CHAPTER I

INTRODUCTION

1.1 Background of the study

The role of money in an economic is very important. Proper and well-planned
management of money directs, determines and enhances the health and productivity
of total financial sector and the performance financial sector affects the growth of
economy. The economy of a country indicates the development of the country. The
financial sector plays an important role in the development of the country and
mobilization of financial resources. Hence, money is a subject to manage, and banks
are the manager. Therefore, bank as manager collects, disperse and controls the flow
of money. Banks collect the fund from financial sector organizes the scattered
domestic financial resources and invests them in different sectors. Economic
development depends upon various factors however, the major are capital formation
and proper utilization of the capital. The organized financial sector collects the fund,
mobilize and invest the fund in the best possible manner.

Banks play an important role in the economic growth of a country. Banking, when
properly organized, aids and facilitates the growth of trade and industry. The issue of
development always rests upon the mobilization of resources. Banks function of
lending ensures required volume of capital to resources mobilization. In the modern
economy, banks are to be considered not as dealers in money but as the leaders of
development. “Banks are not just the storehouse of the country‟s wealth but are the
reservoirs of resources necessary for economic development. Bank renders valuable
services to trade and industry. The economic growth of a country depends on the
growth and development of trade and industry, Industrial development can take place
only if sufficient money is invested in industries. Banks undertake the stupendous task
by mobilizing the savings of the people and lending the same to the trades and
industrialists. The banks help in the uniform development of the different regions in
the country. (Kulkarni; 1981: 141)

Therefore, a bank is an institution that deals with money by accepting various types of
deposits, disbursing loan and rendering other financial services. Since banks are

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rendering a wide range of services to the people from different walk of life, they have
become an essential part of modern society. In other words, bank is an institution that
accepts the deposits from people and in turn advance loan by creating credit. In this
process, they earn interest and commission, out of which they pay interest to the
depositors i.e. People who deposits fund with them. Banks have opened their branches
in towns and villages offering different types of services to the different level of
people. Banks‟ debt-usually referred as „Bank Deposit‟ that is commonly accepted in
final settlement of debt of other people. It is different from other financial institution
in the sense that they cannot create credit though they may be accepting deposits and
making advances. Thus, bank‟s business was basically to buy and sale of credit.
Credit instruments are kept on stock-in-trade also on the basis of its own credit and
banks create money transferred by credit instruments. They must gain the confidence
and trust of the people to create credits. It is said that the flow of credit is very much
important like the circulation of blood in human life. If the circulation of blood is not
smooth it will do irreparable harm to the body. Similarly, unsteady and unevenly flow
of credit harms the economy. Bank came in existence mainly with the objectives of
collecting the idle funds, mobilizing them into productive sectors and causing an
overall economic development. That mobilized deposits contribute to the
development of economic infrastructure of the nation. Banks are not just storehouses
of the wealth but are reservoir of resources. The contribution of the bank has been
very substantial in increasing production and employment by motivating people to
save and in collecting the scattered saving in the form of deposits. The bankers have
the responsibility of safeguarding the interest of the depositors, the shareholders and
the society they are serving. (Kulkarni; 1981: 121)

The development of banking is relatively recent in Nepal. In case of Nepal too there
were merchants, goldsmiths and moneylenders working as ancestors of modern
banking. In Nepal, the origination of banks started through Sahu (Goldsmith).Even
though the specific date of the beginning of money and banking deal in Nepal is not
obvious, it is speculated that during the Lichhavi period, King Guna kam dev had
borrowed money from the rich people to build the city. The historical record shows
that Guna kama dev, the king of Kathmandu, borrowed money to rebuild his kingdom
in 780 BS. Some fifty-seven years thereafter, a merchant „Shankhadhar‟ introduced
„Nepal Sambat‟ by clearing all the indebtedness of the people in 937BS. This clearly

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proved that money-lending practices were prevalent at that time. Later, during the
regime of Mallas, money-lending business became more penetrating and popular.
Towards the end of the 14th century, Jayasthiti Mallas, the ruler of Kathmandu,
divided the people in sixty-four classes on the basis of their occupation. Among them
one was Tankadhari and the people belonging to this class were engaged in money
lending business. It is believed that the money lending business became quite popular
in the reign of Mallas, particularly in financing the trade with Tibet and India. Thus,
the role of Tankadhari was akin to that of a banking agent. However, these
moneylenders advanced loan against personal security of land, building etc. As they
were free to charge any amount as interest and other charges on the loan advances.
Naturally, the interest rate was higher, discriminatory and unfair. Of course, this gave
birth to malpractices, frauds and exploitation in the whole Nepalese society. Even
today, such practices of usury are prevalent in Nepalese village, which are beyond the
purview of modern banking system. Thus, it was the duty of government to control
the malpractices of the moneylenders and to set up a financial institution to make easy
credit facilities for the general people. As a result, with growing consciousness and
awareness of this, „Tejarath Adda‟ had been established as an institution, during the
period of Rana , under the Prime Minister of Ranodip Singh in 1933 B.S.

As a result, with growing consciousness and awareness of this, during the time of the
Prime Minister Ranodip Singh in 1933 B.S an institution called "Tejarath Adda" was
established for simple banking against the security of gold, silver and ornaments.
However, it accepted no deposit from public. For the development of commercial
sector "Tejarath Adda" was converted into Nepal Bank Ltd. in 1994 B.S.

Modern baking started with the inception of NBL under the Nepal Bank Act 1936 in
1994 B.S. NBL had Herculean responsibilities of attracting people towards the
banking system from pre-dominant moneylenders and to expand banking services.
Being a first Commercial Bank it was natural that NBL paid more attention to profit
generating business and opened branches at urban centers. So, the establishment of
central bank had become immensely an urgent task. The Government however, has
onus of stretching banking services to the nook of the country and also managing
financial system in a proper way. Thus, Nepal Rastra Bank (NRB) was set up in 14th
Baishk 2012 B.S. as a central bank with an authorized capital of Rs 10 million fully

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subscribed by the HMG under Nepal Rastra Bank Act 2012 B.S. It has been
functioning as the government‟s bank and has contributed to the growth of financial
sector. The major challenge before Nepal Rastra bank today is to ensure the robust
health of financial institutions. Nepal Rastra Bank, the central bank of Nepal
regulates, inspects, supervise and monitor the whole functions of bank and financial
companies of Nepal. The second commercial bank Rastriya Banijaya Bank was
established in 2022 B.S. The two commercial banks extended their operation
extensively throughout the country.

Nepal Industrial Development Corporation (NIDC) and Agriculture Development

Bank were established to facilitate development activities by providing loans and
equity capital. The former Industrial Development Center was established in 2013
B.S. and was converted into NIDC in 2016 B.S. to finance equity and loan capital to
industries that are going to be established in the country. Agricultural Development
Bank Nepal was established in 2004 to finance agricultural sector as well as agro-
based industries within the country.

In modern times , commercial banks , which are facilitated, regulated and supervised
by the Central bank, confined them and concentrated in their activities of fulfilling the
financial needs of their customers. With the opening of NABIL bank in1985 A.D. the
door of opening commercial banks was opened to the private sector. As the
commercial banks grew they stopped entertaining small projects. Thus a scope for
opening finance companies emerged. In 2042 B.S., finance company Act was passed;
but private sector kept stony silence till 2049 B.S. The first break came in the month
of Shrawan of that year, when the first company Nepal Housing and Finance
Company came. The second came in the Poush of the same year, Nepal Finance and
Saving Company. Now there are altogether 79 finance companies operating in Nepal.
After the financial liberation in the 1980‟s the reform measure were undertaken .Such
measures include deregulation in interest rate determination, portfolio management,
market-based tenders for government securities sales, non-subsidized credits etc. the
market would determine the cost of funds and rate of lending .Better use funds, easy
availability of funds to the entrepreneurs, better returns to the depositors, professional
approach towards customer satisfaction. ([Link])

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1.1.1 Role of Banks in the National Economy
Banks are the major component in the financial system. They work as the
intermediary between depositors and lenders and facilitate in overall development of
the economy, with major thrust in industrial development. So, commercial banks are
those that accept deposits and finance to the business and finance to the business and
project. They provide short term and long- term finance. As per Commercial Bank
Act 2031 B.S, “A commercial Bank means the bank which deals in exchanging
currency, accepting deposits, giving loans and doing commercial transactions.”

Commercial Banks play the role of financial intermediary collecting the fund from
surplus unit and supplying the to deficit units (investors). Commercial banks help the
process of saving and of the holding of saving in a socially describe form. Though
their advances bank also help the creation of the incomes which further saving by the
community and further growth potentials emerge for the good of economy. In a
planned economy, bank emerges for the good economy and makes the entire planned
productive process possible by providing funds for all types of production
incorporated in the plan, regardless of whether the production is in the public sector or
whether the production is undertaken by one type of organization or another. All
employment income distribution and other objectives of plan are as far as possible
subsumed into production plan which banks finance. The importance of commercial
banks is directing the economic activities in the system is indeed overwhelming with
the establishment of commercial banks the flood gates of development promising
great hopes for people in the life open.

However, poor economy may be there will be needed for institution, which allows
such saving as are currently forthcoming to be invested conveniently and safely and
which ensure that they are channeled into the most useful purpose. Therefore, the
tasks of commercial banks in underdeveloped countries are almost self-evident. Their
purpose is to provide a collecting point for saving of a relatively small average
amount from a large number of individual sources so long as the means to utilize
saving safely and profitably are not available within an economy, funds will either to
be directed aboard, sterilized in useless hoards of cash or precious metals or more
likely still will not accumulated all. (Pandey; 1991: 37)

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1.2 Brief Introduction of ADBL
With the main objective of providing institutional credit for enhancing the
productivity of the agricultural sector in the country, the Agricultural Development
Bank, Nepal was established in 2025 under the ADB Act 1967, as successor to the
cooperative Bank. The Land Reform Savings Corporation was merged with ADB/N
Act 1967, as successor to the cooperative Bank. The Land Reform savings
corporation was merged with ADB in 1973. Subsequent amendments to the Act
empowered the Bank to expand the scope of financing to promote cottage industries.
The amendments also permitted the bank to engage in commercial banking activities
for the mobilization of domestic resources. Agricultural Development Bank Limited
is an autonomics organization largely owned by Government of Nepal. The bank has
been working as a premier rural credit institution since the last three decades,
contributing as more than 67% institutional credit supply in the country. Hence, rural
finance if the principle operational area of ADBL. Besides it has also been executing
small farmers Development program (SFDP) was initiated for financing small formers
on group liabilities in order to boost up the socio-economic condition of rural
populace. In 1984, the amendment of the Act also permitted ADB/N to extend its
wing in commercial banking activities so as to mobilize urban resources in the rural
areas of the country. In 1993, ADB/N initiated farmers‟ co-operative approach by
transferring SFDP into the small Farmers‟ cooperative Limited (SFCL).

