Lending Policy Of Bank Of Kathmandu

CHAPTER – I
INTRODUCTION

Background of the study

Concept of Bank
B

ank, a financial institution, is playing a vital role in the economic development of the country. The function of banks are not only accepting deposits and granting loans but also, including wide range of services to the different strata of society, to facilitate the growth of trade, commerce, industry and agriculture of the national economy. In the absence and insufficiency of banking and financial facilities, the growth of the economic development becomes slow. However, bank is a resource for economic development, which maintains the self-confidence of various segments of society and advances credit to the people?
It may be said that Banking in its must simple form, is as old as authentic history. Banking has come to the present advanced form through various stages. In the history of banking development, we can't forget the bank of case De San Giorgio in Genoa, established in 1148 and Bank of Venice established in 1157. In 1401, the Bank of Barcelona established in Barcelona. In fact, Modern bank started to take rapid speed in forming and functioning from 17th century. During this periodic, Bank of Milan, Bank of Florence and Bank of ST. George was established in Genoa. In 1609, the Bank of Amsterdam was established in Germany and the Bank of England was established in England.
In Nepal, the history of the bank is not so long. In 1933 BS (1876 AD), the "Tejarath Adda" was established by Rano dip Singh for simple banking transaction. However, Nepal Bank Limited is the first commercial bank in Nepal. Nepal Rastra Bank was established on 2012 B.S. as a Central bank of nation. On 2016 B.S., Nepal Industrial Development Bank, the second commercial bank of Nepal was established on 2022 B.S., Nepal Bank Limited and Agriculture Development Bank was established on 2024 B.S. Since government followed the liberalization policy speedy growth of bank began. Now in Nepal, there are altogether 18 commercial banks are providing their services.
In conclusion, we can say that Banking is not static but a dynamic concept. It is a product of centuries and the development, which has taken place in the product of a method of trial and error and experiences, which were made.

Commercial Banks in Nepal

Commercial banks are the financial institutions, which deal in accepting deposits from persons and institutions, provide interest, formulate capitals and grant loans against securities. They contribute significantly in the formation and mobilization of internal capital and developmental effort, furnish necessary working capital according to the requirements for trade, commerce, and industry and even to agriculture sectors, perform agency function to make life easier and play an important role in credit creation. Besides, they also provide technical and administrative assistance to industries, traders and business enterprises. So they are being the means for the upliftment of society. Their main objectives are to earn reasonable profit as reward for their service by proper mobilization of idle resources collecting them from different scattered sources, in particular productive sectors.
According to Nepal Commercial Bank Act 2031 B.S., "A commercial Bank is one which exchanges money, deposits money, accepts deposits, grants loans and performs commercial banking functions and which is not a bank meant for cooperation, agriculture, industries or for such specific purpose.
The history of banking system starts from 1994 B.S. in Nepal with the establishment of Nepal Bank Limited, which is the first commercial bank of Nepal. Nepal Bank Limited was established under Nepal Bank Act as the join ventures between government and public sector, Nepal Bank Limited plays a great role to develop the banking sectors in Nepal. To regulate issue of currency, security country wide circulation of Nepalese currency, achieving stable exchange rate and to mobilize capital for economic development and for stigmatization of trade, industry and banking system. Nepal Rastra Bank came into existence in 2013 B.S. as country's central bank. NRB directed it's attention towards development of banking system by formulation relevant polices and procedure. In this connection, commercial bank Act 2021 B.S. was brought and credit control regulation was formulated. To develop banking and commercial sector in Nepal later on Rastriya Banijaya Bank was

Table No.1
List of Commercial Banks in Nepal

S.N
Name of Commercial Banks Established
Date (B.S.) Operation
Date (B.S.) Head Office
1 Nepal Bank Ltd. 1994/07/30 1994/07/30 Kathmandu
2 Rastriya Banijya Bank Ltd. 2022/10/10 2022/10/10 Kathmandu
3 Nepal Arab Bank Ltd. 2041/03/29 2041/03/29 Kathmandu
4 Nepal Investment Bank Ltd. 2042/11/16 2042/11/16 Kathmandu
5 Standard Chartered Bank Nepal Ltd. 2043/10/16 2043/10/16 Kathmandu
6 Himalayan Bank Ltd. 2049/10/05 2049/10/05 Kathmandu
7 Nepal SBI Bank Ltd. 2050/03/23 2050/03/23 Kathmandu
8 Nepal Bangladesh Bank Ltd. 2050/02/23 2050/02/23 Kathmandu
9 Everest Bank Ltd. 2051/07/01 2051/07/01 Kathmandu
10 Bank of Kathmandu Ltd. 2051/11/28 2051/11/28 Kathmandu
11 Nepal Credit and Commerce Bank Ltd. 2053/06/28 2053/06/28 Siddharthanagar
12 Lumbini Bank Ltd. 2055/04/01 2055/04/01 Narayangadh
13 Nepal Industrial & Commercial Bank Ltd. 2055/04/05 2055/04/05 Biaratnagar
14 Machhapuchhre Bank Ltd. 2057/06/17 2057/06/17 Pokhara
15 Kumari Bank Ltd. 2056/08/24 2057/12/21 Kathmandu
16 Laxmi Bank Ltd. 2058/06/11 2058/12/21 Birgunj
17 Sirdhartha Bank Ltd. 2058/06/12 2059/09/09 Kathmandu
(Sources: Banking & Financial Statistics, Vol 44, NRB)
Introduction of Bank of Kathmandu Limited

Bank of Kathmandu Limited (BOK) has today become a landmark in the Nepali banking sector by being among the few commercial banks entirely managed by Nepali professionals and owned by the Nepali public where the general public owns majority of the shares.
BOK was incorporated in 1993 and became fully operational in March 1995 as a joint venture between Nepalese promoters and The Siam Commercial Bank PLC of Thailand. Initially the Banks promoters consisted of Nepalese shareholders holding 45% of the Banks shares. The Siam Commercial Bank PLC held 30% of the shares. The General Public held the remaining 25% of the shares. During the third year of operation The Siam Commercial Bank PLC sold their shares making way for a full Nepalese ownership. Today the general public owns 58% of the shares while the promoters hold 42% of the shares.
BOK has recently opened its tenth branch in Birgunj to facilitate convenient banking with true nationwide reach. Besides providing easy banking access to the mid development region Birgunj branch is started with an intension of introducing excellent banking services to the local entrepreneurs and other local people.
Today, BOK is proud to be associated with leasing business houses in the country and strives to provide innovative and competent services in days ahead by dedicating itself for the progress and growth of the institution, community, customers, employees and shareholders that would undoubtedly make BOK the "Bank of Choice".
An Overview of Lending Policy

