advances to total
assets, loan & advances to total deposit, gross domestic product, inflation and loan
growth rate. Return on loan & advances have neutral relation with non-performing loan.
Non-performing assets to loan & advances, real interest rate and size has positive relation
with non-performing assets in context of Nepalese commercial banks.

5.3. Recommendations

Based on the findings of this study, the following major recommendations have been
proposed:

1. The high portion of non-performing loan accompanied by higher provision of

NBL indicates that the bank’s credit portfolio needs serious attention. Hence NBL
is recommended to take immediate remedial actions for recovering bad debts.

120
2. Joint venture banks contribution to loans and advances is relatively low. Entire
economy is largely dependent upon the proper execution of lending function by
commercial banks. Low level of lending means, low level of investment resulting
to low level of productivity, which may ultimately affect negatively on the
national economy. Loans and advances on one hand is the highest income-
generating asset and on the other hand it also helps to upgrade the economic
health of the country. Hence joint venture banks are recommended to increase its
investments in productive sector in the form of loans and advances.

3. It has been observed that the loans and advances of state owned banks and joint
venture banks are decreasing and less further investment of deposit in recent
years. Hence it is recommended for state owned banks and joint venture banks for
exploring new areas of investment.

4. Since the banks previous year of NPL (NPLt-1) influences the current level of
NPL. So, banks need to improve the current level of NPL if it wants to maintain
the NPL at acceptable level in future.

5. The main factors which leads to Non-Performing Loan are improper credit
appraisal system, ineffective credit monitoring and supervision system etc.
Besides that negligence in taking information from Credit Information Bureau
may also lead to bad debts. Hence all the 18 banks are recommended to be more
cautious and realistic while granting loans and advances. After advancing loans
there should be regular supervision and follow up for proper utilization of loan.

6. It is recommended for the banks to initiate training and development program for
the employees to make them efficient and professional in credit appraisal,
monitoring and proper risk management.

7. Follow the directives of NRB and acting upon it also reduces many of the credit
risk. There are penalty implications on non-compliance of the directives. Hence

121
 all the 18 banks are recommended to follow the directives and they are also
suggested to come up with a stronger internal audit department to ensure that the
directives are properly implemented.

8. The regulation regarding loan classification and provisioning is stringent and

tighter than the previous. Hence NRB should not only impose directives but also
create supportive environment for the commercial banks. NRB is recommended
to strengthen Credit Information Bureau (CIB) so that banks can get required
credit information about the borrowers on time. This would help in reducing NPL.

9. It is often said that ‘Prevention is better than cure’. Hence it is recommended for
all the 18 banks to take preventive measures before the loan goes to default. All
the banks are recommended to have an information system to gather all the
possible information and activities about its borrowers so that necessary
precautions can be taken in time.

Scope for Future Research

The sample banks represent more than 56 percent of the population with 18 sample banks
out of 32 commercial banks This study used observations from commercial banks along
with 50 respondents. The result represents only commercial banks with different terms
like loan & advances to total assets, loan & advances to total deposit, non-performing
assets to loan & advances, return on loan & advances, loan growth rate, bank size, GDP
and INF). Hence, future studies are suggested to include significant number of
observations from other financial institutions along with commercial banks.

While assessing the opinion of respondents in relation to non-performing assets in

Nepalese commercial bank, this study has conducted a survey mostly among credit and
administrative departments employees mostly concentration in Kathmandu valley.
Further studies are suggested to extend the survey around other places of the country
including broad categories of respondents such as regulation makers, independent
practitioners and other departments employees with a view to assess the opinion in more
broader term.

122
 Reference

Bercoff et al. (2002). Argentinean Banks Credit Growth and the Tequila Crisis. A
Duration Analysis (Unpublished).

Michael et al. (2006). Effect of Non Performing Assets on Operational Efficiency of

Central Cooperative Banks. Indian Economic Panarama .

Balasubramaniam, C. (2012). Non Performing Assets and Profitability of Commercial

Banks in India: Assessment and Emerging Issues. Journal of Research in
Commerce and Management .

