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1.1 Background

A bank generates a profit from the differential between the level of interest it pays for deposits
and other sources of funds, and the level of interest it charges in its lending activities. This
difference is referred to as the spread between the cost of funds and the loan interest rate.
Historically, profitability from lending activities has been cyclic and dependent on the needs and
strengths of loan customers. In recent history, investors have demanded a more stable revenue
stream and banks have therefore placed more emphasis on transaction fees, primarily loan fees
but also including service charges on array of deposit activities and ancillary services
(international banking, foreign exchange, insurance, investments, wire transfers, etc.). However,
lending activities still provide the bulk of a commercial bank's income.
Bank is a financial institution, which deals with money by accepting various types of deposits,
disbursing loan and rendering various types of financial services. It is the intermediary between
the deficit and surplus of the financial resources. Banking when properly organized, aids and
facilitates growth on trade and considered not as dealers in money but as the leader of
development. Bank are not just the storehouse of the country's wealth but are the reservoirs of
resources necessary for economic development. Sound-banking system is the crucial means to
accelerate the development of a country by strengthening the economic condition in today’s
globalized economy of the twenty-first century. This requires the well-developed corporate
culture, proper management of risk and return and healthy competitive environment that
facilitate mobilization of small saving in the commercial and industrial sectors that will enhance
the economic and social welfare of a country.
In Nepal, banking sector started in 1937 A.D. with the establishment of Nepal Bank Ltd., Nepal
Rastra Bank, and the central bank of Nepal, established in 1957 A.D. followed by
RastriyaBanijya Bank in 1966 A.D. As Nepalese government took liberal economic policy, joint
venture banks started to operate since 1982 A.D. with the establishment of Nepal Arab Bank
Ltd. Till December 2010; thirty-two commercial banks have been operating in the country. With
the growth rate of banking industry from the 1982 A.D., the risk on banking also made a mark
simultaneously. Most of the Nepalese banks have suffered from credit risk, which is associated
with the non-payment of loan by the borrowers.
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Present challenges to the banking sector are: to manage the excess/short liquidity, to invest the
money in productive as well as new sector, to manage the accumulated non-performing loan.
Commercial banks collect deposits from individuals and invest them as loan and advance to the
borrowers and receive interest as the output of the business. Commercial banks' profit and
operating cost are borne by these interest collected from the borrowers. When interests as well as
the principal are not collected in due time, the existence of the bank and the deposits of
individuals will be in threat. So, necessary action must be taken by the banks and government to
overcome this situation.
In addition to the credit, bank faces other risks. According to the Nepal Rastra Bank Unified
Directives 2009, the major source of risk is credit risk, liquidity risk, foreign exchange risk, and
interest rate risk and operation risk etc. The BCBS released the "International Convergence of
Capital Measurements and Capital Standards: Revised Framework", popularly known as Basel
II, on June 26, 2002 . A comprehensive version of the framework issued in June 2006. Basel II
recognizes that banks can face a multitude of risks, ranging from the traditional risks associated
with financial intermediation to the day-to-day risks of operating a business as well as the risks
associated with the ups & downs of the local and international economies. As a result, it more
explicitly associates capital requirements with the particular categories of major risks that banks
face.
1.2 Profile of Organization

Parbhu Bank was born in April 2002 as the 16th commercial bank in Nepal. In 2002 Parbhu
Bank merged with HISEF Finance Limited, a first generation financial company which was the
first merger in the Nepali corporate history.Parbhu Bank is a Category ‘A’ Financial Institution
and re-registered in 2006 under the “Banks and Financial Institutions Act” of Nepal. The Bank’s
shares are listed and actively traded in the Nepal Stock Exchange (NEPSE).

Parbhu Bank is a technologically driven progressive Bank with strong risk and corporate
governance foundations .Parbhu is known for our innovation and claim to many “firsts” in the
Nepalese financial market .Parbhu have the best asset quality among all financial institutions in
the country and our technology has been rated “Highly Secure” by an independent
internationally accredited information system auditors. Parbhu ’s award winning Annual Reports
has set the standards for quality, presentation and disclosure for the Nepalese corporate sector to
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follow since 2005.Parbhu Bank promotes a separate life insurance company – Prime Life
Insurance Limited which came into operation in 2009.

Parbhu Bank believes that the “customer is king” and pledges to deliver products and services in
a customized and simplified manner. Parbhu has always taken the initiative for the wellbeing of
the society in which it operates and has been contributing to different sectors like health,
employment, and education.