The enactment of Bank and Financial Institution Ordinance (BAFIO) in February

2004 abolished all Acts related to financial institutions including the ADB/N Act,
1967. In line with the BAFIO, ADBL has been incorporated as a public limited
company on July 14, 2005. Thus ADBL operates as an “A” category financial
institution under the legal framework of BAFIO and the company act, 2053. ADBL is
a sole financial institution in the country maintaining its activities by three major
windows namely Development financing, Commercial Banking and Small framers
development. Through these sectors it is contributing more than 79% of institution
credit to the real populace by strengthening its network in the entire geographical
region the mountains the Hills and the Terai.

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ADBN operates as an autonomous body that has been controlled by the Ministry of
finance. The ADBL has in total 12 billion rupees of an authorized capital, by which
Rs. 11.2 Billion rupees is paid-up Capital.

1.2.1 Vision
ADBL aims to be a Mass-based Complete Bank serving from Urban to Rural

1.2.2 Mission
To deliver comprehensive banking solution strengthening its extensive network.

1.2.3 Objective
To provide quality banking services,
To adopt market driven strategy,
To obtain sustained and competitive return on investment.

1.2.4 Organization and Management of the ADBL

The Board of Director (BOD) is the apex of the bank. The major functions of BOD
are to formulate policies, strategies rules and regulation of the institution. The General
Manager executes day-to-day operation of the bank. Deputy General Managers,
Division chiefs, Directors and Board secretary closely assist the General Manager
Policy decisions made by the board are put into operation by the field offices under
the supervision of Regional offices.

At present, the Board consists of seven members including Chairperson of the ADBL.
Other members included a representative each from the Ministry of Land Reform and
Management, Ministry of Agriculture and co-operatives, the expert in banking sector
from the list of Nepal Rastra Bank (NRB) and remaining two board members as per
MOU of the Bank.

As a part of implementing its new business modality especially following the

financial and operation review and restructuring, the organizational set up and the
operational network is guided by the following principles.

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1.2.5 Main Function of the ADBL
The Major functions of the ADBL are to:
Provide a full and balanced range of financial products and services that
satieties the needs of the customers on a profitable and sustainable basis.
Strive constituting to provide improved products and services to its clients at
reasonable cost using modern unified banking communication and information
technology.
Execute full fledged commercial banking functions using the concept of
unified banking operation.
Provide short, medium and long term agricultural credit to individual farmers,
small farmers groups and co-operative societies.
Provide project loan for agricultural business, cottage and small scale
industries, alternative energy based on feasibility study.
Provide credit on non- agricultural business and other marketing facilities.
Develop mutually acceptable relationship with government in the pursuit of
improvement in living standards in rural areas while respecting best financial
practices.
Provide credit to support the poverty alleviation program of Government of
Nepal.
Develop competent and professional human resources.
On the way of executing its main function in the financial market, the bank gives its
priority on building reputation for professionalism, competitive pricing reliability and
quality service and innovation. In addition, the bank fosters its operation in
accordance with the best banking practices acting with financial prudence and
keeping in mind the need to balance profitability with asset presentation and liquidity
and to safeguard depositions funds.

1.2.6 Reform and Restructuring program

i) Reforms in Brief
Closely observing the domestic and international market scenario, reform and
restructuring processes have been inevitable part of development procedures. On the
way of analyzing the domestic market, we have several examples of restructuring
processes which ultimately tend to bring positive impact in overall business

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environment. Formally reform and restructuring in Nepalese financial sector begins
with the financial and operation review of two big government owned commercial
banks under the financial support of World Bank. Later on, it is followed by the
restructuring of ADBL of NIDC under the financial support of Asian Development
Bank. In fact, restructuring is nowadays has become a familiar procedure in Nepalese
financial sector.

In context of ADBL, restructuring reengineering reformation has already been taken

is the past based on situational demand. Basically the main strength of ADBL is its
flexibility to adopt the change in changed business environment. Had there been no
flexibility in ADBL operation modality the existence in the financial market would
have been quite impossible. Some of the examples of its flexibilities and
innovativeness can be recalled as follows.
Overcome the weak capital based by stepping into external borrowing ,
Innovate the poor targeted small farmers Development Program when
bank financing services reached only limited number of relatively better
off households,
Align with the technology front when financing didn't sufficiently
translate into technological improvements through linkage alone,
Federate the small farmers Development program into farmers owned
managed and planned small farmers co-operative limited when operation
lost hit the alarming state.
Restore deposits for rural credit with the initiation of the commercial
banking activities when external financers began putting up unnecessary
and difficult conditions,
Made a time appropriate decision by introducing Firm Reform program in
1997 when loan default rates were increasing,
Follow International Accounting system and Directives of the Nepal
Rastra Bank with the implementation of second Reform program in 2001
when financial viability and sustainability has become the main slogan for
its existence.

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In addition, after the liberalization in the financial market, ADBL also made
prosperity to the recommendation of financial and operational review team of ADBN
(TA-3580-HEP) and the directives of NRB. In that prospective, ADBL has made the
following improvisations in policies within a small span of time.
Adopt comprehensive reform by reducing and amalgamating the offices as
per restructuring policy.
Impose the voluntary retirement scheme (VRS) in 2061 by utilizing its
own internal resources to bring the staff under optimum size without
creating any deterioration in the business performance.
Adopt cash basis income recognition policy in commercial banking and
development branches.
Forward an aggressive and effective loan write off policy from FY
2060/61

These timely adopted reforms have displayed positive changes in the working
environment there by upgrading the status of the ADBL. As a result, a group of
consultants under the TA component of the Asian Development Bank (ADB), Manila
has assisted the management till March 2006 to carryout its capacity building in
various areas of ADBL. Recently Asian Development Bank Manila and ADBL have
signed memorandum of understanding as a part of restructuring ADBL.

ii) Restructuring
With the beginning of the new millennium, the financial sector in Nepal has
materialized a drastic change in Rural Finance as well as in Legal and Regulatory
Framework. The government in the year 2000, published the financial sector strategy
statement (FSSS) aiming to focus on two main activities. First to develop favorable
operational and legal environment in the financial sector for fair and equal footing
environment and secondly enhancing institutional capacity. As a result, in 2002, NRB
Act-2002and Bank and Financial Institutional ordinance (BFIO) 2003 were
promulgated to refocus on ADBL's core business functions especially target on
strengthening organizational flexibility, enhancing skill and knowledge of its
management and operational staff. In this context, in 2002 and 2004, two consequent
technical assistances supported by the Asian Development Bank had been initiated

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with the aim of helping ADBL in identifying its financial and operational weakness;
and , strengthening its operational knowledge through training and capacity building
activities.
The first intervention under the TA-3580-NEP as on operational and financial review
of ADBL focused on the following five major areas of ADBL.
Governance
Organization
Operational policy and procedures
Management Information System
Financial Performance
The review addresses the weakness of ADBL with focusing areas for improvement
and recommended the commercialization/restructuring. As a result, the second
intervention is implemented from early 2004 towards the end of 2005 under the
institutional strengthening of selected Rural Finance Institutions. The TA focused on
the institutional development capacity building for central training institute and
Regional Training centers of ADBL. The active participatory discussions and problem
solving skills have helped both consulting teams and ADBL management in reaching
a common program in terms of developing programs in operational areas such as:
Risk Management
Training Management Internal Audit
Credit Management
Business planning
Accounting
Altogether 749 management and operational staff have been trained and new
operational procedures have been applied at both regional and branch levels. In the
mean time the following major activities are taken into consideration under the Rural
Finance Sector Development cluster program.
Financial Recapitalization
Organizational Restructuring
New policy, procedures and standards
New MIS system
Continuous Training and comprehensive Human Resource Management
New operational and Financial performance Targets.

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1.3 Statement of the Problems
In our country, the industrialization is still in its infancy and therefore the concept of
profit planning has not even been familiarized in the most of the business concerns.
By proper profit planning a business can be managed more effectively and efficiently.
Banks play vital role in economic growth of a country. As being a financial
institution, bank must make profit out of its operations for its survival and fulfillment
of the responsibilities assigned. Bank major activities include mobilization of
resources, which involves cost, and profitable deployment of those resources, which
generates income. The differential interest income over the interest cost, which is
popularly called as Interest Margin or Spread, can be considered as the Contribution
Margin in the Profit of the bank. The other operational expenses form a burden to the
Contribution Margin, which, the banks are attempting to compensate by other income,
generated out of non fund based business activities of the Bank. The present study has
tried to analyze and examine the profit planning side of Bank taking a case of
Agricultural Development Bank. Furthermore, the study has tried to answer the
following research questions:
Does ADBL have appropriate profit planning system?
What is the condition of Bank in terms of fund mobilization and investment
policy?
Does the Bank deploy the resources generating satisfactory yield?
What is the relationship of investment, loans and advances with total deposits
and net profit?
Does the bank giving proper attention toward non-funded business activities
thereby generating satisfactory amount of other income?

1.4 Objectives of the Study

The basic objective of this study is to make profitability analysis of ADBL. The
following are the specific objectives of this study.
To examine the resource mobilization and deployment for income
generating activities.
To analyze the relationship e.g. investment, loan and advances with
deposit and profitability.
To study the growth of the business of the Bank over the period

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 To find return rate and expected return to shareholders

1.5 Significance of the Study

The present study is the analysis of profitability of Agricultural Development Bank
limited. The ADBL is mandated by Nepal Government to provide financial services
to the rural population to simulate income and generate employment in remote areas.
This study will find the strengths and weaknesses of the Bank by analyzing the
opportunities and threats in its overall conduct in the real ground. This study will also
be an important support to the management, owner, clients and other interest groups
in analyzing the bank‟s economic strength and performance efficiency. As it is a well
known fact that the Development Banks can affect the economic condition of the
whole country, it will be helpful to the policy makers while formulating the policy
regarding ADBL and people can understand now benefit its taking by them from the
semi-government banks.

1.6 Limitation of the Study

The study has the following limitations.
This study is mainly based on secondary data provided by the bank so the
study is concerned on that extent.
This study is based on the data of five years period i.e. from F/Y 2063/064 to
2067/068.
This study is focused only on the profitability analysis of ADBL.
The accuracy of the study is based on the data published on annual report,
annual programmed and budget of the bank.
Only ADBL is taken into consideration in this study.
Many financial & statistical tools are used to study the financial performance.
But this study has used limited tools.

1.7 Organization of the study

This study has been organized in to five chapters in the following order.
Chapter 1: Introduction
Chapter 2: Review of literature
Chapter 3: Research Methodology

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Chapter 4: Presentation and Analysis of data
Chapter 5: Summary, recommendation and conclusion.

The first chapter contains the general background, introduction of ADBL, statement
of problems, objectives of study, significance and limitations of the study.

The second chapter presents the analysis of related literature that includes especially
conceptual framework and review of other research articles and thesis.

The third chapter deals with the research methodology. It includes research design
population and sample, data collection procedure, method of analysis and data period
covered.

The fourth chapter will contain presentation and analysis of data. It also includes the
major findings of study.

Finally, the fifth chapter deals with the summary, recommendation and conclusion.

A bibliography and other appendixes used in statistical results have been attached at
the end of the study.

