The Context and Background of the Proposal:
The proposal is to concentrate on two commercial Bankss of Nepal: Rastriya Banijya Bank ( a proper Nepali bank ) and Everest Bank Limited ( a joint venture bank ) ; RBB and EBL severally in acronyms. These are the two chief Bankss runing in the banking industry in the spread outing economic system of Nepal.
Rastriya Banijya Bank ( RBB ) is to the full authorities owned, and the largest commercial bank in Nepal. RBB was established on January 23, 1966 ( 2022 Magh 10 BS ) under the RBB Act. Now, the bank is running under bank and fiscal institute act 2063. RBB has been lending to socio-economic development of the state for the last four and half decennaries. The Bank has presently entered into 46 old ages of service. RBB provides assorted banking services to a broad scope of clients ; A they include elect to hapless persons, institutional clients, and the customersA from industry / concern communities. RBB has many analogous agreements with major international Bankss all over the universe that facilitate trade finance, bank-originated personal financess transportations and interbank financess transfer. The bank has played important function for the development of fiscal sector i.e. bank, insurance companies through its booster ‘s function. As a 2nd commercial bank of the state, the bank has been lending in the trade, industry and agricultural sector of the state. The bank has besides contributed in the hydropower sector. Health and Education sector are besides benefitted through its expense. As a authorities owned bank the bank is besides lending towards accomplishing national ends as per the authorities directives. The bank has made important part in the development of private sector either by loan expense orA by active engagement in the carnivals organized by industrial and concern communities.
A taking commercial bank of Nepal established in the twelvemonth 1994 in joint venture with Punjab National Bank, India, Everest Bank Limited ( EBL ) started its operation with a position and aim of widening professionalized and efficient banking services to assorted sections of the society. Punjab National Bank ( PNB ) , EBL ‘s joint venture spouse ( keeping 20 % equity in the bank ) is the largest nationalized bank in India. With its presence virtually in all the of import Centres at Nepal, EBL offers a broad assortment of banking services which include corporate and personal banking, industrial finance, agricultural finance, funding of trade and international banking. The big presence and huge resource base have helped the Bank to construct strong links with trade and industry.
These two Bankss make for an interesting comparing since they are both taking commercial Bankss with big figure of clients, covering a diverse scope of commercial sectors. They both portion the bad intelligence associated with increased commissariats, preempted by loan default and additions in non-performing loans. The bad intelligence in loan loss commissariats is most likely to happen when 4th one-fourth audits correct under-provisioning comparative to additions in non-performing loans during the first three quarters of the financial twelvemonth which found the common victim in RBB and EBL. In contrast to EBL, the bad intelligence stems from direction exerting power over loan-loss commissariats and their battle in protection of larger Numberss of defaulters in RBB. The revelation of RBB as holding more possible menaces of addition in non-performing assets to EBL is enormously credited to the flexibleness for efficient catching commissariats. At the clip when economic activities are turning quickly throughout the state, it is most acclivitous undertaking for the Bankss to pull off and control non-performing assets. Furthermore, political instability has resulted in more instances of commercial loans defaulting. Interestingly, consumer loans are barely non-performing given to the rise of middleclass and service industry. But this tendency differs in both EBL and RBB. This survey purposes to underline the importance of direction of non-performing assets of RBB and EBL while comparing the commissariats and their result in banking sector.
Preliminary Literature Review
Investing theory defines non-performing plus as “ a debt duty where the borrower has notA paidA anyA antecedently agreed uponA involvement and chief refunds to the designated loaner for an drawn-out period of clip. ” The non-performing plus is hence non giving any income to the loaner in the signifier of chief and involvement payments. Non-performing plus has become the major job in investing banking since the origin of banking service itself.
