Chapter 1: INTRODUCTION

1.1 Context information

Risk is one of the hindrances, which has always been associated with the financial
institutions. Commercial banks always face different types of risks from very beginning
that may have negative effects on their performances and leads them to loss. The ability
of comprehensive risk management has become the basic requirement of commercial
banks for running their operations smoothly. Among the various risks faced by the
banks, credit risk has the greatest impact on bank's performance and its profitability.

Credit risk is the type of risk, which causes negative effects on the financial result and
bank's capital. If the borrower is not able to pay the interest or repay the principal
according to the terms of the bank then it is credit risk. Standards Australia/Standards
New Zealand (2004) has explained credit risk as the risk that a borrower or counterparty
will fail to meet their obligations according to the agreed terms, resulting in economic
loss to the financial institution. It is the major risk the commercial banks are exposed
during the normal course of lending whh arises from non – performance of the
borrower.

Profitability is an important tool in financing sector. Malik (2011) explains that the
profitability is one of the most important objectives of financial management because
one goal of financial management is to maximize the owner`s wealth and profitability
is very important determinants of performance. Banks cannot run without profitability.
Profitability is required for the survival of the banking business. So, measuring
profitability is very important. Credit risk has the major impact on bank's profitability
as huge amount of bank's revenue are accrues from loans from which the interest is
derived. To maintain the profitability credit risk management plays a vital role.

To extend the credit is one of the main and challenging functions of commercial bank
through which the banks are able to maximize their profit. As credit risk is the biggest
risk much attention is need to be paid on its management. MS & N (2016) explains that
banks face too many serious problems due to unsuccessful credit risk management but
the credit lending remains the chief activity of the banking sector throughout the world.
They further mentioned that by considering the importance of credits in the banking

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sector and their severe economic impact. So, it is extremely important to find the
relation and impact of credit with profitability of the bank.

Among different risks faced by the bank, credit risk is the most vital risk and every
bank should be aware about this risk. Lally et al. (2016) explained in their study that
banks should now have a keen awareness of the need to identify, measure, monitor and
control credit risk as well as to determine that they consist adequate capital against these
risks and that they are compensated for risks incurred. They also mentioned that The
Basel Committee is issuing this document in order to encourage banking supervisors
globally to promote sound practices for managing credit risk.

Li et al. (2014) has mentioned that credit risk is one of significant risks of banks by the
nature of their activities. This study further explained that by effectively managing the
credit risk exposure of bank they not only support the viability and profitability of their
own business, they also contribute to systemic stability and to proper allocation of
capital in the economy. Credit risk management is extremely important for reducing the
loss of revenue and for the long-term success of the banking business. Therefore, by
giving thoughts to these facts, this project has examined the relation of credit risk and
profitability.

1.2 Purpose of study

This study is done to analyze the impact of credit risk on profitability of the commercial
banks of Nepal. The main purposes of the study are as follows:

• To identify the credit risk management of Nepal Investment Bank Ltd. and Standard
Chartered Bank.
• To examine the impact of credit risk on profitability of Nepal Investment Bank Ltd
and Standard Chartered Bank.

1.3 Significance of the study

Several research works has been done in various aspects of commercial banks of Nepal,
especially financial performance, liquidity analysis, deposit analysis etc. However,
there seem to be not much effort to study on credit risk analysis and its impact.
Therefore, this study has focus on the credit risk and its impact in profitability of
commercial bank. The significances of the study are:

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• This study will help to analyze the credit risk faced by the bank
• This study will help to understand the relation between credit risk and profitability.
• This will help to understand how factors such as –net interest, non-performing loans,
bank size affect on profitability which is the indictors of credit risk.
• This study will be useful reference for the researchers who would plan to make any
related study precisely.

1.4 Literature review

Boahene et al. (2012) published an article "Credit risk and Profitability of selected
banks in Ghana", utilized regression analysis in an attempt to reveal the connection
between credit risk and profitability of selected banks, and established that credit risk
components. One of the components is non-performing loan rate and identified that
there is a positive and significant relationship with bank profitability in Ghana. This
shows that banks in Ghana enjoy high profitability regardless of high credit risk, an
opposing view to other views expressed in many studies that credit risk indicators are
negatively related to profitability.

Abdelrahim (2013) published the research article "Effectiveness of Credit Risk

Management of Saudi Banks in the Light of Global Financial Crisis". This study have
used descriptive and analytical methods are used. Bank size is taken as independent
variable. The main result of this study is that bank size has a negative impact on the
effectiveness of credit risk management of Saudi Banks.