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 CHAPTER-II
REVIEW OF LITERATURE

This chapter is basically concerned with review of literature relevant to the topic
profitability analysis. The purpose of reviewing of literature is to develop some
expertise in one‟s area, to see what new contribution has made and to receive some
ideas for developing a research design. Thus, previous studies cannot be ignored as
they provide the foundation of the present study. This chapter highlights the literature
that is available in concerned subject as to my knowledge, research work, and relevant
study on this topic, review of journals and articles and review of thesis work
performed previously.

Review of literature refers the survey of materials which means reviewing research
studies or other relevant propositions in the related area of the study. So that all past
studies, their conclusion and deficiencies may be known and the further research can
be conducted. It is an integral and mandatory process in research work. (Joshi P.R,
2003:107)

In other words, review of literature is finding the pertinent fact with the available
literature in ones fields of research. The study of the material available on research
topics is called review of literature. Review of literature not only provides solid
information on the topic but also guides along the future stream of action. The textual
constraints would help it to support area of research in order to explore the relevant
and true facts for the reporting purpose.

The study aims to analyze the profitability of ADBL. For the purpose it needs to
review of literatures on the concern area. There are several studies have been already
done from which the researches can make clear ideas and concepts. What is other
opinion and concepts? What is the outcome of others researches? What has done and
written? These all and other related questions are reviewed in this chapter, which is
the guideline and inputs of the study. This chapter includes conceptual framework
from review of related books and articles, review of different masters‟ theses and
research gap.

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2.1 Conceptual Framework
Conceptual framework deals with the theoretical aspects of working profit,
profitability, liquidity, theory of profit, need for profit, tradeoff between profitability
and liquidity, financial statement of commercial bank, profit and loss a/c, income
statement etc.

Reviewing the literature, it is empirical to state that the literatures are focused on the
financial indicators which are very much in alignment with the prudential practices.
Some literatures emphasize that the variables such as deposit, assets, debts, equity
have significant relationship with financial performance and profitability of the bank.
Some other literatures show that level of planning are responsible for the profitability
and financial performance of the banks and financial institutions. In the meantime,
some literatures suggest that there was no relationship between these variables.
However, the literature cited above does not explain the deposit collection in terms of
bank's performance; it gives an idea that the banks overall performance is directly or
indirectly related with the amount of deposit collection. This study tries to see the
implication of factors affecting deposit collection and mobilization as this is the major
driving force that leads the organization in earning optimum profit. In light of this
background this study was undertaken.

2.1.1 Evolution of Banking:

Economists do not have exact records about the origin of the word “Banking”. The
term bank is derived from the Latin word “Bancus” which refers to the bench on
which the banker would keep his money and records. Some Economists says its origin
to the French word” Banque” and the Italian word “Banco” which means a bench for
keeping, lending and exchanging of money or coins in the market place by money
[Link] invention of money was a milestone in the history of economy and
developing the banking as a habit people. It has made economic and business activity
more precise and efficient. This gave the emergence of non-institutional banking
activities. Merchants, Money Lender and Goldsmith were the ancestors of modern
bankers. During the early periods, although the banking business was mostly done by
private individuals, many countries established public banks either for the purpose of
facilitating, commerce or to serve the government. The Bank of Venice established in

16
1157, is supposed to be the most ancient bank. Originally, it was not a bank in modern
sense being simply an office for the transfer of public debt.

During 1401, a public bank was established in Barcelona. It used to exchange money,
receive deposits and discount bill of Exchange, both for the citizen and foreigners.
During 1407, the Bank of Geneva was established. In 1609, The Bank of Amsterdam
was established. It was established to meet the needs of merchants of the city. The
Bank also adopted a plan by which depositors receive a kind of certificate entitling
them to withdraw his deposit within six months. The most of European banks now in
existence were found on the model of Bank of Amsterdam.

2.1.2 Profit & Profitability

Generally profit is defined as the excess of revenue over cost. In other words, profit is
the residual income, which is equal to sale proceeds minus costs. Profit is the
resources left to the firm for future growth and explanation or reward to be distributed
to the entrepreneurship in the form of dividends etc. In a simple term, profits mean the
residual balance of earning expected to be available with the firm that is obtained after
deducting entire expenses, costs, charges and provision from total revenue of a period
of time.

It is lifeblood of each type of business. Every business organization should earn

profits to survive and grow over the long period of time. Obviously, organization will
have no future if it is unable to make reasonable profit from its operation. As a matter
of fact, the overall efficiency of an organization is reflected in its profits. Profits to the
managements are the test of efficiency and a measurement of control: to the owners, a
measure of worth of their investment; to the creditors, the margin of safety to the
employees; a source of fringe benefits to the Government, a measure of fixed paying
capacity and the basis of legislative action; to customers, a hint to demand for better
quality and price cuts; to a bank, less burden some source if finance existence and
finally to the country, profit are index of economic progress. Thus, if an organization
fails to make profit, capital invested erodes and if this situation prolongs it ultimately
cease to exist.

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Profit has been universally recognized and accepted as a measure of business
efficiency. Thus, the larger the profits, the more efficiency and profitable the business
organization is deemed to be. This criterion has the greater advantage that it provides
a common standard of measuring the efficiency if different bank. Regarding this,
Laxmi Narayan clearly states, “Profit is the simple, convenient and the most popular
yardstick of jugging the efficiency of private and public business enterprises. Profit
helps in judging the overall efficiency and is easy to calculate. Even through profit
maximization, unlike private enterprise, is not objective of public enterprises, yet
profit services as a well accepted criterion for the judging the overall efficiency of
public enterprises too.” (Narayan, 1980 A.D., P.260).

The profit is the ultimate measure of effectiveness. A profitable company is likely to

offer not only security of employment but also promotion prospects, job opportunities
and the intense personnel motivation that comes from being associated with success.
John Argent observes, “Profit is the barometer of the success of business. It is, indeed,
a magic eye that mirrors all aspects of entire business organizations including the
quality output.” (Argent, 1968 A.D., P.34)

The term „profitability‟ is composed of two words profit and ability. It reflects the
capacity of a business organization to earn profit. It is also referred to as earning
capacity or earning power of the concern investment. Thus, the term profitability may
be taken as the ability to earn profit. According to Howard and Upton, “The word
profitability may be defined as the ability of a given investment to earn return on its
use.”

It may be mentioned that the term „profitability‟ is distinguished from the word profit.
Profit refers to the absolute quantum of profit whereas profitability alludes to the
ability to earn profit. The former is an absolute measure in itself while the latter is a
relative one. According to W.M. Harper, the profitability is a relative measure. It
indicates the most profitable alternative. The profit, on the other hand is an absolute
measure. It indicates the overall amount of profit earned by transaction. As the
profitability is the relative measure, it is used to judge the degree of operational
efficiency of management. Furthermore, it is essentially employed to measure the
relative efficiency of different trading systems or different investments within one

18
system. In the profitability analysis, the profit making ability of an organization is
measured in terms of size of investment in it or its sales volume. Such an analysis of
profitability reveals how particularly such a position stand as a result of transactions
made during the year. It is particularly interesting to the suppliers of funds who can
evaluate their investment and take necessary decision thereon.

The state of profitability is a variable thing like the temperature and humidity of a
day. The determination of profitability by an accountant or analyst is very much
similar to temperature reading and study of humidity by a meteorologist. A
meteorologist records the weather on daily basis with an intention to forecast its
future prospects. Likewise, an analysis records yearly profit of a bank with a view to
make prediction of the future prospects.

The purpose of profitability measurement is to see whether a bank has effectively

used its resources to achieve its profitability objectives. The profitability objectives
refer not to the maximum profit the business can produce but to the minimum it must
produce. The minimum profit is the profit at the minimum rate required for the
desired type of investment in the bank. However, there mustn‟ t be enough profit to
yield the capital in the market rate of return on money, which is already sunk in
business, but also to provide additional capital needed to cover the cost of staying in
business.

2.1.3 Meaning of Profit

Profit, from Latin means “to make progress”. It is defined in various ways. In
economics, profit is the concept of reward of the entrepreneur for risk taking and
management. In business operations, it is the gain from manufacturing, merchandising
and selling operations after all expenses are met. Since profit is added to net worth, it
may be measured by the increase in net worth over that of the previous accounting
period. The amount of concern‟s profit thus may be determined not only through the
profit and loss statement but also by the comparison of the earned surplus or net worth
in the balance sheet which, however, is the residue of profits after dividends and any
other appropriations and does not reveal details of sources of income and expenses,
which are found in profit and loss account. In speculative transactions, profit is the

19
excess of the net selling price over the costs (including all charges) of the security or
commodities traded in. (Woelfel, 1999 A.D., P.540)

Profit is a motivating factor behind many managerial activities. Much has been
written about the role (as opposed to the method of calculation) of profit. Profit plays
three roles in the capitalistic society. Profit is the financial reward of risk taking;
profit is the financial reward for having monopoly power; profit is the
financial reward for the efficient management. The promise of profit provides a strong
incentive to owners and managers to act efficiently. "Profit is essential for every
enterprise to survive in the long run as well as to maintain capital adequacy through
retained earning. It is also necessary to accept market for both debts and equity to
provide funds for increased assistance to the productive sectors.” (Robinson, 1951
A.D., P.21-22)

Account and economics are two disciplines in which profit is viewed in different
concept. Pure economic profit is the increase in wealth that an investor has from
making an investment, taking into consideration all costs associated with that
investment including the opportunity cost of capital. Accounting profit is the
difference between retail sales price and the costs of manufacture. A key difficulty in
measuring either definition of profit is in defining costs. Accounting profit may be
positive even in competitive equilibrium when pure economic profits are zero.

In economics, a firm is said to be making an economic profit when its revenue

exceeds the total (opportunity) cost of its inputs. According to Adam Smith (The
father of economics), “Profit is the sum remaining after the payment of all wages
(wage) in economics includes payments to officers of corporations, to proprietors, to
partners and to farmers, as well as to what we today term(labor), and rent on the
unimproved value of land, as the return to capital.”

Profit in the accounting sense is the net figure of difference between all types of
measurable revenues and all measurable costs. In accounting, profit is expressed only
on explicit and measurable accounting terms and on the book value basis. However,
in economics, profit is measured in the realizable terms. “Profit in the accounting
sense is the excess of revenue receipts over the costs incurred in producing this

20
revenue. This concept of profit is also known as residual concept. But, in economics,
both implicit and explicit costs are deducted from total sales revenue in determining
profits.” (Cauvery, 1997 A.D., P.122-123) As a matter of fact over the years there has
been quite an evolution as to what particular items should be deducted from gross
income to arrive at an “accounting” profit. Thus, “accounting” profit is a concept of
man-made legislation, of the courts, of the Security of Exchange Commission, of
accounting organizations; a concept, which has always been in evolution. “Economic”
profit on the other hand, is a concept of a natural law of economics, and like the law
of gravitation has remained and will remain unchanged over the ages. However, the
profit under discussion is concerned with accounting profit, which in a simple
language, is the positive and fruitful difference between two revenues and total
expenses over a period of time, Multiple meaning of the word "profits" have always
been troublesome. Accountants have made energetic efforts in recent years to discard
the word for that purpose and to refer to the conventional concept as business income
a natural term at avoids any overlap with economic theory. The most important points
of difference between the economists and accountants are as follows:
The inclusiveness of costs i.e. what should be subtracted from revenue to get
profit.
Meaning of depreciation
The treatment of capital gains and losses
The price level basis of valuation of assets and liabilities
Although there may be arguments in favor and against profit generating
almost all firms require earning it. Their rate of earning differs from firm to
firm and time to time.

