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Efficient and effective credit management can strengthen banks position. At
present, slowdown in economic activities due to prevailing internal and external factors
has declined the transaction of commercial banks affecting in loan demand and its
recovery leading to low profitability posture. Ineffective credit management is a major
problem of banks in Nepal.
This study is conducted to obtain overall view of credit management of the
sampled bank. It is one of the most important and complicated functions performed by the
bank. Each bank has credit department and loan administration to conduct, monitor and
supervise credit operation. The administration of a particular loan ends when it is
recovered. But the process never ends until the bank exists. The success of bank highly
depends on the efficient management of credit as per environment. The economy of
country is already in the recession due to slowdown of global economy and unstable
internal environment leading to adverse affect in business and industrial sector. Such
phenomenon has unfavorable affect on banking sector.
A crisis in bank is the indicator of crisis in the economy. Hence, the quality of
management of credit is considered an important topic as it directly influences the
performance of the bank. This study is an attempt to get insight on credit management
practiced in the sampled bank. It encompasses credit policy, loan approval, loan
administration and loan repayment including the credit risk and its mitigation. This
information will help to determine the efficiency and effectiveness of the banks credit
management practice.
1.1.1. ECONOMIC SCENARIO OF NEPAL
Nepal is an agricultural country, because about 91% of the total population is
engaged in agricultural work. Agriculture is the mainstay of economy, providing a
livelihood for over 80% of the population and accounting for 40% of the GDP. Moreover,
about 75% of the total exports of Nepal are agricultural products. So, agricultural
development is extremely essential for improving the economic life of the country.
Nepals per capita GDP has stagnated between $200 and $250 for the last 15 years. The
growth in Gross Domestic Product (GDP) in FY 2003/2004 is expected to be at 4.2
percent. Domestic credit in the banking system increased by 8.8% to NRS 248.5 billion
compared to 10.2% increase in the previous year. Of which, credit to private sector posted
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a growth of 13.3% to NRS 171.1 billion as compared to the increase of 13.2% in previous
year.
1.1.2. HISTORY OF BANKING IN NEPAL
Like other countries, goldsmiths, merchants and moneylenders were the ancient
bankers of Nepal. Tejarath Adda was established during the tenure of the then Prime
Minister Ranoddip Singh in 1933 B.S. It can be taken as the first step for institutional
development of banking system. They did not accept deposit from public but advances
loan to public and government of its staff against gold, silver, and property as collateral.
On the other hand, on the basis of occupation of public, Jayasthiti Malla divided 64 castes
and Tankadhari a traditional banker was one of them who involved in monetary
transaction. It was the first traditional banker but in a disorganized way. Tankadhari used
to charge the people with higher interest rates for the fund borrowed so as to save the
people from the higher interest rates.
Banking in true sense of terms started with the inception of Nepal Bank Limited
on 30th Kartik 1994 B.S., right from the inception; it carried out functions of a
commercial bank. Nepal established first legation in international level in London in 1934
for creating international relation with the various countries. Under the international
influence and the national necessity, Nepal Bank Ltd. was established under the Nepal
Bank Act 1994. Nepal Bank Ltd. had a Herculean responsibility of attracting people
towards banking sectors from predominant non-institutional transaction as well as
introducing other banking services. It was the only commercial bank in Nepal. Being a
commercial bank, it paid more attention to profit generating business. But it is the onus of
government to look into neglected sectors.
Nepal Rastra Bank was set up under Nepal Rastra Bank Act 2012 B.S. as central
bank of Nepal. This act has been repealed and Nepal Rastra Act 2058 has been enacted by
the parliament. It is regarded as the apex body of monetary and banking structure.
Rastriya Banijya Bank was fully set up as the fully government owned commercial bank
in 2022 B.S. with its establishment banking services spread to both urban and rural areas.
Agricultural Development Bank was established in 2024 B.S. for the upliftment of
agricultural sector.
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The government of Nepal adopted liberal economic policy to accelerate countrys
growth and development. Foreign investment and participation of private sector were
encouraged. The government then enacted Joint Venture Banking policy. People are
offered valuable services and nation as a whole beginning to take benefit. Commercial
banks should operate under the Commercial Bank Act 2031, Nepal Rastra Act 2058 and
Company Act 2053 and Contract Act 2056. Nepal Arab Bank Ltd. (currently known as
NABIL) is the first bank established in joint investment in Nepal in 2041 B.S. A year
later Nepal Indosuez Bank Ltd. currently renamed as Nepal Investment Bank Ltd. was set
up. With the passage of time several other joint venture and private bank has been
established. Nepal Industrial Development Corporation (NIDC) and Agricultural
Development Bank (ADB) were only two development banks established before the
enactment of Nepal Development Bank Act in 2052 B.S. After the introduction of Nepal
Development Act 2052 many development banks have been set up.
Establishment of financial institutions and banks in Nepal has taken a tremendous
speed over the past ten years with the evolution of globalization and liberal economic
policies.
1.1.3. INDUSTRY PROFILE
The history of commercial bank in Nepal starts with the establishment of Nepal
Bank Limited in 1937 A.D. Prior to that there was no systematic banking system in the
country. Todays bank in Nepal has shown absolute remarkable growth and progress in
banking activities. All together 30 Commercial banks, 79Finance companies, 87
Development banks, 21 Micro Credit Development Banks, 16 Co-operatives, 45 NGOs
are currently in operation. Banks should be taken as strong means for the economic
growth and development of the country.
ACE is one of the leading development banks among 73 development banks
established. It offers variety of corporate and retail products and services to its customers
for sound relationship. Achievement made by ACE in opening new branches, acquisition
of property, non-banking assets and conducting future plans have kept the bank in leading
position. Significant portion covering 63% increment in credit disbursement in various
sector contributed in income of ACE in the year 2007/08. Thus, credit management
became major concern for banks income.
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Appropriate credit policy has been formulated considering countrys economic
policy, NRB directives and banks own objectives and rules. ACE has followed stepwise
loan approval process initiating with submission of loan application form led by direct
interview, field visit and loan appraisal. Proper lending document inclusive of security
documentation, borrowers citizenship certificate, income tax registration certificate etc
depending upon the nature of borrower are demanded to secure the credit and attain legal
validity.
Upon approval of credit and lending documentation, actual disbursement takes
place. The bank has experienced decline in credit growth pattern. The credit growth rate
reached only 15% in FY 2006/07. Nonetheless, credit deposit ratio over the study period
has been recorded in excess of 93.35% on average that can be considered sufficient from
profitability aspect.
Credit department continuously administer the loan and maintains contact with the
borrower to ensure credit terms have been complied. As per NRB directives, ACE has to
classify loan into 4 categories namely standard, sub-standard, doubtful and bad loan and
has to maintain adequate loan loss provision of 1%, 25%, 50% and 100% respectively.
ACE has been offering variety of credit facilities such as agriculture, mining,
manufacturing, construction, metal products machinery and electronics equipment,
production and assembles of transportation equipment, wholesalers and retailers, finance,
insurance and real estate, service industries and other loans. It has been introducing new
credit facilities such as loan against gold & silver as per market demand.
ACE accepts various collateral/ securities before sanctioning the loan amount
considering its durability, reliability, marketability and stability of value so that the bank
becomes able to recover the principal and interest of loan.
ACE, before granting credit facility to any of the clients verifies the financial
position. The bank calculates various ratios such as profitability, liquidity and debt-equity
ratio in order to be secured of the client financial status and their repayment capacity.
Nevertheless, bank has to deal with problem loan and suffer credit risk. Some customer
does settle its obligation as per the loan agreement and there are various internal and
external factors that affect credit risk. ACE analyses credit risk as business risk,
management risk, security risk and financial risk and mitigate them to overcome it.
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d. Is their efficiency in lending in terms of deposit collection?e. What is the credit efficiency of ACE Development Bank?f. Is there any relationship between credit portion and profitability situation?g. Is the credit practices adopted by ACE Development Bank in good position?h. What is the debt and total equity portion of ACE Development Bank?
