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Shanker
Dev Campus
Library,
Putalisadak,
Kathmandu
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By:
SHOVA MAHARJAN
Shanker Dev Campus
Campus Roll No: 755/061
T.U. Registration No: 7-2-24-557-2001
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A Thesis Submitted to:

Office of the Dean
Faculty of Management
Tribhuvan University
In partial fulfillment of the requirement for the Degree of

Master of Business Studies (MBS)
Kathmandu, Nepal
September, 2010
Property of Shanker Dev Campus Library, Putalisadak,

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Shanker Dev Campus Library
MANAGING CORE RISK IN BANKING:

CREDIT RISK MANAGEMENT

Kathmandu
This is to certify that the Thesis
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Submitted by:
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Entitled:
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SHOVA MAHARJAN
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RECOMMENDATION
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has been prepared as approved by this Department in the prescribed format of the Faculty of
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Management. This thesis is forwarded for examination.
......
.....
..
Asso. Prof. Kishor Maharjan
Prof. Bisheshwor Man Shrestha
Prof. Dr. Kamal Deep Dhakal
(Thesis Supervisor)
(Head of Research Department)
(Campus Chief)

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We have conducted the viva voce of the thesis presented
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Entitled:
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SHOVA MAHARJAN
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by
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And found the thesis to be the original work of the student and written
according to the prescribed format. We recommend the thesis to
be accepted as partial fulfillment of the requirement for
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Master Degree of Business Studies (MBS)
Viva-Voce Committee
Head, Research Department
Member (Thesis Supervisor)
....
Member (External Expert)
....

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VIVA-VOCE SHEET

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DECLARATION
I hereby declare that the work reported in this thesis entitled MANAGING CORE RISK
IN BANKING: CREDIT RISK MANAGEMENT submitted to Office of the Dean,
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Faculty of Management, Tribhuvan University, is my original work done in the form of partial
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fulfillment of the requirement for the Master Degree in Business Studies (MBS) under the
SHOVA MAHARJAN
Researcher
Campus Roll No.: 755/061
T.U. Regd. No.: 7-2-24-557-2001
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supervision of Assoc. Prof. Kishore Maharjan of Shanker Dev Campus.

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ACKNOWLEDGEMENT
The completion of this thesis is a matter of great pleasure for me. It has fulfilled the partial
requirement for the Degree of Master of Business Studies as well as helped me to enhance my
practical knowledge on the subject matter. It wouldnt have been completed without invaluable
support, supervision and suggestions from my teachers, elders, colleagues, and friends.
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Therefore, I would like to share the joy with all who owe equal credit for it.
First of all my sincere gratitude goes to my honorable teacher as well as the thesis supervisor
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Assoc. Prof. Kishor Maharjan, Shanker Dev Campus, who helped me by providing significant
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ideas, encouragement and techniques besides his invaluable time. Besides him, I would like to
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thank Prof. Bisheshwor Man Shrestha, Head of Research Department, Shanker Dev Campus,
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for his valuable inspiration and suggestions.
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Let me offer my sincere thanks to the staffs of Bank of Kathmandu Limited and Nepal
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Industrial and Commercial Bank Limited for their support and cooperation in collecting data
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and other information during the study. I would like to thank the respondents of questionnaire
for their efforts in answering the questions and the library staffs of Shanker Dev Campus and
also the Central Library of Tribhuvan University for providing references to me.
In the same way, I am also thankful to my parents, and friends for their endless encouragement
and facilitation in preparing this Thesis.
Shova Maharjan
Researcher

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TABLE OF CONTENTS
Recommendation
Viva-Voce Sheet
Acknowledgement
Table of Contents
List of Tables
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List of Figures
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Abbreviations
Page No.
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CHAPTER I: INTRODUCTION
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1.1 Background of the Study
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1.2 Statement of the Problem

1.3 Objective of the Study
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1.6 Organization of the Study
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1.5 Limitations of the Study
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1.4 Significance of the Study
CHAPTER II: REVIEW OF LITERATURE

2.1 Conceptual Review
2.1.1 Credit Risk
2.1.2 Credit Risk Management
2.1.3 Mitigating Credit Risk
2.1.4 Credit Risk Limit
2.1.5 The Metrics for Measuring Credit Risk
10
2.1.6 Approaches to Credit Risk Measurement
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2.1.6.1 Expert System
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2.1.6.2 Artificial Neural System
12

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Declaration
2.1.6.3 Rating System
13
2.1.6.4 Credit Scoring System
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2.1.7 Principles for Managing Credit Risk
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2.1.8 Implementation of Credit Risk Principle
19
2.1.9 Decision Making in Credit Risk
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22
2.3 Review of Journals and Articles
25
2.4 Review of Thesis
29
2.5 Research Gap
34
CHAPTER III: RESEARCH METHODOLOGY
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3.1 Research Design
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2.2 Review of NRB Directives
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3.2 Population and Sample
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3.3 Nature and Source of Data

3.4 Data Collection Techniques
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3.5 Analytical Tools
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3.5.1 Financial Tools
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3.5.2 Statistical Tools
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CHAPTER IV: DATA PRESENTATION AND ANALYSIS

4.1 Secondary Data Analysis
42
4.1.1 Total Credit to Total Assets
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4.1.2 Non Performing Credit to Total Credit
44
4.1.3 Structure of Non Performing Credit
46
4.1.4 Credit Loss Provisioning to Total Credit
49
4.1.5 Credit and Interest Written Off to Total Credit
51
4.1.6 Concentration of Maximum Exposure to a Single Borrower
53
4.1.7 Correlation and Regression Analysis
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4.1.7.1 Net Profit and Non Performing Credit
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4.1.7.2 Net Profit and Maximum Exposure to Single Borrower
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4.1.7.3 Credit Written Off and Maximum Exposure to Single

Borrower to Credit
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4.1.8.1 Structure of Non Performing Credit
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4.1.8.2 Credit and Interest Suspense Write Off
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4.2 Primary Data Analysis
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4.2.2 Procedure for Alleviating Credit Risk
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4.2.3 Important Factor for Credit Assessment & Risk Grading
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4.2.1 Crucial Element for Making Credit Guideline
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4.2.5 Ineffective Principle Inviting Credit Risk
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4.2.6 Banks Interest after Identifying Sort of Risk
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4.2.4 Effective Approach for Credit Management & Risk Reduction
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4.2.8 Most Risky Sector
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4.2.9 Effect of Non Performing Credit
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4.2.7 Efficiency of Banks in Credit Management
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4.2.10 Best Option to Solve Non Performing Credit
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4.2.11 Best Time for Follow Up
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4.2.12 Main Influencing Factor in Credit Disbursement
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4.2.13 Method for Recovering Credit
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4.2.14 Suggestion for Effective Credit Management
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4.3 Major Findings of the Study
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CHAPTER V: SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary
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5.2 Conclusion
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5.3 Recommendations
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BIBLIOGRAPHY
APPENDICES

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4.1.8 Trend Analysis

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LIST OF TABLES
Page No.
4.1
Total Credit to Total Assets
42
4.2
Non Performing Credit to Total Credit
44
4.3
Structure of Non Performing Credit
47
4.4
Credit Loss Provisioning to Total Credit
49
4.5
Credit and Interest Written Off to Total Credit
51
4.6
Concentration of Maximum Exposure to a Single
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Borrower to Credit
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Net Profit and Non Performing Credit
4.8
Net Profit and Maximum Exposure to Single Borrower
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4.9
Credit Written Off and Maximum Exposure to Single Borrower
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4.10
Trend Analysis of Structure of Non Performing Credit
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4.11
Trend Analysis of Credit and Interest Suspense Write Off
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4.12
Crucial Element for Making Credit Guideline
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4.13
Procedure for Alleviating Credit Risk
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4.14
Important Factor for Credit Assessment & Risk Grading
64
4.15
Effective Approach for Credit Management & Risk Reduction
4.16
Ineffective Principle Inviting Credit Risk
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4.17
Banks Interest after Identifying Sort of Risk
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4.18
Efficiency of Banks in Credit Management
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4.19
Most Risky Sector
71
4.20
Effect of Non Performing Credit
72
4.21
Best Option to Solve Non Performing Credit
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4.22
Best Time for Follow Up
75
4.23
Main Influencing Factor in Credit Disbursement
76
4.24
Method for Recovering Credit
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4.25
Suggestion for Effective Credit Management
79
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4.7
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66

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Title
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No.

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LIST OF FIGURES
Page No.
4.1
44
4.2
46
4.3
51
4.4
53
4.5
Concentration of Maximum Exposure to a Single
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Borrower to Credit
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59
4.7
60
4.8
62
4.9
4.10
65
4.11
67
4.12
Ineffective Principle Inviting Major Credit Risk
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4.13
70
4.14
4.15
Most Risky Sector
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4.16
73
4.17
75
4.18
76
4.19
77
4.20
79
4.21
80
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4.6
64
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Title
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No.

Kathmandu
Bank of Kathmandu
C.V.
Coefficient of Variation
CL
Credit Loss
CLP
Credit Loss Provision
DC
Doubtful Credit
Exp.
Exposure
Max.
Maximum
ME
Maximum Exposure
NIC
Nepal Industrial and Commercial Bank
NP
Net Profit
NPC
Non Performing Credit
NPC/TC
NRB
Nepal Rastra Bank
P.E.
Probable Error
Coefficient of Correlation
S.D.
Standard Deviation
SSC
Sub Standard Credit
TA
TC
TC/TA
WO
Written Off
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BOK
Total Assets
Total Credit

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ABBREVIATIONS

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CHAPTER I
INTRODUCTION
1.3 Background of the Study
Risk is inherent in all aspects of a commercial operation, however for Banks and financial
institutions, credit risk is an essential factor that needs to be managed. Credit risk is the
possibility that a borrower or counter party will fail to meet its obligations in accordance with
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corporates, individuals, and other banks or financial institutions.
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agreed terms. Credit risk, therefore, arises from the banks dealings with or lending to
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Credit risk management needs to be a robust process that enables banks to proactively manage
loan portfolios in order to minimize losses and earn an acceptable level of return for
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shareholders. Central to this is a comprehensive IT system, which should have the ability to
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capture all key customer data, risk management and transaction information including trade &
Forex. Given the fast changing, dynamic global economy and the increasing pressure of
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globalization, liberalization, consolidation and dis- intermediation, it is essential that banks
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have robust credit risk management policies and procedures that are sensitive and responsive to
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these changes.
Sound credit management is a prerequisite for a financial institutions stability and continuing
profitability, while deteriorating credit quality is the most frequent cause of poor financial
performance and condition. The prudent management of credit risk can minimize operational
risk while securing reasonable returns.
The board and management should set goals or targets for their loan portfolio mix, as part of
their annual planning process. The loan portfolio should be monitored on an ongoing basis, to
determine if performance meets the board's expectations, and the level of risk remains within
acceptable limits.

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Standardized lending procedures should be adopted to reduce risk of transactional error, and
ensure compliance with regulatory requirements and board policy. Approval and
disbursements, documentation, lending staff and loan security are just some of the procedures
for preventing credit risk.
The purpose of this study is to provide directional guidelines to the banking sector that will
improve the risk management culture, establish minimum standards for segregation of duties
and responsibilities, and assist in the ongoing improvement of the banking sector in Nepal.
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Credit risk management is of utmost importance to Banks, and as such, policies and procedures
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should be endorsed and strictly enforced by the MD/CEO and the board of the Bank.
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1.4 Statement of the Problem
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Banks and financial institutions are competing among themselves to advance credit to limited
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opportunity sectors. Banks and financial institutions are investing in house loan, hire purchase
loan for safety purpose. Lack of good lending opportunities, banks is facing problems of over
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liquidity. Nowadays, banks have increasing number of deposits in fixed and saving accounts
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but have decreasing trend in lending behaviors. So, this has caused major problems in
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commercial banks. Nowadays, due to competition among banks, the interest rate charge for
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loan is in decreasing trend. Due to unhealthy competition among banks, the recovery of the
banks credit is going towards negative trends. Non-performing 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. Therefore, it
is necessary to analyze the credit risk management or credit disbursement recovery provision
for loss and write off of credit. As the sample of commercial banks, Bank of Kathmandu and
Nepal Industrial and Commercial Bank have been selected.
Research problems may be stated in the form of following questions:a) To what extent is the credit of the bank vulnerable to the credit risk?
b) Whether the bank has kept adequate loan loss provision to cover the credit risk?

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c) What policy guidelines will be crucial for the banks to abate the credit risk?
d) What procedural guidelines should be implemented by the banks to avoid credit risk?
1.3 Objective of the Study
banking sectors. The specifics objectives of the study are as follows:

a. To analyze the credit risk level in the banks.
b. To test credit loss provision kept by the bank in relation to total credit.
The main objective of this study is to ascertain the management of core risk, credit risk, in
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c. To evaluate the better policy and procedural guidelines that the bank should follow to
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lessen the credit risk.
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d. To collect the opinion for effective credit management.
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1.4 Significance of the Study
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The study will be mainly significant to the shareholders, depositors and other creditors to
identify the productivity of their funds in the sampled banks. Likewise other financial agencies,
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e.g. stock exchange and stock brokers are also interest in the performance of bank, as it has
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been listed in the stock exchange market. Besides them, the study will also help the
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management of he banks to analyze the effectiveness of its credit management and policies of
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the bank in comparison to competitors. The study will also be equally significant to the central
bank to formulated the new credit policy, as there are certain loopholes as a result of which the
non-performing assets has been regarded as the main problem of the commercial banks in these
days.
1.5 Limitations of the Study

The study has some limitations. The main limitations of the study are as follows: -
a. Though, there has been in operation of 27 commercial banks in Nepal, only two
commercial banks, Bank of Kathmandu and Nepal Industrial and Commercial bank, are
taken for the proposed study.
b. This study concentrates only on credit risk management of selected commercial banks.

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c. The secondary data will be used for presentation and interpretation. Only 5-years, from
the fiscal year 2004/05 to 2008/09, data will be considered.
d. This study is only a case study; hence the conclusion drawn from the study does not
ensure wide applicability in all types of enterprise running in different situations.
while that of primary data depends on the responses of respondents.
e. The reliability of the secondary data depends on the accuracy of the annual reports,
f. In this study, only selected financial and statistical tools as well as techniques are used.
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The whole study is divided into five different chapters. They are:
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1.6 Organization of the Study
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Chapter I is the introduction chapter. It includes background of the study, statement of the
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problems, objectives of the study, significance of the study, and limitations of the study and
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organization of the study.
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Chapter II deals with review of literatures, which includes conceptual/ theoretical review and
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review of related studies.
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Chapter III is research methodology which includes research design, population and sample,
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source of data, data collection techniques and data analysis tools.
Chapter IV deals with analyzing the data of the sampled banks related to the credit risk and the
opinions of the respondents. It also shows major finding of the study.
Chapter V includes summary and conclusion of the study. It also deals with recommendations
suggested.
Besides these, Bibliography and Appendix are presented at the end of the study.

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CHAPTER II
REVIEW OF LITERATURE
2.3 Conceptual Review
2.1.1 Credit Risk
Credit risk in its simplest definition refers to the task of loss through default on financial
assets. If this risk in not managed and mitigated effectively and efficiently, the fundamental
business of lending can bring trouble to entire financial industry. Establishing an effective
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credit risk management framework should be a top priority for every organization in this
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regard. But, if the established framework is not feasible enough for generating sufficient return
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for the stakeholders, one cannot hope that it will be sustainable in the long run. So, the
managements of the financial institutions have to find out an effective, at the same time,
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profitable and sustainable credit risk management policy for the smooth running of its
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operations in the lending business. (Saunders; 1999: 43-44)
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Credit risk is an investor's risk of loss arising from a borrower who does not make payments as
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promised. Such an event is called a default. Another term for credit risk is default risk. Investor
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losses include lost principal and interest, decreased cash flow, and increased collection costs,
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which arise in a number of circumstances:
A consumer does not make a payment due on a mortgage loan, credit card, line of credit,
or other loan
A business does not make a payment due on a mortgage, credit card, line of credit, or
other loan
A business or consumer does not pay a trade invoice when due
A business does not pay an employee's earned wages when due
A business or government bond issuer does not make a payment on a coupon or

principal payment when due
An insolvent insurance company does not pay a policy obligation
An insolvent bank won't return funds to a depositor

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A government grants bankruptcy protection to an insolvent consumer or business.
(Caouette, Altman & Narayanan; 1998: 113-114)
2.1.2 Credit Risk Management

Credit risk management is a very important area for the banking sector and there are wide
prospects of growth and other financial institutions also face problems which are financial in
nature. Also, banking professionals have to maintain a balance between the risks and the
returns. For a large customer base banks need to have a variety of loan products. If bank lowers
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the interest rates for the loans it offers, it will suffer. (Asarnow & Edwards; 1995: 61)
In terms of equity, a bank must have substantial amount of capital on its reserve, but not too
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much that it misses the investment revenue, and not too little that it leads itself to financial
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instability and to the risk of regulatory non-compliance. Credit risk management is risk
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assessment that comes in an investment. Risk often comes in investing and in the allocation of
capital. The risks must be assessed so as to derive a sound investment decision. And decisions
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should be made by balancing the risks and returns. (Carty & Fons; 1993: 45)
securities
and
other
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investments.
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Giving loans is a risky affair for bank sometimes and certain risks may also come when banks
The risk of losses that result in the default of payment of the debtors is a kind of risk that must
be expected. A bank has to keep substantial amount of capital to protect its solvency and to
maintain its economic stability. The greater the bank is exposed to risks, the greater the amount
of capital must be when it comes to its reserves, so as to maintain its solvency and stability.
(Moody; 2000: 31)
Credit risk management must play its role then to help banks be in compliance with Basel II
Accord and other regulatory bodies. For assessing the risk, banks should plan certain estimates,
conduct monitoring, and perform reviews of the performance of the bank. They should also do
Loan reviews and portfolio analysis in order to determine risk involved. Banks must be active

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in managing the risks in various securities and derivatives. Still progress has to be made for
analyzing the credits and determining the probability of defaults and risks of losses. So credit
risk management becomes a very important tool for the survival of banks.
Lenders mitigate credit risk using several methods:
2.1.3 Mitigating Credit Risk
a) Risk-Based Pricing: Lenders generally charge a higher interest rate to borrowers who are
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more likely to default, a practice called risk-based pricing. Lenders consider factors relating
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to the loan such as loan purpose, credit rating, and loan-to-value ratio and estimate the effect
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on yield (credit spread). (Delianedis & Geske; 1998: 35)
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b) Covenants: Lenders may write stipulations on the borrower, called covenants, into loan
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agreements:
Periodically report its financial condition.
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Refrain from paying dividends, repurchasing shares, borrowing further, or other specific,
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voluntary actions that negatively affect the company's financial position.
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Repay the loan in full, at the lender's request, in certain events such as changes in the
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borrower's debt-to-equity ratio or interest coverage ratio. (Delianedis & Geske; 1998:
c) Credit Insurance and Credit Derivatives: Lenders and bond holders may hedge their
credit risk by purchasing credit insurance or credit derivatives. These contracts the transfer
risk from the lender to the seller (insurer) in exchange for payment. The most common
credit derivative is the credit default swap. (Kealhofer; 1993: 65)
d) Tightening: Lenders can reduce credit risk by reducing the amount of credit extended,
either in total or to certain borrowers. For example, a distributor selling its products to a

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troubled retailer may attempt to lessen credit risk by reducing payment terms from net 30 to
net 15. (Kealhofer; 1993: 66)
e) Diversification: Lenders to a small number of borrowers (or kinds of borrower) face a
high degree of unsystematic credit risk, called concentration risk. Lenders reduce this risk
by diversifying the borrower pool. (Kealhofer; 1993: 67)

f) Deposit Insurance: Many governments establish deposit insurance to guarantee bank
deposits of insolvent banks. Such protection discourages consumers from withdrawing
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money when a bank is becoming insolvent, to avoid a bank run), and encourages consumers
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to holding their savings in the banking system instead of in cash. (Kealhofer; 1993: 67)
2.1.4 Credit Risk Limit
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The purpose of a credit risk limit system is to ensure that a banks actual risk-taking is in line
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with its risk-bearing capacity. A particular focus is on the avoidance of excessive risk
concentrations, which may jeopardize the existence of a bank. With this objective in mind, a
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limit system needs to be consistent across all parts of an organization to ensure that a banks
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risk-bearing capacity is not exceeded at the aggregate level. This goal implies that the actual
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size of the limits must be derived from the banks risk appetite, business objectives, and risk-
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bearing capacity. This process is often guided by qualitative considerations; however,

quantitative techniques are also being applied, including the definition and quantification of
stress scenarios against which the bank aims to protect itself by credit risk limitation
techniques. (Lown & Morgan; 2001: 43-44)
2.1.5 The Metrics for Measuring Credit Risk
With the improvements that Basel II has brought about for the quantification of credit risk at
the individual and portfolio levels, a number of metrics can now be used to measure credit risk.
The characteristics can be classified along two dimensions: (1) the extent to which a metric is
risk sensitive and (2) the extent of which it is capable of taking worst-case losses correctly into
account. Traditional credit risk metrics, such as gross or net exposure, are less risk sensitive