Olalere et al. (2015) have empirically studied about the credit risk on profitability of
commercial banks. They published a research article "The Empirical Effects of Credit
Risk on Profitability of Commercial Banks: Evidence from Nigeria". In their study,
they investigated the effect of credit risk in the commercial banks of Nigeria. They took
the sample of eight commercial banks, from the period 2011-2014. Secondary data were
use to prepare the report. The data were obtained from annual reports and financial
statement of the banks.

In this study, ROE is taken as the financial performance indicators while

Nonperforming loans (NPL) as credit risk indicators. This article studies that the
management of credit risk is crucial to financial institutions survival, owner’s interest
and ultimately, their profitability as well. It explains that non-performing loan ratio is
negatively significant with ROE during the period. The plausible reason for this is that

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most of the systematically important banks have a fairly bad credit management
policies because it reflect a negative influence on their return on equity, and this implies
that they are exposed to greater risk of illiquidity and distress. It explains that increasing
bad loans in banks occurs because of poor credit policies in banks, bad management
and this reduces the bank’s profitability significantly. They concluded that non-
performing loan ratio established the negative and significant relationship with
profitability. This can be explained with the fact that the unusual lending of loans and
advances is found to be the major portion of financial risk faced by the banks. This
study has properly explained non-performing loan as the factors that has been
significantly affecting the profitability of the banks.

In the article published by Kutum (2017) titled "The Impact of Credit Risk on the
Profitability of Banks Listed on the Palestine Exchange" There is clear explanation
about how bank size and net income growth affect on credit risk that affect the
profitability of the bank. The study uses data collected from the financial statements of
five, out of the six, listed banks on the Palestine Exchange from 2010 to 2015.

The objective of the study is to assess the impact of Credit Risk on the Profitability of
Banks Listed on the Palestine Exchange. Based on the 2010 to 2015 financial
information of five banks listed on the exchange the study concludes that credit risk, as
measured by non-performing loans to total loans and advances has a weak but positive
relationship with profitability as measured by return on assets. The study also found a
weak but positive relationship between the sizes of the banks and profitability.

Poudel (2018) has published a research article titled "Assessment of credit risk in
Nepali commercial banks". The objective of this article is to identify the major
indicators of credit risk among the Nepali commercial banks. In this article, 15 Nepalese
commercial banks were used as a sample. All the data were collected through secondary
data collection method. All the data in this study were obtained from the database of
World Bank for macroeconomic variables for the period from 2002/03 to 2014/15 and
database of Nepal Rastra Bank for bank specific variables. One way Fixed Effect Model
(FEM) of panel data analysis was used as a major tool of analysis.

The major finding of this report is that, it does not matter what the volume and periods
of such credit, public deposit is the ultimate source of credit. Such public deposits result
in the forms of creative deposits by the means of credit creation to generate income as

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interest. Bank size was taken as one of the specific variables in this report in identifying
the credit risk in commercial bank. This report had analyses the correlation coefficient
of bank size (0.61*) and explained that it has positive relation with credit risk in Nepali
commercial banks. Which means, higher the bank size, higher would be the credit risk.
This study concluded that bank size has no any clear direction of impact on credit risk.
In this report, it has shown that there is impact on bank's credit risk but it also says that
it does not have any clear impact. This report has not clearly explained the reason for
that.

Abera (2018) has published an article "The Impact of Credit Risk on Profitability of
Private Commercial Banks in Ethiopia". The objective of the study is to empirically
examine the impact of credit risk on profitability of private commercial banks in
Ethiopia. One of the specific objectives is to assess if there is any relationship between
bank size and the performance of commercial Banks. It has studied about the financial
performance of Ethiopian banks over the period of 14 years (2003-2016).

This report clearly explains that bank size has a positive and statistically insignificant
impact of Bank Size on bank profitability. It has shown that there is a huge difference
between the biggest bank and the small bank. That private commercial banks which
have a big size have an advantages of absorbing some credit risks. There is a positive
and statistically insignificant impact of Bank Size on bank profitability according to
this article. The article measured coefficient result of 0.014506 and a p-value of 0.1040.
Based on this finding, bank size is not affect bank performance. Bank’s size appears to
have a positive relationship with performance. It has concluded that bank can increase
profitability if its size gets big. This report has clearly explained about how bank size
impact on profitability.

Table 1.1

Reviews of empirical studies

Study Major findings

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 Identified that there is a positive and significant relationship with bank
Boahene et al. (2012) profitability in Ghana. It shows that the banks in Ghana enjoy high
profitability regardless of high credit risk.