1.3. OBJECTIVES OF THE STUDY
It is no doubt that the role of the development banks is significant in the
development of the nation. Banks help in the development of the country by providing
credit to the necessary sectors. The main objective of the study is to examine overall
credit management practice of the ACE Development Bank. The specific objectives are
as follows:
a. To evaluate the credit policy & credit analysis system prevailing in the bank.b. To investigate loan recovery process regarding credit management of the bank.c. To examine lending efficiency & its contribution to profit of the bank.d. To find out loan classification & loan loss provision & its impact on the
profitability of the bank.
e. To evaluate the liquidity, asset management, profitability & risk position of ACEthe bank.
1.4. ORGANIZATION OF THE STUDY
The whole study is divided into five chapters as follows:
ChapterI: The first chapter is the introductory chapter. It contained General background
of the study, statement of problem and objective of the study. Economic scenarios of
Nepal, history of banking in Nepal and industry profile are given in the general
background of the study.
ChapterII: The second chapter is about the review of literature. The chapter conceptual
framework and review of literature is related to different studies. It consisted of
theoretical background, review of literature, review of Nepalese studies and concluding
remarks.
Chapter III: The third chapter is concentrated on research methodology used in the
study. It includes nature and sources of data, method of data collection, data processing
techniques and limitation of the study.
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Chapter IV: The fourth chapter contains the data processing, data analysis and
interpretation of this study. This is the main chapter of the study.
Chapter V: The fifth chapter contains the findings of whole study after which major
conclusions and the recommendations of the overall study period are provided. The list of
bibliography and appendix are also given at the end for references.
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2.1.1. LOAN CLASSIFICATIONNepal Rastra Bank as the central bank of Nepal has the authority to design,
formulate, implement and supervise various banking strategies and policies. In order to
facilitate credit function of commercial bank, Nepal Rastra Bank has classified loan in
different categories. Previously loan and advances were classified in six categories
namely good, acceptable, evidence of sub-standard, sub-standard, doubtful and bad.
At present loan has been classified in four categories based on quality and aging
of credit. A bank is required to classify their loan on the basis of overdue aging schedule
and provide on a quarterly basis. This sort of provision has helped bank to curtail losses
due to non-payment of interest and principle in due time. The four categories of loan with
its duration and loan loss provision are tabulated as follows:
Table 2.1 Classification of Loan
Type of Loan Provision Requirement CriteriaStandard Principal overdue up to 3 months 1%
Substandard Principal overdue up to 6 months 25%
Doubtful Principal overdue up to 1 year 50%
Bad Principal overdue above 1 year
100%
(a) STANDARD
All Loans and Advances the principal of which are not past due or past due
for a period up to 3 (three) months shall be included in this category.
(b) SUB-STANDARD
All loans and advances the principal of which are past due for a period of
more than 3 months and up to 6 months shall be included in this category.
(c) DOUBTFUL
All loans and advances the principal of which are past due for a period of
more than 6 months or up to 1 (one) year shall be included in this category.
(d) LOSS
All loans and advances the principal of which are past due for a period of
more than 1 (one) year shall be included in this category.
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This classification is based purely upon repayment and business transaction of the
customer with the bank. There may be up gradation and degradation in the category
depending upon transaction. If the loan is restructured and rescheduled, 12.5% should be
kept aside as loan loss provision.
2.1.2. CREDIT POLICY
Lending is the primary business of a bank. Essentially this activity involves use of
depositors funds, which the bank must protect under the countrys regulatory
requirements. Therefore, sound banking practices require strong assurances that loans
granted by it will be repaid in timely manner and with accrued interest. Loan losses can
quickly erode its capital along with the customers. Banks have developed credit approval
process that is based on a system of checks and balances, while allowing sufficient
flexibility to bank management to meet customers financing needs promptly and
efficiently.
There must exist transparency in both the credit process and its management
structure. The management structure must be free from any ambiguities or doubts in the
description of responsibilities and authorities of different levels of management of banks
credit matter.
ACE with one of the objective of providing quality service to the customers has
formulated and implemented lending policy to meet its objectives. ACE as one of the full-
fledged banks of Nepal advances loans to various sectors such as priority sector, deprived
sector, industrial sector, social sector and commercial sector.
2.1.3. CREDIT PRINCIPLES
Bank has to follow cautious policy and conduct the business of lending based oncertain sound principles. They are:
Access the customers character for integrity and willingness to pay. The customer should have the capacity and willingness to pay. There should be proper plan for possibility of default. Extension of credit period if risk can be managed. Behave ethically in all the credit activities. Be proactive in identifying, managing and communicating risk.
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2.1.4. OBJECTIVES OF SOUND CREDIT POLICY
Considering the importance of lending to the individual bank and society it serves,
it is imperative that the bank meticulously plans its credit operations.
To provide guidance to lending officers To make quality credit decisions To establish a standard for control To provide authority to different level of management To comply with the regulations. To avoid unnecessary risks. To have performing assets.
2.1.5. PRUDENCE IN LENDING
The primary business of the bank is creating and delivering quality financial
services to its customers throughout Nepal. Its customer base consists of individual,
corporations, other financial institution, public sector companies, and co-operatives. The
financial services presently provided by the bank include commercial banking, retail
banking and treasury services.
General policy guidelines shall govern the implementation of the business strategy
of the bank with respect to credit extensions.
The bank shall adhere to all Regulatory Guidelines and all amendments includingthose provided by NRB.
The bank shall not make any credit facility available to anyone whose moralintegrity is questionable. Fundamental rule is Know Your Customer.
Credit officers must thoroughly understand the lending rationale for any creditrequest.
Credit officers must acquire information about borrowers purpose, source ofrepayment and repayment plan.
Borrowers whether or not related to bank must provide complete, accurate and up-to-date financial information.
Credit extensions to borrowers shall be in accordance to NRB directives. The bank will not lend to investment companies that are not listed in the Stock
Exchange.
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2.1.6. NRB DIRECTIVES
All the banks in the country are required to follow the directives and instruction of
Nepal Rastra Bank. Various directives are issued by NRB to regulate commercial banks.
Credit and purchase and discount of bills have been classified as secured, less secured,
doubtful and bad for the purpose of adequate provisioning. The following are the NRB
regulation on classification and provisioning of loans:
Table 1.2 Loan Loss Provision
Type of Loan Provision Requirement
Standard 1%
Substandard 25%
Doubtful 50%
Bad 100%
Pass loan is called Performing and others are called Non-performing assets.
Provision requirement in case of loan given against personal guarantee only is additional
20% for Standard, Substandard and Doubtful loans. Provision for restructured,
rescheduled and swapped loan is 12.5% only. Non-compliance of such directives will not
be tolerated by the central bank and as the consequence commercial banks are penalized.
2.1.7. TYPES AND NATURE OF LOAN
I) Types of Loan
Short Term Loan, Mid Term Loan, Long Term Loan
This loan is given up to the period of 1 year to those who have lower requirements
than other types. ACE grants this loan to agricultural sector, small industrial sector, small
projects etc. This loan is given to the period of 1 to 5 years. This loan is granted for the
period of 5 years and above for big corporate houses or big project.
II) Nature of Loan
ACE with increment in services provides different natures of loans to its
customers as per their requirement. The loans are classified under Funded Loan by ACE.
i. Term Loan
Term loans are given for the purpose of financing fixed assets. The interest rates
for prime sectors are 12% and for others are 14%.
