USE OF CAMEL RATIO IN PREDICTION OF

FINANCIAL HEALTH OF GOVERNMENT

OWNED COMMERCIAL BANKS

BY
Rohan Byanjankar

A Summer Project Report Submitted to

Faculty of Management, Tribhuvan University
in the partial fulfillment of the requirements for the degree of

Bachelor of Business Administration

at the
Sainik Awasiya
Mahavidyalaya Tribhuvan
University

Sallaghari, Bhaktapur

April 2017
 STUDENT’S DECLARATION

This is to certify that I have completed the Summer Project entitled “Use of CAMEL
ratio in Prediction of Financial Health of Government Owned Commercial Banks”
under the guidance of “Mr. Krishna Prasad Gwachha” in partial fulfillment of the
requirements for the degree of Bachelor of Business Administration at Faculty of
Management, Tribhuvan University. This is my original work and I have not
submitted it earlier elsewhere.

Date: Signature:

Name:

i
 CERTIFICATE FROM THE SUPERVISOR

This is to certify that the summer project entitled “Use of CAMEL ratio in Prediction
of Financial Health of Government Owned Commercial Banks” is an academic work
done by “Rohan Byanjankar” submitted in the partial fulfillment of the requirements
for the degree of Bachelor of Business Administration at Faculty of Management,
Tribhuvan University under my guidance and supervision of Krishna Prasad
Gwachha. To the best of my knowledge, the information presented by him/her in the
summer project report has not been submitted earlier.

Signature of the Supervisor

Krishna Prasad Gwachha

Faculty of Finance,

Sainik Awasiya Mahavidyalaya, Sallaghari, Bhaktapur

ii
 ACKNOWLEDGEMENTS

I would like to express my sincere gratitude to Sainik Awashiya Mahavidyalaya,

Sallaghari, Bhaktapur, for providing the golden opportunity to prepare a project work
on “Use of CAMEL ratio in Prediction of Financial Health of Government Owned
Commercial Banks”. The research work is a rigorous task and calls for stringent
effort. The horizon of knowledge proliferated with the exploration of facts and
figures; also it has made me aware of the contemporary banking scenario of Nepal
along with the abridged picturesque of Nepalese Banking System. Moreover, I
experience and enjoyed the difficulty in conducting research, however, I got
opportunity to hone my language, knowledge, and talent.

I am extremely thankful to Mr. Krishna Prasad Gwachha for his immeasurable

guidance, inspiration, and resource materials, without which I would not have been
able to prepare this project work being in bound of complete formality. I express my
sincere thanks to Mr. Ram Singh Budal, BBA Coordinator; SAMB for his time and
advises in managing the content of the project work. I express my sincere thanks to
our friends for their time and advises to sharpen up this study.

As learning is not just acquiring knowledge from books only but also implementing it
in real life situation. Therefore, this is the platform where we get the opportunity to
exhibit our skills, creativity etc. Such work will certainly lay the foundation stone for
us to enhance the degree of our potentiality.

I would be obliged to any suggestions and comments from the readers that will assist
in further improvement of this project work.

April 2017

Rohan Byanjankar

iii
 TABLE OF CONTENTS

Student’s Declaration......................................................................................................i

Certificate From the Supervisor.....................................................................................ii

Acknowledgements.......................................................................................................iii

Table of Contents..........................................................................................................iv

List of Tables.................................................................................................................vi

List of Figures..............................................................................................................vii

Abbreviations..............................................................................................................viii

Executive Summary......................................................................................................ix

CHAPTER I INTRODUCTION

1.1. Context Information........................................................................................1

1.1.1. Introduction..............................................................................................1

1.1.2. Overview of CAMELS Framework.........................................................2

1.2. Purpose of the Study........................................................................................5

1.3. Significance of the Study.................................................................................5

1.4. Limitation of the Study....................................................................................6

1.5. Literature Survey.............................................................................................6

1.6. Research Methods used for Data Collection and Analysis.............................9

1.6.1. Research Design.......................................................................................9

1.6.2. Population and Sample.............................................................................9

1.6.3. Sources of Data......................................................................................10

1.6.4. Data Processing Technique....................................................................10

CHAPTER II DATA PRESENTATION AND ANALYSIS

2.1. Organization Profile......................................................................................12

2.1.1. Rastriya Banijya Bank............................................................................12

2.1.2. Nepal Bank Limited (NBL)...................................................................12

iv
 2.1.3. Agriculture Development Bank.............................................................13

2.2. Data Presentation...........................................................................................13

2.2.1. Capital Adequacy...................................................................................13

2.2.2. Asset Quality..........................................................................................16

2.2.3. Management Capability.........................................................................19

2.2.4. Earnings..................................................................................................22

2.2.5. Liquidity.................................................................................................25

2.3. Data Analysis.................................................................................................28

2.3.1. Analysis of Coefficient of Variation, Skewness, and Kurtosis..............29

2.3.2. Correlation Matrix..................................................................................33

2.3.3. Regression Analysis...............................................................................33

2.4. Findings and Discussion................................................................................36

2.4.1. Findings..................................................................................................36

2.4.2. Discussion..............................................................................................37

CHAPTER III CONCLUSION AND ACTION IMPLICATION

3.1. Conclusion.....................................................................................................39

3.2. Action Implications.......................................................................................40

Appendices

Appendix 1: Indicators of Each Components of CAMEL Framework

Appendix 2: Descriptive Statistical Tools Using Microsoft Excel

Appendix 3: Financial Profile of Sample Banks

Glossary

References

v
 LIST OF TABLES

Table Details Page

Number Number

Table 2.1 Capital Adequacy Ratio 14

Table 2.2 Total Loans and Advances, Non-Performing Loan, and 17

Loan Loss Provision

Table 2.3 Operating Expense Ratio and Asset Utilization Ratio 20

of Sampled Banks

Table 2.4 ROE, ROA, and PM of sampled banks over 6 years 23

Table 2.5 Loan to deposit Ratio, Cash Reserve Ratio, and Cash 26
and Equivalent to Total Asset ratio

Table 2.6 Coefficient of Variation, Skewness, and Kurtosis of 29

indicators of components of CAMEL Framework

Table 2.7 Correlation Matrix showing relationship between 33

Earnings and other indicators of CAMEL Framework

Table 4.1 Financial Profile of Nepal Bank Limited

Table 4.2 Financial Profile of Rastriya Banijya Bank

Table 4.3 Financial Profile of Agricultural Development Bank

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 LIST OF FIGURES

Figure Details Page

Number Number

Figure 2.1 CC to RWA and CAR of Sampled Banks 14

Figure 2.2 Average CC to RWA and CAR of Sampled Banks over 15

6 years along with IACAR

Figure 2.3 NPLR and LLPR of sampled banks over 6 years 17

Figure 2.4 LLP/NPL ratio of sampled banks over 6 years 18

Figure 2.5 Operating Expenses Ratio of sampled banks over 6 years 20

Figure 2.6 Asset Utilization Ratio of sampled banks over 6 years 20

Figure 2.7 ROE and Profit Margin of sampled banks over 6 years 23

Figure 2.8 Return on Asset of Sampled banks over 6 years 24

Figure 2.9 LDR, Average LDR, and Required LDR of sampled 26

banks over 6 years

Figure 2.10 Cash Reserve Ratio of sampled banks over 6 years. 27

Figure 2.11 Coefficient of Variation of CAMEL ratios of Sampled 29

Banks over 6 Years

Figure 2.12 Skewness of CAMEL ratios of Sampled Banks over 6 30

Years

Figure 2.13 Kurtosis of related ratios of Sampled Banks over 6 years 31

Figure 2.14 Relationship of AUR with ROE, ROA and, PM 33

Figure 2.15 Relationship of NPL with ROE, ROA, and PM 34

Figure 2.16 Relationship of LDR with ROE, ROA, and PM 34

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 ABBREVIATIONS

 ADB: Asian Development Bank

 ADBL: Agricultural Development Bank Limited
 AUR: Asset Utilization Ratio
 CAMELS: Capital Adequacy, Asset Quality, Management Capability, Earnings,
Liquidity and Sensitivity to Market
 CAR: Capital Adequacy Ratio
 CBNRBR: Cash Balance at NRB Ratio
 CBTAR: Cash Balance to Total Asset Ratio
 CBTDR: Cash Balance to Total Deposit Ratio
 CCD: Credit to Core Capital cum Deposit Ratio
 CCR: Core Capital to Risk Weighted Asset
 CDR: Credit to Deposit Ratio
 CRAR: Capital to Risk Weighted Asset Ratio
 EPS: Earning Per Share
 LDR: Loan to Deposit Ratio
 LLP: Loan Loss Provision
 LLPR: Loan Loss Provision Ratio
 NBL: Nepal Bank Limited
 NII: Net Interest Income
 NPL: Non-Performing Loan
 NPLR: Non-Performing Loan Ratio
 NRB: Nepal Rastra Bank
 PM: Profit Margin
 RBBL: Rastriya Banijya Bank Limited
 ROA: Return on Asset
 ROE: Return on Equity
 TA: Total Asset
 TD: Total Deposit
 TLA: Total Loans and Advances

viii
 EXECUTIVE SUMMARY

In the modern era, the banking sector has proved its striking eminence; it holds a big
support to the economy of any nation chiefly because of the transactions of huge,
ever- proliferating wherewithal. Banking is a complex system and the complete study
of banking system calls for rigorous efforts in data collection, analysis, and
interpretation; however, the vested interest of a researcher lie profusely. The prime
objective of this research to use CAMEL ratio in Prediction of Financial Health of
Government Owned Commercial Banks. Three commercial banks, Nepal Bank
Limited, Rastriya Banijya Bank Limited, and Agricultural Development Bank
Limited, served as the subjects in the study designed to investigate the six years’
(2011 to 2016) financial performance of commercial banks. The study made use of
secondary obtained from Bank Supervision Report, and Banking and Financial
Statistics by Nepal Rastra Bank, and Annual Reports of concerned commercial banks.
Each of the component of CAMEL has been examined being based on corresponding
financial ratios. Capital Adequacy Ratio and Core Capital to Risk Weighted Exposure
have been examined to assess capital adequacy, and Asset Quality has been inspected
by analyzing Non-performing loan and Loan Loss Provision. Management Capability
is an qualitative aspect, and has been appraised by assessing Operating Expense Ratio
and Asset Utilization Ratio; Return on Asset, Return on Equity, and Profit Margin
have been analyzed to study the profitability. Liquidity position of sampled banks
have been gauged by perusing Loan to Deposit Ratio, Cash and Equivalent to Total
Asset, Cash and Equivalent to Total Deposit, and Cash Balance at NRB to Total
Deposit. Moreover, descriptive statistical tools such as mean, median, standard
deviation, coefficient of variation, skewness, and kurtosis have been used. The results
reveals that the current status of government owned commercial banks of Nepal is
satisfactory. Each of the indicators of components of CAMEL is evincing the positive
signal, which concludes that the overall financial scenario of government owned
commercial banks is strengthening. ROA and Profit Margin have positive relationship
with AUR and LDR, while ROE has negative relationship with both AUR and LDR.
Further, the result evinces that ROE, ROA and Profit Margin have positive
relationship with Non-performing loan. Lastly, the result evinces that NPLR and LDR
have consistency over study years, while indicators of capital adequacy have high
inconsistency.

ix
 CHAPTER I

INTRODUCTION

1.1. Context Information

1.1.1. Introduction
Financial Institutions have become one of the indispensable components of economy
of every nation. The proper financial system is the utmost requirement for the smooth
functioning of an economy. Among myriad financial institutions, commercial banks
make up the largest group of depository institutions measured by asset size.
“Commercial Banks are those banks that sell deposits and make loan to businesses
and individuals. Commercial banks are the largest deposit holders, and they are the
largest source of loans to consumer, and corporate.” (Rose & Hudgins, 2010)

The history of financial system of Nepal began in 1937 with the establishment of the
Nepal Bank Ltd. as the first commercial bank of Nepal with the joint ownership of
government and general public; Nepal Rastra Bank was established after 19 years
since the establishment of the first commercial bank. A decade after the establishment
of NRB, Rastriya Banijya Bank, a commercial bank under the ownership of
Government Nepal was established (Nepal Rastra Bank, 2015). NRB has adopted
standardized approach of Basel II in its simplified form- the simplified standardized
approach. NRB's traditional supervision methodology was based on compliance check
and CAMELS (Capital Adequacy, Asset Quality, Management competence, Earning,
Liquidity, and Sensitivity to Market Risk) ratings (Nepal Rastra Bank, 2015).

