CHAPTER I INTRODUCTION

1.1. BACKGROUND OF THE STUDY Credit risk is a necessary consequence of vibrant economy. Everyone involved in complex production processes must wait for payment until the goods or services are delivered to the final consumer or even later if credit is extended to the consumer as well. When there is a failure in the process, the loss must be allocated among the producers. Intermediaries, like banks or mints, can transfer the payment delays and the credit risk among producers, or between producers and outside investors. These intermediaries can also reduce the amount of delay through fractional reserves and the amount of risk through diversification. But payment delays and credit cannot be eliminated entirely without stifling the economy (Brown, 2004). The process of identification, analysis and either acceptance or mitigation of uncertainty in investment decision-making, essentially, risk management occurs anytime and investor or fund manager analyzes and attempts to quantify the potential for losses in an investment and then takes the appropriate action (or inaction) given their investment objectives and risk tolerance. Inadequate risk management can result in severe consequence for companies as well as individuals. Simply, credit risk management is a two-step process determining what risks exist in an investment and then handling those risks in a way best-suited to your investment objectives. Risk management occurs everywhere in the financial world. It occurs when an investor buys low-risk government bonds over more risky corporate debt, when a fund manager hedges their currency exposure with currency derivatives and when a bank performs a credit check on an individual before issuing them a personal line of credit (Bulliavant, 2010). Like Commercial bank, development bank also acts as an investment intermediary linking the savers and users of capital. Capital formation is thus regarded as one of the indispensable functions executed by any commercial bank. Capital formation is done through credit advancement and its management. Credit disbursement and credit recovery is the prominent feature of credit management.

Efficient and effective credit management can strengthen banks position. At present, slowdown in economic activities due to prevailing internal and external factors has declined the transaction of commercial banks affecting in loan demand and its recovery leading to low profitability posture. Ineffective credit management is a major problem of banks in Nepal. This study is conducted to obtain overall view of credit management of the sampled bank. It is one of the most important and complicated functions performed by the bank. Each bank has credit department and loan administration to conduct, monitor and supervise credit operation. The administration of a particular loan ends when it is recovered. But the process never ends until the bank exists. The success of bank highly depends on the efficient management of credit as per environment. The economy of country is already in the recession due to slowdown of global economy and unstable internal environment leading to adverse affect in business and industrial sector. Such phenomenon has unfavorable affect on banking sector. A crisis in bank is the indicator of crisis in the economy. Hence, the quality of management of credit is considered an important topic as it directly influences the performance of the bank. This study is an attempt to get insight on credit management practiced in the sampled bank. It encompasses credit policy, loan approval, loan administration and loan repayment including the credit risk and its mitigation. This information will help to determine the efficiency and effectiveness of the banks credit management practice. 1.1.1. ECONOMIC SCENARIO OF NEPAL Nepal is an agricultural country, because about 91% of the total population is engaged in agricultural work. Agriculture is the mainstay of economy, providing a livelihood for over 80% of the population and accounting for 40% of the GDP. Moreover, about 75% of the total exports of Nepal are agricultural products. So, agricultural development is extremely essential for improving the economic life of the country. Nepals per capita GDP has stagnated between $200 and $250 for the last 15 years. The growth in Gross Domestic Product (GDP) in FY 2003/2004 is expected to be at 4.2 percent. Domestic credit in the banking system increased by 8.8% to NRS 248.5 billion compared to 10.2% increase in the previous year. Of which, credit to private sector posted

a growth of 13.3% to NRS 171.1 billion as compared to the increase of 13.2% in previous year. 1.1.2. HISTORY OF BANKING IN NEPAL Like other countries, goldsmiths, merchants and moneylenders were the ancient bankers of Nepal. Tejarath Adda was established during the tenure of the then Prime Minister Ranoddip Singh in 1933 B.S. It can be taken as the first step for institutional development of banking system. They did not accept deposit from public but advances loan to public and government of its staff against gold, silver, and property as collateral. On the other hand, on the basis of occupation of public, Jayasthiti Malla divided 64 castes and Tankadhari a traditional banker was one of them who involved in monetary transaction. It was the first traditional banker but in a disorganized way. Tankadhari used to charge the people with higher interest rates for the fund borrowed so as to save the people from the higher interest rates. Banking in true sense of terms started with the inception of Nepal Bank Limited on 30th Kartik 1994 B.S., right from the inception; it carried out functions of a commercial bank. Nepal established first legation in international level in London in 1934 for creating international relation with the various countries. Under the international influence and the national necessity, Nepal Bank Ltd. was established under the Nepal Bank Act 1994. Nepal Bank Ltd. had a Herculean responsibility of attracting people towards banking sectors from predominant non-institutional transaction as well as introducing other banking services. It was the only commercial bank in Nepal. Being a commercial bank, it paid more attention to profit generating business. But it is the onus of government to look into neglected sectors. Nepal Rastra Bank was set up under Nepal Rastra Bank Act 2012 B.S. as central bank of Nepal. This act has been repealed and Nepal Rastra Act 2058 has been enacted by the parliament. It is regarded as the apex body of monetary and banking structure. Rastriya Banijya Bank was fully set up as the fully government owned commercial bank in 2022 B.S. with its establishment banking services spread to both urban and rural areas. Agricultural Development Bank was established in 2024 B.S. for the upliftment of agricultural sector.

The government of Nepal adopted liberal economic policy to accelerate countrys growth and development. Foreign investment and participation of private sector were encouraged. The government then enacted Joint Venture Banking policy. People are offered valuable services and nation as a whole beginning to take benefit. Commercial banks should operate under the Commercial Bank Act 2031, Nepal Rastra Act 2058 and Company Act 2053 and Contract Act 2056. Nepal Arab Bank Ltd. (currently known as NABIL) is the first bank established in joint investment in Nepal in 2041 B.S. A year later Nepal Indosuez Bank Ltd. currently renamed as Nepal Investment Bank Ltd. was set up. With the passage of time several other joint venture and private bank has been established. Nepal Industrial Development Corporation (NIDC) and Agricultural Development Bank (ADB) were only two development banks established before the enactment of Nepal Development Bank Act in 2052 B.S. After the introduction of Nepal Development Act 2052 many development banks have been set up. Establishment of financial institutions and banks in Nepal has taken a tremendous speed over the past ten years with the evolution of globalization and liberal economic policies. 1.1.3. INDUSTRY PROFILE The history of commercial bank in Nepal starts with the establishment of Nepal Bank Limited in 1937 A.D. Prior to that there was no systematic banking system in the country. Todays bank in Nepal has shown absolute remarkable growth and progress in banking activities. All together 30 Commercial banks, 79Finance companies, 87 Development banks, 21 Micro Credit Development Banks, 16 Co-operatives, 45 NGOs are currently in operation. Banks should be taken as strong means for the economic growth and development of the country. ACE is one of the leading development banks among 73 development banks established. It offers variety of corporate and retail products and services to its customers for sound relationship. Achievement made by ACE in opening new branches, acquisition of property, non-banking assets and conducting future plans have kept the bank in leading position. Significant portion covering 63% increment in credit disbursement in various sector contributed in income of ACE in the year 2007/08. Thus, credit management became major concern for banks income.

Appropriate credit policy has been formulated considering countrys economic policy, NRB directives and banks own objectives and rules. ACE has followed stepwise loan approval process initiating with submission of loan application form led by direct interview, field visit and loan appraisal. Proper lending document inclusive of security documentation, borrowers citizenship certificate, income tax registration certificate etc depending upon the nature of borrower are demanded to secure the credit and attain legal validity. Upon approval of credit and lending documentation, actual disbursement takes place. The bank has experienced decline in credit growth pattern. The credit growth rate reached only 15% in FY 2006/07. Nonetheless, credit deposit ratio over the study period has been recorded in excess of 93.35% on average that can be considered sufficient from profitability aspect. Credit department continuously administer the loan and maintains contact with the borrower to ensure credit terms have been complied. As per NRB directives, ACE has to classify loan into 4 categories namely standard, sub-standard, doubtful and bad loan and has to maintain adequate loan loss provision of 1%, 25%, 50% and 100% respectively. ACE has been offering variety of credit facilities such as agriculture, mining, manufacturing, construction, metal products machinery and electronics equipment, production and assembles of transportation equipment, wholesalers and retailers, finance, insurance and real estate, service industries and other loans. It has been introducing new credit facilities such as loan against gold & silver as per market demand. ACE accepts various collateral/ securities before sanctioning the loan amount considering its durability, reliability, marketability and stability of value so that the bank becomes able to recover the principal and interest of loan. ACE, before granting credit facility to any of the clients verifies the financial position. The bank calculates various ratios such as profitability, liquidity and debt-equity ratio in order to be secured of the client financial status and their repayment capacity. Nevertheless, bank has to deal with problem loan and suffer credit risk. Some customer does settle its obligation as per the loan agreement and there are various internal and external factors that affect credit risk. ACE analyses credit risk as business risk, management risk, security risk and financial risk and mitigate them to overcome it.

1.2. STATEMENT OF PROBLEM Development banks in Nepal have been facing various challenges and problems. Some of them arise due to the economic condition of the country, while others arise due to the lack of the clarity of the policy of government and many of the others arise due to the default borrowers. After liberalization of economy, banking sector has growth and various opportunities have emerged. However, the financial institutions do not seem to be performing well during the study period. Liquidity is high with the financial institutions. Hence, the banks and financial institutions are competing among themselves to advance credit to limited sectors available. Banks and financial institutions are investing in house loan, hire purchase loan for safety purpose. Due to lack of good lending opportunities, banks appear to be facing problems of excess liquidity. Nowadays, banks have increasing amount of deposits in fixed and saving accounts but have decreasing trend in lending behaviors. So, this has caused major problem to the development banks. Due to unhealthy competition among the banks, the recovery of the banks credit is going towards negative trends. Nonperforming credits of the banks are increasing year by year. To control such type of state, the regulatory body of the banks and financial institutions, NRB has renewed its directives of the credit loss provision. In the modern trend Credit management plays a significance role in all aspects of the banking fields. The banks effort is to mobilize their available deposit money with the help of giving credit. Credit is the main source of income for the banks, so proper practice must be adopted to maintain a sustainable position in the market. It is very important for analyzing the performance of credit management each year with the help of auditing report. Therefore, it is necessary to analyze the credit management or credit disbursement recovery provision for loss and write off of the credit. The issues being enquired in this study are presented in the form of following research questions: a. Is there the bank has right level of liquidity? b. How far ACE Development Bank is able to use its resources in credit and advances? c. What is the growth in deposit, liquidity and lending practices?

d. Is their efficiency in lending in terms of deposit collection? e. What is the credit efficiency of ACE Development Bank? f. Is there any relationship between credit portion and profitability situation? g. Is the credit practices adopted by ACE Development Bank in good position? h. What is the debt and total equity portion of ACE Development Bank? 1.3. OBJECTIVES OF THE STUDY It is no doubt that the role of the development banks is significant in the development of the nation. Banks help in the development of the country by providing credit to the necessary sectors. The main objective of the study is to examine overall credit management practice of the ACE Development Bank. The specific objectives are as follows: a. To evaluate the credit policy & credit analysis system prevailing in the bank. b. To investigate loan recovery process regarding credit management of the bank. c. To examine lending efficiency & its contribution to profit of the bank. d. To find out loan classification & loan loss provision & its impact on the profitability of the bank. e. To evaluate the liquidity, asset management, profitability & risk position of ACE the bank. 1.4. ORGANIZATION OF THE STUDY The whole study is divided into five chapters as follows: Chapter I: The first chapter is the introductory chapter. It contained General background of the study, statement of problem and objective of the study. Economic scenarios of Nepal, history of banking in Nepal and industry profile are given in the general background of the study. Chapter II: The second chapter is about the review of literature. The chapter conceptual framework and review of literature is related to different studies. It consisted of theoretical background, review of literature, review of Nepalese studies and concluding remarks. Chapter III: The third chapter is concentrated on research methodology used in the study. It includes nature and sources of data, method of data collection, data processing techniques and limitation of the study.

Chapter IV: The fourth chapter contains the data processing, data analysis and interpretation of this study. This is the main chapter of the study. Chapter V: The fifth chapter contains the findings of whole study after which major conclusions and the recommendations of the overall study period are provided. The list of bibliography and appendix are also given at the end for references.

CHAPTER II REVIEW OF LITERATURE

Review of literature is the integral part of the entire research process and makes the valuable contribution to almost every operational step. It has the value even before the first step; that is, when you are merely thinking about a research question that you may want to find answers to through research journey. In initial stages of research it helps to establish the theoretical roots of the study clarify ideas and develop methodology, but later on the review of literature serves to enhance and consolidate knowledge base and help to integrate findings with the existing body of knowledge. Since an important responsibility in research is to compare the finding with those of others, it is here that the literature review plays an extremely important role (Kumar, 2008). For review study, the researcher uses different books, reports, journals and research studies published by various institutions. It is divided into four headings; they are as follows. Theoretical or conceptual framework Review of literature Review of Nepalese studies Concluding remarks

2.1. CONCEPTUAL FRAMEWORK Credit administration involves the creation and management of risk assets. The process of lending takes into consideration about the people and system required for the evaluation and approval of loan requests, negotiation of terms, documentation, disbursement, administration of outstanding loans and workouts, knowledge of the process awareness of its and weaknesses are important in setting objectives and goals for lending activities and for allocating available funds to various lending functions such as commercial, installment and mortgage portfolios (Johnson, 1940:132). In the article Monetary policy and deposit mobilization in Nepal has concluded that mobilization of the domestic saving is one of the prime objectives of the monetary policy in Nepal. And commercial banks are the most active financial intermediary for generating resources in the form of deposit of private sector and providing credit to the investors in different sectors of the economy (Bajracharya, 1991:93).