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ii. Working Capital Loan
ACE provides this loan to meet the day-to-day transactions of the companies,
industries. The interest rates for primary sectors are 12% and for other sectors are 14%. It
is essential for running any companies, businesses, industries etc.
iii. Overdraft Loan
This loan facility is provided to those clients who are regular customers of the
bank for a long period of time. They have built up strong and trustworthiness
relationships with the bank for which they can overdraw money from their account as per
their requirement and approval from the bank. The rate is at 12% for prime sector
whereas 14% for other sectors.
iv. Trust Receipt Loan
This type of loan is mainly provided for importers against letter of credit. The
bank provides 80% of loan to their valued client for the credit period of 90/120/150/180
days. Importers then repay their loan amount to bank after sell of particular goods.
v. Pre-shipment
This type if loan is mainly provided for exporters. Exporters have to send goods to
the importer as requested. Then, for the production of the certain quantity of goods,
exporter without money asks the bank for loan. Importer after receiving goods, clears the
amount of the exporter, exporter then clears his loan amount along with the interest of the
bank.
vi. Post-shipment
This type of loan is mainly provided for exporters. When goods are produced as
asked by the importer, exporter needs to send it. But exporter without any amount to meetoperating expenses occurred on shop and loading goods on shop asks for loan with the
bank. The interest rate fixed on this loan is 10% for prime sector and 11% for other
sector.
vii. Hire Purchase Loan
This loan is provided for the purchase of automobiles, vehicles etc. to professionals,
companies, business executives etc. The interest rate charged is 13% for prime sector and
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15% for other sector. The bank offers 80% loan for new vehicle and 50% for second hand
cars.
viii. Housing Loan
The bank also provides this type of loan to its customers where the interest rate is
14% for the maturity up to 5years and for above 5 years it is 13%.
ix. Bills Purchase Loan
When the exporter receives the cheque with the restrictions to be received only
after the completion or certain period, he/she asks for the bank to pay for the amount
mentioned in the cheque. After completion of the specified time in cheque, bank recovers
its amount from the importer.
Under Non-funded, ACE has classified loan as followings:
x. Letter of Credit/ Documentary Credit (LC/DC)
A letter of credit is defined as a letter issued by the bank on behalf of the buyer in
favor of the seller. An L/C is opened at the request of the buyer.
xi. Bank Guarantee
ACE takes guarantee on behalf of its customer to the third party to make paymentup to a specified amount. The third party feels assured that in case of default, bank will
clear the due amount. The bank provides various types of bank guarantee to its customers
such as bid bond, performance bond, advance payment guarantee, custom guarantee, and
credit guarantee.
2.1.8. LOAN APPROVAL PROCESS
The Approving Authority approves loan only after being convinced that the loan
will be repaid together with interest. There are many processes involved to improve the
loan, which has been appended below:
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Figure 2.1 Loan Approval Process
i. Application
A borrower is normally required to submit an application to the bank as a request
for the loan along with project proposal, historical financial statements and documents
pertaining to companys legal existence.
Implementation of Credit Facility
Application for the Loan
Conducting the InterviewLoan purpose
Loan amount
Repayment source
Repayment schedule
History of prospective customer
Banking relationship
Credit AnalysisHistorical analysis
Analyzing 7Cs of the credit
Field/ Site Visit
Forecast and Risk Rating
System
Return
Liquidation
Credit worthiness and Debt Structure
Preparing the credit report
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ii. Conducting the interview
Though the documents submitted gives various information about the borrower,
collecting details by interviewing the borrower is of great importance. Normally, such an
interview takes place at the bank premise. The interviewer normally a loan officer should
attempt to gain as much information as possible during the initial interview. Interviewer
inquires about the topics mentioned below:
Loan purposeThe objectives of taking loan should be very precise and should not
conflict with commercial loan policy of the concerned bank.
Loan amount
The amount of loan is stated when the purpose is given. The bank should
also try to assess loan amount to be granted.
Repayment sourceEvery business loan should have a backup repayment source to clear the
loan amount when the time arrives, which may be sale of inventory, sale of assets,
increase in other debts etc.
Repayment scheduleThe applicant and the bank should set forth the timing for repayment of the
payment pattern of interest and principal amount.
History of the prospective customerCustomer can be an individual or a firm or a corporate body. The
interviewer should try to gather the biographical information such as background
and experience of principals, its duration of operation, services rendered etc.
Banking relationshipThe interviewer should find out whether the applicant has accounts and
loans if any in other financial institutions or banks. They should be aware of such
relationship with others and applicants must disclose required facts as well.
iii. Credit analysis
The following steps are taken to analyze/appraise loan application:
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Historical AnalysisIt refers to analysis of past financial statements and business risk. The
former is quantitative while the latter is qualitative.
Analyzing 7Cs of the credit3CsCharacter- honesty
Capacity- ability to employ fund
Capital-borrowers equity
5CsCollateral- marketability, price stability
Condition
7CsCash flow- to ascertain repayment
Credit information
iv. Field/site visit
Authorized staff form credit department of the bank will visit business set up. Site
visit is banks another attempt to comprehend the prospective customer and his business.
it concentrates on attaining information such as production and cost related data,
applicants reputation, character, financial condition, location of business can be assessed.
v. Forecast and risk rating system
Based on the findings of historical analysis, and in the light of present and
foreseeable future environment, the analyst should highlight to what extent inherent risks
will be mitigated and how unmitigated risk can be covered.
vi. Return
The analysis should be made to calculate total return as interest, fee and
commission and compare whether it meets banks standard.
vii. Liquidation
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The analyst should ascertain banks ability to recover loan in case of liquidation of
the borrower.
viii. Creditworthiness and debt structure
The creditworthiness and honesty of the applicant enables the bank to extend the
loan facility. The analyst should structure the debt facility to be extended.
Preparing the credit reportThe credit report should be prepared in a structured format including all
the details of customer, sources, consequences of financial statements etc. After
the completion of credit appraisal and preparation of the report, it is forwarded to
the management for approval.
ix. Implementation of credit facility
After being satisfied with loan appraisal and required security documentation
mentioned in the offer letter, bank will then open overdraft or loan account in favor of the
client.
2.1.9. CREDIT ANALYSIS
There is practice of analyzing 7Cs of credit about borrower by the bank before
approving proposal;
i. CharacterCharacter refers to personal traits such as ethics, honesty, integrity,
reliability of borrowers, which is significant for lending decision. The actual
purpose, trustworthiness in answering the queries, responsibility and seriousness
in making efforts to repay loan is observed by the bank.
ii. CapacityThe bank views two aspects. Firstly, the bank sees whether the applicant
possess legal capacity to borrow loan. Secondly, whether the applicant has
capacity to generate sufficient income to repay the loan amount or not. If the
borrower has high capacity, quality management and good market value then the
capacity of the client is said to be high and bank grants loan on that basis. Hence,
suitable ratios (liquidity, leverage, profitability, efficiency) are analyzed based on
historical and projected financials.
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iii. CapitalCapital refers to net worth of the borrower. Leverage ratio will be high if
the borrower has low capital. A bank gives loan only when it finds leverage ratio
acceptable to it or if the borrower has enough capital.
iv. CollateralTo safeguard its risky assets in case of default, bank asks for securities or
collateral from the borrower, no matter how prosper the financial position of the
borrower is. Collateral can be fixed in nature- land, building, machinery or
working capital like inventories and account receivables.
v.
ConditionCondition refers to the general economic condition beyond the control of
borrower such as security, political and other social condition affects the business.
Loan is given to the borrower if lending official feels general condition is
favorable for that type of business.
vi. Cash FlowThe credit officials usually check the cash flow of the business to ascertain
repayment of loan amount taken with interest. If the figure shows positive
response then they advance loan to such clients.
vii. Credit InformationThe bank should confirm the type of loan the borrower requires and should
provide all the credit information beforehand.
2.1.10. METHOD AND MECHANISM FOR LOAN APPROVAL
Loan/project appraisal refers to the critical evaluation of the project in lights of
various types of risks and returns. Thus, ACE doesnt lend to anyone who is in need of
money. A prudent banker denies giving or extending credit facilities unless he is
convinced that the project is viable i.e. the loan amount is repaid along with interest from
the proceeds of project. The primary considerations for ACE to sanction the loan amount
are as follows:
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i. Technical AppraisalUnder technical appraisal, assessment of the various requirements for the
production process together with their quality and availability are made. Various
factors like location, legal aspects, and technology for production, plant and
equipment efficiency for the project are cautiously analyzed.
ii. Commercial AppraisalIt focuses on the position of repayment of debt along with interest, if the
product cannot be sold at the estimated price. Hence, the bank considers nature of
products, style, perish ability, quality, company sales methods, distribution
pattern, promotional activities, competitive advantage, government regulations
and economic conditions. Moreover the bank also considers quality and types of
customers, aging schedule, credit terms and policies. Thus, the bank examines
commercial viability of the product.
iii. Managerial AppraisalThe quality and integrity of management plays a deciding role to forge
ahead of competitors and to ensure repayment of the loan. The bank evaluates
management on the basis of quality, performance, philosophy and capability and
decided to lend it is satisfied.
iv. Financial AppraisalFinancial appraisal is related to cost benefit analysis because only paying
concern can repay the loan. Bank makes financial analysis based on projected data
such as cost of the project and production, earnings, benefits, cash flow statement
and proforma balance sheet.
