Credit Management of Siddhartha Bank Limited

Submitted By:

Pratima Pudasaini

Exam Roll No.14220118

PU Registration No.: 2014-2-62-0029

A Graduate Research Report

Submitted To:

SAIM College

Pokhara University

Submitted for the degree of Master of Business Administration (MBA)

January, 2016
 Certificate of Authorship

I hereby declare that this submission “Credit Management of Siddhartha Bank

Limited” 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, expert where due acknowledgement is made in the
acknowledgements.

…………………..

Pratima Pudasaini

PU Registration No.: 2014-2-62-0029

Approval Sheet

RECOMMENDATION FOR APPROVAL

This Graduate Research Report prepared and submitted by Pratima Pudasaini in partial
fulfillment of the requirement for the degree of Master of Business Administration
(Global Business) has been supervised by me and recommends it for acceptance.

Name of the Advisor:

…………………………………

Signature:

Date:

ACCEPTANCE OF THE EXTERNAL EXAMINER

I approve the Graduate Research Report submitted by Pratima Pudasaini.

The grade sheet has been submitted to the Dean, School of Business, Pokhara University
through the college on a separate evaluation sheet.

Name of External Examiner:

Signature:

Date:

VIVA EXAMINATION

The candidate has successfully defended the guaduate research Report. We recommend it
for acceptance. The grade sheet has been submitted to the Dean, Pokhara University
through the college on a separate evaluation sheet.

External Examiner:

GRP Adviser:

Other members:

Date...............
 ACKNOWLEDGEMENTS

This thesis entitled “Credit Management of Siddhartha Bank Limited” has been a matter
of great pleasure for me to complete this thesis work under the supervision and
constructive guidance of respected advisor Prof. Dr. Ashok Raj Pandey, Lecturer of
South Asian Institute of Management (SAIM). He helped me in providing all sorts of
guidance, constructive, critical and analytical support in order to complete this thesis
work in the form as required by the faculty of management, SAIM College and Pokhara
University for the partial fulfillment-Degree of Master in Business Administration
(MBA).

I would like to extend my profound gratitude to all honorable teachers of SAIM college,
staffs of library and administration of the college and all my colleagues who helped me
directly and in directly for the completion of this thesis work.

I would like to extend my appreciation to the staffs of concerned companies who

provided me the necessary data and information.
Finally, I would like to extend my heartily thanks to all the members of my family and
relatives who inspired me in many ways to cope during the entire period of the study.

Sushan Shrestha
March, 2016
 Table of Contents

Page no.
Cover Page
Certificate of Authorship
Approval Sheet
Acknowledgement
Table of Contents
List of Tables and Figures
List of Abbreviations
Executive Summary

CHAPTER-I: INTRODUCTION
1.1 Background of the Study………………………………………………………1
1.1.1 Origin and Development of Banks in Nepal…………………………4
1.1.2 Brief profile of Siddhartha Bank limited……………………………..6
1.1.3 Statement of the Problems…………………………………………....8
1.1.4 Objectives of the study……………………………………………….9
1.1.5 Significance of the study………………..…………………………..10
1.1.6 Limitations of the study……………………………………………..10
1.1.7Organization of the study…………………………………………....10

CHAPTER-II: REVIEW OF LITERATURE

2.1 Literature Review…………………………………………………………12
2.2 Theoretical Review………………………………………………………..17
2.2.1 Concept of Credit…………………………………………………..17
2.2.1.1 Types of Credit…………………………………………….18
2.2.2 Credit Management………………………………………………..21
2.2.3 Credit Risk Appraisal……………………………………………...24
2.1.4 Credit Policy of Bank……………………………………………...25
2.2.5 Factors Affecting Credit Policy of Bank…………………………..27
2.2.6 Review of Nepal Rastra Bank Directives ………………………...28
 CHAPTER-III: RESEARCH METHODOLOGY
3.1 Research design…………………………………………………………...30
3.2 Population and Sample……………………………………………………30
3.3 Sources and Collection of Data…………………………………………...31
3.4 Data Analysis Tool………………………………………………………..31
3.4.1 Financial Tools……………………………………………………………..31
3.4.1.1 Liquidity Ratio……………………………………………………32
3.4.1.2 Leverage Ratio……………………………………………………33
3.4.1.3 Activity Turnover Ratio…………………………………………..34
3.4.1.4 Assets Quality Ratio………………………………………………35
3.4.1.5 Profitability Ratio………………………………………………....36
3.4.2 Statistical Tools…………………………………………………………….37
3.4.2.1 Arithmetic Mean (Average)………………………………………37