Nepalese economy is still in embryonic stage and struggling to blossom. The

remittance based Nepalese economy has about twenty-eight commercial banks, which
is deemed as not a favorable state by financial experts and economists. The health
check of commercial banks in Nepal has been the matter of concern for almost all
Nepalese people as commercial banks are the largest amongst the depository
institutions, with market capitalization of Rs. 1467.152 Billion, which is 50.82 percent
of total market capitalization (Rawal & Sapkota, 2016-17). Among twenty-eight
commercial banks in Nepal, three commercial banks are fully or partially owned by
Government of Nepal. The financial soundness of government owned commercial
bank in Nepal is the primary concern of the research report. All the commercial
banks in Nepal are under
surveillance of Nepal Rastra Bank, the central bank of Nepal. NRB, the apex body of
all banking and financial institutions, has recently adopted principles of BASEL III
accord, which clearly states that the financial soundness of every commercial bank
must be measured under CAMELS rating system, however, Nepal Rastra Bank has
been conducting financial analysis under CAEL, that is, Capital Adequacy, Asset
Quality, Earning and Liquidity.

The financial soundness of government owned-giant commercial banks of Nepal is

the matter of concern for every individual, domestic and foreign corporation, and
Nepal Government itself. Hence, the health checkup of these three commercial banks
has been carried out by examining Capital adequacy, Asset quality, Management
quality, Earning, and Liquidity (CAMEL rating).

1.1.2. Overview of CAMELS Framework

Basel Committee on Banking Supervision, committee of the banks for international

settlements, an institution that promotes financial and monetary cooperation among
the world’s central banks (Encyclopedia Britannica, 2015). CAMELS rating system,
which consist of Capital adequacy, Asset Quality, Management Capability, Earnings
and Liquidity, has been recommended by Basel Committee on Banking Settlement as
the standard rating criteria for assessing a financial institution. However, the sixth
component, sensitivity (S) was added to CAMEL in 1995, which refers to sensitivity
to market risk and addresses interest rate risk. Most of the world’s central banks and
monetary institutions are using the CAMELS framework to assess the health of
financial institutions.

1.1.2.1. Capital Adequacy

CAMELS framework is widely regarded as the unabridged tool for assessing the
financial health of a financial institution. The six components of CAMELS framework
namely; capital adequacy, asset quality, management capability, earnings, and
liquidity are the focal points that reflects the degree of soundness of a financial
institution. The first component, capital adequacy that refers to the statutory minimum
reserves of capital a bank or other financial institutions must have available. Capital
adequacy determines how well the financial institution can manage with shocks to
their balance sheet (Asian Development Bank, 2002). Hence, the capital adequacy

2
tracks the Capital

3
Adequacy Ratio (CAR), which is a measure of a bank’s capital, expressed as the
percentage of a bank’s risk weighted asset. The capital adequacy ratio takes into
account the most important financial risks- foreign exchange risk, credit risk and
interest rate risk. The capital adequacy ratio is important from the view point of
solvency of bank as higher CAR denotes the ability of financial institution to manage
shocks with balance sheet resulted from untoward events which arise as a result of
credit risk as well as market risk, also foreign exchange risk (Baral, 2005). Leverage
ratio can be used to measure the capital adequacy of the bank and financial
institutions. Leverage ratio is calculated by dividing book value of core capital by
book value of total assets, which must be greater than 3 percent according to Basel III.

Core Capital
Leverage Ratio = ≥ 3%
Total Asset

As per the directive of Nepal Rastra Bank, Capital Adequacy Ratio must be
maintained 11%; further, NRB has strictly directed all commercial banks that the
amount of the supplementary capital should not be in excess to the amount of the core
capital (Nepal Rastra Bank, 2015).

1.1.2.2. Asset Quality

Assets refers to the valuable rights owned by the company or financial institution, and
is the major component of balance sheet (Oxford Learner's Dictionary, 2017). Asset
of a company generates revenue in the form of interest or rent or any other form of
income such as interest on investment, interest on loan (housing loan, auto loan,
corporate loan, agriculture loan) (Kiyosaki, 2011). The asset side of financial
institutions is largely populated by Loans and advances, which occupies 64.84 percent
of total asset (Nepal Rastra Bank, 2015). Good loans are the most profitable asset of
every bank and financial institution (Rose & Hudgins, 2010). The quality of asset
determines the degree of credit risk exposure of a financial institution. Some of the
measures to indicate the quality of asset held by Financial Institutions are loan
concentration by industry, region borrower, and portfolio quality; pattern of cash
flow, loan-loss provision ratio, loan loss ratio, reserve ratio, and check and balance of
loans (Asian Development Bank, 2002).

4
1.1.2.3. Management Capability

Management assessment determines whether an institution is able to properly react to

financial stress (Asian Development Bank, 2015). This component rating is reflected
by the management's capability to point out, measure, look after, and control risks of
the institution's daily activities. It covers the management's ability to ensure the safe
operation of the institution as they comply with the necessary and applicable internal
and external regulations (Asian Development Bank, 2002). Management Capability
refers to how well the management of the financial institutions is utilizing its
resources. It is concerned with deposit and credit marketing. The business strategy of
a bank is the key determinant of management capability of a bank or any organization.
A bank with strong management has high asset utilization rate, less operating expense
ratio, high earnings per employee.

1.1.2.4. Earning

Healthy financial institutions have high earning capability other things remain
constant. Profitability is the major determinant of smooth operation of financial
institutions; however, high profitability reflects excessive risk taking by financial
institution (Saunders & Cornett, 2007). Return on Asset, Return on Equity, Net
Interest Income (NII), and Earning per Share (EPS) are major four tools used to assess
profitability of financial institutions. NRB uses return on total assets as an indicator of
profitability of a commercial bank. It also uses interest income, net interest income,
non-interest income, operating income, and net profit to evaluate the profitability of a
commercial bank (Nepal Rastra Bank, 2015).

1.1.2.5. Liquidity

One of the most important tasks the management of any financial institutions faces
ensuring adequate liquidity at all times, no matter what emergencies may appear. A
financial firm is considered to be liquid if it has ready access to immediate spendable
funds at reasonable cost at precisely the time those funds are needed (Rose &
Hudgins, 2010). In case of commercial banks, first type of liquidity risk arises when
depositors of commercial banks seek to withdraw their money and the second type
does when commitment holders want to exercise the commitments recorded off the
balance sheet (Baral, 2005). NRB uses Credit to Deposit ratio, cash and equivalent to

5
total asset ratio,

6
and cash and equivalent to total deposit ratio to measure the liquidity position of
commercial banks (Nepal Rastra Bank, 2015). However, Commercial banks prefer
Credit to Core Capital cum Deposit (CCD) ratio to Credit to Deposit ratio.

1.1.2.6. Sensitivity

Sensitivity refers to the degree of responsiveness of asset and liabilities of a financial

asset towards changes in interest rate (Baral, 2005). The sixth component of
CAMELS, sensitivity measures market risk, more specifically interest rate risk.
Commercial banks all around the world are involved in borrowing and lending,
transaction of foreign exchange, use of derivatives instruments and so on (Rawal &
Sapkota, 2016-17). All above mentioned commercial bank activities are subject to
either interest rate risk or foreign exchange rate risk or price risk. The high degree of
sensitivity reflects the hazardous health of financial institutions and vice-versa.
Interest rate risk, price risk, and foreign exchange risk are the major risk associated
with sensitivity (Asian Development Bank, 2015).

1.2. Purpose of the Study

The major purpose of the study is to use CAMEL ratio in Prediction of Financial
Health of Government Owned Commercial Banks. The specific purposes of this study
are as follows:

 To determine overall performance of government ownership banks in Nepal

 To find out the current financial status of Government Ownership Nepalese Banks

1.3. Significance of the Study

Commercial banks are the dominant depository financial institutions all over the
world (Saunders & Cornett, 2007). The gravity of the rationale of sound financial
sector has increased tremendously after the international financial upheaval of 2008
ensuing global economic recession (Baral, 2005). Health of a financial institution is a
function of multiple factors such as quality of assets, liquidity position, capital base,
market sensitivity, and earnings. All these factors are associated with the specific risk
exposure of a financial institution such as credit risk, interest rate risk and so on.
Financial Performance of Commercial Banks of Nepal has been one of the most
preferred topics by myriad researchers; but majority of the study were conducted at
Joint Venture Banks
7
(Baral, 2005) and Domestic Private Banks (Basnet, 2008; Bhandari, 2010). There has
not been any significant study concentrating on the overall performance of
government owned commercial banks of Nepal. The report provides basic picturesque
of the government owned commercial banks of Nepal. This study scrutinizes each
component of CAMEL by using the corresponding financial ratios to determine the
overall performance of these banks. This report has made use of statistical tools such
as regression, and correlation to depict the relationship between profitability, and
other elements of CAMEL framework. Therefore, the report makes clear presentation
on impact of other elements of CAMEL framework on profitability of government
owned commercial banks, and signifies the differences in the findings of the different
studies. Consequently, the report will be fruitful for all the concerned parties such as
shareholders, creditors, depositors and other stakeholders of these banks; moreover,
the sampled commercial banks are the cradle of Nepalese Banking System, as a result,
the study of overall performance of these banks is the matter of concern for every
individual, business, and government of Nepal itself.