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than others because they do not change with the credit quality of the obligor, but rather focus
strongly on worst-case losses such as the default of a single large obligor or a sovereign transfer
risk event. By contrast, statistical risk metricssuch as expected loss, regulatory capital (in
particular in the case of the internal ratingsbased approach), or even economic capitalare
economic capital, credit risk concentrations, but fail to capture worst-case scenarios.
much more risk sensitive in that their values change with credit quality and, in the case of
Also, statistical risk measures are much more subject to model risk than exposure- based
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metrics, but they often permit a more meaningful risk aggregation across, for example,
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products, obligors, or business lines than their exposure counterparts. The classic example of
credit lines that are difficult to aggregate under normal conditions is the case of counterparty
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risk limits and traditional credit lines for a single obligor. These considerations show that no
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single risk metric is a panacea. Rather, the question of which to use depends on which risk
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metric best fits the purpose at hand. (Morgan; 1997: 66-67)
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2.1.6 Approaches to Credit Risk Measurement
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An efficient approach should be followed by the organization to measure the credit risk and
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eventually to reduce the risk. The four approaches that could be crucial to measure the credit
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risk are enumerated below;
2.1.6.1 Expert System
In an expert system, the credit decision is left to the local or branch lending officer or
relationship manager. Implicitly, this persons expertise, subjective judgment, and weighting of
certain key factors are the most important determinants in the decision to grant credit. The
potential factors and expert systems a lending officer could look at are infinite; however, one of
the most common expert systems - the five Cs of credit - will yield sufficient understanding.
The expert analyzes these five key factors, subjectively weights them, and reaches a credit
decision: (Altman & Saunders; 1997: 31-32)

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a) Character: A measure of the reputation of the firm, its willingness to repay, and its
repayment history. In particular, it has been established empirically that the age of a firm
is a good proxy for its repayment reputation. (Altman & Saunders; 1997: 32)
b) Capital: The equity contribution of owners and its ratio to debt (leverage). These are
probability of bankruptcy. (Altman & Saunders; 1997: 32)
viewed as good predictors of bankruptcy probability. High leverage suggests a greater
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c) Capacity: The ability to repay, which reflects the volatility of the borrowers earnings. If
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repayments on debt contracts follow a constant stream over time, but earnings are volatile
(or have a high standard deviation), there may be periods when the firms capacity to
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repay debt claims is constrained. (Altman & Saunders; 1997: 33)
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d) Collateral: In the event of default, a banker has claims on the collateral pledged by the
borrower. The greater the priority of this claim and the greater the market value of the
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underlying collateral, the lower the exposure risk of the loan. (Altman & Saunders; 1997:
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33)
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e) Cycle (or Economic) Conditions: The state of the business cycle; an important element
in determining credit risk exposure, especially for cycle-dependent industries. For
example, durable goods sectors tend to be more cycle-dependent than nondurable goods
sectors. Similarly, industries that have exposure to international competitive conditions
tend to be cycle-sensitive. (Altman & Saunders; 1997: 33)
2.1.6.2 Artificial Neural System

An artificial neural system simulates the human learning process. The system learns the nature
of the relationship between inputs and outputs by repeatedly sampling input/output information
sets. Neural networks have a particular advantage over expert systems when data are noisy or
incomplete: neural networks can make an educated guess, much as would a human expert.

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Neural networks are characterized by three architectural features: inputs, weights, and hidden
units. A major disadvantage of neural networks is their lack of transparency. The internal
structure of the network is hidden and may not be easy to duplicate, even using the same data
inputs. This leads to a lack of accountability because the systems intermediate steps cannot be
checked. Moreover, although the neural network is useful as a tool of classification or
prediction, it does nothing to illuminate the process or the relative importance of the variables;
that is, the neural net does not reveal anything about the intermediate steps that lead to the final
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output. (Hawley, Johnson & Raina; 1990: 10-12)
ib
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2.1.6.3 Rating System
One of the oldest rating systems for loans was developed by the U.S. Office of the
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Comptroller of the Currency (OCC). The system has been used in the United States (and
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abroad) by regulators and bankers to assess the adequacy of their loan loss reserves. The OCC
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rating system places an existing loan portfolio into five categories: four low-quality ratings and
one high quality rating. Over the years, bankers have extended the OCC rating system by
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developing internal rating systems that more finely subdivide the pass/performing rating
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category. For example, at any given moment, there is always a chance that some pass or
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against these loans.
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performing loans will go into default, and that some reserves, even if very low, should be held
Adoption of internal ratings for the purpose of assessing regulatory capital requirements has the
potential to distort the integrity of the rating system, especially if banks view capital as costly
and wish to minimize that cost. Supervisors will have to validate the accuracy of a wide variety
of internal rating systems. This may prove impossible without access to large amounts of data,
as well as in the presence of non quantifiable subjective factors that make the rating system into
an unverifiable black box. Moreover, reliance on internal ratings raises concerns about: (1) the
ongoing integrity of each system; (2) the consistency and comparability of the ratings,
particularly across national boundaries; and (3) the evolution and disclosure of best-practices
methods that become international standards. (Theodore; 1999: 110-113)

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2.1.6.4 Credit Scoring System
Credit scoring systems can be found in virtually all types of credit analysis, from consumer
credit to commercial loans. The idea is essentially the same: Pre-identify certain key factors
that determine the probability of default (as opposed to repayment), and combine or weight
them into a quantitative score. In some cases, the score can be literally interpreted as a
probability of default; in others, the score can be used as a classification system: it places a
potential borrower into either a good or a bad group, based on a score and a cut-off point.
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(Basak & Shapiro; 2001: 75-76)
ib
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2.1.7 Principles for Managing Credit Risk
The five principles that are considered to be crucial for managing the credit risk are discussed
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below;
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Principle One: The role of the Board in Establishing a Policy for Managing Credit Risk
The Board of Directors (or its equivalent) of an organization should (a) devise a Credit Risk
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policy (including criteria governing the allocation of Credit Limits) and a strategy which is
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consistent with the commercial policy and objectives, the financial position, the risk appetite
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and the levels of expertise of the organization; (b) ensure that there is an adequate framework
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of systems and controls in place to give effect to that policy; and (c) ensure that the senior
managers appointed to the task of establishing, overseeing and operating within that framework
of systems and controls have the appropriate qualities and expertise to carry out that task. In
determining its Credit Risk policy, the Board should take into account the fact: (Belkin,
Forest, Aguais, & Suchower; 1998: 75-78)
a. that techniques, systems and controls put in place to manage Credit Risk, while helping
to quantify, control and mitigate or offset the risk of default, will not necessarily
eliminate it altogether;
b. that Credit Risk should not be seen in isolation, but as part of a group of inter-related
risks e.g. market risk, liquidity risk, legal risk and operational risk, the totality of which

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should be measured against and managed within the risk appetite, management structure
and financial strength of the organization; and
c. that legal, regulatory and market developments may impact on the organizations policy
and procedures for managing Credit Risk and senior management should therefore keep
Risk.
abreast of any such developments which may be relevant to the organizations Credit
Principle Two: Establishing a Framework of Systems and Controls for Managing Credit
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Risk (the Framework)
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Senior management should establish an independent framework of systems and controls which
fully reflects the Credit Risk policy and strategy set by the Board of Directors, accords with
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accepted principles of good corporate governance and is capable of identifying, measuring,
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pricing, recording, monitoring, managing, mitigating and reporting on the organizations Credit
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Risk (the Framework). While the Framework may vary in detail from organization to
organization, it should: (Belkin, Forest, Aguais, & Suchower; 1998: 82-84)
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a. be consistent with the policy objectives determined by the Board;
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b. adequately reflect the objectives, requirements and criteria;
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employees;
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c. be embedded in the culture of the organization and understood by all relevant
d. be founded on the principle of functional segregation;
e. establish clear and suitably documented procedures and allocation of responsibilities and
functions to individual managers and staff; and
f. be implemented and monitored by persons who are adequately trained and have
sufficient knowledge, competence, qualities and authority to discharge their duties
effectively.
Principle Three: Establishing Practices and Procedures within the Framework for the
Effective Assessment, Evaluation Measurement and Management of Credit Risk.

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Senior management should ensure that the Framework incorporates appropriate practices and
procedures to enable Credit Risk to be evaluated, assessed, measured, monitored, managed,
recorded, and reported at an individual Counterparty, Portfolio Organization and Group level.
Organizations should operate within sound, well-defined criteria, practices and procedures for
processes for: (Belkin, Forest, Aguais, & Suchower; 1998: 86-88)
identifying, assessing, evaluating, measuring and managing Credit Risk which should include
a. assessing the credit quality of and approving counterparties and, as appropriate,

intermediaries and credit support providers (typically expressed as an estimated
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probability of default (PD)), which may be derived from a rating system (whether
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external or internal), by internal assessment (e.g. utilizing market data, benchmarking) or

from credit market data or some combination of these factors;
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b. assessing and determining which transactions may be traded with a counterparty in
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terms of the underlying commodity or asset (e.g. oil, gas, power, coal, emissions), the
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nature of the transaction, the terms and conditions under which they are traded and their
consequential risk profile;
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c. assessing and monitoring the risk impact of dealing with that counterparty and in those
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transactions on the organizations overall portfolio, including concentration risk, where a
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source of risk;
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portfolio may contain a high level of direct or indirect transactions with a common
d. for setting and approving credit limits;

e. agreeing the terms and conditions of business to be undertaken with a counterparty;
f. assessing the risk-reward (i.e. of each counterparty relationship) in order to ensure that it
is managed and set at a level which contributes to the organizations overall profitability.
Evaluation of Credit Risk and subsequent approval of counterparty relationships and limits
should be based on appropriate quantitative measures, be founded on all relevant data, and be
properly documented.
Principle Four: Utilizing Credit Enhancement

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Senior management should ensure that the Framework takes into account and, as may be
appropriate, utilizes any or all of the various methodologies of Credit Enhancement. Senior
management should ensure that the Framework takes into full account the role of Credit
Enhancement in mitigating Credit Risk and that the organizations approach to evaluating the
use of Credit Enhancement. The use of Credit Enhancement techniques involves a commitment
1998: 91-92)
to assess and cater for a wide range of issues including: (Belkin, Forest, Aguais, & Suchower;
a. a methodology for quantifying Credit Risk, including the credit quality of a counterparty
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and of any credit support provider (e.g. parent or third party guarantor, letter of credit
ib
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issuing bank etc.);
b. an assessment and, with appropriate regularity, review of the risks associated with the
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use of Credit Enhancement techniques such as enforceability, issuer default, insolvency
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of the credit support obligor etc;
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c. ensuring that there is a sufficient correlation between the potential exposure of the
organization following a counterparty default and the calculation methodology in respect
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of that potential exposure for the purpose of assessing the level of required Credit
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Enhancement;
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d. ensuring that a valuation mechanism is incorporated into the relevant documentation
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sufficient to facilitate the regular monitoring of levels of exposure and direct credit
support to cater for fluctuations and volatility in both the value of the transaction and the
value of any direct credit support provided (and of any Credit Risk assumed as a result
of providing such support) and credit support received; factoring into the credit
management process of the organization the fact that the enforcement of Credit
Enhancement (e.g. claiming on a guarantee, drawing down on a letter of credit) may not
always be instantaneous (e.g. delay may occur between the taking of an enforcement
decision and actual receipt of the proceeds);
e. recognizing the need for accurate and enforceable documentation of Credit Risk
Enhancement (and Mitigation) arrangements; and

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f. recognizing that Credit Enhancement techniques are risk diversification techniques, not
risk elimination techniques, and are therefore a compliment to, and not a substitute for,
counterparty evaluation and analysis.
Principle Five: Mitigating Credit Risk through Contractual Document
Senior management should use, wherever appropriate, documentation as a means of recording

accurately the obligations, liabilities, rights and intentions of the parties and establishing any
mechanisms, such as netting, for the purposes of Credit Risk mitigation; and ensure that it
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understands the extent to which that documentation is enforceable. Documentation can play a
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key role in minimizing Credit Risk and establishing certain legal and other protections in the
(Belkin, Forest, Aguais, & Suchower; 1998: 94-97)
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event of its materialization. The organizations documentation policy should therefore:
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a. require the terms of the trading arrangements between the parties, including the rights
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and obligations of the organization (and any arrangements entered into and agreed over
the telephone), to be recorded and documented accurately;
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b. require all terms of business to be executed in a timely manner,
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c. require documentation to be retained (with back-up copies) in a safe place for a suitable
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period of time (whether in electronic form or otherwise);
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d. ensure that confirmations and periodic statements are provided as agreed, and checked
for accuracy with any discrepancies being resolved as soon as possible; and
e. identify the type of transactional documentation or commercial contracts and Credit
Enhancement documentation which require review by internal (or, if appropriate,

external) counsel prior to their execution.
2.1.8 Implementation of Credit Risk Principle

When an organization takes steps to implement the above-mentioned Principles (and the
related action points set out in these Guidelines) it should consider whether those steps:

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a. are appropriate to and properly reflective of the financial strength, standing and structure
of a counterparty (and are the subject of a review process sufficient to ensure that that
continues to be the case);
b. take into account, where relevant, the nature and extent of any credit support provided
mechanism or ultimate supporting parent;
by that counterparty including the quality of any credit support provider, Clearing
c. are consistent with its own risk appetite, financial strength and overall business
objectives, taking into account its exposure to risk in other areas or sectors of its
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business;
ib
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d. give proper recognition and, where appropriate, effect to the capacity of accepted
methodologies and practices for mitigating Credit Risk;
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e. are being applied not in isolation but as part of a balanced appraisal of inter-related and,
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sometimes, offsetting risks (e.g. market risk, operational risk etc.); and
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(Maclachlan; 1999: 121-123)
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f. are capable of being delivered by the organization on an effective and continuous basis.
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The adoption by an organization of these (or other similar) principles and practices should help
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to reduce its overall exposure to risk, aid the organizations awareness and understanding of
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that risk, foster greater market integrity and confidence (and therefore increased liquidity) and
improve trading efficiencies to the advantage of all market participants and their counterparties.
However, it is recognized that, because of the size or the nature of the business of an
organization, it may not have the resources or systems or it may not be necessary to implement
in detail all the recommendations set out in these Guidelines (e.g. where the degree of Credit
Risk to which an organization is subject does not justify the costs of full implementation).
Nevertheless, all organizations should consider carefully the concerns that lie behind the
principles and how they might otherwise be addressed to help manage and reduce their overall
exposure to Credit Risk. It is important to bear in mind that Credit Risk can never be totally
eliminated and that the overall objective of good management in this area is to be able to
manage its potential to impact negatively on an organization.

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2.1.9 Decision Making in Credit Risk
After measuring the sort of credit risk, the management should make decision to lessen such
risk. The five main steps that are essential for decision making are;
Step-1: Curing Loan: The objective at this step is to decide whether the loan can be returned
permanently to the performing portfolio, preferably without encountering any economic losses,
and which treatment ought to be applied to achieve this aim. Key success factors are the time
horizon in which action steps are taken (since the cure rate typically decreases within a very
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short period) and efficient communication with the customer to identify the reasons for
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repayment problems and arrive at a mutual agreement, if possible. To support the decision that
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the customer (if cured). (Wall & Koch; 2000: 37)
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is to be made at this point, it is important to measure the probability of default or re-default of
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Step-2: Restructuring Loan: If the decision in previous step has been negative i.e. the loan
cannot be returned to the portfolio, the objective will then be to determine whether the bank
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should replace the non-performing loan with a loan that might be less profitable than the
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original but still a worthwhile investment. Key success factors at this stage are a timely
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response and decision by the bank as well as a correct assessment of the customer probability to
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(re-) default on the new loan. Relevant metrics at this point are:
a. Future debt service capacity of the client, considering the payment characteristics of the
new loan.
b. Probability of (re-) default on the new loan.

c. Profitability of the restructured loan.
d. Expected recovery from a liquidation of the original loan (if it is not restructured).
If the banks decision is not to restructure, multi-product customers will enter step-3, whereas
(in most cases) single-product customers will be directly routed to step-4. (Wall & Koch;
2000: 38-39)

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Step-3: Terminating Customer Relationship: The goal of this step is to determine the
prospective relationship with the customer, based on default probabilities of the customers
other products, a general reassessment of the customers debt service capacity, and the
customers value to the bank (information that would also be needed if the bank ultimately
decided to initiate collection and recovery procedures). Key success factors at this point are the
efficiency of the collection and recovery processes (in terms of costs and recovery amount), the
appropriate collection strategy, the client communication to reach an agreement, and a correct
assessment of the customers value to the bank. Relevant metrics at this point are
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a. Future debt service capacity of the customers other products with the bank
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b. Probabilities of default for those products
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c. The customers present and future value to the bank.
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The detailed rules that determine the decision at this point will focus on those metrics. Thus, in
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addition to the usual risk measures, customer value measurement methods and principles enter
the picture. It is, therefore, necessary that debt management assume a customer perspective,
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rather than the usual product-related view. (Wall & Koch; 2000: 40-42)
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Step-4: Selling Loan: Finally, the goal of is to determine whether selling the loan is more
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profitable than liquidation and subsequent recovery. This question will be posed only if the
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respective bank is in a position to perform non-performing loan (NPL) transactions in the credit
markets and if a suitable deal is planned. At the same time, however, banks of all sizes are
increasingly gaining access to the skills necessary to enter into NPL transactions, mainly by
sharing the use of relevant platforms with other institutions. Thus, the objective of this step is
becoming relevant for an increasing number of institutions. (Wall & Koch; 2000: 43)
2.4 Review of NRB Directives

In this section, the directives provided by the bank in relation to efficiently manage the credit
have been reviewed;

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1. Classifications of Loan and Advances: Effective from FY 2001/02 banks shall classify
outstanding principal amount of loan and advances on the basis of aging. As per the directives
issued by NRB, all loans and advances shall be classified into the following four categories:
a. Pass Loan: - Loans and advances whose principal amount are not past due and past due
defined as performing loans.
for a period up to 3 months shall be included in this category. These are classified and
b. Sub-Standard Loan: - All loans and advances that are past due for a period of 3 months
to 6 months shall be included in this category.
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c. Doubtful Loan: - All loans and advances which are past due for a period of 6 months to 1
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year shall be included in this category.
d. Loss: - All loans and advances which are past due for a period of more than 1 year as well
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as advances which have least possibility of recovery or considered unrecoverable and
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those having thin possibility of even partial recovery in future shall be included in this
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category.
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Loans and advances falling in this category of sub-standard, Doubtful and loss are classified
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and defined as Non-performing loan. It is appropriate in the view of the banks management;
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there is not restriction in classifying the loan and advances from low risk category to high risk
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category. For instance, loans falling under substandard may be classified into doubtful or loss
and loans falling under doubtful may be classified into loss category. The term loan and
advances also includes bulls purchased and discounted.
2. Additional Arrangement in Respect of Pass Loan: Loan and advances fully secured by
gold, silver, fixed deposit receipts, credit cards and government securities shall be include
under pass category. Loans against fixed deposit receipts of other banks shall also qualify for
inclusion under pass loan. However, where collateral of fixed deposit receipt or government
securities or NRB bonds is placed as extra security, such loan has to be classified on the basis
of clause 1 to clause 7. While renewing working capital loan having maturity period up to one
year can be classified as pass loan. If the interest of working capital nature loans and advance is