2.1.11. LENDING DOCUMENTATION
Lending process will not be carried on until the borrower submits necessary
documents to the bank. The need of documents depends on the nature of loan and type of
borrower. Documents should be recognized under the prevailing law and rules. Common
documents are listed below:
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i. Request letterThis is the letter prepared by the borrower for requesting the amount of loan to
be sanctioned as per their requirement. They make a proposal to the bank for
acquiring loan for their business or other personal purpose. After this letter is
received, the bank forwards its activities toward the valued clients.
ii. Security documentationBank undertakes certain steps to secure the credit. One of the major actions
involved is obtaining tangible collateral such as land, building, and machinery. The
credit department ensures that the security terms of credit are executed prior
disbursement of approved credit facilities. Different types of facilities obtained by the
banks are:
Mortgage deed/title deed documentsThe value of fixed assets such as land, building, plant and machineries are
commonly called as collateral or mortgage. Official valuators estimate these
properties. It is prepared as a valuation report consisting of market and distress
value and given to the bank. The ownership of mortgage or particular assets,
which is called as title deed also, should be submitted to the bank.
GuaranteeGuarantee is an obligation to pay when the initial borrower refuses or is
unable to meet the debt. Bank requires guarantee form reputed person/firm or
company to take guarantee to pay the required amount in case of borrowers
default. There are three forms of guarantee;
Personal guarantee Cross guarantee Corporate guarantee
Hypothecation and pledgeHypothecation is a general charge over the assets for debt where neither
ownership nor possession is passed to the banker. The bank requires documents as
hypothecation of stocks, equipments, machinery, and assignment of receivables.
Pledge is the bailment of the property as security for payment of debt. Pledgedproperty is in possession of bank.
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iii. Firm/company registrationSole trading, partnership or joint stock company must submit registration
certificate issued by Company Registrar to the bank. An institution should mention the
name of the firm, location, capital, etc.
iv. Income tax registration certificateAn individual or an institution or a firm must routinely clear the income tax
imposed by the government. The Xerox copy of such certificate should be submitted to
the bank.
v. Memorandum of associationA public company must submit memorandum of association to the bank, which
includes capital structure i.e. authorized capital, issued capital, paid-up capital,
subscribed capital, organizational structure, name of Board of Directors and authorized
persons.
vi. Article of associationArticle of association is another important document to be submitted by a
corporate borrower, which contains overall rules and regulations regarding
transactions, authority and responsibility of board directors, important deeds and
agreements etc.
vii. Other documentsSome of the other documents to be obtained as per the nature of the client are
as follows:
Board/partnership resolution Credit Information Bureau (CIB) report Renewed registration certificate Valid tax clearance certificate Site visit report of the properties Family consent of all properties Insurance policy Copy of citizenship certificate Black list consent of the parties Family details of shareholders
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2.1.12. DISBURSEMENT AND ADMINISTRATION OF LOAN
Upon approval of credit facilities and the completion of documentation i.e. when
all the collateral/security are obtained arrives to a phase of disbursement. Disbursement
means actual releasing of cash i.e. agreed amount of loan or credit facility is allowed to
the clients. Disbursement process involves;
Satisfying with the documents i.e. all the required pre-conditions is met. Obtaining clearance or instructions of the concerned department i.e. clearance of
legal cell and the instruction of the related loan officer.
Obtaining related documents from the customer such that their operating accountcan be created.
Since a tremendous amount of deterioration can take place in a short time, it ispreferable to receive statements from firms on a quarterly basis by the loan
officer.
Creating of loan account and disbursement as per the terms agreed. The loan officer should verify timely that the borrower is not violating any
requirements of the loan agreement. Breach of any terms and conditions will
constitute default.
Periodic review of loan document is necessary. Finally there is settlement i.e. every credit has a fixed maturity. If the loan is not
repaid in time then the bank takes legal action against the borrower for disposal of
securities to liquidate the loan.
Further after disbursement of funds the loan has to be continuously administered
i.e. monitored for checking if it is compliance with the terms of approval. Administration
of loan involves:
Realizing principal and interest as and when it becomes due. Ensure submission of related documents by the obligor. Such documents may be
the stock and debtors statement, firm renewal certificate, tax renewal certificates
etc.
Conducting periodic site visits to see the funds are utilized for the purpose. Ensuring compliance with the credit terms by the obligor. Compliance to NRB issued guidelines and banks credit policy.
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Assemble records and analyze the credit information in order to ascertain thedegree of risk associated with the loan.
2.1.13. CREDITS AUDIT/RENEW
A bankers true financial picture is gauged on the basis of its quality of assets i.e.
credit assets. Since credit is a risky asset, credit facility given to each and every borrower
needs to be audited and adequate loan provision should be made as per the NRB
directive.
Credit audit refers to the examination of the quality of credit, loan loss provision,
loan documentation, compliance of terms and conditions of credit etc. the main objective
of the credit audit is to check whether the borrower is utilizing fund for their genuinepurpose or not and is conferring due installment/ interest payment. It can be done in two
ways;
Verification of loan External and internal field visit
Normally, auditors prepare a checklist to carry out auditing and inspection of banks
credit activities.
Depending upon the past performance and forecast of the borrower, bank renews
credit enhancing the limit, curtailing the limit or may reject. While renewing the credit
facilities, documentation already executed should be reviewed as documents like expiry
of insurance policy and more documents.
2.1.14. RISK ASSESSMENT
Proper assessment of credit risk, loan monitoring and delinquency control begins
with well-documented member files. Maintaining orderly and adequately documented
loan files is an important element of credit risk management. Proper documentation
provides the following major benefits:
It constitutes evidence of the terms and conditions of a member's indebtedness.
It creates valid security which can be realized if it is in compliance with legal
requirements.
It provides an audit trail of the loan decision (e.g. that the loan was authorized in
accordance with policy and good lending judgment).
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It allows easy and efficient follow up of problem situations (e.g. skip tracing) or
routine member inquiries.
It establishes a member's credit history for future lending decisions.
Ideally, loan application and credit investigation information; alternatively, credit
and security files should be stored together in a fireproof environment. Negotiable
security should be subject to the dual control of a security custodian and a designated
senior management person. The appropriate lending officer to ensure their continuing
validity should purge all files on a regular and periodic basis.
(Source:http://www.dico.com/design/SBFP_En/Credit%20Risk%20Management%20%2
8Credit%20Management%29.pdf)
a.MEANING OF RISK
Risk is defined in Websters as a hazard; a peril; exposure to loss or injury.
Thus, risk refers to the chance that some unfavorable event may occur. No investment
will be undertaken unless the expected rate of return is high enough to compensate the
investor for the perceived risk of investment.
Bank invests much of their funds in assets that are subject to change in value due
to changing market conditions or credit quality of such assets. Risk represents uncertainty
that the assets will earn an expected rate of return or that a loss may occur. In other
words, it is borrowers inability to payback the facility extended.
b. CREDIT RISK
Credit risk is the risk of non-repayment of loan. It is that risk in which a borrower
will not settle its obligations in accordance with agreed terms. Credit risk is the risk of
loss that may occur from the failure of any party to abide by the terms and conditions of
any financial contract with the bank, principally the failure to make required payments on
loans due to the bank.