1.4. Limitation of the Study

The proposed study has limitation on its part, which are as follows:

 The study represents abridged scenario of government owned commercial banks

of Nepal.
 The report has only covered certain major financial ratios that defines each
component of CAMEL.
 The study has not examined the sixth component of CAMELS, sensitivity to
market.
 The study is only based on six year’s data from 2011 to 2016.
 Simple statistical tools have been used to describe and interpret the data.

1.5. Literature Survey

Literature survey is a process of systematic, meticulous and critical summary of the

published literature in the field of concerned research. A literature review (or
overview) is a summary and analysis of current knowledge about a particular topic or
area of enquiry (Zikmund, Babin, Carr, & Griffin, 2009). A survey of research
articles,

8
financial reports, and newspaper articles has been carried out to discover what other
researches have been already done in the corresponding research topic.

Baral (2005) has evaluated the financial health of joint venture banks in the
framework of CAMEL. Multiple financial ratios have been examined such as capital
adequacy ratio, asset utilization ratio, return on asset, return on equity, profit margin,
credit to deposit ratio, Cash and equivalent to total deposit ratio and so on. Three joint
venture commercial banks have been evaluated along with their comparative study.
Baral found that the joint venture commercial banks are well capitalized but their
capital base relative to the risk-weighted assets is not strong. Quality of assets of joint
venture banks on the average is satisfactory. Nonperforming assets of all joint venture
banks under study are far below the aggregate percentage of nonperforming assets of
commercial banks. Both indicators—operating expenses ratio and earning per
employee—of management quality of joint venture banks are above the industry
average during the study period. Earning/profitability indicators—ROE, ROA and PM
—show that financial health of joint venture banks is not so weak. In general, earning
performance of joint venture banks, as indicated by ROA, is fair. Liquidity indicators
of joint venture banks show that they have stored high level of liquidity and are not
facing the liquidity deficit problem, instead, they are facing the high liquidity problem
(Baral, 2005).

Narasimhan and Goel (2013) have analyzed the capital adequacy and the leverage of
the four Indian Banks and have attempted to correlate it with their growth. This report
analyses the performance of the top Indian banks, both private and public sector for
the period FY 2008 – 2012, the years since the last world recession. The report
attempts to demonstrate that the Indian banks exhibit stability in such times of crisis
due to their capital structure and regulatory environment. The study analyzes the
capital adequacy ratio and the Debt to Equity ratio of these four banks in the Indian
scenario: ICICI, Axis Bank, HDFC and SBI. The study tries to compare the capital
adequacy ratios and debt to equity ratios of these banks, and see how the successfully
banks have managed to survive the recession with the help of their capital structure
and reserves. The report reveals that the Capital adequacy of these banks has been
between 10 and 20 percent most of the time. A capital adequacy in this range seems to
be a safe and optimum yet, neither being so low that there is a problem in case of a
recession, and not being so high as to hamper growth. There is an increasing trend

9
in the capital adequacy moving

1
forward in the years 2008-2012. Further, there is a wide range of fluctuation in the
Debt to equity ratios of the banks. ICICI bank has the lowest debt to equity with a
value of around four, while the other private sector banks have kept it at around 8 or
9. SBI has one of the highest debts to equity ratios of around 12, showing that it
leverages the most to expand business. In general, the banking sector as such is
known to have a higher Debt to equity ratio than the manufacturing sector companies
do. Lastly, there is a positive correlation between the earnings per share of a bank and
its debt to equity ratio. ICICI, with one of the lowest debt to equity ratios, has
relatively lower earnings per share as compared to the rest. Axis bank and HDFC
have moderately good earnings with a moderate debt to equity ratio. SBI, in contrast
has leveraged a lot with a debt to equity ratio of around 12, since they have the
support of government reserves (Narasimha & Goel, 2013).

Sheefeni (2015) has assessed the bank-specific determinants for non-performing loans
in commercial banks in Namibia. The study employed time-series econometric
techniques of unit root, co-integration, and impulse response functions and forecast
error variance decomposition on the quarterly data covering the period 2001 to 2014.
Two models were estimated in which return on assets and return on equity were
alternating as profitability measures, among other variables that explain non-
performing loans. The results reveal that return on assets, return on equity, loan to
total asset ratio, log of total assets are the main determinants of nonperforming loans.
In specific terms, there was negative relationship between non-performing loans and
return on assets as well as return on equity (Sheefeni, 2015). Furthermore, a positive
relationship between non-performing loans and loan to total asset ratio was found.
Lastly, the results revealed a positive relationship between non-performing loans and
log of total assets.

Adebisi and Matthew (2015) studied the impact of non-performing loans on firms’
profitability of banks in Nigeria. The increased incidence of non-performing loans
(NPL) in Nigerian bank generated the current literature on quality of banks
profitability. Though, there have been reforms in the banking industry to ensure
effective financial institutions, the banks shareholders’ funds are affected by the non-
performing loans. This study made use of secondary data obtained from the Annual
Report and Statement of Accounts of the NDIC for a period of seven (7) years
(2006- 2012). Data were

1
analyzed using the regression statistical tools. Adebisi and Matthew revealed that
there is no relationship between the Non-Performing Loans (NPL) and Return on
Assets (ROA) of Nigerian Banks. This means that the asset values of the firms are not
affected by the level of NPL. The shareholders wealth maximization is affected as
second result showed that there is a relationship between the Non-performing Loan
(NPL) and Return on Equity (ROE) of Nigerian Banks. The research recommended
that the banks should ensure that the banks customer has viable means of repaying the
loan, which should be monitored to ensure efficiency (Adebisi & Matthew, 2015).

1.6. Research Methods used for Data Collection and Analysis

Research methodology refers to the process of collecting, processing, analyzing and

presenting the facts and figures in the understandable manner. The research is
primarily focused on the health checkup of Government Owned Commercial Banks of
Nepal. So, the research methodologies and necessary tools that contribute in
examining the overall performance of the commercial bank has been used.

1.6.1. Research Design

“Research design is a master plan specifying the methods and procedures for
collecting and analyzing the needed information” (Zikmund, Babin, Carr, & Griffin,
2009). Descriptive research design is the most apposite research design for conducting
this research as it seeks accumulate facts and portray the profile of each Government
Owned Banks in the framework of CAMEL.

1.6.2. Population and Sample

This study examines the financial performance of government owned commercial

banks of Nepal based on CAMEL framework over the period of 6 years (2011 to
2016). Currently, there are 28 commercial banks in Nepal, out of which, Government
of Nepal, wholly or partially, owns three commercial banks: Nepal Bank Limited
(NBL), Rastriya Banijya Bank Limited (RBBL), and Agricultural Development Bank
Limited (ADBL). Therefore, the study examines entire population, and the study
years spans over 6 years (2011 to 2016).

1
1.6.3. Sources of Data

The report encompasses a wide range of data that has been collected from various
sources. Secondary data has only been used in preparing the report. For preserving the
veracity of report, the necessary data have been collected from the audited reports of
concerned bank, financial report by Nepal Rastra Bank, and articles published in
National Daily.

The secondary data used in this report are as follows:

 Journals (Journal of Nepalese Business Studies)
 Articles from national newspapers
 Bank Supervision Report by Nepal Rastra Bank
 Bank and Financial Statistics by Nepal Rastra Bank
1.6.4. Data Processing Technique

1.6.4.1. Tabulation and Diagrammatic Representation of Data

To preserve the understandability of the data, the data have been classified and
presented in tables in order to make easy for viewers to make understand, and analyze
the data presented in the report. Data presented in table is more understandable in
comparison to data in paragraph. More interestingly, same data presented
diagrammatically provides more vivid presentation to the viewers than tabulation. So,
various diagrams such as bar diagram, line chart etc. have been used to give a vivid
presentation of data.

1.6.4.2. Statistical and Financial Tools

Descriptive statistics refers to statistics, which summarize and describe the data in a
simple and understandable manner (Zikmund, Babin, Carr, & Griffin, 2009).
Descriptive Statistical tools used in this report includes mean, median, standard
deviation, coefficient of variation, skew-ness, and kurtosis.

Financial tools depict the health of bank and financial institutions. Some of the major
financial ratios used to indicate each component of CAMEL framework are as
follows: Core Capital to Risk Weighted Asset (CCR) and Capital Adequacy Ratio
(CAR) represent Capital Adequacy. Nonperforming Asset Ratio (NPLR), Loan Loss
Provision Ratio (LLPR) appraise Asset Quality. Asset Utilization Ratio (AUR) and
Operating

1
Expenses Ratio (OER) assess Management Capability. Return on Asset (ROA),
Return on Equity (ROE) and Profit Margin (PM) are the indicators of Profitability.
Loan to Deposit Ratio (LDR), Cash and Equivalent to Total Asset Ratio (CETAR),
Cash and Equivalent to Total Deposit Ratio (CETDR), and Cash Balance at NRB to
Total Deposit Ratio (CBNRBR) reveal Liquidity Position.

1
 CHAPTER II

DATA PRESENTATION AND ANALYSIS

2.1. Organization Profile

2.1.1. Rastriya Banijya Bank

Rastriya Banijya Bank Limited (RBBL) was established on January 23, 1966 (10th
Magh, 2022 B.S.). It is one of the pioneering bank in the nation with the history of
half century. Earlier constituted under RBB act 2021 with the full ownership of the
government of Nepal, the Bank has been running under Bank and Financial Institute
Act (BAFIA) and Company Act (CA) 2063 at present. The Bank licensed by NRB as
an 'A' class commercial Bank of the country, has grown up as an indispensable
component of the Nepalese economy. RBBL has been a key player in Nepalese
banking sector and has established as the pillar for the development of banking in
Nepal. RBBL has contributed in the monetization of the economy eradicating the
system of dual currency in the market, initiating preliminary financial literacy, helping
in flourish of industrial, commercial and financial sector of the nation. RBBL has
currently employed 2600 employees and has made stringent effort to provide banking
services to its customers all across the nation through 170 branches, 17 counters and
28 branchless banking and 72 ATMs. (Rastriya Banijya Bank Limited, 2017)

2.1.2. Nepal Bank Limited (NBL)

Nepal Bank Limited, the pioneering bank of Nepal was established in November 15,
1937 A.D (Kartik, 30, 1994). It was formed under the principle of Joint venture (Joint
venture between government and general public). NBL's authorized capital was Rs.
10 million and issued capital Rs. 2.5 million of which paid-up capital was Rs. 842
thousand with 10 shareholders. The bank has been providing banking through its
branch offices in the different geographical locations of the country. NBL has been
licensed by NRB as a 'A' class commercial Bank of the country and is one of the
renowned bank of Nepal with more than one hundred branches all across Nepal. NBL
has currently employed 2356 employees (as per May 3, 2016) all across its one
hundred and twenty-six computerized branches located in different districts of Nepal.
(Nepal Bank Limited, 2017)
2.1.3. 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. Hence, rural finance is the principal
operational area of ADBL. Furthermore, the bank has also been involved in
commercial banking operations since 1984. The enactment of Bank and Financial
Institution Act (BAFIA) abolished all Acts related to financial institutions including
the ADBN Act, 1967. In line with the BAFIA, ADBL has been incorporated as a
public limited company on July 14, 2005. Thus, ADBL operates as an "A" category
financial Institution under the legal framework of BAFIA and the Company Act,
2053. (Agricultural Development Bank Limited, 2017)