Batra. (2003). Developing the Asian Markets for Non Performing Assets: Developments
in India. 3rd Forum on Asian Insolvency Reform, Seoul , Korea .

Chijoriga. (2000). The Interrelationship Between Bank Failure and Political Interventions
in Tanzania in the Pre-Liberalization Period. African Journal of Finance and
Management .

Fafack, & Hippolyte. (2005). Non Performing Loan in Sub-Saharan Africa: Causal
Analysis and Macroeconomic Implication. World Bank Policy Research Working.

Hu et al. (2006). Ownership and Non Performing Loans: Evidence From Taiwan's Bank.

Jimenez, & Saurina. (2005). Credit Cycle, Credit Risk and Prudential Regulation.

Kumar, D. M., & Gaurav, K. (2012). The Determinants of Non Performing Assets in
Indian Commercial Bank: An Econometric Study. Euro Journals .

Kumar, R. P. (2002). A Comparative Study of Non Performing Assets in India in the

Global Context- Similarities and Dissimilarities, Remedial Measures. The Indian
Institute of Management .

Kumar, T. C., & Ravindra, S. (2012). Non Performing Assets- A Cause of Concern for
Banks . ASM'S International E-Journal of Ongoing Research in Management and
IT .

123
Malyadri, P., & S.Sirisha. (2012). Assets Quality and Non Performing Assets of Indian
Commercial Banks. World Science Publisher, United States .

Mark, T. (2011). The Impact of Non Performing Loans on Loan Growth: An Econometric
Study of Jamaica and Triridad and Tobago.

Meenakshi, & Mahesh, H. (2012). Banking Sector Reforms and NPA: A Study of Idian
Commercial Banks. The Institution For Social and Economic Change .

Poongavanam, S. (2011). Non Performing Assets: Issuess, Causes and Remedial

Solution. Asian Journal of Management Research .

Prasad, G. B., & Venna, D. (2011). NPAS in Indian Banking Sector - Trends and Issues.
Journnal on Bank Financial Services and Insurance Research .

Prasad, K., & Reddy, B. R. (2012). Management of Non Performing Assets in Andhra
Bank. Indian Journal of Applied Research .

Raj, S. N. (2011). Non Performing Loans and Stock Prices. In PYC Nepal Journal of
Management (p. 93). digi design.

Rajan, & Dhal. (2003). Non Performing Loan and Terms of Credit of Public Sector
Banks in India. Reserve Bank of India .

Rajaraman, & Vashistha. (2002). Non Performing Loans of Indian Public Sector Banks-
Some Pannel Results. Economic and Political Weekly .

Rosy, K. (2012). Non Performing Assets of Commercial Banks. IUP Journal of

Monetary Economics .

Salas, & Saurina. (2002). Credit Risk in Two Institutional Regimes: Spanish Commercial
and Saving Banks. Journal of Financial Services Research .

Sandeep, A., & Parul, M. (2012). Non Performig Assets: Comparative Position of Public
and Private Sector Banks in India. International Journal of Business and
Management .

124
Sandeep, K. (2012). Non Performing Assets of Indian Commercial Bank. SUMEDHA
Journal of Management .

Santanu, D. (2007). Management of Non Performing Assets in Indian Public Sector

Banks with Special Reference to Jharkhand.

Selvarajan, B., & Vadivalagan, D. G. (2013). A Study on Management of Non

Performing Assets in Priority Sector Reference to Indian Bank and Public Sector
Bank (PSB). Global Journal of Management and Business Research .

Shalini, H. (2013). A Study on Causes and Remedies for Non Performing Assets in
Indian Public Sector Banks with Special Reference to Agricultural Development
Branch, State of Mysore. International Journal of Business and Management .

Shyamla, A. (2012). NPAS in Indian Banking Sector. Indian Streams Research Journal .

Sima, V. (2013). A Comparative Analysis of NPA Management Between SBI and CBI.
Indian Journal of Research .

Sinkey, & Greenwalt. (1991). Loan Loss Exprience and Risk Taking Behavior at Large
Commercial Banks. Journal of Financial Services Research .