Book named Banking Management says that in banking sector or transaction, an unavoidableness of loan management and its methodology are regarded very important. Under this management, many subject matters like the policy of loan flow, the documents of loan flow, loan administration, audit of loan, renewal of loan, the condition of loan flow, the provision of security, the provision of the payment of capital and its interest, and other such procedures. This management plays a great role in healthy competitive activities (Bhandari, 2003:170). It is very important to be reminded that most of the bank failures in the world are due to shrinkage in the value of loan and advances. Hence, risk of non-payment of loan is known as credit risk or default risk (Dahal, 2002:114). Portfolio management helps to minimize or manage the credit risks by spreading over the risk to various portfolios. This method of managing credit risk is guided by the saying do not put all the eggs in a single basket (Bhandari, 2004:300) A credit transaction is anagreement between two partiesthe borrower and the lender subject to a mutual agreement on the terms of credit. The terms of credit are defined based on five critical financial parametersamount of credit, interest rate, maturity of loans, frequency of loan servicing and collateral. Optimizing decision pertaining to the terms of credit could differ from the borrower to that of lender. As such, the mutual agreement between the borrower and the lender may not necessarily imply an optimal configuration for both. At this juncturedistinction between a defaulter and a nonperforming loan account is in order. A default entails violation of the loan contract or the agreed terms of the contract, while non-performing loan (NPL) entails that the borrower does not renege from the loan contract but fails to comply the repayment schedule due to evolving unfavorable conditions. However, from the perspective of corporate finance, a common perspective is that both the cases of defaulter and non-performer imply similar financial implications, i.e., financial loss to institutions. Moreover, in the Indian context regulatory and supervisory process does no focus on such a distinction between default and non-performer as far as prudential norms are concerned. The NPL is defined as past due concept, taking into account either non-payment of due principal or both. For simplicity, this common perspective prevails in the rest of the theoretical analysis. The most important reason for default could be mismatch between borrowers terms of credit and creditors terms of credit interest. 10

2.1.1. LOAN CLASSIFICATION Nepal Rastra Bank as the central bank of Nepal has the authority to design, formulate, implement and supervise various banking strategies and policies. In order to facilitate credit function of commercial bank, Nepal Rastra Bank has classified loan in different categories. Previously loan and advances were classified in six categories namely good, acceptable, evidence of sub-standard, sub-standard, doubtful and bad. At present loan has been classified in four categories based on quality and aging of credit. A bank is required to classify their loan on the basis of overdue aging schedule and provide on a quarterly basis. This sort of provision has helped bank to curtail losses due to non-payment of interest and principle in due time. The four categories of loan with its duration and loan loss provision are tabulated as follows: Table 2.1 Classification of Loan Type of Loan Standard Substandard Doubtful Bad (a) STANDARD All Loans and Advances the principal of which are not past due or past due for a period up to 3 (three) months shall be included in this category. (b) SUB-STANDARD All loans and advances the principal of which are past due for a period of more than 3 months and up to 6 months shall be included in this category. (c) DOUBTFUL All loans and advances the principal of which are past due for a period of more than 6 months or up to 1 (one) year shall be included in this category. (d) LOSS All loans and advances the principal of which are past due for a period of more than 1 (one) year shall be included in this category. Provision Requirement Principal overdue up to 3 months Principal overdue up to 6 months Principal overdue up to 1 year Principal overdue above 1 year Criteria 1% 25% 50% 100%

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This classification is based purely upon repayment and business transaction of the customer with the bank. There may be up gradation and degradation in the category depending upon transaction. If the loan is restructured and rescheduled, 12.5% should be kept aside as loan loss provision. 2.1.2. CREDIT POLICY Lending is the primary business of a bank. Essentially this activity involves use of depositors funds, which the bank must protect under the countrys regulatory requirements. Therefore, sound banking practices require strong assurances that loans granted by it will be repaid in timely manner and with accrued interest. Loan losses can quickly erode its capital along with the customers. Banks have developed credit approval process that is based on a system of checks and balances, while allowing sufficient flexibility to bank management to meet customers financing needs promptly and efficiently. There must exist transparency in both the credit process and its management structure. The management structure must be free from any ambiguities or doubts in the description of responsibilities and authorities of different levels of management of banks credit matter. ACE with one of the objective of providing quality service to the customers has formulated and implemented lending policy to meet its objectives. ACE as one of the fullfledged banks of Nepal advances loans to various sectors such as priority sector, deprived sector, industrial sector, social sector and commercial sector. 2.1.3. CREDIT PRINCIPLES Bank has to follow cautious policy and conduct the business of lending based on certain sound principles. They are: Access the customers character for integrity and willingness to pay. The customer should have the capacity and willingness to pay. There should be proper plan for possibility of default. Extension of credit period if risk can be managed. Behave ethically in all the credit activities. Be proactive in identifying, managing and communicating risk.

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2.1.4. OBJECTIVES OF SOUND CREDIT POLICY Considering the importance of lending to the individual bank and society it serves, it is imperative that the bank meticulously plans its credit operations. To provide guidance to lending officers To make quality credit decisions To establish a standard for control To provide authority to different level of management To comply with the regulations. To avoid unnecessary risks. To have performing assets. 2.1.5. PRUDENCE IN LENDING The primary business of the bank is creating and delivering quality financial services to its customers throughout Nepal. Its customer base consists of individual, corporations, other financial institution, public sector companies, and co-operatives. The financial services presently provided by the bank include commercial banking, retail banking and treasury services. General policy guidelines shall govern the implementation of the business strategy of the bank with respect to credit extensions. The bank shall adhere to all Regulatory Guidelines and all amendments including those provided by NRB. The bank shall not make any credit facility available to anyone whose moral integrity is questionable. Fundamental rule is Know Your Customer. Credit officers must thoroughly understand the lending rationale for any credit request. Credit officers must acquire information about borrowers purpose, source of repayment and repayment plan. Borrowers whether or not related to bank must provide complete, accurate and upto-date financial information. Credit extensions to borrowers shall be in accordance to NRB directives. The bank will not lend to investment companies that are not listed in the Stock Exchange.

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2.1.6. NRB DIRECTIVES All the banks in the country are required to follow the directives and instruction of Nepal Rastra Bank. Various directives are issued by NRB to regulate commercial banks. Credit and purchase and discount of bills have been classified as secured, less secured, doubtful and bad for the purpose of adequate provisioning. The following are the NRB regulation on classification and provisioning of loans: Table 1.2 Loan Loss Provision Type of Loan Standard Substandard Doubtful Bad Provision Requirement 1% 25% 50% 100%

Pass loan is called Performing and others are called Non-performing assets. Provision requirement in case of loan given against personal guarantee only is additional 20% for Standard, Substandard and Doubtful loans. Provision for restructured, rescheduled and swapped loan is 12.5% only. Non-compliance of such directives will not be tolerated by the central bank and as the consequence commercial banks are penalized. 2.1.7. TYPES AND NATURE OF LOAN I) Types of Loan Short Term Loan, Mid Term Loan, Long Term Loan This loan is given up to the period of 1 year to those who have lower requirements than other types. ACE grants this loan to agricultural sector, small industrial sector, small projects etc. This loan is given to the period of 1 to 5 years. This loan is granted for the period of 5 years and above for big corporate houses or big project. II) Nature of Loan ACE with increment in services provides different natures of loans to its customers as per their requirement. The loans are classified under Funded Loan by ACE. i. Term Loan Term loans are given for the purpose of financing fixed assets. The interest rates for prime sectors are 12% and for others are 14%.

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ii. Working Capital Loan ACE provides this loan to meet the day-to-day transactions of the companies, industries. The interest rates for primary sectors are 12% and for other sectors are 14%. It is essential for running any companies, businesses, industries etc. iii. Overdraft Loan This loan facility is provided to those clients who are regular customers of the bank for a long period of time. They have built up strong and trustworthiness relationships with the bank for which they can overdraw money from their account as per their requirement and approval from the bank. The rate is at 12% for prime sector whereas 14% for other sectors. iv. Trust Receipt Loan This type of loan is mainly provided for importers against letter of credit. The bank provides 80% of loan to their valued client for the credit period of 90/120/150/180 days. Importers then repay their loan amount to bank after sell of particular goods. v. Pre-shipment This type if loan is mainly provided for exporters. Exporters have to send goods to the importer as requested. Then, for the production of the certain quantity of goods, exporter without money asks the bank for loan. Importer after receiving goods, clears the amount of the exporter, exporter then clears his loan amount along with the interest of the bank. vi. Post-shipment This type of loan is mainly provided for exporters. When goods are produced as asked by the importer, exporter needs to send it. But exporter without any amount to meet operating expenses occurred on shop and loading goods on shop asks for loan with the bank. The interest rate fixed on this loan is 10% for prime sector and 11% for other sector. vii. Hire Purchase Loan This loan is provided for the purchase of automobiles, vehicles etc. to professionals, companies, business executives etc. The interest rate charged is 13% for prime sector and

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15% for other sector. The bank offers 80% loan for new vehicle and 50% for second hand cars. viii. Housing Loan The bank also provides this type of loan to its customers where the interest rate is 14% for the maturity up to 5years and for above 5 years it is 13%. ix. Bills Purchase Loan When the exporter receives the cheque with the restrictions to be received only after the completion or certain period, he/she asks for the bank to pay for the amount mentioned in the cheque. After completion of the specified time in cheque, bank recovers its amount from the importer. Under Non-funded, ACE has classified loan as followings: x. Letter of Credit/ Documentary Credit (LC/DC) A letter of credit is defined as a letter issued by the bank on behalf of the buyer in favor of the seller. An L/C is opened at the request of the buyer. xi. Bank Guarantee ACE takes guarantee on behalf of its customer to the third party to make payment up to a specified amount. The third party feels assured that in case of default, bank will clear the due amount. The bank provides various types of bank guarantee to its customers such as bid bond, performance bond, advance payment guarantee, custom guarantee, and credit guarantee. 2.1.8. LOAN APPROVAL PROCESS The Approving Authority approves loan only after being convinced that the loan will be repaid together with interest. There are many processes involved to improve the loan, which has been appended below:

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Figure 2.1 Loan Approval Process

Application for the Loan

Conducting the Interview Loan purpose Loan amount Repayment source Repayment schedule History of prospective customer Banking relationship

Credit Analysis Historical analysis Analyzing 7Cs of the credit

Field/ Site Visit

Forecast and Risk Rating System

Return

Liquidation

Credit worthiness and Debt Structure Preparing the credit report

Implementation of Credit Facility

i. Application A borrower is normally required to submit an application to the bank as a request for the loan along with project proposal, historical financial statements and documents pertaining to companys legal existence.

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ii. Conducting the interview Though the documents submitted gives various information about the borrower, collecting details by interviewing the borrower is of great importance. Normally, such an interview takes place at the bank premise. The interviewer normally a loan officer should attempt to gain as much information as possible during the initial interview. Interviewer inquires about the topics mentioned below: Loan purpose The objectives of taking loan should be very precise and should not conflict with commercial loan policy of the concerned bank. Loan amount The amount of loan is stated when the purpose is given. The bank should also try to assess loan amount to be granted. Repayment source Every business loan should have a backup repayment source to clear the loan amount when the time arrives, which may be sale of inventory, sale of assets, increase in other debts etc. Repayment schedule The applicant and the bank should set forth the timing for repayment of the payment pattern of interest and principal amount. History of the prospective customer Customer can be an individual or a firm or a corporate body. The interviewer should try to gather the biographical information such as background and experience of principals, its duration of operation, services rendered etc. Banking relationship The interviewer should find out whether the applicant has accounts and loans if any in other financial institutions or banks. They should be aware of such relationship with others and applicants must disclose required facts as well. iii. Credit analysis The following steps are taken to analyze/appraise loan application: 18

Historical Analysis It refers to analysis of past financial statements and business risk. The former is quantitative while the latter is qualitative.

Analyzing 7Cs of the credit 3Cs Character- honesty Capacity- ability to employ fund Capital- borrowers equity 5Cs Collateral- marketability, price stability Condition 7Cs Cash flow- to ascertain repayment Credit information

iv. Field/site visit Authorized staff form credit department of the bank will visit business set up. Site visit is banks another attempt to comprehend the prospective customer and his business. it concentrates on attaining information such as production and cost related data, applicants reputation, character, financial condition, location of business can be assessed. v. Forecast and risk rating system Based on the findings of historical analysis, and in the light of present and foreseeable future environment, the analyst should highlight to what extent inherent risks will be mitigated and how unmitigated risk can be covered. vi. Return The analysis should be made to calculate total return as interest, fee and commission and compare whether it meets banks standard. vii. Liquidation

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The analyst should ascertain banks ability to recover loan in case of liquidation of the borrower. viii. Creditworthiness and debt structure The creditworthiness and honesty of the applicant enables the bank to extend the loan facility. The analyst should structure the debt facility to be extended. Preparing the credit report The credit report should be prepared in a structured format including all the details of customer, sources, consequences of financial statements etc. After the completion of credit appraisal and preparation of the report, it is forwarded to the management for approval. ix. Implementation of credit facility After being satisfied with loan appraisal and required security documentation mentioned in the offer letter, bank will then open overdraft or loan account in favor of the client. 2.1.9. CREDIT ANALYSIS There is practice of analyzing 7Cs of credit about borrower by the bank before approving proposal; i. Character Character refers to personal traits such as ethics, honesty, integrity, reliability of borrowers, which is significant for lending decision. The actual purpose, trustworthiness in answering the queries, responsibility and seriousness in making efforts to repay loan is observed by the bank. ii. Capacity The bank views two aspects. Firstly, the bank sees whether the applicant possess legal capacity to borrow loan. Secondly, whether the applicant has capacity to generate sufficient income to repay the loan amount or not. If the borrower has high capacity, quality management and good market value then the capacity of the client is said to be high and bank grants loan on that basis. Hence, suitable ratios (liquidity, leverage, profitability, efficiency) are analyzed based on historical and projected financials. 20

iii.

Capital Capital refers to net worth of the borrower. Leverage ratio will be high if the borrower has low capital. A bank gives loan only when it finds leverage ratio acceptable to it or if the borrower has enough capital.

iv.

Collateral To safeguard its risky assets in case of default, bank asks for securities or collateral from the borrower, no matter how prosper the financial position of the borrower is. Collateral can be fixed in nature- land, building, machinery or working capital like inventories and account receivables.

v.

Condition Condition refers to the general economic condition beyond the control of borrower such as security, political and other social condition affects the business. Loan is given to the borrower if lending official feels general condition is favorable for that type of business.

vi.

Cash Flow The credit officials usually check the cash flow of the business to ascertain repayment of loan amount taken with interest. If the figure shows positive response then they advance loan to such clients.

vii.

Credit Information The bank should confirm the type of loan the borrower requires and should provide all the credit information beforehand.

2.1.10. METHOD AND MECHANISM FOR LOAN APPROVAL Loan/project appraisal refers to the critical evaluation of the project in lights of various types of risks and returns. Thus, ACE doesnt lend to anyone who is in need of money. A prudent banker denies giving or extending credit facilities unless he is convinced that the project is viable i.e. the loan amount is repaid along with interest from the proceeds of project. The primary considerations for ACE to sanction the loan amount are as follows:

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i.

Technical Appraisal Under technical appraisal, assessment of the various requirements for the production process together with their quality and availability are made. Various factors like location, legal aspects, and technology for production, plant and equipment efficiency for the project are cautiously analyzed.

ii.

Commercial Appraisal It focuses on the position of repayment of debt along with interest, if the product cannot be sold at the estimated price. Hence, the bank considers nature of products, style, perish ability, quality, company sales methods, distribution pattern, promotional activities, competitive advantage, government regulations and economic conditions. Moreover the bank also considers quality and types of customers, aging schedule, credit terms and policies. Thus, the bank examines commercial viability of the product.

iii.

Managerial Appraisal The quality and integrity of management plays a deciding role to forge ahead of competitors and to ensure repayment of the loan. The bank evaluates management on the basis of quality, performance, philosophy and capability and decided to lend it is satisfied.

iv.

Financial Appraisal Financial appraisal is related to cost benefit analysis because only paying concern can repay the loan. Bank makes financial analysis based on projected data such as cost of the project and production, earnings, benefits, cash flow statement and proforma balance sheet.