Identified that the bank size has a negative impact on the effectiveness
Abdelrahim (2013) of credit risk management of Saudi Banks.

Found that non-performing loan ratio established the negative and

significant relationship with profitability and explained non-
(Olalere et al., 2015)
performing loan as the factors that has been significantly affecting the
profitability of the banks.

Found that non-performing loans to total loans and advances has a

(Kutum, 2017) weak but positive relationship with profitability as measured by return
on assets. The study also found a weak but positive relationship
between the sizes of the banks and profitability.

Found that it does not matter what the volume and periods of such
credit, public deposit is the ultimate source of credit. Such public
deposits result in the forms of creative deposits by the means of credit
creation to generate income as interest. Bank size has no any clear
(Poudel, 2018)
direction of impact on credit risk. In this report, it has shown that there
is impact on bank's credit risk but it also says that it does not have any
clear impact.

Found that bank size has a positive and statistically insignificant

impact of Bank Size on bank profitability. It has shown that there is a
(Abera, 2018) huge difference between the biggest bank and the small bank. That
private commercial banks which have a big size have an advantages of
absorbing some credit risks.

By reviewing the literature, it reveals that there are not enough effort given to study
about the impact of credit risk on the profitability of commercial banks in Nepal. It

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discloses that there is lacking conclusion of relationship between credit risk
management and profitability of commercial banks of Nepal.

1.5 Research methods used for data collection

Research methods that are used for the study are discussed on the following headings.

1.5.1 Research design

This study has used comparative research design. It has compared the impact of credit
risk on profitability of two banks (Nepal Investment Bank Ltd. and Standard Chartered
Bank). Quantitative research is used to collect the data.

1.5.2 Population and sample

Among different commercial banks of Nepal, Nepal Investment Bank Ltd. and Standard
Chartered Bank are taken for the present study. Financial statements of at least 5 years
(2014/15 to 2018/19) have been taken as sample for comparative analysis of impact of
credit risk on the profitability of commercial banks in Nepal.

1.5.3 Nature and source of data analysis

This research is completely based on secondary data. In this study, websites of banks,
online publications articles and journal papers have been use to analyze the data.

1.5.4 Data analysis method

In this project, statistical tools are used to analyze the data. The statistical tools that are
used are as follows:

Mean

The arithmetic mean, also called the mathematical expectation or or average, is the
central value of a discrete set of numbers: specifically, the sum of the values divided by
the number of values. It is the most commonly used and readily understood measure of
central tendency. In this study, mean is calculated to find out the average of different
variables i.e. non-performing loan, bank size and net interest income. Mathematically,

∑𝑋
Mean =
𝑁

Where, X= Amount of variables

N= Number of variables

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Standard deviation
Standard deviation often represented by Greek letter sigma, is the measure of a spread
of data around the mean. It is the statistical measure of dispersion or deviation of
possible outcomes around an expected or mean value. In this study, we use it to measure
the risk.
Mathematically,
√∑(𝑥−𝑥̅ )2
Standard Deviation (ϭ) =
𝑛
Where, X= Amount of variables

N = Number of variables

Coefficient of variation

Coefficient of variation is the standardized measure of risk per unit of return. It is

calculated as the standard deviation divided by the expected return or average return. It
is the relative measure of risk. In this study it is use to relatively evaluate the risk caused
by non-performing loan, bank size and interest income.

Regression

Literal meaning of regression is stepping back or returning to the average value. It is

use to identify the impact of one variable on another. In this report, regression is used
to study the impact of credit risk indicators such as, non-performing loan, bank size and
interest income on profitability.

1.5.5 Conceptual framework

In this project there are two types of variables i.e. dependent and independent.
Dependent variables are those, which are affected by the change in independent
variables. Profitability is dependent variable for this project. The variable influence the
dependent variable in positive or negative way is said to be independent variable. Non-
performing loan, Bank size and net interest income is taken as the independent variable.
If these variable changes there will be change in profitability.

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 Non- performing loan

Bank size Profitability

Net interest income

Figure 1.1: Conceptual framework of the study

Source: MS & N (2016), Olalere et al. (2015), Poudel (2018) and Abera (2018)

1.6 Definition of variables

Net interest income

Net interest income is one of the important variables to measure the profitability of the
organization. It can be taken as credit risk indicator, as the amount of net interest income
is low, higher the credit risk there will be. It is the difference between the revenue
generated from a bank's interest-bearing assets and expenses associated with paying on
its interest-bearing liabilities. A bank's assets consist of all forms of personal and
commercial loan, mortgage and securities. The liabilities consist of interest-bearing
customer deposits. The excess revenue that is generated from the interest earned on
assets over the interest paid out on deposits is the net interest income. If a bank earns
more interest from its assets than it pays out for liabilities than it will be profitable for
the Bank or else it may face credit risk.

