DETERMINANTS OF CAPITAL ADEQUACY RATIO OF

COMMERCIAL BANKS IN NEPAL

(With Reference to ADBL, NABIL, and NIBL)

A Project Work Report

Submitted By
Elina Adhikari
Caspian Valley College
T.U. Regd. No.: 7-2-0755-0005-2015
Exam Roll No.: 5160022
Campus Roll No.: 22

Submitted To
The Faculty of Management
Tribhuvan University
Kathmandu

In Partial Fulfilment of the Requirements for the Degree of

BACHELOR OF BUSINESS STUDIES (BBS)

Balkumari, Lalitpur
December, 2020
 DECLARATION

I hereby declare that the project work entitled “DETERMINANTS OF

CAPITAL ADEQUACY RATIO OF COMMERCIAL BANKS IN NEPAL
(With Reference to ADBL, NABIL, and NIBL)” submitted to the Faculty of
Management, Tribhuvan University, Kathmandu is an original piece of work
under the supervision of Mr. Shyam Kaji Khatri, Faculty Member, Caspian
Valley College, Lalitpur, and is submitted in partial fulfillment of the
requirements for the award of the degree of Bachelor of Business Studies
(BBS). This project work report has not been submitted to any other university
or institution for the award of any degree or diploma.

…………………………
Elina Adhikari
Caspian Valley College
T.U. Regd. No.: 7-2-0755-0005-2015
Exam Roll No.: 5160022
Campus Roll No.: 22

Date: December, 2020

i
 SUPERVISOR'S RECOMMENDATION

The project work report entitled “DETERMINANTS OF CAPITAL

ADEQUACY RATIO OF COMMERCIAL BANKS IN NEPAL (With
Reference to ADBL, NABIL, and NIBL)” submitted by ELINA ADHIKARI of
CASPIAN VALLEY COLLEGE, KUMARIPATI, LALITPUR is prepared
under my supervision as per the procedure and format requirements laid by the
Faculty of Management, Tribhuvan University, as partial fulfillment of the
requirements for the award of the degree of Bachelor of Business Studies
(BBS). I, therefore, recommend the project work report for evaluation.

…………………………
Mr. Shyam Kaji Khatri
Head of Research Department
And Project Work Supervisor

ii
 ENDORSEMENT

We hereby endorse the Project Work Report entitled “DETERMINANTS OF

CAPITAL ADEQUACY RATIO OF COMMERCIAL BANKS IN NEPAL
(With Reference to ADBL, NABIL, and NIBL)” submitted by ELINA
ADHIKARI of CASPIAN VALLEY COLLEGE, KUMARIPATI, LALITPUR
in partial fulfillment of the requirements for award of the Bachelor of Business
Studies (BBS) for external evaluation.

………………………….. …………………….
Mr. Shyam Kaji Khatri Mr. Gobind Khanal
Head of Research Department Principal
Project Work Supervisor

Date: December, 2020

iii
 ACKNOWLEDGEMENTS

This research study on “DETERMINANTS OF CAPITAL ADEQUACY

RATIO OF COMMERCIAL BANKS IN NEPAL (With Reference to ADBL,
NABIL, and NIBL)” has been prepared as the Partial Fulfilment of Bachelor of
Business Studies (BBS). The interest of the study was arose from the group
discussing with my colleagues by realizing that no much studies have been
conducted in this sector in the context of Nepal.

First of all, I would like to express my heartiest gratitude and sincere thanks to
my project work supervisor and Chairman of Research Committee Mr. Shyam
Kaji Khatri Caspian Valley College, who encouraged me from initial to
completion of this task with their scholarly guidance and profound comment
and suggestions. And further more I would like to thank Principal Mr. Gobind
Khanal.

I would also like to express my respected teachers Mr. Mukund Jha, Gopal
Khatry and staff Mr. Balkrishn Subedi of Caspian Valley Collage who directly
and indirectly supported as well as inspired me to complete this project work.

Lastly, my heartiest thank goes to my family members and college staffs

along with classmates who have supported me by providing consistent
help and encouragement.

Elina Adhikari
December, 2020

iv
 TABLE OF CONTENTS

DECLARATION..........................................................................................................i
SUPERVISOR'S RECOMMENDATION.................................................................ii
ENDORSEMENT.......................................................................................................iii
ACKNOWLEDGEMENTS.......................................................................................iv
TABLE OF CONTENTS............................................................................................v
LIST OF TABLES.....................................................................................................vii
LIST OF FIGURES..................................................................................................viii
ABBREVIATIONS.....................................................................................................ix
ABSTRACTS................................................................................................................x

CHAPTER-I:INTRODUCTION................................................................................1
1.1 Background of the Study..........................................................................................1
1.1.1 Introduction to Sampled Commercial Banks................................................3
1.2 Problem Statement...................................................................................................5
1.3 Objectives of the Study............................................................................................6
1.4 Rationale of the study...............................................................................................6
1.5 Literature Review.....................................................................................................7
1.5.1 Conceptual Review.......................................................................................8
1.5.3 Research Gap...............................................................................................14
1.6 Research Methodology...........................................................................................14
1.6.1 Research Design..........................................................................................14
1.6.2 Population and Sample................................................................................15
1.6.3 Nature and Sources of Data.........................................................................15
1.6.4 Data Collection Procedure..........................................................................15
1.6.5 Data Analysis Tools....................................................................................15
I. Financial Tools.................................................................................................16
II. Statistical Tools...............................................................................................18
1.8 Limitations of the Study.........................................................................................18
1.7 Report Structure.....................................................................................................19

CHAPTER-II:RESULTS AND ANALYSIS...........................................................20

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2.1 Results....................................................................................................................20
2.1.1 Cash Adequacy Ratio (CAR)......................................................................20
2.1.2 Liquidity......................................................................................................22
2.1.3 Profitability Ratio........................................................................................23
4.1.4 Bank Size....................................................................................................26
4.1.5 Interest Rate Margin (NIM)........................................................................27
4.1.6 Credit Risk..................................................................................................29
2.3 Major Findings.......................................................................................................30

CHAPTER-V:SUMMARY AND CONCLUSIONS...............................................33

5.1 Summary................................................................................................................33
5.2 Conclusions............................................................................................................34
BIBLIOGRAPHY
APPENDIX

vi
 LIST OF TABLES

Table No Title Page No

Table 1.1: Minimum Paid Up capital requirement.......................................................10
Table 2. 1: Capital Adequacy Ratio of Sample Banks.................................................21
Table 2. 2: Liquidity Ratio of Sample Banks...............................................................22
Table 2. 3: ROA of Nepalese Commercial banks........................................................24
Table 2. 4: ROE of sample banks.................................................................................25
Table 2. 5: Bank Size of sample banks........................................................................26
Table 2. 6: Interest Rate Margin..................................................................................28
Table 2. 7: Credit Risk of Sample Banks.....................................................................29

vii
 LIST OF FIGURES

Figure No Title Page No

Figure 2. 1: Capital Adequacy Ratio of Sample Banks...............................................21
Figure 2. 2: Liquidity Ratio of Commercial Banks......................................................23
Figure 2. 3: ROA of Nepalese Commercial Banks......................................................24
Figure 2. 4: ROE of Sample Banks..............................................................................25
Figure 2. 5: Bank Size of Sample Banks......................................................................27
Figure 2. 6: Interest Rate Margin.................................................................................28
Figure 2. 7: Credit Risk of Sample Banks....................................................................30

viii
 ABBREVIATIONS

ADBL : Agriculture Development Bank

CAR : Capital Adequacy Ratio
CR : Credit Risk

IRR : Interest Rate Risks

JVBS : Joint Venture Banks
LRR : Loan Reserves Ratio
NIBL : Nepal Investment Bank Limited
NRB : Nepal Rastra Bank
OLS : Ordinary Least Square
ROA : Return on Assets
ROE : Return on Equity
SAP : Structural Adjustment Programme
TA : Total Asset
TL : Total Loan

ix
 ABSTRACTS

This study analyzes the determinants of the capital adequacy ratio of

commercial banks in Nepal. There are 27 commercial banks in Nepal. Among
them three commercial banks have been taken for sample i.e. ADBL, NABIL
and NIBL for judgmentally sampling. Secondary data have obtained from
commercial banks annual reports fiscal year 2014/15 to 2018/19.