Commercial banks perform a wide spectrum of functions. However, advancing loans is one of their major functions. Bank loans contribute a lot to the growth of new business, which ultimately improves the economic health of the country. The role of bank loan in the economic development of the country is of great value. Normally, commercial banks loans in four forms namely overdraft, cash credit, direct loan and discounting bills of exchange. Loans and advances constitute a major portion of the assets of a commercial bank and the interest income earned from loans and advances is a major contributor to a bank's profit.
It is a very sensitive subject that what sort of credit policy a bank should have. As a financial institution bank collects deposit from various sources and utilized them in providing loan & investing them in various sectors. The commercial banks are inspired with the motive of gaining profit. To fulfill this objective, they must pay much more attention to the flow of loan. Regarding loan policy, it should make clear to its policy & view and should follow the credit policy, which would match its own objectives, vision, economic policy & directions of the Central Bank. A bank should adopt such a policy, which helps in the development of the business, industrial marketability to get adequate return from it.
If the loan asset of the bank turns out to be non-performing or least liquid, the bank can't obtain the targeted return from loans & advances. Thus, an effective lending policy is a must. Lending policy is a process involving follow up, credit renew and settlement of loan, credit recovery, etc.

Principles of Sound Lending Policy

The purpose of loan and advances should be productive and income generating. To fulfill these purposes, bank should adopt clear and sound credit policy while granting loan and advances. A sound credit policy gives due regard to the following cardinal principles:

a) Principle of Safety
b) Principle of Liquidity
c) Principle of Profitability
d) Principle of Diversification
e) Principle of National Interest

a) Principle of Safety
While granting loan and advances the bank must consider the chances of its being repaid by the borrower along with interest. Scrupulous care must be taken to see that the funds lent are not subject to any undue risk of being lost due to deployment for unproductive or speculative ventures or due to dishonesty of the borrowers.

b) Principle of Liquidity
Generally liquidity means the capacity to produce cash on demand for deposit. The amount advanced should be able to convert into cash quickly or whenever needed.
c) Principle of Profitability
Bank should lend fund to the profitable sector as (as it has) to repay the interest on deposit and maximize the wealth of shareholder. But, it should not forget the safety and liquidity principle while selecting the profitable sectors to invest.
d) Principle of Diversification
The principle of diversification is based on the famous saying, "Do not keep all the eggs in one basket". As the loan and advances are the risky assets, banks should spread the risk by lending to a large number of borrower instead of giving loans and advances to a few, by making large advances.

e) Principle of National Interest
The loans and advances are to be granted to the productive sectors, such as industry, trading, service and other priority sectors.

Directives of NRB Relating to Loans & Advances

As per the directives of Nepal Rastra Bank, banks & other financial institutions classify their loans and advances into following four categories:

1. Pass: Loan and advances which are not overdue or are overdue for a period of less then three months.
2. Sub-Standard: Loans and advances, which are overdue for a period from three to six months.
3. Doubtful: Loans and advances, which are overdue for a period from six months to one year.
4. Loss: Loans & advances which are overdue for a period of more than one year or which have little chance of recovery or are not recoverable fully or partly.

Loans and advances, which are not overdue but met one or more of the following criteria, are also classified as loss asset:

1. No collateral or collateral pledged not as per agreement with bank.
2. Borrower gets bankrupt
3. Borrower not accessible
4. Bill, purchased or discounted, not reimbursed within 90 days.
5. Loan amount used for purposes other than indicated
6. Loan recovery process prolongs for provided to any blacklisted borrower.

Similarly, in the case of term loan, if any installment is overdue, then the outstanding amount is also considered as overdue. Classification of loan & advances and required provision Banks are required to classify loans and advance (inclusive of balance in bills purchased/discounted) under the following four categories and provide provision for as follows (on the balance amount at the annual closing):




Classification of loan Provision Required
Good
Sub-standard
Doubtful
Bad 1%
25%
50%
100%

 Commercial banks are required to extend their loan 4% to priority sector, & 3% to the deprived sector should be granted of the total loan & advances, failing which they are liable to pay penalty on the shortfall amount at the maximum prevailing lending rate of the bank during examination is imposed.

Transactions not permitted for commercial banks under Sec-13 of Commercial Bank Act 2031.
 To extend loan/advances against security of own share
 To extend advances to directors or their family members.
 To extend advances to companies/organizations in which the directors or his family members jointly, severally have financial interest (10% or more paid share capital held).
 To extend advances beyond stipulated single borrower/group

Lending Policy of BOK

Lending is a major function of BOK. Providing credit or lending in the form of loan and advances is a profitable activity of the bank. Interest received from loan and advances is a major source of income of the bank. Loan and advances are the risky assets. Therefore, the bank follows a clear and sound credit policy while investing in these assets. Credit/lending policy is decision, made in advance about management of the credit i.e. loan and advances. The credit policy is established by the BOD considering NRB's circular and rules and regulations of HMG and other influencing circular factors. These policies are communicated to the lending officers and staffs of loan department through Credit Policy Guide, Credit Administration Manual, Nabsy's Manual and Loan Modules Manual. The staffs follow Credit Facility Request (CFR) of bank for disbursement and repayment of loan. In all business dealing lending officer is guided by principle of honesty and integrity, the interest of creditors, depositors and stockholders of the bank, and the laws, rules and regulations of HMG and NRB, which affect the bank's practices.