Non-performing loan
Non-performing loan is the type of bank loan in which the borrower does not pay the
agreed installment or interest for more than 90 days. Bhattarai (2017) explains that the
amount of non-performing loan is one of the indicators of performance of the economy.
Less the non-performing loan, better the financial health of the economy. If the non–
performing loan is more, there will be poor financial health and crisis may result in the

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economy. Higher the non-performing loan, higher will the credit risk and low
profitability.

Bank size

The total assets from the balance sheet are considered as the bank size. Increasing bank
size can increase profitability by allowing banks to realize economies of scale.(Y. R.
Bhattarai, 2016) explains that bank size is generally used to capture potential economies
or diseconomies of scale in the banking sector. Pantha (2019) has taken bank size as
the credit risk indicator and explained that larger banks tend to be more active in
markets, have a greater product and have better possibilities for risk diversification.

Profitability

Profitability is the ability of a company to earn a profit from its operation. It is the
measurement of efficiency. Olalere et al. (2015) explained that, profitability can be
defined as the assessing of a bank policy and operation in a monetary form. It also
shows banks overall financial health over a period of time. In this report is the
dependent variable which is affected by other variables such as, non-performing loan,
bank size and net interest income.

1.7 Limitation of the study

The limitations of the study are as follows:

• There are many commercial banks in Nepal this research is based on only two
commercial banks.
• This research only includes data of Nepal Investment Bank Ltd. and Standard
Chartered Bank for the period 2014/15 to 2018/19, which is 5 years’ financial
period.
• This study has only applied limited number of statistical tools to analyze data.

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 Chapter 2: DATA PRESENTATION AND
ANALYSIS
2.1 Organization profile

Organization profile consists brief information about the history, evolution,

performance, mission, vision etc. In this report, two well known commercial banks of
Nepal are taken as sample i.e. Nepal Investment Bank Ltd. and Standard Chartered
Bank. The organization profiles of both banks are given below:

2.1.1 Organization profile of Nepal Investment Bank Ltd.

Nepal investment bank is one of the leading commercial banks of our country.
Previously it was known as Nepal Indosuez Bank Ltd. It was established in February
27, 1986 as a joint venture between Nepalese and French partners. The French partner
that is holding 50% of the capital of Nepal Investment Bank Ltd. was Credit Agricole
Indosuez. It was a subsidiary of one of the largest banking group in the world.

In 2002, 50% shareholding of Credit Agricole Indosuez in Nepal Indosuez Bank Ltd
was acquired by group of Nepalese companies comprising of bankers, professionals,
industrialists and business men. After that, the name of the bank also changed to Nepal
Investment Bank Ltd. Nepal Investment Bank Ltd. is licensed by Nepal Rastra Bank
(the central bank of Nepal) as a commercial bank under Class “A” financial institution
category. The registered office of the bank is located at Durbar Marg, Kathmandu
Nepal. The bank’s ordinary shares are listed in the Nepal Stock Exchange for public
trading. Nepal Investment Bank Ltd. is licensed to operate as a commercial bank under
the Banking and Financial Institution Act. Now the bank 82 branches, 16 Extension
Counters, 110 ATM outlets, 10 Revenue Collection offices scattered throughout the
country until now. Nepal Investment Bank Ltd. is the parent company with its
subsidiary namely NIBL Ace Capital Limited.

Shareholder structure:
At present, the Bank's shareholding pattern is as follows

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 Table 2.1

Shareholders structure

Share holders Percentage

Promoters 69%

General public 31%

Total 100%

Vision

The vision of Nepal Investment Bank Ltd is to be the most preferred provider of
Financial Services in Nepal.

Mission

The mission of Nepal Investment Bank Ltd is to become the leading Nepali bank,
delivering world class service through the blending of state-of-the-art technology and
visionary management in partnership with competent and committed staff, in order to
achieve sound financial health with sustainable value addition to all their stakeholders.
They are committed to do this mission while ensuring the highest levels of ethical
standards, professional integrity, corporate governance and regulatory compliance.

