Post on 15-May-2020
Impact of Capital Adequacy on the Financial Performance of
Commercial Banks in Nepal
(Special reference of NABIL and NIB)
BY
SANTOSH DAHAL
TU Registration. No. 7-2-22-30-2014
Exam Roll No. 14494/14
A Summer Project Report Submitted to
Faculty of Management, Tribhuvan University
In partial fulfillment of the requirements for the degree of
Bachelor of Business Administration
at the
Patan Multiple Campus
Tribuvan University
Patandhoka, Lalitpur
May, 2018
ii
RECOMMENDATION BY SUPERVISOR
This is to certify that the summer project entitled “ Impact of capital adequacy on the
financial performance of Commercial Bank” is an academic work done by “ Mr. Santosh
Dahal” submitted in the partial fulfillment of the requirement for the degree of Bachelor of
Business Administration” at faculty of Management; Tribhuvan University under my
guidance and supervision. To the best of my knowledge, the information presented by him
in the summer project report has not been submitted earlier.
Signature of supervisor
Name:
Designation:
Date:
iii
VIVA - VOCE SHEET
We have conducted the viva - voce examination of the summer project report presented by
Santosh Dahal
Patan Multiple Campus
Patandhoka, Lalitpur
TU Registration Number: 7-2-22-30-2014
Entitled
Impact of capital adequacy on the financial performance of commercial banks in
Nepal (Special reference of NABIL and NIBL)
And found the report to be original work of the student and written according to the
prescribed format. We recommend the report to be accepted as partial fulfillment of the
requirements for the degree of
Bachelor of Business Administration (BBA)
Head, Research Department:………………………….
Member (Report Supervisor):…………………………
Member (External Expert):……………………………
Date:…..…………………………………………………
iv
DECLARATION
This is to certify that I have completed the Summer Project entitled “Impact of Capital
Adequacy on The Financial Performance of Commercial Bank (Special reference of
NABIL and NIB)” under the guidance of DR. Yuga Raj Bhattarai and Prof.Bijaya
Gopal Shrestha in partial fulfillment of the requirements for the degree of Bachelor OF
Business Administration at Faculty of Management, Tribhuvan University. This is my
original work and I have not submitted it earlier elsewhere.
……………….
Santosh Dahal
2018, April
v
ACKNOWLEDGEMENT
The report writing is entitled in “Impact of Capital Adequacy on the financial performance
of commercial bank” has been carried out in partial fulfillment of the Bachelor of Business
Administration course of Tribhuvan University.
This research has focus on analyzing the capital adequacy ratio and its effect on financial
performance of commercial bank by taking reference of NIBL and NABIL bank. Effort has
been made to analyze in the precise manner.
I would like to express my deep gratitude to Dr. Yuga Raj Bhattarai and Professor Bijaya
Gopal Shrestha sir of Patan Multiple College for providing Valuable directions and
suggestion for report writing. I also like to offer cordial thanks to the concerned authorities
of Nepal Investment Bank and Nabil bank for helping me for providing the necessary data.
For any kind of mistakes and errors detected, which I might have committed knowingly or
unknowingly during the preparation of this report, I highly apologize for that.
Thank you
vi
TABLE OF CONTENTS
TITLE PAGE ……………………………………….…………………………………………………i
RECOMMENDATION BY SUPERVISOR ............................................................................. ii
VIVA - VOCE SHEET ........................................................................................................... iii
DECLARATION .................................................................................................................... iii
ACKNOWLEDGEMENT ....................................................................................................... v
LIST OF TABLES................................................................................................................ viii
LIST OF FIGURES ............................................................................................................... ix
LIST OF ABBREVIATIONS ................................................................................................... x
EXECUTIVE SUMMARY ..................................................................................................... xi
CHAPTER I INTRODUCTION ........................................................................................ 1
1.1 Context Information ................................................................................................ 1
1.2 Statement of problem .............................................................................................. 3
1.3 Purpose of the Study ............................................................................................... 4
1.4 Significance of the Study ........................................................................................ 4
1.5 Literature Survey ..................................................................................................... 5
1.5.1 Conceptual framework .......................................................................................... 5
1.5.2 Review of related studies....................................................................................... 8
1.5.3 Concluding Remarks ........................................................................................... 10
1.6 Methodology ......................................................................................................... 11
1.6.1 Research design ................................................................................................... 11
1.6.2 Sample Designing ................................................................................................ 11
1.6.3 Sampling Procedures ........................................................................................... 12
1.6.4 Data collection Procedures .................................................................................. 12
1.6.5 Sources of Data.................................................................................................... 12
1.6.6 Data Analysis Procedures .................................................................................... 12
vii
1.6.7 Data Analysis and Presentation Procedures ........................................................ 12
1.6.8 Tools and Techniques .......................................................................................... 13
1.6.9 Regression analysis ............................................................................................. 16
1.7 Limitation of the study .......................................................................................... 17
1.8 Organization of the Study ..................................................................................... 17
CHAPTER II DATA PRESENTATION AND ANALYSIS .......................................... 19
2.1 Organization profile ................................................................................................... 19
2.1.1 Introduction to NABIL Bank Limited ................................................................. 19
2.1.2 Introduction to NIBL (Nepal Investment Bank limited) ..................................... 20
2.2 Data presentation of commercial banks ..................................................................... 20
2.2.1 Capital Adequacy and Profitability Position of NIBL ........................................ 21
2.2.2 Trend analysis of CART and ROA of NIBL ....................................................... 22
2.2.3 Capital Adequacy and Profitability Position of NABIL...................................... 23
2.2.4 Trend analysis of CART and ROA of NABIL .................................................... 24
2.3 Descriptive statistic of Variables ............................................................................... 25
2.3.1 Descriptive statistic of study Variables of NIBL ................................................ 26
2.3.2 Descriptive statistic of study Variables of NABIL.............................................. 27
2.4 Result from regression model .................................................................................... 28
2.5 Findings and Discussion ............................................................................................ 31
2.5.1 Major finding from the Analysis of Secondary Data: ......................................... 31
CHAPTER III CONCLUSION AND ACTION IMPLICATION ................................ 34
3.1 Conclusion ................................................................................................................. 34
3.2 Action Implications .................................................................................................... 35
REFERENCES
APPENDICES
viii
LIST OF TABLES
Table 2.1 Capital Adequacy Ratio and ROA of NIBL ...................................................... 21
Table 2.2 Bar Diagram of Capital Adequacy Ratio and ROA of NABIL ......................... 23
Table 2.3 Descriptive statistic of study Variables ............................................................... 25
Table 2.4 Descriptive statistic of NIBL .............................................................................. 27
Table 2.5 Descriptive statistic of NABIL ........................................................................... 28
Table 2.6 Pearson Correlation Coefficients (n=20) ............................................................. 29
Table 2.7 Regression Coefficients (n=20) .......................................................................... 30
ix
LIST OF FIGURES
Figure 1.1: Independent and dependent variable of the study ............................................. 10
Figure 2.1 Bar Diagram of Capital Adequacy Ratio and Return on asset of NIBL ............ 22
Figure 2.2 Trend analysis of CART and ROA of NIBL ...................................................... 23
Figure 2.3 Bar Diagram of Capital Adequacy Ratio and ROA of NABIL ........................ 24
Figure 2.4 Trend analyses of CART and ROA .................................................................... 25
Figure 2.5 Scatter Diagrams of CAR-T and ROA ............................................................... 31
x
LIST OF ABBREVIATIONS
Acronym Full form
BCBS : Basel committee on banking supervision
CAR : Capital Adequacy Ratio
CAR-S : Supplementary Capital
CAR-T : Total Capital Adequacy Ratio
CRWA : Capital to Risk Weighted Asset
NABIL : Nabil Bank Limited
NIBL : Nepal Investment Bank Limited
NRB : Nepal Rastra Bank
ROA : Return on Asset
xi
EXECUTIVE SUMMARY
This project analyses the impact of the capital on the financial performance of the
commercial banks by taking the reference of NABIL and NIBL. Simple judgmental
sampling is used to select sample banks. Capital provides buffer against losses and thus it
ensures safety and soundness of the financial institutions. It is necessary to ensure that the
bank have sufficient capital. Capital regulations are therefore put in place to ensure that the
banks meet the minimum capital requirement expected of them.
Many authors have postulated the capital adequacy has a great impact on the financial
performance of financial institutions especially commercial banks. This study provides
evidence that supports the central banks give high consideration toward the minimum
capital requirement of the commercial banks and to tightly monitor their operations while
at the same time remaining profitable. It therefore shows what impact capital adequacy has
on the profitability of the banks. This study also focused on whether commercial banks
able to protect depositor or not.