The average Capital Adequacy Ratio (CAR), liquidity, NIM, credit risk of
ADBL is greater than NABIL and NIBL. The average ROE, bank size, total
loan, of NIBL is greater than ADBL and NABIL. The total deposit and total
assets of NABIL is greater than ADBL and NIBL.
The Pearson correlation has used to find the relationship between variables at
5% level of confidence. The correlation between the CAR and CRR, ROA,
ROE, CR, BS, NIM, TL, TD, TA are 0.892, 0.482, -0.661, 0.842, 0.040, 0.656,
-0.049, -0.394, and -0.247 respectively. The relationship between CAR and
CRR, ROA, CR, BS, and NIM has positive relation. The CAR and ROE, TL,
TD and TA has negative relations. Dependent variable CAR is significant at
1% probability level.
The R-Square, which is, also a measure of the overall fitness of the model
indicates that the model is capable of explaining about 94.80 of the variability
the share prices of banks. Its means that the independent variable i.e. CRR,
ROE, ROA, credit risk, bank size, NIM, total loan, total deposit, total assets has
effect the net profit variable in 94.80% and 5.20% effect the other factors.

The p value is 0.010 and Alpha value is 0.05. The p value is less than Alpha
value. There is significance relationship between CAR and CRR, ROE, ROA,
credit risk, bank size, NIM, total loan, total deposit, and total assets of sample
banks.

x
 CHAPTER-I
INTRODUCTION

1.1 Background of the Study

A strong and sound financial system can promote economic growth, mobilize
and allocate resources efficiently, make capital more productive and create
jobs. It lessens vulnerability to financial crisis and defrays the economic and
social costs that accompany financial disruption. Since the financial system
performs the crucial task of raising funds for, and channeling funds to
productive investment, successful financial liberalization is normally a
significant constituent of a country’s strategy for economic growth. In Nepal,
the pace of financial liberalization started in the mid-1980s when the
government allowed the entry of commercial banks in joint venture with
foreign bank. Since then, the Nepalese financial system has undergone rapid
structural changes, with a large number of financial institutions rendering an
array of financial products and services. While the increased competition has
been instrumental in enhancing efficiency in the financial sector, new
challenges have also emerged (Thapa, 2017).

These lenders can supply funds to the ultimate borrowers, who are mainly
firms, governments and households, in two ways. The first is through financial
markets, which consist of money markets, bond markets and equity markets.
The second is through banks and other financial intermediaries such as money
market funds, mutual funds, insurance companies and pension funds. It
emphasizes the importance of capital by arguing that “capital is pivotal to
everything that a bank does, and changing it... has wide-ranging implications
for bank management and bank investors.” Specifically, he suggests
that changing capital requirements has the effect of changing banks’ behaviour
towards risk because capital levels (i) constrain a key performance measure
(return on equity); (ii) influence a bank’s ability to lend and spend; and (iii)
limit dividends and capital repatriation. Capital, therefore, is the cushion that
1
protects banks from insolvency. But bank failure may occur because of
illiquidity even if a bank is solvent. Is not this exactly what happened to
Northern Rock, which endured a bank run on its deposits in September 2007
A.D. Then what is so good for the bank itself about being solvent if, as a result
of a loss event, it is not in a position to resume business as usual. Solvent or
insolvent, Northern Rock could not resume business as usual, creating
significant problems for the British government and forcing the nationalization
of the bank in February 2008 (Ghimire, 2018).

The importance of banking system for financial economy, it is worthwhile to

make a detail study of capital adequacy of such financial institutions. Adequacy
is one of the most important topics for both regulatory authorities and banks. It
represents the most important element of banks stability and solidarity, in
this regard regulatory authorities have worked on introducing different
measures of adequacy, the most prominent of which was the capital
adequacy approved by Basel committee in (1983). And applied by more
than (100) countries, furthermore the application of that standard during the last
years resulted in many weaknesses that led the committee to make some
modifications on that standard and, ultimately, suggesting a new standard to
measure adequacy under the name Basel II (Basel Committee on Banking
Supervision, 1983: 4).

A bank’s capital forms the safety net or cushion that allows it to remain solvent
and to continue operating despite unexpected macroeconomic or institutional
difficulties. Capital also enforces discipline in private banks since they must
subject themselves to market scrutiny in order to augment their capital base.
Too low a level of capital as a percentage of total assets can subject the bank to
a disproportionate risk of failure if adversity strikes. On the other hand, too
high a capital base will reduce the gearing or leverage, thus requiring the bank
to push up margins and fees in order to general a fair return to investor.

Commercial banks are legally required to maintain adequate capital funds. The
primary function of bank capital is to provide resources to absorb possible
2
future losses on assets. How much capital should a commercial bank have?
Banks generally prefer a lower level of capital to maximize on return on equity
while regulatory agencies prefer a higher level to protect market stability
(Desai 2015).

1.1.1 Introduction to Sampled Commercial Banks

A. Agriculture Development Bank

Agricultural Development Bank Limited (ADBL) is an autonomous

organization largely owned by Government of Nepal. The bank has been
working as a premier rural credit institution since the last three decades,
contributing a more than 67 percent of institutional credit supply in the
country. The main objective of providing institutional credit for enhancing the
production and productivity of the agricultural sector in the country, the
Agricultural Development Bank, Nepal has established in 1968 under the
ADBN Act 1967, as successor to the cooperative Bank. The Land Reform
Savings Corporation has merged with ADBN in 1973. Subsequent
amendments to the Act empowered the bank to extend credit to small farmers
under group liability and expand the scope of financing to promote cottage
industries. The amendments also permitted the bank to engage in commercial
banking activities for the mobilization of domestic resources. The bank
worked as a premier rural credit institution since its establishment,
contributing substantial agricultural credit supply in the country. Rural finance
has been the principal operational area of ADBN in the past. However, the
bank is also involved in commercial banking operations since 1984, to provide
commercial banking services.

The bank has 51% share of Government of Nepal and 49% of public. Most of
its shareholders are customers and employees. The enactment of Banks and
Financial Institutions Act (BAFIA) took all the banks and financial institutions
(BFIs) under its umbrella and abolished all the acts related to the BFIs
including the ADBN Act, 1967. Since then, the bank has been working as a

3
public limited company registered under the Companies Act, 2006 and has
licensed as "A class financial institution" by Nepal Rastra Bank from 2006.

Having glorious history of more than 52 years, the bank is one of the leading
commercial banks of the country. With its investment in agriculture, industry,
trade, commerce and households, the bank has above 1.2 million happily
satisfied customers. Just like its slogan "Sampurna Banking Suvidha sahitko
Tapai Hamro Ghar Aanganko Bank" (The bank with complete banking solution
at your own door step), it is spread all over the 7 provinces & 77 districts of the
nation with its 278 offices. While providing comprehensive services with
complete banking solution, the bank has main motto of promoting rural
agriculture, productive and deprived sectors. The bank is committed to provide
best banking services through its widespread network and help the government
from its part, to achieve the aim of "Prosperous Nepal, Happy Nepali".