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not regular, such loan and advances should be classified on the basis of interest outstanding
period.
3. Additional Arrangement in Respect of loss Loan: Even if the loan is not past due, loans
a. Security is not sufficient,

b. The borrower has been declared bankrupt,
c. The borrower is absconding or cannot be found,
having any or all of the following discrepancies shall be classified as loss.
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d. Purchased or discounted bills are not realized within 90 days from the due date and non
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fund based letter of credit and guarantees etc are not realized within 90 days from the
date of conversion into fund based are not realized within 90 days,
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e. The credit has not been used for the purpose originally intended,
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f. Owing to non-recovery, initiation as to auctioning of the collateral has passed six
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months and if the recovery process is under litigation,
g. Loan provided to the borrowers included in the blacklist of credit information center
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(CIC),
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h. Project or business is not in operative conditions, project or business is not in operation,
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i. Credit Card Loan is not written off within 90 days from past due date.
4. Additional Arrangements in Respects of Term Loan: In respect of term loans, the

classification shall be made against the entire outstanding loan on the basis of the past due
period of overdue installment.
5. Prohibition to Recover Principal and Interest by Overdrawing the Current Account
and Exceeding the Overdraft Limit: Principal and interest on loans and advance shall not be
recovered by overdrawing the borrowers current account or where overdraft facility has been
extended, by overdrawing such limit. However, this arrangement shall not be constructed as
prohibitive for recovering the principal and interest by debiting the customers account. Where
a system in the bank exists as to recovery of principal and interest by debiting the customers

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account, and recovery is made as such resulting in overdraft, which is not settled within one
month, such overdrawn principal amount shall also be liable to be include under the
outstanding loan and such loan shall be downgraded by one step from its current classification.
In respects if recognition of interest, the same shall be as per the clause relating to income
recognition mentioned in directives no 4.
6. Letter of Credit and Guarantees: If letter of credit and guarantees and other contingent
liabilities converted into fund based liabilities and have to be paid, in such condition such loan
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shall be classified as pass loan within 90 days from the date of conversion into fund based.
ib
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After 90 days such loan shall be classified as loss loan.
7. Rescheduling and Restructuring of the Loan: If the bank is confident on the following
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bases of written plan of action submitted by borrower, it may reschedule or restructure the
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loans and advances. Clear bases of rescheduling or restructuring should be attached with loan
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files.
a. If there is proof of adequate documents and collateral security relating to loan.
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b. If the bank is confident in recovery of restructured or rescheduled loans and advances.
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In addition to written plan of action for rescheduling or restructuring of loan, payment of at
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least 25 percent of total accrued interest up to the date of rescheduling of restructuring should
have been collected.
8. Loan Loss Provisioning: The loan loss provisioning, on the basis of the outstanding loans
and advances and bills purchases classified as per this directives, shall be provided as follows:
Classification of Loan
Loan Loss Provision
Pass loan
1%
Sub-standard loan
25%
Doubtful loan
50%
Loss
100%

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2.3 Review of Journals and Articles
Wenner, Navajas, Trivelli & Tarazona (2007), in their article, Managing Credit Risk in
Rural Financial Institutions in Latin America, have stated that credit risk management in
Latin American rural financial institutions is improving and evolving, but much still needs to be
done. Many of the institutions surveyed demonstrated success as measured by high overall rates
of profitability, low delinquency rates in both general and agricultural portfolios, and sustained
growth rates in agricultural portfolios over time. Nonetheless, the paucity of institutions active
in rural areas and expressed desires for better risk management systems, the relatively small
ib
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loan sizes, and restricted terms indicate that the situation is less than optimal.
Massive credit expansion in developed countries has been due in large part to the introduction
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and wide diffusion of risk transfer techniques (insurance, securitization, derivatives, etc.) and
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the wider acceptance of different types of collateral (inventories, accounts receivables,
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warehouse receipts, etc.). In Latin America, the most common risk transfer instruments
available are publicly financed loan guarantee funds; however, they are used only modestly (25
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percent). Historically, guarantee funds have been plagued with problems of high costs, limited
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additionality, and moral hazard. Recent work has shown that the most successful guarantee
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funds in Latin America (in terms of additional) are those in Chile, and that much of the positive
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impact is due to adequate regulation. In order to introduce some of the other risk transfer
instruments more commonly found in developed financial markets, investments will be needed
to reform and strengthen the insurance industry, capital markets, credit bureaus, commercial
codes, secured transaction frameworks, and information disclosure rules.
Burns & Stanley (2008), in their article, Managing Consumer Credit Risk, have stated that
the tools for improving management of consumer credit risk have advanced considerably in
recent years as industry leaders and their advisors have focused on the development of
increasingly sophisticated analytical tools.

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Advances in data warehousing technology and overall computational efficiencies have greatly
facilitated these developments. At the same time, application of these new methodologies
varies substantially among firms and between industry segments. Generally speaking, the credit
card industry tends to be the furthest along the development path, but even here, variability
exists. A number of lending firms have developed highly refined portfolio segmentation
designs and enhanced risk-based score-card schemes, but only a few have reached the level of
fully integrated models that employ multi-variable regression analysis. Risk management
practices in the consumer lending business are generally much stronger than in the early 1990s
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and the industry is far better positioned to weather the current economic downturn than it was a
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decade ago.
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Fatemi & Fooladi (2009), in their article, Credit Risk Management: A Survey of Practices,
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have stated that credit risk arises from uncertainty in a given counterparty's ability to meet its
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obligations. The increasing variety in the types of counterparties (from individuals to sovereign
governments) and the ever-expanding variety in the forms of obligations (from auto loans to
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complex derivatives transactions) has meant that credit risk management has jumped to the
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forefront of risk management activities carried out by firms in the financial services industry.
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In a survey of the largest financial institutions based in the US, the study finds that identifying
counterparty default risk is the single most-important purpose served by the credit risk models
utilized. Close to half of the responding institutions utilize models that are also capable of
dealing with counterparty migration risk. Surprisingly, only a minority of banks currently
utilize either a proprietary or a vendor-marketed model for the management of their credit risk.
Interestingly, those that utilize their own in-house model also utilize a vendor-marketed model.
Not surprisingly, such models are more widely used for the management of non-traded credit
loan portfolios than they are for the management of traded bonds.
Gillespie, Hackwood & Mihos (2010), in their article, Managing Credit Risk for Global
Commodity Producers, have stated that commodity producers require robust systems,

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processes and a cross functional involvement in credit management to minimize credit risk at
the customer and portfolio level. Despite the recent financial crisis, many exporting producers
still lack the basic systems and processes required to actively manage credit risk. Managing
credit risk has become increasingly difficult for commodity producers due to increased default
risk from buyers, no internationally recognized credit rating, banking requirements tightening
and sector risk profiles and poor credit risk culture within the marketing and sales groups.
reducing ability of customers to arrange payment guarantees, widening variation in sovereign
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However, many leading commodity producers have implemented robust controls and tools to
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manage the credit risk process. This study has sought to highlight five areas of focus to improve
the management of credit risk; a) producers should develop an internal credit rating system for
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customers, b) internal credit limits should be used as the main control point in the export
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process, c) close relationships should be maintained with credit insurers and banks, d) a
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standard credit risk process and set of tools should be used by all marketing and sales
personnel, and e) a portfolio view of credit risk should be reviewed regularly by a senior
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executive team.
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Ganzi & Huppman (2010), in their article, Credit Risk Management: How the Banking
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Industry is Integrating Environmental & Social Issues: Is Being Green Financially
Responsible?, have stated that credit risk management is undergoing an important transition.
Banks are no longer treating environmental and other social issues as peripheral to their
business concerns; they no longer focus simply on recycling paper or using energy-efficient
light bulbs. Based on meetings with 80 officers at 38 leading financial institutions, a study
financially supported by Environmental Resources Management (ERM), indicates that the
majority of the worlds large banks agree that integrating environmental and broader social
issues into their core credit risk management process is essential to managing credit risk in the
21st century. Leading banks such as Citigroup, ABN AMRO, Westpac, and Barclays, to name a
few, now view these non-traditional issues as real credit risk variables that may potentially
affect their clients bottom lines as well as their own.

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In summary, it now appears that a growing number of leading global credit providers are in
varying stages of consideration and/or implementation of industry best practices for addressing
environmental issues and, in many cases, social issues. These actions are being taken by the
credit providers, not just because it is good for their image or because they see it as their moral
obligation, but because they believe it makes sound bottom-line economic sense for their long-
term credit portfolio quality (delinquency, write-offs and recovery) and overall financial
performance. The two big unknowns appear to be: (1) will these financial institutions (and, in
particular, their Boards and Executive Management teams) make the needed financial
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commitment to establish and implement effective internal and external (i.e., at client level)
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programs and processes, and (2) if they make the commitment, will it lead to the tipping point
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where all global credit providers will follow suit (a leveling of the playing field).
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2.4 Review of Thesis
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Pradhan (2006), in his thesis, Credit Management of Siddhartha Vikash Bank Limited, has
the main objective to analyze the credit management of the SVBL. The specific objectives of
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the study are;
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a. To analyze the trends of deposit collection and credit lending.
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b. To assess total amount of loan.
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c. To evaluate the performance of SVBL in terms of liquidity, profitability, sector wise

loan, and non-performing loan.
d. To analyze the capital adequacy of SVBL.
The major findings of the study are;
a. Deposit collection of SVBL has significantly increasing trend. There is continuous

increasing trend from 10 percent to 100 percent.
b. In all year total fixed deposit has more contribution than other deposit. Then more
contribution of saving deposit than that of current and call deposit.
c. Correlation between deposit and loan disbursement is 0.99. This indicates that these two
variables relation is highly positive.

Kathmandu - 37

Kathmandu
d. Capital adequacy of the SVBL has sufficient against NRB standard. It indicates that the
lending capacity of SVBL is high.
e. The highest risk of SVBL is in credit risk.
Lama (2007), in his thesis, A Study on Credit Management of Agriculture Development Bank
main objective, the study has other specific objectives;

a. To evaluate the trend of loan investment, collection and outstanding.
Limited, has the main objective to evaluate the lending procedure of ADBL. In addition to this
ry
b. To show the achievement of purpose-wise and term-wise loan disbursement, outstanding
ib
ra
and collection of ADBL.
sL
c. To study lending policy, loan recovery procedure, interest rate and discount of ADBL.
pu
Ca
m
a. The total investment of development financing increased from Rs. 7.13 billion in FY
Rs.0.82 billion or 10.43%.
ev
057/58 to Rs. 12.85 billion in FY 062/63 registering an annual average growth trend of
rD
b. The total collection of development financing increased from Rs. 5.34 billion in FY
ke
Sh
an
Rs. 0.93 billion or 14.22%.
c. The total outstanding of development financing increased from Rs. 12.89 billion in FY
Rs. 1.33 billion or 9.53%.
d. Actual loan investment/disbursement, collection and outstanding of short-term is
gradually increased every year. The lowest percentage of loan collection to

disbursement is 76.46% in FY 060/61 and the highest is 87.33% in FY 062/63.
e. ADBLs targeted and achieved loan disbursement is continuously followed by loan
collection amount also in increasing trend.
Though achieved collection ratio is
increasing each year, achieved loan disbursement is in fluctuating trend since FY

059/60.

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Kathmandu
Burlakoti (2008), in her thesis, Credit Policy Analysis of Commercial Bank with Special
Reference to Everest Bank Limited, has the main objective to find out the credit management
position of Everest Bank Limited. The specific objectives of the study are;
a. To evaluate the various financial ratios of the EBL.
c. To analyze trend of deposit utilization towards loan and advances and net profit.
b. To determine the impact of deposit in liquidity and its effect on lending practices.
ry
a. Cash and bank balance to current deposit of the bank shows the fluctuating trend during
ib
ra
the study period. Similarly, cash and bank balance to interest sensitive ratio of EBL is
also in fluctuating trend.
sL
b. Credit and advance to fixed deposit ratio of EBL is fluctuating trend. The mean ratio is
pu
2.26 times in the study period. However, non-performing assets to total assets of EBL is
Ca
m
in declining trend, whose mean ratio is 0.978%.
c. The debt to assets ratio of EBL is excessively high or in other words they have
ev
excessively geared capital structure. On an average 93% of assets is financed through
rD
debt capital that is outsiders cost bearing fund.
ke
d. Return on loan and advances of EBL is also in fluctuating trend. The mean ratio is 2.2%.
Sh
an
This shows the normal earning capacity of EBL.
Guragain (2009), in his thesis, Credit Practices: A Study on NABIL Bank Ltd., SCB Nepal
Ltd. and Himalayan Bank Ltd., has the major objective of examining the credit management
in the selected banks. The specific objectives of the study are;
a. To determine the liquidity position, the impact of deposit in liquidity and its effect on
credit practices.
b. To measure the bank's lending strength.
c. To analyze the portfolio behavior of credit and measure the ratio and volume of lending
made in agriculture, priority and productive sector.

Kathmandu - 39

Kathmandu
d. To measure the credit performances in quality, efficiency and its contribution in total
income.
The major findings of the study are:
a. The measurement of liquidity has revealed that the mean current ratio of all the three
banks is not widely varied. All of them are capable in discharging their current liability
by current asset.
b. SCBNL's tendency to invest in government securities has resulted with the lowest ratio
ry
of loans and advances to total assets ratio whereas NABIL Bank Ltd. has highest due to
ib
ra
steady and high volume of loans and advances throughout the years.
sL
c. The loans and advances and investment to deposits ratio has shown that NABIL Bank
pu
Ltd. has deployed the highest proportion of its total deposits in earning activities. This is
Ca
m
the indicative of that in fund mobilizing activities NABIL Bank Ltd. is significantly
better.
d. The portfolio analysis has revealed that the flow of loans and advances in agriculture
ev
sector is the lowest priority sector among these commercial banks. The contribution of
rD
all the banks in industrial sector is appreciable. The contribution made by Himalayan
ke
Bank Ltd. in industrial sector is the greatest and that of SCBNL is the least.
Sh
an
e. The lending in commercial purpose is highest in case of NABIL Bank Ltd. and least in
case of SCBNL. SCBNL has highest contribution in service sector lending. It has
contributed 25.47 % of its total credit in general use and social purpose.
f. The mean ratio of interest income to total income has concluded that the contribution of
interest income in total income is higher in case of Himalayan Bank Ltd. and lower in
case of SCBNL. The interest expenses to total deposits ratio indicate that the cost of
fund in Himalayan Bank Ltd. is the highest and that of SCBNL is the least.
Thakuri (2009), in his thesis, A Comparative Study on Credit Management of Commercial

Banks; with Special Reference to NABIL and SCBNL, has the main objective to explore the
credit efficiency or inefficiency and its management in commercial banks. The specific

Kathmandu - 40

Kathmandu
objectives of the study are;
a. To assess credit practice of selected commercial banks.
b. To explore the credit efficiency of selected commercial banks.
c. To explore the relationship with loan and advances, non-performing loan and net profit
of selected commercial banks.
a. The credit practices of NABIL in terms of total laons to deposit ratio is found to be more
ry
than SCBNL (i.e. 0.6298 > 0.3660). It indicates that NABIL has been strong to mobilize
ib
ra
its total deposit as loan.
b. In terms of interest income to loan and advances ratio, Nabil has mean score of 0.0932
pu
performance in earning interest income.
sL
and SCBNL has the mean score of 0.0858. Form this point, NABIL Bank has the best
Ca
m
c. Lending policy of SCBNL with regard to non-performing loan to total loans and
advances was found to be the lowest with the mean value with 0.0351 as compare to
ev
NABIL Bank. The result indicates that if non-performing loan increases, the overall
rD
banking business will be negatively affected.
ke
d. The ratio of loans and advances to total assets was found greater in NABIl in comparison
Sh
an
with SCBNL which shows the good lending performance of NABIL, whereas in terms of
loan and advances to current assets ratio, NABIL has highest mean than that of SCBNL,
this meant that NABIL has relatively better practice in short term lending.
e. Lending policy of SCBNL in terms of loan loss provision to total loans and advances
was found relatively better than that of NABIL.
Simkhada (2010), in her thesis, Credit Policy of Commercial Banks in Nepal, has the
objective to provide the credit practices in NIBL and SBI bank. The specific objectives are;
a. To examine the liquidity and assets management of NIBL and SBI.
b. To evaluate the investment policy of NIBL and SBI.
c. To study the growth ratio of loan and advances.

Kathmandu - 41

Kathmandu
d. To analyze the investment to total deposit and net profit NIBL and SBI.

a. Both banks current assets have exceeded the current liabilities therefore the ratio is
b. NIBL has maintained both current ratio and cash reserve ratio better than that of SBI.
considered satisfactory. But the cash reserve ratios have fluctuated in high degree.
c. The assets management ratio shows that deposit utilization of NIBL is less effective than
SBI.
ry
d. NIBL has invested lower amount of government securities and share and debenture than
ib
ra
that of NIBL.
e. The growth ratio of total deposit, loan and advances, total investment and net profit of
pu
sL
NIBL are less than that of SBI.
Ca
m
2.6 Research Gap
All of the above study reviewed are concerned with the credit management of the bank, and has
ev
given little preference to the credit risk. Further the study lacks the policy and procedures need
rD
to be adopted by the bank to lessen the credit risk. Recognizing these gaps, the present study
ke
has been conducted to analyze the core risk; especially the credit risk of the bank along with the
Sh
an
suggestions on how the procedurals guidelines should be to prevent the credit risk and what
effective policy should the bank adopt to lessen the credit risk, along with the suggestions that
might be crucial for the bank to have sound credit management.

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Kathmandu
CHAPTER III
RESEARCH METHODOLOGY
3.1 Research Design
Generally, research design is the plan, structure and strategy of investigation conceived so as to
obtain answer to research questions and to control variance. It is arrangement for collection and
analysis of data. To achieve the objective of this study, descriptive and analytical research
design has been used. Some financial and statistical tools have been applied to examine facts
ry
and descriptive techniques have been adopted to evaluate the core risk, especially the credit risk
sL
ib
ra
of the banks.
pu
3.2 Population and Sample
Ca
m
Currently 28 commercial banks are operating in Nepal. The study of all these banks on the
ground of credit risk will be somewhat absurd and onerous within this study paper. Thus, only
two banks, namely Bank of Kathmandu Limited (BOK) and Nepal Industrial and Commercial
rD
ev
Bank Limited (NIC), have been chosen as sample from the total population.
ke
3.3 Nature and Source of Data
Sh
an
The study is based on primary data as well as secondary data. To evaluate the credit risk and
the credit provision kept by the banks, the secondary data have been analyzed, whereas to trace
out the procedural and policy guideline that the bank should follow for lessening credit risk and
to collect the opinion for effective credit management, the primary data have been analyzed.
The sources of secondary data are mainly AGM reports of BOK, NIC and NRB and other
concerned organizations, bulletins, publication, researches, journals, articles, unpublished thesis

reports, newspapers, books, authorized websites and internet. Whereas the source of primary
data is the collection of opinions from employees, shareholders, depositor and borrowers of the
observed banks through questionnaire.

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Kathmandu
3.4 Data Collection Techniques
The research consists of both primary and secondary data. Since the nature of these two types
of data is different; the data collection procedure also varies. To collect the secondary data, the
researcher has visited the different libraries, BOK, NIC and NRB, and other useful book stores,
and collection related publications and periodicals. Official websites are searched in order to
questionnaire from different personnel related to the observed banks.
ry
3.5 Analytical Tools
collect required information. On the other hand, the primary data are merely collected through
ib
ra
The data collected from various sources leads to the logical conclusion, only if the appropriate
tools and techniques are adapted to analyze such data. The collected data has been no meaning
sL
if such data are not analyzed. To analyze the data in this research, the researcher has used some
Ca
m
pu
financial and statistical tools.
3.5.1 Financial Tools
ev
Generally the ratio analysis has been conducted on the secondary data analysis. The major
ke
rD
ratios carried down have been enumerated below;
Sh
an
a) Total Credit to Total Assets
Granting credit is the prominent function of bank to yield earning through interest income.
However, the bank should diversify its available fund, which means that the bank should not be
solely dependent on credit. Thus, the credit to total assets measures the risk on assets of the
bank, considering higher ratio results higher risk.
b) Non Performing Credit to Total Credit

Non performing credit is ubiquitous in each bank. The bank cannot absolutely eliminate the non
performing credit rather it can lessen such credit. Thus, higher non performing credit to total
credit represents greater credit risk in the bank.