The study relied on secondary data and thus annual reports of the Selected banks were used
to provide the much needed information in the study. Percentage was used to analyze and
regression analysis was used to give insight into the relationship between the variables.
Total capital adequacy ratio and supplementary capital is major independent variable and
ROA is dependent variable in this study. Descriptive study also done to analyses the
overall data and individual data of selected banks respectively.
The major finding in the study is that selected banks maintain adequate capital to protect its
customer. Capital Adequacy also creates impact on ROA of the banks. Through the
regression analysis this study concludes that there is negative relationship between total
capital adequacy ratio and ROA of the banks and also finds that there is impact of capital
adequacy on the profitability of the banks.
1
CHAPTER I
INTRODUCTION
1.1 Context Information
The financial sector plays an important role in the development process of a country
through financial intermediation. Strong financial institutions are critical for increased
investment, economic growth, Employment and poverty alleviation, (Kyalo, 2002).
Banking as a vital section of total financial system, has a greater importance in overall
economic development. The Banking system occupies an important place in the nation's
economy. A banking institution is indispensable in a modern society. It plays a vital role in
the economic development of the country and forms the core of the money market in an
advanced country. The banking sector in Nepal is growing rapidly. Commercial banks are
mushrooming even at this time of recession in the economy of the world. In the current
context of the rapid expansion of the banks and financial institutions along with the
financial sector liberalization, Nepal Rastra Bank, the central bank of Nepal must regulate,
supervise and monitor the financial sector.
Financial performance is a subjective measure of how well a firm uses its assets from its
primary mode of Business to generate revenue. The term also used as a general measure of
a firms overall financial health over a given period of time, and can be used to compare
similar firms across the same industry or to compared industries or sectors in aggregation
(Hales, 2005)
Capital base of financial institutions facilitates depositors in forming their risk perception
about the institutions. Also, it is the key parameter for financial managers to maintain
adequate levels of capitalization. Moreover, besides absorbing unanticipated shocks, it
signals that the institution will continue to honor its obligations. The most widely used
indicator of capital adequacy is capital to risk-weighted assets ratio (CRWA). According to
Bank Supervision Regulation Committee (The Basel Committee) of Bank for International
Settlements, a minimum 9 percent CRWA is required.
2
Capital adequacy ultimately determines how well financial institutions can cope with
shocks to their balance sheets. Thus, it is useful to track capital-adequacy ratios that take
into account the most important financial risks—foreign exchange, credit, and interest rate
risks—by assigning risk weightings to the institution’s assets.
A sound capital base strengthens confidence of depositors. This ratio is used to protect
depositors and promote the stability and efficiency of financial systems around the world.
Capital adequacy is the amount of capital a bank or other financial institution has to hold as
required by its financial regulator (Investopedia). This is usually expressed as a capital
adequacy ratio of equity that must be held as a percentage of risk-weighted assets.
These requirements are put into place to ensure that the financial institutions do not take on
excess leverage and become insolvent. Capital requirements govern the ratio of equity to
debt, recorded on the assets side of a firm's balance sheet. Capital requirement should not
be confused with reserve requirements, which govern the liabilities side of a bank's balance
sheet- in particular, the proportion of its assets banks must hold in cash or highly-liquid
assets. Liquid assets include cash and bank balances, money at call and short notice having
placement of up to 90 days and investments in government securities (Ogboi, 2013).
The capital adequacy requirement affects the monetary transmission mechanism. If some
firms are bank dependent, their responsiveness of loan supply to change in monetary policy
determines the strength of the transmission mechanism. The adequate capital was regarded
as the amount of capital that can effectively discharge the primary capital function of
preventing bank failure by absorbing losses. Basel committee appointed by BIS formulated
rules and relation for effective supervision of the central banks. It is prescribed
international norms to be followed by the central banks. This committee prescribed norms
in order to protect the interest of the customer. Profitability is the ability to make profit
from all the business activities of an organization, company, firm, or an enterprise. It shows
how efficiently the management can make profit by using all the resources available in the
market. It measuring the profitability of a bank, bank regulators and analysts have used
Return On Assets and Return on Equity to assets in industry performance and forecast
trends in market structure as inputs in statistical models to predict bank failure and failures
and mergers and for a variety of other purposes where a measure of profitability.
3
1.2 Statement of problem
Nepalese economy is in primitive stage. There are various challenges that are emerging
with the globalization and liberalization. So. To boost up the economy, proper supervisory
and monitoring body is essential. In the context of the favorable macro-economic
indicators and based on the concept of competitive financial system Nepal Rastra Bank
(NRB) has been implementing the monetary policy so as to provide dynamism to the
economy. In the light of the global scenario, a strong, well managed, and efficient financial
system would contribute positively to sustainable development of the economy; NRB has
come up the updated capital adequacy framework, 2015 and unified directive (revised
version) 2017. This helps to set its priority in devising and implementing appropriate legal,
regulatory, managerial, and supervisory policies and provisions aimed at building a sound
and stable financial sector. The implementation of this updated capital adequacy
framework, 2015 and Unified Directives (revised version of 2007) 2017 will enhance the
effectiveness of the NRB to undertake appropriate regulation, supervision and monitoring
responsibilities for the qualitative development of the financial sector. Realizing the
significance of capital for ensuring the safety and soundness of the banks and the banking
system, and ensure the economic stability in the country, at large, NRB has developed and
enforced capital adequacy requirement based on international practices with appropriate
level of customization based on domestic state of market developments. Nepalese
commercial banks continuously improved its service for the customer. Banks tries to
maintain better image in front of the whole public. The coupled with various inherent
limitations of system like internal rating based approach of even standardized Approach
impractical and unfeasible. Thus, at this juncture, this framework prescribes simplified
Standardized approach impractical and unfeasible. Thus, at this juncture, this framework
prescribes simplified Approach (SSA) to measure credit risk.
1. Whether the selected commercial banks maintain the capital Adequacy position as
per the NRB Directives or not?
2. Is there any relationship between financial performance and CAR of selected
banks?
3. What is the effect of capital adequacy ratio on financial performance of commercial
banks?
4
1.3 Purpose of the Study
The main purpos of the report entitled “impact of capital adequacy on the financial
performance of commercial bank” is investigating the relationship between the capital
adequacy and the financial performance of the selected bank. It also tried to clarify the how
banking sector Maintain the capital requirement and how its create effect on the financial
performance of the banks. The major objective is pointed as follows+
1.) To assess the capital adequacy position of selected commercial banks as per the
NRB Directives.
2.) To observe the relationship between financial performance and CAR of selected
banks.
3.) To investigate the impact of capital adequacy on the profitability of the selected
banks.
1.4 Significance of the Study
Capital adequacy ultimately determines how well financial institutions can cope with
shocks to their balance sheets. Capital adequacy of any banking institution directly and
indirectly affect on the financial performance of the bank. Today's banking sector need to
consider the satisfaction of the customer as well as the overall performance of the bank in
order to maintain its image in competitive environment. The capital was regarded the most
important ingredient of any organization. However, there is no uniform international
regulatory standard for setting bank capital requirement prior to 1988. The Basel
committee on banking supervision (BCBS) developed the capital Accord, which is known
as Basel I, to align the capital adequacy requirements applicable especially to banks in G-
10 countries. Basel I introduced the minimum capital requirement in order to save the
banking sector from being bankrupted.
Thus the minimum capital standard set by the NRB for the Nepalese commercial bank as
per the international standard is very vital to safeguard the rights of the depositors and the
creditors. The study attempts to provide the basis for the reference for the Nepalese
commercial banks. The banks can know the impact of the capital adequacy in their
performance.
5
In these sense the study undertakes the significant role for the commercial banks to suggest
for their improvement to the selected commercial banks as well as the other commercial
banks. Moreover, the policy makers as well as planners at various levels can even get
benefited through the reference from the analysis and the results of the research. The study
will have further importance on various other groups like Nepal Rastra Bank, other
financial institutions, Depositors, borrowers, shareholders and other stake holders of the
bank and financial institutions, and other researchers in similar matters at large.
1.5 Literature Survey
This research focused on the effects of capital adequacy on the financial performance of
commercial banks by taking the special reference of NABIL and NIBL. Literature review
consists of a review of finance theories related to the study, literature as derived from
research work by other researchers, some general literature to aid in further understanding
the purpose and a summary.
