NON-PERFORMING ASSESTS AND PROFITABILITY IN

MICRO FINANCE COMPANY

(NMB MICROFINANCE)

A project Work Proposal

Laxmi Narayan Bhattarai

Tu Registration No.: 7-2-278-853-2020

Pashupati Multiple Campus

Group: -Finance

Submitted to:
Faculty of Management
Tribuvan University
Kathmandu

In a partial fulfilment of the requirements for the degree of

Bachelor of Business Studies (BBS)

Chabahil,Kathmandu
April, 2025
 TABLE OF CONTENTS

Title Page i
Table of Contents ii
CHAPTER I: INTRODUCTION

1.1 Background of the Study ………………………………………………...1

1.2 Profile of the organization …………………………………………..…..2

1.3 Statement of Problems ………………………………………………..…3

1.4 Objectives of the Study ……………………………………………….…3

1.5Significance of the study………………………………...…………….…..4

1.6 Review of literature ………………………………………………………4

1.7Research Methodology ……………………………………………………5

1.7.1 Research Design ………………………………………………….….5

1.7.2 Populattion and Sample………………………………………………5

1.7.3 Nature and Source…………………………………………………….5

1.7.4 Data Collection Procedure ……………………………………………6

1.7.5 Method of Data Analysis ……………………………………………..7

1.8 Limitation of the study ……………………………………………………8

Reference

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 CHAPTER I
INTRODUCTION

1.1 Background of the Study

The concept of Non-Performing Assets (NPAs) has become a central issue in the financial
sector, especially in microfinance institutions (MFIs), where the balance between financial
stability and profitability is often more delicate than in commercial banks. Non-Performing
Assets refer to loans or advances that are in default or arrears, where the borrower has failed
to repay the principal or interest as per the terms of the agreement. According to Bourke
(1989), high levels of NPAs can severely impact a financial institution's profitability by
increasing the cost of managing defaulted loans and limiting the potential for earning interest
on performing loans. In the case of microfinance, where the focus is on lending to low-
income clients with limited financial access, the challenge of managing NPAs becomes even
more pronounced.

Microfinance institutions such as NMB Microfinance play a critical role in providing

financial services to underserved populations, with the goal of reducing poverty and
promoting financial inclusion (Srinivasan & Bhat, 2011). However, the very nature of
microfinance lending—targeting high-risk borrowers—makes these institutions particularly
vulnerable to the issue of NPAs. As Chaudhary (2014) notes, while microfinance institutions
aim to offer small loans to individuals or groups who do not have access to traditional
banking services, they also face higher risks of defaults due to the lack of collateral and the
generally unstable financial situations of their clients. This creates a constant balancing act
between financial inclusion goals and the institution’s need to maintain financial health.

In recent years, NMB Microfinance, like other microfinance institutions in Nepal, has been
facing increased pressure to manage NPAs effectively. According to Nepal Rastra Bank
(2019), while MFIs in Nepal have shown growth in outreach and customer base, the rising
NPAs have threatened their sustainability and profitability. Studies have shown that the
relationship between NPAs and profitability is often negative, as high levels of NPAs lead to
higher provisioning for bad debts, which reduces the available capital for reinvestment
(Koirala & Sharma, 2020). This trend is particularly concerning for institutions like NMB

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Microfinance, as their success is inherently linked to profitability and the ability to reinvest in
future lending activities.

A number of researchers, such as Amin & Chatterjee (2017), have highlighted that
profitability in microfinance institutions can be influenced by the extent of NPAs, with many
institutions facing challenges in maintaining profitability while adhering to stringent
regulatory capital adequacy requirements. NMB Microfinance, in particular, must balance its
commitment to providing micro-loans to marginalized communities with the operational need
to maintain low levels of NPAs, ensuring that profitability is not adversely affected. The
problem becomes even more complex as macroeconomic factors, such as inflation, economic
instability, and shifts in consumer behavior, also play a significant role in the performance of
MFIs, as noted by Ghosh & Ghosh (2018).

