Impact of Capital Adequacy on the Financial Performance of Commercial ... · Impact of Capital Adequacy on the Financial Performance of Commercial Banks in Nepal (Special reference

Impact of Capital Adequacy on the Financial Performance of

Commercial Banks in Nepal

(Special reference of NABIL and NIB)

BY

SANTOSH DAHAL

TU Registration. No. 7-2-22-30-2014

Exam Roll No. 14494/14

A Summer Project Report Submitted to

Faculty of Management, Tribhuvan University

In partial fulfillment of the requirements for the degree of

Bachelor of Business Administration

at the

Patan Multiple Campus

Tribuvan University

Patandhoka, Lalitpur

May, 2018

ii

RECOMMENDATION BY SUPERVISOR

This is to certify that the summer project entitled “ Impact of capital adequacy on the

financial performance of Commercial Bank” is an academic work done by “ Mr. Santosh

Dahal” submitted in the partial fulfillment of the requirement for the degree of Bachelor of

Business Administration” at faculty of Management; Tribhuvan University under my

guidance and supervision. To the best of my knowledge, the information presented by him

in the summer project report has not been submitted earlier.

Signature of supervisor

Name:

Designation:

Date:

iii

VIVA - VOCE SHEET

We have conducted the viva - voce examination of the summer project report presented by

Santosh Dahal

Patan Multiple Campus

Patandhoka, Lalitpur

TU Registration Number: 7-2-22-30-2014

Entitled

Impact of capital adequacy on the financial performance of commercial banks in

Nepal (Special reference of NABIL and NIBL)

And found the report to be original work of the student and written according to the

prescribed format. We recommend the report to be accepted as partial fulfillment of the

requirements for the degree of

Bachelor of Business Administration (BBA)

Head, Research Department:………………………….

Member (Report Supervisor):…………………………

Member (External Expert):……………………………

Date:…..…………………………………………………

iv

DECLARATION

This is to certify that I have completed the Summer Project entitled “Impact of Capital

Adequacy on The Financial Performance of Commercial Bank (Special reference of

NABIL and NIB)” under the guidance of DR. Yuga Raj Bhattarai and Prof.Bijaya

Gopal Shrestha in partial fulfillment of the requirements for the degree of Bachelor OF

Business Administration at Faculty of Management, Tribhuvan University. This is my

original work and I have not submitted it earlier elsewhere.

……………….

Santosh Dahal

2018, April

v

ACKNOWLEDGEMENT

The report writing is entitled in “Impact of Capital Adequacy on the financial performance

of commercial bank” has been carried out in partial fulfillment of the Bachelor of Business

Administration course of Tribhuvan University.

This research has focus on analyzing the capital adequacy ratio and its effect on financial

performance of commercial bank by taking reference of NIBL and NABIL bank. Effort has

been made to analyze in the precise manner.

I would like to express my deep gratitude to Dr. Yuga Raj Bhattarai and Professor Bijaya

Gopal Shrestha sir of Patan Multiple College for providing Valuable directions and

suggestion for report writing. I also like to offer cordial thanks to the concerned authorities

of Nepal Investment Bank and Nabil bank for helping me for providing the necessary data.

For any kind of mistakes and errors detected, which I might have committed knowingly or

unknowingly during the preparation of this report, I highly apologize for that.

Thank you

vi

TABLE OF CONTENTS

TITLE PAGE ……………………………………….…………………………………………………i

RECOMMENDATION BY SUPERVISOR ............................................................................. ii

VIVA - VOCE SHEET ........................................................................................................... iii

DECLARATION .................................................................................................................... iii

ACKNOWLEDGEMENT ....................................................................................................... v

LIST OF TABLES................................................................................................................ viii

LIST OF FIGURES ............................................................................................................... ix

LIST OF ABBREVIATIONS ................................................................................................... x

EXECUTIVE SUMMARY ..................................................................................................... xi

CHAPTER I INTRODUCTION ........................................................................................ 1

1.1 Context Information ................................................................................................ 1

1.2 Statement of problem .............................................................................................. 3

1.3 Purpose of the Study ............................................................................................... 4

1.4 Significance of the Study ........................................................................................ 4

1.5 Literature Survey ..................................................................................................... 5

1.5.1 Conceptual framework .......................................................................................... 5

1.5.2 Review of related studies....................................................................................... 8

1.5.3 Concluding Remarks ........................................................................................... 10

1.6 Methodology ......................................................................................................... 11

1.6.1 Research design ................................................................................................... 11

1.6.2 Sample Designing ................................................................................................ 11

1.6.3 Sampling Procedures ........................................................................................... 12

1.6.4 Data collection Procedures .................................................................................. 12

1.6.5 Sources of Data.................................................................................................... 12

1.6.6 Data Analysis Procedures .................................................................................... 12

vii

1.6.7 Data Analysis and Presentation Procedures ........................................................ 12

1.6.8 Tools and Techniques .......................................................................................... 13

1.6.9 Regression analysis ............................................................................................. 16

1.7 Limitation of the study .......................................................................................... 17

1.8 Organization of the Study ..................................................................................... 17

CHAPTER II DATA PRESENTATION AND ANALYSIS .......................................... 19

2.1 Organization profile ................................................................................................... 19

2.1.1 Introduction to NABIL Bank Limited ................................................................. 19

2.1.2 Introduction to NIBL (Nepal Investment Bank limited) ..................................... 20

2.2 Data presentation of commercial banks ..................................................................... 20

2.2.1 Capital Adequacy and Profitability Position of NIBL ........................................ 21

2.2.2 Trend analysis of CART and ROA of NIBL ....................................................... 22

2.2.3 Capital Adequacy and Profitability Position of NABIL...................................... 23

2.2.4 Trend analysis of CART and ROA of NABIL .................................................... 24

2.3 Descriptive statistic of Variables ............................................................................... 25

2.3.1 Descriptive statistic of study Variables of NIBL ................................................ 26

2.3.2 Descriptive statistic of study Variables of NABIL.............................................. 27

2.4 Result from regression model .................................................................................... 28

2.5 Findings and Discussion ............................................................................................ 31

2.5.1 Major finding from the Analysis of Secondary Data: ......................................... 31

CHAPTER III CONCLUSION AND ACTION IMPLICATION ................................ 34

3.1 Conclusion ................................................................................................................. 34

3.2 Action Implications .................................................................................................... 35

REFERENCES

APPENDICES

viii

LIST OF TABLES

Table 2.1 Capital Adequacy Ratio and ROA of NIBL ...................................................... 21

Table 2.2 Bar Diagram of Capital Adequacy Ratio and ROA of NABIL ......................... 23

Table 2.3 Descriptive statistic of study Variables ............................................................... 25

Table 2.4 Descriptive statistic of NIBL .............................................................................. 27

Table 2.5 Descriptive statistic of NABIL ........................................................................... 28

Table 2.6 Pearson Correlation Coefficients (n=20) ............................................................. 29

Table 2.7 Regression Coefficients (n=20) .......................................................................... 30

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LIST OF FIGURES

Figure 1.1: Independent and dependent variable of the study ............................................. 10

Figure 2.1 Bar Diagram of Capital Adequacy Ratio and Return on asset of NIBL ............ 22

Figure 2.2 Trend analysis of CART and ROA of NIBL ...................................................... 23

Figure 2.3 Bar Diagram of Capital Adequacy Ratio and ROA of NABIL ........................ 24

Figure 2.4 Trend analyses of CART and ROA .................................................................... 25

Figure 2.5 Scatter Diagrams of CAR-T and ROA ............................................................... 31

x

LIST OF ABBREVIATIONS

Acronym Full form

BCBS : Basel committee on banking supervision

CAR : Capital Adequacy Ratio

CAR-S : Supplementary Capital

CAR-T : Total Capital Adequacy Ratio

CRWA : Capital to Risk Weighted Asset

NABIL : Nabil Bank Limited

NIBL : Nepal Investment Bank Limited

NRB : Nepal Rastra Bank

ROA : Return on Asset

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EXECUTIVE SUMMARY

This project analyses the impact of the capital on the financial performance of the

commercial banks by taking the reference of NABIL and NIBL. Simple judgmental

sampling is used to select sample banks. Capital provides buffer against losses and thus it

ensures safety and soundness of the financial institutions. It is necessary to ensure that the

bank have sufficient capital. Capital regulations are therefore put in place to ensure that the

banks meet the minimum capital requirement expected of them.