1.5.1 Conceptual framework
Toft (1989) defined a bank as a system for providing a special kind of service connected
directly or indirectly with finance. A commercial bank therefore is a bank of commerce or
trade which is profit oriented and its main function is to accept deposits, lend money and
transfer funds among banks, individuals and businesses (Deaton et al, 1994).
The commercial banks which currently number 28 play a major significant role in the
Nepalese economy by mobilizing savings, taking deposits, lending money in the economy,
undertaking money transfers and providing a host of other services derived from their wide
range of financial Expertise.
Capital is essential and critical to the perpetual continuity of a bank as a going concern.
Capital requirement is a bank regulation which sets a framework on how banks and
depository institutions must handle their capital. Capital provides cushion that enables
banks to continue to operate even if they suffer temporary losses. Several theories have
been put forward to explain variations in the performance of various financial institutions.
These theories are: Agency theory, prospect theory, dividend relevance theories and capital
structure theories.
6
1.5.1.1 Agency Theory
Agency theory defines the firm as a “nexus of contracts” between different resource
suppliers. Two parties are central to agency theory; principals who supply capital and
agents who manage the day today affairs of the firm. Since the interests of the agents are
not necessarily those of the principal, the organization encounters agency costs. These
costs consist the expenses of monitoring the behavior of agents, including budget
restrictions, compensation practices (including stock options, bonuses and other
incentives), and the loss of profits due to operating rules and restrictions on management.
They also include bonding costs of the agents, and the costs of sub-optimal decisions,
defined as decisions that are made in the best interest of agents rather than principals.
Agency theory argues that in the modern corporation, in which share ownership is widely
held, managerial actions depart from those required to maximize shareholders returns
(Berle and means 1932; Pratt and Zeckhauser 1985). Agency theory specifies mechanisms
which reduce agency loss, for instance incentive schemes for managers which reward them
financially for maximizing shareholders interests.
1.5.1.2 Prospect Theory
According to the prospect theory, an individual can rationally exhibit differing degrees of
risk aversion over time depending on his position relative to target outcome. Decision
makers will be risk seeking if they perceive themselves to be operating below target.
Conversely, if they are operating above target they will be risk averse. For example, should
banks management find itself operating below target, a profitable sale of appreciated
securities can quickly add to the bottom line a practice commonly referred to as “gains
trading”. Earnings will improve only for the accounting period of the sale.
Profits can be augmented on a more lasting basis by increasing the loan portfolio through
the provision of credit to higher risk borrowers, resulting in higher interest income per
dollar invested. Generating the funds to finance these loans is also possible through
liability management e.g. increasing the rate paid on certificates of deposit to attract new
money. If management is operating above target then this does not need to occur. The
further below target bank operates the greater the variability of rates of return.
7
1.5.1.3 Dividend Relevance Theories
The dividend relevance theories state that the choice of appropriate dividend policy affects
the value of the firm e.g. Walter J E (1963) on his theory on dividend policy argued that the
relationship between the returns on investments, r and the cost of equity, ks, determine the
optimal dividend or pay out policy. He argue that if risks the firm should retain all the
earnings for re-investment whereas if risks the firm should distribute all the earnings as
dividends for the shareholders are able to earn more if the earnings were paid out to them
as dividends.
Ross (1977) on his incentive signaling theory on dividend policy argued that an increase in
dividends was often accompanied by an increase in price of stocks, while a dividend cut
generally led to a decrease in the stock prices. Ross suggested that managers can use
capital structure as well as dividends to give signals concerning the firms’ future prospects.
Ross theory rest on the premise that signals with cash-based variables (either debt interest
or dividend) cannot be mimicked by unsuccessful firms because such firms do not have the
future cash generating power to maintain the announced dividend or interest payment.
Accordingly, the higher the dividend yield on a stock, the greater it’s before tax returns.
1.5.1.4 Trade-off Theory
The trade off theory rationalizes that firms maximize their value when the additional
benefits (marginal benefits) that stem from debt (i.e. interest expense tax deductibility, the
disciplinary role of debt, lower informational costs relative to equity) equal the marginal
cost of debt (i.e. bankruptcy costs, agency costs between stake holders and bondholders).
1.5.1.5 Capital Structure Theories
How and why firms choose between the various sources of capital has been a source of
much debate in both developing and developed countries. The fundamental question asked
is whether the debt-equity mix in a firm really matters.
The cost of capital declines and the value of the firm increases with leverage (gearing) up
to a prudent debt level and after reaching the optimum point (minimum cost of capital or
maximum value of the firm), average causes the cost of capital to increase and the value of
8
the firm to decline (Solomon Ezra, 1959). The capital structure debate is dominated by two
theories which are the trade-off theory and the pecking order theo
1.5.2 Review of related studies
The research covered previous studies that had been done in Europe, Asia and USA on
capital adequacy, and the financial performance of commercial banks and other financial
institutions.
Aymen (2013) conducted case study on the Impact of capital on financial performance of
bank of Tunisia and revealed that the capital and the financial performance are two
important variables in the banking sector. They show the ability of banks to achieve
sustainable benefits and to address systemic shocks. The author used a static panel to study
empirically relationship between capital and financial performance by approximating the
capital by the ratio.
Sedhian (2012) concluded that capital adequacy has helped in developing suitable
prudential norms to save the banks and financial institutions from financial crisis and
signals of failure. The dissertation further concluded that the operating environment of the
bank has changed radically, and their risk management system has also improved.
Kiragu (2010) conducted study on the relationship between profitability and capital
adequacy of commercial banks by using empirical analysis and regression model. He
reaches in the conclusion that there is insignificant relationship between ROE and capita.
Even with the inclusion of control variable, the relationship remained insignificant. On the
other hand, the study found that there is significant negative relationship between ROA and
capital.
Bhattarai (2009) there was a significant impact of the directives on the various aspects of
the commercial banks. Also, it was found that banks would fall short in supplementary
capital but can maintain its total capital according to the NRB directives made impact on
the bank and results were the increase in the operational procedures of the bank increased
the operational cost of the bank. Short term decrease in profitability, which results to lesser
dividends to shareholders and lesser bonus to the employees. Reduction in loan exposure of
the bank decreases in interest income but increase the protection to the depositor's money.
Increases protection to the money of the depositors through increases capital adequacy
9
ratios adds more stringent loan related directives and increase in demand for loan loss
provisions and various other reserves to increase the core capital.
Poudel (2009) showed that net profit is closely related with total loan and advances. If the
loan and advances increases, there is increase in net profit too. Thus, net profit depends on
total loan and advances as well as other investment of banking activities. Since net profit is
the net income for the banks which is net amount i.e. deducting of various expenditure
amount. Specially, increment in pass loan leads the increment in net income of the bank.
Liyuqi(2007) found that liquidity and credit risk have negative impact on bank's
profitability. Jackson (2011) studied the impact of credit risk management on financial
performance of commercial banks in Kenya and concluded that credit risk management
have positive relationship with banks profitability
In the context of Nepal, Udas (2007) revealed that there was significant impact on NRB
directives of capital adequacy on the various aspects of the commercial banks and it also
helped in maintaining the stability of commercial banks in the financial market and to
uplift the banking sector in Nepal to international standard.
Al- Mikhlafi et al. (2004) stated that both banking risk indicators and returns are affected
by bank capital adequacy and this will be reflected in the bank value. The study also
revealed the need for taking necessary internal actions and measures to ensure compliance
with Basel II decision regarding banking capital adequacy, and finally selecting the time
scheduling that is suitable for execution.
The capital structure in the banking industry is highly regulated in compare to other
industries. Bank capital and risk are intimately related each other (Ross, 2002). Therefore,
the concepts of capital adequacy have been a subject of discussion among the academia as
well as professionals since many years. The tern capital adequacy is a subject of discussion
about the rational level of capital.
Morrison and White (2001), found that if the regulator's reputation is poor, then economy
will exhibit multiple rational equilibriums. The regulator can follow a loose regulation
policy which will maximize the size of banks and so allows the largest possible amount of
funds to be channeled in to profitable investment.
10
1.5.3 Concluding Remarks
Capital adequacy is a minimum capital requirement that must be maintained by the
commercial bank in order to protect its depositor. Bank operates in the complex
environment; they invest in the environment by taking the large amount of the risk. If any
uncertainty is happened, bank need to face large crisis. So that bank must maintain the
minimum capital requirement. Capital adequacy directly and indirectly affects the financial
performance of the bank. Higher the risk required high level of capital adequacy ratio. So
there is heart and blood relation between the capital adequacy and the financial
performance of the bank. Capital requirement helps to increase the strength of the banking
sector. According to the directive of Nepal Rastra Bank, every bank must maintain the 11
percent of capital adequacy ratio. Capital adequacy directly affect on the profitability of
commercial banks. Though different research has done before on this topic, it is rare to
find current situation results on selected topic. So the main aim of this research is fulfilling
the current gap and analysis the current impact of capital adequacy ratio on the financial
performance of the commercial banks.