3.4.2.2 Standard Deviation………………………………..………………37

3.4.2.3 Co- Variance…………………………………………………...…38

3.4.2.4 Least Square Linear Trend………………………………………..38

3.4.2.5 Probable Error of Correlation Coefficient………………………..39

CHAPTER-IV: DATA PRESENTATION AND ANALYS

4.1 Deposits of SBL………………………………………………………….….40
4.2 Deposit Composition of SBL…………………………………………….….42
4.3 Loans and Advances of SBL…………………………………………….…..44
4.4 Loans and Advances to the Deposit collection………………………….…..46
4.5 Percentage Change in Deposit Collection and Loans and Advances……..…48
4.6 Profitability Ratios…………………………………………………………..50
4.7Liquidity Ratios……………………………………………………………..52
4.8Analysis of Non-Performing Loan…………………..…………………...…56
4.9 Analysis of Capital Adequacy ………………………………………………57
4.10 Correlation between Deposit and Loans and Advances………………..…..58
4.11Relationship of Total Lending and Total deposit to Profitability……….…59
4.12 Trend Analysis of Total Deposit Collection………………………….…….60
4.13 Trend Analysis of Loans and Advances…………………………….………61

CHAPTER-V: SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary of the Findings…………………………………………………….63
5.2 Conclusion …………………………………………………………………..65
5.3 Recommendations……………………………………………………………66

BIBLIOGRAPHY
ANNEXES
 List of Tables
Page No.

Table No.4.1: Deposit Collection by SBL……………………………………………...40

Table No. 4.2: Deposit Composition of SBL…………………………………………....42

Table No. 4.3: Loans and Advances of SBL…………………………………………....45

Table No. 4.4: Loan Disbursed to Deposit Collection…………………………………..47

Table No. 4.5: Deposit Collection and Loan and Advances…………………………….49

Table No. 4.6: Analysis of Net Interest to Total Assets………………………………...50

Table No. 4.7:Net Profit to Total assets Ratio…………………………………………51

Table No. 4.8: Return on Equity Capital……………………………………………….52

Table No. 4.9: Analysis of Current Ratio………………………………………………53

Table No. 4.10: Cash and Bank Balance to Total Deposit………………………………54

Table No. 4.11: Cash and Bank Balance to Current Assets………………………….....55

Table No. 4. 12: Non-Performing loan to Total loans and advances……………………56

Table No. 4.13: Capital Adequacy Ratio………………………………………………..57

Table No.4.14: Coefficient of correlation between Deposit Collection and Loan

Disbursement…………………………………………………………………………….58

Table No. 4.15: Total amount of Net Profit, Deposit and Lending……………………..59

Table No. 16: Relationships between total lending and Total Deposit to Profitability…60

Table No. 4.17: Trend of Total Deposit………………………………………………....60

Table No. 4.18: Trend of Loans and Advances………………………………………....61

 List of Figures

Page No.

Figure No. 4.1: Deposit Collection of SBL……………………………………………..41

Figure No. 4.2: Deposit Composition of SBL…………………………………………..44

Figure No. 4.3: Loans and Advances………………………………………………...….46

Figure No. 4.4: loan Disbursed to Deposit Collection …………………………………48

Figure No. 4.5: Trend of Deposit Collection……………………………………………61

Figure No. 4.6: Trend of Loans and Advances of SBL…………………………………62

ABBREVIATIONS
A.D. - Anno Domini

A.M. - Arithmetic Mean

B.S. - Bikram Sambat

BOK - Bank of Kathmandu

C.V. - Coefficient of Variation

EPS - Eerning Per Share

F/Y - Fiscal Year

G.M - General Manager

Ktm - Kathmandu

Ltd. - Limited

M. - Million

MBA - Master of Business Administration

NBL - Nepal Bank Limited

NIBL - Nepal Investment Bank Limited

No. - Number

NPA - Non-Performing Assets

NPL - Non-Performing Loan

NRB - Nepal Rastra Bank

P.E - Probable Error

Pvt. - Private

r - Coefficient of Correlation

ROE - Return on Equity

Rs. - Rupees

S.E - Standard Error

Executive Summary

The primary objective of the study is to analyze the credit management of SBL which
will be useful for management, shareholders, creditors, investors, depositors, etc. The
major findings of the study are carried out by analyzing the financial data from 2004/05
to 2013/14. This study is mainly based on the annual report provided by the concerned
bank. While sampling the bank for study, only one development bank has been taken as
sample. Siddhartha bank limited (SBL), established in 2002 as the seventeenth
commercial bank of the country. And promoted by prominent personalities of Nepal,
today stands as one of the consistently growing banks in Nepal.