Lending Documents
BOK does not distribute the approval loan until all necessary documents have been obtained. The bank demands various types of documents from its customers while sanctioning a loan/advances. General documents obtained by the bank from its customers are:
a. Corporate borrowing resolution
b. Financial statements of borrower of last three years
c. Partnership deed in case of partnership business
d. Article of Association & Memorandum of Association in case of Joint Stock Company
e. Feasibility report, Security documents.
f. Document of firm registration, Income Tax registration and clearance for the fiscal year.
g. Promissory note, Letter of agreement
h. Assignment of bills and account receivables
i. Power of attorney, Letter of continuity
j. General letter of hypothecation
k. Supplementary agreement & Subordination agreement
l. Letter of guarantee, Wealth statement
m. General counter guarantee & General letter of trust receipt
n. Letter of set-off
o. Bills purchase agreement.
p. Loan deed (In Nepali Paper)
q. Board resolution to borrow
r. Paripassu charge, Citizenship certificate, & Certificate of ownership
But the documents and their other procedure may vary on different type of loan.


Lending Procedure
Loan approval process is multi-step process, which may vary according to size and types of loans and is based on available information for loan appraisal. The steps of loan approval process are described as follows:

i. Application
A borrower is required to submit an application to the bank along with required documents-project proposal, historical financial statements and documents pertaining legal existence of business. The application contains name, address, qualification, legal status and experience of borrower; past dealings; purpose of loan; Amount of sought; Turnover; Profitability; Viability; security and business worth.

ii. Interview
After submitting a loan application, the loan interview is conducted. An interview gives the customer the opportunity to explain his credit needs, and it also provides an opportunity for the bank's loan officer to assess the customer's character & sincerity of purpose.

iii. Credit Analysis
After interviewing the borrower, the personal of BOK carry out credit analysis. The analysis of the goodness of such loan is called credit analysis. Under this, the integrity of the borrower & the source of repayment are analyzed. Under it, borrower's traits such as honesty & truthfulness, his capacity to generate enough income to repay loan, collateral, net worth of the borrower and general economic condition etc. are analyzed. It is very important analysis.

iv. Proposal Appraisal
BOK generally carries out project appraisal before accepting medium and long-term loan proposals. A project appraised can simply be understood as a process of assessing the viability of projects to judge the soundness of loan proposals. A number of factors are taken into account while appraising a project. The factors may differ as per the types of project. However, BOK generally considers the factors as summarized in the figure:-






Fig No.4
Factors for Proposal Appraisal













v. Loan Approval
If the banker is satisfied with the information provided by the applicant and with the document while evaluating them, the banker may decide to provide loan. Such decision is made by the authorized officials or management committee often on the recommendation of loan evaluation committee.


The lending procedure can be shown as below:


Fig No.5
Lending Procedure of BOK Ltd.

APPLICATION



INTERVIEW



THE CREDIT ANALYSIS




PROJECT APPRAISAL




APPROVAL/REJECTION


Types of Loan Provided by BOK

The common types of loans that are offered by BOK to its customers are as follows:
A. Corporate Loan
As competition has been fierce in Corporate Banking business, there are constraints in volumes and margins in Corporate Bank business. Under it the bank provides the following types of loans.


I. Term Loan

II. Working Capital Loan
(a) Overdraft
(b) Demand/Short-term Loan
(c) Trust Receipt/Importers Loan
(c) Export Loan

III. Other Loan
(a) Loan Against Fixed Deposit
(b) Loan Against Govt. Bond / 1st Class Bank Guarantee
(c) Priority Sector/Deprived Sector:
(d) Consortium Financing
B. Consumer Loan
As a result of constraints in volumes and margins in Corporate Bank business, Consumer Bank products are increasingly preferred by financial institutions. The bank has been the pioneer in formulating Foreign Employment Loan directives of His Majesty’s Government under their foreign employment program. Under it the bank provides the following types of loans.
(a) Car 4U Loan:
(b) LCV loans/Buses
(b) HCV loans/Trucks
(c) Foreign Employment Loan
(d) Educational Loan
(e) Housing Loan

Loan Follow-Up

The loan follow-up can simply be understood as a post assessment of the approved loan. The BOK Personnel keep close contact with the borrowers to know the developments that may hinder the repayment of loan. At the same time loan follow-up helps to build up a good rapport with the borrowers that ultimately may result in good future prospects for the bank itself.

Credit Renew

BOK provides the facility of renewal of loan to the borrowers based on the utilization of loan amount without any adverse record, with regular interest payment and also if the bank is satisfied with the transactions of the borrower throughout the year.

Fieldwork Procedures:

Here the fieldwork procedures are made with the help of the data collected from concerned banks. Only secondary data are used for the analysis of the study. The collected data are tabulated & presented with different statistical diagram, chart, trend line & tools like correlation has been shown. Then it is analyzed in accordance to the need of the study.
The process of fieldwork started with the orientation class taken by the teachers of our college. Orientation class helped the students, who were eager to write fieldwork report, in selection the topic. After selection the topic, students were provided with the "Letter of Introduction" by the college that made the researcher easier to collect information from the concerned bank for many times. In the research of this fieldwork, the first attempt, the reporter made the study of the bank thoroughly and asked about the different things associated with the bank. This 1st visit helped the researcher to obtain the annual reports of the bank. This annual report helped a lot in preparing the fieldwork report. But only annual report is not sufficient. So the bank was visited many times to acquire the information about the bank. Questions were asked when the doubt existed. Similarly, the reasons behind the fluctuating position of lending policy were also revealed

Method of Data Collection

This study is done in Bank of Kathmandu Ltd. especially in corporate office of Bank of Kathmandu Ltd. Kamaladi Road, Kathmandu. This study is carried out to find out the lending policy of BOK. In this study, the tool used to collect is secondary data. Questionnaires were developed to gather primary data. Secondary data is that which has been used in an investigation but originally collected by someone else. Required information were collected from various secondary sources like published official documents of the organization, reports, books, magazines, newspapers, booklets and brochures, newsletter, internet and other unpublished documents of the organization

Objectives of the Study

Mainly this report is focused on the following objectives:

 To highlight the lending practices of the BOK Ltd.
 To find out the trend in total loan & advances positions of the bank.
 To find out whether the bank has been following the directives formulated by NRB or not.