Siraj, K., & Sudarsanan, D. P. (2012). A Study on the Performance of Non Performing
Assets of Indian Banking During Post Millennium Period. International Journal
of Business and Management .

Sthapit. (2009, April Friday). Global Financial Crisis and Poor Nations: Bearing Others'
Burden. p. 2.

Venkata, V., & Murali, M. (2012). Non Performing Assets: An Indian Perspective.

Vivek, S., & Deepak, B. (2012). A Study of Trends of Non Performing Assets in Private
Banks in India. Journal in Multidisciplinary and Acaddemic Research.

Shrestha, N. R. (2011). Non Performing Loans and Stock Prices of Nepali Commercial
Banks. Journal of Management , 92.

125
Reports
CBS (2011). Statistical Year Book of Nepal, Kathmandu: Central Bureau of Statistics
NRB (2011). Banking and Financial Institution Statistics: Nepal Rastriya Bank,
Kathmandu
NRB (2011). Unified Directives, Kathmandu: Nepal Rastriya Bank
NRB (2011). Supervision Report, Kathmandu: Nepal Rastriya Bank
NEPSE (2010/11). Financial Statements of Listed Companies, Kathmandu: Nepal Stock
Exchange Limited, Kathmandu Nepal

Websites
www.nepalstock.com
www.nrb.org.np
www.sebon.gov.np
www.google.com

126
Appendices

127
 Appendix A
Nepalese Commercial Banks
Correlations coefficient
NPL LATA LATD NPALA RL RIR GDP INF SIZE GL NPLt-1
Pearson NPL 1.000 -.449 -.491 .454 -.188 .152 -.100 -.221 .112 -.210 .756
Correlation
LATA -.449 1.000 .904 -.003 -.199 .029 .015 .070 -.462 .236 -.417
LATD -.491 .904 1.000 -.115 -.099 -.042 .025 .043 -.399 .325 -.451
NPALA .454 -.003 -.115 1.000 -.644 .146 -.107 -.069 -.095 -.198 .272
RL -.188 -.199 -.099 -.644 1.000 -.025 .120 .156 .182 .036 .251
RIR .152 .029 -.042 .146 -.025 1.000 -.163 -.209 -.339 .057 .242
GDP -.100 .015 .025 -.107 .120 -.163 1.000 .073 .160 .013 -.023
INF -.221 .070 .043 -.069 .156 -.209 .073 1.000 .348 -.175 -.094
SIZE .112 -.462 -.399 -.095 .182 -.339 .160 .348 1.000 -.253 .140
GL -.210 .236 .325 -.198 .036 .057 .013 -.175 -.253 1.000 -.126
NPLt-1 .756 -.417 -.451 .272 .251 .242 -.023 -.094 .140 -.126 1.000
Sig. (1-tailed) NPL . .000 .000 .000 .006 .021 .092 .001 .067 .002 .000
LATA .000 . .000 .485 .004 .350 .423 .176 .000 .001 .000
LATD .000 .000 . .063 .092 .287 .370 .283 .000 .000 .000
NPALA .000 .485 .063 . .000 .025 .076 .180 .102 .004 .000
RL .006 .004 .092 .000 . .367 .055 .018 .007 .317 .000
RIR .021 .350 .287 .025 .367 . .015 .002 .000 .224 .001
GDP .092 .423 .370 .076 .055 .015 . .165 .016 .431 .381
INF .001 .176 .283 .180 .018 .002 .165 . .000 .009 .105
SIZE .067 .000 .000 .102 .007 .000 .016 .000 . .000 .031
GL .002 .001 .000 .004 .317 .224 .431 .009 .000 . .046
NPLt-1 .000 .000 .000 .000 .000 .001 .381 .105 .031 .046 .
N NPL 180 180 180 180 180 180 180 180 180 180 180
LATA 180 180 180 180 180 180 180 180 180 180 180
LATD 180 180 180 180 180 180 180 180 180 180 180
NPALA 180 180 180 180 180 180 180 180 180 180 180
RL 180 180 180 180 180 180 180 180 180 180 180
RIR 180 180 180 180 180 180 180 180 180 180 180
GDP 180 180 180 180 180 180 180 180 180 180 180
INF 180 180 180 180 180 180 180 180 180 180 180
SIZE 180 180 180 180 180 180 180 180 180 180 180
GL 180 180 180 180 180 180 180 180 180 180 180
NPLt-1 180 180 180 180 180 180 180 180 180 180 180