Many authors have postulated the capital adequacy has a great impact on the financial

performance of financial institutions especially commercial banks. This study provides

evidence that supports the central banks give high consideration toward the minimum

capital requirement of the commercial banks and to tightly monitor their operations while

at the same time remaining profitable. It therefore shows what impact capital adequacy has

on the profitability of the banks. This study also focused on whether commercial banks

able to protect depositor or not.

The study relied on secondary data and thus annual reports of the Selected banks were used

to provide the much needed information in the study. Percentage was used to analyze and

regression analysis was used to give insight into the relationship between the variables.

Total capital adequacy ratio and supplementary capital is major independent variable and

ROA is dependent variable in this study. Descriptive study also done to analyses the

overall data and individual data of selected banks respectively.

The major finding in the study is that selected banks maintain adequate capital to protect its

customer. Capital Adequacy also creates impact on ROA of the banks. Through the

regression analysis this study concludes that there is negative relationship between total

capital adequacy ratio and ROA of the banks and also finds that there is impact of capital

adequacy on the profitability of the banks.

1

CHAPTER I

INTRODUCTION

1.1 Context Information

The financial sector plays an important role in the development process of a country

through financial intermediation. Strong financial institutions are critical for increased

investment, economic growth, Employment and poverty alleviation, (Kyalo, 2002).

Banking as a vital section of total financial system, has a greater importance in overall

economic development. The Banking system occupies an important place in the nation's

economy. A banking institution is indispensable in a modern society. It plays a vital role in

the economic development of the country and forms the core of the money market in an

advanced country. The banking sector in Nepal is growing rapidly. Commercial banks are

mushrooming even at this time of recession in the economy of the world. In the current

context of the rapid expansion of the banks and financial institutions along with the

financial sector liberalization, Nepal Rastra Bank, the central bank of Nepal must regulate,

supervise and monitor the financial sector.

Financial performance is a subjective measure of how well a firm uses its assets from its

primary mode of Business to generate revenue. The term also used as a general measure of

a firms overall financial health over a given period of time, and can be used to compare

similar firms across the same industry or to compared industries or sectors in aggregation

(Hales, 2005)

Capital base of financial institutions facilitates depositors in forming their risk perception

about the institutions. Also, it is the key parameter for financial managers to maintain

adequate levels of capitalization. Moreover, besides absorbing unanticipated shocks, it

signals that the institution will continue to honor its obligations. The most widely used

indicator of capital adequacy is capital to risk-weighted assets ratio (CRWA). According to

Bank Supervision Regulation Committee (The Basel Committee) of Bank for International

Settlements, a minimum 9 percent CRWA is required.

2

Capital adequacy ultimately determines how well financial institutions can cope with

shocks to their balance sheets. Thus, it is useful to track capital-adequacy ratios that take

into account the most important financial risks—foreign exchange, credit, and interest rate

risks—by assigning risk weightings to the institution’s assets.

A sound capital base strengthens confidence of depositors. This ratio is used to protect

depositors and promote the stability and efficiency of financial systems around the world.

Capital adequacy is the amount of capital a bank or other financial institution has to hold as

required by its financial regulator (Investopedia). This is usually expressed as a capital

adequacy ratio of equity that must be held as a percentage of risk-weighted assets.

These requirements are put into place to ensure that the financial institutions do not take on

excess leverage and become insolvent. Capital requirements govern the ratio of equity to

debt, recorded on the assets side of a firm's balance sheet. Capital requirement should not

be confused with reserve requirements, which govern the liabilities side of a bank's balance

sheet- in particular, the proportion of its assets banks must hold in cash or highly-liquid

assets. Liquid assets include cash and bank balances, money at call and short notice having

placement of up to 90 days and investments in government securities (Ogboi, 2013).

The capital adequacy requirement affects the monetary transmission mechanism. If some

firms are bank dependent, their responsiveness of loan supply to change in monetary policy

determines the strength of the transmission mechanism. The adequate capital was regarded

as the amount of capital that can effectively discharge the primary capital function of

preventing bank failure by absorbing losses. Basel committee appointed by BIS formulated

rules and relation for effective supervision of the central banks. It is prescribed

international norms to be followed by the central banks. This committee prescribed norms

in order to protect the interest of the customer. Profitability is the ability to make profit

from all the business activities of an organization, company, firm, or an enterprise. It shows

how efficiently the management can make profit by using all the resources available in the

market. It measuring the profitability of a bank, bank regulators and analysts have used

Return On Assets and Return on Equity to assets in industry performance and forecast

trends in market structure as inputs in statistical models to predict bank failure and failures

and mergers and for a variety of other purposes where a measure of profitability.

3

1.2 Statement of problem

Nepalese economy is in primitive stage. There are various challenges that are emerging

with the globalization and liberalization. So. To boost up the economy, proper supervisory

and monitoring body is essential. In the context of the favorable macro-economic

indicators and based on the concept of competitive financial system Nepal Rastra Bank

(NRB) has been implementing the monetary policy so as to provide dynamism to the

economy. In the light of the global scenario, a strong, well managed, and efficient financial

system would contribute positively to sustainable development of the economy; NRB has

come up the updated capital adequacy framework, 2015 and unified directive (revised

version) 2017. This helps to set its priority in devising and implementing appropriate legal,

regulatory, managerial, and supervisory policies and provisions aimed at building a sound

and stable financial sector. The implementation of this updated capital adequacy

framework, 2015 and Unified Directives (revised version of 2007) 2017 will enhance the

effectiveness of the NRB to undertake appropriate regulation, supervision and monitoring

responsibilities for the qualitative development of the financial sector. Realizing the

significance of capital for ensuring the safety and soundness of the banks and the banking

system, and ensure the economic stability in the country, at large, NRB has developed and

enforced capital adequacy requirement based on international practices with appropriate

level of customization based on domestic state of market developments. Nepalese

commercial banks continuously improved its service for the customer. Banks tries to

maintain better image in front of the whole public. The coupled with various inherent

limitations of system like internal rating based approach of even standardized Approach

impractical and unfeasible. Thus, at this juncture, this framework prescribes simplified

Standardized approach impractical and unfeasible. Thus, at this juncture, this framework

prescribes simplified Approach (SSA) to measure credit risk.

1. Whether the selected commercial banks maintain the capital Adequacy position as

per the NRB Directives or not?

2. Is there any relationship between financial performance and CAR of selected

banks?

3. What is the effect of capital adequacy ratio on financial performance of commercial

banks?

4

1.3 Purpose of the Study

The main purpos of the report entitled “impact of capital adequacy on the financial

performance of commercial bank” is investigating the relationship between the capital

adequacy and the financial performance of the selected bank. It also tried to clarify the how

banking sector Maintain the capital requirement and how its create effect on the financial

performance of the banks. The major objective is pointed as follows+

1.) To assess the capital adequacy position of selected commercial banks as per the

NRB Directives.

2.) To observe the relationship between financial performance and CAR of selected

banks.

3.) To investigate the impact of capital adequacy on the profitability of the selected

banks.

1.4 Significance of the Study

Capital adequacy ultimately determines how well financial institutions can cope with

shocks to their balance sheets. Capital adequacy of any banking institution directly and

indirectly affect on the financial performance of the bank. Today's banking sector need to

consider the satisfaction of the customer as well as the overall performance of the bank in

order to maintain its image in competitive environment. The capital was regarded the most

important ingredient of any organization. However, there is no uniform international

regulatory standard for setting bank capital requirement prior to 1988. The Basel

committee on banking supervision (BCBS) developed the capital Accord, which is known

as Basel I, to align the capital adequacy requirements applicable especially to banks in G-

10 countries. Basel I introduced the minimum capital requirement in order to save the

banking sector from being bankrupted.

Thus the minimum capital standard set by the NRB for the Nepalese commercial bank as

per the international standard is very vital to safeguard the rights of the depositors and the

creditors. The study attempts to provide the basis for the reference for the Nepalese

commercial banks. The banks can know the impact of the capital adequacy in their

performance.

5

In these sense the study undertakes the significant role for the commercial banks to suggest

for their improvement to the selected commercial banks as well as the other commercial

banks. Moreover, the policy makers as well as planners at various levels can even get

benefited through the reference from the analysis and the results of the research. The study

will have further importance on various other groups like Nepal Rastra Bank, other

financial institutions, Depositors, borrowers, shareholders and other stake holders of the

bank and financial institutions, and other researchers in similar matters at large.

1.5 Literature Survey

This research focused on the effects of capital adequacy on the financial performance of

commercial banks by taking the special reference of NABIL and NIBL. Literature review

consists of a review of finance theories related to the study, literature as derived from

research work by other researchers, some general literature to aid in further understanding

the purpose and a summary.