Kathmandu - 44

Kathmandu
c) Structure of Non Performing Credit

The non performing credit has to be categorized into sub standard credit, doubtful credit and
credit loss as per the time lapse after the due date of repayment. The analysis of the structure of
non performing credit thus aids to measure the chances of credit default and ultimately the
ry
credit risk.
ib
ra
d) Credit Loss Provisioning to Total Credit
sL
As per the provision of the NRB, each bank has to keep 1% of the performing credit, 25% of
pu
the substandard credit, 50% of the doubtful credit and 100% of the credit loss as the credit loss
Ca
m
provision to confront the disaster situation that will be created by the credit default. Thus, the
credit loss provisioning to total credit reveals the credit risk in the bank, as the high ratio
ke
rD
ev
indicates high risk.
Sh
an
e) Credit and Interest Written Off to Total Credit
After realizing that the default credit is absolutely unrecoverable even after auctioning the
collateral pledged or selling the credit or other, the bank has to write off such credit along with
the interest suspense. Thus, to examine the credit risk, the credit and interest written off to total
credit has been calculate. Notably, high ratio indicates high credit risk.
f) Concentration of Maximum Exposure to a Single Borrower to Credit

The credit guideline of the bank should be clear enough on granting the maximum amount of
credit to a single borrower. The concentration of maximum exposure to a single borrower to
total credit represents the dependability of the bank on limited borrowers, and eventually

Kathmandu - 45

Kathmandu
gauges the credit risk. Basically, high ratio indicates high credit risk, on the event of the default
3.5.2 Statistical Tools
of the concentrated borrower.
The analysis could not have been done without using the statistical tools. The following
ry
statistical tools have been effectively utilized for data analysis.
ib
ra
a) Mean
Arithmetic mean or simply a mean of a set observation is the sum of all the observations
sL
divided by the number of observations. Arithmetic mean is also known as the arithmetic
Ca
m
pu
average.
Let x1, x2, x3, ., xn be the n values of the variable then their arithmetic mean be
ke
rD
ev
denoted by x is defined by,
Sh
an
Where, n is the number of observations.
b) Standard Deviation
The standard deviation is the absolute measure of dispersion in which the drawbacks present in
other measures of dispersion are removed. It is said to be the best measure of dispersion as it
satisfies most of the requisites of a good measure of dispersion.
c) Coefficient of Variation
The coefficient of dispersion based on standard deviation multiplied by 100 is known as the

Kathmandu - 46

Kathmandu
coefficient of variation (C.V.). Less the C.V., more will be the uniformity and more the C.V.,
less will be uniformity. The C.V. is defined by,
d) Correlation Coefficient
When the relationship is of quantities nature, the appropriate statistical tool for discovering and
measuring the relationship and expressing it in a brief formula is known as correlation. If the
values of the variables are directly proportional then the correlation is said to be positive. On
ry
the other hand, if the values of the variables are inversely proportional, the correlation is said to
ib
ra
be negative, but the correlation said to be negative, but the correlation coefficient always
Ca
m
pu
sL
remains within the limit of +1 to -1. By Karl Pearson, the simple correlation coefficient (R) is;
e) Regression Lines
ev
The regression line is the line that gives the best estimate of one variable for any given value of
rD
the other variable. The simple regression equation of dependent variable (Y) on the
ke
independent variable (X) is given by;
Sh
an
y = a + bx
We shall get the normal equation for estimating a and b as.

X = Na + b Y
XY = aY + b Y2
Where,
X = the value of independent variable
Y = the value of dependent variable
a = Y-intercept
b = slope of the trend line/coefficient of regression

Kathmandu - 47

Kathmandu
N = number of pairs of observations.
a = Y- b X
f) Trend Analysis
A widely and most commonly used method to describe the trend is the method of least square.
represented by;
Yc
a + bx (i)
ry
Where,
ib
ra
a = y intercept or value of y when x = 0
sL
b = slope of the trend line or amount of change that comes in y of a unit change in x.
pu
To find the value of x and y, the following equations should be solved;

=
na + bx .. (ii)
xy
ax + bx2 (iii)
Sh
an
ke
rD
ev
Ca
m

Kathmandu - 48
Let the trend line between the dependent variable y and the independent variable x (i.e. time) be

Kathmandu
CHAPTER IV
DATA PRESENTATION AND ANALYSIS

4.1 Secondary Data Analysis
Under this section, the first objective, i.e. the analysis of the credit risk level and the second
objective, i.e. the analysis of the credit loss provision kept by the bank, have been achieved
with the aid of financial ratio and statistical analysis.
ry
4.1.1 Total Credit to Total Assets
ib
ra
Mainly the bank mobilizes its fund in granting credit and making investment. The total credit to
sL
total assets measures the degree of risk in total assets of the bank. Generally it is considered
that higher the total credit to total assets, the greater the risk in total assets and vice versa.
pu
Table 4.1
BOK
TC
TA
2004/05 6182.05 9857.13
2005/06 7488.70 12278.33
2006/07 9694.10 14581.39
2007/08 12747.72 17721.92
2008/09 14945.71 20496.00
Mean
S.D.
C.V.%
Sh
an
ke
rD
ev
FY
Ca
m
Ratio
62.72
60.99
66.48
71.93
72.92
67.01
4.78
7.13
(Rs. in Million, Ratio in %)
NIC
TC
TA
4909.35 7510.39
6902.12 10383.60
9128.65 11679.34
11465.33 15238.73
13915.85 18750.63
Ratio
65.37
66.47
78.16
75.24
74.22
71.89
5.06
7.03
(Source: Appendix II)
To gauge the risk of total assets through credit, the ratio of total credit to total assets has been
determined. The table reveals that, except in the fiscal year 2005/06, the ratio has continually
increased in each fiscal year in BOK, along with the increment in both total credit and total
assets. The total asset of the bank has ranged from Rs. 9857.13 millions in the fiscal year
2004/05 to Rs. 20496 millions in the fiscal year 2008/09. Alike the total assets, the total credit
of the bank has also increased from Rs. 6182.05 millions in the fiscal year 2004/05 to Rs.

Kathmandu - 49

Kathmandu
14945.71 millions by the end of the fiscal year 2008/09. It is transparent that the total asset of
BOK is outweighed by the credit assets. The total credit of the bank has ranged from 60.99% in
the fiscal year 2005/06, however for the fiscal year 2004/05 it is 62.72%, to 72.92% in the
fiscal year 2008/09. Thus, inevitably credit granting is the major use of the fund of the bank. In
variation in such granting ratio is quite uniform, i.e. 7.13% only.
average, 67.01% of the total assets of the bank has been mobilized in granting credit, and the
In addition, the ratio of total credit to total assets of NIC has increased for the first three years,
ry
and then it has decreased in the last two fiscal years, although both the credit and total assets of
ib
ra
the bank have increased in each year. This implies that the pace of increment in total assets of
the bank is greater than that of total credit in last two years. In other word, the bank has
sL
diversified its total fund in other assets as well. In five consecutive fiscal years, the total credit
pu
of the bank has reached to Rs. 13915.85 millions by the end of the fiscal year 2008/09 from Rs.
Ca
m
4909.35 in the fiscal year 2004/05, and the total asset of the bank has ranged from Rs. 7510.39
millions in the fiscal year 2004/05 to Rs. 18750.63 millions in the fiscal year 2008/09.
ev
Moreover, the ratio of total credit to total assets has mounted to 78.16% in the fiscal year
rD
2006/07 from 65.37% in the fiscal year 2004/05, and by the end of the fiscal year 2008/09, the
ke
ratio is 74.22%. In average, NIC bank has mobilized 71.89% of the total assets in granting
Sh
an
credit and the uniformity in the ratio is also high, i.e. the variation is just 7.03%.
Palpably both the banks have taken credit as the major use of the fund and thus they have
disbursed the credit aggressively. However, the average disbursement ratio on total assets of
NIC is higher than that of BOK, indicating high risk in the total assets of NIC through credit
default. Considering the credit risk, presumably NIC bank has decreased the preponderance of
the total credit on total assets in the last two fiscal years.

Kathmandu - 50

Kathmandu
Figure 4.1
pu
4.1.2 Non Performing Credit to Total Credit
sL
ib
ra
ry
Ca
m
When the borrower delays in paying the credit, the bank restructures its credit and categorizes
such delayed credit as non performing credit. Thus increment in the non performing credit is
pernicious to the bank health. The higher the non performing credit to total credit, the greater
rD
ev
the risk the bank faces.
Table 4.2
FY
Sh
an
ke
2004/05
2005/06
2006/07
2007/08
2008/09
Mean
S.D.
C.V.%
NPC
308.51
203.62
243.30
236.90
190.31
BOK
TC
6182.05
7488.70
9694.10
12747.72
14945.71
Ratio
4.99
2.72
2.51
1.86
1.27
2.67
1.27
47.44
NPC
185.43
179.55
101.14
98.16
129.18
NIC
TC
4909.35
6902.12
9128.65
11465.33
13915.85
Ratio
3.78
2.60
1.11
0.86
0.93
1.85
1.15
62.27
Despite the laudable effort of BOK in diminishing the non performing credit from Rs. 308.51
millions in the fiscal year 2004/05 to Rs. 190.31 millions in the fiscal year 2008/09, the non

Kathmandu - 51

Kathmandu
performing credit has shown fluctuating trend. However, the decrement in non performing
credit in proportion to the total credit of the bank in each fiscal year is quite appreciable.
Clearly, the non performing credit to total credit of the bank has decreased from 4.99% in the
fiscal year 2007/08 to 1.27% in the fiscal year 2008/09. It, thus, indicates tacit conversion of
non performing credit in performing credit within these fiscal years by BOK. In average, 2.67%
47.44%.
of the total credit of the bank has turned to non performing credit, which has fluctuated by
ry
Alike BOK, NIC bank has also decreased its non performing credit in the five consecutive
ib
ra
fiscal years, i.e. from Rs. 185.43 millions in the fiscal year 2004/05 to Rs. 129.18 millions in
the fiscal year 2008/09, although the non performing credit of the bank is lowest, Rs. 98.16
sL
millions, in the fiscal year 2007/08. Consequently, the non performing credit to total credit of
pu
NIC has followed decreasing trend in first four fiscal years, and thus it has been lowered from
Ca
m
3.78% in the fiscal year 2004/05 to 0.86% in the fiscal year 2007/08, while in the fiscal year
2008/09, it is 0.93%. In average, 1.85% of the total credit granted has been turned to non
rD
ev
performing credit and the variation in such conversion is 62.27%, indicating high fluctuation.
ke
Comparing the banks on the basis of the non performing credit to total credit, it has been
Sh
an
ascertained that the credit management of the NIC is more effective than that of BOK, as a
result the credit risk on the granted amount is less in NIC in comparison that of BOK in each
fiscal year. However, the attempt of BOK in drastically reducing the credit risk, i.e. the non
performing credit to total credit, could be omen of sound credit management in future.

Kathmandu - 52

Kathmandu
Figure 4.2
pu
4.1.3 Structure of Non Performing Credit
sL
ib
ra
ry
Ca
m
The non performing credit is composed of sub standard credit, doubtful credit and credit loss.
Higher the percentage of credit loss implies the greater chances of the non performing credit in
ev
turning absolutely default and eventually carries high risk. Thus it would be favorable, if the
Table 4.3
ke
rD
non performing credit is dominated by sub standard credit and then by doubtful credit.
FY
Sh
an
Structure of Non Performing Credit
2004/05
2005/06
2006/07
2007/08
2008/09
Mean
S.D.
C.V.%
FY
NPC
Rs.
308.51
203.62
243.30
236.90
190.31
236.53
41.10
17.38
NPC
(Rs. in Million)
BOK
SSC
Rs.
88.42
71.61
39.86
100.18
36.91
67.40
25.39
37.67
SSC
DC
%
28.66
35.17
16.38
42.29
19.39
28.38
9.64
33.95
Rs.
89.81
8.80
36.58
19.25
21.08
35.10
28.76
81.92
NIC
CL
%
29.11
4.32
15.03
8.13
11.08
13.53
8.54
63.13
DC
Rs.
130.28
123.21
166.86
117.47
132.32
134.03
17.24
12.86
%
42.23
60.51
68.58
49.59
69.53
58.09
10.68
18.39
CL

Kathmandu - 53
2004/05
2005/06
2006/07
2007/08
2008/09
Mean
S.D.
C.V.%
Rs.
185.43
179.55
101.14
98.16
129.18
138.69
37.41
26.97
Rs.
45.97
0.65
6.13
9.63
2.42
12.96
16.79
129.58
%
24.79
0.36
6.06
9.81
1.87
8.58
8.75
102.03
Rs.
11.39
7.86
0.93
11.76
61.13
18.61
21.61
116.10
%
6.14
4.38
0.92
11.98
47.32
14.15
16.97
119.94
Rs.
128.07
171.04
94.08
76.77
65.63
107.12
38.31
35.76
%
69.07
95.26
93.02
78.21
50.81
77.27
16.37
21.19

Kathmandu
(Source: Appendix V)
To analyze the credit risk of the bank in depth, the structure of non performing credit has been
ry
scrutinized. The table emblazons that the trend of sub standard credit of BOK has traced the
ib
ra
same path, i.e. increasing or decreasing, of the non performing credit in most of the fiscal years.
As a result the sub standard credit has decreased from Rs. 88.42 millions in the fiscal year
sL
2004/05 to Rs. 36.91 million by the end of the fiscal year 2008/09. Further, the coverage of sub
pu
standard credit has followed fluctuating trend and thus it has ranged from 16.38% in the fiscal
Ca
m
year 2006/07 to 35.17% in the fiscal year 2008/09. In average, 28.38% of the total non
performing credit has been represented by sub standard credit. Similarly, the doubtful credit of
ev
the BOK has fluctuated extremely during the five consecutive fiscal years, and thus it has
rD
ranged from Rs. 89.81 millions in the fiscal year 2004/05 to Rs. 8.80 in the fiscal year 2005/06.
ke
Moreover, the doubtful credit to non performing credit has also fluctuated drastically in the
Sh
an
periods, and thus the ratio is highest, 29.11%, in the fiscal year 2004/05 and lowest, 4.32%, in
the fiscal year 2005/06. In average, the doubtful credit covered 13.53% of the total credit
granted. However, in most of the fiscal years, the credit loss to non performing credit of BOK
has increased compared to that of the previous years. The credit loss of the bank has ranged
from Rs. 117.47 millions in the fiscal year 2007/08 to Rs. 166.86 millions in the fiscal year
2006/07. In addition, the credit loss to non performing credit of the bank is maximum, 69.53%,
in the fiscal year 2008/09 and it is minimum, 42.23%, in the fiscal year 2004/05. In average,
more than half, 58.09%, of the non performing credit has remained most vulnerable to credit
risk, and the variation in such risk extent is 18.39%.

Kathmandu - 54

Kathmandu
Likewise, the sub standard credit in NIC bank has varied widely during the five consecutive
fiscal years, and thus it is highest, Rs. 45.97 millions, in the fiscal year 2004/05 and lowest, Rs.
0.65 millions, in the fiscal year 2005/06, while in the fiscal year 2008/09, it is Rs. 2.42 millions.
Consequently, the ratio of sub standard credit to total non performing credit has also remained
highest, 24.79%, in the fiscal year 2004/05 and lowest, 0.36%, in the fiscal year 2005/06, while
in the fiscal year 2008/09, it is 1.87%. In average, the sub standard credit has represented
8.58% of the non performing credit. Similarly, the doubtful credit of NIC bank has followed
fluctuating trend and thus it has ranged from Rs. 61.16 millions in the fiscal year 2008/09 to Rs.
ry
0.93 millions in the fiscal year 2006/07. Further, the doubtful credit to total non performing
ib
ra
credit has decreased for the first three years, and then it has increased in the last two fiscal
years. As a result, the ratio of doubtful credit to non performing credit has ranged from 0.92%
sL
in the fiscal year 2006/07 to 47.32% in the fiscal year 2008/09, and eventually it is 14.15% in
pu
average. Besides these, the credit loss of the bank is highest than other forms of non performing
Ca
m
credit in each fiscal year. The credit loss of the bank has ranged from Rs. 171.04 millions in the
fiscal year 2005/06 to Rs. 65.63 millions in the fiscal year 2007/08. Ultimately the credit loss to
ev
non performing credit of the bank has ranged from 95.26% in the fiscal year 2005/06 to 50.81%
rD
in the fiscal year 2008/09, and in average the ratio is 77.27%. This clearly indicates that the
Sh
an
non performing credit.
ke
preponderance of credit loss is highest than that of sub standard credit and doubtful credit in
Analyzing the structure of non performing assets, it has been ascertained that the non
performing assets of both the banks is outweighed by the credit loss. Both the bank should
adopt tight recovery and monitoring policy to deduct such pernicious assets. However, among
the two observed banks, the credit risk, on the basis of the component of non performing assets,
is higher in NIC than in BOK, as the credit loss to non performing assets is higher in NIC in
comparison to that of BOK.
4.1.4 Credit Loss Provisioning to Total Credit

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Kathmandu
The ratio of credit loss provisioning to total credit measures, actually what percentages of the
total credit has been kept as credit loss provision. Higher the ratio indicates high credit risk of
the bank.
Table 4.4
ry
CLP
197.64
246.16
187.25
200.65
236.46
ib
ra
Ratio
4.36
3.07
3.04
2.24
2.00
2.94
0.83
28.15
NIC
TC
4909.35
6902.12
9128.65
11465.33
13915.85
Ratio
4.03
3.57
2.05
1.75
1.70
2.62
0.98
37.42
pu
2004/05
2005/06
2006/07
2007/08
2008/09
Mean
S.D.
C.V.%
CLP
269.47
229.62
294.77
285.08
298.42
BOK
TC
6182.05
7488.70
9694.10
12747.72
14945.71
sL
FY
Ca
m
The table reveals that the provision of credit loss has been fluctuated during the periods and
thus it has ranged from Rs. 229.62 millions in the fiscal year 2005/06 to Rs. 298.42 in the fiscal
ev
year 2008/09. Nonetheless the ratio of credit loss provision to total credit has decreased in each
rD
fiscal year, indicating decrement in the chances of credit default, and thus it has diminished
from 4.36% in the fiscal year 2004/05 to 2.00% in the fiscal year 2008/09. In average, 2.94% of
Sh
an
provisioning is 28.15%.
ke
the total credit has been provisioned as credit loss for the security, and the variation in such
Alike in BOK, the credit loss provisioning amount in NIC is also in fluctuating trend, and thus
it has ranged from Rs. 187.25 millions in the fiscal year 2006/07 to Rs. 246.16 millions in the
fiscal year 2005/06. In contrast, the ratio of credit loss provision to total credit of the bank has
been gradually decreased. The ratio has been deducted to 1.70% in the fiscal year 2008/09 from
4.03% in the fiscal year 2004/05. In average, the bank has been able to maintain the credit loss
provisioning to total credit to 2.62%, and the variation in the ratio is 37.42%.
It seems that both the banks have contemplated about the destructive effect of default credit, as
a result both the banks have significantly deducted the non performing credit of the bank. This

Kathmandu - 56

Kathmandu
ultimately has benefited the bank from keeping low credit loss provision to total credit, and
thus has eventually deducted the credit risk of the banks in comparison to the past credit risk.
Comparing two banks, it can be concluded that the overall credit risk is high in BOK than in
NIC, as a result BOK has to kept high credit risk to total credit risk. This fact has also been
buttressed by the non performing credit to total credit ratio.
Figure 4.3
ke
rD
ev
Ca
m
pu
sL
ib
ra
ry
Sh
an
4.1.5 Credit and Interest Written Off to Total Credit
After analyzing the sort of default credit and determining that such credit, along with the
interest, is absolutely unrecoverable, the bank prefers to write off the credit and interest
suspense amount. Thus, higher the credit and interest suspense written off in respect to total
credit, greater will be the credit risk.
Table 4.5
FY
BOK
Written Off
TC
2004/05
209.13
6182.05
2005/06
95.21
7488.70
2006/07
--9694.10
NIC
Ratio Written Off
TC
3.38
39.23
4909.35
1.27
29.72
6902.12
0.00
103.32
9128.65
Ratio
0.80
0.43
1.13