Given the rising concern around NPAs and profitability in Nepal’s microfinance sector, this
study aims to explore the relationship between non-performing assets and profitability in
NMB Microfinance. By analyzing financial data, the study will provide a deeper
understanding of how NPAs influence profitability in microfinance institutions and offer
recommendations for mitigating the risks associated with high levels of NPAs. In doing so, it
will contribute to the ongoing discourse on how microfinance institutions can maintain
profitability while fulfilling their social missions.

1.2 Profile of the (NMB Microfinance)

NMB Microfinance is one of the leading microfinance institutions in Nepal, established with
the primary goal of providing financial services to underserved and rural populations. The
institution operates under the broader umbrella of NMB Bank, a well-known commercial
bank in Nepal, which has expanded its services into the microfinance sector to improve
financial inclusion in the country. NMB Microfinance was founded with a mission to provide
financial solutions tailored for economically disadvantaged communities, offering services
such as micro-loans, savings accounts, and insurance to individuals who typically lack access
to traditional banking services (NMB Microfinance, 2020). The bank is particularly focused
on women, farmers, and small entrepreneurs in rural areas, aiming to foster sustainable
economic development by empowering marginalized groups (Sharma, 2018).

The institution operates with a network of branches spread across various regions in Nepal,
predominantly in rural areas where financial services are scarce. According to Nepal Rastra

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Bank (2020), microfinance institutions like NMB Microfinance are crucial to promoting
inclusive economic growth by extending financial services to populations that otherwise
might be excluded from mainstream banking services. This is especially vital in Nepal, where
a significant portion of the population resides in remote areas and relies on microfinance
institutions for credit and other financial services. NMB Microfinance provides a variety of
loan products, including income-generating loans, agricultural loans, and group loans, which
are designed to address the specific needs of its clientele (NMB Microfinance, 2020).

In terms of financial performance, NMB Microfinance has demonstrated significant growth

in both outreach and capital base. As of 2020, the institution reported steady improvements in
its loan portfolio, assets, and client base, reflecting the growing demand for microfinance
services in Nepal. According to Shrestha (2019), despite challenges related to non-
performing assets (NPAs) and market volatility, NMB Microfinance has managed to maintain
a competitive edge through efficient management practices and innovative financial products.
However, like other microfinance institutions in Nepal, NMB Microfinance faces challenges
related to managing the risks of NPAs, which can impact profitability and long-term
sustainability. These challenges are particularly pressing as the institution expands its lending
portfolio to include higher-risk borrowers, including those involved in agriculture and small-
scale businesses (Koirala, 2020).

NMB Microfinance's operations are governed by the regulations set forth by Nepal Rastra
Bank, which ensures that the institution adheres to sound financial practices and safeguards
against systemic risks. Nepal Rastra Bank (2019) has emphasized the importance of effective
risk management practices in microfinance, particularly in relation to managing NPAs, which
have the potential to undermine the financial stability of these institutions. Despite regulatory
efforts, NMB Microfinance faces the challenge of maintaining profitability while providing
financial inclusion services to high-risk borrowers. To address this, the institution has
adopted various measures, including better credit risk assessment procedures and more
targeted lending strategies (Koirala & Sharma, 2020).

Overall, NMB Microfinance has made significant strides in its mission to improve financial
inclusion in Nepal. By providing essential financial services to rural populations, the
institution plays a key role in alleviating poverty and supporting local entrepreneurship.
However, to ensure its long-term sustainability, it must continue to balance profitability with

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the social mission of empowering low-income individuals, while effectively managing the
challenges posed by NPAs and financial instability (Sharma, 2018; Koirala, 2020)

1.3 Statement of the Problem

Microfinance institutions (MFIs) like NMB Microfinance play a vital role in financial
inclusion by providing essential banking services to underserved populations, particularly in
rural areas. However, the increasing levels of Non-Performing Assets (NPAs) have raised
concerns about the sustainability and profitability of these institutions. NMB Microfinance,
while successfully reaching marginalized groups, faces the challenge of balancing its social
mission of financial inclusion with the necessity of maintaining financial health. High levels
of NPAs pose a significant threat to profitability, as they lead to higher provisions for bad
debts and limit the bank’s capacity to reinvest in lending activities. Understanding the
relationship between NPAs and profitability is crucial for devising strategies that can both
ensure financial stability and enhance the impact of microfinance services. Despite the
growing concern around NPAs in Nepali microfinance institutions, there is limited research
on how these non-performing assets affect profitability, particularly in institutions like NMB
Microfinance.