1.5.1 Conceptual framework

Toft (1989) defined a bank as a system for providing a special kind of service connected

directly or indirectly with finance. A commercial bank therefore is a bank of commerce or

trade which is profit oriented and its main function is to accept deposits, lend money and

transfer funds among banks, individuals and businesses (Deaton et al, 1994).

The commercial banks which currently number 28 play a major significant role in the

Nepalese economy by mobilizing savings, taking deposits, lending money in the economy,

undertaking money transfers and providing a host of other services derived from their wide

range of financial Expertise.

Capital is essential and critical to the perpetual continuity of a bank as a going concern.

Capital requirement is a bank regulation which sets a framework on how banks and

depository institutions must handle their capital. Capital provides cushion that enables

banks to continue to operate even if they suffer temporary losses. Several theories have

been put forward to explain variations in the performance of various financial institutions.

These theories are: Agency theory, prospect theory, dividend relevance theories and capital

structure theories.

6

1.5.1.1 Agency Theory

Agency theory defines the firm as a “nexus of contracts” between different resource

suppliers. Two parties are central to agency theory; principals who supply capital and

agents who manage the day today affairs of the firm. Since the interests of the agents are

not necessarily those of the principal, the organization encounters agency costs. These

costs consist the expenses of monitoring the behavior of agents, including budget

restrictions, compensation practices (including stock options, bonuses and other

incentives), and the loss of profits due to operating rules and restrictions on management.

They also include bonding costs of the agents, and the costs of sub-optimal decisions,

defined as decisions that are made in the best interest of agents rather than principals.

Agency theory argues that in the modern corporation, in which share ownership is widely

held, managerial actions depart from those required to maximize shareholders returns

(Berle and means 1932; Pratt and Zeckhauser 1985). Agency theory specifies mechanisms

which reduce agency loss, for instance incentive schemes for managers which reward them

financially for maximizing shareholders interests.

1.5.1.2 Prospect Theory

According to the prospect theory, an individual can rationally exhibit differing degrees of

risk aversion over time depending on his position relative to target outcome. Decision

makers will be risk seeking if they perceive themselves to be operating below target.

Conversely, if they are operating above target they will be risk averse. For example, should

banks management find itself operating below target, a profitable sale of appreciated

securities can quickly add to the bottom line a practice commonly referred to as “gains

trading”. Earnings will improve only for the accounting period of the sale.

Profits can be augmented on a more lasting basis by increasing the loan portfolio through

the provision of credit to higher risk borrowers, resulting in higher interest income per

dollar invested. Generating the funds to finance these loans is also possible through

liability management e.g. increasing the rate paid on certificates of deposit to attract new

money. If management is operating above target then this does not need to occur. The

further below target bank operates the greater the variability of rates of return.

7

1.5.1.3 Dividend Relevance Theories

The dividend relevance theories state that the choice of appropriate dividend policy affects

the value of the firm e.g. Walter J E (1963) on his theory on dividend policy argued that the

relationship between the returns on investments, r and the cost of equity, ks, determine the

optimal dividend or pay out policy. He argue that if risks the firm should retain all the

earnings for re-investment whereas if risks the firm should distribute all the earnings as

dividends for the shareholders are able to earn more if the earnings were paid out to them

as dividends.

Ross (1977) on his incentive signaling theory on dividend policy argued that an increase in

dividends was often accompanied by an increase in price of stocks, while a dividend cut

generally led to a decrease in the stock prices. Ross suggested that managers can use

capital structure as well as dividends to give signals concerning the firms’ future prospects.

Ross theory rest on the premise that signals with cash-based variables (either debt interest

or dividend) cannot be mimicked by unsuccessful firms because such firms do not have the

future cash generating power to maintain the announced dividend or interest payment.

Accordingly, the higher the dividend yield on a stock, the greater it’s before tax returns.

1.5.1.4 Trade-off Theory

The trade off theory rationalizes that firms maximize their value when the additional

benefits (marginal benefits) that stem from debt (i.e. interest expense tax deductibility, the

disciplinary role of debt, lower informational costs relative to equity) equal the marginal

cost of debt (i.e. bankruptcy costs, agency costs between stake holders and bondholders).

1.5.1.5 Capital Structure Theories

How and why firms choose between the various sources of capital has been a source of

much debate in both developing and developed countries. The fundamental question asked

is whether the debt-equity mix in a firm really matters.

The cost of capital declines and the value of the firm increases with leverage (gearing) up

to a prudent debt level and after reaching the optimum point (minimum cost of capital or

maximum value of the firm), average causes the cost of capital to increase and the value of

8

the firm to decline (Solomon Ezra, 1959). The capital structure debate is dominated by two

theories which are the trade-off theory and the pecking order theo

1.5.2 Review of related studies

The research covered previous studies that had been done in Europe, Asia and USA on

capital adequacy, and the financial performance of commercial banks and other financial

institutions.

Aymen (2013) conducted case study on the Impact of capital on financial performance of

bank of Tunisia and revealed that the capital and the financial performance are two

important variables in the banking sector. They show the ability of banks to achieve

sustainable benefits and to address systemic shocks. The author used a static panel to study

empirically relationship between capital and financial performance by approximating the

capital by the ratio.

Sedhian (2012) concluded that capital adequacy has helped in developing suitable

prudential norms to save the banks and financial institutions from financial crisis and

signals of failure. The dissertation further concluded that the operating environment of the

bank has changed radically, and their risk management system has also improved.

Kiragu (2010) conducted study on the relationship between profitability and capital

adequacy of commercial banks by using empirical analysis and regression model. He

reaches in the conclusion that there is insignificant relationship between ROE and capita.

Even with the inclusion of control variable, the relationship remained insignificant. On the

other hand, the study found that there is significant negative relationship between ROA and

capital.

Bhattarai (2009) there was a significant impact of the directives on the various aspects of

the commercial banks. Also, it was found that banks would fall short in supplementary

capital but can maintain its total capital according to the NRB directives made impact on

the bank and results were the increase in the operational procedures of the bank increased

the operational cost of the bank. Short term decrease in profitability, which results to lesser

dividends to shareholders and lesser bonus to the employees. Reduction in loan exposure of

the bank decreases in interest income but increase the protection to the depositor's money.

Increases protection to the money of the depositors through increases capital adequacy

9

ratios adds more stringent loan related directives and increase in demand for loan loss

provisions and various other reserves to increase the core capital.

Poudel (2009) showed that net profit is closely related with total loan and advances. If the

loan and advances increases, there is increase in net profit too. Thus, net profit depends on

total loan and advances as well as other investment of banking activities. Since net profit is

the net income for the banks which is net amount i.e. deducting of various expenditure

amount. Specially, increment in pass loan leads the increment in net income of the bank.

Liyuqi(2007) found that liquidity and credit risk have negative impact on bank's

profitability. Jackson (2011) studied the impact of credit risk management on financial

performance of commercial banks in Kenya and concluded that credit risk management

have positive relationship with banks profitability

In the context of Nepal, Udas (2007) revealed that there was significant impact on NRB

directives of capital adequacy on the various aspects of the commercial banks and it also

helped in maintaining the stability of commercial banks in the financial market and to

uplift the banking sector in Nepal to international standard.

Al- Mikhlafi et al. (2004) stated that both banking risk indicators and returns are affected

by bank capital adequacy and this will be reflected in the bank value. The study also

revealed the need for taking necessary internal actions and measures to ensure compliance

with Basel II decision regarding banking capital adequacy, and finally selecting the time

scheduling that is suitable for execution.

The capital structure in the banking industry is highly regulated in compare to other

industries. Bank capital and risk are intimately related each other (Ross, 2002). Therefore,

the concepts of capital adequacy have been a subject of discussion among the academia as

well as professionals since many years. The tern capital adequacy is a subject of discussion

about the rational level of capital.

Morrison and White (2001), found that if the regulator's reputation is poor, then economy

will exhibit multiple rational equilibriums. The regulator can follow a loose regulation

policy which will maximize the size of banks and so allows the largest possible amount of

funds to be channeled in to profitable investment.