Kathmandu - 57

Kathmandu
2007/08
2008/09
Mean
S.D.
C.V.%
45.40
----
12747.72
14945.71
0.36
0.00
1.00
1.28
127.53
20.51
4.38
11465.33
13915.85
0.18
0.03
0.51
0.40
78.49
In most of the observed fiscal years, BOK has written off the suspense credit and interest
amount. Nevertheless the written off amount of the bank has considerably decreased. The
written off amount of BOK is Rs. 209.13 millions in the fiscal year 2004/05, Rs. 95.21 millions
in the fiscal year 2005/06 and Rs. 45.40 millions in the fiscal year 2007/08. Further such
ry
written off amount has represented 3.38% of the total credit in the fiscal year 2004/05, 1.27%
ib
ra
of the total credit in the fiscal year 2005/06 and 0.36% of the total credit in the fiscal year
sL
2007/08. In average, the written off of credit and interest suspense has represented 1% of the
pu
total credit, and the variation in the ratio of written off to total credit is 127.53%, indicating
high inconsistency. The table depicts that the recovery policy of the bank is quite strong in the
Ca
m
fiscal year 20006/07 and fiscal year 2008/09, as a result the bank does not have to written off
ev
any credit and interest suspense amount in such year.
rD
Alike BOK, NIC bank has also deducted the unrecoverable credit and interest suspense.
ke
However the written off amount has fluctuated during the entire observed periods, and thus it
Sh
an
has varied from Rs. 4.38, in lowest, in the fiscal year 2008/09 to Rs. 103.32 millions, in highest,
in the fiscal year 2006/07. The written off credit and interest suspense to total credit has also
fluctuated during the periods. It has 0.80% in the fiscal year 2004/05, 0.43% in the fiscal year
2005/06, 1.13% in the fiscal year 2006/07, 0.18% in the fiscal year 2007/08 and 0.03% in the
fiscal year 2008/09. In average, the written off credit and interest expenses has represented
0.51% of the total credit amount, and the ratio has varied by 78.49%, indicating highly
inconsistency.
The table has enlightened that NIC bank has written off credit and interest expenses more
regularly than the BOK. Despite this, the credit risk in NIC bank is lower than that of BOK,

Kathmandu - 58

Kathmandu
since the written off credit and interest suspense to total credit of NIC bank is lower than that of
BOK.
Figure 4.4
4.1.6 Concentration of Maximum Exposure to a Single Borrower to Credit
Ca
m
pu
sL
ib
ra
ry
ev
A bank should diversify its credit to maximum number of borrowers. Providing maximum
rD
credit to limited borrowers can jeopardize the recovery policy and may carry high credit risk.
Sh
an
the observed banks.
ke
The following table portrays the maximum amount of credit granted to the single borrower of
Table 4.6
Concentration of Maximum Exposure to a Single Borrower to Credit
FY
2004/05
2005/06
2006/07
2007/08
2008/09
Mean
S.D.
C.V.%
BOK
Max. Exp.
TC
161.05
6182.05
257.21
7488.70
250.00
9694.10
476.62
12747.72
256.07
14945.71
Ratio
2.61
3.43
2.58
3.74
1.71
2.81
0.71
25.39
NIC
Max. Exp.
TC
119.30
4909.35
179.38
6902.12
207.44
9128.65
215.46
11465.33
345.96
13915.85
Ratio
2.43
2.60
2.27
1.88
2.49
2.33
0.25
10.75

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Kathmandu
Clearly, the maximum credit granted by BOK to a single borrower has fluctuated during the
five consecutive fiscal years. The concentration of maximum exposure to a single borrower has
ranged from Rs. 161.05 millions in the fiscal year 2004/05 to Rs. 476.62 millions in the fiscal
year 2007/08. Similarly, the ratio on maximum exposure to single borrower to total credit has
to 3.74% in the fiscal year 2007/08. In average, the ratio is 2.81%, with 25.39% variation.
also fluctuated during the periods and thus it has ranged from 1.71% in the fiscal year 2008/09
In contrast to BOK, the concentration of maximum exposure to a single borrower amount in
ry
NIC has followed increasing trend during the five consecutive fiscal years. Initially, it is Rs.
ib
ra
119.30 in the fiscal year 2004/05 and by the end of the fiscal year 2008/09, it has gradually
increased to Rs. 345.96 millions. Nevertheless the ratio of maximum exposure to total credit
sL
has fluctuated during the periods, and thus it has ranged from 1.88% in the fiscal year 2007/08
pu
to 2.60% in the fiscal year 2005/06. In average, the ratio is 2.33% and the variation in the ratio
Ca
m
is 10.75%.
ev
Comparing the two banks on the average ratio, it can be considered that the credit risk is high in
rD
BOK as compared to that of NIC, since the ratio is higher in BOK. However, NIC bank should
Sh
an
the credit risk.
ke
also halt the increasing trend of the maximum exposure to single borrower amount to decrease
Figure 4.5
Concentration of Maximum Exposure to a Single Borrower to Credit

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Kathmandu
4.1.7 Correlation and Regression Analysis
Under this section, the effect on non performing credit, and maximum exposure to single
borrower on net profit, and the effect of maximum exposure to single borrower to credit and
4.1.7.1 Net Profit and Non Performing Credit
interest written off have been measure through correlation and regression analysis.
Generally, it has been accepted that the non performing credit has adverse relationship with the
net profit of the bank. To test this fact on the observed banks, the correlation coefficient,
ry
probable error and regression analysis have been performed.
ib
ra
Table 4.7
Net Profit and Non Performing Credit

r
P.E.
6 P.E.
Regression
sL
Bank
Remark
-0.6819 0.1614 0.9684 NP = 734.89 1.90 NPC Insignificant
NIC
-0.6152 0.1875 1.1248 NP = 375.33 1.37 NPC Insignificant
Ca
m
pu
BOK
(Source: Appendix III)
ev
As expected, it has been ascertained that the non performing credit has negative relationship
rD
with the net profit of the bank, which means the net profit of both the observed banks decreases
ke
with the increase of the corresponding non performing credit. The table manifests that the
Sh
an
correlation coefficient between non performing credit and net profit of BOK is -0.6819 and that
of NIC is -0.6152.
Also, the regression analysis indicates that an increment in Rs. 1 of non performing credit leads
to Rs. 1.90 decrease in net profit in BOK, if the other variable, 734.89, remains constant, and
Rs. 1.37 decrease in net profit of NIC, if the other variable, 375.33, remains stable. Thus it is
palpable that the effect of non performing credit is slightly trivia in NIC as compared to that in
BOK. However, it cannot be deduced that the net profit of both the bank solely depends upon
the fluctuation on non performing credit, since there is statistically insignificant relationship
between non performing credit and net profit, as the correlation coefficient between these two
variables in both the banks is lower than the calculated 6 P.E.

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Kathmandu
4.1.7.2 Net Profit and Maximum Exposure to Single Borrower
The maximum concentration of the bank in single borrower could lead to credit risk and
ultimately it may be pernicious to the profit of the bank. To gauge whether the maximum
them have been performed.

Table 4.8
Net Profit and Maximum Exposure to Single Borrower
r
Regression
Remark
BOK
0.5117
0.2227 1.3359
NP = 128.68 + 0.56 ME
NIC
0.8922
0.0615 0.3691
NP = -27.02 + 1.00 ME
ib
ra
6 P.E.
sL
P.E.
ry
Bank
Insignificant
Significant
exposure to single borrower really adversely affects the net profit, the relationship between
pu
Astonishingly the relationship between the net profit and maximum exposure to single
Ca
m
borrower has diverted from the expected proviso, which means that the net profit increases with
the increase in concentration to maximum exposure to single borrower. The correlation
ev
between the net profit and maximum exposure to single borrower of BOK is 0.5117 and that of
ke
rD
NIC is 0.8922.
Sh
an
The positive correlation has eventually resulted that with the increase in Rs. 1 of the maximum
exposure to single borrower, the net profit of BOK increases by Rs. 0.56, if the variable,
128.68, remains constant, and the net profit of NIC increases by Rs. 1.00, if the variable, 27.02, remains rigid. However, the relationship between net profit and maximum exposure to
single borrower could be justified only in NIC, since the calculated r value is greater than
corresponding 6 P.E. only in NIC bank. Thus, net profit of BOK may not increase even with the
increase in maximum exposure, as per the probability test, in some circumstances.
4.1.7.3 Credit Written Off and Maximum Exposure to Single Borrower

The bank writes off the credit and interest suspense that are unrecoverable more frequently.
Such written off may have been caused by various determinants; among them the maximum

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Kathmandu
exposure of bank to single borrower can be one. The verify this, the relationship between these
two aforementioned variables has been measured.
Table 4.9
Credit Written Off and Maximum Exposure to Single Borrower
r
P.E.
6 P.E.
Regression
Remark
BOK
-0.4456 0.2418 1.4506
CW = 162.93 0.33 ME Insignificant
NIC
-0.3738 0.2595 1.5569
CW = 75.89 0.17 ME
Insignificant
Bank
ry
The table reveals that the credit written off and the maximum exposure to single borrower has
ib
ra
negative relationship, which implies that the credit written off is not caused by the great amount
borrower of the bank, rather it has been caused by the small borrower. The calculated
sL
correlation coefficient between these two variables is -0.4456 in BOK and -0.3738 in NIC.
pu
Further, the regression line indicates that the maximum exposure to single borrower instead
Ca
m
decreases the amount to be written off. As the bank increases Rs. 1 in maximum exposure, the
credit and interest suspense amount to be written off decreases by Rs. 0.33 in BOK and Rs.
ev
0.17 in NIC, ultimately augmenting the profit of the bank. However, the ascertained
rD
relationship between these two variables in both the banks could not be justified, since the
Sh
an
ke
value of r is lower than the 6 P.E. in each bank.
4.1.8 Trend Analysis
Under this section the structure of the non performing credit and the amount of credit and
interest suspense that would have to be written in the forthcoming four fiscal years have been
evaluated to estimate the credit risk in future.
4.1.8.1 Structure of Non Performing Credit

To predict the value of the component of non performing credit, the components have been
assumed as the dependent variable on the time period. The estimated value of sub standard
credit, doubtful credit and credit loss of BOK and NIC for the forthcoming four fiscal years are
presented in the table.

Kathmandu - 63

Kathmandu
Table 4.10
CL
133.53
133.36
133.20
133.03
132.87
134.53
0.17X
SSC
-10.48
-18.29
-26.10
-33.91
-41.72
36.40
7.81X
NIC
DC
49.63
59.97
70.30
80.64
90.98
-12.40 +
10.34X
CL
41.37
19.46
-2.46
-24.37
-46.29
172.86
21.92X
ib
ra
SSC
2009/10
45.06
2010/11
37.62
2011/12
30.17
2012/13
22.73
2013/14
15.28
Regression 89.73
Y=
7.45X
BOK
DC
-3.00
-15.70
-28.40
-41.10
-53.80
73.21
12.70X
ry
FY
(Rs. in Million)
(Source: Appendix IV)
The table reveals that the percentage decrease of doubtful credit in non performing credit in the
sL
forthcoming fiscal years will be highest than that of other components of non performing credit
pu
in BOK. The sub standard credit decreases by Rs. 7.45 millions in each fiscal year, doubtful
Ca
m
credit decreases by Rs. 12.70 millions in each fiscal year and credit loss decreases just by Rs.
0.17 in each fiscal year. By the end of the fiscal year 2013/14, it has been estimated that the sub
ev
standard credit of BOK will be decreased to Rs. 15.28 millions, the doubtful credit will be
ke
rD
decreased to nil, since in negative, and the credit loss will be decreased to Rs. 132.87 millions.
Sh
an
Similarly, the decrease amount in credit loss in NIC is highest than the other component of non
performing credit. The substandard credit decreases by Rs. 7.81 millions per year, the credit
loss decreases by Rs. 21.92 millions per years, while in contrast the doubtful credit increases by
Rs. 10.34 millions per year. This shows that NIC will be able to deduct the credit loss, which is
considered more proximity for causing the credit written off, most effectively, but will be
unsuccessful to control the growing doubtful credit. Nevertheless, the substandard credit of the
bank will be nil, since negative, the doubtful credit will be Rs. 90.98 millions, and the credit
loss will also be nil, since negative, by the end of the fiscal year 2013/14. If NIC pays more
concern to decrease the doubtful credit, the chance of decreasing credit risk in the bank is
inevitable.

Kathmandu - 64

Kathmandu
Thus, it can be concluded, with the present trend, the BOK bank will try to deduct all the
components of the non performing credit in the future, whereas the NIC bank will make
emphasis to deduct the substandard credit and the credit loss in the forthcoming fiscal years.
Figure 4.6
ev
4.1.8.2 Credit and Interest Suspense Write Off
Ca
m
pu
sL
ib
ra
ry
rD
To predict whether the observed banks needs to write off the credit and interest expenses
ke
further in the forthcoming fiscal years and to determine the credit risk, the trend analysis has
Sh
an
been done, assuming credit and interest suspense write off as dependent variable on time
period, independent variable.
Table 4.11
(Rs. in Million)
Fiscal Year
2009/10
2010/11
2011/12
2012/13
2013/14
Regression Y =
BOK
-70.47
-117.28
-164.09
-210.89
-257.70
210.37 46.81 X
NIC
15.76
7.87
-0.02
-7.91
-15.81
63.11 7.89 X
(Source: Appendix IV)

Kathmandu - 65

Kathmandu
The table depicts that BOK will not have to write off credit and interest expenses anymore in
future, since the estimated value of write off is negative and the write off amount will decrease
by Rs. 46.81 million per year. However, NIC bank will still have to face the write off problem
in the forthcoming two fiscal years, and from then this bank also will not need to write off any
credit and interest suspense. The decrease in write off amount in NIC will be Rs. 7.89 million
interest suspense write off will be dragged to nil by both the banks.
Figure 4.7
Sh
an
ke
rD
ev
Ca
m
pu
sL
ib
ra
ry
4.2 Primary Data Analysis
per year. Thus it can be estimated that at the end of the fiscal year 2011/12 the credit and
To meet the third objective; better policy and guideline that the bank should follow to lessen
the credit risk, and the fourth objective; collect the opinion for effective credit management, the
primary data analysis has been conducted. The question number 1 to 6 is prepared for the third
objective and question number 7 to 14 is prepared to meet the fourth objective. For meeting the
third objective, the opinions of 15 employees of banks and 15 shareholders of the observed
banks have been collected, whereas for meeting the fourth objective, the opinions of 15
employees, 15 depositors and 15 borrowers of observed banks have been collected. Notably,
all questions are objective type for achieving the ease response.

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Kathmandu
4.2.1 Crucial Element for Making Credit Guideline
The credit guideline of the bank should be robust enough to meet the credit risk. Thus the
guideline builder should be cautious enough considering the entire obstacle. Further, the
guideline should not be opaque and thus should clearly define all the terms.

Total
No.
%
7
23
7
23
12
40
1
4
3
10
30
100
ib
ra
ry
Shareholder
No.
%
2
13
4
27
8
53
0
0
1
7
15
100
(Source: Opinion Survey, 2010)
pu
Industry & Business Focus

Types of Credit Facilities
Single Borrower Limit
Cross Border Risk
Discouraged Business Types
Total
Employee
No.
%
5
33
3
20
4
27
1
7
2
13
15
100
sL
Response
Table 4.12
Ca
m
The table manifests that 23% of the total respondents, i.e. 7 out of 30, and 33% of employees,
i.e. 5 out of 15, and 13% of the shareholders, i.e. 2 out of 15, have stated that the bank should
be most cautious on what type of industry and business segment will be more focused while
ev
making the credit guideline. While 20% of the employees, 27% of the shareholders, and 23% of
rD
the total respondents have affirmed that types of credit facilities that will be granted is most
ke
crucial for credit guideline. In contrast, the majority of the total respondents, 40%, the majority
Sh
an
of shareholders, 53%, and 27% of the employees have pointed out that the maximum amount of
credit to be granted to a single borrower is most crucial while formulating the credit guideline.
Whereas the person supporting cross border risk is just trivia, i.e. only 7% of the employees,
which has represented 4% of the total respondents. Finally, 10% of the total respondents; 13%
of the employees and 7% of the shareholders, have stated that the bank should consider the
discourage business types for credit advancement while formulating the credit guideline.
Considering the overall majority, it can be assumed that the decision on single borrower limit is
most crucial for credit guideline.
Figure 4.8
Crucial Element for Making Credit Guideline (in Total)

Kathmandu - 67
4.2.2 Procedure for Alleviating Credit Risk
ib
ra
ry

Kathmandu
sL
Credit risk is palpable in bank. However, such risk should be controlled and the bank should be
pu
aware enough to recognize the perfidious borrower. To examine what procedure should be
Ca
m
adopted by the bank for alleviating the credit risk, the respondents are asked on this issue.
ev
Table 4.13
ke
Response
rD
Sh
an
Risk-Based Pricing
Covenants
Credit Insurance & Derivatives
Tightening
Diversification
Total
Employee
No.
%
3
20
6
40
0
0
2
13
4
27
15
100
Shareholder
No.
%
4
27
4
27
2
13
3
20
2
13
15
100
Total
No.
%
7
23
10
33
2
7
5
17
6
20
30
100
For alleviating credit risk, 20% of the employees, 27% of the shareholders and 23% of the total
respondents have indicated risk-based pricing, which involves charging higher interest rate for
likely defaulter, considering loan purpose, loan to value ration, credit spread etc, as the best
procedure. However, 40% of the employees, 27% of the shareholders and 33% of the total
respondents have pointed out covenants, which involves a proviso for submitting financial
report by the borrower, refraining from paying dividend, repurchase share, borrowing further

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Kathmandu
by the borrower institution, as the best procedure. While 13% of the shareholders, which has
represented 7% of the total respondents, have affirmed the practice of credit insurance and
credit derivative as the best procedure for alleviating credit risk.
Likewise, 13% of the employees, 20% of the shareholders, and 17% of the total respondents
have urged the practice of tightening, which involves reducing the credit amount, obliging
borrower to make payment in time etc., can lessen the credit risk. Finally, 27% of the
employees, 13% of the shareholders and 20% of the total respondents have suggested that the
ry
bank should diversify its credit portfolio to various sectors either than concentrating on limited
ib
ra
area to prevent and finally reduce the credit risk. Considering the overall majority, it can be
the credit risk.
pu
Figure 4.9
sL
inferred that the practice of covenants would be the optimum procedures for the bank to lessen
Sh
an
ke
rD
ev
Ca
m
Procedure for Alleviating Credit Risk (in Total)
4.2.3 Important Factor for Credit Assessment & Risk Grading
While disbursing the credit, the bank makes assessment of the credit proposal and grades the
risk. To investigate on what factor the bank should focus most in making credit assessment and
risk grading, the respondents are asked on this issue.
Table 4.14

Kathmandu - 69
Response
Character
Capital
Capacity
Collateral
Cycle (Economic Condition)
Total
Employee
No.
%
2
13
3
20
6
40
4
27
0
0
15
100
Shareholder
No.
%
4
27
3
20
4
27
3
20
1
6
15
100
Total
No.
%
6
20
6
20
10
33
7
23
1
4
30
100

Kathmandu
Precisely 13% of the employees, 27% of the shareholders and 20% of the total respondents
have stated the bank should focus most on the character of the borrower, which mainly includes
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assessing the repayment history of the borrower, willingness to repay etc., while making credit
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assessment and risk grading. Similarly, 20% of the employees, 20% of the shareholders and
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20% of the total respondents have avowed that the bank should consider the capital of the
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borrower, if institution, the assessment of equity contribution and the amount of debt capital, if
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personal the appraisal of the fixed assets other than collateral. Likewise, 40% of the employees,
27% of the shareholders and 33% of the total respondents have pointed out capacity of the
borrower as the most important factor, which merely incorporates assessment of ability to repay
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reflected by volatility of borrowers earning.
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In addition, 27% of the employees, 20% of the shareholders and 23% of the total respondents
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have affirmed that the assessment of the market value of collateral pledged against the credit is
most important while making credit assessment and risk gauging. Besides these, 6% of the
shareholders, which represents 4% of the total respondents, have said that the cycle of the
business, or the economic condition, of borrower should be predicted cautiously while making
credit assessment and risk grading. Eventually, on the basis of the overall majority, it can be
concluded that undoubtedly the paying capacity of the borrower is most crucial for making
credit assessment and risk grading.