Importance of the study

The following are the few points, which throw lights on the importance on this fieldwork report.
 As a business student, it is a golden opportunity to show skill in financial analysis; this report will show the intelligence and skill of the student. This report is a criterion for evaluation of the student's qualification.
 This fieldwork report will provide information to the student as to how the business house is running.
 This fieldwork report might be useful for those who are willing to know something about the lending policy of BOK.
 This fieldwork report may be useful for the library purpose so that any student wanting to prepare a report can have some ideas about it.
 This fieldwork report can be used as a guideline while preparing a small project report.
 This fieldwork report is prepared for the partial fulfillment of the requirement for the Degree of Bachelor of Business Studies.





Limitations of the study

No study can be free from its own limitations. So, the present study has also some limitations. They are:

 In the study, an effort has been made to make the comparative analysis of the data over 5 years only i.e. from 2000/01 to 2004/05
 Resources & time is limited.
 Focus is given only on credit policy & position, not on others.
 Deposits & credit are interrelated. So, even the study focuses only on credit aspect, the attention has been given to deposit too.
 The study is primarily based on the secondary data source such as annual reports of concerned banks, and other related journals, magazines, books etc. So the reliability of conclusion of the study depends upon the accuracy of secondary data.
 The directives of NRB in English version are not available. So, translation has been done in own effort





































•••

CHAPTER-2
ANALYSIS AND PRESENTATION OF DATA

Distribution of Assets

The total assets of BOK constitute various current assets & fixed assets. The asset distribution of BOK for Fiscal Year (FY) 2061/62 can be shown in the below table & figure.

Table - 4
Asset Distribution for 2004/05
(Rs. in Millions)
Assets Amount Percentage
Cash and Bank Balance 740.52 7.51%
Money at Call and Short Notice 328.87 3.34%
Investment and Placements 2598.26 26.36%
Loan, Advances & Overdrafts (O/D) 5912.58 59.98%
Other Assets 95.23 0.97%
Fixed Assets 181.67 1.84%
9857.13
(Sources: Balance Sheet of F/Y 2004/05.)


Fig No: 6
Assets Distribution of BOK Ltd.



As per the above table and figure, BOK's total asset is 9857.13 million in F/Y 2004/05. Out of the total asset Rs. 5912.58 is covered by loan/advances & bills purchased. It is 59.98% of the total assets. It is the highest percentage among the percentages of other assets. It shows that the bank has invested a maximum amount of its funds on risky assets (i.e. loan).
Outstanding Loan/Advances & Bills Purchased Trend

Loans, advances and overdraft occupy the largest portion of the total assets of BOK. BOK provides loan & Advances in both foreign & local currency to its customers. BOK's outstanding loan/advances & bills purchased in last five fiscal years are depicted through the below table & figure.

Table No.5
Loan/Advances & Bills Purchased
Fiscal Year Loan/Advances & Bills Purchased % Change
2000/01 4,127.05 -
2001/02 4,613.70 11.79%
2002/03 4,542.70 -1.54%
2003/04 5,647.70 24.32%
2004/05 5,912.58 5.65%
(Rs. in Millions)






(Sources: 5 Years' Balance Sheet of BOK Ltd.)

Fig No: 7
Trend line of Loan/Advances & Bills Purchased of BOK Ltd.



The above table & figure show the total loan extended by the BOK over five fiscal years. The total outstanding loan/advances & bills purchased for FY 2000/01 was Rs. 4,127.05 millions. It was increased to Rs. 4,613.70 millions in FY 2001/02. But it decreased to 4,542.70 in FY 2002/03. Outstanding loan/advances & bills purchased for FY 2003/04, 2004/05 were 4,542.70 millions, 5,647.70 millions, 6,248.30 millions respectively.
The outstanding loan/advances & bills purchased have been increasing every year except in FY 2002/03. The increment in FY 2001/02 is 11.79%. In FY 2002/03, the outstanding loans/advances & bills purchased decreased by 1.54%. It is because of the sluggish Nepalese economy. But, in FY 2003/04 is increased by 24.32%. Similarly loan/advances & bills purchased increased by 5.65% in FY 2004/05.
Credit Deposit Ratio

This ratio indicates the deposit management of the bank. It measures the extent to which the bank is efficient in mobilizing total deposit to total credit. The total credit indicates loan advances and overdraft, bills purchased & discounted. It is calculated by dividing total credit by total deposit.


Table No.6
Credit Deposit Ratio of BOK Ltd .
(Rs. in Millions)
FY Total Deposit Total Credit %
2000/01 5,713.49 4,127.05 72.23%
2001/02 5,723.29 4,613.70 80.61%
2002/03 6,170.71 4,542.70 73.62%
2003/04 7,741.64 5,647.70 72.95%
2004/05 8,943.00 5912.58 66.72%
Mean ( )
73.23%
(Sources: 5 Years' Balance Sheet of BOK Ltd.)

Fig No: 8
Credit Deposit Ratio of BOK Ltd.


It would be profitable for BOK to invest 100% of the total deposit. But it is impossible as a certain cash has to be maintained in the premises of the bank to fulfill withdraw facilities of the clients and at the same time BOK has to maintain certain percentage of amount as per NRB's rule. Above table shows that the credit deposit ratio of BOK is increasing & decreasing trend. In FY 2000/01 credit deposit ratio is 72.23% and was increased by 8.38% in FY 2001/02 and remained 80.61%. It was decreased by 73.62%, 72.95% & 66.72% in FY 2002/03, 2003/04 & 2004/05 respectively. This trend shows that the bank in FY 2002/03, 2003/04, 2004/05 is unable to utilize outsider's fund. But in FY 2001/02 the bank is in satisfactory position with respect to mobilizing total credit and total deposit. In FY 2002/03, the bank was able to mobilize total credit & total deposit than FY 2000/01, 2003/04 & 2004/05 but it is unable to mobilize it's resources than FY 2001/02. In last five years, the total deposit is increasing each year but the total credit is not increasing as compare to the total deposit. It is because of the instability in economic condition of the country. People are afraid of investing in various sectors because of fair of loss in business. So, they don’t take loan from the banks. Moreover, they only deposit their savings in the bank instead of investing such deposits in various investing areas.
The table above shows the total loan to total deposit ratio trend of BOK, which is 73.23% in average of 5 years. The mean value indicates that 73.23% of total deposit has been given out as loan and advances to the enterprises, firms, companies etc.