10

1.5.3 Concluding Remarks

Capital adequacy is a minimum capital requirement that must be maintained by the

commercial bank in order to protect its depositor. Bank operates in the complex

environment; they invest in the environment by taking the large amount of the risk. If any

uncertainty is happened, bank need to face large crisis. So that bank must maintain the

minimum capital requirement. Capital adequacy directly and indirectly affects the financial

performance of the bank. Higher the risk required high level of capital adequacy ratio. So

there is heart and blood relation between the capital adequacy and the financial

performance of the bank. Capital requirement helps to increase the strength of the banking

sector. According to the directive of Nepal Rastra Bank, every bank must maintain the 11

percent of capital adequacy ratio. Capital adequacy directly affect on the profitability of

commercial banks. Though different research has done before on this topic, it is rare to

find current situation results on selected topic. So the main aim of this research is fulfilling

the current gap and analysis the current impact of capital adequacy ratio on the financial

performance of the commercial banks.

Based on the theory and past empirical evidences following conceptual model has been

developed for this study.

Figure 1.1: Independent and dependent variable of the study

Independent Variable Dependent Variable

Capital Adequacy: (CORE,

SUPPLEMENTARY AND

TOTAL CAPTAL)

Financial Performance:

ROA

11

1.6 Methodology

This report draws its conclusion from two separate sources of information: information

related to the understanding of the general Basel II framework and information regarding

its implementation in the banks as well as considers the impact of capital adequacy on the

financial performance.

In this chapter, the overall method used while taking part in research activity has been

explained. Research methodology refers to the various sequential steps adopted by

researcher in studying a problem certain objective in view. Hence, the present Research

methods include Research Design, Sampling Design (population, sample size, sampling

methods), Data collecting procedure and data analysis procedures. The capital adequacy

and its impact on profitability of the commercial banks is the main focus of the study.

Thus, the study is made with respect to capital adequacy of two commercial banks. These

banks are compared on capital adequacy on the basis of the annual report provided and

mainly on profit and loss account, Balance sheet and Basel II disclosure.

1.6.1 Research design

The study basically follows descriptive research method by accommodating the causal

comparative research design. It examines the existing situations of capital adequacy and

profitability structure of commercial banks in Nepal. On the other hand, the study tries to

examine the effect of different capital adequacy norms on profitability composites.

Therefore, the study will be based on quantitative approach.

1.6.2 Sample Designing

There has been a remarkable development in the banking sector in Nepal. There are all

together 28 commercial banks operating in the country.

It is lengthy, time consuming and vague while taking all of these institutions into

consideration. The sample method has been selected to select the banks to study for this

research. The banks that have been sampled for the study are Nepal Investment Bank

Limited and Nabil Bank Limited.

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1.6.3 Sampling Procedures

The simple judgmental sampling method is used for the sample to be taken. These two

banks are selected randomly from the available twenty eight banks in Nepal. The banks

with different characteristics have been selected so that the comparative study can be made.

1.6.4 Data collection Procedures

This research is based on the secondary data. The data is collected by the frequent visits to

the central bank and the two commercial bank s under study. Besides this, the other sources

of data are secondary data published by government and non government organization and

the internet as well.

1.6.5 Sources of Data

Mainly secondary data published and provided by NRB, and concerned commercial banks,

annual reports etc. is used for research works. Besides, to draw the useful information,

visits are made to central library, Nepal Rastra Bank Library etc. Internet websites is

browsed to get the required information.

1.6.6 Data Analysis Procedures

The data is analyzed on the basis of the information gathered from banks annual report

especially balance sheet capital adequacy sheet, BASEL II disclosure etc. so as to get

desired objective. Tables graphs and charts are used to present the data and analyze and

interpret the finding precisely.

1.6.7 Data Analysis and Presentation Procedures

The data presented and analyzed in the study are all secondary data. The data are analyzed

on the basis of the information gathered from the bank's annual report especially, balance

sheet, capital adequacy sheet etc. tables, graphs and charts have been presented to analyze

and interpret the findings. The comparative study has been made and banks are analyzed

and ranked on the basis of their performance. The data gathered from the banks are

compared with the directive issued by the central bank and analysis is made on

implementation and compliance aspects.

13

1.6.8 Tools and Techniques

1.6.8.1 Financial Tools

Capital adequacy ratio

Capital adequacy ratio is used to describe or measure the bank's capital fund. It is

expressed as a percentage of a bank's risk weighted credit exposures. Capital adequacy

ratio is calculated on the basis of core capital supplementary capital and total risk weighted

asset of the bank. This ratio is plays a significant role to protect depositors and promote the

stability and efficiency of financial system around the world and to examine adequacy of

the total capital fund and core capital.

Mathematically, CAR =

X 100

Where,

Total capital fund = core capital + Supplementary Capital

ROA (Return on Assets)

Return on assets (ROA) is a financial ratio that shows the percentage og profit a company

earns in relation to its overall resources. It is commonly defined as net income divide by

total asset. Net income is derived from the income statement of the company and is the

profit after taxes. The asset are read from the balance sheet and include cash and cash

equivalent items such as receivable, inventories, Land, capital the value of intellectual

property such as patents. ROA observed a negative but significant relationship between

Capital adequacy ratio and return on assets.

ROA =

1.6.8.2 Statistical tools

Statistical tools are used to analyze the relationship between two or more variables and to

find how these variables are related. In this study, following statistical tools are used.

14

Arithmetic mean or average

Arithmetic mean is an average of a given set of data this is divided by the number of

observation/ years. The arithmetic mean (AM) is denoted by X

Mean ( X ) =

n = Number of Year

∑X = Sum of X series

Standard Deviation

The coefficient of variation is the most commonly used measure of relative variation. It is

used in such problems where the researcher wants to compare the variability of more than

two years. Greater the C.V. the Variable or conversely less consistent, less uniform, more

consistent, more uniform, more stable and homogeneous.

Standard deviation (o ) = √

Where d= X - X

Coefficient of correlation

Correlation is a statistical tool design to measure the degree of association between two or

more variables. In other word if the changes in one variable affects the changes in other

variable, then the variable are said to be co- related when it is used to measure the

relationship between two variables, then it is called simple correlation. The coefficient of

correlation measures the degree of relationship between to sets of figures. Among the

various methods of finding out coefficient of correlation, Karl pearson’s method is applied

in the study. The result of coefficient of correlation is always lie between +1 and -1. The

formula for the calculation of coefficient of correlation between X and Y is given below.

15

r =

√

Where,

R = Correlation coefficient

∑x1 = X1 - X1

∑X2 = X2 - X2

The interpretation of calculated value of correlation coefficient by following way

If r = 0, then there is no correlation between variables

If r > 0, then there is positive correlation between variables

If r < 0, then there is negative relation between variables

If r = +1, then there is perfect positive correlation

If r = -1, then there is perfect negative correlation

Probable error (P.E.) = 0.675 *

√

Kurtosis

Kurtosis is statistical measure that is used to describe the distribution, of observed data

around the mean sometimes referred to as the volatility of volatility. Kurtosis is used in

statistical field to describe in the trend charts. Kurtosis can be present in a chart with fat

tails and a low, even distribution, as well as be present in a chart with skinny tails and

distribution concentrated toward mean.

K =

Where,

Q= quartile

P= percentile

16

Interpretation style of calculated value

If K = 0.263, the distribution is mesokurtic or normal]

If K< 0.263, the distribution is leptokurtic

If k< 0.263, the distribution is platykurtic

Skewness

Skewness is asymmetry in a statistical distribution, in which the curve appears distorted or

skewed either to the left or to the right. Skewness can be quantified and define the extent to

which a distribution differs from normal distribution.

Sk(P) =

Interpretation of calculated value of coefficient of skewness

If Sk(P) = 0, then this shows that the distribution is symmetrical (non -skewed)

If Sk(P) > 0, then this shows that the distribution is positively skewed or right

skewed

If Sk(P) <0, then this shows that the distribution is negatively skewed or left skewed

1.6.9 Regression analysis

In this report simple regression is used to show the relationship between the dependent and

independent variable. In this model Return on Asset is shown as dependent variable where

total Capital adequacy ratio and supplementary capital is considered as independent

variable. This shows that if total capital adequacy ratio and supplementary capital ratio is

changed, then it directly create effect on the return on assets.

ROAit = β0 + β1CARTit + β2CARSit+ eit

Where,

17

ROAit = Return on asset of ith

bank in t year

CARTit = Total Capital Adequacy ratio of ith

Bank in t year

CARSit = Supplementary Capital Ratio of ith

Bank in t year

β0 = The intercept o the regression Line

β1, β2 = the slope which represents the degree with which market price per share changes as

the independent variable changes b one unit variables.

eit = error term

1.7 Limitation of the study

This project report is prepared is for the partial fulfillment of the requirements for the

degree of Bachelor of Business Administration. There are various limitations faced during

the research work. Some major limitations faced are listed out as below:

1. It mostly focuses on the study of Nepalese banks with special reference to capital

Adequacy ratio.