Research Questions

 What is the impact of non-performing assets (NPAs) on the profitability of NMB

Microfinance?
 How does NMB Microfinance manage its non-performing assets, and what strategies
have proven effective in reducing NPAs?
 Is there a significant relationship between the level of NPAs and the long-term financial
sustainability of NMB Microfinance?

1.4 Objective of the Study

this study is to explore the impact of Non-Performing Assets (NPAs) on the profitability of
NMB Microfinance. Specifically, the study aims to examine how fluctuations in the level of
NPAs affect the financial performance of the institution. It seeks to evaluate the effectiveness
of the strategies employed by NMB Microfinance to manage its NPAs and mitigate their
negative effects on profitability. Furthermore, the study aims to assess the long-term financial
sustainability of the institution, considering the current trends in NPAs, and to identify key

4
factors that influence the balance between liquidity, asset quality, and profitability. Through
this analysis, the study intends to provide actionable insights and recommendations that can
help NMB Microfinance improve its profitability while maintaining effective NPA
management practices, ultimately ensuring the institution’s continued financial health and
growth.

The objective of the study includes.

 To Examine the impact of NPAs on the profitability of NMB Microfinance.

 To Evaluate NMB Microfinance’s NPA management strategies and their effectiveness.

 To Investigate the relationship between NPAs and the long-term financial sustainability
of NMB Microfinance.

1.5 Significance of the Study

This study is significant as it provides valuable insights into the relationship between Non-
Performing Assets (NPAs) and profitability in NMB Microfinance, an essential institution in
Nepal's microfinance sector. Understanding how NPAs affect profitability is crucial for the
management of the institution, enabling it to develop effective strategies to mitigate the
impact of defaults and ensure long-term financial stability. The findings of this study can
serve as a guide for improving NMB Microfinance’s operational strategies, leading to more
effective NPA management and enhanced financial performance.

1.6 Review of the Literature

The relationship between Non-Performing Assets (NPAs) and the profitability of financial
institutions, particularly Microfinance Institutions (MFIs), has garnered significant attention
in academic literature. emphasized that NPAs directly affect the profitability of banks, as they
increase the cost of loan recovery and reduce the institution's ability to generate income from
performing loans. This is especially true for microfinance institutions, where the focus on
lending to underserved communities exposes institutions to higher risks of defaults and non-
repayment (Chaudhary, 2014).

Amin & Chatterjee (2017), MFIs with higher NPAs face increased operational costs due to
the need for provisioning, which limits their ability to reinvest in new loans or expand
services. observed that the effective management of NPAs is critical for maintaining financial

5
health, as institutions must balance outreach to low-income borrowers with the sustainability
of their lending practices.

Koirala & Sharma (2020) further investigated the dynamics of NPA management in Nepali
MFIs, finding that institutions like NMB Microfinance face the challenge of managing NPAs
while continuing to meet their social goals of poverty alleviation and financial inclusion.
These authors also noted that adopting sound risk management practices, such as thorough
credit assessments and monitoring loan performance, can help reduce NPAs and enhance
profitability.

Shrestha (2019) reinforced the idea that NPAs can hinder an MFI’s profitability, especially
in a volatile economy like Nepal’s. However, it also pointed out that institutions that adopt
innovative lending models, such as group lending and income-generating loans, have been
able to reduce their NPA levels and maintain profitability. also suggest that profitability in
MFIs is closely linked to the ability to manage credit risk, making NPA reduction a key
determinant of success.

In conclusion, the literature underscores the significant impact of NPAs on the profitability of
Microfinance Institutions, especially in developing countries like Nepal. The management of
NPAs is a critical factor for ensuring the financial sustainability of MFIs while balancing
their social mission. This study aims to build on these insights by exploring how NMB
Microfinance can better manage NPAs to achieve sustainable profitability.