2.1.11. LENDING DOCUMENTATION Lending process will not be carried on until the borrower submits necessary documents to the bank. The need of documents depends on the nature of loan and type of borrower. Documents should be recognized under the prevailing law and rules. Common documents are listed below:

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i.

Request letter This is the letter prepared by the borrower for requesting the amount of loan to be sanctioned as per their requirement. They make a proposal to the bank for acquiring loan for their business or other personal purpose. After this letter is received, the bank forwards its activities toward the valued clients.

ii.

Security documentation Bank undertakes certain steps to secure the credit. One of the major actions

involved is obtaining tangible collateral such as land, building, and machinery. The credit department ensures that the security terms of credit are executed prior disbursement of approved credit facilities. Different types of facilities obtained by the banks are: Mortgage deed/title deed documents The value of fixed assets such as land, building, plant and machineries are commonly called as collateral or mortgage. Official valuators estimate these properties. It is prepared as a valuation report consisting of market and distress value and given to the bank. The ownership of mortgage or particular assets, which is called as title deed also, should be submitted to the bank. Guarantee Guarantee is an obligation to pay when the initial borrower refuses or is unable to meet the debt. Bank requires guarantee form reputed person/firm or company to take guarantee to pay the required amount in case of borrowers default. There are three forms of guarantee; Personal guarantee Cross guarantee Corporate guarantee

Hypothecation and pledge Hypothecation is a general charge over the assets for debt where neither ownership nor possession is passed to the banker. The bank requires documents as hypothecation of stocks, equipments, machinery, and assignment of receivables. Pledge is the bailment of the property as security for payment of debt. Pledged property is in possession of bank.

23

iii.

Firm/company registration Sole trading, partnership or joint stock company must submit registration

certificate issued by Company Registrar to the bank. An institution should mention the name of the firm, location, capital, etc. iv. Income tax registration certificate An individual or an institution or a firm must routinely clear the income tax imposed by the government. The Xerox copy of such certificate should be submitted to the bank. v. Memorandum of association A public company must submit memorandum of association to the bank, which includes capital structure i.e. authorized capital, issued capital, paid-up capital, subscribed capital, organizational structure, name of Board of Directors and authorized persons. vi. Article of association Article of association is another important document to be submitted by a corporate borrower, which contains overall rules and regulations regarding transactions, authority and responsibility of board directors, important deeds and agreements etc. vii. Other documents

Some of the other documents to be obtained as per the nature of the client are as follows: Board/partnership resolution Credit Information Bureau (CIB) report Renewed registration certificate Valid tax clearance certificate Site visit report of the properties Family consent of all properties Insurance policy Copy of citizenship certificate Black list consent of the parties Family details of shareholders

24

2.1.12. DISBURSEMENT AND ADMINISTRATION OF LOAN Upon approval of credit facilities and the completion of documentation i.e. when all the collateral/security are obtained arrives to a phase of disbursement. Disbursement means actual releasing of cash i.e. agreed amount of loan or credit facility is allowed to the clients. Disbursement process involves; Satisfying with the documents i.e. all the required pre-conditions is met. Obtaining clearance or instructions of the concerned department i.e. clearance of legal cell and the instruction of the related loan officer. Obtaining related documents from the customer such that their operating account can be created. Since a tremendous amount of deterioration can take place in a short time, it is preferable to receive statements from firms on a quarterly basis by the loan officer. Creating of loan account and disbursement as per the terms agreed. The loan officer should verify timely that the borrower is not violating any requirements of the loan agreement. Breach of any terms and conditions will constitute default. Periodic review of loan document is necessary. Finally there is settlement i.e. every credit has a fixed maturity. If the loan is not repaid in time then the bank takes legal action against the borrower for disposal of securities to liquidate the loan. Further after disbursement of funds the loan has to be continuously administered i.e. monitored for checking if it is compliance with the terms of approval. Administration of loan involves: Realizing principal and interest as and when it becomes due. Ensure submission of related documents by the obligor. Such documents may be the stock and debtors statement, firm renewal certificate, tax renewal certificates etc. Conducting periodic site visits to see the funds are utilized for the purpose. Ensuring compliance with the credit terms by the obligor. Compliance to NRB issued guidelines and banks credit policy.

25

 Assemble records and analyze the credit information in order to ascertain the degree of risk associated with the loan. 2.1.13. CREDITS AUDIT/RENEW A bankers true financial picture is gauged on the basis of its quality of assets i.e. credit assets. Since credit is a risky asset, credit facility given to each and every borrower needs to be audited and adequate loan provision should be made as per the NRB directive. Credit audit refers to the examination of the quality of credit, loan loss provision, loan documentation, compliance of terms and conditions of credit etc. the main objective of the credit audit is to check whether the borrower is utilizing fund for their genuine purpose or not and is conferring due installment/ interest payment. It can be done in two ways; Verification of loan External and internal field visit

Normally, auditors prepare a checklist to carry out auditing and inspection of banks credit activities. Depending upon the past performance and forecast of the borrower, bank renews credit enhancing the limit, curtailing the limit or may reject. While renewing the credit facilities, documentation already executed should be reviewed as documents like expiry of insurance policy and more documents. 2.1.14. RISK ASSESSMENT Proper assessment of credit risk, loan monitoring and delinquency control begins with well-documented member files. Maintaining orderly and adequately documented loan files is an important element of credit risk management. Proper documentation provides the following major benefits: It constitutes evidence of the terms and conditions of a member's indebtedness. It creates valid security which can be realized if it is in compliance with legal

requirements. It provides an audit trail of the loan decision (e.g. that the loan was authorized in

accordance with policy and good lending judgment).

26

It allows easy and efficient follow up of problem situations (e.g. skip tracing) or

routine member inquiries. It establishes a member's credit history for future lending decisions. Ideally, loan application and credit investigation information; alternatively, credit and security files should be stored together in a fireproof environment. Negotiable security should be subject to the dual control of a security custodian and a designated senior management person. The appropriate lending officer to ensure their continuing validity should purge all files on a regular and periodic basis. (Source:http://www.dico.com/design/SBFP_En/Credit%20Risk%20Management%20%2 8Credit%20Management%29.pdf) a. MEANING OF RISK Risk is defined in Websters as a hazard; a peril; exposure to loss or injury. Thus, risk refers to the chance that some unfavorable event may occur. No investment will be undertaken unless the expected rate of return is high enough to compensate the investor for the perceived risk of investment. Bank invests much of their funds in assets that are subject to change in value due to changing market conditions or credit quality of such assets. Risk represents uncertainty that the assets will earn an expected rate of return or that a loss may occur. In other words, it is borrowers inability to payback the facility extended. b. CREDIT RISK Credit risk is the risk of non-repayment of loan. It is that risk in which a borrower will not settle its obligations in accordance with agreed terms. Credit risk is the risk of loss that may occur from the failure of any party to abide by the terms and conditions of any financial contract with the bank, principally the failure to make required payments on loans due to the bank. 2.1.15. FACTORS AFFECTING CREDIT RISK There are mainly two factors that affect credit risk i.e. internal and external factors:

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a. INTERNAL FACTORS Internal factors are those factors that are internal to the organization and can be controlled by the organization. Internal factors do affect the credit risk in various manners. Some of the internal factors are as follows: Lack of transparency in financial statement of borrower Excessive importance in mortgage lending against land and building Dearth of efficient human resources Lack of internal credit rating system and risk base pricing Name lending Inadequate financial analysis of borrower while lending Lack of detailed credit policy of the bank External influences from high-ranking officials while sanction or recovery Multiple banking arrangements on current assets of borrower Non-application of sophisticated credit risk model Increase in interest arrears Others

b. EXTERNAL FACTORS External factor are those factors that are not at all the part of the organization, but the change in which would affect the operation of the organization. External factor does have impacts on the risk factor of the organization. Some of the external factors are as follows: Political instability Economic environment Fluctuation of market interest rate Fluctuation of foreign exchange rate Fluctuation of commodity price Absence of credit rating agency Inefficiency of Credit Information Bureau No mechanism for submission of transparent and accurate financials. Inefficiency of Company Registrar Office Lack of adequate legal framework

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2.1.16. CREDIT RISK ANALYSIS There are four major types of risk that fall under credit risk: a. Business risk b. Management risk c. Security risk d. Financial risk a. Business risk The factors that affect the business risk and are analyzed by the bank are as follows: Supply risk Demand risk Competition Production risk Business environment Economic downturn Tariff changes Technology change

b. Management risk Management risk analyses the following factors: Labor dispute Fraud Change of ownership Management incompetence Succession risk Management change

c. Security risk Under security risk following factors are included Liquidation risk Security document lost Security document not completed correctly Fraudulent valuation

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d. Financial risk Financial risk undertakes the following factors in analyzing the risk: Increased interest rate Transaction risk Collection risk Repayment risk Decreasing profit margin Declining sales Cost overruns Obsolescence of inventory

2.1.17. RISK MITIGATION Risk is inevitable in all enterprises, organizations or companies. It arises both from change and human shortcoming so avoiding risk is not an option but should be managed and handled carefully. Risk can be mitigated by the bank using: Frequent monitoring Prompt action on early warning signals Effective problem loan management Deal with borrowers who meet the target market criteria Monitor industry condition Insurance assigned to bank Professional valuation of security 2.1.18. PRACTICAL OBSERVATION & WRITE-UP BASED ON THEM The bank needs to compute the following ratios before approval of the loan to its customers. The bank requires analyzing the following ratios from the documents provided by the borrowers as Profit and loss statement, Balance sheet for the year and cash flow statement. Before granting loan, the bank should verify all the documents as well as these ratios to figure out the financial position of the borrowers and justify. 2.1.19. COMPANY PROFILE OF ACE DEVELOPMENT BANK LTD. (ACE) Since its inception in August 1995, ACE Finance Company Ltd. (now ACE Dev. Bank Ltd.) has been a leading player in the financial market of Nepal. Over the years, regulators and customers have been in appreciation of the many financial products and

30

innovations developed by us. Its diversified risk asset portfolio has served the economy in every sector as have the wide choices of deposit account schemes. Its wholesale banking initiatives have assisted numerous commercial banks and private enterprises with risk management concerns such as debentures and rights. ACE resolve to provide client-centric solutions and surpass the expectations of its stakeholders remains firm and unyielding. We are now in a position to provide various products to serve all its customers needs under one umbrella. We are now more competitive than ever with new products and innovations in the pipeline. ACE Finance Co. Ltd has now evolved into ACE Development Bank Ltd., a fullyfledged category B development bank. It resolves to provide client-centric solutions and surpass the expectations of its stakeholders remains firm and unyielding. It is now in a position to provide various products to serve all its customers needs under one umbrella. It is now more competitive than ever with new products and innovations in the pipeline. ACE employees are all qualified with a minimum of a Bachelors Degree. All its managerial level personnel have a minimum of an MBA degree. Employees are constantly upgraded in seminars, workshops and training programs in the country and internationally. ACE Development Bank prides itself in having the highest productivity in ratio to its size. Internal changes have been initiated for a while now and managers have been designated to head their respective departments. With effective and rigorous training over, its enhanced and empowered personnel have confidently taken the reigns of ACE Development Bank. I. MISSION An organizations mission is the purpose or reason for the organizations

existence. It tells what the company is providing to society, either a service like housecleaning or a product like automobiles. It puts into words not only what the company is now, but also what it wants to become-managements strategic vision of the firms future. The mission statement promotes a sense of shared expectations in employees and communicates a public image to important stakeholder groups in the companys task environment.

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(Wheelen, Hunger, and Rangarajan, 2006) Mission Statement BANKING ON INNOVATION AND INTEGRITY To be the preferred provider for financial services by introducing a wide range of banking products. To enhance and maintain quality service to the clients. To serve a larger base of customers by expanding geographically. To participate in the economic development of Nepal by providing services in micro finance, infrastructure development financing etc. To ensure maximum value to stakeholders. To focus on good corporate governance and corporate social responsibilities. II. CAPITAL STRUCTURE OF ACE The basic goal of a firm is to maximize the value of the firm or shareholders wealth. To achieve this goal the company should have sound investment and financing Policy Company should acquire current and fixed assets. To finance these assets afirmcan use various sources of financing. These sources of financing may be long term or short term. It needs capital, when it expands its business or activity. Capital denotes the longterm funds of the firm raised from long-term debt, preferred stock and common equity. Debt capital includes all long term borrowing incurred by the firm. Debentures, bonds, long-term loan etc. equity capital consists of the long-term funds provided by the firms owners, the stockholders, Common stock, share premium, reserve and surplus, retained earnings. Capital structure refers to the combination of long-term sources of funds, such as, long-term debt, preference stock and common equity including reserves and surpluses (i.e retain earnings). Capital structure=Long-term debt + Preferred stock + Common equity (Gautam & Thapa, 2008) i. Share Capital It is the ownership capital of a company raised by the issue of its shares. It is an amount invested by the shareholders towards the nominal value of shares. A company needs share capital in order to finance its activities. There are different kinds

32

of share capital. According to the proposed amendment, which was proposed in 14th Annual General Meeting, the share capitals are as follows; a. Authorized Capital The capital that is mentioned in the Memorandum of Association as the maximum amount share capital is called Authorized Capital. (1,00,00,000 ordinary shares of NRs. 100 each amounting to 1,000,000,000) b. Issued Capital Issued capital means part of authorized capital which is actually offered to public for subscription. Generally company doesnt issue the entire authorized share at a time. So, IC <AC (75,04,640 ordinary shares of NRs. 100 each amounting to 750,464,000) c. Paid-up Capital Paid-up Capital means part of called up capital, which has been actually received, from companys shareholder. (75,04,640 ordinary shares of NRs. 100 each amounting to 750,464,000, out of which 776,000 bonus shares) (Koirala and Shrestha, 2006) Table 2.3 Share Ownership S.N. 1 Particulars Domestic Ownership 1.1 Nepal Government 1.2 Foreign Stake 1.3 Category A Licensed Institutions 1.4 Other Licensed Institutions 1.5 Other Institutions 1.6 Public 1.7 Others Foreign Ownership Total % 20 80 100 Share Capital 152,122,700 598,341,300 750,464,000

The above table represents that most of the share ownership of ACE is owned by the Domestic Owners (other institutions and public owns 20% and 80% respectively) which is 100% and of the share of the company, while the Foreign Owners do not own any shares of the company. The total share capital of ACE is 750,464,000.

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Figure 2.2 Shareholding pattern of ACE

Shareholding pattern of ACE

Percentage share 100 80 60 40 20 0 Other Institutions Public Share Holders 20 Other Institutions Public 80

III.

