Assets Of Commercial Bank In Nepal Analysis

Assets Of Commercial money box In Nepal AnalysisThe aim of this project is to assess the level of non-performing assets and its repercussions in overall financial stability of commercial messageised shore in Nepal by dint of the comparison surrounded by proper Nepali lodge and the joint venture bank.The specific objectives are To determine the extent to which commercial banks take care potential financial instability be arrive of non-performing assets.To identify the mechanisms by which commercial banks control non-performing assets.To identify successful and unsuccessful measures in singing to recover and mobilization of non-performing assets of commercial bank.To find out Whether or non Nepalese Commercial Banks are following(a) rules and regulations of NRB (Nepal Rastra Bank) regarding their lend, especially to of importtain the provision for NPA?To enumerate and examine the level of NPA to get assets, total lending and total deposit of these two commercial banks.To identify the internal and external factors affecting on the growth of NPA?To identify the effects of Non-Performing Assets on ROA and ROE of these two commercial banks.To identify which bank has high level of non- performing assetsTo make recommendations as to how commercial banks might improve their efforts in relation to minimization of non-performing assets.These objectives ordain be achieved by addressing the following research questionsWhich bank, proper nepali bank or joint venture bank, is actively seeking to denigrate risks of non-performing assets?When did non-performing assets start showing impacts in the bank?What resources do the banks devote to control non-performing assets?Who decides on this resource allocation?How do banks seek to control non-performing assets?Is non-performing asset change magnitude amongst banks? What is the degree of increment of non-performing asset in proper Nepali commercial bank and joint venture bank?What percentage of total assets and to tal lending is occupying by NPAs of Nepalese commercial banks?How does non-performing assets effects on return on total assets (ROA) and shareholders justness (ROE)?What are major internal factors, external factors and other main causes to growth of NPA?To compare the percentage of non-performing assets of these commercial banks in different time period.Which measure (or measures) in particular has been effective in curbing non-performing assets of commercial banks?What factors establish to a successful solicitude of non-performing assets?Are increased non-performing assets retaining nutriment considered to be good news for all banks or only for particular banks?Do the paygrade implications of non-performing assets vary across banks?The Context and Background of the ProposalThe proposal is to concentrate on two commercial banks of Nepal Rastriya Banijya Bank (a proper Nepali bank) and Everest Bank exceptional (a joint venture bank) RBB and EBL respectively in acronyms. These are the two main banks operating in the banking industry in the expanding economy of Nepal.Rastriya Banijya Bank (RBB) is fully presidential term owned, and the largest commercial bank in Nepal. RBB was established on January 23, 1966 (2022 Magh 10 BS) under the RBB Act. Now, the bank is running under bank and financial institute act 2063. RBB has been bestow to socio- sparing development of the country for the last four and half decades. The Bank has currently entered into 46 socio- sparing classs of service. RBB provides various banking services to a wide range of customersthey accommodate elite to poor individuals, institutional customers, and the customersfrom industry / business communities. RBB has many correspondent arrangements with major international banks all over the world that facilitate trade finance, bank-originated ain funds transfers and interbank funds transfer. The bank has played crucial role for the development of financial sector i.e. bank, insurance compa nies through its promoters role. As a second commercial bank of the country, the bank has been contributing in the trade, industry and agricultural sector of the country. The bank has in like manner contributed in the hydropower sector. Health and Education sector are also benefitted through its disbursement. As a government owned bank the bank is also contributing towards achieving national goals as per the government directives. The bank has made operative contribution in the development of private sector either by impart disbursement orby active participation in the fairs organised by industrial and business communities.A leading commercial bank of Nepal established in the year 1994 in joint venture with Punjab National Bank, India, Everest Bank Limited (EBL) started its operation with a view and objective of extending professionalized and efficient banking services to various segments of the society. Punjab National Bank (PNB), EBLs joint venture partner (holding 20% equity in the bank) is the largest nationalized bank in India. With its straw man virtually in all the important centres at Nepal, EBL offers a wide variety of banking services which include merged and personal banking, industrial finance, agricultural finance, financing of trade and international banking. The large presence and vast resource base have helped the Bank to build well-knit links with trade and industry.These two banks make for an interesting comparison since they are both leading commercial banks with large number of clients, covering a various(a) range of commercial sectors. They both share the bad news associated with increased provisions, preempted by loan default and increases in non-performing loans. The bad news