Values and principals

Their core values tell that the customers and the communities they serve, who they
really are, what they are about and the principles by which they pledge to conduct
business. In essence, they believe that success can gain by following their core values
and principles:

Customer Focus: At Nepal Investment Bank Ltd, the prime focus is to perfect their
customer service. Customers are their first priority and driving force. They wish to earn
customer confidence and be their trusted partner.

Quality: they believe a quality service experience has greatest importance to the
customers and they are strongly committed in fulfilling this ideal.

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Honesty and Integrity: They provide the highest level of integrity to their customers.
Their main principal is to create an ongoing relationship of trust and confidence with
customers. They show honesty, fairness and respect to their customer.

Belief in their people: They believe that the employees are their most valuable asset
and their competitive strength. The worth and dignity of individual employees who
devote their careers for the progress of the bank are respected.

Teamwork: They believe in teamwork. They have recognized that loyal and motivated
teams can produce extraordinary results. Performance culture does derive them, in
which recognition and rewards are based on individual merit and demonstrated record
of accomplishment.

Good corporate governance: This bank is committed in following best practices

resulting in good corporate governance.

Credit risk management of Nepal Investment Bank Ltd.

To evaluate credit risk of the bank, Nepal Investment Bank Ltd has formulated different
tools. Before processing for credit decisions to the concerned authorities, Credit Risk
Management Department reviews the credit proposals and assigns independent risk
rating. Five pillars of credit namely Industry Environment, Financial Indicators,
Management Quality, Conduct of Account and Security Realization are taken into
consideration while assigning risk for Corporate Credit & SME whereas, four pillars of
credit namely Borrower’s Competency, Financial & Repayment Capacity, Conduct of
Account and Security Realization are taken into consideration while assigning risk for
Personal/Consumer Loan. Credit quality, credit performance, emerging trends,
expected level of credit losses are reviewed on periodic basis. Credit Risk Management
Committee thoroughly discusses and reviews the Credit Risk reports then present to
Risk Management Committee and to the BOD. Based on thorough analysis, discussion
necessary strategies, policies and action plans are formulated. Such policies and action
plans to concerned staff for effective implementation.

Management of Environment and Social Risk Environment and Social Risk are also a
part of credit assessment tool wherein relation of business with society, its labor,
environmental impact are assessed while taking credit decision.

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2.1.2 Organization profile of Standard Chartered Bank Nepal Limited

Standard Chartered Bank Nepal Limited is one of the greatest commercial bank of our
country. It has started its operation since 30th January, 1987. It is a subsidiary
of Standard Chartered PLC. Now, the bank has become an integral part of Standard
Chartered Group.This bank is having 70.21% of its ownership within the company and
Nepalese public owns the 29.79% of the shares. This bank is the only international bank
currently operating in Nepal.

This bank has been providing service to its clients and customers through an extensive
domestic network. The global network of Standard Chartered Group enables the bank
to provide truly international banking services in our country. This bank provides a
whole set banking services to the customers all around including individuals, mid-
market local corporate, multinational companies, large public-sector companies,
airlines, hotels and the development organizations segment consisting of embassies, aid
agencies, multilateral entities, non-government organizations, bilateral entities and
international non-government organizations. It is the first bank in Nepal to implement
the Anti Money Laundering policy and is first apply the ‘Know Your Customer’
procedure on all the customer accounts. This bank has 15 points of representation, 26
ATMs across the country and more than 531 local staff

This bank considers in providing shareholder value socially, ethically and

environmentally responsible manner. It has played an active role in supporting those
communities in which its customers and staff live since its long history.

Vision

Standard Chartered Bank vision is to make the organization an excellent service share
Centre for the Standard Chartered Group. The company also holds some costs in its
operations. These consist of courage of corporation taking a measured risk and are on
the lead for what is right. It is also responsive through timely delivery of the relevant
solution for their customers. Standard Chartered Bank also adopts creativity, which
encourages innovativeness, and adaptability that leads to continuously improving the
quality of service they provide to their customers. This bank focuses on trustworthiness
and aim of being honest, open and reliable to their clients and customers.

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Its vision statement is: "We have a key role to play in stimulating economic and social
development through the services we provide and by being a force for good. The
success of our business depends on this."

Mission

The mission of Standard Chartered Bank is to create exceptional value for our clients,
investors and staff; through market leadership in providing innovative Shariah
compliant products and solutions, and by adopting and living our core values.