2. Though there are 28 commercial banks functioning at presents, this study

undertakes only two banks i.e. Nabil bank limited and NIBL (Nepal investment

Bank Limited)

3. The research is based on the secondary data only. The primary sources are not used.

The report presented in merely based on the annual reports of the banks mentioned.

4. Due to the time constraint, they study does not deals the comprehensive study of

the selected commercial banks.

5. Moreover, the reliability of tools, lack of research experiences and lack of data are

the other limitation of this study.

1.8 Organization of the Study

This project report is prepared for the partial fulfillment of the requirements for the degree

of Bachelor of Business Administration. In this report whole chapter is classified into the

three parts.

18

Chapter I: Introduction section includes Background of the study, statement of the

problem, objective of the study, significance of the study, literature review, Research

Methodology, limitation of the study and Organization of the study

Chapter II: Data presentation and analysis section includes organization profile, Data

analysis and major finding of the study.

Chapter III: Conclusion and Action Implications.

19

CHAPTER II

DATA PRESENTATION AND ANALYSIS

This chapter generally discussed about organization profile, Data presentation, Data

analysis and finding and discussion. Data for Analysis can be obtained from the different

sources and they can be presented as tables or charts like bar diagram, graphs etc. the

methods of data presentation and analysis are used to analyze the given data and to present

them in very finest manner and let the data to present for drawing inferences. The data

collected from the concerned Samples Banks, NRB directives and from various other

sources like libraries, booklets, published reports, journals, internet website are organized

and classified for analysis. ROA and CAR are analyzed to understand the financial

performance of commercial banks.

2.1 Organization profile

2.1.1 Introduction to NABIL Bank Limited

Nabil Bank limited is the nation's first private sector bank, commencing its business since

July 1984. Nabil was incorporated with the objective of extending international standard

modern banking services to various sectors of the society. Pursuing its objective, Nabil

provides a full range of commercial banking services through its 52 points of

representation. In addition to this, Nabil has presence through over 1500 Nabil remit agents

throughout the nation. Nabil, as a pioneer in introducing many innovative products and

marketing concepts in the domestic banking sector, represents as milestone in the banking

history of Nepal as it started an era of modern banking with customer satisfaction measured

as a focal objective while doing business. Operations of bank including day- to - day

operations and risk management are managed by highly qualified and experience

management team. Bank is fully equipped with modern technology which includes

international standard banking software that supports the E-channels and E-

transactions.Nabil is moving forward with a mission to be "1st choice provider of complete

financial solutions" for all its stakeholders, customers, shareholders, Regulators,

communities and staff. Nabil is determined in delivering excellence to its stakeholders in

20

an array of avenues, not just one parameter like profitability or market share. It is reflected

in its Brand promise "together ahead". The entire Nabil team embraces a set of Values

"C.R.I.S.P" representing the fact that Nabil consistently strives to be customer focused,

Result oriented, Innovative, synergetic and professional.

2.1.2 Introduction to NIBL (Nepal Investment Bank limited)

Nepal Investment Bank Ltd. (NIBL), previously Nepal Indoseuz bank Ltd., was established

in 1986 as a joint venture between Nepali and French partners. The Frenchpartner (holding

50% of the capital) was Credit Agricole Indoseuz, a subsidiary of one of the largest

banking groups in the world. When Credit Agricole Indoseuz decided to divest, a group of

companies compromising of bankers, professionals, industrialists and businessman

acquired 50% of the holdings of Credit Agricole Indoseuz in Nepal Indoseuz Bank in April

2002. The name of the bank was changed to Nepal Investment Bank Ltd. upon approval of

the Bank’s Annual General Meeting, Nepal Rastra Bank and Company Registrar's office.

NIBL, being managed by the team of experienced bankers and professionals with a proven

track record, can match needs of the customers.

NIBL have undertaken many initiatives to strengthen customer experience through

multiple touch points such as internal banking, mobile banking and branchless banking. Its

overall growth record in deposits, lending, net profit and capital base is second to none.

• Highest growth rate among banks in Nepal.

• Experienced management and sound corporate governance.

• Top lender in Nepal with total loans and advances.

• Highest deposits

• Highest Net profit

• Highest paid up capital among the financial institutions.

• Largest among Taxpayers in Nepal

2.2 Data presentation of commercial banks

Capital adequacy ratio shows the relationships between Capital fund and Total risk

weighted assets of the bank. Capital adequacy ratio helps to increase the confidence of the

21

depositor and consumer. It provides the bases for protecting costumer wealth. According to

NRB Directive 2072 BS commercial Banks in Nepal required to minimum 6% of core

capital to RWA and 11% of capital adequacy. Total capital includes core capital and

supplementary capital.

Return on Assets (ROA) is a financial ratio that shows the percentage of profit a company

earns in relation to its overall resources. This study mainly focused on how financial

performance of company is changed due to change in capital adequacy.

2.2.1 Capital Adequacy and Profitability Position of NIBL

Central bank regulated the all the commercial banks. Banks should maintain the capital as

per the requirements of the central banks. By maintaining the total capital adequacy ratio it

is most important to firm utilize the resource effectively and efficiently.

Table 2.1

Capital Adequacy Ratio and ROA of NIBL

Year CAR-T(%) CAR-S(%) ROA(%)

2007/2008 11.28 4.26 1.79

2008/2009 11.24 3.57 1.7

2009/2010 10.55 2.68 2.2

2010/2011 10.91 2.05 2.02

2011/2012 11.1 2.14 1.6

2012/2013 11.49 1.76 2.6

2013/2014 11.27 1.48 2.3

2014/2015 11.9 1.75 1.9

2015/2016 14.92 2.36 2

2016/2017 13.02 1.87 2.1

Mean 11.77 2.39 2.02

SD 1.29 0.89 0.30

CV 0.11 0.37 0.15

Source: Annual Report of NIBL

Table 2.1 shows ten year CAR and ROA of the NIBL Bank. NIBL is continuously

maintained the better capital adequacy ratio over the 10 years period. The highest capital

adequacy is 14.92 percent in 2016. In same year the ROA is 2 percent. That shows increase

in capital adequacy ratio relatively degrade the financial performance of company. The

average of CAR-T, CAR-S and ROA is 11.77%, 2.39% and 2.02% respectively. The data

also presents that fluctuation of CAR-T is higher than CAR-S and ROA. CV of ROA is

less that means ROA of NIBL is less fluctuated in observed periods.

22

Figure 2.1 Bar Diagram of Capital Adequacy Ratio and Return on asset of NIBL

Fig. 2.1 shows the CAR and ROA of NIBL during 10 years time period. The highest CAR

is 14.92 in 2016 and highest ROA is 2.6 in 2013. Mainly figure show the inverse

relationship between the total CAR and NIBL. When the CAR increased ROA is

comparatively decreased.

2.2.1.1 Comparison of CAR set by NRB directive and CAR maintained by NIBL

The data shows the Capital Adequacy Ratio (CAR) to be maintained as per the NRB

directive and the actual CAR maintained by the bank. It shows that NIBL is able to

maintain its capital adequacy requirement as the differential CAR shows the positive

figure. The CAR maintained by the bank is 11.28%, 11.24%, 10.55%, 10.91%, 11.1%,

11.49%, 11.27%, 11.10%, 14.92% and 13.02% respectively in last ten years. That shows

NIBL able to meet the NRB requirements. Up to 2072 BS firm need to maintain CAR ratio

more than 10% and new directive of NRB 2072/2073 commercial bank state that

commercial bank should maintain the 11 % of CAR. NIBL succeed to maintain capital

adequacy ratio as per the directive.

2.2.2 Trend analysis of CART and ROA of NIBL

This considers the past movement of the CART and ROA. This show how ROA is change

with the change in total capital adequacy ratio of the banks. Generally return on asset is

change with the change in total capital adequacy ratio of the banks. Banks maintain total

capital adequacy ratio by focusing their business resources utilization program.

0

5

10

15

20

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Pe

rce

nta

ge

Years

ROA(%)

CAR-T(%)

23

Figure 2.2 Trend analysis of CART and ROA of NIBL

The figure 2.2 shows the trend of CART and ROA of the commercial bank. This indicates

the CART and ROA is increasing continuously in ten years of the tine. In the same time the

increasing rate of ROA is smaller than ROA. Figure also indicates at the time of increase in

CART, ROA is decline. This show there is negative relation between the CART and ROA.

2.2.3 Capital Adequacy and Profitability Position of NABIL

This is considering to analysis the overall total capital adequacy ratio and profitability

position of the commercial banks.