Literature devoted to the cause and consequence of non-performing assets of Bankss dressed ores chiefly over the effect and overall impact on the systematic well-being of bank due to the rise of non-performing assets. In the article “ Differential Valuation Implications of Loan Loss Provisions across Banks and Fiscal Quarters ” Chi-Chun Liu ( 1997 ) concentrates over the impact of loan loss commissariats in market: “ Prior research finds that, on norm, the market reacts positively to loan loss commissariats conditional on less discretional information about loan default, such as non-performing loans and loan write-downs ” ( 133 ) . Liu ‘s determination holds across different theoretical account specifications and survey periods, despite extremist alterations in the banking industry over clip. Liu finds that loan loss commissariats are good intelligence merely for Bankss with loan portfolios that contain a high proportion of loans for which loss commissariats require judgement and discretion on a loan-by-loan footing ( for example, commercial loans ) instead than utilizing statistical methods ( e.g. , consumer loans ) .
A significant organic structure of research sought to corroborate direction ‘s function regarding loan default. James M. Wahlen ‘s ( 1994 ) survey in “ The Nature of Information in Commercial Bank Loan Loss Disclosures ” suggests that loan loss commissariats are to be “ maintained at degrees considered equal to reflect direction ‘s outlooks of future losingss ” because “ directors have private information sing default hazards built-in in the loan portfolio ” ( 455 ) . Wahlen finds that director ‘s judgement is necessary in gauging the loan loss proviso each period. Wahlen farther contends, “ It is prohibitively dearly-won for investors and proctors to obtain all of direction ‘s information about the loan portfolio each period. . . [ Thus ] bank directors can exert discretion over the timing of commissariats for certain loan losingss ” ( 456 ) . Wahlen examines the dealingss between unexpected loan loss commissariats and both stock returns and alterations in future hard currency flows, and the function of directors in managing non-performing assets, in his survey.
Similarly, Iftekhar Hasan and Stephen D. Smith ( 1997 ) have argued that traditional position in profitableness of banking establishments does non grok late developing market tendencies. The couple has through empirical observation investigated the alternate hypothesis utilizing overall net income steps: “ the negative price-concentration relationship does non keep over the full scope of ascertained market concentration ” ( 47 ) . They have focused on the impact of concentration and efficiency steps utilizing monetary value informations for single merchandises and services. Jackson ( 1992 ) suggests that any generalisation of such statements since price-concentration steps may change well across clip periods. Recently, in a comprehensive survey, Berger and Hannan ( 1993 ) found more support for the structure-conduct-performance hypothesis than for the relative-market-power and/or efficient construction hypothesis.
While concentrating over the function of banking sector in bringing the great depression of 1930s in America, Adam B. Ashcraft ( 2005 ) analyses the deduction of non-performing assets in overall macroeconomic scenario in the article “ Are Banks Really Special? New Evidence from the FDIC-Induced Failure of Healthy Banks. ” Ashcraft contends that terrible contraction in Bankss consequences from uncontrolled loaning. He writes:
While there is some dissension in the literature over the precise mechanism through which failure affects existent activity it is difficult to walk off without the decision that bank failures played an of import macroeconomic function in the badness of the economic downswing. What are the possible mechanisms? The most direct consequence is through the loss of existent wealth by uninsured depositors and other creditors. Even in the absence of a wealth consequence, nevertheless, the creditors of a failed bank lose liquidness while they wait for assets to be liquidated, which in bend affects existent disbursement in the presence of borrowing restraints. ( 1712 )
Ashcraft observes that when a bank fails, some long-standing relationships with its clients are disrupted, if non destroyed. If clients are unable to replace these relationships with other loaners on equal footings, this contraction in the supply of bank recognition has an consequence on existent activity. And eventually, there is the menace of contagious disease, where the failure of one establishment prompts a tally on other Bankss, distributing the consequence of failure throughout the economic system.
