1.

INTRODUCTION
Financial sector plays vital role in the economy. The growth and financial stability of a country
depends upon the financial soundness of banking sector. It intermediates the flow of funds from
surplus unit to deficit unit. Among financial sector, banking sector is considered as highly
regulated sector since it uses the saving of general public which needs to be taken due care.
Nepal Rastra Bank (NRB) is the central bank of Nepal which regulates the banking sector in
Nepal. Banking institutions have increased significantly in Nepal over the last decade which in
turn has increased the level of competition and complexity as well. The banking sector has seen
very good growth in the banking habit of people, services diversification, and use of information
technology. All these factors are making banking sector even more complex than before. Since
there are so many banks in Nepal competing for same market segment with almost identical
services, it is becoming difficult to differentiate the banks in terms various financial performance
indicators. To evaluate the financial performance of banks a widely used model called CAMEL
has been used in this study.
Performance analysis of commercial banks involves scientific selection of sample banks that
represent the performance of all commercial banks of Nepal. The study uses the performance
results which are available in the form of quarterly financial statements and tries to explore the
various CAMEL ratios that will represent the overall financial performance.
Analysis of performance will provide guidance to people for making investment decisions.
Financial performance analysis assesses the performance of stocks, bonds, commodities, and
other types of investments. A strong financial system promotes investment by financing
productive business opportunities, mobilizing savings, efficiently allocating resources and makes
easy the trade of goods and services. The banking sector is increasingly growing and it has
witnessed a huge flow of investment. In addition to simply being involved in the financial
intermediation activities, banks are operating in a rapidly innovating industry that urges them to
create more specialized financial services to better satisfy the changing needs of their customers.
An analysis of the financial statement can reveal whether the firm will be able to meet its longterm debt commitment, whether the firm is financially distressed, whether the company is using
its physical assets efficiently, whether the firm has an optimal financing mix, whether the firm is
generating adequate return for its shareholders, whether the firm can sustain its competitive

advantage. The evaluation of a firms performance usually employs the financial ratio method,
because it provides a simple description about the firms financial performance in comparison
with previous periods and helps to improve its performance of management .Moreover, the ratio
analysis assists in determining the financial position of the bank compared to other banks.
In order to cope with the complexity and a mix of risk exposure to banking system properly,
responsibly, beneficially and sustainable, it is of great importance to evaluate the overall
performance of banks by implementing a regulatory banking supervision framework. One of
such measures of supervisory information is the CAMEL rating system. CAMEL stands for
Capital Adequacy, Assets Quality, Management Efficiency, Earning Quality and Liquidity.
CAMEL rating system helps the banks to enhance required capital adequacy, strengthen asset
quality, improve management, increase earnings and manage liquidity. It will be helpful for the
bank to know the specific details of the model which in turn lead to identify the strengths and
weaknesses of the banks.
Therefore, the present study is necessitated to examine the performance of selected commercial
banks during the period of 2068-2071 BS and explore the relationship between banks and their
performance indicators. The study is based on 16 ratios relating to Capital Adequacy, Assets
Quality, Management Efficiency, Earning Quality and Liquidity.