B. Nabil Bank Limited

NABIL Bank Limited, the first foreign joint venture bank of Nepal, started
operations in 12 July 1984. It is class “A” licensed commercial bank regulated
under the Banks and financial institutions Act 2017 A.D. NABIL Bank
Limited (“the Bank”) is a public limited company listed on the Nepal Stock
Exchange, incorporated on May 11, 1984 under the Companies Act 2006 A.D.
of Nepal, and is domiciled in Nepal. The Bank has its registered office at
‘NABIL Center’, Tindhara, Durbarmarg, Kathmandu-01, Nepal and its branch
offices are located across the Nepal. It was incorporated with the objective of
extending international standard modern banking services to various sectors of
the society. Pursuing its objective, NABIL provides a full range of
commercial banking services through its 62 points of representation. In
addition to this, NABIL has presence through over 1500 NABIL Remit agents
throughout the nation. NABIL, as a pioneer in introducing many innovative
products and marketing concepts in the domestic banking sector, represents a
milestone in the banking history of Nepal as it started an era of modern
banking with customer satisfaction measured as a focal objective while doing

4
business. NABIL Bank is moving forward with a mission to be “1 st Choice
Provider of Complete Financial Solutions” for all its stakeholders, Customers,
Shareholders, Regulators, and Communities & Staff. It is reflected in its
Brand Promise “Together Ahead”.

A. Nepal Investment Bank Limited

Nepal Investment Bank Limited is one of the leading commercial banks of

Nepal. Previously known as Nepal Indosuez Bank Ltd., the bank was
established in 1986 as a joint venture between Nepalese and Credit Agricole
Indosuez. The Nepalese investors bought all the shares of French company i.e.
50% in 2001. From then the Nepalese investors have raised this bank to one of
the most trusted and popular bank in the country. Till date it has 78 branches, 8
Extension Counters (98 ATM outlets) scattered throughout the country giving
modern banking services of international class from 9:30am to 7pm evening.

Nepal Investment Bank Ltd. (NIBL), previously Nepal Indosuez Bank Ltd.,
was established in 1986 as a joint venture between Nepalese and French
partners. The French partner (holding 50% of the capital of NIBL) was Credit
Agricole Indosuez, a subsidiary of one of the largest banking group in the
world. Later, in 2002 a group of Nepalese companies comprising of bankers,
professionals, industrialists and businessmen acquired the 50% shareholding of
Credit Agricole Indosuez in Nepal Indosuez Bank Ltd., and accordingly the
name of the Bank also changed to Nepal Investment Bank Ltd.

1.2 Problem Statement

There are different researches that have done before on capital adequacy in
different countries. Theoretical as well as empirical evidence has been
presented by the researchers there insights on capital adequacy. A brief
overview of the studies focusing on developed factors that may affect capital
adequacy.
Banks capital plays a very important role in maintaining safety and solidarity of
banks and the security of banking systems. In general as it represents the buffer
gate that prevents any unexpected loss that banks might face, which might

5
reach depositors funds, given that banks operate in a highly uncertain
environment that might lead to their exposure to various risks, and losses,.
That might result from risks facing banks, and can be divided into two major
types (considering the ability to predict losses occurrences and their size). The
expected losses: losses that occur frequently to any bank, and their size is often
small. The problem statement of the research study can be stated as:
1. What is the major factor of determinants of capital adequacy ratio?
2. What is the profitability position of sample banks?

1.3 Objectives of the Study

The main objective of the study is to investigate empirically the determinants
of CAR in commercial banks in Nepal. The study period covered the year
2014/15 to 2018/19 on which three banks are selected based on availability of
five years data. The study use secondary data, which has gathered from annual
reports of the banks under study. The other objectives are:
1. To study the major determination factor of Capital Adequacy Ratio of
sample banks.
2. To analyze the profitability of sample banks.

1.4 Rationale of the study

The study is concerned with the capital adequacy ratio of banking sector.
Nepalese banking sector does not have a long history, hence, it provide a
glimpse of management of capital by nascent banking sector. Studying banking
sector of Nepal is interesting in the sense there are many banks with foreign
investment and such banks are supposed to be an efficient manager of capital.
The study makes some major contributions to the literature of capital adequacy
ratio in banking sector. Firstly, this is probably first study to analyze different
hypotheses related to determinants of capital adequacy for banking sector in
Nepal. Secondly, this study also examines the explanatory power of various
bank specific characteristics of two different banks to test the robustness of the
results found for the overall banking sector. Thirdly, the study also provides

6
various policy implications and suggestions for efficient management of
capital.

1.5 Literature Review

Review of literature is a way to discover what other research in the area stated
problem has uncovered. It provides foundation for present study, establishes a
point of departure for future research, avoids needles duplication of costly
effort, and reveals areas of needed research. It enables the researcher to know
about what research has done in the subject, what theories have advanced the
approach taken by other researchers and shows gap to fill through the proposed
research (Panta, 2016).

The capital adequacy ratio has calculated by dividing a bank's capital by its
risk-weighted assets. The capital adequacy ratio (CAR) is a measurement of a
bank's available capital expressed as a percentage of a bank's risk-weighted
credit exposures. The capital adequacy ratio, also known as capital-to-risk
weighted assets ratio (CAR), has used to protect depositors and promote the
stability and efficiency of financial systems around the world. Two types of
capital has measured: tier-1 capital, which can absorb losses without a bank
being required to cease trading, and tier-2 capital, which can absorb losses in
the event of a winding-up and so provides a lesser degree of protection to
depositors.

This group of ten countries, known as the G-10 countries, included Belgium,
Canada, France, Germany, Holland, Italy, Japan .Sweden, the United Kingdom
and the United States. Since inception, the Basel Committee on Banking
Supervision has met regularly at the Bank for International Settlement in Basel,
Switzerland. The Basel conduct 1975 provided a general statement on the
responsibilities of national authorities for the supervision of international
banks. This conduct has revised in 1983, paving the way for more standardized
methods of bank supervision among central banks around the world.

7
1.5.1 Conceptual Review

I. Capital and level of capital required

Capital, in its simplest form, represents the portion of the value of a bank’s
assets that has not legally required to be repaid to anyone. In more complicated
forms, it can include portions of the value that do have to be repaid but only far
in the future. Capital has intended to protect certain parties from losses,
including depositors, bank customers, and bank counterparties. Any losses that
occur would fall instead on the owners of the bank or occasionally some other
party which is lesser concern to those establishing the capital rules. Regulators
and rating agencies are generally not directly concerned about losses ultimately
falling on shareholders of the bank, since they have purchased the shares
knowing that they share both the upside and the risks of ownership (Thapa,
2017).
Bank capital consists of own sources of asset financing. The volume of capital
is an equivalent of the net assets worth, representing the margin by which
assets outweigh liabilities. Assets equal to capital is what would be left for
bank owners to split up after all depositors and creditors have been satisfied.
On a bank’s books, own funds (shareholders 'equity, own capital) break down
into the following items:
 Share capital;
 Capital funds;
 Profit-generated funds (with the legal reserve fund as a typical
example);
 Profits/losses from previous periods (retained earnings; unsettled
losses are reported as a negative item);
 Current year’s results (profit; loss reported as a negative item);
 Loan loss reserves

Capital is supposed to protect bank from all sorts of uninsured and unsecured
risks apt to turn into losses. This is where we get to the two principal functions
of capital – to absorb losses and to build and maintain confidence in a bank. So
8
how much capital does a commercial bank need. There is no single correct
measure for how much capital a bank needs, partly because it is a judgment call
and partly because it depends on the viewpoint of the party making the
measurement. Banks generally look to maintain capital that equals or exceeds
the maximum of four gauges described below. Thus, the most conservative key
constituency determines the level of capital a bank will hold (Van Horne,
2009).
 Regulatory capital requirements: Bank regulators such as Nepal Rastra
Bank (NRB) in Nepal and Federal Deposit Insurance Corporate (FDIC)
in USA set forth most binding capital requirements for banks so as to
hold sufficient capital for bank to maintain adequate risk.
 Rating agency capital requirements: In an international context and fair
bit of national context, ratings from Standard and Poor’s, Moody’s and
Fitch in US and European context, and ICRA in Nepal has an important
implication to level of capital as the cost of raising funds through issue
of debt and preferred shares is considerably affected by credit ratings.
For instance, a lower rating (DDD, conversely AAA is a higher rating)
by ICRA Nepal indicates high default risks which is based on its relative
capability of the corporate entity to timely service debts and obligations.
These ratings have bearings on the cost as well as subscription of
instruments, which affect the level of capital of banks.
 Investor-determined capital requirements: Under unusual circumstances,
such as sometimes occurred in the recent financial crisis, banks may
discover that participants in the financial markets view the right capital
level differently from the regulators or the rating agencies. For example,
at the turn of 2009 some of the big banks found that investors were
deeply concerned about the level of their tangible common equity as a
percentage of total assets. Banks could not afford to ignore this
perception, even though it was not the primary focus of either regulators
or rating agencies.