2.2. Data Presentation

2.2.1. Capital Adequacy

Capital Adequacy ratio is one of the most significant financial tools that measures the
bank’s capital in terms of its risk-weighted exposure. Nepal Rastra Bank puts regular
surveillance on capital adequacy of banks and financial institutions; especially
commercial banks are under strict monitoring of Nepal Rastra Bank. The New Capital
Adequacy Framework requires the banks to maintain minimum capital requirements.
As per the framework, commercial banks need to maintain at least 6 percent Tier I
capital and 10 percent Total Capital (Tier I & Tier II). The minimum capital adequacy
requirements are based on risk-weighted exposures (RWE) of the banks. The capital
adequacy ratios of banks are monitored on monthly basis. The average Capital
Adequacy Ratio of the commercial banks in the review year is 12.03 percent. (Nepal
Rastra Bank, 2014)

1
 Table 2.1

Capital Adequacy

Ratio

Average
Fiscal CC to Average
Bank CAR CC to IAR
Year RWA CAR
RWA
NBL (9.66) (9.66)
2011 RBBL (22.52) (22.52) (5.54) (4.08) 10.59
ADBL 15.55 19.95
NBL (5.82) (5.82)
2012 RBBL (9.35) (9.35) (0.31) 1.03 11.50
ADBL 14.25 18.25
NBL - -
2013 RBBL 1.51 2.94 5.54 6.94 12.26
ADBL 15.10 17.89
NBL 4.63 5.26
2014 RBBL 3.66 5.60 7.03 8.68 12.03
ADBL 12.79 15.17
NBL 6.61 7.80
2015 RBBL 9.91 10.34 9.07 10.23 11.55
ADBL 10.69 12.55
NBL 7.72 9.11
2016 RBBL 10.73 11.20
ADBL 10.94 12.84 9.80 11.05 11.89
Source: Bank Supervision Report, 2015; Banking and Financial Statistics, 2015

The capital adequacy of three government owned commercial banks of Nepal from
2011 to 2016 has been presented in the table 2.1. The core capital to risk weighted
exposure has also been presented along with capital adequacy ratio. The yearly
average core capital to risk weighted assets and yearly average capital adequacy ratio
has been presented in table 2.1. Moreover, the Industry Average Ratio (IAR) has also
been annexed in the table 2.1 for clear comparison.

1
 Capital Adequacy Ratio
25.00
20.00
15.00
10.00
5.00
- (5.00)
(10.00)
(15.00)
(20.00) NBL RBBL ADBL NBL RBBLADBL NBL RBBL ADBL NBL RBBLADBL NBL RBBLADBL NBL RBBL ADBL
(25.00)
2011 2012 2013 2014 2015 2016

CC to RWA CAR Required CAR Required CC to RWA

Figure 2.1: CC to RWA and CAR of Sampled Banks

In figures 2.1, CC to RWA and CAR of individual banks in each years has been
presented in the bar diagram. On 2011, two out of three commercial banks are under-
capitalized as their CC to RWA and CAR is negative, that is below, 6 percent, and 10
percent respectively, while agricultural development bank is well capitalized as it has
maintained the standard by NRB (Bank Supervision Report, 2014). Nepal Bank
Limited in undercapitalized in 2012 to 2016, while Rastriya Banijya Bank has been
well capitalized since 2015 onwards. However, Agricultural Development Bank has
maintained CC to RWA and CAR during the surveyed years.

Average CC to RWA, CAR, and IACAR

15.00

10.00

5.00

2011 2012 2013 2014 2015 2016

(5.00)

(10.00)

Average CC to RWA Average CAR IAR

Required CAR Required CC to RWA

1
Figure 2.2: Average CC to RWA and CAR of Sampled Banks over 6 years along with
IACAR

The figure 2.2 provides vivid presentation of average CC to RWA and CAR of
sampled commercial banks in a particular year along with Industry Average Capital
Adequacy Ratio (IACAR) of corresponding years. The government owned
commercial banks have maintained standard CC to RWA and CAR since 2015
onwards; nevertheless, the IACAR is higher in the study years in comparison to
average CC to RWA and CAR of sampled banks.

2.2.2. Asset Quality

Asset quality ratios give a picture of the deposit-taker’s asset composition, and show
vulnerabilities in terms of potential losses from nonperforming loans and risks from
lack of diversification; asset quality overviews non-performing loans to total gross
loans, and sectoral distribution of loans to total loans (Asian Development Bank,
2015). Asset quality encompasses non-performing loan (NPL), loan loss provision
(LLP), LLP to NPL ratio, and NPL to Gross Loan. It is obvious from the theoretical
prescription that the performance of commercial banks largely depends on the quality
of assets held by them, and quality of the assets relies on the financial health of their
borrowers. (Jha & Hui, 2012)

1
 Table 2.2

Total Loans and Advances, Non-Performing Loan, and Loan Loss Provision

Fiscal Year Bank TLA NPL LLP NPLR LLPR LLP/NPL Average NPLR Average LLPR Average LLP/NPL
NBL 26,709.9 1,410.7 36.4 5.3 0.1 2.6
2011 RBBL 36,866.1 4,024.6 419.5 10.9 1.1 10.4 8.8 2.9 28.2
ADBL 34,459.9 3,491.5 2,504.0 10.1 7.3 71.7
NBL 29,698.9 1,731.6 252.1 5.8 0.9 14.6
2012 RBBL 40,448.4 2,940.4 639.3 7.3 1.6 21.7 6.8 2.6 36.0
ADBL 39,393.1 2,880.6 2,067.9 7.3 5.3 71.8
NBL 37,855.3 1,714.8 364.3 4.5 1.0 21.2
2013 RBBL 49,044.9 2,604.8 349.7 5.3 0.7 13.4 5.4 1.3 22.3
ADBL 49,770.5 3,211.5 1,033.4 6.5 2.1 32.2
NBL 41,196.0 2,397.5 252.1 5.8 0.6 10.5
2014 RBBL 60,854.9 2,402.8 638.9 4.0 1.1 26.6 5.2 0.9 18.6
ADBL 57,505.3 3,332.5 620.0 5.8 1.1 18.6
NBL 53,374.5 2,069.6 442.6 3.9 0.8 21.4
2015 RBBL 75,836.5 2,562.0 790.8 3.4 1.0 30.9 4.1 1.1 26.9
ADBL 66,601.1 3,269.7 930.1 4.9 1.4 28.4
NBL 55,131.9 2,122.6 175.3 3.9 0.3 8.3
2016 RBBL 85,470.4 3,376.1 1,056.9 4.0 1.2 31.3 3.9 0.8 19.3
ADBL 79,751.9 3,070.4 562.0 3.9 0.7 18.3
Mean 51,109.4 2,700.8 729.7 5.7 1.6 25.2 5.7 1.6 25.2
Median 49,770.5 2,700.8 620.0 5.3 1.1 21.4
Skewness 0.5 (0.1) 1.7 1.2 2.4 1.6
Kurtosis (0.5) (0.7) 3.2 1.5 6.4 2.8
Source: Bank Supervision Report, 2015; Banking and Financial Statistics, 2015; Annual Report of Sampled Banks, 2016

1
In the table 2.2, an aggregate picture of asset quality of sampled banks has been
presented. Loan and advances is the major component of bank’s asset. The asset side
of financial institutions is largely populated by Loans and advances, which occupies
64.84 percent of total asset (Nepal Rastra Bank, 2015). Mean, median, standard
deviation, coefficient of variance, skewness, and kurtosis of aggregate data of TLA,
NPL, LLP, and LLP/NPL has been calculated. ROA of sampled banks over sampled
years is more volatile as its coefficient of variance is highest, that is, 111.2. NPL of
sampled banks over sampled years is negatively skewed, while TLA, LLP, NPLR,
and LLPR is positively skewed. TLA and NPL of sampled banks over sampled years
has kurtosis less than 0.263, so the data has platykurtic distribution. LLP, NPLR,
LLPR, and LLP/NPL have kurtosis more than 0.263, so the data has leptokurtic
distribution.
NPLR and LLPR
12.0
10.0
8.0
6.0
NPLR and

4.0
2.0
-
N

RB

AD

RB

AD

RB

AD

RB

AD

RB

AD

RB

AD
2011 2012 2013 2014 2015 2016
Bank / Year

NPAR LLPR

Figure0.1: NPLR and LLPR of sampled banks over 6 years

1
 LLP/NPA
80.0
70.0
60.0
50.0
40.0
LLP/

30.0
20.0
10.0
-

N
N

RB

RB

RB

RB

RB

RB
AD

AD

AD

AD

AD

AD
2011 2012 2013 2014 2015 2016
Bank / Year

LLP/NPA

Figure 2.4: LLP/NPL ratio of sampled banks over 6 years

In Figure 2.3 and Figure 2.4, line charts have been presented for the graphical
representation of Non-Performing Asset ratio, Loan Loss Provision Ratio and
LLP/NPL. In the year 2011, NPLR of RBBL is much higher than rest two banks, but
LLPR of ADBL is much greater in comparison to NBL and RBBL. Similarly, the
LLPR of ADBL is significant in 2012. Consequently, the LLP/NPL of ADBL is
distinctly higher than of NBL and RBBL in two consecutive years. In 2013 to 2016,
there is no such deviation in NPLR and LLPR; as a result, there is certain consistency
in LLP/NPL over latter four years.

2.2.3. Management Capability

Management capability in Banking and Financial Institutions is nothing new, as such

a process has been ongoing for some time with varying degrees of success among
those institutions benefiting from the use of available resources. Strengthening
management capability is a continuous process that must envisage a role for
shareholders, funding agencies and regulators (Blackman, 2001). It is primarily a
qualitative factor applicable to individual institutions. Several indicators, however,
can jointly serve as an indicator of management soundness. Expenses ratio, earning
per employee, cost per loan, average loan size and cost per unit of money lent can be
used as a proxy of the management quality (Baral, 2005).