Model Summary R Square and Adjusted R Square

Std. Error Change Statistics

Model Adjusted
R R Square of the
R Square Durbin-
Estimate
R Square Sig. F Watson
F Change df1 df2
Change Change

1 .881(a) .776 .763 5.75010 .776 58.470 10 169 .000 1.597

a Predictors: (Constant), NPLt-1, GDP, INF, GL, NPA LA, RIR, LA TA, SIZE, RL, LA TD
b Dependent Variable: NPL

128
 Regression Coefficients
Standardized
Unstandardized Coefficients t Sig.
Coefficients
Model
B Std. Error Beta B Std. Error

(Constant) 17.814 3.312 5.379 .000

LATA -.170 .072 -.222 -2.344 .020
LATD .026 .052 .047 .497 .620
NPALA -.225 .161 -.085 -1.401 .163
RL -.855 .111 -.468 -7.664 .000
RIR -.194 .127 -.063 -1.525 .129
GDP -.483 .566 -.032 -.853 .395
INF -.374 .192 -.082 -1.950 .053
SIZE -.012 .031 -.019 -.381 .704
GL -2.073 1.005 -.084 -2.062 .041
NPLt-1 .823 .052 .823 15.708 .000
a Dependent Variable: NPL

Appendix B
State Owned Banks
Model Summary R Square and Adjusted R Square

Adjusted R Std. Error of Change Statistics Durbin-

Model
R R Square Square the Estimate R Square Sig. F Watson
Change F Change df1 df2 Change
1 .891(a) .795 .687 10.80771 .795 7.353 10 19 .000 1.575
a Predictors: (Constant), NPLt-1, GDP, GL, INF, NPA LA, LA TA, SIZE, RIR, RL, LATD
b Dependent Variable: NPL

Regression Coefficients
Standardized
Unstandardized Coefficients t Sig.
Coefficients
Model
B Std. Error Beta B Std. Error

(Constant) 52.158 16.576 3.147 .005

LATA -.645 .314 -.709 -2.053 .054
LATD .400 .222 .625 1.805 .087
NPALA -1.571 1.004 -.270 -1.565 .134
RL -1.262 .344 -.639 -3.669 .002
RIR .351 .822 .071 .427 .674
GDP -2.689 2.680 -.111 -1.003 .328
INF -2.071 1.019 -.282 -2.032 .056
SIZE -.027 .175 -.024 -.155 .879
GL -7.785 14.942 -.065 -.521 .608
NPLt-1 .697 .182 .704 3.837 .001
a Dependent Variable: NPL