1.7 Methods
A systematic research study requires following a proper methodology to achieve the set of
objectives. Research Methodology is a systematic approach of finding solution of a particular
problem. It is systematic collection, recording, analysis, interpretation and reporting of data
and information. This chapter aims to present a basic framework of the research work.
Research methodology is a way of explaining how a researcher intends to carry out their
research. It's a logical, systematic plan to resolve a research problem. A methodology details
a researcher's approach to the research to ensure reliable, valid results that address their aims
and objectives. This chapter contains the research design, sample size, time frame, instrument
of data collection, validity and reliability, data processing tools and techniques, variables etc.

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1.7.1 Research Design
This research is based on recent historical data of last five years. The study range is from
2076/2077 to 2080/2081 This research is mainly focused on NMB Microfinance of the . To
achieve objective of the study, descriptive and analytical research design has been adopted.
1.7.2 Population and Sample
The population for this study includes the financial data of NMB Microfinance over the past
5 years, focusing on indicators of Non-Performing Assets (NPAs) and profitability. The
sample will consist of specific financial documents such as Balance Sheets, Income
Statements, and Loan Performance Reports that reflect the institution’s NPA levels and
profitability. A purposive sampling method will be used to select years with notable trends in
NPAs and profitability, ensuring the analysis is relevant to the study's objectives.
1.7.3 Nature and Source of Data

This study will rely on secondary data, which includes existing financial records, reports, and
documents related to Non-Performing Assets (NPAs) and profitability of NMB Microfinance.
The data will be sourced from annual reports, financial statements, audit reports, and other
relevant publications provided by NMB Microfinance, as well as reports from regulatory
bodies like Nepal Rastra Bank. Secondary data is used because it provides a comprehensive
overview of the institution’s financial performance over time.

1.7.4 Data Collection Procedure

For this study, secondary data will be collected from NMB Microfinance's financial reports,
including annual reports, balance sheets, income statements, and loan performance records.
These documents will be obtained from the institution’s official archives and public
disclosures. Additionally, relevant reports from Nepal Rastra Bank and other regulatory
bodies will be accessed to supplement the data. The collected data will cover a period of 5-10
years to assess trends in Non-Performing Assets (NPAs) and profitability. All data will be
thoroughly reviewed to ensure accuracy and relevance to the study objectives.

1.7.5 Method of Data Analysis

The data collected for this study will be analyzed using descriptive analysis to examine the
relationship between Non-Performing Assets (NPAs) and profitability in NMB Microfinance.
Key financial ratios, such as the NPA ratio and Return on Assets (ROA), will be calculated to
evaluate the impact of NPAs on profitability. The study will also use trend analysis to
observe changes in NPAs and profitability over time, helping to identify patterns and

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potential correlations. Finally, a comparative analysis will be performed to benchmark NMB
Microfinance's performance against industry standards and similar microfinance institutions
in Nepal.

1.8 Limitation of the Study

This study is limited by the reliance on secondary data, which may not capture real-time
changes or underlying factors influencing NPAs and profitability. Additionally, the scope is
confined to NMB Microfinance and may not be fully representative of other microfinance
institutions in Nepal. The study’s findings are also dependent on the availability and accuracy
of financial reports, which may have limitations in terms of transparency or completeness.
Finally, external factors such as economic conditions and regulatory changes are not directly
analyzed, yet they could influence the results.

Some of the limitations of the study are as follows:

· The study uses secondary data, which may lack depth and real-time updates.

· The focus on NMB Microfinance limits broader applicability.

· The data may have gaps or inconsistencies.

· The study excludes external economic and policy factors.

· The analysis is limited to a specific time period.

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 References

Amin, R., & Chatterjee, S. (2017). Impact of non-performing assets on profitability in

microfinance institutions: Evidence from India. Journal of Microfinance, 19(2), 23-37.

Bourke, P. (1989). Concentration and other determinants of bank profitability in Europe,

North America, and Australia. Journal of Banking & Finance, 13(1), 65-79.

Chaudhary, K. (2014). Microfinance institutions in Nepal: Challenges and opportunities.

Journal of Nepalese Business Studies, 7(1), 49-56.

Ghosh, P., & Ghosh, D. (2018). Microfinance and its role in poverty alleviation: A study on
the relationship between NPAs and profitability. International Journal of Financial Studies,
12(4), 119-129.

Koirala, D., & Sharma, R. (2020). Impact of non-performing loans on profitability in Nepali
MFIs. The Journal of Microfinance, 15(2), 59-71.