1
 Table 2.3

Operating Expense Ratio and Asset Utilization Ratio of Sampled Banks

Fiscal
Bank TOR TOE NOI TA OER AUR
Year
NBL 2,673.5 2,452.9 220.6 55,700.1 91.8 4.8

2011 RBBL 3,199.5 2,363.1 836.4 94,646.7 73.9 3.4

ADBL 4,568.7 5,091.0 (522.4) 66,668.3 111.4 6.9
NBL 2,345.7 2,556.2 (210.4) 61,071.9 109.0 3.8

2012 RBBL 3,093.2 2,677.9 415.3 107,478.3 86.6 2.9

ADBL 4,719.6 7,011.6 (2,292.0) 79,256.5 148.6 6.0
NBL 3,092.0 2,731.0 361.0 77,171.2 88.3 4.0

2013 RBBL 4,038.5 3,486.3 552.2 115,351.6 86.3 3.5

ADBL 5,282.1 4,610.8 671.3 92,584.3 87.3 5.7
NBL 3,356.5 3,362.5 (5.9) 83,311.1 100.2 4.0

2014 RBBL 4,706.1 3,721.0 985.1 130,046.9 79.1 3.6

ADBL 5,426.8 4,610.8 816.0 108,375.5 85.0 5.0
NBL 3,935.6 3,480.0 455.6 90,309.2 88.4 4.4
2015 RBBL 5,563.3 4,106.1 1,457.2 150,571.5 73.8 3.7
ADBL 6,338.6 4,623.7 1,714.9 119,614.3 72.9 5.3
NBL 2,144.6 1,501.0 643.7 91,365.1 70.0 2.3

2016 RBBL 6,590.7 4,519.9 2,070.7 174,626.6 68.6 3.8

ADBL 7,349.2 4,668.2 2,681.0 112,709.8 63.5 6.5
Mean 4,356.90 3,754.10 602.79 100,603.27 88.03 4.42
Median 4,303.59 3,603.65 597.92 93,615.50 86.45 4.02
Skewness 0.331 0.539 -0.600 0.727 1.557 0.447
Kurtosis -0.761 0.922 2.534 0.708 3.988 -0.478
Source: Bank Supervision Report, 2015; Banking and Financial Statistics, 2015;
Annual Report of Sampled Banks, 2016

Management capability of a bank is the quantities measure of banks performance that

overviews how efficiently bank’s management and its entire team is utilizing the

2
available resources to provide better financial services to customers ensuing higher
operating revenue, and profit. In the table 2.3, Operating Expense Ratio (OER), and
Asset Utilization Ratio (AUR) are the indicators of management capability. The
higher OER is reflects management incapability in minimizing cost while the higher
AUR evinces better management practice and competence.

Operating Expenses Ratio

160.0
140.0
120.0
Operating Expense

100.0
80.0
60.0
40.0
20.0
-
L

L
N

RB

AD

NB

RB

AD

NB

RB

AD
BL

BL

BL

BL

BL

BL

BL
2011 2012 2013 2014 2015 2016
Bank/Year

OER

Figure2.5: Operating Expenses Ratio of sampled banks over 6 years

Asset Utilization Ratio

8.0
6.0
4.0
Asset Utilization

2.0
-
N

RBB

RBB

RBB

RBB
BL

L
AD
BL
NBL

L
AD
BL
NBL

L
AD
BL
NBL

2011 2012 2013 2014 2015 2016

Bank / Year

AUR

Figure 2.6: Asset Utilization Ratio of sampled banks over 6 years

In figure 2.5 and figure 2.6, the Operating Expenses Ratio (OER) and Asset
Utilization Ratio (AUR) has been presented respectively. The operating expenses ratio
of sampled banks is not extremely fluctuating over 6 years as the curve formed in

2
figure 7 is almost

2
straight; in reference to table 2-3, the coefficient of variance of OER is the lowest, that
is, 22.148, which evinces that OER is consistent over study years. however, OER
above 100 is not desirable condition for a bank, so NBL and ADBL had frightening
situation during 2011, 2012, and 2013. More specifically, ADBL had more alarming
figure in 2012 with OER almost 150 percent. In 2015 and 2016, the OER of all
sampled banks is below 100, which evinces that the sampled banks are improving in
management of resources.

The Asset Utilization Ratio of ADBL is higher than other sampled banks over all
study years (2011-2016). This indicates that ADBL is making better mobilization and
utilization of its available resources. ADBL has provided financial services to almost
all districts of Nepal through its 264 branches (Nepal Rastra Bank, 2015). From 2011
to 2016, the Asset Utilization Ratio of RBBL is least in first five consecutive years
amongst the sampled banks because of high concentration of asset in RBBL and it has
higher NPL in 2011 and 2016. Moreover, the AUR of NBL has eroded in 2016 due to
disbursement of loans in unproductive sector, which eventually reduced its capability
of further lending in latter phase of 2016.

2.2.4. Earnings

Earnings and profitability ratios assess the efficiency of deposit-takers in using their
assets (return on assets) and capital (return on equity), and ability to generate interest
income (interest margin to gross income) and minimize administrative costs
(noninterest expenses to gross income) (Asian Development Bank, 2015).

2
 Table 2.4

ROE, ROA, and PM of sampled banks over 6 years

Fiscal
Bank NI TOR SE TA ROE ROA PM
Year
NBL 383.44 2,673.46 380.40 55,700.10 100.7984 0.6884 14.3424

2011 RBBL 1,759.26 3,199.50 1,172.30 94,646.70 150.0687 1.8588 54.9854

ADBL 2,365.48 4,568.66 9,474.30 66,668.30 24.9674 3.5481 51.7762
NBL 176.36 2,345.74 1,772.80 61,071.90 9.9482 0.2888 7.5184

2012 RBBL 1,446.21 3,093.17 1,172.30 107,478.30 123.3652 1.3456 46.7549

ADBL 1,861.03 4,719.63 9,474.30 79,256.50 19.6429 2.3481 39.4317
NBL 791.51 3,091.98 3,716.40 77,171.20 21.2976 1.0256 25.5987

2013 RBBL 1,310.12 4,038.52 8,589.00 115,351.60 15.2534 1.1358 32.4405

ADBL 2,259.95 5,282.10 9,636.80 92,584.30 23.4512 2.441 42.785
NBL 716.96 3,356.51 6,465.00 83,311.10 11.0898 0.8606 21.3603

2014 RBBL 1,733.39 4,706.06 8,589.00 130,046.90 20.1815 1.3329 36.8332

ADBL 1,509.46 5,426.77 9,636.80 108,375.50 15.6635 1.3928 27.8151
NBL 526.12 3,935.59 6,465.00 90,309.20 8.138 0.5826 13.3683
2015 RBBL 4,637.28 5,563.30 8,589.00 150,571.50 53.991 3.0798 83.3549
ADBL 1,876.19 6,338.63 9,860.80 119,614.30 19.0268 1.5685 29.5993
NBL 1,048.19 2,144.63 6,465.00 91,365.06 16.2133 1.1473 48.8751

2016 RBBL 5,549.93 6,590.66 8,588.97 174,626.56 64.6169 3.1782 84.209

ADBL 6,180.64 7,349.25 10,374.40 112,709.83 59.5759 5.4837 84.099
Average 2,007.31 4,356.90 6,690.14 100,603.27 42.07 1.85 41.40
Median 1,621.43 4,303.59 8,588.99 93,615.50 20.74 1.37 38.13
Skewness 1.372 0.331 -0.766 0.727 1.440 1.298 0.623
Kurtosis 1.488 -0.761 -0.892 0.708 1.544 2.236 -0.263
Source: Bank Supervision Report, 2015; Banking and Financial Statistics, 2015;
Annual Report of Sampled Banks, 2016

2
In the table 2.4, Return on Asset (ROA), Return on Equity (ROE), and Profit Margin
(PM) have been calculated by using the concept of financial ratios. ROE is a measure
of profitability that calculates how many dollars of profit a company generates with
each dollar of shareholders’ equity. The ROE of NBL and RBBL is over 100 percent
in 2011 and ROE of RBBL has exceeded 100 percent in the following year too. The
ROE has drastically decreased in the following years due to increase in shareholder’s
equity, which has to be mandatorily increased to Rs. 8 billion by the end of 2074 B.S.
ROA of ADBL is highest among the sampled banks in all sampled years except in
2015.

ROE and PM of Sampled Banks

160
140
120
100
80
60
40
20
0

NBL RBBL ADBL NBL RBBL ADBL NBL RBBL ADBL NBL RBBL ADBL NBL RBBL ADBL NBL RBBL ADBL
2011 2012 2013 2014 2015 2016

ROEPM

Figure 2.7: ROE and Profit Margin of sampled banks over 6 years

In the figure 2.7, ROE and Profit Margin have been presented. The ROE of NBL and
RBBL is higher in 2011; the ROE of RBBL is still high in 2012, while ROE of NBL
drastically declined. ROE of sampled banks in 2013 and 2014 has eroded, and in 2015
and 2016, the ROE of RBBL have revived; also, ROE of ADBL has increased in
2016. Similarly, the profit margin of sampled banks during former four years is lower,
but in 2015 and 2016, the profit margin of all sampled banks have increased.

2
 ROA
6
5
4
3
Return on

2
1
0

L
N

RB

AD

NB

RB

AD

NB

RB

AD
BL

BL

BL

BL

BL

BL

BL
2011 2012 2013 2014 2015 2016
Year/Bank

ROA

Figure 2.8: Return on Asset of Sampled banks over 6 years

Figure 2.8 presents the return on asset of sampled banks over 6 years from 2011 to
2016. The ROA is has followed a pattern, that is, ROA of ADBL is greater than of
RBBL and ROA of RBBL is greater than NBL except in 2015. In 2015, ROA of
RBBL is greater than ADBL, and NBL has least ROA over sampled years.

2.2.5. Liquidity

Liquidity indicators describe the deposit-takers’ ability to meet sudden demand for
cash (Asian Development Bank, 2015). The risk that a sudden surge in liability
withdrawals may require an FI to liquidate assets in a very short period of time and at
less than fair market prices. Liquidity risk arises when an FI’s liability holders, such
as depositors or insurance policyholders, demand immediate cash for the financial
claims they hold with an FI or when holders of off-balance-sheet loan commitments
(or credit lines) suddenly exercise their right to borrow (draw down their loan
commitments). (Saunders & Cornett, 2007).