Based on the theory and past empirical evidences following conceptual model has been
developed for this study.
Figure 1.1: Independent and dependent variable of the study
Independent Variable Dependent Variable
Capital Adequacy: (CORE,
SUPPLEMENTARY AND
TOTAL CAPTAL)
Financial Performance:
ROA
11
1.6 Methodology
This report draws its conclusion from two separate sources of information: information
related to the understanding of the general Basel II framework and information regarding
its implementation in the banks as well as considers the impact of capital adequacy on the
financial performance.
In this chapter, the overall method used while taking part in research activity has been
explained. Research methodology refers to the various sequential steps adopted by
researcher in studying a problem certain objective in view. Hence, the present Research
methods include Research Design, Sampling Design (population, sample size, sampling
methods), Data collecting procedure and data analysis procedures. The capital adequacy
and its impact on profitability of the commercial banks is the main focus of the study.
Thus, the study is made with respect to capital adequacy of two commercial banks. These
banks are compared on capital adequacy on the basis of the annual report provided and
mainly on profit and loss account, Balance sheet and Basel II disclosure.
1.6.1 Research design
The study basically follows descriptive research method by accommodating the causal
comparative research design. It examines the existing situations of capital adequacy and
profitability structure of commercial banks in Nepal. On the other hand, the study tries to
examine the effect of different capital adequacy norms on profitability composites.
Therefore, the study will be based on quantitative approach.
1.6.2 Sample Designing
There has been a remarkable development in the banking sector in Nepal. There are all
together 28 commercial banks operating in the country.
It is lengthy, time consuming and vague while taking all of these institutions into
consideration. The sample method has been selected to select the banks to study for this
research. The banks that have been sampled for the study are Nepal Investment Bank
Limited and Nabil Bank Limited.
12
1.6.3 Sampling Procedures
The simple judgmental sampling method is used for the sample to be taken. These two
banks are selected randomly from the available twenty eight banks in Nepal. The banks
with different characteristics have been selected so that the comparative study can be made.
1.6.4 Data collection Procedures
This research is based on the secondary data. The data is collected by the frequent visits to
the central bank and the two commercial bank s under study. Besides this, the other sources
of data are secondary data published by government and non government organization and
the internet as well.
1.6.5 Sources of Data
Mainly secondary data published and provided by NRB, and concerned commercial banks,
annual reports etc. is used for research works. Besides, to draw the useful information,
visits are made to central library, Nepal Rastra Bank Library etc. Internet websites is
browsed to get the required information.
1.6.6 Data Analysis Procedures
The data is analyzed on the basis of the information gathered from banks annual report
especially balance sheet capital adequacy sheet, BASEL II disclosure etc. so as to get
desired objective. Tables graphs and charts are used to present the data and analyze and
interpret the finding precisely.
1.6.7 Data Analysis and Presentation Procedures
The data presented and analyzed in the study are all secondary data. The data are analyzed
on the basis of the information gathered from the bank's annual report especially, balance
sheet, capital adequacy sheet etc. tables, graphs and charts have been presented to analyze
and interpret the findings. The comparative study has been made and banks are analyzed
and ranked on the basis of their performance. The data gathered from the banks are
compared with the directive issued by the central bank and analysis is made on
implementation and compliance aspects.
13
1.6.8 Tools and Techniques
1.6.8.1 Financial Tools
Capital adequacy ratio
Capital adequacy ratio is used to describe or measure the bank's capital fund. It is
expressed as a percentage of a bank's risk weighted credit exposures. Capital adequacy
ratio is calculated on the basis of core capital supplementary capital and total risk weighted
asset of the bank. This ratio is plays a significant role to protect depositors and promote the
stability and efficiency of financial system around the world and to examine adequacy of
the total capital fund and core capital.
Mathematically, CAR =
X 100
Where,
Total capital fund = core capital + Supplementary Capital
ROA (Return on Assets)
Return on assets (ROA) is a financial ratio that shows the percentage og profit a company
earns in relation to its overall resources. It is commonly defined as net income divide by
total asset. Net income is derived from the income statement of the company and is the
profit after taxes. The asset are read from the balance sheet and include cash and cash
equivalent items such as receivable, inventories, Land, capital the value of intellectual
property such as patents. ROA observed a negative but significant relationship between
Capital adequacy ratio and return on assets.
ROA =
1.6.8.2 Statistical tools
Statistical tools are used to analyze the relationship between two or more variables and to
find how these variables are related. In this study, following statistical tools are used.
14
Arithmetic mean or average
Arithmetic mean is an average of a given set of data this is divided by the number of
observation/ years. The arithmetic mean (AM) is denoted by X
Mean ( X ) =
n = Number of Year
∑X = Sum of X series
Standard Deviation
The coefficient of variation is the most commonly used measure of relative variation. It is
used in such problems where the researcher wants to compare the variability of more than
two years. Greater the C.V. the Variable or conversely less consistent, less uniform, more
consistent, more uniform, more stable and homogeneous.
Standard deviation (o ) = √
Where d= X - X
Coefficient of correlation
Correlation is a statistical tool design to measure the degree of association between two or
more variables. In other word if the changes in one variable affects the changes in other
variable, then the variable are said to be co- related when it is used to measure the
relationship between two variables, then it is called simple correlation. The coefficient of
correlation measures the degree of relationship between to sets of figures. Among the
various methods of finding out coefficient of correlation, Karl pearson’s method is applied
in the study. The result of coefficient of correlation is always lie between +1 and -1. The
formula for the calculation of coefficient of correlation between X and Y is given below.
15
r =
√
Where,
R = Correlation coefficient
∑x1 = X1 - X1
∑X2 = X2 - X2
The interpretation of calculated value of correlation coefficient by following way
If r = 0, then there is no correlation between variables
If r > 0, then there is positive correlation between variables
If r < 0, then there is negative relation between variables
If r = +1, then there is perfect positive correlation
If r = -1, then there is perfect negative correlation
Probable error (P.E.) = 0.675 *
√
Kurtosis
Kurtosis is statistical measure that is used to describe the distribution, of observed data
around the mean sometimes referred to as the volatility of volatility. Kurtosis is used in
statistical field to describe in the trend charts. Kurtosis can be present in a chart with fat
tails and a low, even distribution, as well as be present in a chart with skinny tails and
distribution concentrated toward mean.
K =
Where,
Q= quartile
P= percentile
16
Interpretation style of calculated value
If K = 0.263, the distribution is mesokurtic or normal]
If K< 0.263, the distribution is leptokurtic
If k< 0.263, the distribution is platykurtic
Skewness
Skewness is asymmetry in a statistical distribution, in which the curve appears distorted or
skewed either to the left or to the right. Skewness can be quantified and define the extent to
which a distribution differs from normal distribution.
Sk(P) =
Interpretation of calculated value of coefficient of skewness
If Sk(P) = 0, then this shows that the distribution is symmetrical (non -skewed)
If Sk(P) > 0, then this shows that the distribution is positively skewed or right
skewed
If Sk(P) <0, then this shows that the distribution is negatively skewed or left skewed
1.6.9 Regression analysis
In this report simple regression is used to show the relationship between the dependent and
independent variable. In this model Return on Asset is shown as dependent variable where
total Capital adequacy ratio and supplementary capital is considered as independent
variable. This shows that if total capital adequacy ratio and supplementary capital ratio is
changed, then it directly create effect on the return on assets.
ROAit = β0 + β1CARTit + β2CARSit+ eit
Where,
17
ROAit = Return on asset of ith
bank in t year
CARTit = Total Capital Adequacy ratio of ith
Bank in t year
CARSit = Supplementary Capital Ratio of ith
Bank in t year
β0 = The intercept o the regression Line
β1, β2 = the slope which represents the degree with which market price per share changes as
the independent variable changes b one unit variables.
eit = error term
1.7 Limitation of the study
This project report is prepared is for the partial fulfillment of the requirements for the
degree of Bachelor of Business Administration. There are various limitations faced during
the research work. Some major limitations faced are listed out as below:
1. It mostly focuses on the study of Nepalese banks with special reference to capital
Adequacy ratio.