129
 Correlations Coefficient
NPL LATA LATD NPALA RL RIR GDP INF SIZE GL NPLt-1
Pearson NPL 1.000 -.407 -.421 -.110 -.162 .303 -.220 -.543 -.249 -.147 .598
Correlation
LATA -.407 1.000 .923 .448 -.093 .073 -.011 -.036 -.197 .166 -.319
LATD -.421 .923 1.000 .505 -.070 -.056 .039 .103 -.041 .095 -.366
NPALA -.110 .448 .505 1.000 -.574 -.100 .101 -.034 -.209 -.146 -.298
RL -.162 -.093 -.070 -.574 1.000 .295 -.040 .187 .111 .213 .488
RIR .303 .073 -.056 -.100 .295 1.000 -.163 -.209 -.538 -.101 .546
GDP -.220 -.011 .039 .101 -.040 -.163 1.000 .073 .240 .036 -.142
INF -.543 -.036 .103 -.034 .187 -.209 .073 1.000 .458 .083 -.284
SIZE -.249 -.197 -.041 -.209 .111 -.538 .240 .458 1.000 .219 -.165
GL -.147 .166 .095 -.146 .213 -.101 .036 .083 .219 1.000 .161
NPLt-1 .598 -.319 -.366 -.298 .488 .546 -.142 -.284 -.165 .161 1.000
Sig. (1-tailed) NPL . .013 .010 .282 .196 .052 .121 .001 .092 .219 .000
LATA .013 . .000 .007 .312 .351 .476 .426 .148 .191 .043
LATD .010 .000 . .002 .357 .385 .418 .294 .414 .308 .023
NPALA .282 .007 .002 . .000 .300 .297 .430 .134 .221 .055
RL .196 .312 .357 .000 . .056 .417 .161 .280 .129 .003
RIR .052 .351 .385 .300 .056 . .195 .134 .001 .298 .001
GDP .121 .476 .418 .297 .417 .195 . .351 .101 .425 .227
INF .001 .426 .294 .430 .161 .134 .351 . .005 .331 .064
SIZE .092 .148 .414 .134 .280 .001 .101 .005 . .122 .192
GL .219 .191 .308 .221 .129 .298 .425 .331 .122 . .198
NPLt-1 .000 .043 .023 .055 .003 .001 .227 .064 .192 .198 .
N NPL 30 30 30 30 30 30 30 30 30 30 30
LATA 30 30 30 30 30 30 30 30 30 30 30
LATD 30 30 30 30 30 30 30 30 30 30 30
NPALA 30 30 30 30 30 30 30 30 30 30 30
RL 30 30 30 30 30 30 30 30 30 30 30
RIR 30 30 30 30 30 30 30 30 30 30 30
GDP 30 30 30 30 30 30 30 30 30 30 30
INF 30 30 30 30 30 30 30 30 30 30 30
SIZE 30 30 30 30 30 30 30 30 30 30 30
GL 30 30 30 30 30 30 30 30 30 30 30
NPLt-1 30 30 30 30 30 30 30 30 30 30 30

Appendix C
Joint Venture Banks
Model Summary R Square and Adjusted R Square

Change Statistics
Model R Adjusted R Std. Error of R Durbin-
R Square Square the Estimate Square Sig. F Watson
Change F Change df1 df2 Change
1 .957(a) .916 .901 2.35372 .916 64.126 10 59 .000 2.562
a Predictors: (Constant), NPLt-1, LATA, GDP, INF, RIR, RL, GL, SIZE, NPALA, LATD
b Dependent Variable: NPL

130
 Correlation Coefficient
NPL LATA LATD NPALA RL RIR GDP INF SIZE GL NPLt-1
Pearson NPL 1.000 .019 -.203 .839 -.417 .117 -.094 -.135 -.469 -.424 .832
Correlation
LATA .019 1.000 .946 .078 -.200 -.077 .074 .149 .096 .205 .010
LATD -.203 .946 1.000 -.174 -.008 -.101 .072 .134 .098 .284 -.158
NPALA .839 .078 -.174 1.000 -.721 .161 -.174 -.091 -.308 -.453 .596
RL -.417 -.200 -.008 -.721 1.000 -.101 .188 .189 .111 .308 -.016
RIR .117 -.077 -.101 .161 -.101 1.000 -.163 -.209 -.495 .075 .173
GDP -.094 .074 .072 -.174 .188 -.163 1.000 .073 .232 .138 .044
INF -.135 .149 .134 -.091 .189 -.209 .073 1.000 .524 -.031 -.033
SIZE -.469 .096 .098 -.308 .111 -.495 .232 .524 1.000 -.078 -.445
GL -.424 .205 .284 -.453 .308 .075 .138 -.031 -.078 1.000 -.220
NPLt-1 .832 .010 -.158 .596 -.016 .173 .044 -.033 -.445 -.220 1.000
Sig. (1-tailed) NPL . .439 .046 .000 .000 .168 .219 .133 .000 .000 .000
LATA .439 . .000 .261 .049 .262 .270 .109 .216 .044 .467
LATD .046 .000 . .075 .474 .203 .278 .135 .209 .009 .096
NPALA .000 .261 .075 . .000 .092 .075 .228 .005 .000 .000
RL .000 .049 .474 .000 . .203 .060 .058 .181 .005 .449
RIR .168 .262 .203 .092 .203 . .089 .041 .000 .268 .076
GDP .219 .270 .278 .075 .060 .089 . .274 .027 .128 .359
INF .133 .109 .135 .228 .058 .041 .274 . .000 .398 .393
SIZE .000 .216 .209 .005 .181 .000 .027 .000 . .261 .000
GL .000 .044 .009 .000 .005 .268 .128 .398 .261 . .034
NPLt-1 .000 .467 .096 .000 .449 .076 .359 .393 .000 .034 .
N NPL 70 70 70 70 70 70 70 70 70 70 70
LATA 70 70 70 70 70 70 70 70 70 70 70
LATD 70 70 70 70 70 70 70 70 70 70 70
NPALA 70 70 70 70 70 70 70 70 70 70 70
RL 70 70 70 70 70 70 70 70 70 70 70
RIR 70 70 70 70 70 70 70 70 70 70 70
GDP 70 70 70 70 70 70 70 70 70 70 70
INF 70 70 70 70 70 70 70 70 70 70 70
SIZE 70 70 70 70 70 70 70 70 70 70 70
GL 70 70 70 70 70 70 70 70 70 70 70
NPLt-1 70 70 70 70 70 70 70 70 70 70 70