Fig No: 9
Trend Line of Total Deposit & Total Credit of BOK Ltd.



From figure also, we can see that loan is increasing simultaneously up to year 2001/02. After that it decreases little in the year 2002/03 it goes on increasing and in this way the trend line goes upward.
But the deposit in the year is increasing in every year from FY 2000/01 to 2004/05. In this way, there in both the lines shows the good condition of the bank in term of total deposit & total credit.

Investment & Loan/Advances of BOK Ltd.

The BOK Ltd. does not keep the deposited amount idle. It utilizes them by investing them into profitable & secure area and providing them to various sectors as loan. The bank invests in HMG securities such as Treasury Bills, Development Bond, National Saving Bonds, investment in certificate of deposit, mutual fund, local bank, foreign bank etc and provides loan to priority sector, corporate sector & consumer sector etc. The investment & loan/advances of BOK can be shown in below table & figure.
Table No.7
Loan & Investment of BOK Ltd.
(Rs. in Millions)




FY Total Loan Total Investment
2000/01 4,285.93 419.82
2001/02 4,890.07 667.45
2002/03 4,856.03 1816.15
2003/04 6,008.31 2477.41
2004/05 6,182.04 2598.25












(Sources: Various Annual Reports of BOK Ltd.)














Fig. No. 10
Loan & Investment of BOK Ltd.


In the above table & figure, the investment amount is increasing every year, but the loan amount decreased in FY 2002/03. The loan amount was Rs. 4,285.93 millions, Rs. 4,890.07 millions, Rs. 4,856.03 millions, Rs. 6,008.31 millions & Rs. 6,182.04 millions in FY 2000/01, 2001/02, 2002/03, 2003/04 & 2004/05 respectively. Similarly the investment amount was Rs. 419.82 millions, Rs. 667.45 millions, Rs. 1816.15 millions, Rs. 2477.41 millions, Rs. 2598.25 millions in FY 2000/01, 2001/02, 2002/03, 2003/04 & 2004/05 respectively.
Out of total deposit, the portion of loan amount is greater than that of investment amount. It indicates that the interest income from loan & advances may be greater than the rate of return gained from investment. Most of the investable amount is invested into HMG securities, which are secure, & no risk. So, from HMG securities, the bank may receive low rate of return. Thus, the bank may be interested to provide loan than to invest.

Interest Income to Total Loan /Advances & Overdraft

Banks charges certain percentage interest on loan, advances & overdrafts. The interest charged is a major source of income for the commercial banks. Interest income to the total loan/advance of BOK Ltd. can be shown in the following table & figure.

Table No.8
Interest Income to Total Loan/Advances
FY Total Interest Income Total Loan, Advances & Draft %
2000/01 465.03 4,127.05 11.27
2001/02 473.29 4,613.70 10.26
2002/03 496.81 4,542.70 10.94
2003/04 567.09 5,647.70 10.04
2004/05 607.10 5,912.58 10.27
(Rs. in Millions)
(Sources: various annual reports of BOK Ltd)

The above table 8 shows that the interest income is increasing in every fiscal year. But the portion of interest income on total loan, advances & overdraft is fluctuating i.e 11.27%, 10.26%, 10.94%, 10.04% & 10.27% in FY 2000/01, 2001/02, 2002/03, 2003/04, 2004/05 respectively. It is due to decrease in loan amount in FY 2002/03. In FY 2000/01 the interest was Rs. 465.03 millions and it increases to Rs. 473.29 Rs, 496.81, Rs.567.09 & Rs.607.00 in the FY 2001/02, 2002/03, 2003/04 & 2004/05 respectively. It can be shown by the following figure:








Fig. No. 11
Interest Income to Total Loan/Advances

The above figure shows the trend of interest income and total loan & advances. In the figure, though the loan amount is in increasing & decreasing trend, the interest on the total loan amount is increasing every year. In FY 2002/03, the total loan amount decreased, but the interest amount did not decrease. It shows that the bank has good interest coverage capacity.

Interest Income from Loan / Advances & Overdraft to the Total Interest Income
Interest is the main source of income of the BOK. Though BOK has earned interest from various sources such as interest from investment on government securities, loan, advances, and overdrafts and placements etc, interest from loan, advances & overdraft has covered the major part of the total interest income. It can be shown in the following table & figure.




Table 9
Interest Income from Loan/Advances & Overdraft To
Total Interest Income

FY Total Interest Income Interest Income from
Loan / Advances & Overdraft %
2000/01 465.03 399.85 85.98%
2001/02 473.29 433.64 91.62%
2002/03 496.81 435.03 87.57%
2003/04 567.09 469.50 82.79%
2004/05 607.10 502.95 80.97%
Mean ( )
85.78%
(Rs.in millions)
(Sources: various annual reports of BOK Ltd.)




Fig No: 12
Interest Income from Loan/Advances & Overdraft to Total
Interest Income


The above table & figure shows that the most of the interest income is covered by loan/advances & overdraft. Here total income includes interest income from investment on government securities, loan, advances, and overdrafts and placements. As per table 2.4, total interest income is Rs. 465.03 millions in FY 2000/01. Out of Rs.465.03 millions Rs. 399.85 millions is interest income form Loan, advances & overdrafts. It is 85.98% of the total interest. In FY 2001/02, it was increased to 433.64, which is 91.62% of the total interest income Rs.473.29 millions. It was because of increment of the total loan & advances in this year. But in further years interest income rate from loan/advances & overdrafts gradually decreased. In FY 2002/03, 2003/04 & 2004/05 it remained 87.57%, 82.79% & 80.97%. It shows that interest rate trend is decreasing rate. It is because of credit deposit ratio.
However, the table shows that a major source of total interest income is interest charged on loan/advances & overdrafts. The mean value 85.78% indicates that 85.78% of total interest income has been covered by loan and advances, which has an important contribution towards profit of BOK.















