Loan management and recovery status in commercial banks in Nepal

1. INTRODUCTION
1.1 General Background
Globalization, privatization, free market, economic liberalization are the key phenomenon taking in this 21st century, making the activities of banks and financial institutions more complex and challenging. Recent development in science and information technology has turned the whole world as a small village. A small mistake made by an organization effect in numerous sectors for the long run; to the organization, as well as to the nation. So the organization shall be conscious and vigilant in their activities. Banking sector started in 1994 B.S. from establishment of Nepal Bank Ltd, there after Central bank established in 2013 B.S. then Rastriya Banijya Bank in 2022 B.S. Joint venture banks started from 2041 B.S. after taking the liberal economic policy by the government. Since then, till now there has been seventeen commercial banks operating in the country and there are altogether 282 financial institutions. Most of the deposits collected and loan provided by the financial institution are hold by the commercial banks, so the area of the commercial bank is chosen for the study. Present challenges to the banking sector are: to manage the excess liquidity outstanding, to invest the money in productive as well as new sector, to accumulate the non-performing loan outstanding. Commercial banks collect deposits from individuals and invest them as loan and advance to the borrowers and receive interest as the output of the business. Commercial banks profit and operating cost are borne by these interest collected from the borrowers. When these interests as well as the principal cannot collect in due time, the existence of the bank and the deposits of individuals will be in threat. So, necessary action shall be taken by the banks, as well as by the government to overcome from this situation. A notice published by Nepal Bank Ltd. on 18th December 2004 in kantipur daily: Large and reputed organization and its holder are not initiated to pay back its interest and principal to the bank, which are burden to Nepalese people. Nepal bank has NRs 2074 crores doubtful loan outstanding that comes to loss of NRs. 5453 to each shareholder and NRs. 896 per head to Nepalese people. So the bank will take necessary action to recover its loan by any means. Similarly, RBB has also published its large loan defaulter time to time in national daily: which has non-performing loan around 56 percent. Several banks and financial institutions published 35-day notice for non-recovery of loans, making good business to the newspapers while increasing cost to the institutions. These been evidence for us to state that the loan sanction administration in Nepalese banks are weedy as well as the loan recovery process are too long and there may require improvement in laws and regulations regarding it. As a news published in The Himalayan Times," Newly appointed NRB governor said the central bank would take stringent measures against willful defaulters in course of recovery of bad loans. More strong measures will be taken in addition to the existing black listing of willful defaulters, again, NRB will not let the public's money be misused, since it is a major responsibility of the bank to keep the financial status of the banking sector sound and vibrant." Commercial banks hold around 70 percent of the total deposit and 60 percent of the total loan and advances made in the financial sector. Problem in the financial sector are the 1

Loan management and recovery status in commercial banks in Nepal

1.4 Statement of Problem

Banking industry in the eyes of the layman appears as a very profitable sector, giving rich dividends and profitability to the investors. However, unlike the general perception, the industry is plagued with immense challenges to sustain it and outpace those within the industry, mainly due to rising competition and weak economic situation in the country. The challenges currently prevailing in the industry are as under: Nepal Bank Ltd. and Rastriya Banijya Bank are the large commercial bank which holds about 70 percent of total deposit collected by the financial institution, where at the same time both the banks have excess NPL (around 56 percent in RBB and around XX percent in the NBL), so that the management of these banks are given to the foreign experts. We have seen and heard about the private and joint venture banks regarding providing the loans to single person or organization which immaculate risk in investment. Commercial Bank's main function is to collect the savings from individuals and invest them in different sector as loan and advances. Bank's Have the banks has improved in loan management and NPA management after taking charge by the foreign management? Loan administration in commercial banks? Loan investment portfolio in commercial banks? Loan recovery status in commercial banks.

1.5 Objectives of the Study

The study basically aims to evaluate the financial position of NEA and to suggest recommendation based upon it. The specific objectives of this study will be: To analyze NPL outstanding and its effect. To identify loan administration procedure of commercial banks. To access the loan investment portfolio in the commercial banks. To examine the necessary actions taken for recovery of NPL by the commercial banks. To measure the comparative output of loan management in private and government banks. To provide some suggestions and recommendation based on the findings for the improvement in loan management.

1.6 Rationale of the study

Banking sector is vital sector for economic growth in a country. Any study in this sector will helpful for several stakeholders. Researcher believes that following institution and individual will be benefited from the study

Loan management and recovery status in commercial banks in Nepal

Individual who will carryout further research work in commercial banks regarding loan section. Commercial banks whose study been made. Individuals who have keen interest in Nepalese economy and banking sector. Investors, depositors, borrowers Students, teachers, managers, policymakers, etc.

1.7 Limitation of the Study:

The study and outcome of the study will be an individual effort. Therefore management and resource mobilization will limit the in-depth study of few commercial banks operating in the country. The study will be based on secondary data; therefore, the accuracy of results and conclusions highly depends upon the reliability of these data. The evaluation is made through the analysis of financial statement published and presented by the banks. As the title specifies the study covers about loan subject only others factor beside these will not studied. Resource, time, money constraints and inaccessibility of sufficient information also limit the conclusion drawn from study. This study may not be precise as it is prepare to fulfill the partial requirement of the MBS program.