SERVICES RENDERED BY ACE Banks provide various kinds of services to their customers in order to facilitate

them with solutions to their various problems. This in general is called rendering of services. Likewise, ACE does render its services to gratify its customers in variety of forms. The services rendered by ACE can be discussed as under. i. Remittance The fund can be transferred from one place to another, both domestic and international. This facility is used for import/export trade. The payment and receipt in Nepalese and foreign currency can be performed. ii. Bills Purchase When exporter receives cheques from importer, which is to be paid only after the certain time duration, then importer in need of money requests the bank to accept the cheques like security and give him the money. The bank after completion of the time period receives amount from the importer through cheques. iii. Clearing/Collection ACE provides the services of inter-banking transaction. Cheques of various other banks are accepted and cleared, as ACE is also the member of clearinghouse.

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iv.

Trade Finance This department is responsible for opening letter of credit for those people who are involved in trading activities by issuing letter of credit as an issuing bank to advising bank in case of import and vice-versa for export. The contents required are request letter, proforma invoice, packing list, and certificate of origin, insurance and transport document.

v.

Bank Guarantees It is a non-funded facility provided by the bank for its valued clients. There are

bank guarantees such as bid bonds, performance bond, advance payment guarantee, custom guarantee, back-to-back letter of credit and credit guarantee. vi. Export Credit This service is provided to exporter who needs to export goods both at national and international level. It provides service to export goods at national level. i.e Pokhara to Kathmandu, Eastern development region to western development region. It also provides service to export goods at international level. i.e Nepal to India, Nepal to China. vii. Loans and Advances Bank provides loans to different sectors such as loan to company/firm, personal loan, hire purchase loan, housing loan etc. It advances credit against cash pledge, pledge of shares, personal guarantee, corporate guarantee, gold & silver by following the direction of Nepal Rastra Bank. viii. Vehicle Loans It is the hire purchase loan provided by the bank for purchasing motorbikes, car, jeep, and etc. The bank offers 80% loan for new vehicle and 50% for second hand cars. The interest rate is 12% - 14% per annum, but conditions apply that the interest rate will be periodically reviewed to be line with the market.

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ix.

Deposits ACE accepts various kinds of deposits providing interest rate according to the nature of deposits such as saving account, call deposit and fixed deposit account. ACE provides various deposit schemes like, ACE Gold ETF, ACE Nari Bachat Khata, ACE Awakash Bachat Yojana, ACE Rhino Account, ACE Share trading Account, Zero Balance Savings and Pension Khata.

x.

Tele-banking Services An account holder of this bank can use their own password from their

convenient place to access by telephone to make enquiry of account balance and to order statement of account. xi. Any Branch Banking (ABBS) ACE has many branch within the country. Patan branch, Kirtipur branch, Chabahil branch, Birgunj branch, Parsa bazaar branch, Urlabari branch e.t.c. This facility enables customers of ACE to deposit or withdraw money and acquire any information from any branch of ACE. One can easily deposit and withdraw money from any branch of such bank. xii. Locker Facility For the persons having valuables like gold, silver, documents etc, ACE provides locker facilities with special code number keys for the safety with ample parking space, strategic location and choice of sizes. xiii. ATM Services ATM stands for Automatic Teller Machine. Generally, it is also known as any time money. ATM itself clear the meaning. People can withdraw the money any time convenient. The ATM services provided by the bank are cash withdrawal, fast cash, statement or balance inquiry, and pin code change for the customers. xiv. ATM Locations For the conveniences of customers, ATMs are located in, Narayan Chour, Naxal, Kathmandu, Jawalakhel, Lalitpur, Naya Bazaar, Kirtipur, Parsa Bazar, Chitwan, Link Road, Birgunj, Urlabari, Morang UPCOMING OUTLETS:

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Chabahil, Kathmandu, New Road, Kathmandu. It is opened 24 hours a day, 7 days a week, and 365 days a year. xv. ACE Debit Card Debit card is the most convenient way of making payment of goods, safe and easy to carry, withdraw cash from ATMs, used within Nepal and India, get replacement if lost or stolen. It is the card of international brand. xvi. NTC Mobile Bill Payment This facility provided by the bank will be started shortly. It enables Nepal Telecommunication Corporation (NTC) mobile phone owners to make payment through the bank in the following modes. xvii. Full or partial payment by cash. Full or partial payment by account transfer.

E-banking Services This facility provides customers of ACE to view and check their statement of account from any part of the country or the world, request cheque pad. They need not personally approach to the bank. They can also change the password for the means of safety.

xviii.

SMS Banking SMS stands for short message service. This facility provides customers of

ACE to check their balance of account through their cellular phones. It is very helpful for those who do not have enough time to visit banks to receive their statement or check the balance in their account. IV. i. SPECIAL ACHIEVEMENTS OF THE BANK New Branches In line with the bank's policy to expand and serve its customers through a wider network, the bank has opened another branch during FY 2009/10 at Chabahil, Parsa and Ullabari. All 7 branches opened so far have made encouraging progress in providing modern banking services.

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ii.

Acquisition of property With a view of the demand from its shareholders to acquire its own premises

for its branches, the bank has purchased around 5,460 sq. ft. of land in Adarsh Nagar of Birgunj, where the bank will construct a building and relocate therein the existing Birgunj branch. iii. Non-Banking Assets Out of the total non-banking assets amounting to NRS 46 million, the bank has sold two properties worth NRS 9.4 million during the year. On remaining balance of NRS 36.9 million, the bank has made the provision of NRS 12.3 million being onethird of the non-banking assets as per Nepal Rastra Bank regulation. These properties are expected to be sold in the near future. iv. New Products & Services During this year operations, various new deposit products have been introduced with the competitive interest rate which has been appreciated by their valued customers. ACE has been able to increase its customer base by large and there has been a significant growth in the saving and fixed deposit portfolio for the bank by 41.01% of total deposit. Followings are the deposits scheme of the bank ACE Gold ETF ACE Nari Bachat Khata ACE Awakash Bachat Yojana ACE Rhino Account ACE Share trading Account Zero Balance Savings Pension Khata

v.

Human Resources During previous FY, the bank had recruit staffs at all levels, due to the rapid

growth and advent of new branches. The bank has sufficient level of human resource to support its further growth.

38

To improve the skills and knowledge of staff, the bank continuous to provide job-related training, both in-house and external for which the bank conducted several training programs to the benefit of all staff. Besides continuous in-house training programs, 9 staff participated in different professional training courses outside the country while 67 staff participated in job related training course/seminars conducted by professional training centers within the country. vi. Social community works ACE has focused on the upliftment of the youth and on environmental issues. Education is given huge priority, as is entrepreneurship in its social commitments. ACE has been actively involved with various communities and social upliftment programs. ACE took initiation by helping Hoste Hainse towards its mission of eliminating child labor through education. The scholarship fund provided by ACE has helped less privileged children of Sarlahi district. ACE has also joined hands with Ashoka Nepal in helping young entrepreneurs by providing seed money towards their creativity in implementing projects that would help towards solving societys problems. ACE has also supported Nepalese Young Entrepreneurs Forum in its belief that the youth of Nepal need guidance to nurture their talent. ACE has provided funds and advisory service to local bodies for maintaining cleanliness through environmental awareness. Ward No.19, Hanuman Dhoka area, a recipient of its environment initiative, has been active in making the locals aware of the necessity of a clean environment especially in the heritage areas. The development of the Nagpokhari area, another heritage site, has received its financial support as well. ACE was also one of the sponsors of the opening of Garden of Dreams. ACE strongly believes that this will create awareness about heritage preservation and underscore the importance of preserving protected green areas. ACE support various educational institutions by either donating its computers or by providing scholarships to the students.

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vii.

Corporate Social Responsibilities ACE has always believed in being a good corporate citizen and has been investing in various social causes. ACE is very proud to have the One-horned Rhino as its official mascot. The One-horned Rhino is indigenous to South Asia but is now classified as an endangered species due to poaching and habitat destruction. In its bid to raise awareness about the need for One-horned Rhino conservation, we have provided a financial assistance of Rs. 1.5 million to National Trust for Nature Conservation that manages the Central Zoo to build the Rhino Habitat Centre, a small token towards a great cause that it will continue to support. ACE was one of the sponsors for the Million Mums campaign which is a joint initiative of Safe Motherhood Network and White Ribbon Alliance (WRA, UK) to raise awareness and advocate against maternal mortality. ACE is also working jointly with Women Entrepreneurs Association of Nepal (WEAN) for the empowerment of the disadvantaged and needy people especially women through generation of self-employment opportunities. It will be providing trainings and access to finance for implementation of business plans through WEAN to the needy in order to facilitate their financial needs. It has already provided a grant to the WEAN Training Fund. In May 2009, the news of hundreds of deaths in far-western Nepal due to diarrhea/cholera exposed how the underprivileged can lose their lives for lack of basic sanitation. We provided financial support to Annapurna Post Sahayogi Haathharu campaign which mobilized the funds from the campaign through an NGO, DEPROSC Nepal to prevent the epidemic from serving other. ACE also believes that children are the future. It is providing monthly donation to Nepal Children Organization (Bal Mandir, Naxal) to distribute food and fruits to the children under their patronage. It also provides scholarships to needy and deserving students on a regular basis. The CEO is on the Board of various educational charity organizations as well.

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viii.

Future Plans As part of the efforts to deliver the customers the best of services, the bank, in

near future, will; The coming decade will focus on growth based on integrity and innovation. Introduction of a wide range of banking products including multicurrency transactions. Expansion of Branches Micro Financing Infrastructure developing financing Introduction of Investment Banking Products. Concentration on Fee based activities. Emphasis on enhancing and maintaining service quality for its clients. Emphasis on returning value to stakeholders. Infrastructure development financing. Strategies for managing risk. Enhance relationship with the Regulators; underscore IT for Transparency. Adoption and implementation of the Basel II accord. Continue Policy of Integrity and Innovation. V. MAIN FACTORS AFFECTING THE BUSINESS The main factors affecting the banks business are The existing abnormal situation is affecting all sectors of the society and the economy. The sluggish economy resulting in increased credits risks. Political uncertainty. In view of above-mentioned factors, it would be a challenge task for the bank to maintain its current level of performance. VI. INTERNATIONAL BANKING International banking, particularly, prompt and efficient handling of inward and outwards remittances, letter of credits etc have been one of the strengths of ACE. ACE has developed correspondent relationship with numerous banks globally.

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VII.

TECHNOLOGY ACE has been equipped with up to date and modern technology. For further

improvement in international banking performance and to facilitate the customer transactions with prompt and quicker services, ACE has decided to use the services of Society for Worldwide Inter-bank Financial Telecommunication widely known as S.W.I.F.T. It supplies secure messaging, network transfer, and 24 hours global support. It also decides to connect al its offices in various parts of the country through V-SAT, which is any branch banking facility. VIII. DEPARTMENTS OF ACE Departments are units where different functions of an organization are performed; the cumulative effect of which is to achieve the organizational goal. ACE has various departments to perform various works effectively. The synergy produce by these departments result in effective performance, thus achieving the goal. The figure below shows the various departments of ACE. Figure 2.3 Department of ACE Customer Service Department Cash & Transfer Department Treasury Department Credit Department Research and Development Marketing Department Accounts Department Administration Department Share Department Legal Department Human Resource Department Compliance Department

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IX.

FUNCTIONS OF DEPARTMENTS The vision of an organization is accomplished only when the objectives of the

organization are fulfilled; for the purpose of which, various departments are formed. In other words, the organogram of the organization comprises of various departments, which perform their respective actions in order to meet the objective of the organization. Followings are various departments of ACE performing their respective functions: i. Customer Service Department It is a very crucial department where numbers of customers make face-to-face interaction with the staff of ACE. The main function of this department is to provide the customers answer to their queries related to bank. They open and close the account, make statement request, cheque pad request and its disbursement, balance enquiry, balance certificate as demanded by the customers. ii. Cash and Transfer Department This department handles all the cash inflows and outflows including overdraft facility. It accepts deposits; payment of cash is made through cheques and withdrawal slip, balance transfer and draft. iii. Treasury Department This department handles all the cash to be placed on various other banks and financial institutions for higher rate of interest. iv. Credit Department This department provides loan facility to the clients. It provides loan against collateral such as land, building and fixed deposit. It also advances different types of loan as long term loan, short term loan, working capital loan, overdraft loan, housing loan, hire purchase loan, home equity loan, construction, etc. v. Research and Development Every organizations or companies have research and development department for the progress of the companies. Similarly, this department generates new ideas, explores new technologies and innovations to be used, prepare annual reports, issue newsletters, and provides up-to-date information about the bank to the general public

43

and the banks official itself. They research for new plans and programs required for the bank in this cut throat competition. vi. Marketing Department The main function of this department is to increase the number of deposit clients for the bank. The staffs of this department go to various places and meet different people and convince them to open an account in this bank. They convey the facilities provided by the bank to general public. vii. Account Department This department maintains all the incomes and expenses incurred by the bank. It keeps the record of outgoing cash inflows such as administrative expenses, salaries, purchase of machineries and official equipment, electricity cost, stationary cost etc. They provide income statement, profit and loss account and balance sheet of the bank. viii. Administration Department Under this department, the staffs requirement of official equipments,

stationeries, managing vehicles and branch openings are taken care of. Other departments make a request for the items needed and fill up the store requisition form for that matter. ix. Share Department The main purpose is to distribute number of shares and dividend earned by the customers. The customer purchase shares of this bank and is entitled to receive dividend by the profits earned. This department also conducts Initial Public Offering (IPO) of various financial institutions. x. Legal Department This department handles all the issues related to rules and regulation as per the Nepal Rastra banks directives. It looks after weather the activities go through according to the law or not. If not done in the right way, it control such activities. If any disputes arise in the organization, this department makes the settlement. xi. Human Resource Department This department keeps all the record of staff working in the bank regarding leave, absenteeism, working hours, details of staff. The main functions are 44

recruitment, selection of manpower in the bank as per required vacancy, strategic planning, succession planning, motivation, performance appraisal, training and development and employees relationship. xii. Compliance Department This department handles all the procedure have been followed or not as prescribed by the central bank. If the procedure is not going according to the prescribed by the central bank, this department controls it. X. BRANCH NETWORK Expansion of any business starts with the establishment of network of branches all over the country with potential market. Branch network is the network of various branches of ACE working simultaneously at various locations in order to cater the requirement of customers of various geographic locations. The figure below depicts various branches of ACE. Figure 2.4 Branch Network KATHMANDU HEAD OFFICE NarayanChaur, Naxal

PATAN BRANCH JawalakhelLalitpur

KIRTIPUR BRANCH Nayabazar

CHABAHIL BRANCH Chuchhepati

BIRGUNJ BRANCH Link Road

PARSA BAZAR BRANCH Khairahani, Chitwan

URLABARI BRANCH UrlabariBazar, Morang

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XI.