2. Though there are 28 commercial banks functioning at presents, this study
undertakes only two banks i.e. Nabil bank limited and NIBL (Nepal investment
Bank Limited)
3. The research is based on the secondary data only. The primary sources are not used.
The report presented in merely based on the annual reports of the banks mentioned.
4. Due to the time constraint, they study does not deals the comprehensive study of
the selected commercial banks.
5. Moreover, the reliability of tools, lack of research experiences and lack of data are
the other limitation of this study.
1.8 Organization of the Study
This project report is prepared for the partial fulfillment of the requirements for the degree
of Bachelor of Business Administration. In this report whole chapter is classified into the
three parts.
18
Chapter I: Introduction section includes Background of the study, statement of the
problem, objective of the study, significance of the study, literature review, Research
Methodology, limitation of the study and Organization of the study
Chapter II: Data presentation and analysis section includes organization profile, Data
analysis and major finding of the study.
Chapter III: Conclusion and Action Implications.
19
CHAPTER II
DATA PRESENTATION AND ANALYSIS
This chapter generally discussed about organization profile, Data presentation, Data
analysis and finding and discussion. Data for Analysis can be obtained from the different
sources and they can be presented as tables or charts like bar diagram, graphs etc. the
methods of data presentation and analysis are used to analyze the given data and to present
them in very finest manner and let the data to present for drawing inferences. The data
collected from the concerned Samples Banks, NRB directives and from various other
sources like libraries, booklets, published reports, journals, internet website are organized
and classified for analysis. ROA and CAR are analyzed to understand the financial
performance of commercial banks.
2.1 Organization profile
2.1.1 Introduction to NABIL Bank Limited
Nabil Bank limited is the nation's first private sector bank, commencing its business since
July 1984. Nabil was incorporated with the objective of extending international standard
modern banking services to various sectors of the society. Pursuing its objective, Nabil
provides a full range of commercial banking services through its 52 points of
representation. In addition to this, Nabil has presence through over 1500 Nabil remit agents
throughout the nation. Nabil, as a pioneer in introducing many innovative products and
marketing concepts in the domestic banking sector, represents as milestone in the banking
history of Nepal as it started an era of modern banking with customer satisfaction measured
as a focal objective while doing business. Operations of bank including day- to - day
operations and risk management are managed by highly qualified and experience
management team. Bank is fully equipped with modern technology which includes
international standard banking software that supports the E-channels and E-
transactions.Nabil is moving forward with a mission to be "1st choice provider of complete
financial solutions" for all its stakeholders, customers, shareholders, Regulators,
communities and staff. Nabil is determined in delivering excellence to its stakeholders in
20
an array of avenues, not just one parameter like profitability or market share. It is reflected
in its Brand promise "together ahead". The entire Nabil team embraces a set of Values
"C.R.I.S.P" representing the fact that Nabil consistently strives to be customer focused,
Result oriented, Innovative, synergetic and professional.
2.1.2 Introduction to NIBL (Nepal Investment Bank limited)
Nepal Investment Bank Ltd. (NIBL), previously Nepal Indoseuz bank Ltd., was established
in 1986 as a joint venture between Nepali and French partners. The Frenchpartner (holding
50% of the capital) was Credit Agricole Indoseuz, a subsidiary of one of the largest
banking groups in the world. When Credit Agricole Indoseuz decided to divest, a group of
companies compromising of bankers, professionals, industrialists and businessman
acquired 50% of the holdings of Credit Agricole Indoseuz in Nepal Indoseuz Bank in April
2002. The name of the bank was changed to Nepal Investment Bank Ltd. upon approval of
the Bank’s Annual General Meeting, Nepal Rastra Bank and Company Registrar's office.
NIBL, being managed by the team of experienced bankers and professionals with a proven
track record, can match needs of the customers.
NIBL have undertaken many initiatives to strengthen customer experience through
multiple touch points such as internal banking, mobile banking and branchless banking. Its
overall growth record in deposits, lending, net profit and capital base is second to none.
• Highest growth rate among banks in Nepal.
• Experienced management and sound corporate governance.
• Top lender in Nepal with total loans and advances.
• Highest deposits
• Highest Net profit
• Highest paid up capital among the financial institutions.
• Largest among Taxpayers in Nepal
2.2 Data presentation of commercial banks
Capital adequacy ratio shows the relationships between Capital fund and Total risk
weighted assets of the bank. Capital adequacy ratio helps to increase the confidence of the
21
depositor and consumer. It provides the bases for protecting costumer wealth. According to
NRB Directive 2072 BS commercial Banks in Nepal required to minimum 6% of core
capital to RWA and 11% of capital adequacy. Total capital includes core capital and
supplementary capital.
Return on Assets (ROA) is a financial ratio that shows the percentage of profit a company
earns in relation to its overall resources. This study mainly focused on how financial
performance of company is changed due to change in capital adequacy.
2.2.1 Capital Adequacy and Profitability Position of NIBL
Central bank regulated the all the commercial banks. Banks should maintain the capital as
per the requirements of the central banks. By maintaining the total capital adequacy ratio it
is most important to firm utilize the resource effectively and efficiently.
Table 2.1
Capital Adequacy Ratio and ROA of NIBL
Year CAR-T(%) CAR-S(%) ROA(%)
2007/2008 11.28 4.26 1.79
2008/2009 11.24 3.57 1.7
2009/2010 10.55 2.68 2.2
2010/2011 10.91 2.05 2.02
2011/2012 11.1 2.14 1.6
2012/2013 11.49 1.76 2.6
2013/2014 11.27 1.48 2.3
2014/2015 11.9 1.75 1.9
2015/2016 14.92 2.36 2
2016/2017 13.02 1.87 2.1
Mean 11.77 2.39 2.02
SD 1.29 0.89 0.30
CV 0.11 0.37 0.15
Source: Annual Report of NIBL
Table 2.1 shows ten year CAR and ROA of the NIBL Bank. NIBL is continuously
maintained the better capital adequacy ratio over the 10 years period. The highest capital
adequacy is 14.92 percent in 2016. In same year the ROA is 2 percent. That shows increase
in capital adequacy ratio relatively degrade the financial performance of company. The
average of CAR-T, CAR-S and ROA is 11.77%, 2.39% and 2.02% respectively. The data
also presents that fluctuation of CAR-T is higher than CAR-S and ROA. CV of ROA is
less that means ROA of NIBL is less fluctuated in observed periods.
22
Figure 2.1 Bar Diagram of Capital Adequacy Ratio and Return on asset of NIBL
Fig. 2.1 shows the CAR and ROA of NIBL during 10 years time period. The highest CAR
is 14.92 in 2016 and highest ROA is 2.6 in 2013. Mainly figure show the inverse
relationship between the total CAR and NIBL. When the CAR increased ROA is
comparatively decreased.
2.2.1.1 Comparison of CAR set by NRB directive and CAR maintained by NIBL
The data shows the Capital Adequacy Ratio (CAR) to be maintained as per the NRB
directive and the actual CAR maintained by the bank. It shows that NIBL is able to
maintain its capital adequacy requirement as the differential CAR shows the positive
figure. The CAR maintained by the bank is 11.28%, 11.24%, 10.55%, 10.91%, 11.1%,
11.49%, 11.27%, 11.10%, 14.92% and 13.02% respectively in last ten years. That shows
NIBL able to meet the NRB requirements. Up to 2072 BS firm need to maintain CAR ratio
more than 10% and new directive of NRB 2072/2073 commercial bank state that
commercial bank should maintain the 11 % of CAR. NIBL succeed to maintain capital
adequacy ratio as per the directive.
2.2.2 Trend analysis of CART and ROA of NIBL
This considers the past movement of the CART and ROA. This show how ROA is change
with the change in total capital adequacy ratio of the banks. Generally return on asset is
change with the change in total capital adequacy ratio of the banks. Banks maintain total
capital adequacy ratio by focusing their business resources utilization program.
0
5
10
15
20
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Pe
rce
nta
ge
Years
ROA(%)
CAR-T(%)
23
Figure 2.2 Trend analysis of CART and ROA of NIBL
The figure 2.2 shows the trend of CART and ROA of the commercial bank. This indicates
the CART and ROA is increasing continuously in ten years of the tine. In the same time the
increasing rate of ROA is smaller than ROA. Figure also indicates at the time of increase in
CART, ROA is decline. This show there is negative relation between the CART and ROA.
2.2.3 Capital Adequacy and Profitability Position of NABIL
This is considering to analysis the overall total capital adequacy ratio and profitability
position of the commercial banks.