Fig No: 13
Trend Line of Interest Income from Loan/Advances & Overdraft to Total Interest Income


In the above figure, both the trend lines are moving upward, which shows that the interest income from the total loan & the total interest income are in increasing trend. Income from loan/advances & overdraft is increasing with the increase of total interest income. It shows that the interest income from loan/advances & overdraft has been contributing to increase the bank’s total interest income and to increase the net income of the bank, which is the positive signal towards the bank.





Provisions For Possible Losses

Every bank must make provision for possible losses. This provision is to be made as per NRB directives to cover specially identified doubtful loans and advances as on the corresponding fiscal year. Provision for possible losses of BOK for last 5 years are shown in the below table & figure.

Table No.10
Loss Loan Provision
(Rs. in Millions)
FY Total Loan Loss Loan Provision Percentages
2000/01 4,285.93 158.89 3.70%
2001/02 4,890.07 276.37 5.65%
2002/03 4,856.03 313.33 6.45%
2003/04 6,008.31 361.61 6.02%
2004/05 6,182.04 269.47 4.36%
(Sources: Various annual reports of BOK Ltd.)

Fig No: 14
Loss Loan Provision to Total Loan

The above table & figure consists of provision for possible loan losses. Percentage of provision losses for the FYs 2000/01, 2001/02,2002/03,2003/04,2004/05 is 3.70%, 5.65%, 6.45%, 6.02%, and 4.51% respectively. Here 6.45% is the highest percentage and 3.70% is the lowest percentage of loan provision in last 5 years. It shows that the BOK has given more non-performing loan in FY 2002/03 and less non-performing loan in FY 2000/01 comparatively in other fiscal years.



Net Profit to Loan & Advances

Profit is necessary for the smooth operation & long term existence of the bank. And it is also the main objectives of commercial banks. In the total profit of the bank, there is also a part of interest it charged on loan/advance & overdrafts it provided. Interest charged on loan/advances & overdrafts helps to increase the profit of the bank and help to grab the market share in this competitive banking sector. The net profit to the loan/advances of the bank can be shown in the following table & figure.

Table No.11
Net Profit to Loan & Advances
(Rs. in Millions)
FY Net Profit Loan/Advances Percentage
2000/01 65.35 4,127.05 1.58%
2001/02 9.27 4,613.70 0.20%
2002/03 82.13 4,542.70 1.81%
2003/04 127.47 5,647.70 2.26%
2004/05 139.53 5,912.58 2.34%
(Sources: various annual reports of BOK Ltd.)

Fig No: 15
Net Profit to Loan & Advances


The above table & figure show the percentage of net profit to the total loan amount. Here, net profit to loan & advances in FY 2000/01 is 1.58%, but this percent decreased in FY 2001/02 and remained only 0.20%. Since FY 2002/03, the percentage of net profit to the total loan/advances has been increasing every year, though the loan amount was decreased in FY 2002/03. Thus, it shows that the bank has been earning good profit.

Performing & Non Performing Credit to Total Credit

Any loan and advance classified as sub-standard, doubtful, and loss assets are considered as non-performing assets/loan in Nepal. Non-performing loans affect the performance of financial institutions in different ways. First, interest income can't be booked on such loans. Second, provisioning has to be made on them, which again affects the profit of banks. Third, banks with high non-performing loans get lower credit rating from credit rating agencies. Fourth, non-performing loans quite often result from poor project appraisal and vested interest of some groups. Fifth, payment default of interest and principal aggravates the cash flow and liquidity position of the bank.

Table No.12
Performing & Non Performing Loan
FY Total
Loan Performing
Credit %
Non Performing
Credit %
2000/01 4,285.93 3,960.54 92.41% 325.39 7.59%
2001/02 4,890.07 4,493.39 91.89% 396.68 8.11%
2002/03 4,856.03 4,435.16 91.33% 420.87 8.67%
2003/04 6,008.31 5,608.37 93.34% 399.93 6.66%
2004/05 6,182.05 5,912.58 95.6411 269.45 4.36%
(Rs. in Millions)
(Sources: various annual reports of BOK Ltd.)


Fig No: 16
Performing & Non-Performing Loan

The above table & figure show how much loan amount is performing loan & how much loan amount is non-performing loan out of the total loan. Here, most of the loan is performing loan meaning that the bank has more pass or good loan & less non-performing loan. Non-performing loan increased from FY 2000/01 to FY 2002/03, which is not good for the bank. But the non-performing loan has been decreasing from FY 2003/04, which is good symbol.

Securities against Loan, Advances & Bills Purchased
A security means property, which is pledge able under the existing law while giving loan or document relation there to or any other security acceptable to the bank. It may be movable/immovable assets, shares, bonds, debentures, deposits etc. A bank is a legal person. It does not provide the loan without security. It always studies and analyses whether the security recovers the banks principal and interest of the loan. Securities taken by the BOK while granting loan are shown in the following table & figure.

Table No.13
Securities against Loan, Advances & Bills Purchased
(Rs. in millions)
FY 2000/01 2001/02 2002/03 2003/04 2004/05
Collateral of Movable/ Immovable Assets 3,501.79 3,693.36 3,440.09 4532.97 4735.76
Local Banks and Financial Institutions Guarantee 46.75 151.47 15.19 - -
Foreign Bank Guarantee 577.57 56.56 124.64 122.98
Export Documents 209.32 275.25 148.99 125.6 155.04
Fixed Deposit Receipts 237.29 229.43 317.85 432.77 598.66
Government Bonds 283.17 472.80 609.37 547.92 267.35
Other Securities 7.60 10.00 267.99 244.41 302.26
Total 4,285.92 5,409.88 4,856.03 6,008.31 6182.05
(Sources: Various annual reports of BOK Ltd.)

Fig No: 17
Securities against Loan/Advance & Overdraft
The above table & figure show the securities that the bank takes from its borrowers while granting loan & advances. Generally, as collateral, the bank takes movable & immovable assets, local bank & financial institution guarantees, foreign Bank Guarantee, export Documents, fixed Deposit Receipts, government Bonds & other securities. Most of the collaterals are covered by movable & immovable assets.