Credit risk management of Standard Chartered Bank

Standard Chartered Bank, in order to manage its credit exposures, follows the principle
of diversification across products, client segments and industry sectors. To govern the
extension of credit to Corporate & Institutional Banking (CIB) and Commercial
Banking (CB) Clients, Retail Banking Clients Country Portfolio Guidelines, and Credit
Processing Manual is used. The framework is provided by each policy for lending
counterparties, account management, product approvals and other product related
guidance, credit processes and portfolio standards. Through defined framework, credit
risk under Retail Banking, Commercial Banking and Corporate & Institutional Banking
is managed, which sets out policies and standards covering the measurement and
management of credit risk.

The clear segregation of duties between transaction originators in the businesses and
the approvers in the Risk functions has been done. All credit exposure limits are
approved within a defined Credit Approval Authority Framework. All Corporate and
Institutional borrowers, at individual and group level, are assigned with internal credit
rating that supports identification and measurement of risk and integrated into overall
credit risk analysis. Credit Grade (CG) is reviewed periodically and amended in light
of changes in the borrower’s circumstances or behaviour. CG plays a central role in the
credit quality assessment and monitoring of risk. 23 The Credit Issue Committee
(“CIC”), a sub-committee of Executive Risk Committee (ERC), is responsible for
overseeing clients in CIB, CB and Business Banking segments showing signs of actual
or potential weaknesses and also for monitoring of agreed remedial actions for such
clients. The CIC reviews the existing Early Alert (“EA”) portfolio in CIB and CB and
Stress Account Management (SAM) portfolio in Business Banking as well as new
accounts presented to the Committee. It also reviews Retail Portfolio to ensure

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credit issues / adverse trends in the portfolio are identified and addressed through
appropriate actions. The CIC additionally reviews and monitors strategies and actions
being taken on accounts within GSAM’s portfolio. It is chaired by the CEO and meets
monthly. For Retail exposures, portfolio delinquency trends are monitored
continuously at a detailed level. Individual customer behavior is also tracked and
considered for lending decisions. Accounts that are past due are subject to a collections
process, managed independently by the Risk Function. Charged-off / provisioned
accounts are managed by specialist Recovery teams. The credit risk management covers
credit rating and measurement, credit risk assessment and credit approval, large
exposures and credit risk concentration, credit monitoring, credit risk mitigation and
portfolio analysis

2.2 Data presentation and analysis

In this part, different data has been collected through annual report of 5 fiscal years of
the respective banks. The data collected can be presented as below:

2.2.1 Net interest income

Net interest income is the difference between the interest income a bank earns from its
lending activities and the interest it pays to depositors. It is taken as credit risk indicator,
as net interest income and credit risk has negative relationship. If the amount of net
interest income is low, higher the credit risk there will be. It affects profitability of
banks. If a bank earns more interest from its assets than it pays out for liabilities than
there will be greater profitability.

The net interest income of NIBL and SCB are as follows:

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 Table 2.2

Net Interest Income

Amount (NIBL) Amount (SCB)

Fiscal Year (AD) (Rs.) (Rs.)
2014/15 2,978,799,130 1,913,515,465

2015/16 3,921,104,616 1,849,878,019

2016/17 4,976,173,411 2,328,418,034

2017/18 5,850,178,347 3,298,034,155

2018/19 6,173,506,249 3,521,861,998

Mean 4,779,952,351 4,779,952,351

Standard deviation 1333008928 781540607.6

Coefficient of variation 0.2789 0.3026

From this above table, it shows that the net interest income of NIBL from fiscal year
2014/15 to 2015/16 has been increase from Rs. 2,978,799,103 to Rs. 6,173,506,249.
The net interest income of SCB from fiscal year 2014/15 to 2015/16 has been increase
from Rs. 1,913,515,465 to Rs. 3,521,861,998.

Since, NIBL has maximum mean and standard deviation than SCB, it shows that NIBL
has high return and high risk than that of SCB in terms of net interest income. By
relatively analyzing, SCB has coefficient of variance of 0.3026, which is greater than
NIBL.This shows that SCB has greater risk in compare to NIBL due to high coefficient
of variance.

2.2.2 Non- performing loan

Non-performing loan is the loan in which borrower is in default and has not paid
principals and interest in specified period. If there is non-performing loan, three will be
greater credit risk and low profitability.
The non-performing loan of NIBL and SCB are as follows:

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 Table 2.3
Non-performing Loan

Fiscal year (AD) NIBL (Rs.) SCB (Rs.)