2.1.4 Theories of Profit

Economists have propounded several theories of profits to explain profits of
entrepreneurs. Most of the theories are centered on the controversy about the role of
the entrepreneur. In the following section some of the fundamental theories of profit
have reviewed in brief.
1. Theory of Risk and Uncertainty Bearing:- It was F.B. Hawley who first
developed the theory of risk bearing and concluded that profit is a reward of
the entrepreneurs for bearing risks. But, the theory was picked up b

21
 Professor F.H. Knight who divided risk into insurable risk and uncertainties.
Thus according to Knight, profit is a reward to the entrepreneur for his non-
transferable function of bearing non-insurable risk and uncertainties.
2. Dynamic Theory of Profit:- This theory was propounded by J.B. Clark.
According to this theory, 'dynamic changes' in the economy are the basic
causes of emergence of profits. There is no profit in the static economy as no
changes take place. In a dynamic economy there are constant changes in
population, capital, methods of production and industrial set up. These
changes multiply wants of consumers, which earn profits to the entrepreneur.
3. Innovation theory of profit:- Joseph Schumpeter singled out 'innovation'
from the dynamic theory of profits and developed economy and innovation in
the changing world gives rise to profits. In his views, the entrepreneur plays an
important role of introducing innovation in an economy and profits are the
rewards for his role as an innovator. The innovation could be changes or
techniques that reduces cost of production or increases demand for the
product.

2.1.5 Need For Profit

Profit is necessary for the following reasons:
1. Measurement of Performance:- Profit is only factor to measure the
management efficiency, productivity and performance. Profit is the most
widely used yardstick to see what really is to be achieved and where the firm
is to go in the future.
2. Premium to cover costs of staying in Business:- Business environment is
full of risks and uncertainties. to grasp the globally changing technologies, to
stay in the market uncertainties, to replace and acquire assets and enhancing
business scope etc. require a profit margin.
3. Ensuring Supply of Future Capital:- Profit is necessary to plough back in
the investments like innovations, business expansion and self-financing. It also
attracts investors for further investment.
4. Return to the investors:- Shareholders provide equity capital to the business
because they expect the entity will provide return to their funds at least equal
or above market rate of return. To maintain the shareholders expectation, it is

22
 most important that a firm should earn sufficient profit so that it can distribute
dividends.

2.1.6 Profitability of Commercial Banks

Banks today are under great pressure to perform to meet the objectives of
their stockholders, employees, depositors, and borrowing customers, while somehow
keeping government regulators satisfied that the bank‟ s policies, loans, and
investments are sound.” (Rose, 1991 A.D, P.155) The majority of the needs of the
stakeholders are related with the profitability of the banks. For example, in case the
bank earns profits, the investors get dividends, employees get bonus, government gets
benefits in forms of taxes etc. Thus, the foremost objective of the banks is the profit
maximization. As other types of business entity, commercial banks are also inspired
by the profit.

The major source of funds of the bank is the public deposit. Commercial banks invest
public deposits on those sectors where they can attain the maximum income or higher
rate of return as the bank is liable to pay certain rate of interest to the public in their
deposit. Hence the investment or granting of loan and advance by them are highly
influenced by profit margin. Generally the profit of commercial bank depends upon
the interest rate of the bank, volume of loan provided, time period of loan, and nature
of investment in different securities. However, the bank at the same time has to ensure
that their investment is safe from default.

Aspiration of profit to commercial banks seem reasonable as the bank has to cover all
the expenses as interest to the depositors and other administrative costs, they should
make payment in the form of dividend to the shareholders who contributed to build up
the banks capital and keep aside for the provision and reserves. For this the bank
calculates the cost of fund and likely return, if the spread is enough irrespective of risk
involved and absorbs its liquidity obligations, it will go ahead for investment.

A successful bank is one who invests must of its funds in different earning asset
standing safely from the problem of liquidity i.e. keeping cash reserve to meet day-to-
day requirements of the depositors. After all the commercial bank is simply a business
corporation organized for the purpose of maximizing the value of the shareholders

23
wealth invested in the firm at an acceptable level of risk. So bank has to make a
crucial decision regarding a mixture of liquidity and profitability cause lower the
liquidity higher the profitability and higher the liquidity lower the profitability and
both are equally important, banks cannot afford to ignore any of them.

2.1.7 Liquidity
In banking, liquidity is the ability to meet obligations when they come due without
incurring unacceptable losses. In other words, the capacity of bank to pay cash against
any upcoming obligations is called liquidity. Managing liquidity is a daily process
requiring bankers to monitor and project cash flows to ensure adequate liquidity is
maintained. Maintaining a balance between short-term assets and short-term liabilities
is critical as the commercial banks have liability to the deposits collected and they
immediately should give it in the time when the depositors asked. Banking is the
business of financial dealing whose major source of financing is the public deposit.
Deposit accounts represent the primary funding in traditional commercial banks, and
the loan portfolio represents the primary asset. The investment portfolio represents a
smaller portion of assets, and serves as the primary source of liquidity. Investment
securities can be liquidated to satisfy deposit withdrawals and increased loan demand.
Banks have several additional options for generating liquidity, such as selling loans,
borrowing from other banks, borrowing from a Central Bank and raising additional
capital. Most banks are subject to legally-mandated reserve requirements intended to
help banks avoid a liquidity crisis.

A large part of bank deposits are withdrawn on demand and hence the bank must be
prepared with sufficient degree of liquidity of its assets. Once the confidence is lost in
depositors eye, they may withdraw all the deposits within the brief period when the
bank is unable to generate adequate cash without incurring substantial financial losses
since most of assets of the bank are attached in the loan and advances. Even the best
bank can hardly survive in such a situation. Confidence depends upon the ability of
bank to meet the readily demand for cash made by customers. Commercial banks
maintain liquidity in all or any forms of following:
1. Cash in self vault and in other banks-specially in NRB (First Line of Defense).
2. Overnight placements, moony at call or short notice or any other very short
term placements (Second Line Defense).

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 3. Investment in marketable securities like government securities, which can be
easily sold and readily convertible into cash (Third line of Defense,Dahal &
Dahal, 1996 A.D., P.41).

2.1.8 Trade off between Profitability and Liquidity

Profitability of commercial banks is highly dependant on the optimum utilization of
available resources and invests the deposit collected in safe and profit generating
assets like loan, and advances and investments. However, banks can not ignore the
necessity of maintaining a portion of the deposits in their cash vault, or in the
immediate approach like in the account of central banks or in any highly liquid assets
like government treasury bills, other government bonds that can be easily sellable
without loosing and further value.

A sound liquidity position of the bank satisfies the demand of the deposit holder,
which maintains the goodwill of the banks. Since, banks are faithfully considered as
the last resort for monetary needs of the public, the incapability of fulfilling their
demands will loose the faith of the depositors/ public. Once any signaling effect is
negatively attached in the perception of the depositors, they tend to doubt in the
bank‟ s dependability and that can consequent in the bank run. Further, banks must
maintain the certain portion of deposits in the vault and in NRB.

However, liquid assets are almost all idle. They do not generate any profits. The cash
in the vault meets any upcoming obligations immediately but banks will not be able to
generate any returns in such a case. Further, banks do not get any interests or other
returns in the accounts maintained in the central banks, NRB in our case.

Profitability and liquidity maintain a highly negative co-relation. Since both are
equally important for commercial banks, banks cannot ignore any of them. So, the
crucial decision for the management of the banks is to trade-off between them. The
more liquidity the less will be the profitability and vice versa.

2.1.9 Financial Statement of a Commercial Bank

The financial statement of a commercial bank includes balance sheet, profit and loss
account, cash flow statement and other relevant disclosures. Merely presenting the

25
financial statement does not satisfy the aim of the study as financial statements are
just of financial information to this analysis. Thus, the focus of the study will go to the
analysis of the financial statements of the bank, especially on profitability of the bank.
This will make some attempts to identify the financial position of the bank and to give
necessary suggestions thereto.

 Balance sheet
Balance sheet is not an account but it is a statement of assets and liabilities of business
enterprises at the given date. It is a statement summarizing the financial position of
the firm. The balance sheet is prepared at the end of accounting period. Bank's
balance sheet is composed of shareholder's fund, borrowings, debentures and other
liabilities and provision on the liabilities side and cash and bank balance, stock,
debtors, loan and advances, branch accounts, investment and fixed assets on the assets
side. The brief explanation on accounting heads of the balance sheet is provided
below:
A. Capital and Liabilities Side
1. Share Capital:- The amount of paid up capital of the bank should be
mentioned under this head. The amount received against calls made should be
credited in this share capital account.
2. Reserves and Funds:- This accounting head shall contain the amount of
reserves appropriated from profit, as well as created through any other process
and accumulated profit. Generally, this account shall be credited by debit to
profit & loss appropriation account and utilization of such reserves shall be
debited to the concerned reserve and fund accounts. The following account
heads fall under this heading.
General reserve fund:- This is a stationary reserve. Under this head, only the
amount appropriated from profit as per Commercial Banking act shall be
credited. Currently, 20% of the net proft should be transferred to this account.
Distribution of dividend by utilizing this fund is restricted and approval of
Nepal Rastra Bank shall be obtained for the use of this fund for any other
purposes. (NRB, 2062 B.S., P.29).
Capital Reserve Fund:- Profit on revaluation of assets and capital assets
received in grant from other shall be accounted under this head.

26
 Share Premium:- This represents the amount of money collected on issue of
shares in excess of its face value. The outstanding amount in this account shall
not be considered eligible for distribution of dividends. However, it may be
used for issue of bonus shares under approval of Nepal Rastra Bank.
Other Reserves:- Funds and reserves, other than those mentioned above shall
be included under this head.
Accumulated Profit/Loss:- Under this head, the balance of the accumulated
profit or loss as per shown in the Profit and Loss Appropriation account shall
be shown.
3. Borrowing:- The borrowed funds of the bank shall be disclosed under this
head. Bank borrowings, placements, overnight placements, borrowing from
central banks, foreign banks falls under this heading.
4. Deposits:- The principal liability of a commercial bank is its deposits
collected from general public, business and government agencies. Deposits
received from the depositors as well as the interest payable on the deposits
shall be credited to the account of the depositors. The deposit liabilities
accepted by the bank shall be exhibited under this head.
5. Bills Payable:- Under this head, the outstanding amounts pertaining to draft,
telex transfer. Payment orders issued by one branch to another branch of the
bank, as well as bills drawn on the bank by other local and foreign banks shall
be accounted.
6. Other Liabilities:- Other than the capital and liabilities mentioned above, all
other liabilities of whatsoever mature shall be included under this heading.
Any other accounting heads that could not be exhibited elsewhere may be
included under this head as required.