2
 Table 2.5

Loan to deposit Ratio, Cash Reserve Ratio, and Cash and Equivalent to Total Asset ratio

Fiscal Bank TA TLA CE CBNRB TD LDR CETAR CETDR CBNRBR Average

NBL 55,700.10 26,709.90 10,837.97 8,171.00 46,804.20 57.0673 19.4577 23.156 17.4578
2011 RBBL 94,646.70 36,866.10 6,907.31 4,813.50 73,924.10 49.8702 7.298 9.3438 6.5114 69.0424
ADBL 66,668.30 34,459.92 4,808.95 2,534.50 34,394.63 100.1898 7.2133 13.9817 7.3689
NBL 61,071.90 29,698.86 14,468.09 8,569.80 56,042.60 52.9934 23.6903 25.8162 15.2916
2012 RBBL 107,478.30 40,448.40 19,262.92 16,333.60 87,775.00 46.0819 17.9226 21.9458 18.6085 63.3936
ADBL 79,256.50 39,393.10 6,285.18 3,340.70 43,238.99 91.1055 7.9302 14.5359 7.7261
NBL 77,171.20 37,855.28 14,184.21 10,411.80 62,988.90 60.0983 18.3802 22.5186 16.5296
2013 RBBL 115,351.60 49,044.90 3,085.09 11,573.20 91,093.90 53.8399 2.6745 3.3867 12.7047 68.4776
ADBL 92,584.30 49,770.46 9,524.00 6,278.70 54,397.15 91.4946 10.2868 17.5083 11.5423
NBL 83,311.10 41,195.99 6,659.56 2,919.00 69,341.20 59.4105 7.9936 9.604 4.2096
2014 RBBL 130,046.90 60,854.90 3,658.93 20,969.90 107,270.10 56.7305 2.8135 3.4109 19.5487 67.8325
ADBL 108,375.50 57,505.27 3,976.21 4,005.40 65,828.33 87.3564 3.6689 6.0403 6.0846
NBL 90,309.20 53,374.54 3,593.77 4,692.17 78,007.20 68.4226 3.9794 4.607 6.015
2015 RBBL 150,571.50 75,836.50 4,454.43 18,096.10 124,221.70 61.0493 2.9583 3.5859 14.5676 72.0185
ADBL 119,614.30 66,601.12 11,338.84 6,335.73 76,921.30 86.5835 9.4795 14.7408 8.2366
NBL 91,365.06 55,131.92 9,263.97 4,973.70 80,220.82 68.7252 10.1395 11.5481 6.2
2016 RBBL 174,626.56 85,470.37 31,599.99 19,000.91 146,207.63 58.4582 18.0958 21.6131 12.9958 72.8585
ADBL 112,709.83 79,751.86 10,453.61 6,335.73 87,263.50 91.392 9.2748 11.9794 7.2605
Mean 100,603.27 51,109.41 9,686.83 8,853.08 76,996.74 68.94 10.18 13.30 11.05 68.94
Median 93,615.50 49,407.68 8,085.64 6,335.73 75,422.70 60.57 8.63 12.98 9.89
Skewness 0.79 0.59 1.94 0.97 0.88 0.54 0.70 0.16 0.35
Kurtosis 0.71 (0.54) 4.69 (0.38) 0.96 (1.30) (0.66) (1.26) (1.39)

Source: Bank Supervision Report, 2015; Banking and Financial Statistics, 2015; Annual Report of Sampled Banks, 2016

2
Table 2.5 depicts LDR, CETAR, CETDR, and CBNRBR, the indicators of liquidity
position of sampled banks over 6 years. In addition, mean, median, skewness, and
kurtosis have been calculated to describe the characteristics of data.

LDR, Average LDR, and Required LDR of Sampled Banks

120
100
LDR, Average LDR, and Required

80 60
40
20
0

L
N

RB

AD

NB

RB

AD

NB

RB

AD
BL

BL

BL

BL

BL

BL

BL
2011 2012 2013 2014 2015 2016
Year/Bank

LDR Average LDR Required LDR

Figure 2.9: LDR, Average LDR, and Required LDR of sampled banks over 6 years

In figure 2.9, the LDR, Average LDR, and Required LDR of sampled banks over 6
years has been presented. Loan to Deposit Ratio is one of the major indicators of
liquidity. The higher loan to deposit ratio indicates that bank has less liquid assets. As
per the directive of Nepal Rastra Bank, commercial banks have to maintain LDR less
than 80 percent. The LDR of NBL, and RBBL has been maintained under 80 percent
throughout the sample periods, however, the LDR of ADBL withstands above 80
percent from 2011 to 2016.

2
 CASH RESERVE RATIO
CBNRBR Required CBNRB

CBNR
NB

NB

NB

NB

NB

NB
ADB

ADB

ADB

ADB

ADB

ADB
RB

RB

RB

RB

RB

RB
2011 2012 2013 2014 2015 2016
YEAR/BANK

Figure 2.10: Cash Reserve Ratio of sampled banks over 6 years.

Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits of
customers, which commercial banks have to hold as reserves either in cash or as
deposits with the central bank. In the figure 2.10, cash reserve ratio of sampled banks
over 6 years has been presented. All the sampled banks over 6 years’ period have
maintained minimum CRR except in 2014. In 2014, the CRR of NBL is 4.2096
percent, which is below 6 percent requirement. Hence, the CRR of sampled banks is
satisfactory over sampled period.

2.3. Data Analysis

In the above section, the presentation of data of sampled banks over 6 years (2011 to
2016) has been presented in tables, bar diagram, and line graph. The diagrammatic
presentation of tabular data has been done for the vivid presentation of facts and
figures. The presentation of data is rudimentarily necessary for proper data
visualization. The data presentation is essential for accurate data analysis and
interpretation.

2
2.3.1. Analysis of Coefficient of Variation, Skewness, and Kurtosis

Table 2.6

Coefficient of Variation, Skewness, and Kurtosis of indicators of components of

CAMEL Framework

Capital Asset Quality Management

CAMEL
CCR CAR NPLR LLPR LLP/NPL OER AUR
Average 3.96 5.34 5.69 1.57 25.22 88.03 4.42
Median 7.17 8.46 5.31 1.05 21.39 86.45 4.02
SD 10.26 11.27 2.06 1.75 18.38 19.50 1.21
CV 258.99 211.11 36.24 111.25 72.90 22.15 27.42
Skewness -0.99 -0.83 1.24 2.37 1.57 1.56 0.45
Kurtosis 0.67 0.30 1.49 6.44 2.84 3.99 -0.48
Earnings Liquidity
CAMEL
ROA PM LDR CETAR CETDR CBNRBR
Average 1.85 41.40 68.94 10.18 13.30 11.05
Median 1.37 38.13 60.57 8.63 12.98 9.89
SD 1.27 23.02 16.88 6.37 7.29 4.86
CV 68.39 55.61 24.49 62.57 54.85 44.00
Skewness 1.30 0.62 0.54 0.70 0.16 0.35
Kurtosis 2.24 -0.26 -1.30 -0.66 -1.26 -1.39

Coefficient of Variation is a measure of relative variability that expresses standard

deviation as a percentage of the mean (Mann & Lacke, 2010). Coefficient of
Variation is unit less, so it provides basis for comparison among various variables.

2
2.3.1.1. Analysis of Coefficient of Variation

Coefficient of Variation of related ratios of Sampled Banks over 6 years

300.00
250.00
200.00
150.00
Coefficient of

100.00
50.00
-

P
LL

CBNR
C

NP

CET

CET
A

R
LLP/
CC to

Capital Adequacy Asset Quality Management Quality Earnings Liquidity

CAMEL Related Ratios

Figure 2.11: Coefficient of Variation of CAMEL ratios of Sampled Banks over 6 Years

In the figure 2.11, C.V. of CAMEL ratios of sampled banks over 6 years have been presented in line chart. The capital adequacy ratios are highly
fluctuating over 6 years, while fluctuation is minimum in ratios representing management quality. The spread of data representing liquidity of
sampled banks over 6 years is low. Among profitability ratio, ROE is more volatile than ROA, and Profit Margin. ROE is more volatile due to
increment in shareholder’s equity.

3
2.3.1.2. Analysis of Skewness

Skewness of related ratios of Sampled Banks over 6 years

3.00
2.50
2.00
1.50
1.00
Skewness of Related

0.50
- (0.50)
(1.00)
(1.50)

R O
C A

NP A

L D
PA
L PR

R O

P
O

C BNR
A

CET

CET
L P/N
L
CC to

Capital Adequacy Asset Quality L Management Earnings Liquidity

Quality
CAMEL Related Ratios

Figure 2.12: Skewness of CAMEL ratios of Sampled Banks over 6 Years

In the figure 2.12, skew-ness of CAMEL ratios of sampled banks over 6 years have been presented in line chart. Capital Adequacy ratios are
negatively skewed, while skew-ness of remaining elements of CAMEL rating is positively skewed. The asset quality ratios and earnings ratios
have high positive skew-ness.

3
2.3.1.3. Analysis of Kurtosis

Measure of Kurtosis is one of the descriptive statistical measures, which is used to measure the flatness or peakedness of the curve drawn from the
frequency distribution (Sthapit, Yadav, Khanal, & Baidar, 2014).

Kurtosis of related ratios of Sampled Banks over 6 years

7.00
6.00
5.00
4.00
Kurtosis of Related

3.00
2.00
1.00
- (1.00)
(2.00)

P
LL

CBNR
C

L
A
NP

CET

CET
R
LLP/
CC to

Capital Adequacy Asset Quality Management Earnings Liquidity

Quality
CAMEL Related Ratios

Figure 2.13: Kurtosis of related ratios of Sampled Banks over 6 years

Figure 2.13 depicts kurtosis of related ratios of sampled banks over 6 years. The kurtosis of LLPR is higher, which denotes that the curve formed
from frequency distribution is more peaked. The kurtosis less than 0.263 has platykurtic distribution, which means that

3
the curve formed from the frequency distribution is flat. Indicators of Liquidity
positions have platykurtic distribution, while indicators of asset quality have
leptokurtic distribution.

2.3.2. Correlation Matrix

Correlation is a statistical measure that indicates the extent to which two or more
variables fluctuate together. A positive correlation indicates the extent to which those
variables increase or decrease in parallel; a negative correlation indicates the extent to
which one variable increases as the other decreases.

Table 2.7

Correlation Matrix showing relationship between Earnings and other indicators of

CAMEL Framework

CAR AUR NPL LLP LDR CBNRBR

ROE -0.6584 -0.2231 0.306008 -0.1525 -0.4166 0.242154

ROA 0.46794 0.56452 0.560087 0.50853 0.5374 -0.206506

PM 0.25362 0.07313 0.547211 0.3033 0.14965 -0.048537

In the table 2.7, the correlation between components of Earnings and other indicators
of CAMEL framework have been presented. ROE has negative correlation with CAR,
AUR, LLP and LDR, which indicates that ROE increases when these components
decreases and vice-versa. ROE has high negative correlation with CAR in comparison
to other components. ROA has positive correlation with all above components except
CBNBR. ROA has high correlation with AUR and NPL. Similarly, Profit Margin has
positive correlation with CAR, AUR, NPL, LLP, and LDR. Profit Margin has high
positive correlation with NPL.

2.3.3. Regression Analysis

Regression is a statistical measure used in finance, investing and other disciplines that
attempts to determine the strength of the relationship between one dependent variable
(usually denoted by Y) and a series of other changing variables (known as
independent variables).

3
 Relationship between AUR and ROE 200 Relationship between AUR and ROA
100
10
0
5
2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5
0
Asset Utilization Ratio

Return on
Return on

2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5

Asset Utilization Ratio

ROE Linear (ROE) ROA Linear (ROA)

Relationship between AUR and PM 100

50
0
2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5
Asset Utilization Ratio
Profit

PM Linear (PM)

Figure 2.14: Relationship of AUR with ROE, ROA and, PM

Figure 2.14 depicts the relationship of AUR with ROE, ROA, and PM. ROE has
negative relationship with AUR, while ROA and PM have positive relationship with
AUR, which is presented in the figure by linear line; upward sloping line represents
positive relationship, and downward sloping line represents negative relationship.