2014/15 692,234,137 94,769,956

2015/16 592,992,655 101,819,490

2016/17 888,161,357 76,720,052

2017/18 1,665,228,141 84,053,124

2018/19 3,641,002,453 83,450,372

Mean 1,495,923,749 88,162,599

Standard deviation 1270885843 10002407.06

Coefficient of variance 0.8496 0.1135

According to the table the non- performing loan of NIBL is greater than that of SCB.
In year 2015/16 the non-performing loan of NIBL is the lowest i.e. Rs. 592,992,655. In
2018/19 it has increased up to Rs. 3,641,002,453. In SCB,Rs. 76,720,052 is the lowest
amount of Non-performing loan, which is in year 2016/17. In year 2015/16 it is the
highest amount i.e. Rs.101,819,490.

The average of non-performing loan of NIBL is Rs.1,495,923,749 which is greater than

the average of SCB i.e., Rs. 88,162,599. It shows that SCB is more profitable than
NIBL. Standard deviation shows the risk of the bank. NIBL has highest risk as it has
standard deviation of 1270885843, which is greater than that of SCB. Relatively
analyzing NIBL has greater risk than that of SCB as coefficient of variance of NIBL is
0.8496 which is greater than the coefficient of variance of SCB i.e. 0.1135.

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2.2.3 Bank size
In this report, total assets from the balance sheet of banks are considered as the bank
size. If the bank size is greater the will be greater profitability and greater the risk will
be.

The bank size of NIBL and SCB can be presented as below:

Table 2.4

Bank Size

Fiscal Years (AD) NIBL (Rs) SCB (Rs)

2014/15 104,345,436,413 65,059,044,079

2015/16 129,782,705,314 65,185,732,479

2016/17 150,818,033,554 78,356,012,689

2017/18 171,893,546,610 83,094,683,697

2018/19 185,841,988,230 93,264,183,123

Mean 148,536,342,024 76,991,931,213

Standard Deviation 12,100,316,238 32,584,549,213

Coefficient of variance 0.2194 0.1572

According to the table, the bank size of NIBL is greater than that of SCB. NIBL has
bank size of Rs. 104,345,436,413 at the beginning and it increase up to Rs.
185,841,988,230 in year 2018/19. The starting amount of SCB is Rs. 65,059,044,079
at the year 2014/15 and it increases up to Rs. 93,264,183,123 at the year 2018/19. Both
banks have their bank size increasing each year continuously.

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According to the table the profitability of NIBL is greater than that if SCB as it has
greater average value i.e., Rs. 148,536,342,024 and risk is greater in SCB as it consists
of greater standard deviation of Rs. 32,584,549,213. By analyzing risk

through coefficient of variance NIBL has greater risk and greater return as it has
coefficient of variance of 0.1294 which is greater than 0.1572.

2.2.4 Regression analysis

Through regression analysis, we can calculate the impact between net interest income,
non-performing loan, bank size and profitability of both banks. This study uses multi
linear regression because it studies the relation between dependent variable such as, net
profit and independent variables such as, net interest income, non-performing loan and
bank size.

Here is the table of regression analysis.

Table 2.5

Impact of variables

Coefficients Standard Error t Stat P-value

Intercept 603298195.5 1137734754 0.530262606 0.689607389

non-performing
-0.193 0.101 -1.904 0.307
Loan

Interest income 0.921 0.670 1.373 0.400

Bank size -0.012 0.030 -0.406 0.754

Depicts that the impact of non-performing loan on profitability is negative and

insignificant at coefficient of -0.193 and p-value is 0.307. Further, the effect of interest
income on profitability is found to be positive and insignificant at coefficient of 0.921
and p-value of 0.400. Similarly, the impact of bank size on profitability is also found to
be negative and insignificant with coefficient of -0.012 and p-value of 0.754. Hence, it
is found that non-performing loan, interest income and bank size does not have effect
on profitably of the bank.

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 Table 2.6
Test of fitness

zz df SS MS F Significance F

Regression 3 1.79 5.97 52.86 0.100

Residual 1 1.13 1.13 - -

Total 4 1.80 - - -

This table generally tests whether the model Y= a+b1x1+b2x2+b3x3 predicts the
estimation is significant or not i.e. whether the model is fit or not. Since, the table
depicts sig value is greater than 0.01. The regression estimation is insignificant i.e the
model of the study seems to be not fit.

Table 2.7

Test of variation

Regression Statistics

Multiple R 0.997

R Square 0.994

Adjusted R Square 0.975

Standard Error 106259449.5

The R square value 0.994 in the table indicates 99.4 percent of the variation in the
dependent variable: profitability of Nepal Investment Bank Limited and Standard
Chartered Bank is explained by three independent variables: non-performing loan, bank
size, net interest income.