9
  Probabilistic economic capital requirements: Large banks also use
complex models to forecast their financial condition under different
potential scenarios. In general, they try to ensure that there is no more
than say a 0.5% chance that they would find themselves insolvent in any
given year. Sometimes these tests will result in the need for more capital
than suggested by the regulators, but more often, they will produce a
lower number.

Table 1.1: Minimum Paid Up capital requirement

Category Current Capital Requirement
(Million NRs.)
Commercial Banks Rs. 8,00,00,00,000
Development Banks (National Rs. 2,50,00,00,000
Level)
Development Banks (4-10 districts) Rs. 120,00,00,000
Development Banks (1-3 districts) Rs. 50,00,00,000
Finance Companies (National Rs. 80,00,00,000
Level)
Finance companies (1-3 districts) Rs. 40,00,00,000
Source: NRB Directives, 2020

Capital Adequacy
The current level of capital adequacy in Nepal is based on Capital Adequacy
Framework, 2015 (Updated July 2015) whose main objective is to develop safe
and sound financial system by way of sufficient amount of qualitative capital
and risk management practices. This framework is intended to ensure that each
commercial bank maintain a level of capital which is adequate to protect its
depositors and creditors, is commensurate with the risk associated activities
and profile of the commercial bank, and promotes public confidence in the
banking system (Shrestha, 2011).

A. Review of Previous Articles/Journal

Pandey (2012) has stressed that one of the main objectives of a commercial
bank is to safeguard the money of depositors. With the low capital adequacy
rate, the banks were previously lending from the money of the depositors

10
because the capital comprised a very small portion of the total risk-weighted
assets. However, the returns the shareholders or promoters were reaping were
quite high. The risk of the depositors was too high. Pandey further put forward
that a good banking system is, therefore, a sine qua non for maintaining
financial equilibrium in the country. In addition, NRB's efforts in this direction
are praiseworthy.
Mundal (2013), CEO of Standard Chartered Bank Nepal Limited in an article
titled, “Investing with intelligence”, has expressed the following view; People
within organization and investors say that the current economic condition of
the country is a big barrier of making opportunities available to prospective
investors. Investor's awareness of the market is not up to the mark. A through
risk analysis should be alone before making any decision. He finally suggested
that investors should put a little extra for a proper study before any investment
decision.

Rawal (2014) this articles he explain, “Banking Sector’s NPA Alarming”. Non-
Performing Assets in banking sectors that currently stands at 30%, the total
NPA in the banking system is about 35 billon, while it is even worse in case of
two largest commercial banks; Rastriya Banijya Bank and Nepal Bank Limited.
The NPA levels at the state run RBB stands at 52%, while the figure at NBL
reads 62%, which together account for 37% of total deposit of some Rs 200
billion and 40% of the total loan outstanding of Rs. 125 billion of the banking
system. Private sector bank has less non-performing assets in comparison to
RBB and NBL. Neupane, NRB 46th Anniversary; 142, He said that directives
asked the financial institutions to provision 100% on collateral that the banks
accept themselves after they fail to action. As per the directive, the banks
cannot place such assets in their income account until such collateral is
converted into cash. Prior to directive, banks used to provision for losses on
non-banking assets only if amount recovered form auctioning of collator is not
to cover the principal and interest.

11
B. Review of unpublished Thesis
Dhakal (2015) has conclude that entitled "The impact of bank Characteristic,
Financial Structure and Macroeconomic Indicator on Bank Capital Base". This
study investigates the impact of banks characteristics, financial structure and
macroeconomic indicators on banks, capital base in the banking industry. The
study does not account for ratio analysis in the computation of capital adequacy
but rather it examines the determinant of capital adequacy. Economic
indicators such as rate of inflation real exchange rate, demand deposits, money
supply, political instability, return on investment are most robust predictors of
the determinants of capital adequacy. After the global credit crunch capital
adequacy, being critical for banks, led the study to examine the relationship
between bank capital base and macroeconomics variables. This implies that
political stability may reduce financial distress and bankruptcy why foreign
investment will affect Banks capital in most developing economy in the period
of financial crisis.
Sapkota (2016) has mentions that entitled on "Capital Structure Management
(With special reference to the Listed Joint Venture Commercial Bank in
Nepal)". Commercial banks are legally required to maintain adequate capital
funds. The primary function of bank capital is to provide resources to absorb
possible future losses on assets. How much capital should a commercial bank
have? The standard capital adequacy arguments sound like a broken record.
Regulators always seem to want more capital and bankers always want less.
Both sides need well -defined goals for establishing a capital adequacy strategy
and both sides should be taking a broader view of the costs that are relevant in
setting that strategy. From the bank stockholders’ viewpoint, the function of
capital is to earn a satisfactory rate of return. Each view succeeds in explaining
a number of broad patterns in observed capital structures, such as the
association between leverage and various firm characteristics and the aggregate
use of different sources of capital.
However, neither view has succeeded in explaining much of the observed
heterogeneity in capital structures, leverage changes, or security issuance

12
decisions. In section II, we provide an overview of some empirical properties
of corporate capital structure to highlight these successes and failures.
Commercial banks are legally required to maintain adequate capital funds. Any
workable standard for measuring capital adequacy should be expressed in terms
of the functions of bank capital. The rules on minimum capital requirements
have followed an international harmonization guided by the Basel Committee,
starting from 1988, date in which the first agreement has issued.
The main findings of the study are the average of DOL (Degree of Operating
Leverage) for SCBNL and HBL were 14.10 and 5.93. SCBNL had high DOL,
which indicated the riskiness of the company. The average DFL for SCBNL
was higher in comparison to HBL. The average of Long Term Debt as a
percentage of Total Debt for SCBNL and HBL had zero value, which showed
the unlevered condition. The average ratio was above 50 for the SCBNL, this
situation indicated that the debt amount was comparatively high for assets
financing as per the figure of the ratio and the profit margin of the companies
had not shown a satisfactory picture during the study. The profit margin for
SCBNL was higher than HBL, which indicated the good earning capacity of
the company by selling its products.

Shivakoti (2017) has conducted a study entitled “Capital Adequacy ratio

Framework of Selected Commercial Bank in Nepal”. The study investigate that
the banks have been trying to buffer against the risks associated with its
objective by maintaining the sufficient capital adequacy ratio as prescribed by
NRB. However, maintenance of capital adequacy constrained them from their
business. Hence, some of the bankers are not satisfied with this provision. In
line with meeting the norms, they are increasing their capital base through
increment in share capital. At the same time, to decrease credit risk, they have
been trying to decrease their NPA. It has experienced that banks are trying to
meet the norms as far as possible.