SWOT ANALYSIS
The success of the organization significantly depends upon the internal

environment of the organization in which employee devote most of their time. It is very difficult to encode the future course of action, which depends upon various tools such as SWOT analysis, which can be used to find out the internal and external changes in the environment. The components of SWOT analysis are as follows: S stands for Strength W stands for Weakness O stands for Opportunity T stands for Threat Strengths and weakness are internal factors i.e. they are internal attributes of the company itself. The following SWOT analysis are based on the secondary data provided by ACE. i. STRENGTH Strength is the internal attribute of SWOT analysis, which signifies the capability of an organization. Followings are some of the strength of the strengths of ACE: ACE has a good overall reputation. ACE has maintained a sound and healthy relationship with the existing clients. Bank has been providing E-banking facilities to its clients for their convenience. Bank has been continuously trying to explore different possibilities to develop the activities of the bank. ACE has been trying to strengthen its financial condition to face the challenges and competition. Bank has been improving and getting advanced in the technologies. Bank has been able to provide credit facility to various clients, which led to improvement in credit situation. Bank has also gained position in recovering possible amount at the time of lending.

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 Due to quality service provided. There have been an increasing number of depositors, which is a great source of income to the bank. Bank has implemented various innovative programs like career development and training of the employees. Bank has adequately maintained the liquidity position as per Nepal Rastra Bank directives. Bank has been working with specialist technology and marketing expertise. ii. WEAKNESS Weakness is the internal attribute of SWOT analysis, which signifies the incapability of the organization. The weakness should be work out and converted into strength in order for an organization to be able to sustain at hard times. Bank has not been able to open more branches throughout the country. The customers demand for more services and facilities, which the bank may not be able to meet. The ATM machines are still not accessible to customers. Opportunities and threats are external factors, which can affect the company positively or negatively. iii. OPPORTUNITY It is the external attribute of SWOT analysis, which signifies the favorable conditions for an organization. An organization must be able to use its strength in order to grab the opportunities. Some of the opportunities that ACE may come across are as follows: There is an opportunity to improve in terms of saving mobilization and deposit schemes. ACE could take up the advantage of weak and ineffective competitors and try to capture and get hold of the market before they do. This would help bank to establish the market and maintain the market share.

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 Bank in the name of its goodwill can stand ahead in the market leaving others behind by launching newer schemes. Bank can concentrate more on credit control and credit investment. ACE can always have a strategic planning to adopt the changes in the market. There is possibility for bank to enter a new market segment through proper marketing mix after launching debit and credit card system. There is chance of high progress and prosperity where competitors are slow in adopting new technology. Mergers, joint ventures or strategic alliances could be one of the opportunities for the bank. iv. THREATS It is the external attribute of SWOT analysis, which is responsible for the downfall of business of an organization. If the weakness of an organization is not worked out, the organization is most likely to suffer from the threats. Some of the threats that ACE may come across are as follows: The biggest threat for banks and other financial institution is competition, which is ever increasing. Political instability in the country, which has hampered strongly in the economic condition resulting in poor banking transaction. Threats from Maoist and insurgency have greatly influenced the banking sector resulting from declining scale in business. Due to cutthroat competition, clients would have more bargaining power. Change in needs, tastes and preferences of customers can be one of the highest threats. Abrupt changes in Central Bank directives related to provision might be an immediate threat to the bank. Economic recession or depression also influences the banking sector due to fluctuation.

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 Increment in tariff is also a huge threat for banking sectors. Competitors can have better access to channels of distribution, which the bank may not reach. Competitors of the bank may have or use better technology to gain the top position. 2.2. REVIEW OF LITERATURE In a study of loan losses of US banks, McGovern (1993) argued that character has historically been a paramount factor of credit and a major determinant in the decision to lend money. Banks have suffered loan losses through relaxed lending standards, unguaranteed credits the influence of the 1980s culture and the borrowers perceptions. It was suggested that institutions should make a fairly accurate personality morale profile assessment of prospective and current borrowers and guarantors. Besides considering personal interaction they should i) try to draw some conclusions about staff morale and loyalty, ii) study the persons personal credit report, iii) do trade credit reference checking, iv) check referenced from present and former bankers and v) determine how the borrower handles stress. In addition they can minimize risks by securing the borrowers guarantee; using Government guaranteed loan programs and requiring conservative loan to value ratios. Sergio (1996) in a study of non-performing loans in Italy found evidence that an increase in the riskiness of loan assets is rooted in a lending policy adducing to relatively unselective and inadequate assessment of sectored prospects. Interestingly this study refuted that business cycle could be a primary reason for NPLs. The study emphasized that increase in bad debts as a consequence of recession alone is not empirically demonstrated. It was viewed that the lending firm customer relationship will thus prove effective not so much because it overcomes informational asymmetry but because it recoups certain canons of appraisal. Fuentes and Maquieria (1998) Undertook an in depth analysis of loan losses due to composition of lending by type of contract, volume of lending cost of credit and default rates in the Chilean credit market. Their empirical analysis examined different variables, which may affect loan repayment. a) Limitations on the access to credit; b) macroeconomic stability; c) collection technology; d) bankruptcy code; e) information

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sharing; f) the judicial system, g) prescreening techniques and h) major changed in financial market regulation. They concluded that a satisfactory performance of the Chilean credit market in terms of loan repayments hinges on a good information sharing system, an advanced collection technology, macro economic performance and major changes in the financial market regulation. In another study of Chile, Fuentes and Maquieria (2003) analyzed the effect of legal reforms and institutional changes on credit market development and the low level of unpaid debt in the Chilean banking sector. Using time series data on yearly basis (1960- 1977) they concluded that both information sharing and deep financial market liberalization were positively of unpaid loans with respect to the business cycle compared to interest rate of the Chilean economy. Lis et.al. (2000) used a simultaneous equation model in which they explained bank loan losses in Spain using a host of indicators, which included GDP growth rate, debt equity ratios of firms, regulation regime, loan growth, bank branch growth rates, bank size (assets over total size) collateral loans, net interest margin, capital asset ratio (CAR) and market power of default companies. They found that GDP growth (contemporaneous as well as one period lag term) bank size and CAR had negative effect while loan growth, collateral, net interest margin, debt equity, market power, regulation regime and lagged dependent variable had positive effect on problem loans. The effect of branch growth could vary with different lags. Altman Resti and Sironi (2001) analyzed corporate bond recovery rate adducing to bond default rate, macroeconomic variables such as GDP and growth rate, amount of bonds outstanding, amount of default, return on default bonds, and stock return. It was suggested that default rate, amount of bonds, default bonds and economic recession had negative effect while the GPD growth rate and stock return had positive effect on corporate recovery rate. Bloem and Gorter (2001) suggested that a more or less predictable level of nonperforming loans, though it may vary slightly from year to year is caused by an inevitable number of wrong economic decisions by individuals and plain bad luck (inclement weather, unexpected price changes for certain products, etc., Under such circumstances, the holders of loans can make an allowance for a normal share of non-performance. Enterprises may well be able to pass a large portion of these cists to customers in the form

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of higher prices. For instance, the interest margin applied by financial institutions will include a premium for the risk of non-performance on granted loans. Bercoff, Giovanniz and Grimardx (2002) using accelerated failure time (AFT) model in their study of Argentinas banking sectors weakness measured by the ratio of non- performing loans to total loans found that specific indicators such as asset growth, the ratio of net worth to net assets, the ratio of operating cost to assets exposure to peso loans, and institutional characteristics relating to private bank and foreign bank and macroeconomic variables including credit growth, foreign interest rate, reserve

adequacy (imports / reserves) and monetary expansion (M2/ reserves) besides the tequila effect were reasons behind the banking fragility. Their empirical results suggested that the institutions size measured by log of assets had a positive effect but asset growth had a negative effect on NPLs. The variables such as operating cost, exposure to peso loans, credit growth and foreign interest rate had negative effect on NPLs. The macroeconomic variables such as money multiplier and reserve adequacy, institutional characteristics and tequila effect had positive influence on NPLs. The problem of NPAs is related to several internal and external factors confronting the borrowers (Muniappan, 2002). The initial factors are division of funds for expansion / diversification / modernization, taking up new projects, helping/ promoting associate concerns, time / cost overruns during the project implementation stage, business (product, marketing, etc.,) failure, inefficient management, strained labor relations, inappropriate technology / technical problems, product obsolescence etc., while external factors are recession, non-payment in other countries, inputs/ power shortage price escalation, accidents and natural calamities. Mohan (2003) observed that lending rates of have not come down as much as deposit rates and interest rates on Government bonds. While some institutions have reduced their prime lending rates (PLRs) to some extent and are also extending sub PLR loans, effective lending rates continue to remain high. This development has adverse systemic implications especially in a country like India where interest cost as a proportion of sales or corporate are much higher as compared to many emerging economics.

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2.3. REVIEW OF NEPALESE STUDIES Upreti (2001) states that profitability in term of return on shareholders equity ratio of NGBL is found lower in F.Y, 1994/95 (3671%). Similarly, the ratio of HBL is found within the range from 38.68 % (in 1995/96) to 23.13% (in 1998/99). The yearly average of NGBL (i.e. 31.52) is higher than yearly average (i.e.30.152) of HBL. It can be concluded that both the banks have been able to earn profit on shareholders equity but not satisfactory level. NGBL is more success to generate more return on its shareholders funds than that of HBL, although there is no significant different between the averages of these ratio of the two banks. Return on total assets ratio of NGBL is found within the range between 2.95 % (in 1995/96), (2.30%) and (in1994/95) where the same ratio of HBL is found within the range from 2.48 % (in 1995/96) to 1.48% (in 1998/99). The yearly ratio of HBL is generally decreasing over the study period. Moreover, the yearly average of NHBL (2.64) is found higher than the yearly average of HBL along with its yearly average ratio is also higher than composite average of the banks. It can be concluded that return on total assets ratio in cash of NGBL is found better performance by utilizing overall resources but the generated profit is found lower for the overall resources in both the joint venture banks. The main statement of the problem of his research is the Himalayan bank Ltd. and Nepal bank operating in Nepal. In comparison to their JVBs these bank have achieved a desirable success in terms of market share and profit due to their service excellence, consumer satisfaction, highly skilled management and staff and worldwide network of branch. Although, Himalayan Bank Limited and Nepal Grindlays Bank have able to perform better than other local banks and financial companies within a short span of time, they have been facing competition with each other. These banks do not have strong financial position in respect to net profit to capital employed ratio, capital adequacy and earnings per share. The contribution of these banks in rural areas is very unsatisfactory. To know the solution of these problems, the competitive financial analysis of these two banks will be much more helpful. Kapadi (2002) states that most of the capital structure ratios show that the capital structure of both the banks is highly leveraged. Total debt to equity ratio of both the banks reveals that the claims of the outsider exceeds mere than that of the owners over the bank asset. However NABIL bank seems to be more leveraged than SCBNL. Total

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debt to total assets ratio of both the banks has always been over 88, which indicates the excessively geared capital structure. Comparatively NABIL bank has used a little more debt financial than SCBNL. Long term debt to total assets ratio of NABIL bank is seems to be greater as per mean which shows more use of long-term debt by NABIL bank than by SCBNL. Long term debt to net worth ratio of both the banks is following the fluctuating trend. The mean proportion of outsiders fund and owners fund employed in the total capitalization of NABIL bank is higher than that of SCBNL. This implies that it is following an aggressive strategy of higher risk higher return policy. The net fixed asset to net worth ratio of NABIL bank is higher than that of SCBNL as per mean ratio. But the investment of owners equity in fixed assets for both the banks are minimum as is commonly seen in various financial institutions. The main statement of the problem of his research is NABIL bank and SCBNL have been operating well from their very establishment. Their experience on international banking, prompt and computerized services professional altitude are the factor for their rapid progress. They have been gaining weakness and inefficiency of domestic commercial banks. These banks have succeeded to capture a remarkable market share of Nepalese banking sector in a relatively short period of time. This fluctuation in different aspects of both the sample banks can be traced out by analyzing their financial performance. Therefore, the researcher of this thesis will seek the answers to the following questions relating to both of these banks. Bista (2002) found that the study has been undertaken to examine and evaluate the financial performance of NIBIL bank limited. The researcher has used the financial tools to make this study more effective and informative. This study has corrected ten years data from 1991/1992 to 2000/2001 of the NABIL bank limited. The analysis shows that the deposits of the bank have increased during the years 1999/00 and 2000/01. The rate of increase was comparatively low for the year 1996/97. Total loans and advances have been increasing at an average rate of 24% each year, highest of 51% in year and lowest of 7% in year 1996/97. Total investment of the bank has been increasing over the years, which is mainly due to the banks strategy of safe lending and because of increase in customers deposits and limited opportunities for prudent lending. The main statements of the problem of his research is financial management aspect is considered to be the vital and integral part of overall management of any 53

enterprises, ensuring financial strength through adequate cash flows, liquidity and better utilization of assets. Commercial joint venture banks set up in Nepal seem to need grater funds in terms of financing to the expansion of their assets because of growing number of new establishment of joint venture banks in the country. These banks deal with other peoples deposits, most of which are payable on demand. There is no doubt that the survival of the existing commercial banks and other financial institution depend upon how they manage their assets and liabilities to maximize their profits with the minimum exposure of assets to risks, and are guided by there important conflicting criteria of solvency, liquidity and profitability. Therefore, the financial management is the main indicator of the success or failure of any business firm. Financial condition of the business firm should be sound be sound from the point of view of shareholders, debenture holders financial institutions and nation as a whole. Parajuli (2003) states that concept of financial reform emerged since 1980s with economic liberalization. Nepal Government and NRB published the economic and monitory policy to support such reform. As the result of these policies various jointed venture bank established in the private sector. Under the structural adjustment program of the IME the financial sector was further liberalized in 1987. The focus of NRB was placed on indirect monitory control. The agricultural development bank of Nepal and Nepal industrial development corporation were allowed to issue debentures to increase their financial resources. NRB strengthened its regulation and supervision of banking and financial institution and the commercial banks were granted virtually freedom to fix their interest rates on deposit in July 1989 except for the priority sector credit. The credit information Bureau was established in 1989. NRB started to control the financial institutions with strengthening to supervision and monitoring system. It has also pointed out the need of having deposit taking institutions act which its on umbrella act of all deposit taking institution. Some of the main elements of financial sector reform strategy published by NG in December 2000 such as restructuring the government owned banks strengthening the commercial banks regulation accounting and auditing system improving the regulation and supervision on non banking deposit institutions. Luitel (2003) found that to examine the short-term solvency of the NBL the help of liquidity ratios was taken. While comparing the ratios of two periods at an average the first period had higher current liabilities ratio than the second period. The average current