B. Assets Side
1. Cash Balance:- The most liquid assets held by any commercial bank is cash.
This heading shall be used for showing the total amount of cash-in-vault,
consisting of local and foreign currency. Since cash is the most liquid asset, it
is used to cover deposit withdrawals, handle credit demands from customers,
and to meet all regular and emergency expenses.

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2. Balance with banks:- The balances of amounts in non-interest bearing
accounts maintained by the bank with Nepal Rastra Bank as well as with other
local and foreign banks shall be exhibited under this head.
3. Money at call or short notice:- The amount of all interest bearing placement
with other banks with maturity of less than 7 days with stipulated condition for
payment at call or at short notice (48 hours) shall be exhibited under this head.
4. Investments:- As a line of defense to meet demands for cash and serve as a
quick source of funds, banks invest certain proportion of funds in the liquid
assets. These typically include holding of shorter-term government bonds like
treasury bills, development bonds etc. and other securities purchased in the
open market and readily convertible into cash in the financial market. Other
forms of investment include investment in the shares and debentures of other
companies. These investments are mainly made for their ability to generate
income. The investments are to be valued at market price or cost price
whichever is lower.
Commercial banks invest the funds to the shares, debenture and bond of the
other company. They generally do so when there is excess of funds than
required and there are no alternative opportunities to make investment in the
profitable sector. Now-a- days the commercial banks of Nepal have purchased
share and debenture of regional development bank, NIDC and other
development banks etc. these type are mainly held for their income-generating
power and for other advantage like tax shelter etc. The investments are to be
valued at market price or cost price whichever is lower.
5. Loan Advances and Bill Purchased:- This is a primary source of income and
most profitable asset to a bank. The sum outstanding of all loans and advances
extended to the customers as well as bills purchased and discounted bills less
the amount of provisions made shall be exhibited. However, the loans
extended to the staffs shall not be disclosed under this head and should be
shown under other assets.
6. Fixed Assets:- All assets of long-term nature owned by the bank (land &
buildings, machinery, vehicles, office equipments etc) shall be accounted
under this head and be exhibited in the balance sheet at written down value
after deducting the depreciation from the total cost.

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 7. Other Assets:- The heading shall be used for accounting of any other tangible
or intangible assets, not mentioned above. Stationery stock, accrued interest on
investment, accrued on loan, sundry debtors, assets in transit, non-banking
assets, expenses not written off etc.

 Profit & Loss Account

The bank's profit & loss account is composed of interest, administrative expenses,
provision for possible losses, bonus provision, tax provision, investment provision,
etc. as expenses and interest, discount, commission, charges etc, as incomes. The
summary of the heads of account in the profit and loss account in the profit and loss
account of a commercial bank is given below.
A. Expenses Side
1. Interest Expenses:- Payment of interest on deposits accepted by the bank and
on the borrowings is shown under this head. Interest is regularly expensed off
for various deposits; inter bank borrowings, central bank borrowings and other
external obligations.
2. Employee expenses:- All expenses related to the employees of the bank for
the specific period shall be included under this head. Expenses included are
salary, allowances, pension, gratuity, training expenses, uniform expenses etc.
3. Office Overhead Expenses:- All expenses related to the office overhead of
the bank during the specific period shall be included under this head. Some of
the expenses under this head are house rent, insurance, audit expenses,
newspapers and magazines, advertisement etc.
4. Exchange loss:- The negative balance in exchange fluctuation gain/loss
account shall be exhibited under this head.
5. Non-Operating Expenses:-These are the expenses that have no direct
relationship with the operation of banking transaction. Some of the examples
are loss on sale of investment and loss on sale of assets.
6. Bad debts written off:- Where the bank has written off loans on account of
being unrecoverable, such written off amount to the extent not covered by loan
loss provision shall be charged to profit and loss account under this head.
7. Provision for Possible Loss:- This is one of the most important heads of
account related to the profitability of the bank. As per the directive of the
Nepal Rastra Bank, the banks are required to make provision for loan losses.

29
 The provisions are to be made on the basis of the expiry dates on the principal
amount of the loans and advances. As per the directive the provisions to be
made is as follows.
Category Provision required Criteria
Pass 1% due upto 3 months
Substandard 25% due upto 3 - 9 months
Doubtful 50% due for 9 months - 2 year
Loss 100% due for more than 2 years
However, in case of bills purchased items, provision is to be provided at 1% if
it stands due for 90 days and in case it remains due for more than 90 days
100% provision is required. (NRB, 2062 A.D, 36)
8. Provision Staff Bonus:- The amount of bonus set aside for payment to staffs
is disclosed under this head. As per the Nepal Rastra Bank directives the bank
is entitled to make provision for the staff bonus at 10% on the net profit after
adjustment for loan loss provision.
9. Provision for Income Tax:- The amount of income tax on net taxable profit
for the period shall be determined through this head. Taxable profit has to be
determined considering the allowable and disallowable expenses as per the
prevailing income tax act and finance bill.
10. Net Profit:- This figure represents the excess of total income over total
expenses of the bank during the period.

B Income side
1. Interest Income:- This is the primary source of income of any commercial
bank. Under this head the interest received from the customers on behalf of the
loans and advances and on the investments of the bank is exhibited. However,
Nepal Rastra Bank has established several criteria for he recognition as
interest income.
The interest income should be recognized on cash basis.
The amount of interest accrued but not received, have to be credited tothe
interest suspense account.

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 In cast of the interest accrued is realized within one month from the date of
closure of fiscal year, such amount may be recognized in the income of the
earlier fiscal year.
The interest on loans and advances should not be recovered by overdrawing
the borrower's current account or where overdraft limit has been extended by
overdrawing such limit.
2. Commission and Discount:- The total amount of commission, service
charges and discount earned by the bank from the transactions during the
period shall be exhibited under this head. Some examples are commission on
issue of guarantees, commission on issuance of L/C etc.
3. Exchange Gain:- Banks deal with foreign currencies. Foreign currencies are
remitted outwards and inward. Banks involve in trade while dealing this
transaction. Banks make trading gain while selling and buying foreign
currency stocks for their trade as well as banks gain from revaluation the stock
whenever the exchange rates are in their favor. Both the trading gain and
revaluation gain are exhibited under this head.
4. Non-Operating Income:- Income or profit that has no direct relationship with
the operation of banking transaction has to be recognized into profit and loss
account under this head. These incomes are casual source of income and are
not from regular course of business but from other sources where the business
entity can be involved legally as prescribed by the directives if related
government authority. Nepalese commercial banks are allowed to invest in the
share of another entity like other commercial banks, rural development banks,
financial institution and other government institutions. The investing bank
receives dividend income and other income.
5. Other income:- Receipts of all other income not specifically provided under
the income heads as above shall be booked under this head e.g. rental income
of safe deposit boxes, income from telex, service charge, renewal charges etc.
6. Net loss:- The figure represents the excess of total expenses over total income
of the bank during the period.

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2.2 Review of Related Studies
2.2.1. Review of Articles
Poudel (2052) "The People's Republic of China Commercial Bank Law" was
promulgated formally defined as the nature of commercial banks in financial firms.
Since it is a business, of course we wanted to pursue profit maximization as its
operating principles and the ultimate goal to "make their own decisions, self-
financing, self-risk," As a result, the banking sector non-performing assets become
increasingly apparent. In the banking system before the transition is not bad assets,
but this risks the country, the banking sector, the exposure to the country under the
umbrella; mechanism for the transition, the non-performing assets to themselves and
resolved by the banking sector, banking left the "umbrella", then the risk of non-
performing assets also exposed. China has joined the WTO, countries want
development, we must move forward with ease; the banking industry to develop and
compete with foreign banks, we must improve the "body", the key lies in doing the
banking sector non-performing assets disposal. "Solution-maker," and in order to
effectively dispose of non-performing assets, we must thoroughly understand the root
cause of the problem, the eradication of bad assets of soil, blocking the source of bad
assets. Non-performing assets like fire accidents, we cannot bear to prevent the
occurrence of fire accidents, but the accident rate can be reduced to a minimum. What
caused the non-performing assets of the banking industry into being? Writer after in-
depth reflection that the non-performing assets of the banking sector problems arise
deep root system, where the existing system of property rights reasons, but also the
credit system and institutional reasons. In the final analysis is the inefficient allocation
of financial resources results.

The disposal of non-performing assets should be divided into two, on the one hand to
block the source of bad assets, that is incremental to solve problems; the other hand,
has been formed for the effective disposal of non-performing assets, that is to solve
the problem of stock. In the incremental and stock issues should insist on treating the
symptoms, clear the stock of non-performing assets, treatment is standard, while the
control of the new non-performing assets continue to generate is the. Banking non-
performing assets should not be a good and bad assets, the accounting rates, non-
performing assets and asset stripping of the packaging and sale of a simple process,

32
which also includes institutional reforms, banking system reform, reconstruction of
the relationship between banks and enterprises, etc. , in particular the production of
non-performing assets of banking system has profound roots, only deepening the
reform of banking systems in order to achieve the purpose of effecting a permanent
cure.

Pradhan (2058) in his article “NPA: Some Suggestions to Tackle Them” found saying
that unless the growth in NPA is kept in control, it has the potential to cause
systematic crisis. He has mentioned that a dream of globalization led to huge
investment which unfortunately could not be utilized properly due to hesitant
liberalization policies. Large corporate misused the credits and delayed payments and
contributed indirectly for enhancing NPA ratio. He further argues the lack of vision in
appraisal of proposal while loan sanctioning, reviewing or enhancing credit limits,
absence of risk management policy of financing, concentration of credit in few group
of parties and sector. Lack of initiatives to take timely action against willful
defaulters, indecision on existing out of bad loans for fear of investigating agencies
like special police, CIAA, Public Accounts committee of the parliament have also
contributed in whatsoever measures to the worsening situation of NPA front. He
further pointed out that most crucial reason for the increase in the NPA is the shabby
and defaulter friendly legal system. Suggesting the remedy of NPA he adds that
administrative system should be strengthened, Legal reforms should be made and
Assets Reconstruction Company should be formed, Henderson (2003), CEO of RBB
turnaround is restructuring and collection of NPA.

Though these studies are found to be quite useful in their own side but the question of
NPA and its cause as well as effect on various aspects in commercial banks is yet to
be reviewed. In view of these, this study has been based on the various contributing
factors that increase NPA level in commercial banks in Nepalese perspective and its
effect on profitability position of the banks.

Dhungana (2063), in his well article, “Problems of NPL’s and the need of Financial
Discipline in the Nepalese Banking System”, has concluded that poor credit
management and deterioration in the quality of loans give birth to non-performing
assets. The internal measures play significance role to control the growth of NPL.

33
Best credit practices, culture and policies are required to strengthen the internal
factors. The banks should have a proper system and competency on risk management
and should ensure that risk are accurately identified, assessed and controlled properly.
A proper risk management is un doubtly an important tool for a good banking and
NPL management.

He further states that it can be expected that the financial sector reforms will lower
down the level of NPL from the existing level and strengthening the banks and
financial institution internally to manage the credit portfolio efficiently and support
will be continued to make a good credit culture in the system.