Shareholding Pattern 
(A) Local ownership 100%
1. Promoters 30.39%
2. General public 35.53%
3. Others 32 .07%
(B)Foreign ownership 0.00%
100%
1.3 Objectives
The basic objective is the comparative analysis and evaluation of the credit management
of the commercial banks. The following objectives are also considered in this study:
 To examine and analyze the total loans and advances to total deposit.
 To examine and analyze loan loss provision to total loans and advances ratio.
 To examine the credit position of the Parbhu Bank
1.4 Rationale.
Beside thesis, this study no doubt will have importance to various groups but in particular
it is directed towards the certain groups of individuals/institutions, which are as under:
 Has an importance to the shareholders
 Has an importance to the management bodies of the bank for the evaluation of the
performance of the bank.
 Has an importance to the outsiders which the customers, financing agencies, stock
exchange etc.
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1.5 Review

Financial institutions, which are composed of banks, micro finances, and insurances, have
comprehensive roles in serving the needs of the society within the economy. The service is
rendered through providing three major financial functions: intermediation, or allocation,
operational and payment systems. Operational and allocation functions are the provisions of
financial resources to meet borrowing needs of individuals and other economic agents. The main
microeconomic function of banks is the provision of facilities to collect deposits and invest these
deposits as credits. Provision of a sound payment mechanism is also the other expected service
from banks. Hence, the performance of banks is measured in terms of the above major roles of
the banking business and relies on the provision of these functions.

Review of literature is an essential part of all studies. It is a way to discover what other research
in the area of our problem has uncovered. A critical review of the literature helps the researcher
to develop a thorough understanding and insight into previous research works that relates to the
present study. It is also a way to avoid investigating problems that have already been definitely
answered.

The research findings of the study are: The measurement of liquidity has revealed that the mean
current ratio of all the three banks is not widely varied. All of them are capable in discharging
their current liability by current asset, SCBNL's tendency to invest in government securities has
resulted with the lowest ratio of loans and advances to total assets ratio whereas NABIL Bank
Ltd. has highest due to steady and high volume of loans and advances throughout the years, The
loans and advances and investment to deposits ratio has shown that NABIL Bank Ltd. has
deployed the highest proportion of its total deposits in earning activities. This is the indicative of
that in fund mobilizing activities NABIL Bank Ltd. is significantly better, The portfolio analysis
has revealed that the flow of loans and advances in agriculture sector is the lowest priority sector
among these commercial banks. The contribution of all the banks in industrial sector is
appreciable. The contribution made by Himalayan Bank Ltd. in industrial sector is the greatest
and that of SCBNL is the least, the lending in commercial purpose is highest in case of NABIL
Bank Ltd. and least in case of SCBNL. SCBNL has highest contribution in service sector
lending. It has contributed 25.2 7 % of its total credit in general use and social purpose.
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Paudel (2005), in his Master’s thesis, “Credit Policy of Commercial Banks in Nepal”,has the
objective to provide the credit practices in NIBL and SBI bank. The specific objectives are; to
examine the liquidity and assets management of NIBL and SBI, to evaluate the investment
policy of NIBL and SBI, to study the growth ratio of loan and advances, to analyze the
investment to total deposit and net profit NIBL and SBI.
1.6 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 it we study the various
steps that are generally adopted by researcher in studying his research problem along with the
logic behind them. The various objectives of this chapter are to show the financial relations from
which liquidity, structure of working capital and utilization of working capital of the factory can
be measured.

The study about selected listed manufacturing companies in Nepal has been already streamlined
to some extent in earlier chapter regarding their growth, objective, statement of problem, relevant
literature of concerning manufacture in companies have been reviewed in second chapter. This
chapter, the focus has been made on research design, nature of data, population and sample,
source of data, data collection techniques and tools used for data analysis.

1.7 Limitations

Every study has its own limitation & the pointed limitations of this study are as follows: -
 This study is concentrate only on the factors that are related with credit practices.
 This study has focused on the credit behavior only Parbhu Bank.
 Some of the statistical as well as financial tools of comparison & analysis shall be
used in this study.
 The study is based on secondary data such as annual report, financial statement etc.
Inaccessibility of information which could have helped to analyze other
 Queries made with officers of Parbhu bank regarding money lending process or
practice for the credit control.