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ratio of the first period was 105.11% over 100.49% of the second period. Through the proportion of current assets greater than that of current liabilities at an average during both the periods the bank cannot be said to have a sound current ratio or during both the periods the banks did not have healthy short-term solvency. Even then the first period of the study had better short term solvency than the second period. The highest and lowest current ratio for the first period were 110.35% and 101.031%in the F.Y. 047/048 and 048/049 respectively whereas the same for the second period were 104.47.1%.and 94.16% in F. Y. 053/054 and 0567/057 B.S. respectively. The F.Y. 055/056 also showed the ratio less than 100 % i.e.97.92% which signifies that during the years the bank had current liabilities more than current assets. During both the periods liquidity position of the bank was worsening. Joshi (2003) states that the mean current ratio of EBL is slightly higher than that of the SCBNL and the variability of ratio of EBL is more consistence than SCBNL in comparison. The mean ratio of cash and bank balance to total deposit of SCBNL is lower in comparison to EBL. SCBNL has better liquidity position than EBL because of the high volume of liquidity indicated the inability of the bank to mobilize its current assets. Moreover SCBNLs ratios are homogeneous than EBL. The mean ratio of cash and bank balance to current assets of SCBNL is lower in comparison to EBL. Similarly, SCBNLs ratios of the study period are more consistent than EBL. The mean ratio of loan and advances to total deposit of EBL is higher than SCBNL. It can be said that EBL used to provide greater loan and advance in comparison to its total deposit than SCBNL. Likewise, SCBNLs ratio seems to be variable them EBL. The mean ratio of investment on government securities to total working fund of SCBNL is higher than EBL. Consequently, it has consistency in maintaining the ratio than EBL. The mean ratio of return on loan and advances of SCBNL has found to be significantly greater than EBL with more consistency than that of EBL. The mean ratio of credit risk of SCBNL is lower than that of EBLs ratios are more consistent than that of SCBNL. Growth ratio of deposit is more consistent than that of SCBNL is lower i.e. 19.28% in comparison to EBL i.e. 76.46%. The main statement of the problem of his research is the investment decision is the major tool of financial institution. There are many finance companies and commercial banks operating in Nepal. According to NEPSE record, there were 17 commercial banks

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46 finance companies 5 Gramin Bikas banks, 30 non -government financial organizations until July 2001. The fast growth of such organizations has made pro-rata increment of in collecting deposits and their investment. They collected adequate amount from the mass, however they could not find or locate new investment sectors required to mobilizes their fund on the changing context of Nepal. Many banks or companies succumbed to liquidation although they had sustainable investment capacity. The increasing rate of liquidity has caused a downward trend in investment sectors. It has ensured bad impact on interest rate to the depositors, lower market value of shares etc. for the assessment of such adverse impact, this study has shown to contrast and analyses the investment policy of joint venture banks. Joint venture banks viz. standard chartered bank Nepal Ltd and Everest bank limited. Regmi (2004) states that commercial banks are those banks, which works from commercial view point. They perform all kinds of banking functions such as, accepting deposits, advancing credits, credit creation and management of credit and advances. Portfolio management helps to minimize or manage the credit risks and spreading over the risks to various portfolios. Banks earn interest on credit and advances which is one of the major source of income for banks. On average 5 years of research period, cash and bank balance to total deposits of ratio of NB bank and BOK is 12.75% and 14.12% respectively. Likewise NB bank and cash and bank balance 1.584 times of current deposits and BOK has cash and bank balance 1.14 times of current assets. NB bank: most of the credit and advances almost 70% is provided an assets guarantee. The assets guarantee credit is increasing period by period. After assets guarantee bank has provided credit based on bills guarantee credit is 3421.3millions (76.1% of total credit) and in the last period it is 3347.99millions (58.2%of total credit). Dhital (2004) states that the liquidity position of BOKL is comparatively better than SCBNL. It has the highest cash and bank balance to total deposit ratio, cash and balance to current assets ratio. This may be the bank is in a good position to meet the daily cash requirement but it has to bear high cost of fund. Since investment on government securities of SCBNL is far better than BOKL. However, higher ratio shows unstable policy of investment. At last, we can be concluded that BOKL has good deposit collection and SCBNL can success to invest more amounts on government securities. Therefore, BOKL has maintained moderate investment policy on loan and advances. The asset management ratios of the both banks are satisfactory, it can be shown that SCBNL

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is not able to provide its deposit as loan and advances in comparison to BOKL. Whereas, SCBNL have more portion of deposit invested as investment in different sectors. Moreover, SCBNL has not utilized its working fund as loan and advances in comparison to BOKL. Due to security, SCBNL have also invest able its working fund in government securities and other companys share and debentures than that of BOKL. Karki (2004) found that the development of any country largely depend upon its economic development capital formation is the prerequisite in setting the overall pace of the economic development of a country. Well-organized financial system contributes to the process of capital formation by converting scattered saving into meaningful capital investment in order to aid industry, trade, commerce and agriculture for the economic development of the nation. The financial institution play dominant role in the process of economic development. Banks are indispensable elements in these systems. Commercial banks furnish necessary capital needed for trade and commerce for mobilizing the dispersed saving of the individuals and institutions. They provide the bank of the money supply as well as the primary means of facilitating the flow of credit. Dahal (2004) states that the liquidity ratio measures the ability of a firm to meet its short-term obligations and select the short term financial solvency of a firm. The liquidity position of the banks in term of current ratio shows that the ratios of NBBL are always above the normal standard (i.e.2:1) where as HBLs ratio is always below than normal standard. It shows that the liquidity position in term of current assets to current liability of NBBL is better than HBL. Therefore, it is concluded that NBBL is better short -term solvency position as compared with HBL. The liquidity position of NBBL in term of cash and bank balance to deposit ratio is higher than that of HBL (i.e.39.09 percentage>11.85% on an average). Therefore, it is concluded that NBBL has sufficient cash and bank balance to its deposit except fixed deposit then that of HBL. Likewise, the liquidity position of NBBL in term of cash and bank balance to current deposit ratio is found higher than HBL (i.e. 165.95%>63.16% in an average). Here, NBBL has so high ratio that it is bad because ideal assets earn nothing. Therefore, NBBL should invest in productive area. This analysis shows that NBBL has more cash ideal than HBL. Basnet (2005) states that financial analysis involves the method of calculating and interpreting financial ratio in order to assess the firms performance and status. The following are the main findings from the financial ratio. The current ratio measures only 57

total rupees worth of current assets and total rupees worth of current liabilities i.e., it indicates the availability of for current liabilities. A ratio that is grater than one means that the firms has more current asset than current claims against them. The calculation found that the average current ratio of SBI (1.05 times) is greater than that of NBB (0.98times). The table shows that the ratio is in fluctuating trend of SBI and decreasing trend of NBB. The highest ratio for SBI is 31.41% and lowest is 18.45% and lowest ratio is 8.47%. Calculation of loan and advances to total deposit exhibits that the ratio is fluctuating for SBI. It was lowest in fiscal year 2000/2001 whereas the ratio was in increasing trend up to fiscal year 2001/2002 for NBB but it is decreased in 2002/2003. Shrestha (2005) states that lending is one of the most important part of function of a commercial bank and composition of loan and advances directly affects the performance and profitability of the bank. There is intense competition in banking business with limited market and less investment opportunities available. Every bank is facing the problem of default loan and there is always possibility of a certain portion of the loan and advances, profitability deposits position of Nepal SBI Bank Limited is analyzed and its contribution in total profitability has been measured. Subedi (2005) states that deposit is the part of balance sheet which always remains the biggest in amount. It is the sensitive liability among al items. As like total liabilities and capital deposit also increase until 2057/58 and starts to fall down. The increment rate is satisfactory in first and second changing years, and then it has changed by negative digits therefore in two subsequent years. The business in peak where the value was Rs.15839.0077 million. The proportion of debt over the total liabilities and capital is 83.35% in average. Fixed deposit is taken as a long-term debt in the banking business; it is key department factor to capital structure. The bank could collect the deposit is Rs.7667.8459 millions. In two subsequent years, it decreases and becomes Rs.2252.5464millions in the final study years. This items changes by in highly decreasing trend. The average change rate is 5.89%. The proportion over total liabilities and capital is 26.32% in average. The composition of paid up capital, reserve and surplus other reserves and undistributed profit is known as shareholders equity. Unlike other items mentioned above, shareholders equity is regularly increasing. The yearly change rate is in fluctuating trend varied from 8.97% to 24.63%.

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The main statement of his research is the banking industry is one of the fast growing businesses in Nepal. After the liberalization policy was adopted by government this sector has been dramatically. Now, more than one and half dozen banks are in operation. Now too, new banks are being set up. Due to security, problem and political instability government could not be able to pay sufficient attention to business and industry sector. Regulation and monitoring by government has been weekend in the banking sector as like others free and fair competition is decreasing. Customers and stakeholders are too much sad to hear the news that banks have tried to cartel in taking treasury bills before some months other type non-business practices might have been occurred in this industry. Surely such types of practices will hamper the whole sector. Ultimately, the capital structure will be affected. We have been watching the type scenario where the capital structure is not so stagnant and continues progress. Shrestha (2006) found that NB bank has sufficient liquidity. It shows that bank has not got investment sectors to utilize their liquid money. Now, in Nepal many banks and other financial institution are functioning to collect deposits and invest money somewhere in the investable sectors. Therefore, monetarization have been increased since liberalization policy taken by the government. Heavy remittance has also helps to increase the amount of deposits in bank. On the other hand, due to political crisis, economic sectors have been fully damaged. Most of the projects have been withdrawn due to security problem. Therefore, bank has maximum liquidity due to lack of safety investments sectors. NB bank has utilized most funds in the form of credit and advances. More than 75% of total deposits of the bank have been forwarded to customers as a credit and advances. Therefore, it is the major part of utilizing deposits and income generating sectors. If the bank has high deposits, bank can provide money to its customers as credit and advances. Therefore, there is highly positive correlation between total deposits and credit and advances of NB bank is 0.978 times. Therefore, bank is providing different schemes to attract good customers. After attracting deposits from the customers, bank has issued the deposits to the needy area to make profit for the bank. The main statement of the problem of his research is the commercial banks in Nepal have been facing various challenges and problems. Some of them arising due to the economic condition of the country and arising due to lack of policy clarity of government and many of them arising due to default borrowers. After liberalization of economy,

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banking sector has growth and various opportunities have emerged. However, the financial institutions do not seem to be performing well. Liquidity is high with the financial institutions. Hence, the banks and financial institutions are competing among themselves to advance credit to limited sectors available. Banks and financial institutions are investing in house loan, hire purchase loan for safety purpose. Due to lack of good lending opportunities, banks appear to be facing problems of excess liquidity. Nowadays, Banks have increasing amount of deposits in fixed and saving accounts but have decreasing trend in lending behaviors. Therefore, this has caused major problems to the commercial banks. Due to competition among banks the interest rate for loan is in a decreasing trend. Paudyal (2006) states that interest income from loan and advances are the main sources of income, which will increases profit of commercial bank. The main ratio of interest income to total income of NSBL is higher than that HBI. NRB has restricted the gap between the interest taken in loan and advances and interest offered in deposit. HBL have higher mean ratio of interest income to interest expenses and total income to expenses ratio than that of NSBL. HBL has maintained high return in every aspect than that of NSBL. Among the various measurement of profitability ratios return to equity and earnings per share, reflects the relative measure of profitability. The performance of NBL is higher than that of NSBL. Coefficient of correlation between deposit and loan and advances total income and loan and advances of both bank have positive value there is significant relationship between deposit and loan and advances total income and loan and advances. Coefficient of correlation between net profit and loan and advances of both bank have positive relationship. But the number of HBI is greater than number of NSBL. There is no significant relationship between net profit and loan and advances of both banks. They are greater than number of both banks. Gautam (2006) states that many joint venture banks are operating in Nepal as commercial and merchant banks. The growth is still going on as so many new banks are coming into existence after this study. Therefore, JVBs are operating with higher technology and new efficient methods in banking sector. However, this study has been undertaking only three JVBs viz. SCBNL and NBBL to examine and evaluation the financial data. Besides latest financial statement of six year from 1999 to 2004 have been conferred for the purpose of the study. All JVBs has used high percentage purpose of the

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study. All JVBs have used high percentage of total debt in raising the assets. The higher ratio constitutes that the outsiders claim in total assets of the bank is owners claim. The on an average, NBBL bank constitutes 16.27 times of D/E ratio, which should be reduce as quickly as possible. The financial risk of the banks NBBL average degree of finance leverage constitutes 3.73 times which indicates the higher degree of financial risks 3.73 times which indicates the higher degree of financial risks. The average ROE of JVBs i.e. SCBL and NBBL area 37.36% and 21.75% respectively. Sedai (2007) in his dissertation An analysis on lending policy and strength of Nepal Investment Bank Ltd highlighted that aggregate performance of NIBL is satisfactory and pushing upward. Lending strength of NIBL in term of exposure of loan and advances is good and appreciable. The contribution made by bank in industrial as well as agriculture sector of the economy is highly appreciable and its bust up towards national prosperity. The ratio of loan and advances to total asset, loan and advance to shareholders equity indicate a good performance of NIBL in its lending activities.

Looking at the asset management ratio the performance of NIBL seems good in the area of lending, productivity and impact on national economy. The activity ratio also reflects to the soaring performance of NIBL. The decreasing loss loan provision ratio indicate that bank is good enough to judgment in their value customer. The better activity ratio of this bank been a major contributor in managing the lending portfolio according to the demand of the profit oriented business. The high volume of lending activity of NIBL has put this bank in the top position in absolute term. Thus looking at the various summaries and findings, we can conclude that the bank has accelerated its performance in the year 2002/03 and has continued till 2004/5 and the bank has the potentiality to become a leading bank in Nepal. The recommendations are forwarded according to finding and conclusion. It is recommended that extend their credit and branch in rural area, continue to maintain or further increase the performance, decrease the NPL and make proper loss loan provision, required proper market analysis, diversify the investment sector etc. finally however performance of NIBL seems to be good till the date. There are still many opportunities for further growth of the bank. NIBL is suggested to further improve current position of lending portfolio. The bank should concentrate on financial strength, pe5rsonal integrity

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and credibility of the borrower of loan disbursement. It should maintain high level of monitoring and control system over the disbursed loan and advances. To create opportunity of business news and attractive lending scheme would be launched to the customer. The main objective and target of this study is to observe the loan disbursement of Nepal Investment Bank Ltd. its shows the actual lending position, strength and weakness. The specific purpose are study of loan and advances provided to customer, amount loan investing in industrial sector, trend of loan disbursement , process are according to NRB rules & regulation and position of bank and its profitability. 2.4. CONCLUDING REMARKS The review of above relevant literature has contributed to enhance the fundamental understanding and knowledge, which is required to make this study meaningful and purpose. There are various researchers conduct on lending practice, financial performance and credit management of commercial bank. Some of the researchers have compared the financial performance between two or three different commercial bank. In order to perform those analysis researchers have used ratio analysis. Thesis done by Shrestha on credit management of commercial bank with special reference to Nepal SBI bank ltd on 2004 and financial performance of NABIL bank on 2002.done by Bista. However no one has done study on credit policy with special reference to ACE Development Bank Ltd. Therefore the researcher attempts to study in this area. In this study researcher also used the different statistical tools like coefficient of correlation and trend analysis to analyze the data.