Shrestha (2060) “ex-governor of Nepal Rastra Bank” in his article published in The
Boss magazine says the management of bad loan is a high prioritized exercise in the
country for past 10 years. But the remarkable achievements have not been sighted yet.
Handover of management of two big government banks is an example of financial
sector reform action in the country. It has been almost 4 years of handover of
management of two big government banks to the foreign expert but the achievement
is not satisfactory. He identifies not only government banks but private sector banks
are also slowly affected by the non-performing loan. Therefore a strong focus should
made by management to reduce the level of NPL. He believes in co-ordination
between the borrower and the lender. He further says if a viable project is not being
completed in time and not being able to pay its interest in time the bank and the
project owner should sit together and find out the way to complete it rather than
blacklisting and running towards the legal action.

2.2.2 Review of Previous Thesis

Various studies have been conducted on the financial performance of
commercial banks of Nepal. Many of them are concentrated to Nepalese
commercial banks and only few are focused on joint venture bank especially
comparative studies. In this chapter, different previous studies have been
reviewed so that the chances of duplication will be avoided from the present study
and some newness can be created in this field of study.

34
Sapkota (2063), completed the study “Profitability Benchmarking of NB Bank” and
submitted to Shanker Dev Campus in partial fulfillment of the requirement of Degree
of Master in Business Studies.
His Main Objectives are as follows
To examine the profitability situation of the JV bank industry as a whole and
sample banks.
To analyze the profitability trend of NB Bank and the JV bank industry over
the last five years.
To ascertain the comparative position of profitability of NB Bank with respect
to other JV Banks.

His Research Methodologies are as follows

Research methodology is the focal part of the study. Ranges of financial and statistical
tools are used to analyze the collected data and to achieve the objectives of the study.
The analytical statistical tools such as graph, percentage, coefficient of correlation,
regression analysis and the technique of least square are adopted in this study.
Financial tools such as ratio analysis and trend analysis have also been used for
financial analysis.

The major findings of the study are as follows

A serious effort has to be made towards the NPA management. The assets
quality is the most serious issue in the organization and the sincere effort of
the management is to be concentrated in the matter if the bank is to sustain and
performs well in the forthcoming days.
The increasing NPA indicates that the bank seems to be lacking in the conduct
of detailed and proper credit appraisal and monitoring process. The bank
before extending the facilitates needs to make detailed analysis about various
aspects like feasibility of the party, creditworthiness of the client, collateral
offered and previous performances.
The risk inherent in the loans and advances is high. So, the complete
dependence on the interest income is not an appropriate strategy. The
contribution of interest income to total income in year 2062/63 is 78.59%

35
 while the rest contribute only 21.4%. So, the bank should look to increase the
fee-based income as it provides safe and good returns.
NB Bank Ltd. has always been at the top in cost of deposits. The high cost of
deposits not only incurs additional interest expenses but have other indirect
effects. The banks in order to make a return have to set interest rate on loans
and advances at a higher level than the market. So, the risk of potential NPAs
at a future data is high.
Interest payout ratio refers the proportion of interest expenses to the interest
income. Higher the ratio, lower is the profitability. The interest payout ratio of
NB Bank is at 68.34%, the highest of the lot. Therefore the bank should look
to minimize this ratio preferably by obtaining low cost funds.

Poudel (2063) in his thesis paper, “Comparative financial performance appraisal of

joint venture banks” with references to Everest bank limited and Nepal Arab Bank
Ltd

His Main Objectives are as follows

To analyzed relations between different ratios.
To examine the proportion of Comparative financial performance appraisal of
joint venture banks
To give suggestions and recommendations for the betterment of commercials
banks.

His Research Methodologies are as follows

Research methodology is the focal part of the study. Ranges of financial and statistical
tools are used to analyze the collected data and to achieve the objectives of the study.
The analysis of the data will be done according to pattern of data available. Because
of limited time and resources, simple analytical statistical tools such as graph,
percentage, coefficient of correlation, regression analysis and the technique of least
square are adopted in this study. Financial tools such as ratio analysis and trend
analysis have also been used for financial analysis.

36
His Major Findings are as follows
His study especially concentrated on the deposit collection of the bank and
disbursement of the fund as loan and advances.
He has focused on utilization and mobilization of funds and resources of
Nepal Bank Ltd.
He recommended that the bank should try to mobilize its resources efficiently
by creating new business
Service ideas which will certainly help for the better utilization of ideal
resources and for the economic development of the country.

Mandal (2064) in his thesis paper, “Comparative financial performance appraisal of

joint venture banks” has studied mainly three banks i.e. Nepal Arab Bank Ltd
(NABIL), Nepal Indosuez Bank Ltd.(NIBL), and Nepal Grindlays Ltd. (SCBNL). His
main finding is that both SCBNL and NABIL have mobilized the debt funds in proper
way for generating more return but NIBL could not do so as good as NABIL and
SCBNL. He has recommended enhancing banking facilities in rural areas by
encouraging small entrepreneurs development programmers, to play merchant
banking role to mobilize.

His Main Objectives are as follows

To analyze the lending practices and resources utilizations of NB bank.
To examine the correlation and the signification of their relationship between
different ratios related to capital structure

His Research Methodologies are as follows

In this research, data are analyzed by using different types of tools. As per topic
requirements, emphasis is given on statistical tools rather than financial tools. So for
this study following statistical tools and financial tools are use such as Loans and
advances to Total Risk Weighted Assets Ratio, non-performing Loan to Total Loans
and advances Ratio, Loan Loss Provision to Non Performing Loan, Arithmetic Mean
Standard Deviation and Hypothesis Test.

37
His Major Findings are as follows:
Hence, the bank has been suggested to manage its investment portfolio
efficiency
Operational efficiency of the bank is indicate by the operational loss has been
found unsatisfactory.

Tuladhar (2065) on his thesis entitled, “A study on Investment policy of Nepal

Grindlays Bank Ltd. in comparison to other Joint Venture Banks (NABIL and HBL).”
The study found that NGBL has been successful to maintain in the best way both
liquidity position and their consistency among three banks. Profitability position of
NGBL is better than NABIL and HBL.

His Main Objectives are as follows:

To analyze the impact of investment policy selected commercials banks.
To examine the correlation and the signification of their relationship between
different ratios related to capital structure

His Research Methodologies are as follows:

In his thesis the data are analyzed by using different types of tools. As per topic
requirements, emphasis is given on statistical tools rather than financial tools. So for
this study following statistical tools and financial tools are use such as Debt to Equity
ratio, Debt Ratio Interest Coverage Ratio, Earnings per Share, Price Earnings Ratio,
Return on Total Assets, Return on Share Holder's Fund or Equity, Arithmetic means,
Standard Deviation and Correlation Coefficient.

His Major Findings are as follows:

On the basis of this feedback information, regular changes or implementation
of new rules and regulations can be easily carried out.
NRB should also encourage frequent training to new entrants to provide
orientation on the conceptual dimensions and practical aspects of operation of
the banks

38
 Constraints of socio- economic political system on one hand and that of issues
and challenges of JVBs commanding significant banking business of other
spectrum
The collection of deposit and loan investment done by the commercial banks
also to sustain themselves in the environment of competitions,
They should introduce novel technology and equipment‟s to collect deposit.

Regmi (2066) on his thesis entitled, “A comparative study of financial performance

of Himalayan Bank Ltd and Nepal Bangladesh Bank Ltd.” He conducted a study
between HBL and NBBL. Some of the findings of the researcher are that HBL has
better profitability position than NBBL, so it is recommended to NBBL to utilize its
resources more effectively.

His Main Objectives are as follows:

To examine the relationship between different ratios.
To calculated and analyzed the financial and statistical tools.
To give recommendations and suggestions.

His Research Methodologies are as follows:

The research, data are analyzed by using different types of tools. For this study
following statistical tools Arithmetic mean, Standard Deviation, Correlation
Coefficient, Probable Error and Regression Analysis and financial tools Earnings per
Share, Price Earnings Ratio, Return on Total Assets and Return on Share are also use.

His Major Findings are as follows:

He has further suggests that both the banks should extends their resources to
rural areas to promote development
Hence, the bank has been suggested to manage its investment portfolio
efficiency
These are indeed significant milestone in the financial development process to
the economy
But keeping in mind, the social and economic structure of our country, we
should not turn a deaf ear to regional balance.

39
Pokhrel (2067) on his thesis entitled, “A comparative study on financial performance
of Nepal Bangladesh bank Ltd and Everest Bank Ltd.” was concluded to analyzes,
examine an interpret the financial performance of NBBL and EBL for the study. The
study finds out that the average net profit margin remains greater in NBBL. Higher
CV in EBL suggests greater fluctuation in the ratio over the period. EBL found to be
weaker in utilizing the bank assets for the profit generation. EBL holds greater
capacity in paying immediate obligation as revealed by the higher cash and bank
balance to current assets ratio.

His Main Objectives are as follows:

To analyze the impact of financial performance of Nepal Bangladesh bank Ltd
and Everest Bank Ltd
To examine the correlation and the signification of their relationship between
different ratios related to capital structure

His Research Methodologies are as follows:

The research is analyzed by using different types of tools such as statistical tools and
financial tools ie. Earnings per Share, Price Earnings Ratio, Return on Total Assets
Return on Share, Holder's Fund or Equity, Arithmetic mean, Standard Deviation
Correlation Coefficient, Probable Error and Regression Analysis.

His Major Findings are as follows:

Therefore, there should be the awareness program, regularly conduced in
terms of seminars
Workshop from well experienced personnel such as top executives from
banks and concerned regulating authorities.
They should introduce novel technology and equipment‟s to collect deposit.
His study especially concentrated on the deposit collection of the bank and
disbursement of the fund as loan and advances.
Financial credit worthiness of the borrower must be evaluated properly before
granting the loans.

40
Adhikari (2068) in his study entitled, “Evaluating the financial performance of
Nepal Bank Limited” has calculated and analyzed the different ratios by observing
figures of balance sheets of Nepal Bank Limited for the period FY 2038/39 to
2049/50. He remarked that the bank is not found to have been able to utilize its fund
effectively and efficiently for the development of the economy.

His Main Objectives are as follows:

To examine the Evaluating the financial performance of Nepal Bank Limited
To calculated and analyzed the financial and statistical tools by using
secondary and primary data.

His Research Methodologies are as follows:

The research is analyzed by using different types of tools. For this study following
statistical tools and financial tools are use such as Loans and advances to Total Risk,
Weighted Assets Ratio, Non-performing Loan to Total Loans and advances Ratio,
Loan Loss Provision to Non Performing, Loan Ratio Loan Loss Provision to Total
Loans and Advances, Arithmetic mean, standard Deviation, Correlation Coefficient,
Probable Error, Regression Analysis and Test of Hypothesis.

His Major findings are as follows:

The collection of deposit and loan investment done by the commercial banks
also to sustain themselves in the environment of competitions.
The deposit funds in productive sectors and to grants more priority to the local
manpower.
Economic development of a country cannot be imagined without the
development of commerce and industry
He has focused on utilization and mobilization of funds and resources of
Nepal Bank Ltd.