13
1.5.3 Research Gap
There are different researches that have done before on capital adequacy in
different countries. Theoretical as well as empirical evidence has been
presented by the researchers there insights on capital adequacy. According to
international standards minimum capital adequacy ratio for the banks are
required because they can absorb a reasonable level of losses before becoming
insolvent. However, there has been little research in developing nations.
Therefore, the problem here is to use a multiple regression model to investigate
whether there is significant relationship between capital adequacy ratio and
different risk indicators in the Nepalese banking industry. Furthermore, it has
observed that there have not been significant researches on the relationship
between capital adequacy and financial factors in Nepal. Thus, this study is an
attempt to fill the identified gaps.

1.6 Research Methodology

Research methodology refers to the various sequential steps (along with the
rationale of each step) to be adopted by a researcher in studying a problem with
certain objective in view. It is a way to systematic solve the research problem it
may be understood as a science of studying how search is done scientifically.
This chapter consists of the research methodology applied in this study for the
fulfilment of the stated objectives. The overall approach to the research has
presented in this chapter. This chapter consists of research design, sample size,
sample selection, data collection procedure, and data processing as well
presentation technique and tools.

1.6.1 Research Design

In this study, this research study the determination of capital adequacy ratio of
commercial banks in Nepal. To achieve the research objective, descriptive
and analytical research design have used. In fact, the research design is the
conceptual structure within which the research is conduct. To evaluate the
determination of capital adequacy ratio of commercial banks especially that of

14
ADBL, NABIL, and NIBL. This study has based on time series data extracted
from annual reports for the relevant five fiscal years (from the 2014/15 to
2018/19).

1.6.2 Population and Sample

There are 27 commercial banks in Nepal. Among them three commercial banks
have taken for sample i.e., ADBL, NABIL and NIBL for judgmentally
sampling. Therefore, samplings have done selecting from population.

1.6.3 Nature and Sources of Data

There are two types of data, primary and secondary data. This research is based
on secondary data. Secondary sources of data are those data already gathered
by others. Different secondary sources had assisted in resolving or partly
answering the research problem. The external secondary sources include books,
periodicals, articles and journals, published and other unpublished sources. The
annual reports of the sampled banks are the major sources for secondary data.

1.6.4 Data Collection Procedure

Data has been collected from secondary sources. Likewise, data has emanated
from listed banks’ financial reports, published and unpublished books,
scholarly journals, business and financial newspapers and other magazines and
corporate journals. As the study needs historical financial data, which are from
corporate reports, accessing publicly available data has assumed as the suitable
method for the accuracy of the data. As public data is accessible to everyone,
the study made use of the financial performance data, which were of interest to
the present research. Financial reports and other relevant information of the
listed banks for the period 2014/15 to 2018/19 have retrieved from the internet,
by search engines.

1.6.5 Data Analysis Tools

The collected data has analyzed with the help of different financial and
statistical tools.

15
I. Financial Tools
A. Interest Rate Margin
Interest rate risks results from the fluctuation of interest rate and have effect on
bank’s capital as well as revenue as banks face these risks as part of being a
financial intermediaries. The interest rates risks might involve a big threat to its
profits and capital, which requires a good interest rate management from the
part of the bank, through maintaining acceptable levels of interest rates. Interest
risks as measured as ratio of interest rate sensitive assets and interest rate
sensitive liabilities as shown in Interest rate sensitive assets include all the
loans and advances whereas interest rate liabilities include deposits in local
currency.

B. Total Deposits 
Total Deposits is a term included in the balance sheet of a bank. To a common
person, the word deposit most often implies the act of placing your money in
the safety of a bank. Total Deposits from a bank's perspective, various kinds
of deposits have taken into consideration. One of the key functions of
commercial banks is to accumulate funds in the form of deposits from the
surplus sectors of the economy and make same available to the deficit sectors
of the economy. Thus, deposits constitute a significant proportion of banks
total current liabilities and as such require maintenance of adequate capital by
banks. Sharpe defined capital as a difference between assets and deposits, so
the larger the ratio of capital to assets (or the ratio of capital to deposit) the
safer the deposits. As capital was adequate, deposits were “safe enough”. His
idea was that if the value of an institution’s assets may decline in the future, its’
deposits will generally be safer, the larger the current value of assets in relation
to the value of deposits.

C. Total Loan
Total Loan: Of the total approved amount (100% amount), the amount that has
not been disbursed by the lender as of the month ending date. ... Total

16
Loan Amount, means the total amount the consumer will borrow, as reflected
by the face amount of the note.
There are various kinds of loans as per the financial requirements in question.
Banks can give a loan, which can be secured or unsecured. People go for
secured loans due to lower interest rates and the large sum of money available,
which can be used for purchasing a car or house. While unsecured loans are
most common in the form of personal loans, which have a higher interest rate
and are given for smaller amounts for purposes like home renovation and so on.
The maximum loan amount that you can avail is based on the persons’
collateral capacity and credit report. Instruments of credit like credit cards,
standard loans, line of credit.

D. Total Asset
Total Assets, most commonly used in the context of a corporation, is defined as
the assets owned by the entity that has economic value whose benefits can be
derived in the future. Assets are recorded in the balance sheet of the firm.
Assets are further classified into liquid assets and illiquid assets depending on
their liquidity. A liquid asset is that asset that can be easily converted into cash
or readily sold for cash otherwise it is called an Illiquid asset. Assets are also
classified on the balance sheet as either current assets or long-term assets. A
current asset is that asset which can be liquidated within a year, whereas, long-
term assets are those assets which are liquidated in more than a year.
Total Assets Formula = Liabilities + Owner’s Equity
E. Profitability Ratio (ROA & ROE)
The profitability ratio is proxies by two ratios namely: Return on Assets (ROA)
and Return on Equity (ROE). ROA represents all assets owned by the bank and
their ability in generating profits during a specific period. In other words, it
explains the degree to which the bank succeeds in investing its assets and its
efficiency in directing them towards profitable investment opportunities. This
ratio measures the management efficiency in using the available resources and
its ability in realizing revenues from funds or resources available from various
financing resources; therefore, it reflects the effect of the bank financial and
17
operation activities. ROA has measured as net profit after tax divided by total
assets.

II. Statistical Tools

The analysis could not have done without using the statistical tools. All
collected data has tabulated and appropriate statistical techniques such as mean,
standard derivation, C.V, Descriptive statistics, Correlation, Regression and
ANNOVA test have used to analyze the information. All the data have
calculated by using this SPSS software. Descriptive statistics is the term given
to the analysis of data that helps describe, show or summarize data in a
meaningful way such that patterns might emerge from the data. Descriptive
statistics do not however allow us to make conclusions beyond the data the
researcher have analyzed or reach conclusion regarding any hypothesis have
made. They are simply a way to describe data. The researcher used mean,
minimum, maximum, standard deviation and standard error to analyze the data.

1.8 Limitations of the Study

This study, to analyze the determinations of capital adequacy ratio of
commercial banks in Nepal. Every study has limitations due to different factors
of institutions, time-period taken, reliability of statistical data, tools and
variances. The following limitations has pointed out in this study of
profitability of banks:
1. This research covers the major determinations of capital adequacy ratio
variables are interest rate margin, total deposit, total loan, ROA, ROE,
liquidity, credit risk and bank size, it does not cover all other aspects of
the variables.
2. There are 27 banks in Nepal. Among them, this study covers only to
three commercial banks i.e., ADBL, NABIL and NIBL.
3. The study analyzes capital adequacy ratio of commercial banks only, it
may not cover the other financial institutions such as development
banks, finance companies, and cooperatives.

18
 4. There are two types of data, primary and secondary data. This study
based on secondary data.
5. This study covers the analysis of only five years data from FY 2014/15

to FY 2018/19; hence, the conclusion drawn confirms to the above

periods only.