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CHAPTER III RESEARCH METHODOLOGY

3.1. INTRODUCTION Research is an analytical detail study of a specific subject. Research methodology refers to the systematic and meticulous study and investigation on the particular subject matter. The fundamental purpose of this study is to provide an overview on the credit management practices of the sampled bank. This chapter indicated different methods, tools and techniques utilized to present the study in simplified and understandable manner. 3.2. RESEARCH DESIGN The prime objective of this study is to provide an overview on financial risk weighted exposure of ACE. The research methodology used in this research includes personal observation, secondary data and annual reports. The research design is thus an integrated frame of descriptive study. a. Descriptive study is a very useful and most commonly used design of field or project work. This type of study is undertaken in order to describe the different aspects of a situation and environment. It offers ideas for further investigation and research, thus help in identifying problems and make certain simple decisions.

3.3. SOURCES OF DATA Data is the foundation of all report writing and fieldwork projects. Each field project has its own data needs and data sources. a. Secondary Data Secondary data are those data, which are already published and available. It can be classified in three-pairs as internal vs. external data, quantitative vs. qualitative data and periodic vs. Ad-hoc. Sources from which the secondary data for this research are extracted are as follows:

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1. Economy survey of NG, Ministry of finance. 2. Annual general report of EBL. 3. National newspaper, journals and magazine. 4. Internet. 5. NRB directives.
3.4. DATA COLLECTION PROCEDURE Necessary and required data were collected from the corporate department of ACE Development Bank Ltd. concerned personnel of the respected department were in contact. Secondary data were used for the preparation of this report. Secondary data were collected from annual report of ACE, Nepal Rastra Banks published journals and ,related articles, academic books and literature, banks internal reports, files and others have been considered for making this report authentic and more realistic. The concerned personnel provided all the consolidated data records as per the requirement of the report. The data compiled were classified and tabulated to the need of the study. 3.5. TOOLS AND TECHNIQUESFOR DATA ANALYSIS For better understanding and simplicity of this study, various tools and techniques have been issued. In this report following tools and techniques have been utilized a. Financial ratios Financial ratios have been systematically used to analyze and interpret the financial statement of the company. The ratios used are summarized as follows

b. Credit deposit ratio It shows that the deposit collected from the customers are efficiently used or mobilized in advancing loan.

Credit deposit ratio = Total Credit Total Deposit

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c. Net Profit to Loan and Advances Ratio This ratio denotes net profit earned by the bank while advancing loan to different sectors.

Net Profit to Loan and Advances Ratio =

Net Profit

x 100

Loan and Advances d. Loan Loss Coverage Ratio The above ratio indicates to ascertain the percent of the total lending and loan loss provision maintained by the bank.

Loan Loss Coverage Ratio = Total Loan Loss Provision Total Lending e. Current Ratio

x 100

It measures firms short-term solvency and indicates the ability of current assets to meet current obligations.

Current Ratio = Current Assets Current Liabilities

f. Debt-Equity Ratio This ratio is used to analyze long-term solvency of a firm and indicates the extent to which debt financing has been used in the business.

Debt-Equity Ratio = Total Debt Net worth / Total Shareholders fund g. Return on Equity (ROE) This ratio reveals the true picture of the ability of the bank to utilize its owners fund. ROE = Profit After Tax

Net Worth or Shareholders Fund

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h. Net Profit Margin This ratio is the overall measure of the firms ability to turn each Rupee sales into Net Profit. Net Profit Margin = Net Profit Sales x 100

3.6. USAGE OF DIAGRAM a. Bar diagram It consists of bars of equal width. The length of the bars represents the different values of a variable. The bar may be vertical or horizontal. For this study, table has been represented by simple and vertical bar diagram.

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CHAPTER IV DATA ANALYSIS & INTERPRETATION

4.1. FINANCIAL INDICATORS OF ACE 4.1.1. TOTAL CREDIT POSITION OF ACE Advancing loan is one of the vital functions of all banks. Total credit disbursed is undeniably major income earning asset for the development banks. Total credit investment i.e. totals lending of Ace for 5 years from 2004/2008 to 2009/2010 are tabulated as under; (NRs. in Millions) Table 2.1 Total Credit Position Fiscal Year 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010
Source- Secondary Data

Total Credit 675.96 800.64 918.73 1493.23 2273.63 3310.74

Differential Amount 124.68 118 575 780 1037.11

Annual Growth (%) 18% 15% 63% 52% 45.6%

Interpretation The table indicates total credit position for period of five years. In other words, it depicts total lending/ credit advanced by the bank. In FY 2004/2005, total credit amounted to NRS 675.96 million. In FY 2005/2006 total credit amounted to NRS 800.64 million. In FY 2006/2007, total credit amounted to NRS 918.73 million which increased by 15%. However in FY 2007/2008, the lending position grew by 63% amounting to NRS 1493.23 million. In FY 2008/2009, it amounted to NRS 2273.63 million with the growth rate recorded at 52%. In the subsequent year, it amounted to NRS 3310.74 million with the growth rate recorded at 45.6%.

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Figure 4.1 Total Credit Position

Total Credit Position

3500 3000 2500 Amount 2000 1500 1000 500 0 2004/05 2005/06 2006/07 2007/08 Fiscal Year 2008/09 2009/10 675.96 800.64 918.73 1493.23 2273.63 3310.74

4.1.2. CREDIT DEPOSIT RATIO Credit deposit ratio is one of the methods or mechanism applied to measure adequacy of bank capital. Amount collected in the form of deposit is regarded as one of the source for advancing loan. Bankers strength depends considerably on quality of its loan and proportion they bear to the total deposits. This ratio can be obtained as follows: Credit deposit ratio = Total Credit Total Deposit

(NRs. in millions) Table 4.2 Credit Deposit Ratio Fiscal Year 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010
Source- Secondary Data

Total Credit 675.96 800.64 918.73 1493.23 2273.63 3310.74

Total Deposit 779.38 857.67 988.12 1784.55 2623.63 4002.65

Credit Deposit Ratio (%) 86.73 93.35 92.98 83.68 86.66 82.71

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Interpretation The total deposit refers to all those deposits that are accepted by the bank such as saving deposit, fixed deposit; call deposit, current deposit and margin deposit. The table reveals credit deposit ratio of the bank over a period of five years. In FY 2004/2005, credit deposit ratio was 86.73%. In other words, 86.73% of total deposit was invested as credit, it raised to 93.35% and 92.98% in the succeeding year. Though credit deposit ratio fell to 83.68% in the year 2007/08.In FY 2008/09 it was recorded as 86.66%%. In the subsequent year it was recorded as 82.71%.

Figure 4.2 Credit Deposit Ratio

Credit Deposit Ratio

100 90 80 70 Percentage 60 50 40 30 20 10 0 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 Fiscal Year 86.73 93.35 92.98 83.68 86.66 82.71

4.1.3. SECTORED CREDIT MIX ACE has been providing different types of credit facilities to the customers. While disbursing loan it should consider directives issued by NRB and banks own credit policy. Concentration of credit in particular sector must be avoided to minimize risk. Sectored credit mix i.e. sector wise detail of loan and advances of ACE are tabulated as under.

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(NRs. in millions) Table 4.3 Sectored Credit Mix for FY 2008/09 Deployment of Credit Agriculture Mining Manufacturing Construction Metal Products, Machinery and Electronics Equipment Transportation Equipment Production & Fitting Transportation, Communications & Public Services Wholesalers and Retailers Finance, Insurance and Real Estate Service Industries Other Services Consumable Loan Others Others Loan Total
Source- Secondary Data

Amount 7.5 0.00 165.69 583.01 31.51 334.95 27.81 152.22 318.72 20.65 66.73 45.38 5.00 514.46 2,273.63

Percentage (%) 0.33 0.00 7.29 25.64 1.39 14.73 1.22 6.70 14.02 0.91 2.94 2.00 0.22 22.62 100.00

Interpretation The table reflects sectored credit mix for FY 2008/2009. Construction, Transportation Equipment Production & Fitting and Finance, Insurance and Real Estate constitutes major proportion around 25.64% (i.e. NRS 583.01 million), 14.73% (i.e. NRS 334.95 million) and 14.02% (i.e. NRS 318.72 million) respectively. Similarly Manufacturing enjoys 7.29% (i.e. NRS 165.69 million) and wholesalers and retailers are allotted with 6.70 % (i.e. NRS 152.22 million). Whereas agriculture, Metal Products, Machinery and Electronics Equipment, Transportation, Communications & Public Services, Service Industries, Other Services, Consumable Loan, Others and Others Loan holds lower percentage of total lending i.e. 0.33% amounted to NRS 7.5 million, 1.39% to NRS 31.51 million, 1.22% to NRS 27.81 million, 0.91% to NRS 20.65 million, 2.94% to NRS 66.73 million, 2.00% to NRS 45.38 million, and 0.22% to NRS 5.00 million respectively compared to other sectors.

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Figure 4.3 Sectored Credit Mix for FY 2008/2009

30.00 25.64 25.00 Deployment of Credit 22.62 Mining Manufacturing 14.73 Construction Metal Products, Machinery and Electronics Equipment Transportation Equipment Production & Fitting Agriculture

20.00 14.02

15.00

10.00

7.29

6.70 2.94 2.00 0.91 0.22

5.00 0.33 0.00 0.00 1.39 1.22

Percentage (%)

ACEs loan structure for the fiscal year 2008/2009 has been tabulated as under Table 4.4 Sectored Credit Mix for FY 2009/10 Deployment of Credit Agriculture Mining Manufacturing Construction Metal Products, Machinery and Electronics Equipment Transportation Equipment Production & Fitting Transportation, Communications & Public Services Wholesalers and Retailers Finance, Insurance and Real Estate Service Industries Consumable Loan Local Government Others Total
Source- Secondary Data

Amount 19.7 0 330 725.5 47.6 339.6 63.3 314.2 476.8 107.2 55.9 15.2 815.74 3,310.74

Percentage (%) 0.59 0 9.97 21.91 1.44 10.26 1.91 9.49 14.4 3.24 1.69 0.46 24.64 100

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Interpretation The table reflects sectored credit mix for FY 2009/2010. Manufacturing, Construction, Transportation Communications & Public Services, and Finance, Insurance and Real Estate constitutes major proportion around 12.88% (i.e. NRS 452.5 million), 21.81% (i.e. NRS 766.4 million), 10.21% (i.e. NRS 358.9 million) and 12.56%% (i.e NRS 441.3 million) respectively. Similarly Wholesalers and Retailers are allotted with 9.99% (i.e. NRS 351 million). Whereas Agriculture, Metal Products, Machinery and Electronics Equipment, Transportation Equipment Production & Fitting, Service Industries, Consumable Loan, and Local Government holds lower percentage of total lending i.e. 1.22% amounted to NRS 42.9 million, 2.15% to NRS 75.6 million, 1.68% to NRS 59 million, 3.42% to NRS 120.3 million, 1.81% to NRS 63.9 million, and 0.43% to NRS 15.2 million respectively compared to other sectors. Whereas others hold 21.80% of total credit mix amounting to NRS 765.8 million.

Figure 4.4 Sectored Credit Mix for FY 2009/10

25 21.91 20 24.64 Agriculture Mining Manufacturing Construction Metal Products, Machinery and Electronics Equipment 9.49 Transportation, Equipment Production & Fitting Transportation, Communications & Public Services Wholesalers and Retailers Finance, Insurance and Real Estate

Deployment of Credit

15

14.4

10

9.97

10.26

5 0.59 0 Percentage (%) 1.44 0 1.91

3.24 1.69 0.46

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4.1.4. LOAN CLASSIFICATION OF ACE As any other development banks, ACE has to categorize its total lending including bills purchased and discounted as per directives issued by NRB. Loan and advances are classified under four categories standard loan underperforming assets/loan and substandard, doubtful and bad loan as non performing assets. (NRs. in millions) Table 4.5 Classification of loan as per NRB directives Basis of classification Performing loan Standard loan Non- Performing loan Sub- standard Doubtful Bad Total
Source- Secondary Data

2008/09

2009/10

Difference

2273.84 0.15 0.00 0.64 2273.63

3309.68 0.29 0.67 0.1 3310.74

1035.84 0.14 0.67 -0.54 1037.1

Interpretation Above table gives insight on total lending including bills purchased and discounted bills advanced in different sectors that have been categorized in four classification. It can be observed that pass loan has increased to NRs 3309.68 million in FY 2009/10 from NRs 2273.84 million in FY 2008/09. There are three categories under non- performing loan as sited in the table. Sub-standard loan has inclined from NRS 0.15 million to NRS 0.29 million in 2009/10. However, doubtful loan was NRS 0.67 million. Whereas, bad loan was observed slightly decreasing in 2009/10, i.e. NRS 0.1 million. Increase in standard loan (performing assets) by NRS 1035.84 million and decline in Bad loan by NRS 0.54 million can be interpreted as a positive sign. Nonetheless doubtful loan has immensely increased to NRS 0.67 million. Bank must focus and concentrate on reducing such doubtful and bad loan.

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Figure 4.5 Classification of Loan as per NRB Directives

0.1 3500 3000 2500 2000 1500 1000 500 0 2008/09 2009/10 2273.84 0 0.64 0.15 3309.68 Bad Doubtful Sub-standard Loan Standard Loan 0.29 0.67

4.1.5. COLLATERAL/SECURITY A bank is a legal institution that doesnt provide loan without security. Bank analyzes various financial statements like balance sheet, profit & loss account, cash flow statement for the assessment of borrowers credit worthiness. To safeguard banks interest, bank asks for security which proves to be cushion in case of default. Collateral refers to assets pledged against the performance of an obligation. If a borrower defaults on a loan, the bank takes the collateral and sells it.ACE has been extending credit facilities to its customer against various securities such as movable/ immovable assets, fixed deposit receipts, government bonds and other securities. (NRs. in millions) Table 4.6 Securities against Loan & Advances Particulars 2008/2009 2009/2010 Collateral of Movable/ Immovable assets 2228.94 3245.87 Local banks and financial institutions guarantee 0 0 Government guarantee 0 0 Foreign banks guarantee 0 0 Export documents 0 0 Fixed deposit receipts 34.35 45.59 Government bonds 10.33 10.28 Personal guarantee 0 0 Other securities 0 0 Secured 2273.63 3310.74 Unsecured 0 0 Total 2273.62 3310.74
Source- Secondary Data

Difference 1016.93 0 0 0 0 11.24 -0.05 0 0 1037.11 0 1037.12

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Figure 4.6 Securities against Loan & Advances

Collateral of Movable/ Immovable assets 3245.87 Local banks and financial institutions guarantee Government guarantee Foreign banks guarantee 10.28 45.59 0 00 Export documents Fixed deposit receipts Government bonds

Interpretation The above table reveals that there is an increment in secured loan by NRs 1037.11 million in FY 2009/10. The bank advances loan against the above-mentioned securities. The amount lend against collateral of movable and immovable assets increased from NRs 2228.94 million in FY 2008/09 to NRs 3245.87 million in FY 2009/10 by NRs 1016.93 million. Further the Fixed Deposit Receipts shows considerable inclined to NRS 45.59 million from NRS 34.35 million in 2009/10 but Government Bonds declined to NRS 10.28 million from NRS 10.33 million which is negligible decline by 0.05 million. 4.1.6. NET PROFIT TO LOAN AND ADVANCES RATIO A company should earn profit to survive and grow over a long period of time. Profitability reflects the final result of business operations. The main objective of any business is directed towards one definite term profit. Before advancing loan, profit margin of the bank needs to be identified, as bank has to cover various operating and miscellaneous expenses. This ratio can be obtained by applying following formula