2.1.15. FACTORS AFFECTING CREDIT RISK
There are mainly two factors that affect credit risk i.e. internal and external
factors:
http://www.dico.com/design/SBFP_En/Credit%20Risk%20Management%20%28Credit%20Management%29.pdfhttp://www.dico.com/design/SBFP_En/Credit%20Risk%20Management%20%28Credit%20Management%29.pdfhttp://www.dico.com/design/SBFP_En/Credit%20Risk%20Management%20%28Credit%20Management%29.pdfhttp://www.dico.com/design/SBFP_En/Credit%20Risk%20Management%20%28Credit%20Management%29.pdf7/31/2019 Credit Management of ACE Desktop
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a. INTERNAL FACTORS
Internal factors are those factors that are internal to the organization and can be
controlled by the organization. Internal factors do affect the credit risk in various
manners. Some of the internal factors are as follows:
Lack of transparency in financial statement of borrower Excessive importance in mortgage lending against land and building Dearth of efficient human resources Lack of internal credit rating system and risk base pricing Name lending Inadequate financial analysis of borrower while lending Lack of detailed credit policy of the bank External influences from high-ranking officials while sanction or recovery Multiple banking arrangements on current assets of borrower Non-application of sophisticated credit risk model Increase in interest arrears Others
b. EXTERNAL FACTORS
External factor are those factors that are not at all the part of the organization, but
the change in which would affect the operation of the organization. External factor does
have impacts on the risk factor of the organization. Some of the external factors are as
follows:
Political instability Economic environment Fluctuation of market interest rate Fluctuation of foreign exchange rate Fluctuation of commodity price Absence of credit rating agency Inefficiency of Credit Information Bureau No mechanism for submission of transparent and accurate financials. Inefficiency of Company Registrar Office Lack of adequate legal framework
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2.1.16. CREDIT RISK ANALYSIS
There are four major types of risk that fall under credit risk:
a. Business risk
b. Management risk
c. Security risk
d. Financial risk
a. Business risk
The factors that affect the business risk and are analyzed by the bank are as
follows:
Supply risk Demand risk Competition Production risk Business environment Economic downturn Tariff changes Technology change
b. Management risk
Management risk analyses the following factors:
Labor dispute Fraud Change of ownership Management incompetence Succession risk Management change
c. Security risk
Under security risk following factors are included
Liquidation risk Security document lost Security document not completed correctly Fraudulent valuation
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d. Financial risk
Financial risk undertakes the following factors in analyzing the risk:
Increased interest rate Transaction risk Collection risk Repayment risk Decreasing profit margin Declining sales Cost overruns Obsolescence of inventory
2.1.17. RISK MITIGATION
Risk is inevitable in all enterprises, organizations or companies. It arises both
from change and human shortcoming so avoiding risk is not an option but should be
managed and handled carefully. Risk can be mitigated by the bank using:
Frequent monitoring Prompt action on early warning signals Effective problem loan management Deal with borrowers who meet the target market criteria Monitor industry condition Insurance assigned to bank Professional valuation of security
2.1.18. PRACTICAL OBSERVATION & WRITE-UP BASED ON THEMThe bank needs to compute the following ratios before approval of the loan to its
customers. The bank requires analyzing the following ratios from the documents provided
by the borrowers as Profit and loss statement, Balance sheet for the year and cash flow
statement. Before granting loan, the bank should verify all the documents as well as these
ratios to figure out the financial position of the borrowers and justify.
2.1.19. COMPANY PROFILE OF ACE DEVELOPMENT BANK LTD. (ACE)
Since its inception in August 1995, ACE Finance Company Ltd. (now ACE Dev.
Bank Ltd.) has been a leading player in the financial market of Nepal. Over the years,
regulators and customers have been in appreciation of the many financial products and
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innovations developed by us. Its diversified risk asset portfolio has served the economy in
every sector as have the wide choices of deposit account schemes. Its wholesale banking
initiatives have assisted numerous commercial banks and private enterprises with risk
management concerns such as debentures and rights.
ACE resolve to provide client-centric solutions and surpass the expectations of its
stakeholders remains firm and unyielding. We are now in a position to provide various
products to serve all its customers needs under one umbrella. We are now more
competitive than ever with new products and innovations in the pipeline.
ACE Finance Co. Ltd has now evolved into ACE Development Bank Ltd., a fully-
fledged category B development bank. It resolves to provide client-centric solutions andsurpass the expectations of its stakeholders remains firm and unyielding. It is now in a
position to provide various products to serve all its customers needs under one umbrella.
It is now more competitive than ever with new products and innovations in the pipeline.
ACE employees are all qualified with a minimum of a Bachelors Degree. All its
managerial level personnel have a minimum of an MBA degree. Employees are
constantly upgraded in seminars, workshops and training programs in the country and
internationally. ACE Development Bank prides itself in having the highest productivity in
ratio to its size.
Internal changes have been initiated for a while now and managers have been
designated to head their respective departments. With effective and rigorous training
over, its enhanced and empowered personnel have confidently taken the reigns of ACE
Development Bank.
I. MISSIONAn organizations mission is the purpose or reason for the organizations
existence. It tells what the company is providing to society, either a service like
housecleaning or a product like automobiles. It puts into words not only what the
company is now, but also what it wants to become-managements strategic vision of the
firms future. The mission statement promotes a sense of shared expectations in
employees and communicates a public image to important stakeholder groups in the
companys task environment.
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(Wheelen, Hunger, and Rangarajan, 2006)
Mission Statement BANKING ON INNOVATION AND INTEGRITY
To be the preferred provider for financial services by introducing a wide range ofbanking products.
To enhance and maintain quality service to the clients. To serve a larger base of customers by expanding geographically. To participate in the economic development of Nepal by providing services in
micro finance, infrastructure development financing etc.
To ensure maximum value to stakeholders. To focus on good corporate governance and corporate social responsibilities.
II. CAPITAL STRUCTURE OF ACEThe basic goal of a firm is to maximize the value of the firm or shareholders
wealth. To achieve this goal the company should have sound investment and financing
Policy Company should acquire current and fixed assets. To finance these assets afirmcan
use various sources of financing. These sources of financing may be long term or short
term. It needs capital, when it expands its business or activity. Capital denotes the long-
term funds of the firm raised from long-term debt, preferred stock and common equity.
Debt capital includes all long term borrowing incurred by the firm. Debentures, bonds,
long-term loan etc. equity capital consists of the long-term funds provided by the firms
owners, the stockholders, Common stock, share premium, reserve and surplus, retained
earnings. Capital structure refers to the combination of long-term sources of funds, such
as, long-term debt, preference stock and common equity including reserves and surpluses
(i.e retain earnings).Capital structure=Long-term debt + Preferred stock + Common equity
(Gautam & Thapa, 2008)
i. Share CapitalIt is the ownership capital of a company raised by the issue of its shares. It is
an amount invested by the shareholders towards the nominal value of shares. A
company needs share capital in order to finance its activities. There are different kinds
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of share capital. According to the proposed amendment, which was proposed in 14th
Annual General Meeting, the share capitals are as follows;
a. Authorized CapitalThe capital that is mentioned in the Memorandum of Association as
the maximum amount share capital is called Authorized Capital.
(1,00,00,000 ordinary shares of NRs. 100 each amounting to 1,000,000,000)
b. Issued CapitalIssued capital means part of authorized capital which is actually
offered to public for subscription. Generally company doesnt issue the entire
authorized share at a time. So, IC
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Figure 2.2 Shareholding pattern of ACE
III. SERVICES RENDERED BY ACEBanks provide various kinds of services to their customers in order to facilitate
them with solutions to their various problems. This in general is called rendering of
services. Likewise, ACE does render its services to gratify its customers in variety of
forms. The services rendered by ACE can be discussed as under.
i. RemittanceThe fund can be transferred from one place to another, both domestic and
international. This facility is used for import/export trade. The payment and receipt in
Nepalese and foreign currency can be performed.
ii. Bills PurchaseWhen exporter receives cheques from importer, which is to be paid only after
the certain time duration, then importer in need of money requests the bank to accept
the cheques like security and give him the money. The bank after completion of the
time period receives amount from the importer through cheques.
iii. Clearing/CollectionACE provides the services of inter-banking transaction. Cheques of various
other banks are accepted and cleared, as ACE is also the member of clearinghouse.