Table 2.2

Bar Diagram of Capital Adequacy Ratio and ROA of NABIL

Year CAR-T ROA(%)

2007/2008 11.1 2.32

2008/2009 10.7 2.55

2009/2010 10.5 2.37

2010/2011 10.58 2.43

2011/2012 11.01 2.8

2012/2013 11.59 3.25

2013/2014 11.24 2.65

2014/2015 11.57 2.06

2015/2016 11.73 2.32

2016/2017 12.42 2.71

Mean 11.24 2.55

SD 0.60 0.33

CV 0.0533 0.1294

Sources: annual report of NABIL

1.79 1.7 2.2 2.02 1.6

2.6 2.3 1.9 2 2.1

11.28 11.24 10.55 10.91 11.1 11.49 11.27

11.9

14.92

13.02

0

2

4

6

8

10

12

14

16

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Pe

rce

nta

ge

ROA(%)

CAR-T(%)

24

Table 2.2 shows NABIL continuously tried to maintained more CAR then NRB Directive.

In order to maintained the customer trust toward the Bank. The maximum capital adequacy

ratio that is maintained by the NABIL is 12.42% in 2017 where ROA is 2.71%. That also

shows that high in capital adequacy ratio negatively impact on the overall financial

performance of bank

Figure 2.3 Bar Diagram of Capital Adequacy Ratio and ROA of NABIL

Figure 2.3 show the 10 years period CAR and ROA of NABIL. NABIL constantly

maintained the better capital adequacy ratio over the period. This also indicates that

NABIL continuously maintained overall good ROA

2.2.3.1 Comparison of CAR set by NRB directive and CAR maintained by NABIL

The data shows the Capital Adequacy Ratio (CAR) to be maintained as per the NRB

directive and the actual CAR maintained by the bank. It show that NABIL is able to

maintain its capital adequacy requirement as the differential CAR shows the positive

figures. The CAR maintained by the bank are 11.59%, 11.24%, 11.57%, 11.73% and 12.42

respectively which is higher than standard set by NRB. Up to 2072 BS firm need to

maintain CAR ratio more than 10% and new directive of NRB 2072/2073 commercial

bank state that commercial bank should maintain the 11 % of CAR. NABL succeed to

maintain capital adequacy ratio as per the directive.

2.2.4 Trend analysis of CART and ROA of NABIL

This considers the past movement of the CART and ROA. This show how ROA is change

with the change in total capital adequacy ratio of the banks. Generally return on asset is

change with the change in total capital adequacy ratio of the banks. Banks maintain total

capital adequacy ratio by focusing their business resources utilization program

0

5

10

15

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Pe

rce

nta

ge

Years

CAR-T

ROA(%)

25

Figure 2.4 Trend analyses of CART and ROA

The figure 2.4 shows the trend of CART and ROA of the NABIL bank. This indicates the

CART and ROA is increasing continuously in ten years of the tine. In the same time the

increasing rate of ROA is smaller than ROA. Figure also indicates at the time of increase in

CART, ROA is decline. So this show there is negative relation between the CART and

ROA.

2.3 Descriptive statistic of Variables

In this section mean, standard deviation, kurtosis, skewness and min-max of variables (core

capital, supplementary capital and capital adequacy ratio) is analyzed. On the basis of data,

individual and combine analysis has done. The main objective is how commercial bank

continuously succeeds to maintain the better capital adequacy ratio in order to secure its

customer.

Table 2.3

Descriptive statistic of study Variables

Variable Mean SD Kurtosis Skewness Minimum Maximum

All

Sample:

ROA 2.26 0.41 0.14 0.47 1.60 3.25

CART 11.54 1.00 5.94 2.14 10.50 14.92

CARS 1.99 0.75 3.76 1.88 1.20 4.26

Source: Appendix II

2.32 2.55 2.37 2.43 2.8 3.25 2.65

2.06 2.32 2.71

11.1 10.7 10.5 10.58 11.01 11.59 11.24 11.57 11.73 12.42

0

2

4

6

8

10

12

14

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

% p

erc

en

tage

year

ROA

CAR-T

26

Table 2.3 shows in an average commercial bank maintain 2.26 percent of capital adequacy

ratio. The standard deviation is 0.41 that indicate variation in ROA of commercial bank is

less than one during the observation periods. Skewness of the commercial bank is 0.47 that

indicate data are fairly symmetrical and kurtosis 0.14 means that indicate data are slightly

right tailed in normal distribution from the center point. The minimum ROA of commercial

Bank is 1.60 and maximum ROA is 3.25.

In similar manner commercial bank maintain the 11.54 % Total capital adequacy ratio over

the 10 years period. The variation over the CART during the ten years is 1. Kurtosis is

5.94 that indicate CART is right tailed in normal distribution and skewness 1 indicates data

are highly skewed. The minimum Total capital adequacy ratio maintain by the commercial

bank over the 10 years period is 10.50 percent and Maximum capital adequacy ratio that is

maintain by the commercial bank is 14.92.

In same way commercial bank maintain 1.99 percent of supplementary capital in an

average. Standard deviation of supplementary capital is 0.75 that indicate variation is less

than over the ten years period. The skewness is 1.88 that indicates data are highly skewed.

Kurtosis 3.76 indicates supplementary capital is right tailed from the central point in

normal distribution. The minimum supplementary capital ratio is 1.20 and maximum

capital adequacy ratio is 4.26

2.3.1 Descriptive statistic of study Variables of NIBL

In this section only variables related NIBL bank is analyzed. Both Independent variable

and independent variable is analyzed by using descriptive statistic tool

27

Table 2.4

Descriptive statistic of NIBL

Source: Appendix III

Table 2.4 shows the descriptive statistic of dependent variable (ROA) and Independent

variable (CART and CARS) of NIBL. The average of ROA is 2.003. That means over the

10 years of bank history NIBL is able to maintain on an average 2.003 percent ROA. In

similar means standard deviation is 0.087 that mean return on asset variation is less over

the year. Kurtosis is 0.406 which indicate that the data is heavy tailed and little bit right

from the central point of normal distribution. The data is symmetrical distribution.

Skewness is 0.697 that means data are moderately skewed. Minimum ROA is 1.6 and

maximum ROA is 4.260.

Similarly, the average of CART is 11.805. That means over the 11 years of bank history

NIBL is able to maintain on an average 11.805 percent ROA. In similar manner standard

deviation is 0.371 that mean return on asset variation is less over the year. Kurtosis is 3.798

which indicate that the data is heavy tailed and right distribution from the central point of

normal distribution. The data is symmetrical distribution. Skewness is 1.866that means

data are moderately skewed. Minimum ROA is 1.6 and maximum ROA is 4.260.

2.3.2 Descriptive statistic of study Variables of NABIL

In this section only variables related NABIL bank is analyzed. Both Independent variable

and independent variable is analyzed by using descriptive statistic tool.

Variable Mean SD Kurtosis Skewness Minimum Maximum

NIBl:

ROA

2.003 0.087

0.406

0.697

1.600

4.260

CART 11.805 0.371

3.798

1.866

10.550

14.920

CARS 2.305 0.267

1.270

1.379

1.440

4.260

28

Table 2.5

Descriptive statistic of NABIL

Variable Mean SD Kurtosis Skewness Minimum Maximum

NABIl:

ROA 2.55 0.33 1.41 0.87 2.06 3.25

CART 11.24 0.60 0.09 0.61 10.50 12.42

CARS 1.64 0.35 0.71 0.69 1.20 2.35

Source: Appendix IV

The average ROA of NABIL bank is 2.55 that indicates on an average NABIL bank

maintain 2.55 percent of ROA over the 10 years period, SD is 0.33 that means variation in

ROA is less than 1. Kurtosis is 1.41 that means if data are present in normal distribution

then data are slightly left side distributed. And skewness is 0.87 that indicates data are

moderately skewed. The minimum ROA over the period is 2.06 and maximum ROA is

3.25.

The average of CART is 11.24 that indicate NABIL maintain 11.24 percent of CART over

the 10 years period time. SD is 0.60 that means variaion is less and kurtosis 0.09 means

data are skewed near the 0 and 0.61 of skewness shows that data are moderately

symmetrical. The minimum total capital adequacy over the 10 years period is 10.50 and

maximum capital adequacy ratio over the 10 years period is 12.42 percent. The average of

supplementary capital over the 10 years period is 1.64 and SD is 0.35 that means variation

in supplementary capital over the 10 years period is less than 1. Kurtosis is 0.71 that

indicates data are not too much far

from the central point. Skewness is 0.69 that means data are moderately symmetrical. The

minimum supplementary capital is 1.20 and maximum supplementary capital is 2.35.