Net Profit to Loan and Advances Ratio =

Net Profit 100 Loan and Advances

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(NRs. in millions) Table 4.7 Net profit to loan and advances ratio Fiscal Years 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010
Source- Secondary Data

Net Profit 25.14 21.48 53.91 21.90 79.69

Loan & Advances 800.64 918.73 1493.23 2273.63 3310.74

% 3.14 2.34 3.61 0.96 2.40

Figure 4.7 Net Profit to Loan & Advances Ratio

4 3.5 3 2.5 2 1.5 1 0.5 0 2005/06 2006/07 2007/08 2008/09 2009/10 0.96 2.34 2.4 3.61 3.14

Interpretation The above table depicts that the net profit gained from the disbursement of loan to the customers are growing consistently except there was an increase in the FY 2009/10 by 2.40%. It made a continuous progress in the FY 2005/06 and decreased in 2006/07 by 3.14 % and 2.34% respectively. However in FY 2007/08 there was increment by 3.61% but in the next year it recorded by declination of 0.96%. Thus, the bank has earned certain amount of profit from advancing loan, which would contribute in the expenses incurred. 4.1.7. LOAN LOSS COVERAGE RATIO There are two types of loan, good and bad. Good loan is the one, where the borrowers pay back the amount within stipulated time. Bad loan are such where debtors

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do not pay back the loan amount within time limit. Bank has to make certain kind of provision in order to safeguard from the solvency of bankrupt of the bank. This type of ratio is calculated in order to ascertain the percent of total lending and loan loss provision maintained by the bank. Every commercial bank has to maintain loan loss provision as per the instruction of NRB. Such provision is maintained with the objective of banks own safety and security. Since banks fund is tied up in loan loss provision bank must attempt to minimize proportion of loan loss provision to total lending credit investment. Mathematically, Provision to total lending = Total Loan Loss Provision Total Lending X 100

(NRs. in millions) Table 4.8 Loan loss coverage ratios Fiscal Years 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010
Source- Secondary Data

Total Lending 800.64 918.73 1493.23 2273.63 3310.74

Loan Loss Provision 20.38 19.76 16.96 23.4 33.097

Provision to total lending (%) 2.55 2.15 1.14 1.03 1

Interpretation The sited table shows percent of loan loss provision to the total lending. In FY 2005/06 ratio of loan loss coverage declined to 2.55%. In the subsequent year 2006/07, it declined by 2.15%. However, it drastically decreased to 1.14% in FY 2007/08 and again a slight decline by 1.03% in FY 2008/09. For the FY 2009/10, loan loss coverage ratio has drastically declined to 1%.

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Figure 4.8 Loan Loss Coverage Ratio

3 2.5 2 1.5 Series 1 1 0.5 0 2005/06 2006/07 2007/08 Fiscal Year 2008/09 2009/10

4.1.8 LIQUIDITY RATIO

Percentage(%)

Liquidity ratio measure the ability of a firm to meet its obligation in the short-run, usually one year. A firm should ensure that it does not suffer from lack of liquidity and also that it does not have excess liquidity. Lack of sufficient liquidity, will result in poor credit worthiness, loss of creditors confidence. The current ratio is calculated by dividing current assets by current liabilities Current Ratio = Current Assets Current Liabilities (NRs. in millions) Table 4.9 Current ratio Fiscal Years 2005/2006 2006/2007 2007/2008 2008/2009 2008/2009 Current Assets 1035.24 1472.10 3526.51 3782.75 6958.796 Current Liabilities 660.66 1197.71 3141.74 3145.48 3145.48 Ratios 1.57 1.23 1.12 1.20 1.20

Source- Secondary Data

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Interpretation The current ratio of ACE can be depicted from the above table. The current ratio of the bank in the FY 2005/06 was highest by 1.57 compared to the following year. However there is considerable decline from the year 2006/07 to 2007/08 by 1.23, 1.12 respectively. But good thing is that in the FY 2008/09 it has been slightly increasing i.e. 1.20 compare to previous year. Figure 4.9 Current Ratio
1.8 1.6 1.4 1.23 1.2 Percentage 1 0.8 0.6 0.4 0.2 0 2004/2005 2005/2006 2006/2007 Fiscal Years 2007/2008 2008/2009 1.1 1.12 1.2 1.57

4.1.9 EQUITY RATIO

Debt ratio is used to analyze long term solvency of a firm. Debt equity ratio shows the extent to which debt financing has been used in the business. It shows the relative contribution of creditors and owners. The loan agreements may require a firm to maintain a certain level of working capital, minimum current ratio, restrict the payment of dividend or fix limits to the staff salaries & so on. Heavy indebtness leads to creditors pressure and constraints on managements independent functioning and energies. Debt-equity ratio is directly computed by dividing Total debt by Net worth

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Debt-Equity Ratio = Total Debt Net worth / Total Shareholders fund (NRs. in millions) Table 4.10 Debt-Equity ratio Fiscal Years 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009
Source- Secondary Data

Ratios
6.11 4.12 3.34 6.2 3.88

Interpretation The above table indicates that in FY 2004/05 the debt-equity ratio was 6.11 and gradually decreasing in the subsequent years. The debt-equity ratio in the FY 2005/06 was 4.12, but in 2006/07 it declined to 3.34. Furthermore, it was in increasing trend by 6.2 and again in decreasing trend by 3.88 in the FY 2007/08 and 2008/09 respectively. Figure 4.10 Debt-Equity Ratio
7 6.11 6 5 4.12 Percentage 4 3 2 1 0 2004/2005 2005/2006 2006/2007 Fiscal years 2007/2008 2008/2009 3.34 3.88

6.2

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4.1.10. RELATED TO INVESTMENTS Return on Equity (ROE)

ROE measures the profitability of equity funds involved in the firm. ROE indicates how well the firm has used the resources of owners. It reveals the clear picture of the capacity of the bank to utilize its owner fund. ROE can be mathematically expressed as follows ROE = Profit After Tax Net Worth or Shareholders Fund

The numerator of this ratio is equal to Profit after Tax less Preference Dividends. The denominator includes all the contribution made by equity shareholders.

(NRs. in millions) Table 4.11 Returns on Equity Ratio Fiscal Years 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009
Source- Secondary Data

ROE 11.68 15.69 5.98 10.64 6.40

Interpretation The above table depicts the ROE ratio of five fiscal years. The ratio is in a fluctuating situation as in FY 2004/05, the ratio was 11.68%, in the next year 2005/06, and it was15.69% followed by 5.98% in FY 2006/07, in FY 2007/08 10.64% and 6.4% in the year 2008/09. In the year 2007/08, there was a huge increment by 4.66% as compared to 2006/07.

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Figure 4.11 Returns on Equity Ratio

15.69 16 14 11.68 12 Percentage 10 8 6 4 2 0 2004/2005 2005/2006 2006/2007 Fiscal years 2007/2008 2008/2009 5.98 6.4 10.64

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CHAPTER V FINDINGS, SUGGESTIONS & CONCLUSION

5.1. FINDINGS
Based on the companys data and the researchers observation and capability, following findings have been made. 1. When the bank started its operation under new management and team, the total deposit and lending made a progressive increment by 47.01% i.e. NRS 2623.63 million and 52% i.e. NRS 2273.63million respectively. 2. ACE has experienced greater increment in credit position. In FY 2007/2008, the annual growth rate is increasing by 63% but at a diminishing rate, whereas in FY 2008/2009, the bank made a decreased to 52%. 3. ACE credit deposit ratio shows inconsistency in banks performance as there is a fluctuating trend and little decrease in the FY 2007/2008 i.e. 83.68%. It shows that the bank has been utilizing most of its deposits in advancing loans as the credit and deposit amount has increased to NRS 2273.63 million and NRS 2623.63 million in FY 2008/09. 4. Manufacturing and Transportation Equipment Production & Fitting sector comprises major portion of total credit investment of 8.71and 15.28, in FY 2007/2008. Secondly the bank invests 26.05% and 13.46% and 6.70% of loan to Finance, Insurance and Real Estate in FY 2002/03 and 2008/09 respectively. The bank has undergone small changes in case of investment sectors like agriculture, mining, production and assembles of transportation equipment, Wholesalers and Retailers, service industries and others. However in sectors like construction and metal products the bank has made slight declining amount of investment from 30.54% to 25.64% and 0.93% to 1.39% in FY 2003/04 respectively. 5. Total credit of FY 2007/08 and FY 2008/09 has been divided into performing and non-performing assets. Increment in performing assets by NRS 786.45 million are considered favorable. However corresponding increment in bad loan by NRS 0.35 million are acceptable figures.

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6. ACE grants credit facilities against movable and immovable collateral, guarantees, fixed deposit receipts, export documents, bonds. There is an increment in the loan comparatively by NRS 780.4 million for the year 2007/08 to 2008/09. 7. Profits must be earned to sustain the operations of the business, to be able to obtain funds from investors for expansion and growth, to cover the expenses incurred and to contribute towards social overheads for the welfare of the society. Net profit earned from the loan and advances shows favorable condition due to its positive attitude of growth rate except there was a heavy decrease in the FY 2008/09 to 0.96%. 8. Loan loss coverage ratio i.e. loan loss provision to total lending has slightly declined in from FY 2005/06- 2008/09 which is regarded as a positive signto 2.15%, 1.14 and 1.03% respectively. Bank should maintain this effort. 9. Return on equity of ACE was highest in the year 2005/06 i.e. 15.69 which proves the overall effectiveness of the bank and bank has been successful in mobilizing its owners fund in an efficient manner. 10. Liquidity of ACE is fluctuating each year. It is unable to maintain its liquidity position at standard level as the current ratio in last five years is below the required standard level i.e. 2: 1. 11. Debt equity ratio of ACE shows that it is moving towards lower trend, which indicates owners are not investing resource of their own. This reveals danger to the creditors, as during period of low profit, a highly debt-financed company cannot even pay the interest of creditors.

5.2 SUGGESTIONS The study on credit management practices of ACE has revealed various credit performance and functional aspects of bank. The following recommendations and suggestions can be used to improve and promote positive image of the bank: ACE should continue to consider principles of good lending while formulating credit policy and revise and amend them as per Nepal Rastra Bank directives, banks own policy and objectives.

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 Bank should follow entrepreneur- friendly credit policy to tap new market segment consisting of the people with great entrepreneurship spirit and potential. Further credit decision of the bank should weigh viability of the project and credit worthiness to ensure recovery of the loan. Bank should make effort to increase total credit investment by adopting new credit facilities, restructuring existing facilities, charging competitive interest rate in loan. ACE also advances loan against gold, silver and other jewelries so it should continue in this matter since this provision can help increase potential customers. ACE should increase its services and lending rates to priority and deprived sectors as well. Lending in such sectors increases the economic condition of the general public. ACE should timely provide training and development facilities to its staff member in order to enhance their knowledge regarding the current market situation and for up to date work in the credit field. Experienced and well-trained staffs are the most important assets of the bank who help to achieve the desired goal. Bank should further try to invest the deposit money in the productive sector as in the FY 2007/08 there was slight decrease in credit deposit ratio. However, bank must be aware of its liquidity position to safeguard depositors interest and decrease the interest rate imposed on lending to be more competitive. The current ratio of a firm measures its short-term solvency i.e. its ability to meet short-term obligations. The higher the current ratio the more the firms ability to meet current obligations and greater the safety of funds of short-term credit. So, ACE is recommended to maintain current ratio at or above the standard level i.e. 2: 1. ROE measures the return earned of the owners investment in the firm. Here, higher ratio implies higher profitability position and lower ratio implies lower profitability position of the bank. From the analysis it is seen that ROE of ACE is in decreasing pace and the bank should make more effort to increase it.

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 ACE is suggested to lower the debt-equity ratio of the firm as it is increasing drastically and is doubled in 2007/08 compared to 2008/09.

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5.3. CONCLUSIONS Credit management is a major function of any commercial bank. Recent economic downturn, recession in industrial and trading activities and stiff competition in banking industry have resulted in deteriorating investment opportunities and increase in risk in loans and advances. After conducting detailed loan approval process and satisfying with lending documentation especially concerning security and financials, loan is disbursed. Continuous loan administration and credit audit are conducted to confirm customers compliance to credit condition. The characteristics of good collateral are also considered by the bank to overcome any default loan. Credit risk that arises depending upon nature and type of loan are also handled and managed carefully. Credit management in ACE basically covers loan approval process, credit analysis, method and mechanism, lending documentation, disbursement and administration of loan including credit audit. As there is a saying Precaution is better than cure bank should be more analytical and farsighted while disbursing loan in order to prevent loan flow in unproductive sector and non-performing assets. From the analysis done above following conclusions can be drawn; viii. ACE has experienced sudden tremendous growth in credit investment in 2008/09 by 52% compared to previous year as taken over my new management. ix. On the other hand, credit deposit ratio is in fluctuating trend. It also depicts that the bank has been able to mobilize its deposit efficiently in the year 2008/2009 as the ratio of that year is higher as compared to others i.e.86.66%. Thus, most of the deposits collected are deployed as loans and advances and remaining amount for investment in securities and purchase of assets. x. ACE has been advancing different types of credit facilities to the customers. In comparison of two years FY 2007/08 and FY 2008/09, the figure reveals that bank has deployed into numerous sectors which has risen over the years. In conclusion, we can say that the bank has been able to mobilize their deposits accumulated efficiently in various sectors that help them generate income as interest.

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xi.

As for classification of loan the bank has maintained its standard and sub-standard level as per NRB directives but bad loan has extremely increased by NRS 0.64 million respectively, which is not an affirmative sign to measure performance.

xii.

The good quality and correct features of security that bank undertakes should be greatly valuable, durable, marketable and reliable. The proportion of collateral has increased by NRS 2273.64 million in comparison to previous FY 2007/08.

xiii.

As for net profit to loan and advances ratio, the figures explain consistent behavior of the bank except decrease in FY 2008/09 by 0.96%. The trend however shows that there is less amount of profit earned through deploying it into various productive sectors.

xiv.

Bank has been able to maintain the provision of total lending to quite a reasonable ratio except there was greater provision in the year 2001/02 to 5.49 which has been reduced in the following years and should keep up with the consistent attitude.

xv.

During five fiscal years liquidity, debt equity ratio and profitability trend does not show steady rise and fall in the banks financial performance.

xvi.

Flexible credit policy has been formulated that is revised periodically for effective and efficient credit management as per the NRB directives regulated to all the commercial banks. Finally, this report has been prepared by personally indulging in the daily working of the bank. It familiarizes ACEs functions at the corporate level as well as in branch level along with the credit policies procedures, appraisals and credit analysis including practical observations pertaining to the bank.

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