0
20
40
60
80
100
Other
Institutions
Public
20
80
Percentageshare
Share Holders
Shareholding pattern of ACE
Other Institutions
Public
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iv. Trade FinanceThis department is responsible for opening letter of credit for those people
who are involved in trading activities by issuing letter of credit as an issuing bank to
advising bank in case of import and vice-versa for export. The contents required are
request letter, proforma invoice, packing list, and certificate of origin, insurance and
transport document.
v. Bank GuaranteesIt is a non-funded facility provided by the bank for its valued clients. There are
bank guarantees such as bid bonds, performance bond, advance payment guarantee,
custom guarantee, back-to-back letter of credit and credit guarantee.
vi. Export CreditThis service is provided to exporter who needs to export goods both at
national and international level. It provides service to export goods at national level.
i.e Pokhara to Kathmandu, Eastern development region to western development
region. It also provides service to export goods at international level. i.e Nepal to
India, Nepal to China.
vii. Loans and AdvancesBank provides loans to different sectors such as loan to company/firm,
personal loan, hire purchase loan, housing loan etc. It advances credit against cash
pledge, pledge of shares, personal guarantee, corporate guarantee, gold & silver by
following the direction of Nepal Rastra Bank.
viii. Vehicle LoansIt is the hire purchase loan provided by the bank for purchasing motorbikes,
car, jeep, and etc. The bank offers 80% loan for new vehicle and 50% for second hand
cars. The interest rate is 12% - 14% per annum, but conditions apply that the interest
rate will be periodically reviewed to be line with the market.
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ix. DepositsACE accepts various kinds of deposits providing interest rate according to the
nature of deposits such as saving account, call deposit and fixed deposit account. ACE
provides various deposit schemes like, ACE Gold ETF, ACE Nari Bachat Khata,
ACE Awakash Bachat Yojana, ACE Rhino Account, ACE Share trading Account,
Zero Balance Savings and Pension Khata.
x. Tele-banking ServicesAn account holder of this bank can use their own password from their
convenient place to access by telephone to make enquiry of account balance and to
order statement of account.
xi. Any Branch Banking (ABBS)ACE has many branch within the country. Patan branch, Kirtipur branch,
Chabahil branch, Birgunj branch, Parsa bazaar branch, Urlabari branch e.t.c. This
facility enables customers of ACE to deposit or withdraw money and acquire any
information from any branch of ACE. One can easily deposit and withdraw money
from any branch of such bank.
xii. Locker FacilityFor the persons having valuables like gold, silver, documents etc, ACE
provides locker facilities with special code number keys for the safety with ample
parking space, strategic location and choice of sizes.
xiii. ATM ServicesATM stands for Automatic Teller Machine. Generally, it is also known as any
time money. ATM itself clear the meaning. People can withdraw the money any time
convenient. The ATM services provided by the bank are cash withdrawal, fast cash,
statement or balance inquiry, and pin code change for the customers.
xiv. ATM LocationsFor the conveniences of customers, ATMs are located in, Narayan Chour,
Naxal, Kathmandu, Jawalakhel, Lalitpur, Naya Bazaar, Kirtipur, Parsa Bazar,Chitwan, Link Road, Birgunj, Urlabari, Morang UPCOMING OUTLETS:
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Chabahil, Kathmandu, New Road, Kathmandu. It is opened 24 hours a day, 7 days
a week, and 365 days a year.
xv. ACE Debit CardDebit card is the most convenient way of making payment of goods, safe and
easy to carry, withdraw cash from ATMs, used within Nepal and India, get
replacement if lost or stolen. It is the card of international brand.
xvi. NTC Mobile Bill PaymentThis facility provided by the bank will be started shortly. It enables Nepal
Telecommunication Corporation (NTC) mobile phone owners to make payment
through the bank in the following modes.
- Full or partial payment by cash.- Full or partial payment by account transfer.
xvii. E-banking ServicesThis facility provides customers of ACE to view and check their statement of
account from any part of the country or the world, request cheque pad. They need not
personally approach to the bank. They can also change the password for the means of
safety.
xviii. SMS BankingSMS stands for short message service. This facility provides customers of
ACE to check their balance of account through their cellular phones. It is very helpful
for those who do not have enough time to visit banks to receive their statement or
check the balance in their account.
IV. SPECIAL ACHIEVEMENTS OF THE BANKi. New Branches
In line with the bank's policy to expand and serve its customers through a
wider network, the bank has opened another branch during FY 2009/10 at Chabahil,
Parsa and Ullabari. All 7 branches opened so far have made encouraging progress in
providing modern banking services.
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To improve the skills and knowledge of staff, the bank continuous to provide
job-related training, both in-house and external for which the bank conducted several
training programs to the benefit of all staff. Besides continuous in-house training
programs, 9 staff participated in different professional training courses outside the
country while 67 staff participated in job related training course/seminars conducted
by professional training centers within the country.
vi. Social community worksACE has focused on the upliftment of the youth and on environmental issues.
Education is given huge priority, as is entrepreneurship in its social commitments.
ACE has been actively involved with various communities and social
upliftment programs. ACE took initiation by helping Hoste Hainse towards its
mission of eliminating child labor through education. The scholarship fund provided
by ACE has helped less privileged children of Sarlahi district.
ACE has also joined hands with Ashoka Nepal in helping young
entrepreneurs by providing seed money towards their creativity in implementing
projects that would help towards solving societys problems. ACE has also supported
Nepalese Young Entrepreneurs Forum in its belief that the youth of Nepal need
guidance to nurture their talent.
ACE has provided funds and advisory service to local bodies for maintaining
cleanliness through environmental awareness. Ward No.19, Hanuman Dhoka area,
a recipient of its environment initiative, has been active in making the locals aware of
the necessity of a clean environment especially in the heritage areas. The development
of the Nagpokhari area, another heritage site, has received its financial support as
well.
ACE was also one of the sponsors of the opening of Garden of Dreams.
ACE strongly believes that this will create awareness about heritage preservation and
underscore the importance of preserving protected green areas.
ACE support various educational institutions by either donating its computers
or by providing scholarships to the students.
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vii. Corporate Social ResponsibilitiesACE has always believed in being a good corporate citizen and has been
investing in various social causes.
ACE is very proud to have the One-horned Rhino as its official mascot. The
One-horned Rhino is indigenous to South Asia but is now classified as an endangered
species due to poaching and habitat destruction. In its bid to raise awareness about the
need for One-horned Rhino conservation, we have provided a financial assistance of
Rs. 1.5 million to National Trust for Nature Conservation that manages the Central
Zoo to build the Rhino Habitat Centre, a small token towards a great cause that it will
continue to support.
ACE was one of the sponsors for the Million Mums campaign which is a
joint initiative of Safe Motherhood Network and White Ribbon Alliance (WRA, UK)
to raise awareness and advocate against maternal mortality. ACE is also working
jointly with Women Entrepreneurs Association of Nepal (WEAN) for the
empowerment of the disadvantaged and needy people especially women through
generation of self-employment opportunities. It will be providing trainings and access
to finance for implementation of business plans through WEAN to the needy in order
to facilitate their financial needs. It has already provided a grant to the WEAN
Training Fund.
In May 2009, the news of hundreds of deaths in far-western Nepal due to
diarrhea/cholera exposed how the underprivileged can lose their lives for lack of basic
sanitation. We provided financial support to Annapurna Post SahayogiHaathharu
campaign which mobilized the funds from the campaign through an NGO, DEPROSC
Nepal to prevent the epidemic from serving other.
ACE also believes that children are the future. It is providing monthly
donation to Nepal Children Organization (Bal Mandir, Naxal) to distribute food and
fruits to the children under their patronage. It also provides scholarships to needy and
deserving students on a regular basis. The CEO is on the Board of various educational
charity organizations as well.
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viii. Future PlansAs part of the efforts to deliver the customers the best of services, the bank, in
near future, will;
The coming decade will focus on growth based on integrity and innovation. Introduction of a wide range of banking products including multicurrency
transactions.