Literature related to non-performing assets and the Indian experience provides the glance of Asiatic economic system and challenges of banking industry. Prashanth K Reddy ( 2002 ) makes a comparative survey of Asiatic banking industry in “ A comparative survey of Non Performing Assets in India in the Global context – similarities and unsimilarities, remedial steps. ” Reddy stresses the importance of a sound apprehension of the macro economic variables and systemic issues refering to Bankss and the economic system for work outing the NPA job along with the criticalness of a strong legal model and legislative model. Reddy contends:
Concerns have been raised about their relevancy to India. A important per centum of the NPAs of the PSB ‘s are in the precedence sector. Loans in rural countries are hard to roll up and Bankss by virtuousness of their sheer range are better placed to retrieve these loans. Lok Adalats and Debt Recovery Tribunals are other effectual mechanism to manage this undertaking. ARCs should concentrate on the larger borrowers. Further, there is a demand for private sector and foreign engagement in the ARC. Private parties will look to active declaration of the job and non simply see it as a book dealing. Traveling NPAs to an ARC does n’t acquire rid of the job. Actions and steps have to be taken to construct investor assurance. ( 12 )
Reddy stresses on the demand to analyse foreign experiences that must be utilized along with a clear apprehension of the local conditions to make a seamster made solution which is crystalline and just to all stakeholders.
Reducing systemic hazard potency that the non-performing assets create in Bankss is likely the strongest economic principle for supervising of any economic system. In that context all over the universe capital adequateness has become a core instrument of effectual supervising of banking system. But the deficiency of research in Nepali commercial banking sectors has farther prompted to economic instability. This research proposes to analyze the variables behind non-performing assets and its deduction in commercial banking through the comparing between EBL and RBB. Consequently, the research worker hopes in steping into new avenue of research and its brand recommendations for the reform procedure to be initiated in the Nepali banking industry as apart of the liberalization of the economic system in general and the fiscal stableness in peculiar.
Methodology / Sources of Data
Researching NPAs of commercial Bankss is a sensitive subject. Several parties contribute to the “ kineticss ” of the state of affairs. These parties are:
Bank employees and their representative from portfolios of recognition ( loan ) section.
Perspective clients of consumer loan and commercial loan investing from EBL and RBB
Post-graduate pupils of finance and investing from assorted universities
Law professionals managing the instances of NPAs.
Journalists active in having economic round across different outstanding newspapers and magazines.
A comprehensive probe of this subjects should try to roll up informations from each of these parties.
It is proposed that the undermentioned methods of informations aggregation be deployed:
A content analysis of literature produced by these commercial Bankss, peculiarly their investing literature. Much of this literature is prepared for public ingestion and hence will be readily available.
Interviews with a representative sample from each of the parties identified above. Resource restraints do non let for national coverage, therefore these interviews will be conducted in one part of the state, which will be selected on the footing of convenience for the research worker. This could good restrict the generalizations that can be made from the informations.
The research worker will “ present ” as a prospective client and will compose a missive to each Bankss bespeaking counsel for loans. This raises ethical issues since a certain sum of “ misrepresentation ” is involved. However, it is felt that it is a legitimate attack and does n’t do personal injury to any party.
The research worker will despatch questionnaire selecting and placing representative information supplier from each party who in bend will supply with necessary information for the research.
This work is basically a comparative analysis since the issue of loans and the province of recovery of two commercial Bankss are being compared. For the comparing to be meaningful and nonsubjective it is indispensable that a standard model be adopted. It is proposed to construction the information aggregation and besides the comparing and analysis utilizing a distribution model of:
Public Sector Units
Other non precedence Sectors
Small graduated table industries
Other Priority sectors
Therefore in simple footings the consequences of the undertaking could be presented in the undermentioned silent person tabular array:
Borrowing Segment-wise NPA
Percentage of Total NPA
Public Sector Units
Other non precedence Sectors
Small graduated table industry
Other Priority sectors
It is envisaged that this will supply a grade of originality because the application of a distribution model to an investing dealingss issue is fresh.
On the footing of the comparing of the activities of the two Bankss some recommendations can be made sing the comparative success of investing enterprises in this context.