Table 2.2
Bar Diagram of Capital Adequacy Ratio and ROA of NABIL
Year CAR-T ROA(%)
2007/2008 11.1 2.32
2008/2009 10.7 2.55
2009/2010 10.5 2.37
2010/2011 10.58 2.43
2011/2012 11.01 2.8
2012/2013 11.59 3.25
2013/2014 11.24 2.65
2014/2015 11.57 2.06
2015/2016 11.73 2.32
2016/2017 12.42 2.71
Mean 11.24 2.55
SD 0.60 0.33
CV 0.0533 0.1294
Sources: annual report of NABIL
1.79 1.7 2.2 2.02 1.6
2.6 2.3 1.9 2 2.1
11.28 11.24 10.55 10.91 11.1 11.49 11.27
11.9
14.92
13.02
0
2
4
6
8
10
12
14
16
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Pe
rce
nta
ge
ROA(%)
CAR-T(%)
24
Table 2.2 shows NABIL continuously tried to maintained more CAR then NRB Directive.
In order to maintained the customer trust toward the Bank. The maximum capital adequacy
ratio that is maintained by the NABIL is 12.42% in 2017 where ROA is 2.71%. That also
shows that high in capital adequacy ratio negatively impact on the overall financial
performance of bank
Figure 2.3 Bar Diagram of Capital Adequacy Ratio and ROA of NABIL
Figure 2.3 show the 10 years period CAR and ROA of NABIL. NABIL constantly
maintained the better capital adequacy ratio over the period. This also indicates that
NABIL continuously maintained overall good ROA
2.2.3.1 Comparison of CAR set by NRB directive and CAR maintained by NABIL
The data shows the Capital Adequacy Ratio (CAR) to be maintained as per the NRB
directive and the actual CAR maintained by the bank. It show that NABIL is able to
maintain its capital adequacy requirement as the differential CAR shows the positive
figures. The CAR maintained by the bank are 11.59%, 11.24%, 11.57%, 11.73% and 12.42
respectively which is higher than standard set by NRB. Up to 2072 BS firm need to
maintain CAR ratio more than 10% and new directive of NRB 2072/2073 commercial
bank state that commercial bank should maintain the 11 % of CAR. NABL succeed to
maintain capital adequacy ratio as per the directive.
2.2.4 Trend analysis of CART and ROA of NABIL
This considers the past movement of the CART and ROA. This show how ROA is change
with the change in total capital adequacy ratio of the banks. Generally return on asset is
change with the change in total capital adequacy ratio of the banks. Banks maintain total
capital adequacy ratio by focusing their business resources utilization program
0
5
10
15
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Pe
rce
nta
ge
Years
CAR-T
ROA(%)
25
Figure 2.4 Trend analyses of CART and ROA
The figure 2.4 shows the trend of CART and ROA of the NABIL bank. This indicates the
CART and ROA is increasing continuously in ten years of the tine. In the same time the
increasing rate of ROA is smaller than ROA. Figure also indicates at the time of increase in
CART, ROA is decline. So this show there is negative relation between the CART and
ROA.
2.3 Descriptive statistic of Variables
In this section mean, standard deviation, kurtosis, skewness and min-max of variables (core
capital, supplementary capital and capital adequacy ratio) is analyzed. On the basis of data,
individual and combine analysis has done. The main objective is how commercial bank
continuously succeeds to maintain the better capital adequacy ratio in order to secure its
customer.
Table 2.3
Descriptive statistic of study Variables
Variable Mean SD Kurtosis Skewness Minimum Maximum
All
Sample:
ROA 2.26 0.41 0.14 0.47 1.60 3.25
CART 11.54 1.00 5.94 2.14 10.50 14.92
CARS 1.99 0.75 3.76 1.88 1.20 4.26
Source: Appendix II
2.32 2.55 2.37 2.43 2.8 3.25 2.65
2.06 2.32 2.71
11.1 10.7 10.5 10.58 11.01 11.59 11.24 11.57 11.73 12.42
0
2
4
6
8
10
12
14
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
% p
erc
en
tage
year
ROA
CAR-T
26
Table 2.3 shows in an average commercial bank maintain 2.26 percent of capital adequacy
ratio. The standard deviation is 0.41 that indicate variation in ROA of commercial bank is
less than one during the observation periods. Skewness of the commercial bank is 0.47 that
indicate data are fairly symmetrical and kurtosis 0.14 means that indicate data are slightly
right tailed in normal distribution from the center point. The minimum ROA of commercial
Bank is 1.60 and maximum ROA is 3.25.
In similar manner commercial bank maintain the 11.54 % Total capital adequacy ratio over
the 10 years period. The variation over the CART during the ten years is 1. Kurtosis is
5.94 that indicate CART is right tailed in normal distribution and skewness 1 indicates data
are highly skewed. The minimum Total capital adequacy ratio maintain by the commercial
bank over the 10 years period is 10.50 percent and Maximum capital adequacy ratio that is
maintain by the commercial bank is 14.92.
In same way commercial bank maintain 1.99 percent of supplementary capital in an
average. Standard deviation of supplementary capital is 0.75 that indicate variation is less
than over the ten years period. The skewness is 1.88 that indicates data are highly skewed.
Kurtosis 3.76 indicates supplementary capital is right tailed from the central point in
normal distribution. The minimum supplementary capital ratio is 1.20 and maximum
capital adequacy ratio is 4.26
2.3.1 Descriptive statistic of study Variables of NIBL
In this section only variables related NIBL bank is analyzed. Both Independent variable
and independent variable is analyzed by using descriptive statistic tool
27
Table 2.4
Descriptive statistic of NIBL
Source: Appendix III
Table 2.4 shows the descriptive statistic of dependent variable (ROA) and Independent
variable (CART and CARS) of NIBL. The average of ROA is 2.003. That means over the
10 years of bank history NIBL is able to maintain on an average 2.003 percent ROA. In
similar means standard deviation is 0.087 that mean return on asset variation is less over
the year. Kurtosis is 0.406 which indicate that the data is heavy tailed and little bit right
from the central point of normal distribution. The data is symmetrical distribution.
Skewness is 0.697 that means data are moderately skewed. Minimum ROA is 1.6 and
maximum ROA is 4.260.
Similarly, the average of CART is 11.805. That means over the 11 years of bank history
NIBL is able to maintain on an average 11.805 percent ROA. In similar manner standard
deviation is 0.371 that mean return on asset variation is less over the year. Kurtosis is 3.798
which indicate that the data is heavy tailed and right distribution from the central point of
normal distribution. The data is symmetrical distribution. Skewness is 1.866that means
data are moderately skewed. Minimum ROA is 1.6 and maximum ROA is 4.260.
2.3.2 Descriptive statistic of study Variables of NABIL
In this section only variables related NABIL bank is analyzed. Both Independent variable
and independent variable is analyzed by using descriptive statistic tool.
Variable Mean SD Kurtosis Skewness Minimum Maximum
NIBl:
ROA
2.003 0.087
0.406
0.697
1.600
4.260
CART 11.805 0.371
3.798
1.866
10.550
14.920
CARS 2.305 0.267
1.270
1.379
1.440
4.260
28
Table 2.5
Descriptive statistic of NABIL
Variable Mean SD Kurtosis Skewness Minimum Maximum
NABIl:
ROA 2.55 0.33 1.41 0.87 2.06 3.25
CART 11.24 0.60 0.09 0.61 10.50 12.42
CARS 1.64 0.35 0.71 0.69 1.20 2.35
Source: Appendix IV
The average ROA of NABIL bank is 2.55 that indicates on an average NABIL bank
maintain 2.55 percent of ROA over the 10 years period, SD is 0.33 that means variation in
ROA is less than 1. Kurtosis is 1.41 that means if data are present in normal distribution
then data are slightly left side distributed. And skewness is 0.87 that indicates data are
moderately skewed. The minimum ROA over the period is 2.06 and maximum ROA is
3.25.
The average of CART is 11.24 that indicate NABIL maintain 11.24 percent of CART over
the 10 years period time. SD is 0.60 that means variaion is less and kurtosis 0.09 means
data are skewed near the 0 and 0.61 of skewness shows that data are moderately
symmetrical. The minimum total capital adequacy over the 10 years period is 10.50 and
maximum capital adequacy ratio over the 10 years period is 12.42 percent. The average of
supplementary capital over the 10 years period is 1.64 and SD is 0.35 that means variation
in supplementary capital over the 10 years period is less than 1. Kurtosis is 0.71 that
indicates data are not too much far
from the central point. Skewness is 0.69 that means data are moderately symmetrical. The
minimum supplementary capital is 1.20 and maximum supplementary capital is 2.35.