Expansion of Branches Micro Financing Infrastructure developing financing Introduction of Investment Banking Products. Concentration on Fee based activities. Emphasis on enhancing and maintaining service quality for its clients. Emphasis on returning value to stakeholders. Infrastructure development financing. Strategies for managing risk. Enhance relationship with the Regulators; underscore IT for Transparency. Adoption and implementation of the Basel II accord. Continue Policy of Integrity and Innovation.
V. MAIN FACTORS AFFECTING THE BUSINESSThe main factors affecting the banks business are
The existing abnormal situation is affecting all sectors of the society and theeconomy.
The sluggish economy resulting in increased credits risks. Political uncertainty.
In view of above-mentioned factors, it would be a challenge task for the bank
to maintain its current level of performance.
VI. INTERNATIONAL BANKINGInternational banking, particularly, prompt and efficient handling of inward and
outwards remittances, letter of credits etc have been one of the strengths of ACE. ACE
has developed correspondent relationship with numerous banks globally.
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VII. TECHNOLOGYACE has been equipped with up to date and modern technology. For further
improvement in international banking performance and to facilitate the customer
transactions with prompt and quicker services, ACE has decided to use the services of
Society for Worldwide Inter-bank Financial Telecommunication widely known as
S.W.I.F.T. It supplies secure messaging, network transfer, and 24 hours global support. It
also decides to connect al its offices in various parts of the country through V-SAT,
which is any branch banking facility.
VIII. DEPARTMENTS OF ACEDepartments are units where different functions of an organization are performed;
the cumulative effect of which is to achieve the organizational goal. ACE has various
departments to perform various works effectively. The synergy produce by these
departments result in effective performance, thus achieving the goal. The figure below
shows the various departments of ACE.
Figure 2.3 Department of ACE
Accounts Department
Customer Service Department
Treasury Department
Marketing Department
Research and Development
Credit Department
Cash & Transfer Department
Administration Department
Legal Department
Compliance Department
Human Resource Department
Share Department
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IX. FUNCTIONS OF DEPARTMENTSThe vision of an organization is accomplished only when the objectives of the
organization are fulfilled; for the purpose of which, various departments are formed. In
other words, the organogram of the organization comprises of various departments, which
perform their respective actions in order to meet the objective of the organization.
Followings are various departments of ACE performing their respective functions:
i. Customer Service DepartmentIt is a very crucial department where numbers of customers make face-to-face
interaction with the staff of ACE. The main function of this department is to provide
the customers answer to their queries related to bank. They open and close the
account, make statement request, cheque pad request and its disbursement, balanceenquiry, balance certificate as demanded by the customers.
ii. Cash and Transfer DepartmentThis department handles all the cash inflows and outflows including overdraft
facility. It accepts deposits; payment of cash is made through cheques and withdrawal
slip, balance transfer and draft.
iii. Treasury DepartmentThis department handles all the cash to be placed on various other banks and
financial institutions for higher rate of interest.
iv. Credit DepartmentThis department provides loan facility to the clients. It provides loan against
collateral such as land, building and fixed deposit. It also advances different types of
loan as long term loan, short term loan, working capital loan, overdraft loan, housing
loan, hire purchase loan, home equity loan, construction, etc.
v. Research and DevelopmentEvery organizations or companies have research and development department
for the progress of the companies. Similarly, this department generates new ideas,
explores new technologies and innovations to be used, prepare annual reports, issue
newsletters, and provides up-to-date information about the bank to the general public
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and the banks official itself. They research for new plans and programs required for
the bank in this cut throat competition.
vi. Marketing DepartmentThe main function of this department is to increase the number of deposit
clients for the bank. The staffs of this department go to various places and meet
different people and convince them to open an account in this bank. They convey the
facilities provided by the bank to general public.
vii. Account DepartmentThis department maintains all the incomes and expenses incurred by the bank.
It keeps the record of outgoing cash inflows such as administrative expenses, salaries,purchase of machineries and official equipment, electricity cost, stationary cost etc.
They provide income statement, profit and loss account and balance sheet of the bank.
viii. Administration DepartmentUnder this department, the staffs requirement of official equipments,
stationeries, managing vehicles and branch openings are taken care of. Other
departments make a request for the items needed and fill up the store requisition form
for that matter.
ix. Share DepartmentThe main purpose is to distribute number of shares and dividend earned by the
customers. The customer purchase shares of this bank and is entitled to receive
dividend by the profits earned. This department also conducts Initial Public Offering
(IPO) of various financial institutions.
x. Legal DepartmentThis department handles all the issues related to rules and regulation as per the
Nepal Rastra banks directives. It looks after weather the activities go through
according to the law or not. If not done in the right way, it control such activities. If
any disputes arise in the organization, this department makes the settlement.
xi. Human Resource DepartmentThis department keeps all the record of staff working in the bank regarding
leave, absenteeism, working hours, details of staff. The main functions are
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recruitment, selection of manpower in the bank as per required vacancy, strategic
planning, succession planning, motivation, performance appraisal, training and
development and employees relationship.
xii. Compliance DepartmentThis department handles all the procedure have been followed or not as
prescribed by the central bank. If the procedure is not going according to the
prescribed by the central bank, this department controls it.
X. BRANCH NETWORKExpansion of any business starts with the establishment of network of branches
all over the country with potential market. Branch network is the network of variousbranches of ACE working simultaneously at various locations in order to cater the
requirement of customers of various geographic locations. The figure below depicts
various branches of ACE.
Figure 2.4 Branch Network
CHABAHIL BRANCH
Chuchhepati
KATHMANDU HEAD OFFICE
NarayanChaur, Naxal
PATAN BRANCH
JawalakhelLalitpur
KIRTIPUR BRANCH
Nayabazar
BIRGUNJ BRANCH
Link Road
PARSA BAZAR BRANCH
Khairahani, Chitwan
URLABARI BRANCH
UrlabariBazar, Morang
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XI. SWOT ANALYSISThe success of the organization significantly depends upon the internal
environment of the organization in which employee devote most of their time. It is very
difficult to encode the future course of action, which depends upon various tools such asSWOT analysis, which can be used to find out the internal and external changes in the
environment. The components of SWOT analysis are as follows:
S stands for Strength
W stands for Weakness
O stands for Opportunity
T stands for Threat
Strengths and weakness are internal factors i.e. they are internal attributes of the
company itself. The following SWOT analysis are based on the secondary data provided
by ACE.
i. STRENGTHStrength is the internal attribute of SWOT analysis, which signifies the
capability of an organization. Followings are some of the strength of the strengths of
ACE:
ACE has a good overall reputation. ACE has maintained a sound and healthy relationship with the existing clients. Bank has been providing E-banking facilities to its clients for their convenience. Bank has been continuously trying to explore different possibilities to develop the
activities of the bank.
ACE has been trying to strengthen its financial condition to face the challengesand competition.
Bank has been improving and getting advanced in the technologies. Bank has been able to provide credit facility to various clients, which led to
improvement in credit situation.
Bank has also gained position in recovering possible amount at the time oflending.
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Due to quality service provided. There have been an increasing number ofdepositors, which is a great source of income to the bank.
Bank has implemented various innovative programs like career development andtraining of the employees.
Bank has adequately maintained the liquidity position as per Nepal Rastra Bankdirectives.
Bank has been working with specialist technology and marketing expertise.ii. WEAKNESS
Weakness is the internal attribute of SWOT analysis, which signifies the
incapability of the organization. The weakness should be work out and converted into
strength in order for an organization to be able to sustain at hard times.
Bank has not been able to open more branches throughout the country. The customers demand for more services and facilities, which the bank may not
be able to meet.
The ATM machines are still not accessible to customers.Opportunities and threats are external factors, which can affect the company positively or
negatively.
iii. OPPORTUNITYIt is the external attribute of SWOT analysis, which signifies the favorable
conditions for an organization. An organization must be able to use its strength in
order to grab the opportunities. Some of the opportunities that ACE may come across
are as follows:
There is an opportunity to improve in terms of saving mobilization and depositschemes.