2.3 Research Gap

Today‟s world is marketed by rapid changes and new developments, as such
researchers conducted a few years back may not be adequate to explain current
phenomena. Thus continuous attempt needs to be taken and new researches had

41
conducted to build our existing knowledge base, interpret and analyze events in the
face of dynamism. The past financial institution were depends only the interest
margin but in present economic dynamism, only the interest margin is not
sufficient to improve profitability so this research has tried to analyze the extra
ordinary items of income generation in financial institution. To find the new
developments and to bridge the gap between the past research and the present
situation, this research has been set out to conduct the research in this
stimulating topic. The researcher has been through many literature reviews and
given the best to fulfill this work. In this research effort had been made to
understand the Profitability analysis of ADBL and hope this research will be fruitful
for future researchers as reference.

42
 CHAPTER-III
RESEARCH METHODOLOGY

3.1 Introduction
Research methodology is a sequential procedure and collection of scientific methods
to be adopted in a systematic study. In other words, research methodology describes
the methods and process applied in the entire of the study. It is a way to
systematically solve the research problem. It may be understood as a science of
studying how research is done scientifically. In it we study the various steps that are
generally adopted by us in studying his/ her research problem along with the logic
behind them. It consists of research design, population and sampled source of data,
data processing procedure and tools & techniques of analysis of data.

3.2 Research Design

Research Design is a method of defining the research problem. According to C.R.
Kothari, “Research design is a plan, structure and strategy of investing conceived so
as obtain answer to research question and to control variances”. Research design
refers to the framework of the study. It is the blue print for any kinds of studies.
”Research design is the arrangement of condition and analysis of data in a manner that
aims to combine relevance to the research purpose with economy in procedure.

Research design is plan for collection and analysis of data. The purpose of design is to
provide answer to research questions and control variance. Some financial &
statistical tools will be used to examine the facts and descriptive techniques to
evaluate the financial performance of three banks and comparing between themselves.
This study aims to find out the relation of financial performance of three commercial
banks fully managed and owned by Nepalese entrepreneurs. The research design used
for is basically, a historical, empirical, descriptive-cum-analytical research
methodology.

43
3.3 Populations and Sample
Currently, there are 32 commercial banks in Nepal. So this study chooses the
Agricultural Development Bank Limited as sample for study. The financial statements
of latest five years (i.e. from 2063/2064 to 2067/2068) have been taken as sample data
for analyzing the financial performance.

3.4. Nature and Sources of Data

The study is mainly based on secondary data. Data relating to financial performance
of the bank is directly obtained from concerned bank and their websites. The
supplementary data were obtained from unpublished official records of concern bank,
bank‟s staff, booklets, and journals and other sources viz. Security Exchange Center
and Nepal Rastra Bank.

3.5 Data Processing Procedure

The data analysis tools are applied as simple as possible. Data obtained from the
various sources cannot directly be used in their original form. They need to further
verified and simplified for the purpose of analysis. Data, information, figures and
facts so obtained need to be checked, rechecked, edited and tabulated for
computation. According to the nature of data, they have been inserted in meaningful
Tables, which have been shown in appendices. Homogeneous data have been sorted
in one Table and similarly various Tables have been prepared in understandable
manner, odd data are excluded from the Table. Data have been analyzed and
interpreted using financial and statistical tools. The detail calculations that cannot be
shown in the body part of the report are presented in appendices at the end of the
report.

3.6 Tools and Techniques of Analysis

On the basis of historical data financial and statistical tools are used to analysis of
different variables.

3.6.1. Financial Tools

Financial tools are those, which are used for the analysis and interpretation of
financial data. These tools can be used to get the prescribe knowledge of business

44
which in turn are fruitful in exploring the strength and weakness of the financial
policies and strategies. In order to meet the purpose of study, various financial tools
have been used. Financial formulas are as follows:

i. Actual LABP status to Actual Deposit Collection

As it is understood that the major source for resources mobilization of the bank is the
customer deposit and similarly, the major outlet for deployment portfolio is for loan,
advance and bills purchase (LABP), it is desirable to analyze the comparative status
of the same.
Actual LABP Status
Actual Deposit Collection

ii. Interest Expenses to Total Deposit

Interest expenses are the expenditure incurred for making payment of interest to the
deposit collected by the bank. As the customer deposit holds a major share on total
resources of the bank, interest is also highest among others in total expenses of the
bank. This is calculated by interest expenses by total deposit.
Interest Expenses
Total Deposit

iii. Interest Income to LABP

As interest income contributes the major portion of Total revenue mix, this study
attempts to analyze the interest income amount with other relevant data.
Interest income is generated out of the loan and advances made by the bank. This is
calculated by interest incomes to LABP By equity capital. This can be presented as,
Interest Income
LABP

iv. Current Assets to Current Liabilities

The ability of a firm to meet its obligation in the short term is known as liquidity. It
reflects the short term financial strength of the firm. Now the current ratio to measure
relationship of current assets & current liabilities. It is calculated by dividing the total
current assets by total current liabilities

45
 Current Assets
Current Liabilitie s

v. Debt Equity Ratio to Equity Capital

The relationship between borrowed fund and owner‟s equity is known as debt
equity ratio. The standard ratio of debt ratio is 4:1. This shows the capital structure of
any organization. This ratio is calculated by debt equity by equity capital. This can
be presented as,
Debt Equity
Equity Capital

vi. Return on Equity (ROE)

It shows the overall efficiency of the organization. It also shows the profitability
position of the bank. This ratio is calculated as net income after tax divided by total
equity capital. ROE ratio, on the other hand, is a measure of the rate of return
flowing to the Bank s shareholders.

Net Income
Equity Capital

vii. Return on Assets (ROA)

This ratio measures the overall profitability of Total assets. It is also known as Return
on Assets (ROA). This ratio is calculated by dividing net profit (loss) by total
assets. This can be presented as,
Net Income
Total Assets

viii. Earnings per share (EPS)

EPS refers to net profit divided by total numbers of share outstanding. EPS
measures the efficiency of a firm in relative terms. It is a widely used ratio, which
measures the profit available to the ordinary shareholder on per share basis.
The amount of EPS measures the efficiency of a firm in relative terms. This
ratio is calculated as,

46
 Net Income
No of Share

3.6.2 Statistical Tools

Various statistical tools can be used to analyze it. These tools are used in order to
draw the reliable conclusion through the analysis of financial data. Following tools
are used for this purpose.

[Link] Arithmetic Mean

An average is a single value selected from a group of values to represent them in same
way, which is supposed to stand for whole group of which it is a part, as typical of all
the values in the group (Waugh A.E). Out of various measures of the central
tendency, arithmetic mean is one of the useful tools applicable here. It is easy to
calculate and understand and understand and based on all observations.

Arithmetic mean of a given set of observations is their sum divided by the number of
observation. In general, if X1, X2, X3-----------Xn are the given observations, then
arithmetic mean usually denoted by X is given by;

X1 X2 X3 .........X n X
X= =
n n
Where, n = number of observation.

[Link] Standard Deviation

Average like other mean, mode and medium gives us the idea of concentration of the
items around the central part of distribution. But average do not gives clear picture
about the distribution because two distributions with same average may differ in the
scatter ness of the items from the central value. To remove this drawback, dispersion
is used. Dispersion is defined as the measure of variation I the item from the central
value. Among various measure of dispersion, standard deviation is widely used.
Standard deviation is absolute measure of dispersion, which defined as the positive
square root of the mean of the square of deviation taken from the arithmetic means, if
X1, X2, X3------Xn are the given observations, then standard deviation denoted by σ
is given by;

47
 2 2
X X
σ=
n n

Where, n= number of observation in series X

ΣX =Sum of observation in series X
ΣX2 = Sum of squared observations in series X

Standard deviation is the absolute measure of dispersion. The relative measure of

dispersion based on the standard deviation is known as the Coefficient of Standard
deviation.
S tan dard deviation
Coefficient of S.D. = =
Mean X
The coefficient of dispersion based on standard deviation multiplied by 100 is known
as
Coefficient of Variance and written, as C.V is given by;

C.V = 100
X
It is independent unit. So two distributions can bitterly compared with the help of
C.V. for their variability. Less the C.V more will be the uniformity consistency etc
and more the C.V less will be the uniformity consistency etc.

According to Prof. Karl Pearson, coefficient of variation is the percentage variation in

mean, standard deviation being considered as the total variation in the mean. It is one
of the relative measures of dispersion that is useful in comparing the amount of
variation in data groups with different mean.

For comparing the variability of two distributions, we compute the coefficient of

variation for each distribution. A distribution with smaller CV is said to be more
homogeneous or uniform or less variable than other. Conversely, a series with greater
CV is said to be more variable or heterogeneous than the other (Gupta, S.C.
2000:769).

48
[Link]. Correlation Coefficient Analysis
If the distribution consists of two variables then correlation is used to find out the
relation between them. Two variables are said to correlation when they are so related
that the change in the value of one variable is accompanied by the change in the value
of other. Correlation is the measure of relationship between two or more
characteristics of population or sample. It is simply measure the chance between the
phenomenon‟s (Joshi, R.P. 2001).

Correlation is a statistical tools with the help of which we can determine whether or
not two or more variable are correlated & if they are correlated the degree (extent)
and direction of correlation is determined (Shrestha S and Silwal D.P)

Correlation is the statistical tools that we can used to describe the degree of which one
variable is linearly related to another. The coefficient of correlation measures the
degree of relationship between two set of figure. Among the various method of
finding out coefficient (i.e. Karl Pearson‟s Coefficient of Correlation, Spearman‟s
Rank Correlation Coefficient, Kendall‟s Tau etc); Karl Pearson’s method is applied
in this study.

If two variables vary in the same direction i.e. if increase (or decrease) in the value of
one variable result increase (or decrease) in the value of other variable, then two
variables are said to have positive correlation. Similarly, the two variables are said
have negative correlation if they very in the opposite direction i.e. if increase (or
decrease) in the value of one variable result decrease (or increase) in the value of
other variable.

One of the widely used mathematical methods of calculating the correlation

coefficient between two variables is Karl Pearson‟s Correlation coefficient. It is also
known as Pearson‟s correlation coefficient & denoted by rxy or, simply r. if x be the
one variable and y be the other variable with n number of observation then r is
defined;
n XY X Y
r=
2 2
n X2 X Y2 Y

49
Where,
n = number of observation in series X and Y
ΣX= Sum of observations in series X
ΣY= Sum of observation in series Y
ΣX2= Sum of squared observations in series X
ΣY2= Sum of squared observations in series Y
ΣXY= Sum of the product of observations in series X and Y
The result of correlation coefficient is always lies between –1 & +1
When, r = +1, there is positively perfect correlation between two variables
When, r = -1, there is negatively perfect correlation between two variables
When, r = 0, there is no correlation between two variables or the variables are
uncorrelated.
Neither the value of r to +1, closer will be relationship between two variables nor will
the value of r to 0 lesser be the relationship between two variables.

Probable Error of Correlation Coefficient

Probable error of correlation coefficient is an old measure of testing the reliability of
an observed value of correlation coefficient. It is calculated to find the extent to which
correlation coefficient is dependable as it depends upon the condition of random
sampling.