2.4 Result from regression model

Regression analysis is set of statistical process for estimating the relationship among

variables. It includes many techniques for modeling and analyzing several variables, when

29

the focus is on the relationship between dependent variables and independent variables. For

the finding result regression analysis was conducted without control variables.

Test of significance was carried out for all variables studied using the t-test at 95% level of

significance. From the observation, Any p-value greater than 0.05 have a insignificant

relationship where the p-value less than 0.05 considered the significant relationship. The

standardized coefficient and the t-statistic indicate the strength of the relationship between

the dependent and independent variables. The adjusted R square measures the degree of

variability of the dependent variable due to the change in the independent variable.

The major data is analysis below, and a major tool that is used to analyze this is present in

appendix.

2.4.1. Analysis of regression Model

Correlation shows the relationship between the variable. In this section relation between

the capital adequacy ratio and Return on asset is shown.

Table 2.6

Pearson Correlation Coefficients (n=20)

Variable ROA CART CARS

ROA 1

CART -.153 1

CARS -.531* -.030 1

*. Correlation is significant at the 0.05 level (2-tailed).

Table 2.6 shows correlation between the ROA, total capital adequacy ratio and

supplementary capital adequacy ratio from 20 observations. Two tailed is used to analyze

the correlation between the ROA, CART and CARS. Here relation between CART and

ROA is -0.153. That means there is negative relation between the CART and ROA. This

also shows that there is big impact on financial performance of commercial bank due to

change in the capital adequacy ratio over the different period of time. Moreover there is

also negative relationship between the ROA and supplementary capital. That show ROA

move in opposite Direction of capital adequacy ratio.

30

Table 2.7

Regression Coefficients (n=20)

Variable Coefficients t Sig. Collinearity Statistics

Tolerance VIF

Constant 3.645 3.800 .001

CART -.069 -.866 .398 .999 1.001

CARS -.293 -2.738 .014 .999 1.001

R Square-=.311; Adjusted R Square= .234; F-statistics = 4.055; F- Sig.= .035; Durbin-Watson = 1.378

Source: Appendix V

Table 2.7 shows the overall regression coefficient of observed variables. The statistic in

table shows that there is a perfect model fit with an F statistics of 4.055, significant at 95%.

This means that the model specification is correct and that the selected independent

variables are determinants of return on assets. It also indicates that P-value less than 0.05 is

significant. That means a selected variable is affected by the independent variables. The

model summary also shows that the R is .557 with p-value 0.01 Imply that there is a very

significant multiple correlation/relationship between the ROA lag and CAR lag. It also

shows that the model explains up to 31.1 % of the variations in the ROA of the banks.

Adjusted ROA is account for taking all observation so this show variation is 31.1%

Collinearity implies two variables are near perfect linear combinations of one another.

Multicollinearity involves more than two variables. In the presence of multicollinearity,

regression estimate are unstable and have high standard error.

Variance inflation factors come under the collinearity statistic. VIF measure the inflation in

the variance of the parameter estimates due to collinearities that exist among the predictors.

It is a measure of how much the variance of the estimated regression coefficient is

“inflated” by the existence of correlation among the predictor variables. Here VIF is 1.001

that is tend to 4 which means there is significant negative relationship between the

dependent variables and independent variables.

Tolerance presents the percent of variance in the predictor that cannot be accounted for by

other predictors. Here tolerance is 99.99%.

31

In statistic, the Durbin-Waston statistic is a test statistic used to detect the presence of

autocorrelation at lag 1 in the residuals from a regression analysis. If the Durbin- Waston

statistic is substantially less than 2, there is evidence of positive serial correlation. Here

Durbin-Waston is 1.378 which indicates the successive error terms are positively

correlated.

Figure 2.5 Scatter Diagrams of CAR-T and ROA

Figure 2.5, ROA is More concentrate than the CAR over the 10 years of period. CAR and

ROA changed oppositely in this ten years of time period. When there is highest CAR,

ROA is decrease. CAR is not concentrate over the period Like ROA.

2.5 Findings and Discussion

The major finding of the research entitled “impact of capital adequacy ratio in the financial

performance of commercial bank” from the above presentation and analysis have been

highlighted below.

2.5.1 Major finding from the Analysis of Secondary Data:

2.5.1.1 Nepal Investment Bank limited

0

2

4

6

8

10

12

14

16

2006 2008 2010 2012 2014 2016 2018

CAR-T(%)

ROA(%)

Linear (CAR-T(%))

Linear (ROA(%))

32

Total capital, core capital and supplementary capital of NIBL are in increasing

Trend. The total fund consist more than 65% Core capital and remaining

supplementary Capital in 10 years of time.

The contribution of core capital is more for growth of total capital fund of the bank.

On an average bank able to maintain 11.85% CAR this is greater than NRB

Directive.

ROA of NIBL bank also in increasing trend. Its shows NIBL continuously utilize it

asset effectively and efficiently in order to earn the profit.

2.5.1.2 NABIL Bank Limited

The core capital and supplementary capital of NABIL are in increasing trend since

last 10 years continuously. The total capital fund has increased subsequently due to

huge increment in core capital than in the supplementary capital. The portions of

core capital fund are on an average 85 percent respectively during the 10 years of

time.

The contribution of core capital is more for growth of total capital fund of the

NABIL.

On an average NABIL bank able to maintain 11.24 % CAR, this is greater than

NRB directive standard.

Up to 2015 bank focused on maintain more than 10% CAR and from 2015 bank

mostly focused on 11% of CAR.

ROA of bank is continuously increasing trend. That also show that NABIL bank

continuously focused on better utilization of the all resources. It also continuously

improved its image outside by better utilization of resources.

2.5.1.3 Overall findings

Overall there is inverse relationship between the CAR and ROA of the

commercial bank. Banks is not succeeding to increase CAR and ROA in same

time.

On an average commercial bank succeed to maintain 11.24 percent of the CAR

and 2.25 percent of ROA. That shows CAR is 5 times higher than the ROA

33

Higher portion of the total capital fund is covered by core capital of the

commercial bank.

Both banks maintained higher capital adequacy ratio then NRB directive.

34

CHAPTER III

CONCLUSION AND ACTION IMPLICATION

This is the final and most important chapter of the report since this chapter discussed about

the overall summary and conclusion of the research.

3.1 Conclusion

From the whole report it is found that all selected bank is able to maintained adequate

capital Adequacy ratio. Sample bank mostly give attention to core capital rather than

supplementary capital. They have composition of the total capital with more than 60% of

the core capital and remaining that of supplementary capital.

As per the finding derived the commercial banks have been maintaining the capital

adequacy position as per the NRB Directive. The Capital Adequacy can be studied as per

the core capital to Risk weighted Assets Ratio. As far this ratio is concerned all the sample

banks have maintained standard ratio of 6%. This study also shows that there is negative

relationship between the ROA and Capital Adequacy Ratio.

The appropriate Capital Adequacy Ratio indicates that the depositors, creditors as well as

the investor are safe. This ultimately assists in improving the financial performance of the

banks.

All the sample commercial banks have been maintaining the capital Adequacy ratio

as the NRB directives in the study period. Both NIBL and NABIL maintained the

capital adequacy ratio just above the NRB directive.

This overall analysis shows that Capital adequacy directly affect on the

performance of the commercial banks. Higher the capital adequacy negatively

related with the financial performance of the banks.

Capital adequacy norms are set by the NRB in order to protect the depositors.

Depositors are the prime beneficiary of the capital adequacy norms. Since the banks

are maintaining the CAR as per NRB directives, it can be concluded that banks

have safe - guard the deposit of the depositors.

35

Capital Adequacy also creates impact on the profitability of the commercial banks.

Here ROA show the resource utilization, since there is negative relationship

between the CAR and ROA, there also negative relationship between the Capital

Adequacy and profitability of the commercial banks

3.2 Action Implications

Based on the detailed analysis certain recommendation can be made here so that the

concerned authorities’ future researchers, academicians, bankers can get some insight

on the capital adequacy and relationship between capital adequacy position and

financial performance of the commercial banks.

Capital adequacy ratio is determines the capacity of the commercial banks to

safe-guard the depositors, investors and creditors. So, the banks should maintain

the required percentage of CAR as per the NRB directive regarding the Capital

Adequacy ratio.

NIBL and NABIL both bank maintaining CAR just above the requirement.

They should increase the ratio by reducing the total risk weighted by assessing

the low risk bearing assets for investment. This will help the bank to reduce the

Total Risk Weighted assets.