Loan management and recovery status in commercial banks in Nepal

2. RESEARCH METHODOLOGY
2.1 Introduction
The main objective of this study is to find out the loan management and administration procedure taken by commercial banks and loan recovery status of these banks. A suitable and simple research methodology of the study will be followed so as to fulfill the stated objectives as well as to make it easier in visualizing the total study clearly. This chapter includes research design, sources of data, hypothesis and tools used for the analysis.

2.2 Research Design

"A research design is the arrangement of conditions for collection and analysis of data in a manner that aims to combine relevance to the research purpose with economy in procedures." The research is based on recent historical data. The study will explore the loan management and recovery status of the commercial banks. To conduct the study both descriptive and analytical research approach will be adopted. Descriptive approach is utilized for conceptualization, problem identification, conclusion and suggestion of the study where as analytical approach will be followed for the presentation and analysis of data.

2.3 Sources of Data

The main source of data for the purpose of this study is the published financial statements and annual reports of the commercial banks. Beside that central bank's directives, statistic nirdesika, banking and financial statistics, economic review paper, published figures and data in different magazines and newspapers are prime source. The study is thus mainly based on the secondary data. However, in some cases primary data is also obtained from the discussion through bank officials. All other available published and unpublished materials concerning the study as well as some journal abstracts will also be used in the study.

2.4 Tools for Analysis

Different statistical as well as financial tools are used to analysis the collected data. Financial tools: Financial ratio Statistical tools: 4

Loan management and recovery status in commercial banks in Nepal

Mean Standa Ratio Analysis is a powerful tool of financial analysis. A ratio is defined as " the indicated quotient of two mathematical expressions" and as the relationship between two variables. Types of Ratio Used: Following ratios are used to know the financial performance of NEA. A. Liqidity Ratio Liquidity ratios are used to judge the firm's ability to meet short-term obligations. This consists of Current ratio and Quick ratio or Acid test ratio analysis. B. Leverage/ Solvency Ratio Financial leverage or capital structure ratios are calculated to judge the long-term financial position of the firm. This ratio indicates the mix of fund provided by owners and lenders. The leverage ratio consists of Total debt ratio, Debt equity ratio analysis. C. Turnover Ratio Turnover ratio indicates the speed with which assets are being converted or turned over into sales. These ratios are employed to evaluate the efficiency with which firm manages and utilizes its assets. This consists of Fixed assets turnover ratio, Total assets turnover ratio, Inventory turnover ratio and Average collection period. D. Profitability Ratio Profitability ratio measures the success of the firm in earning a net return on sales or on investment. These ratios give the decision about how effectively the firm is being managed. This consists of Net profit margin, Operating expenses ratio, Return on total assets. 2.4.2 Statistical Tools A. Average An average is the figure representing even distribution among the included elements or terms. It is calculated by dividing the sum of the elements with number of elements. B. Coefficient of Correlation It is a statistical measure of relationship between two variables. It shows the variability of one variable in relation to the variation of another variable under consideration. C. Graph 5

Loan management and recovery status in commercial banks in Nepal

Graph helps to show the general trend of the ratios in respect to the time period. A very common and simple way of presenting data for two variables, which have a relationship, is in a figure or chart or a graph. Graph works best when the data is continuous.

2.5 Method of Presentation and Analysis

Simple methods of analysis will be used. Data presentation and analysis will be divided into small sub-topics. Every result will be tabulated and clear interpretations will be given simultaneously. Detail of calculation will be presented at the end of the report. Tables, diagrams, charts, trend analysis and graphs will be use to make report clear and easily understandable. Summary conclusion and recommendations will be presented at the last chapter of the report. Plan of the work This study will be divided into five chapters. Chapter I introduction chapter includes background of the study, statement of the problem, objectives of the study, significance of the study, hypothesis test and limitations of the study. ChapterII will reveal literature review; review from various books, previous research, magazines, etc. Chapter III, research methodology will include research design, population and size, data collection procedure, tools for analysis and method of analysis and presentation. Chapter IV will present, analyze, and interpret data of related topic based on anuual analysis and presentation. Chapter IV will analyze and interpret data of related topic nbased on annual reports of banks. In the last chapter i.e. chapter V summary, conclusion and recommendation of the study will be presented.

Bibliography
1. Sharpe F. William and Alexander J. Gordan "Investment", prentice hall of India, New Delhi, 2000 2. "Vidyut", a half-yearly magazine published by Nepal Electricity Authority 3. Kothari, C.R. "Quantitative techniques", Vikash publishing house pvt. Ltd.,New Delhi,1992 Wolf, H.K. & Pant, P.R. (2000) Social science research & Thesis Writing, Kathmandu: Buddha Academic Enterprises Pvt. Ltd. Different issue of Kantipur daily, The Himalayan Times daily, Gorkhapatra 4. Nirdosh SijapatiRamesh Parajuli "Credit management of commercial bank in the context of financial secrtor reform program",Unpublished thesis, T.U. 2002