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Kathmandu
Figure 4.10
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4.2.4 Effective Approach for Credit Management & Risk Reduction
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Important Factor for Credit Assessment & Risk Grading (in Total)
To reduce the risk, the adoption of effective approach is crucial. To examine what sort of
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approach is most magnitude in Nepalese banking sector for risk reduction, the respondents are
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requested to express their views.
Table 4.15
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Response
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Expert System
Artificial Neural System
Rating System
Credit Scoring System
Total
Employee
No.
%
5
33
1
7
3
20
6
40
15
100
Shareholder
No.
%
4
27
0
0
4
27
7
46
15
100
Total
No.
%
9
30
1
4
7
23
13
43
30
100
For effective credit management and risk reduction, 33% of the employees, 27% of the
shareholders, and 30% of the total respondents have pointed out the expert system approach,
which involves a credit decision left to the local or branch credit officer. Likewise, 7% of the
employees, 0% of the shareholders, and 4% of the total respondents have implied that the bank
should adopt artificial neural system, which incorporates educated guess on input (credit grant),
output (credit recovery along with interest) and hidden obstacles, as the approach for credit
management and risk reduction.

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Kathmandu
Moreover, 20% of the employees, 27% of the shareholders and 23% of the total respondents
have stated that the bank should adopt rating system approach, which involves internal rating
system, classifying credits into pass credit and non performing credit etc., for effectively
managing credit and reducing risk. Further, 40% of the employees, 46% of the shareholders and
43% of the total respondents have opined that the bank needs to adopt credit scoring system,
which includes pre-identifying key factors that determine probability of default, classifying
potential borrower either good or bad etc., for sound credit management and risk reduction.
Gauging the overall majority, it can be concluded that credit scoring system would be the best
Figure 4.11
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approach for the banks credit management and risk alleviation.
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Effective Approach for Credit Management & Risk Reduction (in Total)
4.2.5 Ineffective Principle Inviting Credit Risk
The ineffectiveness of principle to obliterate the risk associated with the credit debilitates the
operation of the bank. Thus, to know which principles ineffectiveness invites the credit risk
most, the respondents are asked on this matter.

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Kathmandu
Table 4.16
Ineffective Principle Inviting Credit Risk
Role of BOD in Establishing

Appropriate Policy
Framework System & Control
Assessment & Evaluation
Credit Enhancement
Contractual Document
Total
Employee
No.
%
1
7
3
5
2
4
15
Shareholder
No.
%
0
0
20
33
13
27
100
1
7
2
5
15
7
47
13
33
100
Total
No.
%
1
4
4
12
4
9
30
13
40
13
30
100
Response
ry
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The ineffectiveness of the role of board of directors in formulating optimum credit policy is
inviting the credit risk mostly, as per the opinion of 7% of the employees, which represents 4%
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of the total respondents, while the shareholders deny this statement. In contrast, 20% of the
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employees, 7% of the shareholders and 13% of the total respondents have pointed out that the
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ineffectiveness of the principle concerned to establish a framework of system and control for
managing credit risk is the major behind inviting credit risk. Similarly, 33% of the employees,
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47% of the shareholders and 40% of the total respondents have stated that the ineffectiveness of
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credit assessment and evaluation of the credit proposal causes the bank to face credit risk.
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In addition, 13% of the employees, 13% of the shareholders, and 13% of the total respondents
have pointed out that the ineffectiveness of the bank in projecting credit enhancement program
can lead to credit default. Finally, 27% of the employees, 33% of the shareholders and 30% of
the total respondents have stated that the loophole in contractual document to mitigate credit
risk invites the chances of credit default. Analyzing all the principles and the majority of the
total respondents, it can be inferred that the bank mainly fails to establish the practices and
procedures for effective assessment, evaluation measurement and management of credit risk; as
a result the credit risk augments.

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Kathmandu
Figure 4.12
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4.2.6 Banks Interest after Identifying Sort of Risk
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Ineffective Principle Inviting Major Credit Risk (in Total)
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To ascertain the interest of the banks after identifying the sort of credit risk, the respondents are
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requested to express their opinions. The responses obtained from them are presented in the
table below.
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Table 4.17
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Response
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Sh
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Curing Credit
Restructuring Credit
Terminating Customer
Relationship
Selling Credit
Total
Employee
No.
%
8
53
4
27
2
13
1
15
7
100
Shareholder
No.
%
5
33
2
13
4
27
4
15
27
100
Total
No.
%
13
43
6
20
6
20
5
30
17
100
After analyzing the sort of credit risk, the bank would be most interested in curing the credit,
which involves the attempt of returning the credit permanently to performing portfolio without
encountering economic losses, as per the opinion of 53% of the employees, 33% of the
shareholders and 43% of the total respondents. Whereas, 27% of the employees, 13% of the
shareholders and 20% of the total respondents have stated that the bank would be more

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Kathmandu
interested in restructuring the credit, i.e. categorizing the credit into non performing credit,
correct assessment on borrower for re-default etc.
Similarly, 13% of the employees, 27% of the shareholders, and 20% of the total respondents
have stated that the bank would be more interested in terminating customer relationship, and
determining prospective relationship with the customer. Moreover, 7% of the employees, 27%
of the shareholders and 17% of the total respondents have said that the bank would be more
interested in selling credit rather than liquidating and subsequent recovery. Thus, considering
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all the options and the majority of the responses, it can be considered that the bank would be
Figure 4.13
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more interested in curing the loan rather than performing other sort of actions.
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Banks Interest after Identifying Sort of Risk (in Total)
4.2.7 Efficiency of Banks in Credit Management
Banks needs to be efficient enough to manage the credit, otherwise they faces the credit risk.
To investigate whether the Nepalese commercial banks are efficient in credit management, the
respondents are asked on this issue.

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Kathmandu
Table 4.18
Response
Employee Depositor Borrower

No. % No. % No. %
8
53
4
27
3
20
7
47
10
66
12
80
0
0
1
7
0
0
15 100 15 100 15 100
Yes
No
Dont Know
Total
Total
No. %
15
33
29
65
1
2
45 100
Clearly, the table shows that most of the employees are in the opinion that the bank is efficient
ry
in credit management, while in contrast most of the depositors and borrowers are in the opinion
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that the banks are not efficient in credit management. About 53% of the employees, 27% of the
depositors, 20% of the borrowers, and in total 33% of the total respondents have said that the
sL
banks are efficient in credit management. In contrast to it, 47% of the employees, 66% of the
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depositors, 80% of the borrowers, and in total 65% of the total respondents have said the banks
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are not efficient in credit management. While only 7% of the depositors, who has represented
2% of the total respondents, have said that they have no idea on this issue. Certainly on the
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basis of the overall majority, it can be concluded that the bank is not most efficient in managing
Figure 4.14
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its credit, as a result the bank is been in ostentatious situation of credit default.
Sh
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Efficiency of Banks in Credit Management (in Total)
4.2.8 Most Risky Sector

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Kathmandu
Recognizing the most risky sector for credit disbursement is the most important onus of the
bank. To examine empirically, which sector is replete of most credit risk, the responses are
asked to express their views.
Table 4.19
Response

No. % No. % No. %
4
27
4
27
3
20
3
20
5
33
6
40
8
53
6
40
6
40
15 100 15 100 15 100
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Agriculture
Business
Household
Total
Total
No. %
11
25
14
31
20
44
45 100
Most Risky Sector
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Mainly the credit disbursement for household purpose is most risky in recovering process.
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Almost the majority of each category, 53% of the employees, 40% of the depositors, 40% of
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the borrowers and in total 44% of the total respondents have strongly supported this view.
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While 27% of the employees, 27% of the depositors, 20% of the borrowers, and in total 25% of
the total respondents have pointed out agricultural credit as the most risky. Likewise, 20% of
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the employees, 33% of the depositors, 40% of the borrowers, and in total 31% of the total
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respondents have claimed business credit as the most risky. Analyzing all these responses, it
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can be concluded that the credit disbursed for household purpose is most risky than others.
Figure 4.15
Most Risky Sector (in Total)

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Kathmandu
4.2.9 Effect of Non Performing Credit
The idea that non performing credit affects the banking operation is prevalent. But to what
extent is disputable. Thus, to ascertain the extent of the adverse effect of non performing credit
on the banks performance, the empirical study has been performed.

Response

No. % No. % No. %
5
33
6
40
7
47
7
47
6
40
6
40
3
20
3
20
2
13
15 100 15 100 15 100
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Severely Affected
Moderately Affected
Nominally Affected
Total
Total
No. %
18
40
19
42
8
18
45 100
Table 4.20
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The table reveals that the majority of the employees, 47%, are in the opinion that the non
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performing credit has moderately affected the banking business, while 33% of them have
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opined that it has severely affected and 20% of them have stated that it has nominal effect.
Similarly, 40% of the depositors have claimed severe effect of non performing credit on
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banking business, 40% of them have pointed out moderate effect, and 20% of them have stated
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nominal effect. Likewise, 47% of the borrowers have said that non performing credit has severe
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effect, 40% of the borrowers have affirmed that the non performing credit has moderate effect,
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and 13% of them have stated nominal effect. In overall, the majority of the respondents, 42%,
have stated moderate effect, 40% have said severe effect, and 18% have affirmed nominal
effect of non performing credit on banking performance. Thus, on the basis of the overall
majority it can be inferred that the non performing credit has moderate effect on bank. It would
be better if bank performs in maneuver to prevent the non performing credit.

Kathmandu - 78

Kathmandu
Figure 4.16
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4.2.10 Best Option to Solve Non Performing Credit
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Effect of Non Performing Credit (in Total)
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The bank regularly involves in preventing and solving the problem of non performing credit,
which has potential to jeopardize the sustainability of the bank. To examine what procedure
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should the bank adopt in solving the non performing credit, the question has been raised.
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Table 4.21
Sh
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Response
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Strict Recovery Policy

Rebate for Timely
Payment
Monitoring
New Rule & Regulation
Total
Employee
No. %
5
33
3
20
6
1
15
40
7
100
Depositor
No. %
4
27
3
20
8
0
15
53
0
100
Borrower
No. %
4
27
5
33
6
0
15
40
0
100
Total
No. %
13
29
11
25
20
1
45
44
2
100
The table portrays that monitoring the activity of the borrowers is the best option to solve the
problem of non performing credit. The majority of each category, 40% (6 out of 15) of
employees, 53% (8 out of 15) of depositors, 40% (6 out of 15) borrowers, and eventually 44%
(20 out of 45) of total respondents have supported this method. While 29% of the total
respondents; 33% of the employees, 27% of the depositors and 27% of the borrowers, have

Kathmandu - 79

Kathmandu
stated that the strict recovery policy should be adopted by the bank for barricading the ominous
of non performing credit. Similarly, 25% of the total respondents; 20% of the employees, 20%
of the depositors and 33% of the borrowers, have stated that the provision of rebate for timely
payment entices the borrowers to pay the debt in time and thus prevents the problem of non
performing credit. Finally, only 2% of the total respondents, which includes 7% of the
employees, have said that the formulation of new rule and regulation eliminates the problem of
non performing credit. Nonetheless, considering the overall majority, it can be considered that
monitoring the performance of borrower at regular time interval is the best method for solving
Figure 4.17
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the wicked effect of non performing credit.
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Best Option to Solve Non Performing Credit (in Total)
4.2.11 Best Time for Follow Up
After the bank due date of the repayment, the bank needs to action immediately for the
recovery process. But when the bank should adopt such follow up policy for recovery should be
clear enough. To examine the appropriate time for follow up for recovery, the responses have
been collected.
Table 4.22
Response
Employee
Depositor
Borrower
Total

Kathmandu - 80

Kathmandu
Within a Week
Within two Weeks
Within one Month
After one Month onward
Total
No.
2
4
7
2
15
%
13
27
47
13
100
No.
3
5
4
3
15
%
20
33
27
20
100
No.
1
3
6
5
15
%
7
20
40
33
100
No.
6
12
17
10
45
%
13
27
38
22
100
The table shows that 38% of the respondents, 17 out of 45, are in the view that banks should
follow up for the recovery within one month after due date. Similarly, 37% of the respondents,
12 out of 45, have opined that within a two weeks after due date will be the best time that the
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bank should start for recovery. Moreover, 22% of the respondents, 10 out of 45 and 13% of the
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respondents, 6 out of 45, have opined that after one month onward and within a week
respectively will be the best time for follow up. Looking each category, the majority of
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employees, 7 out of 15, and the majority of borrowers, 6 out of 15, have supported within one
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month, whereas the majority of depositors, 5 out of 15, have supported within two weeks for
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follow up after due date. Eventually, considering the overall majority, it can be concluded that
within one month after the matured date of loan will be the best time for bank to follow up for
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recovery process.
Figure 4.18
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Best Time for Follow Up (in Total)
4.2.12 Main Influencing Factor in Credit Disbursement

To inquire the main influencing factor that affects the credit disbursement procedure, the
respondents are requested to express their opinions. The opinions, thus, achieved are presented
in the table below.

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Kathmandu
Table 4.23
Response

No. % No. % No. %
5
33
3
20
2
13
7
47
5
33
4
27
3
20
6
40
8
53
0
0
1
7
0
0
0
0
0
0
1
7
15 100 15 100 15 100
Paper Document
Collateral Valuation
Interest Rate
Employee Behavior
Time Period
Total
Total
No. %
10
22
16
36
17
38
1
2
1
2
45 100
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The table reveals that the majority of the respondents, 38%; which includes 20% of the
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employees, 40% of the depositors and 53% of the borrowers, are in the view that interest rate
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chargeable on the credit is the main influencing factor for credit disbursement. While 36% of
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the total respondents; 47% of the employees, 33% of the depositors and 27% of the borrowers,
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have stated that the collateral value is the most influencing factor in credit disbursement.
Likewise, 22% of the total respondents; 33% of the employees, 20% of the depositors and 13%
of the borrowers, have avowed that the paper document maintained by the bank most influences
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the credit disbursement. Similarly, 2% of the total respondents, which is 7% of depositors, have
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pointed out employee behavior and 2% of the total respondents, which is 7% of borrowers,
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have stated the time period for maturity of credit is the most influencing factor for credit
Sh
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disbursement. Different category of the respondents have outweighed different options as the
major influencing factor, however, on the basis of overall majority, it can be concluded that the
interest rate is the most influencing factor of credit disbursement.

Kathmandu - 82

Kathmandu
Figure 4.19
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4.2.13 Method for Recovering Credit
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Main Influencing Factor in Credit Disbursement (in Total)
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Method of credit recovering has always been a predicament for the bank. Different banks have
different methods for recovering credit. To examine the best method for recovering credit, the
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respondents are questioned on this matter.
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Table 4.24
Sh
an
Response
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Dragging Guarantor
Counseling Borrower
Selling Collateral
Supporting Technically
Total

No. % No. % No. %
1
7
3
20
0
0
5
33
4
27
6
40
7
47
6
40
4
27
2
13
2
13
5
33
15 100 15 100 15 100
Total
No. %
4
9
15
33
17
38
9
20
45 100
About 38% of the total respondents; 47% of the employees, 40% of the depositors, and 27% of
the borrowers, have suggested that selling the collateral value of the borrowers is the best
method for recovering credit in case of default. Similarly, 33% of the total respondents; 33% of
the employees, 27% of the depositors and 40% of the borrowers, have stated that counseling
with the borrower at regular time interval is the best method for recovering credit effectively.
While 20% of the total respondents; 13% of employees, 13% of depositors and 33% of

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Kathmandu
borrowers, have said that providing technical support to the borrower aids in ease recover of
credit. Finally, 9% of total respondents; 7% of the employees and 20% of the depositors, have
said that obliging the guarantor to repay the credit is the best method for credit recovery. On the
basis of overall majority, it can be considered that the selling of collateral pledged by the
default.
Figure 4.20
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pu
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Method for Recovering Credit (in Total)
4.2.14 Suggestion for Effective Credit Management
borrower is the best method for credit recovery and preventing other borrower from becoming
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At the end of the questionnaire, the suggestion for the effective credit management has been
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collected from the respondents. The appropriate suggestion achieved from them can be
advantageous for the bank, if adopted cautiously. The suggestions, thus obtained, are presented
in the below table.
Table 4.25
Response
Careful Evaluation
Appropriate Int. Rate
Monitoring Activity
Timely Collection
Total

No. % No. % No. %
7
47
6
40
5
33
3
20
1
7
4
27
3
20
5
33
3
20
2
13
3
20
3
20
15 100 15 100 15 100
Total
No. %
18
40
8
18
11
24
8
18
45 100

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Kathmandu
Finally in the process of providing suggestion to the bank for effective credit management, it
has been ascertained that the 40% of the total respondents; 47% (7 out of 15) of the employees,
40% (6 out of 15) of the depositors and 33% (5 out of 15), are in the opinion that the careful
evaluation of the credit proposal submitted by the potential borrower along with the character
of borrower is crucial. Similarly, 24% of the total respondents; 20% of the employees, 33% of
the depositors and 20% of the borrowers, have suggested that monitoring the activity of the
borrower after credit granted is the crucial for effective credit management. Further, 18% of the
total respondents; 20% of the employees, 7% of the depositors and 27% of the borrowers, have
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suggested that the interest rate should be appropriate enough, i.e. neither to be too high nor to
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be too low, for sound credit management. Finally, 18% of the total respondents; 13% of the
employees, 20% of the depositors and 20% of the borrowers, have suggested timely collection
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of the credit for having sound credit management. Thus, it can be concluded that scrutiny
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evaluation of credit proposal is most crucial in having best credit management than other post
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credit activities.
Figure 4.21
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Suggestion for Effective Credit Management (in Total)
4.3 Major Findings of the Study

On the basis of the analysis of the data, the following major findings have been drawn;
Findings from Secondary Data

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Kathmandu
Ubiquitously credit has been the major use of total fund of both the banks. In average,
BOK bank has mobilized 67.01% of its total assets and NIC bank has mobilized 71.89%
of its total assets in granting loan.
The preponderance of non performing credit in total credit amount is in decreasing trend
BOK and 1.85% of the total credit in NIC in average.
in both the banks. The non performing credit has occupied 2.67% of the total credit in
In average, the substandard credit, doubtful credit and credit loss has covered 28.38%,
13.53% and 58.09% of the total credit respectively in BOK, while 8.58%, 14.15% and
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77.27% of the total credit has been occupied by substandard credit, doubtful credit and
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credit loss respectively in NIC.
The credit risk in BOK bank is higher than in NIC, as a result the BOK has to keep
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credit loss provision higher than NIC in respect to total credit. The average credit loss
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provision to total credit of BOK is 2.94% and NIC is 2.62%.
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NIC bank has regularly written of the credit and interest suspense, while such event is
irregular in BOK. The credit and interest suspense written off by BOK is 1.00% of total
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credit and that of NIC is 0.51% of total credit in average.
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BOK has been more dependent in single borrower than NIC. The average maximum
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exposure to single borrower to total credit of BOK is 2.81% and that of NIC is 2.33%.
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Though the relationship between non performing credit and net profit is negative, the
relationship is statistically insignificant. Similarly, the relationship between credit
written off and maximum exposure to single borrower is also insignificant in both the
banks. However, the relationship between net profit and exposure to single borrower is
significant in NIC and insignificant in BOK.
The pace of decrease in doubtful credit will be highest than others in the forthcoming
fiscal years in BOK, while such pace of decrease will be highest in credit loss of NIC.
Findings from Primary Data

The majority of the respondents, 40%, have stated that the bank should consider most on
the amount to be disbursed to single borrower while making effective credit guideline.

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Kathmandu
Similarly, 33% of the respondents have said that perfect covenant between the bank and
the borrower is the best method for alleviating the credit risk. Likewise analyzing the
capacity of the borrower is important factor for credit assessment and risk grading.
43% of the total respondents have suggested credit scoring system as the effective
approach for credit management and risk reduction. Also, 40% of the respondents have
inferred that ineffectiveness in credit assessment and evaluation invites major credit risk.
Further, 43% of the respondents have stated that the bank would be more interested in
curing credit after analyzing sort of credit.
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65% of the respondents have opined that the bank is not efficient in credit management.
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Further, 44% of the respondents have stated that the credit granted for household
purpose carries highest risk. In addition, 42% of the respondents have affirmed that the
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non performing credit moderately affects the banking performance.
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44% of the respondents have stated that monitoring of the borrower activities is the best
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method for preventing the non performing credit. Also, 38% of the respondents have
said that the bank should make follow up within one month after the due date of
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recovery.
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Similarly, 38% of the respondents have opined that the interest rate on credit is the main
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influencing factor in disbursing the credit. Also, 38% of the respondents have said that
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the bank should sell collateral pledged by the borrower immediately as a remedy for
recovering credit. And finally 40% of the respondents have suggested that the bank
should make careful evaluation of the credit proposal for having effective credit
management rather than performing other post credit activities.