Bank only give few consideration toward the supplementary capital. They

should also pay attention toward supplementary capital so that the excess of

core capital can be cushioned for the hard period.

The ROA of banks always seem less than 3 percent so that bank should focus

on maintaining more ROA, so commercial banks can utilize its resources more

effective

36

References

Bhattarai, Mahesh (2009), A Study of NRB Directive with Special Reference to Capital

Adequacy and Loan Loss Provision, unpublished master degree thesis, Tribhuvan

University.

Henning, Charles, pigot and scott (1982). Financial markets and the economy. New jersey:

Englewood cliffs.

Kiragu, Chris(2010) , The relationship Between the Profitability and Capital Adequacy of

commercial Banks in Kenya, Master in Business Administration thesis, University of

Nairobi.

Kohan, M.(1999). Financial institution and Markets, New Delhi: Tata McGraw- Hill

publishing Company Limited.

Kyalo J.M (2002). Capital allocation and efficiency of Banking Institutions in kenya the case

of quoted banks at NSE. Unpublished MBA Research project, University of Nairobi.

NABIL Bank Ltd, Annual reports (2063/064 to 2073/074)

Nepal Rastra Bank (2017), Kathmandu: Banking and Supervision Annual Report

Nepal Rastra Bank (2073/074), Kathmandu: Unified Directive

NIBL Bank Ltd, Annual Reports (2063/064 to 2073/074)

Nzioki, S.J. (2011). The Impact of Capital Adequacy on the Financial Performance of

Commercial Banks . unpublished master degree thesis, Business Administration -

School of Business, University of Nairobi.

Poudel, Hari (2009), A case Study of Himalayan Bank Ltd, NRB Directives their

Implementation and Impact on the Commercial Banks, unpublished master degree

thesis, Tribhuvan University.

37

Pradhan, R. S. & Parajuli, P. (2017). Impact of capital adequacy and cost income ratio on

performance of Nepalese commercial banks. International Journal of Management

Research, 8 (1),

Ross, peter S. (2000). Commercial Bank Management. Irwin McGraw-Hill, New Delhi.

Shrestha, Manoj (2010), NRB capital Adequacy Norms for the commercial Banks and its

impacts. Unpublished Master Degree thesis. Kathmandu University.

Singh, H.B. (2063). Banking and insurance, Kathmandu, Asia publishing Ltd.

Thapa, K. (2015), Investment Analysis, Kathmandu: Khanal publication Pvt.Ltd

Weston, J.F. and Copeland, T.E. (1992), Managerial Finance, New York: The Dryden

publication.

38

APPENDICES

Appendix I

List of Bank in Nepal S.N. Name of commercial Banks Established year (A.D)

1 Laxmi Bank Limited 2002

2 Siddhartha Bank Limited 2002

3 Nepal Bank Limited 1937

4 RstriyaBanijya Bank Limited 1966

5 Agriculture development Bank 2006

6 Nabil Bank Limited 1984

7 Nepal investment Bank Limited 1986

8 Standard chartered bank Nepal Limited 1987

19 Himalyan Bank limited 1993

10 Nepal SBI Bank Limited 1993

11 Nepal Bangladesh Bank limited 1993

12 Everest Bank Limited 1994

13 Kumari Bank Limited 2001

14 Bank of kathmandu Limited 1995

15 Nepal credit and commerce Bank limited 1996

16 Global Iime Bank Limited 2007

17 Citizens Bank international limited 2007

18 Prime commercial Bank Limited 2007

19 Sunrise Bank Limited 2007

20 NMB Bank Limited 2008

21 NIC Asia Bank Limited 1998

22 Machhapuchhre Bank Limited 2000

23 Mega Bank Nepal Limited 2010

24 Civil Bank Limited 2010

25 Century Bank Limited 2011

26 Sanima Bank limited 2012

27 Janta Bank Limited 2010

28 Prabhu Bank limited 2016

39

Appendix II

Descriptive analysis of both banks

CAR-T(%)

CAR-S(%)

ROA(%)

Mean 11.5376

2

Mean 1.98952

4

Mean 2.26142

9

Standard Error 0.21839

2

Standard Error 0.16382

Standard Error 0.08948

9

Median 11.27

Median 1.75

Median 2.3

Mode 11.24

Mode 1.75

Mode 2.32

Standard Deviation

1.000799

Standard Deviation

0.750716

Standard Deviation

0.410089

Sample Variance 1.00159

9

Sample Variance 0.56357

5

Sample Variance 0.16817

3

Kurtosis 5.93562

3

Kurtosis 3.76481

3

Kurtosis 0.14308

4

Skewness 2.13639

Skewness 1.87683

3

Skewness 0.47416

7

Range 4.42

Range 3.06

Range 1.65

Minimum 10.5

Minimum 1.2

Minimum 1.6

Maximum 14.92

Maximum 4.26

Maximum 3.25

Sum 242.29

Sum 41.78

Sum 47.49

Count 20

Count 20

Count 20

40

Appendix III

Descriptive analysis of NIBL

CAR-T(%)

CAR-S(%)

ROA(%)

Mean 11.8045

5

Mean 2.30545

5

Mean 2.00272

7

Standard Error 0.37142

3

Standard Error 0.26767

1

Standard Error 0.08722

1

Median 11.28

Median 2.05

Median 2

Mode #N/A

Mode #N/A

Mode #N/A

Standard Deviation

1.231871

Standard Deviation

0.887765

Standard Deviation

0.289278

Sample Variance 1.51750

7

Sample Variance 0.78812

7

Sample Variance 0.08368

2

Kurtosis 3.79778

5

Kurtosis 1.27036

2

Kurtosis 0.40580

2

Skewness 1.86571

7

Skewness 1.37888

5

Skewness 0.69710

3

Range 4.37

Range 2.82

Range 1

Minimum 10.55

Minimum 1.44

Minimum 1.6

Maximum 14.92

Maximum 4.26

Maximum 2.6

Sum 129.85

Sum 25.36

Sum 22.03

Count 10

Count 10

Count 10

41

Appendix IV

Descriptive analysis of NABIL

CAR-T(%)

CAR-S(%)

ROA(%)

Mean 11.244

Mean 1.642

Mean 2.546

Standard Error 0.18888

7

Standard Error 0.10977

6

Standard Error 0.10438

4

Median 11.17

Median 1.66

Median 2.49

Mode #N/A

Mode #N/A

Mode 2.32

Standard Deviation

0.597312

Standard Deviation

0.347141

Standard Deviation

0.330091

Sample Variance 0.35678

2

Sample Variance 0.12050

7

Sample Variance 0.10896

Kurtosis 0.09431

5

Kurtosis 0.71103

1

Kurtosis 1.41078

6

Skewness 0.60992

4

Skewness 0.69359

Skewness 0.87251

3

Range 1.92

Range 1.15

Range 1.19

Minimum 10.5

Minimum 1.2

Minimum 2.06

Maximum 12.42

Maximum 2.35

Maximum 3.25

Sum 112.44

Sum 16.42

Sum 25.46

Count 10

Count 10

Count 10

42

Appendix V

Correlation and Regression analysis by using SPSS

Correlations

ROA CART CARS

ROA Pearson Correlation 1 -.153 -.531*

Sig. (2-tailed) .507 .013

N 21 21 21

CART Pearson Correlation -.153 1 -.030

Sig. (2-tailed) .507 .897

N 21 21 21

CARS Pearson Correlation -.531* -.030 1

Sig. (2-tailed) .013 .897

N 21 21 21

*. Correlation is significant at the 0.05 level (2-tailed).

Results of Regression Analysis

Model Summary

Model R R Square Adjusted R Square

Std. Error of the

Estimate Durbin-Watson

1 .557a .311 .234 .358908429 1.378

a. Predictors: (Constant), CARS, CART

b. Dependent Variable: ROA

43

ANOVAb

Model Sum of Squares df Mean Square F Sig.

1 Regression 1.045 2 .522 4.055 .035a

Residual 2.319 18 .129

Total 3.363 20

a. Predictors: (Constant), CARS, CART

b. Dependent Variable: ROA

Coefficientsa

Model

Unstandardized

Coefficients

Standardized

Coefficients

t Sig.

Collinearity Statistics

B Std. Error Beta Tolerance VIF

1 (Constant) 3.645 .959 3.800 .001

CART -.069 .080 -.169 -.866 .398 .999 1.001

CARS -.293 .107 -.536 -2.738 .014 .999 1.001

a. Dependent Variable: ROA