1.7 Report Structure

The results and the outcomes of the whole research work have presented in
three different chapters as follows:

Chapter-I: Introduction
The first chapter of the report describes background of the study, problem
statement, objective of the study, rationale of the study, theoretical framework,
research hypothesis, conceptual review, empirical review and research gap.
research methodology, research design, population and sample, sources of data,
data collection procedures, data analysis tools, limitation of the study and
report structure.

Chapter –II: Results and Analysis

In the fourth chapter, the data and information have presented results and
discussion by the help of financial and statistical tools. This chapter is the
major finding of the study.

Chapter –III: Summary and Conclusion

Finally, in the fifth and last chapter, summary, conclusion and Implications
have made regarding the entire study. At the end bibliography and appendix
have also used.

19
 CHAPTER-II
RESULTS AND ANALYSIS

This chapter deals with data presentation, analysis and interpretation following
the research methodology presented in the third chapter. Data presentation and
analysis are the central steps of the study. The main purpose of this chapter is
to analyze and elucidate the collected data to achieve the objective of the study
following the conversion of unprocessed data to an understand table
presentation. The chapter deals with the main body of the study.

2.1 Results
The collected data and information have presented in various tables, charts and
graphs for overall banking sector. The data and information have presented in
most understandable format.

2.1.1 Cash Adequacy Ratio (CAR)

The capital adequacy ratio (CAR) is a measurement of a bank's available
capital expressed as a percentage of a bank's risk-weighted credit exposures.
The capital adequacy ratio, also known as capital-to-risk weighted assets ratio,
has used to protect depositors and promote the stability and efficiency of
financial systems around the world. The reason minimum capital adequacy
ratios are critical is to make sure that banks have enough cushion to absorb a
reasonable number of losses before they become insolvent and consequently
lose depositors’ funds. The capital adequacy ratios ensure the efficiency and
stability of a nation’s financial system by lowering the risk of banks becoming
insolvent. Generally, a bank with a high capital adequacy ratio has considered
safe and likely to meet its financial obligations.

20
 Table 2.1: Capital Adequacy Ratio of Sample Banks
Bank Government bank Joint venture Bank Private Bank
Year ADBL NABIL NIBL
2014/15 17.16 11.57 11.90
2015/16 17.18 11.73 14.92
2016/17 20.41 12.90 13.02
2017/18 20.33 13.00 12.66
2018/19 20.37 12.50 13.26
Mean 19.09 12.34 13.15
S.D 1.57 0.59 1.00
C.V 8.21 4.78 7.58
Source: Annual Reports of ADBL, NABIL & NIBL, F.Y 2014/15 to 2018/19

Table 2.1 shows that the average Capital Adequacy Ratio (CAR) of the ADBL,
NABIL and NIBL are 19.09, 12.34 and 13.15 respectively. The average Capital
Adequacy Ratio (CAR) of ADBL is greater than NABIL and NIBL. It indicates
that the capital adequacy ratio weighs up a bank’s capital against its risk. The
CAR shown as a percentage of a bank's risk weighted credit exposures. This
ratio ensures banks have enough capital to cover potential losses, which
protects them from insolvency. The higher the CAR ratio the more stable and
efficient bank. The NABIL’s C.V value of is 4.78, it indicate that NABIL is
less variation then other sample banks. The figure below shows the average
Capital Adequacy Ratio (CAR) for all sample banks for the given period of
study i.e., 2014/15 to 2018/19.
Figure 2. 1: Capital Adequacy Ratio of Sample Banks

21
 25
ADBL
20.41 20.33 20.37 NABIL
20 NIBL
17.16 17.18
14.92
15 13.26
12.9
13.02 1312.66 12.5
11.73
CAR

11.9
11.57
10

0
2014/15 2015/16 2016/17 2017/18 2018/19
Fiscal Year
The figure 2.1 shows that the Capital Adequacy Ratio (CAR) of ADBL,
NABIL and NIBL for the fiscal year of 2014/15 to 2018/19. The CAR of
ADBL is 20.41 in fiscal year 2016/17, which is greater than other sample years
and banks. The Capital Adequacy Ratio (CAR) of NABIL is 11.57 in fiscal
year 2014/15, which is minimization value of among sample years and banks.

2.1.2 Liquidity
The Cash Reserve Ratio refers to a certain percentage of total deposits the
commercial banks are required to maintain in the form of cash reserve with the
Nepal Rastra bank. The objective of maintaining the cash reserve is to prevent
the shortage of funds in meeting the demand by the depositor. The amount of
reserve to be maintained depends on the bank’s experience regarding the cash
demand by the depositors. If there had been no government rules, the
commercial banks would keep a very low percentage of their deposits in the
form of reserves.

Table 2.2: Liquidity Ratio of Sample Banks

Bank Government bank Joint venture Bank Private Bank
Year ADBL NABIL NIBL
2014/15 28.74 14.55 12.00
2015/16 23.33 6.77 7.20
2016/17 31.18 10.02 10.50
2017/18 29.15 10.05 8.20

22
 2018/19 27.20 4.78 5.50
Mean 27.92 9.23 8.68
S.D 2.62 3.33 2.32
C.V 9.39 36.07 26.71
Source: Annual Reports of ADBL, NABIL & NIBL, F.Y 2014/15 to 2018/19

Table 2.2 shows that the average liquidity ratio (CRR) of the ADBL, NABIL
and NIBL are 27.92, 9.23 and 8.68 respectively. The average liquidity ratio
(CRR) of ADBL is greater than NABIL and NIBL. It indicates that the ADBL
is higher liquidity. If the bank has less or more liquidity, there is loss. The cash
reserve is to prevent the shortage of funds in meeting the demand by the
depositor. The C.V of ADBL is 9.39. It indicates that ADBL is less variation
than other sample banks. The figure below shows the average liquidity ratio
(CRR) for all sample banks for the given period of study i.e. 2014/15 to
2018/19.

Figure 2. 2: Liquidity Ratio of Commercial Banks

35.00
31.18 ADBL
30.00 28.74 29.15
27.20 NABIL
NIBL
25.00 23.33
Liquidity Ratio

20.00
14.55
15.00
12.00
10.50
10.02 10.05
10.00 8.20
6.777.20
4.785.50
5.00

-
2014/15 2015/16 2016/17 2017/18 2018/19
Fiscal Year

The figure 2.2 shows that the Capital Adequacy Ratio (CAR) of ADBL,
NABIL and NIBL for the fiscal year of 2014/15 to 2018/19. The CAR of
ADBL is 31.18 in fiscal year 2016/17, which is greater than other sample years
and banks. The Capital Adequacy Ratio (CAR) of NABIL is 4.78 in fiscal year
2018/19, which is minimization value of among sample years and banks.

23
2.1.3 Profitability Ratio
Profitability ratio is a measure of profitability, which helps to measure the
performance of company. They have used to assess a company's ability to earn
profit or income compared to its expenses or other relevant cost that has
incurred during a certain period.

A. Return on Assets

Here the profitability ratio has measured in terms of the relationship between
the net profits and assets. Also, call the ROA profit- to-assets ratio. It measures
the overall effectiveness of management in generating profits with its available
assets. The higher the firms return on total assets, the better.

Table 2.3: ROA of Nepalese Commercial banks

Bank Government bank Joint venture Bank Private Bank
Year ADBL NABIL NIBL
2014/15 3.12 2.06 1.90
2015/16 2.32 2.32 2.00
2016/17 2.15 2.69 2.10
2017/18 2.71 2.61 2.13
2018/19 2.77 2.11 1.79
Mean 2.61 2.36 1.98
S.D 0.34 0.26 0.13
C.V 13.16 10.82 6.36
Source: Annual Reports of ADBL, NABIL & NIBL, F.Y 2014/15 to 2018/19

Table 2.3 shows that the average Return on Assets (ROA) of the ADBL,
NABIL and NIBL are 2.61, 2.36 and 1.98 respectively. The average Return on
Assets (ROA) of ADBL is greater than NABIL and NIBL. The NIBL’s C.V
value of is 6.36, it indicates that NIBL is less variations than other sample
banks. The figure below shows the average ROA for all sample banks for the
given period of study i.e., 2014/15 to 2018/19.