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Kathmandu
CHAPTER V
SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary
There are numerous sources of risk that banks battle against to keep their businesses operating
successfully. Banks use multiple and diverse management strategies to combat their business
risks. Some strategies include using contracts, budgeting, insurance, and training to minimize
potential losses from uncertain events. Risk management is a straightforward process of
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identifying and planning, but this process can become very complicated because of the many
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options available. Among various banking risks, credit risk can be considered as the core risk,
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since most of the banking funds are mobilized in credit and the risk associated with the credit
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can be pernicious to the banking stability.
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Credit risk is risk due to uncertainty in a counterparty's (also called an obligor's or credit's)
ability to meet its obligations. Because there are many types of counterpartiesfrom
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individuals to sovereign governmentsand many different types of obligationsfrom auto
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loans to derivatives transactionscredit risk takes many forms. Banks manage it in different
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ways. In assessing credit risk from a single counterparty, bank must consider three issues.
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Firstly the bank should consider default probability: What is the likelihood that the counterparty
will default on its obligation either over the life of the obligation or over some specified
horizon, such as a year? Secondly the bank should consider credit exposure: In the event of a
default, how large will the outstanding obligation be when the default occurs? And finally the
bank should consider recovery rate: In the event of a default, what fraction of the exposure may
be recovered through bankruptcy proceedings or some other form of settlement?
The manner in which credit exposure is assessed is highly dependent on the nature of the
obligation. If a bank has loaned money to a firm, the bank might calculate its credit exposure as
the outstanding balance on the loan. Suppose instead that the bank has extended a line of credit
to a firm, but none of the line has yet been drawn down. The immediate credit exposure is zero,

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but this doesn't reflect the fact that the firm has the right to draw on the line of credit. Indeed, if
the firm gets into financial distress, it can be expected to draw down on the credit line prior to
any bankruptcy. There are many ways that credit risk can be managed or mitigated. The first
line of defense is the use of credit scoring or credit analysis to avoid extending credit to parties
that entail excessive credit risk. Credit risk limits are widely used. These generally specify the
maximum exposure a firm is willing to take to counterparty. Industry limits or country limits
may also be established to limit the sum credit exposure a firm is willing to take to
counterparties in a particular industry or country. Calculation of exposure under such limits
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requires some form of credit risk modeling. Transactions may be structured to include
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collateralization or various credit enhancements. Credit risks can be hedged with credit
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derivatives. Finally, firms can hold capital against outstanding credit exposures.
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The goal of credit management is to optimize the company's sales and profits by keeping both
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credit risk and payment delinquencies within acceptable limits. Sound credit management
involves finding the right balance in the risk/reward relationship between sales and bad-debt
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losses.
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Eventually, the study aims to analyze the management of core risk, credit risk, in the banking
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sector of the country. To achieve this objective, the study gauges the credit risk level in the
banks, especially in BOK and NIC, tests credit loss provision kept by the bank in relation to
total credit, evaluates the better policy and procedural guidelines that the bank should follow to
lessen the credit risk, and collects the opinion for effective credit management.
5.2 Conclusion
Analyzing the secondary data, it can be concluded that the credit is the major use of the fund in
both the banks. The NIC bank is, however, more aggressive in credit disbursement than BOK,
as a result it can be assumed that the credit risk is more in NIC. Nevertheless, the analysis of
the non performing credit to total credit has capsized such assumption and thus the credit
management of the NIC is more effective than that of BOK. Further, analyzing the structure of

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non-performing assets, it has been ascertained that the non performing assets of both the banks
is outweighed by the credit loss. It can be inferred that both the banks have realization on the
catastrophe of the credit default; as a result both the banks have significantly deducted the non
performing credit of the bank. This ultimately has benefited the bank from keeping low credit
loss provision to total credit, and thus has eventually deducted the credit risk of the banks in
comparison to the past credit risk. Though, NIC bank has written off credit and interest
expenses more regularly than the BOK, the credit risk in NIC bank is lower than that of BOK,
since the written off credit and interest suspense to total credit of NIC bank is lower than that of
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the credit risk is higher in BOK as compared to that of NIC.
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BOK. Also the analysis of maximum exposure to single borrower limit aids to conclude that
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The statistical analysis justified that the net profit of both the bank does not solely depend upon
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the fluctuation on non performing credit, since there is statistically insignificant relationship
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between non performing credit and net profit. Despite this, the regression analysis indicates that
the non performing credit has slightly greater impact on profit in BOK than in NIC. Further, the
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maximum exposure to single borrower limit has turned to be favorable for NIC in raising the
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profit.
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Analyzing the primary data, it can be inferred that the decision on single borrower limit is most
crucial for credit guideline. In addition to this, the practice of covenants would be the optimum
procedures for the bank to lessen the credit risk and more precisely the paying capacity of the
borrower is most crucial for making credit assessment and risk grading. Further, it can be
concluded that credit scoring system would be the best approach for the banks credit
management and risk alleviation. Also the bank mainly fails to establish the practices and
procedures for effective assessment, evaluation measurement and management of credit risk; as
a result the credit risk augments. Despite these, the bank would be more interested in curing the
loan rather than performing other sort of actions. Certainly on the basis of the overall majority,
it can be concluded that the bank is not most efficient in managing its credit. More deeply, the
credit disbursed for household purpose is most risky than others and the non performing credit

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has moderate effect on bank. To alleviate the risk, monitoring the performance of borrower at
regular time interval is the best method for solving the wicked effect of non performing credit.
Eventually, it can be concluded that within one month after the matured date of loan will be the
best time for bank to follow up for recovery process, the interest rate is the most influencing
factor of credit disbursement, the selling of collateral pledged by the borrower is the best
method for credit recovery and preventing other borrower from becoming default, and finally
meticulous evaluation of credit proposal is most crucial in having best credit management than
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other post credit activities.
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5.3 Recommendations
For the enhancement of the banking performance in management of credit risk, the following
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recommendations have been provided;
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Both the banks have been highly dependent on credit while mobilizing the available
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funds. It would be better if both the bank diversify the available funds, and increase the
funds in investment.
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Although the elevation of non performing credit is almost impossible, both the banks
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can follow tight recovery policy to lessen the amount of non performing credit.
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NIC bank needs to lessen the credit loss by having tight recovery policy and preventing
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the sub standard credit and doubtful credit from being credit loss. Similarly BOK needs
to lessen the preponderance of credit loss in total non performing credit.
The credit risk in BOK is higher than in NIC. It would be better if BOK restructures in
credit policy and thus diminish the chances of default credit. Further, BOK should be
less dependent on the single borrower while granting the credit.
For managing the credit risk, both the bank needs to adopt the following suitable general
options, which includes;
Avoiding Risk: This can be accomplished by refusing to extend credit to high-risk

accounts. However, in most banks this is not a viable option since so many
customers could be classified as high risk that refusing to sell to them would reduce
sales to unacceptable levels.

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Controlling Risk: This option involves developing a comprehensive plan to reduce
credit risk in the company's accounts base, then implementing that plan, and
monitoring the credit department's efforts to carry out the plan.
Accepting Risk: A few banks simply accept the risks associated with doing business
with customers identified as high risk. These tend to be banks trying to gain market
debt losses that are almost certain to accompany this policy.
share, banks with high profit margins, and banks with adequate reserves for the bad
Transferring Credit Risk: An example of transferring credit risk would involve
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flooring or factoring of the banks receivable.
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purchasing credit insurance. Other examples of transferring credit risk include

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BIBLIOGRAPHY
Books:
Altman, E.I. & Saunders, A. (1997). Credit Risk Measurements. New York: John Wiley &
Sons.
Angbazo, L., Mei, J.P. and Saunders, A. (1998). Credit Spreads in the Market for Highly
Leveraged Transaction Loans. New York: John Wiley & Sons.
Asarnow, E. (1999). Managing Bank Loan Portfolios for Total Return. Frankfurt: Honer und
ry
Grimm Gmbh & Co.
ib
ra
Basak, S. and Shapiro, A. (2001). A Model of Credit Risk, Optimal Policies, and Asset Prices.
New York: Parkett Publisher Incorporated.
sL
Belkin, B., Forest, L.R., Aguais, S.D. and Suchower, S. J. (1998). Credit Risk Premiums in
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Commercial Lending. New York: Carrol & Graf Publishers.
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m
Boot, A.W.A. and Milbourn. T.T. (2001). Credit Ratings as Coordination Mechanisms.
Amsterdam: Bookman International B.V.
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Wiley & Sons.
ev
Caouette, J., Altman, E. and Narayanan, P. (1998). Managing Credit Risk. New York: John
Sh
an
Bokklubbene AS.
ke
Carty, L., and Fons, J. (1993). Measuring Changes in Credit Quality. Oslo: De Norske
Crouhy, M., Galai, D. and Mark, R. (2000). Analysis of Credit Risk Models. Athens: Hestia
Publishers & Booksellers.
Cunningham, A. (1999). Bank Credit Risk in Emerging Markets. Zrich: JRP Ringier
Kunstverlag AG.
Delianedis, G. and Geske, R. (1998). Credit Risk and Risk-Neutral Default Probabilities.
London: Alastair Sawday Publishing.
Duffee, G.R. (1999). Estimating the Price of Default Risk. Copenhagen: Copenhagen
Publishing House.
Gupton, G.M. (2000). Bank Loan Loss Given Default. London: Banipal Publishing.

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Hawley, D.D., Johnson, J.D. and Raina, D. (1990). Artificial Neural Systems: A New Tool for
Financial Decision-Making. Athens: Kastaniotis Editions.
Hirtle, B.J., Levonian, M., Saidenberg, M., Walter, S. and Wright, D. (2001) Using Credit Risk
Models for Regulatory Capital: Issues and Options. New York: Neal-Schuman Publishers
Incorporated.
Kealhofer, S. (1993). Portfolio Management of Default Risk. San Francisco: KMV Publication.
Kiesel, R., Perraudin, W. and Taylor, A. (2001). The Structure of Credit Risk: Spread Volatility
and Rating Transitions. Edinburgh: Harelquin Mills & Boon Ltd.
ry
Lown, C., and Morgan, D.P. (2001). The Credit Cycle and the Business Cycle. New York:
ib
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Scala Publishers.
Lynch, M. (1998). Credit Default Swaps. New York: Holtzbrinck Publishers.
sL
Maclachlan, I. (1999). Recent Advances in Credit Risk Management. Melbourne: Alto Books
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Pvt. Ltd.
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m
McAllister, P.M. and Mingo, J.J. (1994). Commercial Loan Risk Management, Credit Scoring,
and Pricing. London: The Brown Reference Group PLC.
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Morgan J.P. (1997). Credit Metrics. Auckland: Calico Publishing.
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Nickell, P., Perraudin, W. and Varotto, S. (2001). Ratings versus Equity-Based Credit Risk
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Modeling. Edinburgh: St Johan Patrick Publishers.
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Saunders, A. (1999). Credit Risk Measurement. New York: John Wiley & Sons.
Theodore, S.S. (1999). Rating Methodology: Bank Credit Risk. Westminster: Tango Books
Publishers.
Wall, L.D., and Koch, T.W. (2000). Bank Loan-Loss Accounting. Atlanta: Peachtree Publishers
Limited.
Reports, Journals & Articles:

Asarnow, E., and Edwards, D. (1995). Measuring Loss on Defaulted Bank Loans. Journal of
Commercial Lending. Frankfurt: Honer und Grimm Gmbh & Co. V (4): 1-36.
BOK (F.Y. 2004/05 F.Y. 2008/09). Annual Reports. Kathmandu: Bank of Kathmandu
Limited.

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Burns, Peter and Stanley, Anne (2008). Managing Consumer Credit Risk. Journal of
Economics and Finance. Dallas: Urban Publishers. XXI (5): 1-19.
Fatemi, Ali and Fooladi, Iraj (2009). Credit Risk Management: A Survey of Practices. Journal
of Computational Finance. New York: New York City Publishers. XII (11): 1-52.
Ganzi, John and Huppman, Reed (2010). Credit Risk Management: How the Banking Industry
Decisions in Economics and Finance. Sydney: Brimax Publishing. XVI (9): 27-43.
is Integrating Environmental & Social Issues: Is Being Green Financially Responsible?
Gillespie, Brian, Hackwood, John and Mihos, Chris (2010). Managing Credit Risk for Global
ry
Commodity Producers. Annals of Finance. Kansas City: Walsworth Publishing
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Incorporation. XV (4): 1-34.
Moody, S. (2000). Bank Loan Loss Given Default. Global Credit Research. Dublin: Gill &
sL
Macmillan Limited. XI (3): 1-17.
pu
NIC (F.Y. 2004/05 F.Y. 2008/09). Annual Reports. Kathmandu: Nepal Industrial and
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m
Commercial Bank Limited.
Wenner, Mark, Navajas, Sergio, Trivelli, Carolina and Tarazona, Alvaro (2007). Managing
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Credit Risk in Rural Financial Institutions in Latin America. Journal of Credit Analysis.
ke
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Washington D.C.: Mage Publishers Incorporated. XVI (7): 43-77.
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Thesis:
Burlakoti, Satish (2008). Credit Policy Analysis of Commercial Bank with Special reference to
Everest Bank Limited. An Unpublished Masters Degree Thesis submitted to Faculty of
Management, T.U.
Guragain, Madhusudan (2009). Credit Practices: A Study on NABIL Bank Ltd., SCB Nepal Ltd.
and Himalayan Bank Ltd. An Unpublished Masters Degree Thesis submitted to Faculty
of Management, T.U.
Lama, Dhurba (2007). A Study on Credit Management of Agriculture Development Bank

Limited. An Unpublished Masters Degree Thesis submitted to Faculty of Management,
T.U.

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Pradhan, Bikram Singh (2006). Credit Management of Siddhartha Vikash Bank Limited. An
Unpublished Masters Degree Thesis submitted to Faculty of Management, T.U.
Simkhada, Sahara (2010). Credit Policy of Commercial Banks in Nepal. An Unpublished
Masters Degree Thesis submitted to Faculty of Management, T.U.
Thakuri, Tirtha Raj (2009). A Comparative Study on Credit Management of Commercial
Thesis submitted to Faculty of Management, T.U.
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Websites:
http://www.bok.com.np/investorrelation/annualreport.php
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http://www.nicbank.com.np/Annual-Report.pdf
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http://bfr.nrb.org.np/bfrdirectives.php?vw=15

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Banks; with Special Reference to NABIL and SCBNL. An Unpublished Masters Degree

Kathmandu
APPENDIX I
QUESTIONNAIRE
Respected Sir/Madam,
I am preparing a thesis entitled, Managing Core Risk in Banking: Credit Risk Management, as a
partial fulfillment for the Masters of Business Studies. As a part of the study, a questionnaire that is
related to the topic has been prepared. It would be a great help if you enthusiastically participate in
responding the questionnaire.
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Respondents;
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Name (Optional):
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Designation: Employee/Shareholder/Depositor/Borrower (Please Tick One)
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(Note: Dear shareholders please answer Question no. 1 to 6, employees please answer all, and
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depositors and borrowers please answer only from Question no. 7 to 14.)
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1. The bank should be most cautious on which of the following element while making credit
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guideline?
b) Types of Loan facilities
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a) Industry and Business Segment Focus
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c) Single Borrower Limits

d) Cross Border Risk
e) Discouraged Business Types
2. To alleviate credit risk, the bank should focus mainly on which of the following procedure?
a) Risk-Based Pricing
b) Covenants
c) Credit Insurance and Credit Derivatives
d) Tightening
e) Diversification

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3. While making credit assessment and risk grading, the analysis of of borrower is
a) Character
b) Capital
c) Capacity
d) Collateral
e) Cycle (or Economic Conditions)
most crucial.
4. Which one of the following approaches will befit for your bank for effective credit management and
b) Artificial Neural System
c) Rating System
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d) Credit Scoring System
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a) Expert System
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reducing credit risk?
5. The credit risk of commercial bank has been caused mainly due to the ineffectiveness of which
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principle?
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a) Role of BOD in establishing Policy
b) Framework of Systems and Control
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c) Effective Assessment and Evaluation of Credit

[
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d) Utilizing Credit Enhancement
e) Contractual Documents
6. After identifying the sort of risk, mainly the bank is more interested to...
a) Curing Credit
b) Restructuring Credit
c) Terminating Customer Relationship
d) Selling Credit
7. Do you think that the commercial banks of Nepal are efficient in Credit Management?
a) Yes
b) No [
c) Dont Know

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8. Which of the following do you consider as the most risky sector for credit disbursement?
a) Agriculture
] b) Business
] c) Household [
a) Severely Affected
b) Moderately Affected [
c) Nominally Affected [
c) Monitoring Borrowers Activities
d) New Rule and Regulation
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b) Rebate for Timely Payment
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a) Strict Recovery Policy
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10. Which measure is the best option to solve the problem of Non Performing Credit?
11. If the borrower is having overdue outstanding, the bank should start follow up;
[
[
] d) After one month Onward [
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c) Within one Month
] b) Within two Weeks
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a) Within a Week
b) Collateral Valuation [
c) Interest Rate
d) Employee Behavior
e) Time Period
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a) Paper Document
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12. In you view, which of the following is the main influencing factor in credit disbursement?
13. Which method should be adopted for recovering credit?

a) Dragging Guarantor
b) Counseling Borrower
c) Selling Collateral
d) Supporting Borrower Technically

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9. To what extent is banking operation affected by Non Performing Credit?

Kathmandu
14. At last, what do you suggest the bank for effective credit management?
[
b) Charge Appropriate Interest Rate
c) Monitoring Borrower Activity
d) Timely Collection of Credit
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Thank you for your ef fort.

Kathmandu - 100
a) Careful Evaluation of Credit Proposal
a) Calculation of Mean, S.D. and C.V. of BOK

TC/TA
NPC/TC
CLP/TC
Year
X
Y
Z
x = X-X
62.72
4.99
4.36
2004/05
-4.29
60.99
2.72
3.07
2005/06
-6.02
66.48
2.51
3.04
2006/07
-0.53
71.93
1.86
2.24
2007/08
4.92
72.92
1.27
2.00
2008/09
5.91
Total
335.04
13.35
14.71
2.94
ii) Calculation of Standard Deviation ()

For TC/TA
(x-x)2
114.06
5
3.42
5
an
0.83
8.03
5
N
1.27
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For CLP/TC
(z-z)2
(y-y)2
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C
4.78
For NPC/TC
am
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For CLP/TC
Mean
Z = Z/5
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iii) Calculation of Coefficient of Variation (C.V.)

For TC/TA
For NPC/TC
C.V.x
x
4.78
C.V.x
y
X
67.01
Y
7.13
47.44
For CLP/TC
C.V.z
x
Z
28.15
x2
18.39
36.22
0.28
24.23
34.95
114.06
2.67
ib
67.01
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For NPC/TC
Y = Y/5 =
z = Z-Z
1.42
0.13
0.10
-0.70
-0.94
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i) Calculation of Mean
For TC/TA
Mean
X = X/5
y = Y-Y
2.32
0.05
-0.16
-0.81
-1.40
1.27
2.67
0.83
2.94
Note: i) Same Process has been adopted to calculate the mean, standard deviation and
coefficient of variation of other variables.
ii) Data have extracted from the annual report of BOK.
y2
5.38
0.00
0.03
0.66
1.96
8.03
z2
2.01
0.02
0.01
0.49
0.89
3.42
APPENDIX - II
2.62
ii) Calculation of Standard Deviation ()

For TC/TA
(x-x)2
127.85
5
4.82
5
an
0.98
6.66
5
N
1.15
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For CLP/TC
(z-z)2
(y-y)2
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C
5.06
For NPC/TC
am
1.85
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iii) Calculation of Coefficient of Variation (C.V.)