in loan loss provisions is most likely to occur when fourth quarter audits correct under-provisioning relative to increases in non-performing loans during the first three quarters of the fiscal year which plunge the common victim in RBB and EBL. In contras t to EBL, the bad news stems from management exercising power over loan-loss provisions and their engagement in protection of larger numbers of defaulters in RBB. The disclosure of RBB as having more potential threats of increase in non-performing assets to EBL is hugely credited to the flexibility for efficient promise provisions. At the time when economic activities are growing rapidly throughout the country, it is most uphill task for the banks to manage and curb non-performing assets. Moreover, political instability has resulted in more cases of commercial loans defaulting. Interestingly, consumer loans are hardly non-performing given to the rise of middleclass and service industry. But this trend differs in both EBL and RBB. This study purposes to underscore the importance of management of non-performing assets of RBB and EBL while comparing the provisions and their outcome in banking sector.Preliminary Literature ReviewInvestment theory defines non-performing asset as a debt obligation where the borrower has nonpaidanypreviously agreed uponinterest and principal repayments to the designated loaner for an extended period of time. The non-performing asset is therefore not yielding any income to the lender in the form of principal and interest payments. Non-performing asset has become the major problem in investment banking since the inception of banking service itself.Literature devoted to the cause and effect of non-performing assets of banks concentrates mainly over the consequence and overall impact on the systematic wellbeing of bank due to the rise of non-performing assets. In the article differential coefficient Valuation Implications of Loan Loss Provisions across Banks and Fiscal Quarters Chi-Chun Liu(1997) concentrates over the impact of loan loss provisions in market front research finds that, on average, the market reacts positively to loan loss provisions conditional on less discretionary cultivation about loan default, much(prenominal) as non-performing loans and loan write-offs (133). Lius finding holds across different model specifications and study periods, despite radical changes in the banking industry over time. Liu finds that loan loss provisions are good news only for banks with loan portfolios that contain a high proportion of loans for which loss provisions require judgment and discretion on a loan-by-loan basis (e.g., commercial loans) rather than using statistical methods (e.g., consumer loans).A substantial body of research sought to confirm managements role regarding loan default. jam M. Wahlens(1994) study in The Nature of Information in Commercial Bank Loan Loss Disclosures suggests that loan loss provisions are to be retained at levels considered adequate to reflect managements expectations of future losses because managers have private information regarding default risks inherent in the loan portfolio (455). Wahlen finds that managers judgment is necessary in estimating the loan loss provision each period. Wahlen further contends, It is prohibitively costly for investors and monitors to obtain all of managements information about the loan portfolio each period . . . Thus bank managers can exercise discretion over the timing of provisions for accredited loan losses (456). Wahlen examines the relations between unexpected loan loss provisions and both stock returns and changes in future cash flows, and the role of managers in handling non-performing assets, in his study.Similarly, Iftekhar Hasan and Stephen D. Smith (1997) have argued that traditional view in positivity of banking institutions does not comprehend recently developing market trends. The duo has empirically investigated the alternative hypothesis using overall profit measures the negative expenditure-concentration relationship does not hold over the entire range of observed market concentration (47). They have focused on the impact of concentration and efficiency measures using price data for individual pro ducts and services. Jackson (1992) suggests that any generalization of such statements since price-concentration measures may vary substantially across time periods. Recently, in a comprehensive study, Berger and Hannan (1993) found more support for the structure-conduct-performance hypothesis than for the relative-market-power and/or efficient structure hypothesis.While concentrating over the role of banking sector in fetching the great depression of thirties in America, Adam B. Ashcraft(2005) analyses the implication of non-performing assets in overall macroeconomic scenario in the article Are Banks Really Special? New Evidence from the FDIC-Induced Failure of reasoned Banks. Ashcraft contends that severe contraction in banks results from uncontrolled lending. He writesWhile there is some disagreement in the literature over the precise mechanism through which failure affects real activity it is hard to walk away without the conclusion that bank failures played an important macroe conomic role in the severity of the economic downturn. What are the possible mechanisms? The most direct effect is through the loss of real wealth by uninsured depositors and other creditors. Even in the absence seizure of a wealth effect, however, the creditors of a failed bank lose liquidity while they wait for assets to be liquidated, which in turn affects real spending in the presence of borrowing constraints. (1712)Ashcraft observes that when a bank fails, some long-standing relationships with