Figure 2. 3: ROA of Nepalese Commercial Banks

24
 3.50
3.12 ADBL
3.00 2.712.61 2.77 NABIL
2.69
NIBL
2.50 2.322.32
2.06 2.15 2.10 2.13 2.11
1.90 2.00
2.00 1.79
ROA

1.50

1.00

0.50

-
2014/15 2015/16 2016/17 2017/18 2018/19
Fiscal Year

The figure 2.3 shows that the ROA of ADBL, NABIL and NIBL for the fiscal
year of 2014/15 to 2018/19. The ROA of ADBL is 3.12 in fiscal year 2014/15,
which is greater than other sample years and banks. The return on assets of
NIBL is 1.79 in fiscal year 2018/19, which is minimization among sample
years and banks. The fluctuation is comparatively at lower side for return on
assets than return on equity.

B. Return on Equity

The return on common equity measures the return earned on the common
stockholders’ investment in the firm. Generally, the higher these returns, the
better off are the owners. Return on common equity has calculated as follows:

Table 2. 4: ROE of sample banks

Bank Government bank Joint venture Bank Private Bank
Year ADBL NABIL NIBL
2014/15 25.19 29.93 47.00
2015/16 20.00 37.30 47.60
2016/17 18.08 39.22 47.10
2017/18 23.76 31.12 46.10
2018/19 24.25 24.25 39.82
Mean 22.26 32.36 45.52
S.D 2.73 5.38 2.89
C.V 12.28 16.62 6.35
Source: Annual Reports of ADBL, NABIL & NIBL, F.Y 2014/15 to 2018/19

25
Table 2.4 shows that the average Return on Equity (ROE) of the ADBL,
NABIL and NIBL are 22.26, 32.36 and 45.52 respectively. The average Return
on Equity (ROE) of Nepal Investment Bank limited is greater than RBB and
NABIL. The NIBL’s C.V value of is 6.35, it indicates that NIBL is less
variations than other sample banks. The figure below shows the average ROE
for all sample banks for the given period of study i.e., 2014/15 to 2018/19.
Figure 2. 4: ROE of Sample Banks
50.00 47.00 47.60 47.10 46.10
45.00 ADBL
39.22 39.82
40.00 37.30 NABIL
35.00 31.12 NIBL
29.93
30.00 25.19
23.76 24.25
24.25
ROE

25.00 20.00
20.00 18.08
15.00
10.00
5.00
-
2014/15 2015/16 2016/17 2017/18 2018/19
Fiscal Year

The figure 2.4 shows that the ROE of ADBL, NABIL and NIBL for the fiscal
year of 2014/15 to 2018/19. The ROA of NIBL is 47.60 in fiscal year 2015/16,
which is greater than other sample years and banks. The Return on Equity of
NABIL is 24.25 in fiscal year 2018/19, which is minimization value of among
sample years and banks. The decreasing profit is a bit alarming for the banking
sector so they must search for the further opportunity to invest and bring
uniformity in their profit.

2.1.4 Bank Size

Concerns has sometimes expressed about the "size" of a company or bank's
balance sheet, which will show both assets and debt issued or borrowed by the
organization. When analysts talk about the need to reduce the size of an entity's
balance sheet, they usually mean that, the entity has to reduce the amount of
debt.

Table 2.5: Bank Size of sample banks

Bank Government bank Joint venture Bank Private Bank

26
Year ADBL NABIL NIBL
2014/15 1.21 0.70 1.01
2015/16 1.05 0.62 0.81
2016/17 0.88 0.58 0.86
2017/18 1.12 0.62 2.21
2018/19 1.05 0.55 2.34
Mean 1.06 0.61 1.45
S.D 0.11 0.05 0.68
C.V 10.28 8.20 47.06
Source: Annual Reports of ADBL, NABIL & NIBL, F.Y 2014/15 to 2018/19

The table 2.5 shows that the Bank Size of the ADBL, NABIL, and NIBL are
1.06, 0.61 and 1.45. The Bank Size of NIBL is greater than other sample banks.
The coefficient of variation of NABIL is 8.20. It indicates that NABIL has less
variation.

Figure 2. 5: Bank Size of Sample Banks

2.50 2.34 ADBL
2.21
NABIL
2.00 NIBL

1.50
Bank Size

1.21
1.05 1.12 1.05
1.01
1.00 0.81 0.88 0.86
0.70 0.62 0.62
0.58 0.55
0.50

-
2014/15 2015/16 2016/17 2017/18 2018/19
Fiscal Year

The figure 2.5 shows that the average bank size of ADBL, NABIL, and NIBL
during the fiscal year of 2014/15 to 2017/18. Among the sample banks, NIBL
has the higher bank size. It means that NIBL is better to bank size then other
sample banks.

27
4.1.5 Interest Rate Margin (NIM)

Net interest margin (NIM) is a measure of the difference between

the interest income generated by banks or other financial institutions and the
amount of interest paid out to their lenders (for example, deposits), relative to
the amount of their (interest-earning) assets. It is similar to the gross margin (or
gross profit margin) of non-financial companies. It is usually expressed as a
percentage of what the financial institution earns on loans in a time period and
other assets minus the interest paid on borrowed funds divided by the average
amount of the assets on which it earned income in that time period (the average
earning assets).

Net interest margin is similar in concept to net interest spread, but the net
interest spread is the nominal average difference between the borrowing and
the lending rates, without compensating for the fact that the earning assets and
the borrowed funds may be different instruments and differ in volume. NIM
has calculated as a percentage of net interest income to average interest-earning
assets during a specified period.

Table 2.6: Interest Rate Margin

Bank Government bank Joint venture Bank Private Bank
Year ADBL NABIL NIBL
2014/15 6.97 3.97 4.61
2015/16 7.15 3.74 4.66
2016/17 5.87 4.32 4.34
2017/18 5.46 4.48 4.30
2018/19 4.68 4.19 4.32
Mean 6.03 4.14 4.45
S.D 0.93 0.26 0.16
C.V 15.41 6.29 3.50
Source: Annual Reports of ADBL, NABIL & NIBL, F.Y 2014/15 to 2018/19

Table 2.6 shows that the average interest rate margin of the ADBL, NABIL and
NIBL are 6.03, 4.14 and 4.45 respectively. The average interest rate margin of
ADBL is greater than NABIL and NIBL. It indicates that the ADBL has higher
interest rate margin. The C.V of NIBL is 3.50, it indicates that NIBL is less

28
variation than other sample banks. The figure below shows the average interest
rate margin for all sample banks for the given period of study i.e., 2014/15 to
2018/19.

Figure 2. 6: Interest Rate Margin

8.00 ADBL
6.97 7.15
7.00 NABIL
5.87 NIBL
Interest Rate Margin

6.00 5.46
5.00 4.61 4.66 4.484.30 4.68
4.324.34 4.194.32
3.97 3.74
4.00
3.00
2.00
1.00
-
2014/15 2015/16 2016/17 2017/18 2018/19
Fiscal Year

The figure 2.6 shows that the interest rate margin of ADBL, NABIL and NIBL
for the fiscal year of 2014/15 to 2018/19. The interest rate margin of ADBL is
7.15 in fiscal year 2015/16, which is greater than other sample years and banks.
The interest rate margin of NABIL is 3.74 in fiscal year 2015/16, which is
minimization value of among sample years and banks.

2.1.6 Credit Risk

A credit risk is the risk of default on a debt that may arise from a borrower
failing to make required payments. In the first resort, the risk is that of the
lender and includes lost principal and interest, disruption to cash flows, and
increased collection costs. The loss may be complete or partial.