Sector wise Loan Disbursement

BOK provides loan on various sectors like agriculture, mining, productions, construction, service industries, etc. The sector wise loan disbursement of BOK as on January 15, 2005 is as follows


Table No.14
Sector wise Loan Disbursement

Sectors Amount %
Agriculture 75 1.15%
Productions 2493.7 38.18%
Construction 354.1 5.42%
Metal Productions, Machinery & Electrical Tools & Fittings 232.1 3.55%
Transportation, Communications & Public Services 956.4 14.64%
Wholesaler & Retailers 1284.3 19.66%
Finance, Insurance & Fixed Assets 280.4 4.30%
Service Industries 420.3 6.44%
Consumable Loan 316.8 4.85%
Others 118.5 1.81%
Total 6531.6 100.00%
(Sources: Banking & Financial Statistics, Vol 44, NRB)

Fig No: 18
Sector wise Loan Disbursement

From the above table & figure, we found that the total loan of BOK is distributed in mainly 10 areas. Among them the highest portion is covered by production sector i.e. 38.18% Similarly, Agriculture, Construction, Metal Productions, Machinery & Electrical Tools & Fittings, Transportation, Communications & Public Services, Wholesaler & Retailers, Finance, Insurance & Fixed Assets, Service Industries, Consumable loan & Others covers 1.15%, 5.42%, 3.55%, 14.64%, 19.66%, 4.30%, 6.44%, 4.85%, 1.81%, respectively.




Karl Pearson's Correlation Coefficient

Karl Pearson's Correlation Coefficient is one of the most important statistical tools for measuring of correlation between two or more variables. This is known as Pearsonion Coefficient of Correlation. It is most widely used in practice. It is denoted by rxy or simple r. the formula for computing Karl Pearson's Coefficient of Correlation is stated below:

Where,
N = number of observation in series X and Y
u = Sum of (X-assumed mean; X= Deposit)
v = Sum of (Y-assumed mean; Y= Loan)
r = correlation coefficient

Karl Pearson's Coefficient lies between –1 & +1. If it is +1, it means there is perfectly positive correlation between the variables. If r = -1, it means there is perfectly negative correlation between the variables. If r = 0, it means there is no correlation between the two variables.
Another important statistical tool is to test the significance of the correlation coefficient that is Probable Error (PE). The formula of PE is stated below.

P.E = 0.6745 ×
Where,

r =correlation coefficient
N= No. of Pairs of observations

Here, we can measure correlation between deposit & loan/advance or credit of BOK Ltd with the help of Karl Pearson's Correlation Coefficient.














Table No: - 15
Correlation between Loan & Deposit (Rs in Million)

(Rs. in Millions)
Years Deposit (X) Loan(Y) u=X-6170.71 v=Y-4542.70 u2
v2
uv

2000/01 5,713.49 4,127.05 -457.22 -415.65 209,050.13 172,764.92 190,043.49
2001/02 5,723.29 4,613.70 -447.42 71.00 200,184.66 5,041.00 -31,766.82
2002/03 6,170.71 4,542.70 0.00 0.00 0.00 0.00 0.00
2003/04 7,741.64 5,647.70 1,570.93 1,105.00 2,467,821.06 1,221,025.00 1,735,877.65
2004/05 8,942.75 5912.58 2,772.04 1,369.88 7,684,205.76 1,876,571.21 3,797,362.16
3,438.33 2,130.23 10,561,261.61 3,275,402.14 5,691,516.48


The above calculation shows that the coefficient of correlation is 0.959, which is perfectly positive correlation between the variables. It indicates that there is high degree of positive correlation between total deposit and total credit. It signifies that if the bank increases deposit collection, then the bank can provide more credit to the customer. It also signifies the credit management of the bank.
Again,



6 x P.E. = 6 x 0.0242=0.145
Since r < 6 P.E. so, there is highly significant relationship between total deposit and total credit.

Major Findings

After conducting a thorough study of lending policy of BOK, the following findings have been derived.

i. Most of the part of the total assets is covered by the loan/advances & bills purchased, which shows that BOK has invested a maximum amount of its funds on risky assets (i.e. loan).

ii. The loan & advances position of the bank seems to be favorable. The loan & advances is increasing each year except in FY 2002/03. In FY 2002/03 it decreased by 1.54% due to sluggish economy. In FY 2004/05 it is increased by 24.32%, which is the highest percentage increased in loan & advances of BOK in these five years periods.

iii. Although the credit deposit ratio is in fluctuating trend. The mean value of this ratio is 75.0%, which shows it has been utilizing its funds satisfactorily.

iv. Most of the interest income has been generated through loan & advances disbursement, which also positively affected the profitability level of the bank. It shows the credit position directly affected the profitability of the bank. If the credit position of the bank is strong, the profitability too will be strong. However, it is decreasing since FY 2002/03.

v. The bank has maintained the loan loss provision as directed by the NRB i.e. 1% for pass loan, 25% for sub-standard loan, 50% for doubtful loan & 100% for bad loans.

vi. Net profit to total loan & advances, and interest on net profit are increasing since FY 2002/03.


vii. Though most of the total loan is covered by performing loan, non-performing loan is increasing every year. This shows that the possibility of default risk is also increasing.

viii. Although there is non-performing loan, all the loans & advances including performing & non-performing loan are secured. The bank has taken securities for all the loans/advances & bills purchased.

ix. Most portion of the total loan is granted to the production sector, which covers 38.18% of the total loan.

x. From the study of correlation coefficient of the deposit and loans & advances, the relation found very positive and highly correlated. How much the deposit can be collected, that much the loan & advances level can be increased?












•••


CHAPTER-3
SUMMARY, CONCLUSION & RECOMMENDATION


Summary

The modern banking system that we have today has passed through several stages before reaching the present stage. Because of the liberal economic policy adopted by the Nepalese government a numbers of commercial banks are operating today in Nepal. Among the commercial banks established in Nepal, BOK is one of them.

Bank of Katmandu Ltd was incorporated in 1994 as a joint venture between Nepalese promoters and The Siam Commercial Bank PLC of Thailand, but now it is full Nepalese ownership bank. It has launched its operation with marketing concept that the consumer is the king of the market. From its establishment period it has been providing a wide range of modern banking services to its customers. Among these services, granting credit has been its major function. Granting credit in the form of loan and advances is not only profitable activity but also a public service activity of the bank.