2.4 Result from regression model
Regression analysis is set of statistical process for estimating the relationship among
variables. It includes many techniques for modeling and analyzing several variables, when
29
the focus is on the relationship between dependent variables and independent variables. For
the finding result regression analysis was conducted without control variables.
Test of significance was carried out for all variables studied using the t-test at 95% level of
significance. From the observation, Any p-value greater than 0.05 have a insignificant
relationship where the p-value less than 0.05 considered the significant relationship. The
standardized coefficient and the t-statistic indicate the strength of the relationship between
the dependent and independent variables. The adjusted R square measures the degree of
variability of the dependent variable due to the change in the independent variable.
The major data is analysis below, and a major tool that is used to analyze this is present in
appendix.
2.4.1. Analysis of regression Model
Correlation shows the relationship between the variable. In this section relation between
the capital adequacy ratio and Return on asset is shown.
Table 2.6
Pearson Correlation Coefficients (n=20)
Variable ROA CART CARS
ROA 1
CART -.153 1
CARS -.531* -.030 1
*. Correlation is significant at the 0.05 level (2-tailed).
Table 2.6 shows correlation between the ROA, total capital adequacy ratio and
supplementary capital adequacy ratio from 20 observations. Two tailed is used to analyze
the correlation between the ROA, CART and CARS. Here relation between CART and
ROA is -0.153. That means there is negative relation between the CART and ROA. This
also shows that there is big impact on financial performance of commercial bank due to
change in the capital adequacy ratio over the different period of time. Moreover there is
also negative relationship between the ROA and supplementary capital. That show ROA
move in opposite Direction of capital adequacy ratio.
30
Table 2.7
Regression Coefficients (n=20)
Variable Coefficients t Sig. Collinearity Statistics
Tolerance VIF
Constant 3.645 3.800 .001
CART -.069 -.866 .398 .999 1.001
CARS -.293 -2.738 .014 .999 1.001
R Square-=.311; Adjusted R Square= .234; F-statistics = 4.055; F- Sig.= .035; Durbin-Watson = 1.378
Source: Appendix V
Table 2.7 shows the overall regression coefficient of observed variables. The statistic in
table shows that there is a perfect model fit with an F statistics of 4.055, significant at 95%.
This means that the model specification is correct and that the selected independent
variables are determinants of return on assets. It also indicates that P-value less than 0.05 is
significant. That means a selected variable is affected by the independent variables. The
model summary also shows that the R is .557 with p-value 0.01 Imply that there is a very
significant multiple correlation/relationship between the ROA lag and CAR lag. It also
shows that the model explains up to 31.1 % of the variations in the ROA of the banks.
Adjusted ROA is account for taking all observation so this show variation is 31.1%
Collinearity implies two variables are near perfect linear combinations of one another.
Multicollinearity involves more than two variables. In the presence of multicollinearity,
regression estimate are unstable and have high standard error.
Variance inflation factors come under the collinearity statistic. VIF measure the inflation in
the variance of the parameter estimates due to collinearities that exist among the predictors.
It is a measure of how much the variance of the estimated regression coefficient is
“inflated” by the existence of correlation among the predictor variables. Here VIF is 1.001
that is tend to 4 which means there is significant negative relationship between the
dependent variables and independent variables.
Tolerance presents the percent of variance in the predictor that cannot be accounted for by
other predictors. Here tolerance is 99.99%.
31
In statistic, the Durbin-Waston statistic is a test statistic used to detect the presence of
autocorrelation at lag 1 in the residuals from a regression analysis. If the Durbin- Waston
statistic is substantially less than 2, there is evidence of positive serial correlation. Here
Durbin-Waston is 1.378 which indicates the successive error terms are positively
correlated.
Figure 2.5 Scatter Diagrams of CAR-T and ROA
Figure 2.5, ROA is More concentrate than the CAR over the 10 years of period. CAR and
ROA changed oppositely in this ten years of time period. When there is highest CAR,
ROA is decrease. CAR is not concentrate over the period Like ROA.
2.5 Findings and Discussion
The major finding of the research entitled “impact of capital adequacy ratio in the financial
performance of commercial bank” from the above presentation and analysis have been
highlighted below.
2.5.1 Major finding from the Analysis of Secondary Data:
2.5.1.1 Nepal Investment Bank limited
0
2
4
6
8
10
12
14
16
2006 2008 2010 2012 2014 2016 2018
CAR-T(%)
ROA(%)
Linear (CAR-T(%))
Linear (ROA(%))
32
Total capital, core capital and supplementary capital of NIBL are in increasing
Trend. The total fund consist more than 65% Core capital and remaining
supplementary Capital in 10 years of time.
The contribution of core capital is more for growth of total capital fund of the bank.
On an average bank able to maintain 11.85% CAR this is greater than NRB
Directive.
ROA of NIBL bank also in increasing trend. Its shows NIBL continuously utilize it
asset effectively and efficiently in order to earn the profit.
2.5.1.2 NABIL Bank Limited
The core capital and supplementary capital of NABIL are in increasing trend since
last 10 years continuously. The total capital fund has increased subsequently due to
huge increment in core capital than in the supplementary capital. The portions of
core capital fund are on an average 85 percent respectively during the 10 years of
time.
The contribution of core capital is more for growth of total capital fund of the
NABIL.
On an average NABIL bank able to maintain 11.24 % CAR, this is greater than
NRB directive standard.
Up to 2015 bank focused on maintain more than 10% CAR and from 2015 bank
mostly focused on 11% of CAR.
ROA of bank is continuously increasing trend. That also show that NABIL bank
continuously focused on better utilization of the all resources. It also continuously
improved its image outside by better utilization of resources.
2.5.1.3 Overall findings
Overall there is inverse relationship between the CAR and ROA of the
commercial bank. Banks is not succeeding to increase CAR and ROA in same
time.
On an average commercial bank succeed to maintain 11.24 percent of the CAR
and 2.25 percent of ROA. That shows CAR is 5 times higher than the ROA
33
Higher portion of the total capital fund is covered by core capital of the
commercial bank.
Both banks maintained higher capital adequacy ratio then NRB directive.
34
CHAPTER III
CONCLUSION AND ACTION IMPLICATION
This is the final and most important chapter of the report since this chapter discussed about
the overall summary and conclusion of the research.
3.1 Conclusion
From the whole report it is found that all selected bank is able to maintained adequate
capital Adequacy ratio. Sample bank mostly give attention to core capital rather than
supplementary capital. They have composition of the total capital with more than 60% of
the core capital and remaining that of supplementary capital.
As per the finding derived the commercial banks have been maintaining the capital
adequacy position as per the NRB Directive. The Capital Adequacy can be studied as per
the core capital to Risk weighted Assets Ratio. As far this ratio is concerned all the sample
banks have maintained standard ratio of 6%. This study also shows that there is negative
relationship between the ROA and Capital Adequacy Ratio.
The appropriate Capital Adequacy Ratio indicates that the depositors, creditors as well as
the investor are safe. This ultimately assists in improving the financial performance of the
banks.
All the sample commercial banks have been maintaining the capital Adequacy ratio
as the NRB directives in the study period. Both NIBL and NABIL maintained the
capital adequacy ratio just above the NRB directive.
This overall analysis shows that Capital adequacy directly affect on the
performance of the commercial banks. Higher the capital adequacy negatively
related with the financial performance of the banks.
Capital adequacy norms are set by the NRB in order to protect the depositors.
Depositors are the prime beneficiary of the capital adequacy norms. Since the banks
are maintaining the CAR as per NRB directives, it can be concluded that banks
have safe - guard the deposit of the depositors.
35
Capital Adequacy also creates impact on the profitability of the commercial banks.
Here ROA show the resource utilization, since there is negative relationship
between the CAR and ROA, there also negative relationship between the Capital
Adequacy and profitability of the commercial banks
3.2 Action Implications
Based on the detailed analysis certain recommendation can be made here so that the
concerned authorities’ future researchers, academicians, bankers can get some insight
on the capital adequacy and relationship between capital adequacy position and
financial performance of the commercial banks.
Capital adequacy ratio is determines the capacity of the commercial banks to
safe-guard the depositors, investors and creditors. So, the banks should maintain
the required percentage of CAR as per the NRB directive regarding the Capital
Adequacy ratio.
NIBL and NABIL both bank maintaining CAR just above the requirement.
They should increase the ratio by reducing the total risk weighted by assessing
the low risk bearing assets for investment. This will help the bank to reduce the
Total Risk Weighted assets.