For TC/TA
For NPC/TC
C.V.x
x
5.06
C.V.x
y
X
71.89
Y
7.03
62.27
For CLP/TC
C.V.z
x
Z
37.42
1.15
1.85
0.98
2.62
Note: i) Same Process has been adopted to calculate the mean, standard deviation and
coefficient of variation of other variables.
ii) Data have extracted from the annual report of NIC.
y2
3.72
0.56
0.55
0.98
0.85
6.66
z2
1.99
0.90
0.32
0.76
0.85
4.82
For CLP/TC
Mean
Z = Z/5
x2
42.54
29.40
39.29
11.21
5.42
127.85
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71.89
For NPC/TC
Y = Y/5 =
z = Z-Z
1.41
0.95
-0.57
-0.87
-0.92
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y = Y-Y
1.93
0.75
-0.74
-0.99
-0.92
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For TC/TA
Mean
X = X/5
x = X-X
-6.52
-5.42
6.27
3.35
2.33
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b) Calculation of Mean, S.D. and C.V. of NIC

TC/TA
NPC/TC
CLP/TC
Year
X
Y
Z
65.37
3.78
4.03
2004/05
66.47
2.60
3.57
2005/06
78.16
1.11
2.05
2006/07
75.24
0.86
1.75
2007/08
74.22
0.93
1.70
2008/09
Total
359.46
9.28
13.10
a) Calculation of correlation coefficient and regression line between Net Profit & NPC of BOK
NPC
NP
Year
X
Y
x = X-X
y = Y-Y
x2
y2
xy
308.51
139.53
2004/05
71.98
-145.99
5181.41
21312.50
-10508.51
203.62
202.44
2005/06
-32.91
-83.08
1082.94
6901.95
2733.93
243.3
262.39
2006/07
6.77
-23.13
45.86
534.90
-156.62
236.9
361.50
0.37
75.98
0.14
5773.26
28.27
2007/08
190.31
461.73
2008/09
-46.22
176.21
2136.10
31050.67
-8144.17
Total
1182.64
1427.59
8446.45
65573.29
-16047.1011
For NP
Y = Y/5 =
236.53
285.52
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For NPC
Mean
X = X/5
x2y2
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am
For NP
y
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iv) Simple Regression Equation of NP on NPC
r x y ( X-X)
x
0.6819 x 114.52 (X-236.53)
41.10
or, Y-285.52
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or, Y-285.52
an
Y-Y
1.90 X + 449.37
or, Y
734.89 - 1.90 X
v) Calculation of Probable Error (P.E.)
r2
0.4649
1-r2
0.54
0.6745 (1-r2)
0.36
2.2361
P.E.
0.1614
y2
N
114.52
ev
C
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23534.26
iii) Calculation of Standard Deviation ()

For NPC
x2
x
8446.45
N
41.10
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ii) Calculation of Correlation Coefficient between NPC and NP

r
xy
-16047.101
-0.6819
6 P.E.
0.9684
65573.29
5
APPENDIX - III
For NP
Y = Y/5 =
138.69
185.86
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For NPC
Mean
X = X/5
x2y2
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am
For NP
y
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iv) Simple Regression Equation of NP on NPC
r x y ( X-X)
x
0.6152 x 83.07 (X-138.69)
37.41
or, Y-185.86
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or, Y-185.86
an
Y-Y
1.37 X + 189.47
or, Y
375.33 - 1.37 X
v) Calculation of Probable Error (P.E.)
r2
0.3785
1-r2
0.62
0.6745 (1-r2)
0.42
2.2361
P.E.
0.1875
y2
N
83.07
ev
C
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15537.20

For NPC
x2
x
6997.29
N
37.41
ib
ii) Calculation of Correlation Coefficient between NPC and NP

r
xy
-9558.9539
-0.6152
6 P.E.
1.1248
34499.71
5
b) Calculation of correlation coefficient and regression line between Net Profit & NPC of NIC
NPC
NP
Year
X
Y
x = X-X
y = Y-Y
x2
y2
xy
185.43
113.76
2004/05
46.74
-72.10
2184.44
5198.99
-3370.00
179.55
96.59
2005/06
40.86
-89.27
1669.38
7969.85
-3647.56
101.14
158.48
2006/07
-37.55
-27.38
1410.15
749.88
1028.32
98.16
243.06
-40.53
57.20
1642.84
3271.38
-2318.27
2007/08
129.18
317.43
2008/09
-9.51
131.57
90.48
17309.61
-1251.46
Total
693.46
929.32
6997.29
34499.71
-9558.95394
a) Calculation of Trend Value of Sub Standard Credit of BOK

Year
SSC
Year
X
Y
x = X-X
y = Y-Y
x2
1
88.42
2004/05
-2.00
21.02
4.00
2
71.61
2005/06
-1.00
4.21
1.00
3
39.86
2006/07
0.00
-27.54
0.00
4
100.18
1.00
32.78
1.00
2007/08
5
36.91
2008/09
2.00
-30.49
4.00
Total
15
336.98
10.00
For SSC
Y = Y/5 =
3.00
xy
-42.05
-4.21
0.00
32.78
-60.97
-74.45
67.40
ra
ry
For Year
Mean
X = X/5
y2
442.01
17.76
758.23
1074.79
929.40
3222.18
x2y2
pu
For SSC
ev
C
am
sL
179.50

For Year
x2
x
10.00
1.41
ib
ii) Calculation of Correlation Coefficient between Year and SSC

r
xy
-74.45
-0.4148
or, Y-67.40
or, Y
an
or, Y-67.40
r x y ( X-X)
x
0.4148 x 25.39 (X-3)
1.41
Sh
Y-Y
ke
rD
iv) Simple Regression Equation of SSC on Year
7.45 X + 22.34
89.73 - 7.45 X
v) Calculation of Trend Value of SSC

FY
a
b
2009/10
89.73
-7.45
2010/11
89.73
-7.45
2011/12
89.73
-7.45
2012/13
89.73
-7.45
2013/14
89.73
-7.45
X
6
7
8
9
10
Y = a+bX
45.06
37.62
30.17
22.73
15.28
y2
N
25.39
3222.18
5
APPENDIX - IV
ke
rD
an
Sh
0
40/L40
0
b
-7.45
a
22.34
89.73
ra
ry
ib
sL
pu
am
73520.67
ev
C
For DC
Y = Y/5 =
3.00
y2
2992.75
691.90
2.18
251.35
196.67
4134.85
xy
-109.41
26.30
0.00
-15.85
-28.05
-127.01
35.10
ra
ry
For Year
Mean
X = X/5
x2
4.00
1.00
0.00
1.00
4.00
10.00
x2y2
pu
For DC
ev
C
am
sL
203.34

For Year
x2
x
10.00
1.41
ib
ii) Calculation of Correlation Coefficient between Year and DC

r
xy
-127.01
-0.6246
or, Y-35.10
or, Y
an
or, Y-35.10
r x y ( X-X)
x
0.6246 x 28.76 (X-3)
1.41
Sh
Y-Y
ke
rD
iv) Simple Regression Equation of DC on Year
12.70 X + 38.10
73.21 - 12.70 X
v) Calculation of Trend Value of DC

FY
a
b
2009/10
73.21
-12.70
2010/11
73.21
-12.70
2011/12
73.21
-12.70
2012/13
73.21
-12.70
2013/14
73.21
-12.70
X
6
7
8
9
10
Y = a+bX
-3.00
-15.70
-28.40
-41.10
-53.80
y2
N
28.76
4134.85
5
b) Calculation of Trend Value of Doubtful Credit of BOK

Year
DC
Year
X
Y
x = X-X
y = Y-Y
1
89.81
2004/05
-2.00
54.71
2
8.8
2005/06
-1.00
-26.30
3
36.58
2006/07
0.00
1.48
4
19.25
1.00
-15.85
2007/08
5
21.08
2008/09
2.00
-14.02
Total
15
175.52
ke
rD
an
Sh
0
40/L40
0
b
-12.70
a
38.10
73.21
ra
ry
ib
sL
pu
am
73520.67
ev
C
For CL
Y = Y/5 =
3.00
y2
14.05
117.03
1077.94
274.17
2.92
1486.10
xy
7.50
10.82
0.00
-16.56
-3.42
-1.66
134.03
ra
ry
For Year
Mean
X = X/5
x2
4.00
1.00
0.00
1.00
4.00
10.00
x2y2
pu
For CL
ev
C
am
sL
121.91

For Year
x2
x
10.00
1.41
ib
ii) Calculation of Correlation Coefficient between Year and CL

r
xy
-1.66
-0.0136
or, Y-134.03
or, Y
an
or, Y-134.03
r x y ( X-X)
x
0.0136 x 17.24 (X-3)
1.41
Sh
Y-Y
ke
rD
iv) Simple Regression Equation of CL on Year
0.17 X + 0.50
134.53 - 0.17 X
v) Calculation of Trend Value of CL

Fy
a
b
2009/10
134.53
-0.17
2010/11
134.53
-0.17
2011/12
134.53
-0.17
2012/13
134.53
-0.17
2013/14
134.53
-0.17
X
6
7
8
9
10
Y = a+bX
133.53
133.36
133.20
133.03
132.87
y2
N
17.24
1486.10
5
c) Calculation of Trend Value of Credit Loss of BOK

Year
CL
Year
X
Y
x = X-X
y = Y-Y
1
130.28
2004/05
-2.00
-3.75
2
123.21
2005/06
-1.00
-10.82
3
166.86
2006/07
0.00
32.83
4
117.47
1.00
-16.56
2007/08
5
132.32
2008/09
2.00
-1.71
Total
15
670.14
ke
rD
an
Sh
0
40/L40
0
b
-0.17
a
0.50
134.53
ra
ry
ib
sL
pu
am
73520.67
ev
C
For WO
Y = Y/5 =
3.00
69.95
ra
ry
For Year
Mean
X = X/5
xy
-278.36
-25.26
0.00
-24.55
-139.90
-468.07
x2y2
pu
For WO
ev
C
am
sL
551.34

For Year
x2
x
10.00
1.41
ib
ii) Calculation of Correlation Coefficient between Year and WO

r
xy
-468.07
-0.8490
or, Y-69.95
or, Y
an
or, Y-69.95
r x y ( X-X)
x
0.8490 x 77.97 (X-3)
1.41
Sh
Y-Y
ke
rD
iv) Simple Regression Equation of WO on Year
46.81 X + 140.42
210.37 - 46.81 X
v) Calculation of Trend Value of WO

FY
a
b
2009/10
210.37
-46.81
2010/11
210.37
-46.81
2011/12
210.37
-46.81
2012/13
210.37
-46.81
2013/14
210.37
-46.81
X
6
7
8
9
10
Y = a+bX
-70.47
-117.28
-164.09
-210.89
-257.70
y2
N
77.97
30397.85
5
d) Calculation of Trend Value of Credit and Interest Suspense Write Off (WO) of BOK
Year
WO
Year
X
Y
x = X-X
y = Y-Y
x2
y2
1
209.13
2004/05
-2.00
139.18
4.00
19371.63
2
95.21
2005/06
-1.00
25.26
1.00
638.17
3
0
2006/07
0.00
-69.95
0.00
4892.72
4
45.4
1.00
-24.55
1.00
602.60
2007/08
5
0
2008/09
2.00
-69.95
4.00
4892.72
Total
15
349.74
10.00
30397.85
ke
rD
an
Sh
0
40/L40
0
b
-46.81
a
140.42
210.37
ra
ry
ib
sL
pu
am
73520.67
ev
C
For SSC
Y = Y/5 =
3.00
y2
1089.66
151.54
46.65
11.09
111.09
1410.03
xy
-66.02
12.31
0.00
-3.33
-21.08
-78.12
12.96
ra
ry
For Year
Mean
X = X/5
x2
4.00
1.00
0.00
1.00
4.00
10.00
x2y2
pu
For SSC
ev
C
am
sL
118.74

For Year
x2
x
10.00
1.41
ib
ii) Calculation of Correlation Coefficient between Year and SSC

r
xy
-78.12
-0.6579
or, Y-12.96
or, Y
an
or, Y-12.96
r x y ( X-X)
x
0.6579 x 16.79 (X-3)
1.41
Sh
Y-Y
ke
rD
iv) Simple Regression Equation of SSC on Year
7.81 X + 23.44
36.40 - 7.81 X
v) Calculation of Trend Value of SSC

FY
a
b
2009/10
36.40
-7.81
2010/11
36.40
-7.81
2011/12
36.40
-7.81
2012/13
36.40
-7.81
2013/14
36.40
-7.81
X
6
7
8
9
10
Y = a+bX
-10.48
-18.29
-26.10
-33.91
-41.72
y2
N
16.79
1410.03
5
e) Calculation of Trend Value of Sub Standard Credit of NIC

Year
SSC
Year
X
Y
x = X-X
y = Y-Y
1
45.97
2004/05
-2.00
33.01
2
0.65
2005/06
-1.00
-12.31
3
6.13
2006/07
0.00
-6.83
4
9.63
1.00
-3.33
2007/08
5
2.42
2008/09
2.00
-10.54
Total
15
64.80
ke
rD
an
Sh
0
40/L40
0
b
-7.81
a
23.44
36.40
ra
ry
ib
sL
pu
am
73520.67
ev
C
For DC
Y = Y/5 =
3.00
x2y2
pu
For DC
ev
C
am
N
1.41
or, Y-18.61
or, Y
an
r x y ( X-X)
x
0.6765 x 21.61 (X-3)
1.41
Sh
or, Y-18.61
ke
rD
iv) Simple Regression Equation of DC on Year

Y-Y
10.34 X - 31.01
12.40 + 10.34 X
v) Calculation of Trend Value of DC

FY
a
b
2009/10
-12.40
10.34
2010/11
-12.40
10.34
2011/12
-12.40
10.34
2012/13
-12.40
10.34
2013/14
-12.40
10.34
X
6
7
8
9
10
18.61
sL
152.81

For Year
x2
x
10.00
xy
14.45
10.75
0.00
-6.85
85.03
103.38
ib
ii) Calculation of Correlation Coefficient between Year and DC

r
xy
103.38
0.6765
y2
52.19
115.65
312.72
46.98
1807.61
2335.15
ra
ry
For Year
Mean
X = X/5
x2
4.00
1.00
0.00
1.00
4.00
10.00
Y = a+bX
49.63
59.97
70.30
80.64
90.98
y2
N
21.61
2335.15
5
f) Calculation of Trend Value of Doubtful Credit of NIC

Year
DC
Year
X
Y
x = X-X
y = Y-Y
1
11.39
2004/05
-2.00
-7.22
2
7.86
2005/06
-1.00
-10.75
3
0.93
2006/07
0.00
-17.68
4
11.76
1.00
-6.85
2007/08
5
61.13
2008/09
2.00
42.52
Total
15
93.07
ke
rD
an
Sh
0
40/L40
0
b
10.34
a
-31.01
-12.40
ra
ry
ib
sL
pu
am
73520.67
ev
C
For CL
Y = Y/5 =
3.00
y2
438.99
4086.02
169.99
921.00
1721.25
7337.25
xy
-41.90
-63.92
0.00
-30.35
-82.98
-219.15
107.12
ra
ry
For Year
Mean
X = X/5
x2
4.00
1.00
0.00
1.00
4.00
10.00
x2y2
pu
For CL
ev
C
am
sL
270.87

For Year
x2
x
10.00
1.41
ib
ii) Calculation of Correlation Coefficient between Year and CL

r
xy
-219.15
-0.8090
or, Y-107.12
or, Y
an
or, Y-107.12
r x y ( X-X)
x
0.8090 x 38.31 (X-3)
1.41
Sh
Y-Y
ke
rD
iv) Simple Regression Equation of CL on Year
21.92 X + 65.75
172.86 - 21.92 X
v) Calculation of Trend Value of CL

FY
a
b
2009/10
172.86
-21.92
2010/11
172.86
-21.92
2011/12
172.86
-21.92
2012/13
172.86
-21.92
2013/14
172.86
-21.92
X
6
7
8
9
10
Y = a+bX
41.37
19.46
-2.46
-24.37
-46.29
y2
N
38.31
7337.25
5
g) Calculation of Trend Value of Credit Loss of NIC

Year
CL
Year
X
Y
x = X-X
y = Y-Y
1
128.07
2004/05
-2.00
20.95
2
171.04
2005/06
-1.00
63.92
3
94.08
2006/07
0.00
-13.04
4
76.77
1.00
-30.35
2007/08
5
65.63
2008/09
2.00
-41.49
Total
15
535.59
ke
rD
an
Sh
0
40/L40
0
b
-21.92
a
65.75
172.86
ra
ry
ib
sL
pu
am
73520.67
ev
C
For WO
Y = Y/5 =
3.00
39.43
ra
ry
For Year
Mean
X = X/5
xy
0.40
9.71
0.00
-18.92
-70.10
-78.91
x2y2
pu
For WO
ev
C
am
sL
240.06

For Year
x2
x
10.00
1.41
ib
ii) Calculation of Correlation Coefficient between Year and WO

r
xy
-78.91
-0.3287
or, Y-39.43
or, Y
an
or, Y-39.43
r x y ( X-X)
x
0.3287 x 33.95 (X-3)
1.41
Sh
Y-Y
ke
rD
iv) Simple Regression Equation of WO on Year
7.89 X + 23.67
63.11 - 7.89 X
v) Calculation of Trend Value of WO

FY
a
b
2009/10
63.11
-7.89
2010/11
63.11
-7.89
2011/12
63.11
-7.89
2012/13
63.11
-7.89
2013/14
63.11
-7.89
X
6
7
8
9
10
Y = a+bX
15.76
7.87
-0.02
-7.91
-15.81
y2
N
33.95
5762.73
5
h) Calculation of Trend Value of Credit and Interest Suspense Write Off (WO) of NIC
Year
WO
Year
X
Y
x = X-X
y = Y-Y
x2
y2
39.23
1
2004/05
-2.00
-0.20
4.00
0.04
29.72
2
2005/06
-1.00
-9.71
1.00
94.32
103.32
3
2006/07
0.00
63.89
0.00
4081.68
20.51
4
1.00
-18.92
1.00
358.04
2007/08
4.38
5
2008/09
2.00
-35.05
4.00
1228.64
Total
15
197.16
10.00
5762.73
ke
rD
an
Sh
0
40/L40
0
b
-7.89
a
23.67
63.11
ra
ry
ib
sL
pu
am
73520.67
ev
C

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Merger DEMO :of

A Thesis Submitted to:

In partial fulfillment of the requirement for the Degree of

Property of Shanker Dev Campus Library, Putalisadak,

Shanker Dev Campus Library

MANAGING CORE RISK IN BANKING:

Property of Shanker Dev Campus Library, Putalisadak,

This is to certify that the Thesis

MANAGING CORE RISK IN BANKING:

Shanker Dev Campus Library

Management. This thesis is forwarded for examination.

Asso. Prof. Kishor Maharjan

Prof. Bisheshwor Man Shrestha

Prof. Dr. Kamal Deep Dhakal

(Head of Research Department)

Property of Shanker Dev Campus Library, Putalisadak,

Property of Shanker Dev Campus Library, Putalisadak,

We have conducted the viva voce of the thesis presented

MANAGING CORE RISK IN BANKING:

Master Degree of Business Studies (MBS)

Head, Research Department

Member (Thesis Supervisor)

Member (External Expert)

Property of Shanker Dev Campus Library, Putalisadak,

Shanker Dev Campus Library

Property of Shanker Dev Campus Library, Putalisadak,

Shanker Dev Campus Library

IN BANKING: CREDIT RISK MANAGEMENT submitted to Office of the Dean,

T.U. Regd. No.: 7-2-24-557-2001

supervision of Assoc. Prof. Kishore Maharjan of Shanker Dev Campus.

Property of Shanker Dev Campus Library, Putalisadak,

Property of Shanker Dev Campus Library, Putalisadak,

Shanker Dev Campus Library

for his valuable inspiration and suggestions.

Property of Shanker Dev Campus Library, Putalisadak,

Property of Shanker Dev Campus Library, Putalisadak,

1.1 Background of the Study

1.2 Statement of the Problem

1.6 Organization of the Study

1.5 Limitations of the Study

1.4 Significance of the Study

CHAPTER II: REVIEW OF LITERATURE

2.1.1 Credit Risk

2.1.2 Credit Risk Management

2.1.3 Mitigating Credit Risk

2.1.4 Credit Risk Limit

2.1.5 The Metrics for Measuring Credit Risk

2.1.6 Approaches to Credit Risk Measurement

2.1.6.1 Expert System

2.1.6.2 Artificial Neural System

Property of Shanker Dev Campus Library, Putalisadak,

Shanker Dev Campus Library

2.1.6.3 Rating System

2.1.6.4 Credit Scoring System

2.1.7 Principles for Managing Credit Risk

2.1.8 Implementation of Credit Risk Principle

2.1.9 Decision Making in Credit Risk

2.3 Review of Journals and Articles

2.4 Review of Thesis

2.5 Research Gap

CHAPTER III: RESEARCH METHODOLOGY

3.1 Research Design

2.2 Review of NRB Directives