3
 Relationship between NPL and ROE Relationship between NPL and ROA
200 10
100 5
0 0

Return on
Return on
1000200030004000500010002000300040005000
Non-Performing LoanNon-Performing Loan

ROE Linear (ROE) ROA Linear (ROA)

Relationship between NPL and PM

100
50
0
10002000300040005000
Profit

Non-Performing Loan

PM Linear (PM)

Figure 2.15: Relationship of NPL with ROE, ROA, and PM

Relationship between LDR and ROE Relationship between LDR and ROA
200
6
4
100 2
Return on

0 0
Return on

3050709011030
50 70 90 110
Loan to Deposit RatioLoan to Deposit Ratio

ROE Linear (ROE) ROA Linear (ROA)

Relationship between LDR and PM

100
50
0
Profit

30 50 70 90 110
Loan to Deposit Ratio

PM Linear (PM)

Figure 2.16: Relationship of LDR with ROE, ROA, and PM

In Figure 2.15 and Figure 2.16, ROA, ROE, and PM (indicators of profitability) are
dependent variables, and NPL, and LDR (indicators of Asset Quality and Liquidity
respectively) are independent variables. The downward sloping lines in each diagram

3
represents negative relationship between two variables. In contrary, the upward
sloping lines in each diagram denotes positive relationship between two variables.
The degree of flatness and steepness reflects the degree of responsiveness of
dependent variable to the change in independent variable.

2.4. Findings and Discussion

2.4.1. Findings

The report is based on the evaluation of government owned commercial banks under
the framework of CAMEL. Multiple financial ratios have been used on the basis of
requirement that represents the components of CAMEL. Some of the major findings
of the report are as follows:

 The Capital Adequacy Ratio of Sampled Banks are increasing year by year.
ADBL is well capitalized from 2011 to 2016; RBBL has maintained capital
adequacy ratio above 10 percent since 2015 onwards and is well capitalized since
then. NBL is under-capitalized over entire study years. In 2016, it has capital
adequacy of 9.11 percent, which is still not up to the standard of 10 percent. The
average capital adequacy of sampled banks in 2016 is 11.05 percent, while the
industry average capital adequacy ratio is 11.89 percent, which is slightly higher
than of sampled banks.
 Loans and Advances occupy the significant portion of bank’s asset. The asset side
of sampled banks is also populated by loans and advances and occupies about 60
percent of total asset in 2016. RBBL has the least portion of loans and advances
amongst the sampled banks, with an average of 44.20 percent of total asset
occupied by loans and advances. Moreover, Non-Performing Loan Ratio and Loan
Loss Provision Ratio of NBL is less than other two banks during sampled years.
The Average NPLR of sampled banks over 6 years is 5.7 percent.
 Operating Expense Ratio and Asset Utilization Ratio have represented
management capability of the sampled banks. The Operating Expense Ratio of
ADBL is significantly high in 2012 due to increase in interest expenses. The
average operating expense ratio of sampled banks over 6 years is 88.03 percent.
ADBL has higher asset utilization ratio than other two sampled banks over all
study years. The asset utilization ratio of RBBL is the least among sampled
banks as it has less

3
 portion of total asset on loans and advances. The average asset utilization ratio of
sampled banks over 6 years is 4.42 percent.
 ROE, ROA, and Profit Margin have been used as the major indicators of
profitability. The ROE of RBBL is excessively high in 2011 and 2012, and
suddenly decreased in 2013 and 2014. This is due to addition to shareholder’s
equity, however, RBBL maintained satisfactory ROE in latter two years as its net
income increased. The ROE of NBL was high in 2011, and ADBL has
consistency in ROE.
 There is negative relationship between ROA and Non-Performing Loan of
Government Owned Commercial Banks of Nepal.
 Loan to Deposit Ratio, Cash and Equivalent to Total Asset Ratio, Cash and
Equivalent to Total Deposit Ratio, and Cash at NRB Ratio have been used as the
indicators of liquidity position of sampled banks. The loan to deposit ratio of
ADBL is over 80 percent of Total Deposit in all study years. The average loan to
deposit ratio of sampled banks over 6 years is 68.94 percent; the loan to deposit
ratio of sampled banks is highest in 2016, that is, 72.86 percent of total deposit.
All the sampled banks have maintained Cash Reserve Ratio of 6 percent as per the
directive by Nepal Rastra Bank; however, NBL failed to do so in 2014 with the
shortfall of cash balance at NRB by about 1.8 percent. The average cash reserve
ratio of sampled banks during study period stands at 11.05 percent.
 The performance of sampled banks as a whole is improving. All the indicators of
CAMEL framework reflect positive symbol in the performance of the sampled
banks.
 The net income of Rastriya Banijya Bank has drastically increased in 2015 due to
increase in non-operating income and extra-ordinary income.

2.4.2. Discussion

The report represents abridged scenario of sampled banks. Thus, other researchers can
conduct research on sensitivity to market, which studies the impact of change in
interest rates, and inflation on the performance of a financial institution. Moreover,
the report has only covered certain major ratios that defines each component of
CAMEL. Operating expense ratio and Asset Utilization Ratio has only been used to
depict the picture of management capability; earning per employee, cost per loan,
average loan size, and cost per unit of money lent can be used as proxy of

3
management capability.

3
Similarly, profitability or earnings performance of the financial institution can be
represented by interest spread ratio, earning spread ratio,

The result of this study reveals that there is positive relationship between ROA and
Non-performing loan; nevertheless, Sheefeni (2015) concluded that ROA and Non-
performing loan have negative relation; interestingly Adebisi and Matthew (2015)
revealed that there is no relationship between ROA and Non-performing loan. Hence,
three research evinced three different relationship between ROA, and Non-performing
loan. Thus, further study can be made to clarify the exact realtionhsip between ROA
and Non-performing loan. Furthermore, there is no significant relationship between
ROE and Non-performing Loan (Adebisi & Matthew, 2015); nonetheless, there is
positive relationship between Non-performing Loan and ROE of government owned
commercial banks of Nepal. Hence, the contradiction in the findings is the matter of
concern. Theoretically, Profit Margin should have negative correlation between Non-
Performing Loan and Loan Loss Provision, but the study evinced that Profit Margin
has positive relationship with NPL and LLP. ROE has negative relationship with
AUR and LDR, which contradicts with theory. Therefore, further-extensive study can
be done to depict the true relationship between profitability indicators and non-
performing loan.

3
 CHAPTER III

CONCLUSION AND ACTION IMPLICATION

3.1. Conclusion

The performance of government owned commercial banks has been analyzed on the
basis of CAMEL rating. The financial ratios that indicates respective components of
CAMEL framework has been used to assess overall performance of bank. The overall
scenario of government owned commercial banks was not satisfactory during 2011
and 2012, as two of the government banks (NBL and RBBL) were extremely under-
capitalized. Moreover, Loan loss Provision to Non-Performing Loan Ratio of ADBL
was at critical level during 2011 and 2012, which indicates that there is excess in bad
loans. The management capability of sampled banks seems to be less effective as the
average operating expenses ratios over 6 years is 88.03 percent, which indicates that
only 11.07 percent of total operating revenue is remained after deducting total
operating expenses. The profitability and earnings of sampled banks is over 6 years is
positive; ROE of RBBL is higher than of other two banks. The average profit margin
of sampled banks over 6 years is 41.40 percent, which represents that the government
owned commercial banks are performing well and the performance is being better.
The liquidity position of sampled banks has been examined by assessing LDR, and
CRR. The loan deposit ratio or credit deposit ratio of ADBL has surpassed the 80
percent limit in entire 6 years, but NBL and RBBL have maintain CD ratio below 80
percent. The average CD ratio of sampled banks over 6 years is 68.94 percent. The
CRR of sampled banks from 2011 to 2016 is above 6 percent except in 2014, where
NBL failed to maintain 6 percent CRR. The average CRR of sampled bank over 6
years is 11.05 percent. The current status of government owned commercial banks of
Nepal is strengthening. The performance of government owned commercial banks of
Nepal is improving. The capital adequacy ratio of government owned commercial
banks is strengthening; however, Nepal Bank is struggling to maintain 10 percent
minimum capital requirement. All the components of CAMEL framework have been
scrutinized and the indicator of each components of CAMEL ratings is examined in
accordance to the statuary requirement as well as industry average.
3.2. Action Implications

CAMELS rating system is the financial supervisory rating system developed to assess
bank’s overall condition. The report is concentrated on the performance of
government owned commercial banks of Nepal based on the framework of CAMEL.
Most of the study based on commercial banks have studied joint venture banks (Baral,
2005) and domestic private banks (Bhandari, 2010; Basnet, 2008); however, this
study investigates on overall performance of government owned commercial of Nepal
in the light of CAMEL framework. Some of the major implications of this study have
been presented in following points.

 The capital base of sampled banks in the latter study years is improving, however,
Nepal Bank Limited has weak capital base. Well capitalization is the clamant
requirement of strong banking base, so there is urgency to formulate stringent
policy to maintain strong capital base. So, Nepal Bank Limited should
immediately focus on maintaining strong capital base.
 The report provides multi-dimensional analysis on the performance of the sampled
banks. The project evaluates the capital adequacy, asset quality, liquidity,
profitability, and management capability of government owned commercial banks.
Therefore, the project can be more informative for the concerned parties such as
shareholders, depositors, lenders, employees, and other stakeholders of these
banks.
 This study will be helpful for the management committee of sampled banks in
making plans and policies stressing on the problematic segment of banking
operation. The operating expense ratio is in the problematic stage, thus bank’s
management should curb unnecessary acquisition of non-earning assets such as
buildings, land, and should reduce excessive lending on non-productive sectors.
 The loan to deposit ratio of sampled banks on an average complies with the
directive of Nepal Rastra Bank; however, one of the sampled banks, ADBL, needs
quick assessment in curtailing loan to deposit ratio for liquidity management.
ADBL should suspend its lending activities for a time being and formulate strict
lending and collection policy so that it can maintain loan to deposit ratio as per the
directive of NRB.
 ADBL has higher loan loss provision, which reflects higher possibility of loan
default. Thus, credit department of ADBL must be prudent in making better

4
lending

4
 decision by properly assessing the 5C’s: Character, Collateral, Capital, Capacity,
and Condition.
 Unlike ADBL, Rastriya Banijya Bank should adopt aggressive lending policy in
order to increase the operating income. Its asset utilization ratio is less due to
lower LDR. The credit department must focus on easy loan access to the
customers while maintaining proper assessment system as hasty lending policy
might be proven virulent for overall banking operation.