Credit is the most import function of banks. It is regarded as the core operation of every
bank but the banking sector is far from this fact. Thus, credit management is concerned as
heart issue in Nepalese banking sectors. Nepalese banks are lacking scientific and
imperial research that could identify the issue of credit management. Banks and financial
institutions are investing in house loan and hire purchase loan for safe purpose. Due to
lack of good lending opportunities, banks appear to be facing problems of excess
liquidity. And also due to unhealthy competition among banks the recovery of the bank‘s
credit is going towards negative trend. Non-performing credits of the banks are
increasing year by year. In this regard, the performance of Nepalese banks is to be
analyzed in terms of credit management.

To conclude this study, the whole study has been divided into five chapters of the
different aspects. This research project analyzes trend of deposit collection and lending,
and also analyzes the performance of SBL in terms of financial ratios such as liquidity
ratios, profitability ratios, non-performing loans. The study also examines how well SBL
has managed its capital adequacy and lending.
 BIBLIOGRAPHY

Basnet S. (2008), Credit management of Rastriya Banijjya Bank limited, Kathmandu:

Central Department of Management, T.U
Clemen, J.H. (1963), Banking lending, London, Butterworth Publishers.
Dahal P. (2009), Credit management of Nepal Commerce and Credit Limited,
Kathmandu: Shanker Dev Campus, Putalisadak.
Dhakal, M.N. (2011), A study on Credit Risk Management of Standard Charted Bank
and Rastriya Banijjya Bank, Kathmandu: Shanker Dev Campus Putalisadak.
Dipendra B.C (2005), “Non Performing Assets: A Need for Rationalization”
Kathmandu: Nepal Rastra Bank Samachar Nepal Rastra Bank, vol. 50, p 17
Ghimire S. (2010), A study on Credit Management of Joint Venture Commercial Bank
with reference to NIBL and BOK, Kathmandu: Shanker Dev Campus, Putalisadak
Basu, A. K. (1982). Fundamentals of Banking Theory and Practices, Calcutta, A. K.
Mukarjee Publication.
Karim, Yasir (2012), “Impact of Risk Management on Non-Performing Loans and
Profitability of Banking Sectors of Pakistan.” International Journals of Business
and Social Science. Federal Urdu University of Arts, Science and Technology
Islamabad, Pakistan Vol.3 No. 7; April 2012
Karki A. (2006), A study on Credit Management and Analysis of Commercial Bank
Kathmandu: Shanker Dev Campus, Putalisadak
Kerlinger, F. N. (1983). Foundation of Behavioural Research, New Delhi, Surjeet
Publications.
Kothari C. R. (1990). Research Methodology, Methods and Techniques, 2nd Edition, New
Delhi, Wishwa Prakashan.
Shrestha, R. (2002), A Comparative Study on Investment Policy of Indosuez Bank Ltd.
and Everest Bank Ltd, Kathmandu: Shanker Dev Campus, Putalisadak.
Levin, I. Richard and Rubi, S. Davi (1999). Statistics for Management, Prentice Hall of
India Pvt. Ltd., New Delhi.
Mandlin, Snock (1990). Evaluation of Banking Supervision in Nepal Rastriya Bank.
P. N. Abrd and O. P. Gupta (1987). Dictionary of Commerce, New Delhi, Anmd
Publication.
Paudel, N. P. (2053 BS.). Financial Statement Analysis: An Approach to Evaluate Bank's
Performance, NRB Samchar 41st Anniversary.
Mundal, Sujit (2010). “Understanding of credit derivative.” Business Age. p. 26.
Sekaran, U. (1992). Research Methods in Business, a Skill Building Approach,
Singapore, John Wiley and Sons.
Thapa Kiran (2008). Financial Institutions and Market. Kathmandu: Asmita Publication.
Van Horne, J.C. Wachowicz, J.M. (1997). Fundamentals of Financial Management,
Prentice Hall of India Private Limited.
Singh R. (2008), Credit Management of BOK and NABIL, Kathmandu: Central
Department of Management, T. U.
www.nrb.org.np
www.sbl.com.np
 ANNEXES
ANNEX-1