Table 2.7: Credit Risk of Sample Banks

Bank Government bank Joint venture Bank Private Bank
Year ADBL NABIL NIBL
2014/15 93.77 64.43 74.70
2015/16 95.46 70.49 80.10
2016/17 92.90 65.38 84.90

29
 2017/18 95.64 82.66 74.70
2018/19 93.62 81.96 72.00
Mean 94.28 72.98 77.28
S.D 1.08 7.89 4.63
C.V 1.15 10.81 5.99
Source: Annual Reports of ADBL, NABIL & NIBL, F.Y 2014/15 to 2018/19

Table 2.7 shows that the average credit risk of the ADBL, NABIL and NIBL
are 94.28, 72.98 and 77.28 respectively. The average credit risk of ADBL is
greater than NABIL and NIBL. It indicates that the ADBL has higher credit
risk. Credit risk is the possibility of a loss resulting from a borrower's failure to
repay a loan or meet contractual obligations.

It refers to the risk that a lender may not receive the owed principal and
interest, which results in an interruption of cash flows and increased costs for
collection. The C.V of ADBL is 1.15, it indicates that ADBL is less variation
then other sample banks. The figure below shows the average credit risk for all
sample banks for the given period of study i.e., 2014/15 to 2018/19.
Figure 2. 7: Credit Risk of Sample Banks
120.00

100.00 93.77 95.46 92.90 95.64 93.62 ADBL

84.90 82.66 81.96 NABIL
80.10
80.00 74.70 74.70 72.00 NIBL
70.49
Credit Risk

64.43 65.38
60.00

40.00

20.00

-
2014/15 2015/16 2016/17 2017/18 2018/19

Fiscal Year

The figure 2.7 shows that the credit risk of ADBL, NABIL and NIBL for the
fiscal year of 2014/15 to 2018/19. The credit risk of NIBL is 95.64 in fiscal
year 2017/18, which is greater than other sample years and banks. The credit
risk of NABIL is 64.43 in fiscal year 2014/15, which is minimization value of

30
among sample years and banks.

2.3 Major Findings

1. Table 4.1 shows that the average Capital Adequacy Ratio (CAR) of the
ADBL, NABIL and NIBL are 19.09, 12.34 and 13.15 respectively. The
average Capital Adequacy Ratio (CAR) of ADBL is greater than
NABIL and NIBL. It indicates that the capital adequacy ratio weighs up
a bank’s capital against its risk. The CAR is show as a percentage of a
bank's risk weighted credit exposures. This ratio ensures banks have
enough capital to cover potential losses, which protects them from
insolvency. The higher the CAR ratio the more stable and efficient bank.
The NABIL’s C.V value of is 4.78, it indicates that NABIL is less
variation then other sample banks.
2. Table 4.2 shows that the average liquidity ratio (CRR) of the ADBL,
NABIL and NIBL are 27.92, 9.23 and 8.68 respectively. The average
liquidity ratio (CRR) of ADBL is greater than NABIL and NIBL. It
indicates that the ADBL is higher liquidity. If the bank has less or more
liquidity, there is loss. The cash reserve is to prevent the shortage of
funds in meeting the demand by the depositor. The C.V of ADBL is
9.39. It indicates that ADBL is less variation than other sample banks.
3. Table 4.3 shows that the average Return on Assets (ROA) of the ADBL,
NABIL and NIBL are 2.61, 2.36 and 1.98 respectively. The average
Return on Assets (ROA) of ADBL is greater than NABIL and NIBL.
The NIBL’s C.V value of is 6.36, it indicates that NIBL is less
variations than other sample banks.
4. Table 4.4 shows that the average Return on Equity (ROE) of the ADBL,
NABIL and NIBL are 22.88, 32.36 and 45.52 respectively. The average
Return on Equity (ROE) of Nepal Investment Bank limited is greater
than ADBL and NABIL. The NIBL’s C.V value of is 6.35, it indicates
that NIBL is less variations than other sample banks.

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5. The table 4.5 shows that the Bank Size of the ADBL, NABIL, and NIBL
are 1.06, 0.61 and 1.45. The Bank Size of NIBL is greater than other
sample banks. The coefficient of variation of NABIL is 8.20. It indicates
that NABIL has less variation.
6. Table 4.6 shows that the average interest rate margin of the ADBL,
NABIL and NIBL are 6.03, 4.14 and 4.45 respectively. The average
interest rate margin of ADBL is greater than NABIL and NIBL. It
indicates that the ADBL has higher interest rate margin. The C.V of
NIBL is 3.50, it indicates that NIBL is less variation then other sample
banks.
7. Table 4.7 shows that the average credit risk of the ADBL, NABIL and
NIBL are 94.28, 72.98 and 77.28 respectively. The average credit risk of
ADBL is greater than NABIL and NIBL. It indicates that the ADBL has
higher credit risk. Credit risk is the possibility of a loss resulting from a
borrower's failure to repay a loan or meet contractual obligations. It
refers to the risk that a lender may not receive the owed principal and
interest, which results in an interruption of cash flows and increased
costs for collection. The C.V of ADBL is 1.15, it indicate that ADBL is
less variation then other sample banks.

32
 CHAPTER-III
SUMMARY AND CONCLUSIONS

3.1 Summary
The efficiency of the process through which savings have channeled into
productive activities is crucial for growth and general welfare. The four major
parts of financial systems are Lender, Financial Markets, Borrower and
Financial Intermediaries. Bank/Commercial Bank/Financial Institutions are the
major part of the financial system. It assumes the important role of providing
financial services to businesses and population as a whole. In addition to
ensuring money supply, this also includes asset management, bank advisory
services and transaction processing for large companies.

Capital, in its simplest form, represents the portion of the value of a bank’s
assets that has not legally required to be repaid to anyone. In more complicated
forms, it can include portions of the value that do have to be repaid but only far
in the future. Capital has intended to protect certain parties from losses,
including depositors, bank customers, and bank counterparties. Capital is
supposed to protect a bank from all sorts of uninsured and unsecured risks apt
to turn into losses. This is where we get to the two principal functions of
capital-to absorb losses and to build and maintain confidence in a bank. There
is no single correct measure for how much capital a bank needs, partly because
it is a judgment call and partly because it depends on the viewpoint of the party
making the measurement.

The average CAR of ADBL, NABIL and NIBL banks in fiscal year 2014/15 to
2018/19. The average CAR is 14.86 . The minimum and maximum CAR are
11.57 and 20.41 respectively. The variations of CAR is 22.41%. It indicate that
CAR less variations. The average CRR is 15.28. The minimum and maximum
CRR are 4.78 and 31.18 in overall sample banks among the 5 fiscal years. The

33
C.V of liquidity of sample banks is 63.49%. It indicate that liquidity of sample
bank is highly degree of variation.

3.2 Conclusions
The theoretical and empirical findings presented in the literature whether or on
firmed by the empirical findings of current study or future studies, but they
have economic, operation and policy related implications. Interest rate results
from the fluctuation of interest rate and have effect on bank’s capital as well as
revenue as banks face these risks as part of being financial intermediaries
(brokers), meaning that interest rates risks might involve a big threat to its
profits and capital.
The average Capital Adequacy Ratio (CAR), liquidity, CAR, NIM, credit risk
of ADBL is greater than NABIL and NIBL. The average ROE, bank size, total
loan, of NIBL is greater than ADBL and NABIL. The total deposit and total
assets of NABIL is greater than ADBL and NIBL.
The p value is 0.010 and Alpha value is 0.05. The p value is less than Alpha
value. There is significance between CAR and CRR, ROE, ROA, credit risk,
bank size, NIM, total loan, total deposit, and total assets of sample banks.

34
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