its customers are disrupted, if not destroyed. If customers are unable to replace these relationships with other lenders on equal terms, this contraction in the append of bank credit has an effect on real activity. And finally, there is the threat of contagion, where the failure of one institution prompts a run on other banks, banquet the effect of failure throughout the economy.Literature related to non-performing assets and the Indian experience provides the glimpse of Asian economy a nd challenges of banking industry. Prashanth K Reddy(2002) makes a comparative study of Asian banking industry in A comparative study of Non Performing Assets in India in the Global context similarities and dissimilarities, remedial measures. Reddy stresses the importance of a sound collar of the macro economic variables and systemic issues pertaining to banks and the economy for solving the NPA problem along with the criticality of a strong legal exemplar and legislative good example. Reddy contendsConcerns have been raised(a) about their relevance to India. A significant percentage of the NPAs of the PSBs are in the priority sector. Loans in rural areas are difficult to collect and banks by virtue of their sheer reach are better placed to recover these loans. Lok Adalats and Debt Recovery Tribunals are other effective mechanism to handle this task. ARCs should focus on the larger borrowers. Further, there is a consider for private sector and foreign participation in the ARC. Private parties will look to active re event of the problem and not merely regard it as a book transaction. Moving NPAs to an ARC doesnt get rid of the problem. Actions and measures have to be taken to build investor confidence. (12)Reddy stresses on the need to analyze foreign experiences that must be utilized along with a clear understanding of the local conditions to create a tailor made solution which is transparent and fair to all stakeholders.Reducing systemic risk potential that the non-performing assets create in banks is probably the strongest economic rationale for supervision of any economic system. In that context all over the world capital adequacy has become a core instrument of effective supervision of banking system. But the lose of research in Nepali commercial banking sectors has further prompted to economic instability. This research proposes to study the variables behind non-performing assets and its implication in commercial banking through the comparison betw een EBL and RBB. Consequently, the research worker hopes in treading into new avenue of research and its make recommendations for the reform process to be initiated in the Nepali banking industry as apart of the relaxation method of the economy in general and the financial stability in particular.Methodology / Sources of DataResearching NPAs of commercial banks is a sensitive topic. Several parties contribute to the dynamics of the situation. These parties areBank employees and their representative from portfolios of credit (loan) department.Perspective clients of consumer loan and commercial loan investment from EBL and RBBPost-graduate students of finance and investment from various universitiesLaw professionals handling the cases of NPAs.Journalists active in featuring economic beat across different prominent newspapers and magazines.A comprehensive investigation of this topics should attempt to collect data from each of these parties.It is proposed that the following methods o f data aggregation be deployedA content analysis of literature produced by these commercial banks, particularly their investment literature. Much of this literature is prepared for public consumption and thence will be readily available.Interviews with a representative sample from each of the parties identified above. Resource constraints do not allow for national coverage, hence these interviews will be conducted in one region of the country, which will be selected on the basis of convenience for the researcher. This could well limit the generalisations that can be made from the data.The researcher will pose as a prospective client and will write a letter to each banks requesting guidance for loans. This raises ethical issues since a certain amount of deception is involved. However, it is felt that it is a legitimate approach and doesnt cause personal harm to any party.The researcher will dispatch questionnaire selecting and identifying representative information provider from e ach party who in turn will provide with necessary information for the research.Anticipated OutcomesThis work is essentially a comparative analysis since the issuance of loans and the state of recovery of two commercial banks are being compared. For the comparison to be meaningful and objective it is essential that a standard framework be adopted. It is proposed to structure the data collection and also the comparison and analysis using a distribution framework ofPublic Sector UnitsLarge Industries median(a) Industries other(a) non priority SectorsAgricultureSmall scale industriesOther Priority sectorsHence in simple terms the results of the project could be presented in the following dummy tableBorrowing Segment-wise NPAGross NPARBBEBLAmountPercentage of Total NPAAmountPercentage of Total NPAPublic Sector UnitsLarge IndustriesMedium IndustriesOther non priority SectorsAgricultureSmall scale industryOther Priority sectorsIt is envisaged that this will provide a degree of originality because the application of a distribution framework to an investment relations issue is novel.On the basis of the comparison of the activities of the two banks some recommendations can be made regarding the relative success of investment initiatives in this context.