131
 Regression Coefficients
Standardized
Unstandardized Coefficients t Sig.
Coefficients
Model
B Std. Error Beta B Std. Error

(Constant) 4.885 2.251 2.170 .034

LATA .386 .165 .549 2.340 .023
LATD -.311 .129 -.551 -2.407 .019
NPALA .368 .160 .265 2.297 .025
RL -.058 .103 -.052 -.564 .575
RIR -.273 .087 -.140 -3.156 .003
GDP -.003 .396 .000 -.007 .995
INF .030 .140 .010 .215 .831
SIZE -.121 .032 -.265 -3.785 .000
GL -6.175 1.980 -.153 -3.119 .003
NPLt-1 .453 .087 .453 5.232 .000
a Dependent Variable: NPL

Appendix D
Private Banks
Model Summary R Square and Adjusted R Square

Std. Error
R Adjusted of the Change Statistics Durbin-
Model
R Square R Square Estimate R Square Sig. F Watson
Change F Change df1 df2 Change
1 .889(a) .791 .760 3.28680 .791 26.044 10 69 .000 2.228
a Predictors: (Constant), NPLt-1, RL, GL, GDP, INF, RIR, LATA, LATD, SIZE, NPA LA
b Dependent Variable: NPL

Regression Coefficients
Standardized
Unstandardized Coefficients t Sig.
Coefficients
Model
B Std. Error Beta B Std. Error

(Constant) 9.701 4.451 2.180 .033

LATA .063 .076 .072 .819 .416
LATD -.099 .041 -.217 -2.402 .019
NPALA .495 .303 .282 1.631 .107
RL -.283 .254 -.178 -1.117 .268
RIR -.313 .122 -.179 -2.569 .012
GDP .154 .514 .018 .300 .765
INF -.194 .194 -.075 -1.002 .320
SIZE -.218 .085 -.246 -2.568 .012
GL -1.285 .659 -.128 -1.948 .055
NPLt-1 .476 .085 .477 5.585 .000
a Dependent Variable: NPL