Bank only give few consideration toward the supplementary capital. They
should also pay attention toward supplementary capital so that the excess of
core capital can be cushioned for the hard period.
The ROA of banks always seem less than 3 percent so that bank should focus
on maintaining more ROA, so commercial banks can utilize its resources more
effective
36
References
Bhattarai, Mahesh (2009), A Study of NRB Directive with Special Reference to Capital
Adequacy and Loan Loss Provision, unpublished master degree thesis, Tribhuvan
University.
Henning, Charles, pigot and scott (1982). Financial markets and the economy. New jersey:
Englewood cliffs.
Kiragu, Chris(2010) , The relationship Between the Profitability and Capital Adequacy of
commercial Banks in Kenya, Master in Business Administration thesis, University of
Nairobi.
Kohan, M.(1999). Financial institution and Markets, New Delhi: Tata McGraw- Hill
publishing Company Limited.
Kyalo J.M (2002). Capital allocation and efficiency of Banking Institutions in kenya the case
of quoted banks at NSE. Unpublished MBA Research project, University of Nairobi.
NABIL Bank Ltd, Annual reports (2063/064 to 2073/074)
Nepal Rastra Bank (2017), Kathmandu: Banking and Supervision Annual Report
Nepal Rastra Bank (2073/074), Kathmandu: Unified Directive
NIBL Bank Ltd, Annual Reports (2063/064 to 2073/074)
Nzioki, S.J. (2011). The Impact of Capital Adequacy on the Financial Performance of
Commercial Banks . unpublished master degree thesis, Business Administration -
School of Business, University of Nairobi.
Poudel, Hari (2009), A case Study of Himalayan Bank Ltd, NRB Directives their
Implementation and Impact on the Commercial Banks, unpublished master degree
thesis, Tribhuvan University.
37
Pradhan, R. S. & Parajuli, P. (2017). Impact of capital adequacy and cost income ratio on
performance of Nepalese commercial banks. International Journal of Management
Research, 8 (1),
Ross, peter S. (2000). Commercial Bank Management. Irwin McGraw-Hill, New Delhi.
Shrestha, Manoj (2010), NRB capital Adequacy Norms for the commercial Banks and its
impacts. Unpublished Master Degree thesis. Kathmandu University.
Singh, H.B. (2063). Banking and insurance, Kathmandu, Asia publishing Ltd.
Thapa, K. (2015), Investment Analysis, Kathmandu: Khanal publication Pvt.Ltd
Weston, J.F. and Copeland, T.E. (1992), Managerial Finance, New York: The Dryden
publication.
38
APPENDICES
Appendix I
List of Bank in Nepal S.N. Name of commercial Banks Established year (A.D)
1 Laxmi Bank Limited 2002
2 Siddhartha Bank Limited 2002
3 Nepal Bank Limited 1937
4 RstriyaBanijya Bank Limited 1966
5 Agriculture development Bank 2006
6 Nabil Bank Limited 1984
7 Nepal investment Bank Limited 1986
8 Standard chartered bank Nepal Limited 1987
19 Himalyan Bank limited 1993
10 Nepal SBI Bank Limited 1993
11 Nepal Bangladesh Bank limited 1993
12 Everest Bank Limited 1994
13 Kumari Bank Limited 2001
14 Bank of kathmandu Limited 1995
15 Nepal credit and commerce Bank limited 1996
16 Global Iime Bank Limited 2007
17 Citizens Bank international limited 2007
18 Prime commercial Bank Limited 2007
19 Sunrise Bank Limited 2007
20 NMB Bank Limited 2008
21 NIC Asia Bank Limited 1998
22 Machhapuchhre Bank Limited 2000
23 Mega Bank Nepal Limited 2010
24 Civil Bank Limited 2010
25 Century Bank Limited 2011
26 Sanima Bank limited 2012
27 Janta Bank Limited 2010
28 Prabhu Bank limited 2016
39
Appendix II
Descriptive analysis of both banks
CAR-T(%)
CAR-S(%)
ROA(%)
Mean 11.5376
2
Mean 1.98952
4
Mean 2.26142
9
Standard Error 0.21839
2
Standard Error 0.16382
Standard Error 0.08948
9
Median 11.27
Median 1.75
Median 2.3
Mode 11.24
Mode 1.75
Mode 2.32
Standard Deviation
1.000799
Standard Deviation
0.750716
Standard Deviation
0.410089
Sample Variance 1.00159
9
Sample Variance 0.56357
5
Sample Variance 0.16817
3
Kurtosis 5.93562
3
Kurtosis 3.76481
3
Kurtosis 0.14308
4
Skewness 2.13639
Skewness 1.87683
3
Skewness 0.47416
7
Range 4.42
Range 3.06
Range 1.65
Minimum 10.5
Minimum 1.2
Minimum 1.6
Maximum 14.92
Maximum 4.26
Maximum 3.25
Sum 242.29
Sum 41.78
Sum 47.49
Count 20
Count 20
Count 20
40
Appendix III
Descriptive analysis of NIBL
CAR-T(%)
CAR-S(%)
ROA(%)
Mean 11.8045
5
Mean 2.30545
5
Mean 2.00272
7
Standard Error 0.37142
3
Standard Error 0.26767
1
Standard Error 0.08722
1
Median 11.28
Median 2.05
Median 2
Mode #N/A
Mode #N/A
Mode #N/A
Standard Deviation
1.231871
Standard Deviation
0.887765
Standard Deviation
0.289278
Sample Variance 1.51750
7
Sample Variance 0.78812
7
Sample Variance 0.08368
2
Kurtosis 3.79778
5
Kurtosis 1.27036
2
Kurtosis 0.40580
2
Skewness 1.86571
7
Skewness 1.37888
5
Skewness 0.69710
3
Range 4.37
Range 2.82
Range 1
Minimum 10.55
Minimum 1.44
Minimum 1.6
Maximum 14.92
Maximum 4.26
Maximum 2.6
Sum 129.85
Sum 25.36
Sum 22.03
Count 10
Count 10
Count 10
41
Appendix IV
Descriptive analysis of NABIL
CAR-T(%)
CAR-S(%)
ROA(%)
Mean 11.244
Mean 1.642
Mean 2.546
Standard Error 0.18888
7
Standard Error 0.10977
6
Standard Error 0.10438
4
Median 11.17
Median 1.66
Median 2.49
Mode #N/A
Mode #N/A
Mode 2.32
Standard Deviation
0.597312
Standard Deviation
0.347141
Standard Deviation
0.330091
Sample Variance 0.35678
2
Sample Variance 0.12050
7
Sample Variance 0.10896
Kurtosis 0.09431
5
Kurtosis 0.71103
1
Kurtosis 1.41078
6
Skewness 0.60992
4
Skewness 0.69359
Skewness 0.87251
3
Range 1.92
Range 1.15
Range 1.19
Minimum 10.5
Minimum 1.2
Minimum 2.06
Maximum 12.42
Maximum 2.35
Maximum 3.25
Sum 112.44
Sum 16.42
Sum 25.46
Count 10
Count 10
Count 10
42
Appendix V
Correlation and Regression analysis by using SPSS
Correlations
ROA CART CARS
ROA Pearson Correlation 1 -.153 -.531*
Sig. (2-tailed) .507 .013
N 21 21 21
CART Pearson Correlation -.153 1 -.030
Sig. (2-tailed) .507 .897
N 21 21 21
CARS Pearson Correlation -.531* -.030 1
Sig. (2-tailed) .013 .897
N 21 21 21
*. Correlation is significant at the 0.05 level (2-tailed).
Results of Regression Analysis
Model Summary
Model R R Square Adjusted R Square
Std. Error of the
Estimate Durbin-Watson
1 .557a .311 .234 .358908429 1.378
a. Predictors: (Constant), CARS, CART
b. Dependent Variable: ROA
43
ANOVAb
Model Sum of Squares df Mean Square F Sig.
1 Regression 1.045 2 .522 4.055 .035a
Residual 2.319 18 .129
Total 3.363 20
a. Predictors: (Constant), CARS, CART
b. Dependent Variable: ROA
Coefficientsa
Model
Unstandardized
Coefficients
Standardized
Coefficients
t Sig.
Collinearity Statistics
B Std. Error Beta Tolerance VIF
1 (Constant) 3.645 .959 3.800 .001
CART -.069 .080 -.169 -.866 .398 .999 1.001
CARS -.293 .107 -.536 -2.738 .014 .999 1.001
a. Dependent Variable: ROA