Trend Analysis of Total Deposit collection

5 (a) Trend Analysis of Total Deposit

Amount in million
Year (x) Deposit (y) Year (x)-5 X2 Xy
2004/05 2462.43 -4 16 -9849.72
2005/06 3918.08 -3 9 -11754.2
2006/07 6625.08 -2 4 -13250.2
2007/08 10191.44 -1 1 -10191.4
2008/09 15854.80 0 0 0
2009/10 20197.03 1 1 20197.03
2010/11 21575.65 2 4 43151.3
2011/12 25948.51 3 9 77845.53
2012/13 28392.82 4 16 113571.3
2013/14 35408.65 5 25 177043.3
Total 170574.49 5 85 386762.8

Trend Forecast for Next Five Years

Year Forecast deposit (yc=a+bx)
2014/15 44358.35
2015/16 48908.5
2016/17 53458.65
2017/18 58008.8
2018/19 62558.95

Σ y 170574.49
Where, a= = = 17057.45
n 10
Σ xy 386762.8
b= 2 = = 4550.15
Σx 85
yc = a + bx(2014/15)
=17057.45+4550.15x 6
=44358.35
 b) Trend Analysis of Loans and Advances
Table No. 4.18: Trend Analysis of Loans and Advances
Amount in million

Year (x) Loans and Year (x)-5 X2 Xy

advances(y)
2004/05 2371.25 -4 16 -9485
2005/06 3789.12 -3 9 -11367
2006/07 6223.86 -2 4 -12448
2007/08 9335.60 -1 1 -9335.6
2008/09 13328.62 0 0 0
2009/10 16653.85 1 1 16653.9
2010/11 18384.03 2 4 36768.1
2011/12 20217.58 3 9 60652.7
2012/13 23086.56 4 16 92346.2
2013/14 27186.91 5 25 135935
Total 140577 5 85 299720

Trend Forecast for Next Five Years

Year Forecast loans and advances (yc=a+bx)

2014/15 35214.36
2015/16 38740.47
2016/17 42266.58
2017/18 45792.69
2018/19 49318.8

Σ y 140577
Where, a= = = 14057.7
n 10
Σ xy 299720
b= 2 = =3526.11
Σx 85
yc = a + bx(2014/15)
=14057.7+3526.11x 6
=35214.36
Annex 2: Coefficient of correlation between Deposit Collection and
Loan Disbursement

Regression Statistics
Multiple R 0.99786
R Square 0.995725
Adjusted R
Square 0.995191
Standard
Error 586.3896
Observation
s 10

ANOVA
Significan
Df SS MS F ce F
6.4E+0 1863.
Regression 1 6.41E+08 8 5 9.15E-11
34385
Residual 8 2750822 3
Total 9 6.44E+08

Coefficien Standard P- Lower Upper Lower Upper

ts Error t Stat value 95% 95% 95.0% 95.0%
3.2453 0.011 1954.0 330.639 1954.035
Intercept 1142.338 351.9933 4 8 330.6398 36 84 95
0.7976 0.71672 0.797618
X Variable 1 0.757171 0.01754 43.168 9E-11 0.716723 18 32 16

Coefficient of Correlation = 0.9978

Annex-3: Relationships of Total Lending and Total Deposit to
Profitability

a) Relationship between net profit and Loans and Advances

Regression Statistics
Multiple R 0.942037
R Square 0.887434
Adjusted R
Square 0.873363
Standard
Error 71.94362
Observations 10

ANOVA
Significan
Df SS MS F ce F
32643 63.06
Regression 1 326439.3 9 9 4.6E-05
5175.8
Residual 8 41407.08 8
Total 9 367846.4

Coefficien Standard P- Lower Upper Lower Upper

ts Error t Stat value 95% 95% 95.0% 95.0%
- 0.299 -
Intercept -50.8806 45.90293 1.1084 9 -156.733 54.9717 156.733 54.9717
7.9416 0.02906 0.01598 0.02906
X Variable 1 0.022523 0.002836 2 5E-05 0.015983 3 3 3
Coefficient of Correlation = 0.9420

b) Relationship between Net Profit and Deposits

Regression Statistics
Multiple R 0.95233
R Square 0.906933
Adjusted R
Square 0.8953
Standard
Error 65.41628
Observation
s 10

ANOVA
Significan
Df SS MS F ce F
77.9596
Regression 1 333612 333612 7 2.13E-05
Residual 8 34234.32 4279.29
Total 9 367846.4

Coefficien Standard Lower Upper Lower Upper

ts Error t Stat P-value 95% 95% 95.0% 95.0%
- 61.5901 - 61.5901
Intercept -28.961 39.26757 0.73753 0.48187 -119.512 7 119.512 7
8.82947 2.13E- 0.02178 0.01276 0.02178
X Variable 1 0.017277 0.001957 7 05 0.012765 9 5 9
Coefficient of Correlation = 0.9523