132
 Correlations Coefficient
NPL LATA LATD NPALA RL RIR GDP INF SIZE GL NPLt-1
Pearson NPL 1.000 -.264 -.457 .727 -.437 .164 -.069 -.168 -.358 -.188 .698
Correlation
LATA -.264 1.000 .671 -.113 -.158 .150 -.012 .172 .042 .164 -.242
LATD -.457 .671 1.000 -.312 .040 -.017 -.005 -.043 -.108 .361 -.377
NPALA .727 -.113 -.312 1.000 -.826 .219 -.100 -.058 -.253 -.154 .404
RL -.437 -.158 .040 -.826 1.000 -.201 .186 .114 .158 .011 .009
RIR .164 .150 -.017 .219 -.201 1.000 -.163 -.209 -.515 .082 .215
GDP -.069 -.012 -.005 -.100 .186 -.163 1.000 .073 .255 -.016 .024
INF -.168 .172 -.043 -.058 .114 -.209 .073 1.000 .578 -.282 -.021
SIZE -.358 .042 -.108 -.253 .158 -.515 .255 .578 1.000 -.342 -.286
GL -.188 .164 .361 -.154 .011 .082 -.016 -.282 -.342 1.000 -.081
NPLt-1 .698 -.242 -.377 .404 .009 .215 .024 -.021 -.286 -.081 1.000
Sig. (1-tailed) NPL . .009 .000 .000 .000 .073 .272 .069 .001 .047 .000
LATA .009 . .000 .160 .080 .092 .457 .064 .355 .074 .015
LATD .000 .000 . .002 .362 .442 .483 .353 .170 .000 .000
NPALA .000 .160 .002 . .000 .026 .189 .305 .012 .086 .000
RL .000 .080 .362 .000 . .037 .049 .158 .081 .460 .469
RIR .073 .092 .442 .026 .037 . .075 .031 .000 .234 .027
GDP .272 .457 .483 .189 .049 .075 . .260 .011 .445 .418
INF .069 .064 .353 .305 .158 .031 .260 . .000 .006 .425
SIZE .001 .355 .170 .012 .081 .000 .011 .000 . .001 .005
GL .047 .074 .000 .086 .460 .234 .445 .006 .001 . .238
NPLt-1 .000 .015 .000 .000 .469 .027 .418 .425 .005 .238 .
N NPL 80 80 80 80 80 80 80 80 80 80 80
LATA 80 80 80 80 80 80 80 80 80 80 80
LATD 80 80 80 80 80 80 80 80 80 80 80
NPALA 80 80 80 80 80 80 80 80 80 80 80
RL 80 80 80 80 80 80 80 80 80 80 80
RIR 80 80 80 80 80 80 80 80 80 80 80
GDP 80 80 80 80 80 80 80 80 80 80 80
INF 80 80 80 80 80 80 80 80 80 80 80
SIZE 80 80 80 80 80 80 80 80 80 80 80
GL 80 80 80 80 80 80 80 80 80 80 80
NPLt-1 80 80 80 80 80 80 80 80 80 80 80

133
 Appendix E

(Without using the lagged variable)

Model Summary R Square and Adjusted R Square

Std. Error Change Statistics

Model Adjusted Durbin-
R R Square of the
R Square Watson
Estimate R Square F Sig. F
df1 df2
Change Change Change

1 .670a .448 .419 8.99226 .448 15.354 9 170 .000 .647

a. Predictors: (Constant), GL, GDP, RLA, RIR, INF, LATA, SIZE, NPALA, LATD
b. Dependent Variable: NPL

(Without using the lagged variable)

Regression Coefficients
Standardized
Unstandardized Coefficients t Sig.
Coefficients

B Std. Error Beta B Std. Error

Model
1 (Constant) 29.738 5.042 5.899 .000
LATA -.165 .113 -.216 -1.456 .147
LATD -.110 .080 -.199 -1.378 .170
NPALA 1.170 .210 .442 5.580 .000
RLA .111 .145 .061 .761 .448
RIR .183 .195 .060 .937 .350
GDP -.530 .885 -.035 -.599 .550
INF -.833 .297 -.183 -2.807 .006
SIZE .028 .048 .045 .595 .553
GL -.804 1.567 -.033 -.513 .608
a. Dependent Variable: NPL

134
 Appendix F
Questionnaire on Non-performing Assets of Nepalese Commercial Banks
Non-performing Assets of Nepalese Commercial Banks
Dear Respondent,

This is a survey conducted to meet the academic requirement by a MBA (Finance) student to submit the
graduate research project report Non-performing Assets of Nepalese commercial banks. I would be
thankful if you could take few minutes and complete this questionnaire for giving feedback on the NPA of
Nepalese commercial bank. Your response will be used at aggregate level and will be kept quite
confidential.