4
 APPENDICES

Appendix 1: Indicators of Each Components of CAMEL Framework

1. Capital Adequacy
1.1. Core Capital Ratio (CCR)
CC
CCR =
RWA
Where,
CC = Core Capital
RWA = Risk Weighted Assets
1.2.Capital Adequacy Ratio (CAR)
Tier 1 + Tier 2
CAR =
RWA
2. Asset
Quality
2.1. Non-performing Asset Ratio (NPLR)
𝑁𝑃𝐴
𝑁𝑃𝐴𝑅 =
𝑇𝐿𝐴
Where,
NPL = Non-performing Loan
TLA = Total Loan and Advances
2.2. Loan Loss Provision Ratio
𝐿𝐿𝑃
𝐿𝐿𝑃𝑅 =
𝑇𝐿𝐴
Where,
LLP = Loan Loss Provision
3. Management Capability
3.1. Operating Expenses Ratio (OER)
TOE
OER =
TOR
Where,
TOE = Total Operating Expenses
TOR = Total Operating Revenue
3.2. Asset Utilization Ratio (AUR)
TOR
AUR =
TA
Where,
 TA = Total Assets
4. Earnings Performance
4.1. Return on Equity (ROE)
NI
ROE =
SE
Where,
NI = Net Income
SE = Shareholder’s Equity
4.2.Return on Assets (ROA)
NI
ROA =
TA
4.3.Profit Margin (PM)
NI
PM =
TOR
5. Liquidity Position
5.1. Loan to Deposit Ratio (LDR)
TLA
LDR =
TD
Where,
TD = Total Deposit
5.2. Cash and Equivalent to Total Asset Ratio (CETAR)
CE
CETAR =
TA
Where,
CE = Cash and Equivalent
5.3. Cash and Equivalent to Total Deposit Ratio (CETDR)
CE
CETDR =
TD
5.4. Cash Balance with NRB to Total Deposit Ratio (CBNRBR)
Cash Balance with NRB
CBNRBR =
TD
 Appendix 2: Descriptive Statistical Tools Using Microsoft Excel

Microsoft excel has been used to calculate mean, median, standard deviation,
coefficient of variation, skewness, and kurtosis.

Excel formulae used to calculate above mentioned statistical tools are as follows:

1. Mean

= Average([number 1][number 2][number 3] … )

2. Median

= Median([number 1][number 2][number 3] … )

3. Standard Deviation

= Stdev. P([number 1][number 2][number 3] … )

4. Coefficient of Variation

Standard Deviation
Coefficient of Variation = × 100 %
mean

5. Skewness

= Skew. P([number 1][number 2][number 3] … )

6. Kurtosis

= Kurt([number 1][number 2][number 3] … )

Appendix 3: Financial Profile of Sample Banks

Table 4.1

Financial Profile of Nepal Bank Limited

SN Nepal Bank Limited (In Rs. Million) 2011 2012 2013 2014 2015 2016A
1 Net Interest Income* 2,277.95 1,854.02 2,521.93 2,823.58 3,316.46 1,810.36
2 Total Operating Income* 2,673.46 2,345.74 3,091.98 3,356.51 3,935.59 2,144.63
3 Total Operating Expenses* 2,452.90 2,556.17 2,730.97 3,362.45 3,479.96 1,500.97
4 Operating Profit* 220.56 (210.43) 361.00 (5.95) 455.63 643.66
5 Net Income * 383.44 176.36 791.51 716.96 526.12 1,048.19
6 Loans and Advances** 26,709.90 29,698.86 37,855.28 41,195.99 53,374.54 55,131.92
7 Loan Loss Provision* 36.37 252.06 364.34 252.05 442.62 175.28
8 Non-performing loan** 1,410.73 1,731.63 1,714.84 2,397.48 2,069.64 2,122.58
9 Cash Balance* 10,837.97 14,063.69 14,184.21 6,659.56 3,593.77 9,263.97
10 Cash Balance with NRB** 8,171.00 8,569.80 10,411.80 2,919.00 4,692 4,973.70
11 Balance With Other Banks** 656.3 404.4 432.1 558.7 811.1 859.77
12 Deposits** 46,804.20 56,042.60 62,988.90 69,341.20 78,007.20 80,220.82
13 Total Asset** 55,700.10 61,071.90 77,171.20 83,311.10 90,309.20 91,365.06
14 Shareholder's Equity** 380.40 1,772.80 3,716.40 6,465.00 6,465.00 6,465.00
15 Total Capital Fund** (4,607.70) (3,084.10) (964.20) 2,630.10 3,347.10 3,514.46

Source: * Bank Supervision Report, 2015; ** Banking and Financial Statistics, 2015; A Annual Report of Nepal Bank
 Table 4.2

Financial Profile of Rastriya Banijya Bank

SN Rastriya Banijya Bank (In Rs. Million) 2011 2012 2013 2014 2015 2016A
1 Net Interest Income* 2,603.62 2,354.40 3,287.12 3,890.89 4,595.26 5,549.93
2 Total Operating Income* 3,199.50 3,093.17 4,038.52 4,706.06 5,563.30 6,590.66
3 Total Operating Expenses* 2,363.06 2,677.92 3,486.35 3,720.96 4,106.12 4,519.94
4 Operating Profit* 836.44 415.25 552.17 985.10 1,457.18 2,070.72
5 Net Income* 1,759.26 1,446.21 1,310.12 1,733.39 4,637.28 2,648.47
6 Loans and Advances** 36,866.10 40,448.40 49,044.90 60,854.90 75,836.50 85,470.37
7 Loan Loss Provision* 419.48 639.25 349.73 638.95 790.77 1,056.90
8 Non-performing loan** 4,024.60 2,940.40 2,604.80 2,402.80 2,562.00 3,376.08
9 Cash Balance* 6,907.31 19,262.92 2,400.66 2,940.80 3,830.59 31,599.99
10 Cash Balance with NRB** 4813.5 16333.6 11573.2 20969.9 18096.1 19,000.91
11 Balance With Other Banks** 479.00 584.20 684.42 718.13 623.84 661.27
12 Deposits** 73,924.10 87,775.00 91,093.90 107,270.10 124,221.70 146,207.63
13 Total Asset** 94,646.70 107,478.30 115,351.60 130,046.90 150,571.50 174,626.56
14 Shareholder's Equity** 1,172.30 1,172.30 8,589.00 8,589.00 8,589.00 8,588.97
15 Total Capital Fund** (7,422.90) (2,313.20) 2,503.50 1,272.50 2,386.60 2,505.93

Source: * Bank Supervision Report, 2015; ** Banking and Financial Statistics, 2015; A Annual Report of Nepal Bank
 Table 4.3

Financial Profile of Agricultural Development Bank

SN ADBL (In Rs. million) 2011 2012 2013 2014 2015 2016
1 Net Interest Income* 3,984.70 4,115.03 4,611.59 4,592.30 5,217.35 6,180.64
2 Total Operating Income* 4,568.66 4,719.63 5,282.10 5,426.77 6,338.63 7,349.25
3 Total Operating Expenses* 5,091.04 7,011.63 3,947.08 4,610.76 4,623.71 4,668.22
4 Operating Profit* (522.37) (2,292.00) 1,335.03 816.01 1,714.92 2,681.03
5 Net Income* 2,365.48 1,861.03 2,259.95 1,509.46 1,876.19 2,577.23
6 Loans and Advances* 34,459.92 39,393.10 49,770.46 57,505.27 66,601.12 79,751.86
7 Loan Loss Provision* 2,504.03 2,067.86 1,033.44 619.95 930.05 561.96
8 Non-performing Loan** 3,491.50 2,880.60 3,211.50 3,332.50 3,269.70 3,070.45
9 Cash Balance* 4,808.95 6,285.18 9,524.00 2,693.41 11,338.84 10,453.61
10 Cash Balance with NRB** 2534.5 3340.7 6278.7 4005.4 5977.1 6,335.73
11 Balance With Other Banks** 689.8 844.5 851.3 1282.8 1175.1 1,233.86
12 Deposits* 34,394.63 43,238.99 54,397.15 65,828.33 76,921.30 87,263.50
13 Total Asset** 66,668.30 79,256.50 92,584.30 108,375.50 119,614.30 112,709.83
14 Shareholder's Equity** 9,474.30 9,474.30 9,636.80 9,636.80 9,860.80 10,374.40
15 Total Capital Fund** 10,903.50 12,462.50 13,135.10 14,222.90 12,958.80 14,312.00

Source: * Bank Supervision Report, 2015; ** Banking and Financial Statistics, 2015; A Annual Report of Nepal Bank
 GLOSSARY

Asset Utilization Ratio: Asset Utilization is a ratio used to determine how well a
company is using its available assets to generate a profit. The asset utilization
ratio calculates the total revenue earned for every rupee of assets a company owns.

BASEL III: Basel III is a comprehensive set of reform measures, developed by

the Basel Committee on Banking Supervision, to strengthen the regulation,
supervision and risk management of the banking sector.

Capital Adequacy Ratio: Capital Adequacy Ratio is the ratio of bank’s capital to its
risk. It is expressed as a percentage of a bank’s risk weighted credit exposures. It is
also known as Capital to Risk weighted Asset Ratio.

Cash and Equivalent to Total Asset Ratio: Cash and equivalent to Total Asset
Ratio measures the amount of liquid asset held by the bank with respect to Total
Asset. Higher the cash and equivalent to total asset ratio, higher the liquidity of bank.

Cash and Equivalent to Total Deposit Ratio: Cash and equivalent to Total Deposit
Ratio measures the amount of liquid asset held by the bank with respect to Total
Deposit. Higher the cash and equivalent to total deposit ratio, higher the liquidity of
bank.

Cash Balance at NRB to Total Deposit Ratio: Cash Balance at NRB to Total
Deposit Ratio is a specified minimum fraction of the total deposits of customers,
which commercial banks have to hold as reserves either in cash or as deposits with the
central bank. It is also known as Cash Reserve Ratio.

Core Capital to Risk Weighted Asset: Core Capital to Risk Weighted Asset is the
comparison between a banking firm’s core equity capital to risk weighted aseets. It is
also known as Tier 1 capital ratio. Tier 1 capital includes equity capital, retained
earnings, share premium, and perpetual non-cumulative preferred stock less goodwill
and other fictitious assets.

Earnings per Share: Earnings per share (EPS) is the portion of a company's profit
allocated to each outstanding share of common stock. Earnings per share serves as an
indicator of a company's profitability.
Loan loss provision ratio: Loan loss provision ratio is an indicator of how protected
a bank is against future losses. Loan Loss Provision Ratio is expressed as the
percentage of bank’s total loan and advances.

Loan to Deposit Ratio: Loan-to-deposit ratio (LTD) is a commonly used statistic for
assessing a bank's liquidity by dividing the bank's total loans by its total deposits. It is
a commonly used statistic for assessing a bank's liquidity.

Net interest income: Net interest income is the difference between the revenue that is
generated from a bank's assets and the expenses associated with paying out its
liabilities.

Non-Performing asset ratio: Non-Performing Asset Ratio is a measure of the overall

quality of bank’s loan book. NPL are those assets for which interest is overdue for
more than 90 days.

Operating Expenses Ratio: Operating expense ratio (OER) is a measure of what

it costs to operate a piece of property compared to the income that the property brings
in. An operating expense ratio describes a property's operating expense compared to
the income it generates.

Profit Margin: Profit margin is expressed as a percentage and, in effect, measure

how much out of every dollar of sales a company actually keeps in earnings

Return on Asset: Return on Asset indicates how profitable a company is relative to

its total assets. The return on assets (ROA) ratio illustrates how well management is
employing the company's total assets to make a profit.

Return on Equity: Return on equity (ROE) is a measure of profitability that

calculates how many dollars of profit a company generates with each dollar of
shareholders' equity. eturn on equity (ROE) is a measure of the profitability of a
business in relation to the book value of shareholder equity.
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