2.3 Findings and discussion

The main aim of this study is to explain the various credit risk indicators i.e. the
independent variables such as, non-performing loan, net interest income and bank size

21
impacts on the profitability of commercial banks of Nepal. For this purpose, various
secondary data are collected. The profitability analysis is done in this project. The
profitability analysis helps to measure the amount of profit earned due to the efficiency
of many operation in the bank. With profitability analysis, we can find out different
financial results of the bank. Some of the findings of the report are as follows.

The relationship between interest income and profitability according to regression

analysis is found to be positive and insignificant at coefficient of 0.921 and p-value of
0.400. The relationship between non-performing loan and profitability is negative and
insignificant at coefficient of -0.193 and p-value is 0.307. The relationship between
bank size and profitability is also found to be negative and insignificant with coefficient
of -0.012 and p-value of 0.754. It is found that non-performing loan, interest income
and bank size does not have effect on profitably of the bank.

Table: 2.8

Hypothesis test

Hypothesis Results Tools Sig. level

Ho1 : There is no significant effect of interest Accepted Regression

income with profitability analysis -

Ho2 : There is no significant effect of non-profit Accepted Regression

loan with profitability analysis -

Ho3 : There is no significant effect of bank size with Accepted Regression

profitability analysis -

Discussion

The variables non-performing loan, interest income and bank size are the indicators of
credit risk, that were identified as factors influencing the profitability of commercial
banks. Therefore, this study observed the impact between non-performing loan, interest
income and bank size to the profitability of the banks.

22
 Chapter 3: CONCLUSION AND ACTION
IMPLICATIONS
3.1 Conclusion
Banks and financial institutions face a number of risks and hazards including credit
risks, liquidity risks, operational risks, exchange rate risks, interest rate risks, political
risks, and all other internal and external risks. However, credit risk is considered as the
most common and dangerous risk especially for the banks that can put them into deep
trouble and even they may face bankruptcy. In order to understand the impact of this
risk on banks profitability this study has taken some of the independent variables, that
are credit risk indicators such as, net interest income, non-performing loan and bank
size and has analyzed there effect on profitability of the banks.

In this study, two banks are taken as sample: Nepal investment bank ltd. and Standard
Chartered Bank Nepal, which are playing the role of foster in Nepalese economy.
Strong financial position is must to survive, grow and to be successful in the world
passing through the rapid change. There are different risks the banks have to face to
have strong financial position. One of the major risk is credit risk. The crux of this
report is to analyze the financial status of both Nepal Investment Bank Ltd. and
Standard Chartered Bank Nepal with the help profitability analysis. For this purpose,
comparative analysis is done by calculating mean, standard deviation, coefficient of
variance as well as by doing regression analysis. The result of these analysis are:

By calculating mean, standard deviation and coefficient of variance of net interest

income, we can conclude that NIBL has maximum mean and standard deviation than
SCB, it shows that NIBL has high return and high risk than that of SCB in terms of net
interest income. By relatively analyzing, SCB has coefficient of variance greater than
NIBL that shows SCB riskier in compare to NIBL.

Analysis of mean, standard deviation and coefficient of variance of non-performing

loan shows thatmean of NIBL is greater than the of SCB. It shows that SCB is more
profitable than NIBL. NIBL has highest risk as it has standard deviation is greater than
SCB. Relatively analyzing NIBL has greater risk than that of SCB as coefficient of
variance of NIBL is greater in compare to SCB.

23
By calculating mean, standard deviation and coefficient of variance of bank size, we
can conclude that profitability of NIBL is greater than that of SCB as it has greater
average value. Risk is greater in SCB as it consists of greater standard deviation in
compare to NIBL. By analyzing risk through coefficient of variance NIBL has higher
risk and higher return as it has greater coefficient of variance.

Through regression analysis, it is found that impact of non-performing loan on

profitability is negative and insignificant. The effect of interest income on profitability
is found to be positive and insignificant. Similarly, the impact of bank size on
profitability is also found to be negative and insignificant. Hence, it is found that non-
performing loan, interest income and bank size does not have effect on profitably of the
bank.

3.2 Action and implications

There are various factors that indicate credit risk. This study focuses on some of the
major indicators that influence the profitability. The result of this study will have
important implications and is believed to be helpful for commercial banks of Nepal.
Commercial banks must evaluate those factors that cause the credit risks and analyze
their impact on their profitability. This study encourage commercial banks be aware of
credit risk that may come from different factors to increase the profitability. It guides
different commercial banks and financial institution to improve the rate of profitability
by minimizing credit risk.

24
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