A. General Information

Name (optional)…………………………………..........
Number of Years in banking Career………………….
Gender (Please make a tick mark): Female [ ] Male [ ]
Academic qualification: ………………………………
Position: ……………………….
Department: …………………………..
Age group: ….. <30 …… 30 to39 ……above 40
Bank Name……………………………………………

Questionnaire

B. Please make a tick mark in an appropriate option for each of the following questions

1. In your view, what is the trend of Non-performing Assets of your bank?

 Increasing
 Decreasing
 Stable

2. The Non-performing Assets of the bank is measured by

 Loan & Advances to Total Assets
 Non-performing Assets to Loan & Advances
 Loan & Advances to Total Deposit
 Return on Loan & Advances
 All of above

3. Do you believe that Non-performing Assets will affect on the bank profitability?
 Yes
 No
 Not sure

4. Do you think that firm specific variables and economics variable (firm size, real interest
rate, loan growth rate, GDP, inflation) is sufficient to analyze the Non-Performing Assets
of commercial banks?

135
  Yes
 No
 Not sure

5. Do you think that Joint venture banks are dominating the private and public sectors banks
 Yes
 No
 Not sure

6. Do you believe that increase / decrease changes in NPA affect the bank’s shareholders?
 Yes
 No
 Not sure

7. What are the factors that most affect the Non-performing Assets of commercial banks?
Please, rank the following by attaching one to the most important one and so on

 Firm size [ ]

 Loan growth rate [ ]

 Real interest rate [ ]

 Inflation [ ]

 GDP [ ]

8. What are the reasons for Assets becoming Non-performing Assets?

 Managerial deficiencies during work
 Lack of knowledge of the area of handling
 Lack of timely actions
 Lack of adequate efforts for recovery
 Lack of proper verification of the genuine purpose of Loan & Advances

9. What are the internal reasons for turning good loan into bad loan?
 Defective lending process
 Inappropriate technology
 Poor credit appraisal system
 Managerial deficiencies
 All of above

10. What are the external factors that causes for NPA?
 Willful Defaults
 Industrial Sickness
 Lack of demand
 Change on Govt. policies
 All of above

136
C. Please specify your level of agreement or disagreement with following statements. [Strongly agree = 5,
Agree = 4, Neutral= 3, Disagree = 2, strongly disagree = 1]
Q.N. Statement 1 2 3 4 5

1 It is widely accepted that the percentage of non-performing loans (NPLs) is often

associated with bank failures and financial crises in both developing and developed
countries.

2 Rapid credit growth is often associated with higher NPLs.

3 Return on loan and advances ratio indicates how efficiently the bank has employed its
resources in the forms of loan and advances.

4 High degree of ratio shows the strong positive relationship between NPLs and Loans &
Advances to total Assets.

5 Both bank specific and macroeconomic factors impacts on the loan portfolios of
commercial banks.

6 Greater CD ratio implies the better utilization of total deposits and better earning.

7 There is significant relationship between NPL and Real interest rate of the bank.

8 Higher the Non Performing Assets higher would be the credit risk and hence Lower
would be the profitability.

9 Lower NPL to total Credit ratio is preferred.

10 Banks would improve NPA level by improving screening and monitoring of credit risk
and such policies involve the forecasting of future levels of risk.

11 The effect of the Bank Size has been proved to be positive to a certain extent. However,
for banks that become extremely large, the effect of size could be negative due to
bureaucratic and other reasons.

12 Non-performing assets tends to be pro-cyclical that is NPA tends to fall during periods
of high GDP and rise during periods of low GDP growth.

13 The Non-performing Assets of commercial banks in Nepal is not as good as expected

due to corruption, high intervention of government, lack of proper policy and higher
lending to the non productive sectors.

D. Do you think there are the alternative ways to reduce the NPA? Explain.

………………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………………
…………………………………………………………………………………………..

137