This field report covers loan management in BOK, and is prepared with the objective of finding out weather BOK is able to manage loan effectively or not. Loan and advances are the risky assets, so the bank follows a clear and sound credit policy while making investment in these assets. Credit Policy is the decision made in advance about management of credit. BOD considering laws, rules and regulations of NRB, the rules and regulations of commercial bank act 2031 relating to credit, and an ordinance of banking & financial institution act 2062 and other influencing factors, formulates credit policy of BOK.
BOK is keenly interested in the overall development of the country. It has supplied the money to different sectors in the form of loan, advances and overdrafts. It has provided loans for agriculture, cottage, and small industry, and trade. It follows a systematic process while granting loan and advances. It has been providing various types of loan since its establishment period. In other words, it can be said that it has played a vital role in the development of the country.

Analysis of data shows that loan and advances cover major part of its investment. In FY 2003/04, 59.46% of total assets are loan and advances. Loan, advances & overdraft is following increasing trend up to 2001/02 but in 2002/03 it decreased by 1.25% and then after it has an increasing trend. It shows that the bank has been adopting the sound credit policy since 2003/04.
Loans & advances and total deposit are positively correlated which shows that an increase in total deposit leads to an increase in loan and advances and vice-versa.
A fluctuating trend of interest income is revealed by a study of five years (2000/01 to 2004/05) subsequently, the interest income to loans and advances is in increasing every year at fluctuating rate.

Non-performing loan of BOK was in increasing trend up to FY 2002/03 but from FY 2003/04 it is in decreasing trend. It shows that the bank has more pass loan or good loan. A review of loan loss provision from FY 2000/01 to FY 2004/05 shows that it is increasing every year up to year 2003/04 then decrease in year 2004/05. The increasing trend of loan provision up to FY 2003/04 shows the bank's inefficiency in management of loan. But in FY 2004/05 the bank has become successful in managing its loan, which is indicated by the decrease in loan loss provision.

Interest received from loan and advances is a major source of income for the bank and has a great contribution in the profit of the bank. Interest income on BOK has been increasing every year but the increasing rate is fluctuating.

From all these facts, the conclusion can be drawn that BOK has satisfactory lending position. So, BOK Ltd is well-established commercial bank in Nepal. It has contributed a lot towards the economic development of the nation and has fulfilled the need of commercial banks in the economy.






























Conclusions

After conducting a through study of loan management in BOK, it can be said that credit policy of BOK has given due consideration to the NRB directives, laws, rules and regulations of HMG. BOK has been playing a vital role for the economic development of the country by providing various types of loan to industrial, agricultural and business sector. Credit Policy of BOK is based on the principles of sound credit policy. A major part of fund is invested in the form of loan and advances. Loan and advances of the bank is increasing since 2003/04 even in tough competition. This shows sound credit policy adopted by the bank. Interest income form loan, advances and overdrafts are a major source of income for the bank and have major contribution towards the profit of the bank. BOK is able to perform the loan management satisfactorily till date. All the aspects of loan approval to loan settlement have been paid due attention.

1. The loan asset of the bank is increasing up to the year 2001/2002 then decrease in year 2002/03/ BOK increases its lending capacity up to the year 2003/04 because the loan is repaid within the stipulated time but in year 2002/03, BOK loses its lending capacity because of default of BOK. A loan asset can be a "hen with golden eggs" only if there is a least or no chances of non-repayment.

2. The fluctuation inherent in the interest income on loan and advances is because of the fluctuation in the interest rate itself. A decline in the interest income to loan and advances is not good sign for BOK.

3. Positive correlation between total deposit and loan and advances is a good sign until the deposit follows an increasing trend. But once the total deposit suffers decline, loans and advances will also be aversively affected.

4. The total loan loss provision of BOK shows that the bank is safe in case of non-repayment of loan since there is adequate provision. But at same time it is not possible to rule out the fact that a higher loan loss provision reflects the inefficiency of management.

Though the management of loans and advances in BOK is satisfactory till date, but still the bank needs to adopt some improvement to make loan management more effective.















Recommendations

Bank of Kathmandu Ltd. has completed eleven years of its operation. Since its establishment, it has improved in a very better way. Now it is a well-established bank in Nepal. It has attracted more & more customers through its qualitative services. So, it is highly recommendable. Based on the conclusions derived from the study of loan management in BOK, the bank is suggested to facilitate the improvement program of BOK Ltd.

1. It has only 10 branches, which is not sufficient for giving full-fledged services for the country. Though the bank has recently opened the Birgunj branch, the branch expansion program should continue in future also. The bank should establish new branches in every convenient place & also convening the rural areas of the country.

2. BOK has invested a maximum amount of its funds on risky assets (i.e. loan). Thus, the bank is always threatened by the fear of default. It will be better if the bank diverts some amount of its funds from lending and invests it in less risky investment alternatives. This will help the bank diversify the risk.

3. The increased in loan loss provision in BOK is reflecting the inefficiency of management. The bank needs to reduce its loan loss provision. This can be done by proper risk management, which includes: carefully screening of loan application, proper valuation of security, proper appraisal of projects

4. BOK should provide the facility of interest rate rebate to borrower who repays the loan before stipulated time. This may help to increase the number of early payers that will reduce default risk.

5. If there are large numbers of borrower, it will be difficult to properly manage the funds lend to them. But there are few borrowers it will be quite convenient to manage the loan effectively.

6. BOK should conduct a market research on a periodic basis. This will help to identify the potential borrowers. The identified potential borrowers can be attracted towards the bank by the application of various promotional tools.

Finally, the lending policy should give proper direction for the use of the fund, size of loan, control & influence in credit decision of the bank. Since granting loan eventually leads to loan-passes, bank manager must attempt to minimize the losses. Success depends upon the technical knowledge & on the attitude to assess the credit worthiness of a potential borrower and the merits of the proposition to be financial. BOK Ltd. as a commercial bank has discharged its activities for the development and upliftment of social, commercial, industrial & financial sector. And I wish its process would increase in future.