ACE could take up the advantage of weak and ineffective competitors and try tocapture and get hold of the market before they do. This would help bank to
establish the market and maintain the market share.
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Bank in the name of its goodwill can stand ahead in the market leaving othersbehind by launching newer schemes.
Bank can concentrate more on credit control and credit investment. ACE can always have a strategic planning to adopt the changes in the market. There is possibility for bank to enter a new market segment through proper
marketing mix after launching debit and credit card system.
There is chance of high progress and prosperity where competitors are slow inadopting new technology.
Mergers, joint ventures or strategic alliances could be one of the opportunities forthe bank.
iv. THREATSIt is the external attribute of SWOT analysis, which is responsible for the
downfall of business of an organization. If the weakness of an organization is not
worked out, the organization is most likely to suffer from the threats. Some of the
threats that ACE may come across are as follows:
The biggest threat for banks and other financial institution is competition, which isever increasing.
Political instability in the country, which has hampered strongly in the economiccondition resulting in poor banking transaction.
Threats from Maoist and insurgency have greatly influenced the banking sectorresulting from declining scale in business.
Due to cutthroat competition, clients would have more bargaining power. Change in needs, tastes and preferences of customers can be one of the highest
threats.
Abrupt changes in Central Bank directives related to provision might be animmediate threat to the bank.
Economic recession or depression also influences the banking sector due tofluctuation.
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Increment in tariff is also a huge threat for banking sectors. Competitors can have better access to channels of distribution, which the bank
may not reach.
Competitors of the bank may have or use better technology to gain the topposition.
2.2. REVIEW OF LITERATURE
In a study of loan losses of US banks, McGovern (1993) argued that character has
historically been a paramount factor of credit and a major determinant in the decision to
lend money. Banks have suffered loan losses through relaxed lending standards,
unguaranteed credits the influence of the 1980s culture and the borrowers perceptions. Itwas suggested that institutions should make a fairly accurate personality morale profile
assessment of prospective and current borrowers and guarantors. Besides considering
personal interaction they should i) try to draw some conclusions about staff morale and
loyalty, ii) study the persons personal credit report, iii) do trade credit reference
checking, iv) check referenced from present and former bankers and v) determine how
the borrower handles stress. In addition they can minimize risks by securing the
borrowers guarantee; using Government guaranteed loan programs and requiring
conservative loan to value ratios.
Sergio (1996) in a study of non-performing loans in Italy found evidence that an
increase in the riskiness of loan assets is rooted in a lending policy adducing to relatively
unselective and inadequate assessment of sectored prospects. Interestingly this study
refuted that business cycle could be a primary reason for NPLs. The study emphasized
that increase in bad debts as a consequence of recession alone is not empirically
demonstrated. It was viewed that the lending firm customer relationship will thus prove
effective not so much because it overcomes informational asymmetry but because it
recoups certain canons of appraisal.
Fuentes and Maquieria (1998) Undertook an in depth analysis of loan losses due
to composition of lending by type of contract, volume of lending cost of credit and
default rates in the Chilean credit market. Their empirical analysis examined different
variables, which may affect loan repayment. a) Limitations on the access to credit; b)
macroeconomic stability; c) collection technology; d) bankruptcy code; e) information
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sharing; f) the judicial system, g) prescreening techniques and h) major changed in
financial market regulation. They concluded that a satisfactory performance of the
Chilean credit market in terms of loan repayments hinges on a good information sharing
system, an advanced collection technology, macro economic performance and major
changes in the financial market regulation. In another study of Chile, Fuentes and
Maquieria (2003) analyzed the effect of legal reforms and institutional changes on credit
market development and the low level of unpaid debt in the Chilean banking sector.
Using time series data on yearly basis (1960- 1977) they concluded that both information
sharing and deep financial market liberalization were positively of unpaid loans with
respect to the business cycle compared to interest rate of the Chilean economy.
Lis et.al. (2000) used a simultaneous equation model in which they explained
bank loan losses in Spain using a host of indicators, which included GDP growth rate,
debt equity ratios of firms, regulation regime, loan growth, bank branch growth rates,
bank size (assets over total size) collateral loans, net interest margin, capital asset ratio
(CAR) and market power of default companies. They found that GDP growth
(contemporaneous as well as one period lag term) bank size and CAR had negative effect
while loan growth, collateral, net interest margin, debt equity, market power, regulation
regime and lagged dependent variable had positive effect on problem loans. The effect of
branch growth could vary with different lags.
Altman Resti and Sironi (2001) analyzed corporate bond recovery rate adducing
to bond default rate, macroeconomic variables such as GDP and growth rate, amount of
bonds outstanding, amount of default, return on default bonds, and stock return. It was
suggested that default rate, amount of bonds, default bonds and economic recession had
negative effect while the GPD growth rate and stock return had positive effect on
corporate recovery rate.
Bloem and Gorter (2001) suggested that a more or less predictable level of non-
performing loans, though it may vary slightly from year to year is caused by an inevitable
number of wrong economic decisions by individuals and plain bad luck (inclement
weather, unexpected price changes for certain products, etc., Under such circumstances,
the holders of loans can make an allowance for a normal share of non-performance.
Enterprises may well be able to pass a large portion of these cists to customers in the form
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2.3. REVIEW OF NEPALESE STUDIES
Upreti (2001) states that profitability in term of return on shareholders equity
ratio of NGBL is found lower in F.Y, 1994/95 (3671%). Similarly, the ratio of HBL is
found within the range from 38.68 % (in 1995/96) to 23.13% (in 1998/99). The yearly
average of NGBL (i.e. 31.52) is higher than yearly average (i.e.30.152) of HBL. It can be
concluded that both the banks have been able to earn profit on shareholders equity but
not satisfactory level. NGBL is more success to generate more return on its shareholders
funds than that of HBL, although there is no significant different between the averages of
these ratio of the two banks. Return on total assets ratio of NGBL is found within the
range between 2.95 % (in 1995/96), (2.30%) and (in1994/95) where the same ratio of
HBL is found within the range from 2.48 % (in 1995/96) to 1.48% (in 1998/99). The
yearly ratio of HBL is generally decreasing over the study period. Moreover, the yearly
average of NHBL (2.64) is found higher than the yearly average of HBL along with its
yearly average ratio is also higher than composite average of the banks. It can be
concluded that return on total assets ratio in cash of NGBL is found better performance
by utilizing overall resources but the generated profit is found lower for the overall
resources in both the joint venture banks.
The main statement of the problem of his research is the Himalayan bank Ltd. and
Nepal bank operating in Nepal. In comparison to their JVBs these bank have achieved a
desirable success in terms of market share and profit due to their service excellence,
consumer satisfaction, highly skilled management and staff and worldwide network of
branch. Although, Himalayan Bank Limited and Nepal Grindlays Bank have able to
perform better than other local banks and financial companies within a short span of time,
they have been facing competition with each other. These banks do not have strong
financial position in respect to net profit to capital employed ratio, capital adequacy andearnings per share. The contribution of these banks in rural areas is very unsatisfactory.
To know the solution of these problems, the competitive financial analysis of these two
banks will be much more helpful.
Kapadi (2002) states that most of the capital structure ratios show that the capital
structure of both the banks is highly leveraged. Total debt to equity ratio of both the
banks reveals that the claims of the outsider exceeds mere than that of the owners over
the bank asset. However NABIL bank seems to be more leveraged than SCBNL. Total
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debt to total assets ratio of both the banks has always been over 88, which indicates the
excessively geared capital structure. Comparatively NABIL bank has used a little more
debt financial than SCBNL. Long term debt to total assets ratio of NABIL bank is seems
to be greater as per mean which shows more use of long-term debt by NABIL bank than
by SCBNL. Long term debt to net worth ratio of both the banks is following the
fluctuating trend. The mean proportion of outsiders fund and owners fund employed in
the total capitalization of NABIL bank is higher than that of SCBNL. This implies that it
is following an aggressive strategy of higher risk higher return policy. The net fixed asset
to ne
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