Probable error of correlation coefficient denoted by P.E(r) is obtained as;

1 r2
P.E(r) = 0.6745
n
where,
1 r2
= Standard Error
n
Reasons for taking 0.6745 is that in a normal distribution 50% of observation lie in
the range μ ± 0.6745 σ where, μ and σ denoted the populations mean and standard
deviation.

50
P.E(r) is used to test if an observed value of sample correlation coefficient is
significant of any correlation in the population. It is used to interpret whether the
calculated value of r is significant or not.
If r>P.E; correlation is insignificant. So there is no evidence of correlation
If r>6P.E. r is definitely significant.

[Link] Trend Analysis

Trend analysis is a very useful and commonly applied tool to forecast the future event
in quantitative term, on the basis of the tendencies in the dependent variable in the
past period.

The straight-line trend implies that irrespective or decrease by absolute amount per
unit of time. The linear trend values form a series in arithmetic progression.

The tools that are used to show gradually increase or a decrease of variable over a
period of time is known as trend analysis. With the help of trend analysis the tendency
of variables over the period can be seen clearly.
Mathematically, Y= a + bx
Where,
Y = the value of dependent variable
a = Y-intercept, b = slope of the trend line
X = value of the independent variable i.e. time = Year-2006/07 (with regard to the
data used in the study)
Normal equations fitting above equation are;
ΣY = Na + bΣX
X xy
ΣXY = aΣX + bΣX2 since ΣX = 0 a= ,b=
N X2

For this study, the following variables are used: Total Deposits, Loans and Advance,
Performing Assets, Net Profit and Net worth etc.

[Link] Diagrammatic & Graphical Representation

Diagrams and graphs are visual aids that give a bird‟s eye view of a given set
numerical data. They present the data in simple and readily comprehensive form.

51
Diagrams are primarily used for comparative studies and can‟t be used to study the
relationship between the variables under study. This is done through graphs.

3.7 Period Covered

This study covers a period of five years from FY 2063/64 to 2067/68 of ADBL.

52
 CHAPTER IV
DATA PRESENTATION AND ANALYSIS

4.1 Introduction
In this chapter, various elements and variables related with profit of ADBL are
analyzed. This study is mainly focused on analysis of revenue collection, deposit,
loan and advances, investment, assets etc. by using financial and statistical tools,
such as mean, standard deviation, coefficient of variation, variance analysis,
correlation analysis and ratio analysis. For this purpose, data of 5 years period from
F/Y 2063/64 to 2067/68 of ADBL are used.

4.2 Resource Mobilization

The term resources have been used for the sources of fund required by the bank for its
activities. Bank mobilizes its resources from the following sources:
 Deposit collection
 Loan and borrowing from others
 Capital fund

Among the above sources, the deposit collection is the major source of
resource mobilization, which is in fact, one of the most important activities of a
commercial bank. Loan and borrowing are obtained from local banks, foreign
banks, central bank and other financial institutions generally for a short period of
time.

The capital fund which includes reserve fund also is raised from shareholder‟s
equity. This is the net worth of the bank capital fund of commercial bank is divided
into two categories viz. core capital and supplementary capital.
Following table shows the resources mobilized by the bank over the period of
study.

53
 Table 4.1
Status of Resource mobilization
Amount in Rs „000‟

F/Y 63/64 64/65 65/66 66/67 67/68

Capital 7,528,000 10,777,500 10,777,500 9,437,500 9,474,300
% Share 17.06 22.10 20.97 19.23 18.36
Deposit 32,416,358 32,553,827 35,149,610 32,472,568 34,394,627
% Share 73.46 66.76 68.40 66.17 66.64
Borrowing 373,947 257,372 198,250 259,562 243,701
% Share 0.85 0.53 0.39 0.53 0.47
Other liabilities 3,812,070 5,174,995 5,261,986 6,902,673 7,496,652
% Share 8.64 10.61 10.24 14.07 14.53
Total 44,130,375 48,763,694 51,387,346 49,072,303 51,609,280
Source: Auunal report of ADBL 063/64-067/68

The table 4.1 shows that the status of resource mobilization from the fiscal year
2063/64 to 2067/68. It could be said that the bank has substantially fund
collection from deposit collection. The bank has increased capital fund every year
except in the F/Y 2066/67. Other liability is in fluctuating trend over the study period.
From the table, it was observed that the customer deposit collection contributes
the major share in resource mobilization, which was more than 65 %. Therefore,
total source of resources mobilization comprised of two categories as follows:
a. From Customer Deposit Collection (Deposit)
b. From other sources than Customer Deposit (RCOD)

4.2.1 Deposit Collection

Customer Deposit is the major source of resource mobilization of the bank.
The contribution of customer deposit to total resources is high. Deposit is
collected form various sectors such as licensed institutions, other organized
institutions, individual and others, which qualify to open an account in the Bank.
If deposits are utilized properly, it will increase the profit of the bank. As per the
data of study period, the contribution of customer deposit to total resources of
ADBL is 73.46 %, 66.75%, 68.40% and 66.17% and 66.64% in F/Y 2063/064 to

54
F/Y 2067/068 respectively. Deposits are collected on customer‟s accounts, which are
opened as per the bank‟s policy. The customer‟s deposit accounts are of two
types: One is non-interest bearing deposit account and another is interest bearing
deposit account.
1. Non Interest Bearing Account
i. Current Deposits A/C
ii. Margin Deposits A/C
iii. Other Deposits A/C
2. Interest Bearing Account
i. Saving Deposits A/C
ii. Fixed Deposits A/C
iii. Call Deposits A/C
Table 4.2
Deposit Position of ADBL
Amount in Rs „000‟
Fiscal Year Interest free(A) Interest bearing(B) Total
63/64 2,262,859 30,153,498 32,416,357
64/65 2,397,401 30,156,425 32,553,826
65/66 2,246,743 32,912,867 35,159,610
66/67 2,415,763 30,056,805 32,472,568
67/68 2,929,201 31,765,426 34,694,627
Source: Auunal report of ADBL
Figure 4.1
Deposit Position of ADBL Bank

40,000,000

30,000,000
Amount

20,000,000
10,000,000 Interest free(A)
0 Interest bearing(B)
63/64 64/65
65/66 66/67
67/68

Fiscal Year

Source: Table: 4.2

55
The table 4.2 and figure 4.1 show that percentage of interest free deposit is almost
equal all over the research period from F/Y 2063/064 to F/Y 2067/68. Similarly,
percentage of interest bearing deposit is also in same trend. This indicates that the
overall management system of the bank is efficient. This also indicates the
planning system of deposit is also good. Good customer services, quality
services, adequate and trained human resources, goodwill of the bank and good
governance are the main feature of the efficient management system and ADBL
is considering all those to attract the customers and increase the deposit position.

[Link] Trend analysis of deposit

Table 4.3
Trend analysis of deposit
Amount in Rs „000‟
Trend value
Fiscal Year Deposit (Actual value) Yc =a+bx
63/64 32,416,358.40 32624343
64/65 32,553,827.50 33011871
65/66 35,159,610.20 33399398
66/67 32,472,568.50 33786926
67/68 34,394,627.50 34174454
68/69 34561982
69/70 34949510
70/71 35337038
71/72 35724566
72/73 36112094
Source: Annex- 4

56
56
 Figure: 4.2
Trend analysis of deposit
37000000
36000000
35000000
34000000
33000000
32000000 Trend value Yc =a+bx

31000000
30000000
63/64
64/65
65/66
66/67
67/68
68/69
69/70
70/71
71/72
72/73
Fiscal Years

Source: Table 4.3

The table 4.3 and figure 4.2 show that the trend analysis of deposit from the fiscal
years 2063/064 to 2071/72. The trend line of deposit is increasing trend in the starting
to end years. The trend value is 32624343 in the fiscal years 2063/64 and 35724566 in
the fiscal years 2071/72.

4.2.2 Resource other than Customer Deposits

Resources other than customer deposit (ROCD) are formed with the capital fund,
borrowings, reserve fund and other liability. The following table shows the ROCD
over the period of study.
Table 4.4
Resource other than Customer Deposits
Amount in Rs „000‟

Fiscal Year ROCD Change in Amount % Change

63/64 5,743,853
64/65 11,132,922 5,389,069 93.82
65/66 16,659,128 5,526,206 49.63
66/67 21,277,658 4,618,530 27.72
67/68 24,846,737 3,569,079 16.77
Source: Auunal report of ADBL

57
 Figure 4.3
ROCD of ADBL

25000000
20000000
Amount

15000000
10000000
ROCD
5000000
0
63/64 64/65 65/66 66/67 67/68
Year

Source: Table 4.4

The table 4.4 and figure 4.3 show that ROCD is fluctuating trend. In F/Y 2065/066, it
was increased by 49.63 % than previous year. The bank has made maximum
increment in borrowings, capital fund and reserve fund therefore, the ROCD is highly
fluctuating. Minimizing its borrowings level and increasing its capital fund and
reserve fund is good for the bank. The bank should also try to increase its other source
of resources. In the recent year there is only very less fluctuation which shows the
bank is trying to maintain stability in its resources other than customer deposit. The
chart also shows that ROCD is increasing trend due to bank‟s policy to decrease
borrowings and to decrease debt ratio and increase capital fund and reserve
fund.

58
[Link] Trend analysis of Resource other than Customer Deposits
Table 4.5
Trend analysis of ROCD
Amount in Rs „000‟
Yc = a+ bx
Fiscal Year ROCD (y)
63/64 5,743,853 6261959
64/65 11,132,922 11097010
65/66 16,659,128 15932060
66/67 21,277,658 20767110
67/68 24,846,737 25602161
68/69 30437211
69/70 35272262
70/71 40107312
71/72 44942362
72/73 49777413
Source: Annex- 5
Figure: 4.4
Trend analysis of Resource other than Customer Deposits
60000000

50000000

40000000

30000000

20000000
Yc = a+ bx
10000000

Fiscal Years

Source: Table 4.5

The table 4.5 and figure 4.4 show that the Trend analysis of Resource other than
Customer Deposits from the fiscal years 2063/64 to 2071/72. The trend line is

59
increasing trend in the every year. The trend value is 6261959 in the starting years and
44942362 in the ending years.

4.3 Resource Deployment

Deployment of the resources refers to the reasonable allocation of the resources for
making comfortable liquidity as well as investing in income generating activities.
Besides these, some investments have to be made in fixed assets and other
operating assets for the bank. The deployment of available resources can be
objectively categorized as below.

1. Deployment for liquidity:

This is made for meeting expected withdrawal and other kind of payments
obligations of the bank. The resource for this purpose is kept in liquid form such as
cash in vault, cash at bank etc. generally, there is no yield on this type of
deployment expecting in the case money placed in interest bearing accounts. The
central bank of Nepal, NRB has instructed commercial bank to maintain
approximately 20% of their customer deposit liability as liquid form (Cash in Vault
and at NRB). For this study, cash and bank is grouped in one deployment portfolio.

2. Deployment for income generating activities:

Bank deploys the major portion of the resources for income generating activities
popularly called as fund based exposure. Fund base exposure is taken by the bank in
following two portfolios:

(i) Loans, Advances and Bills purchased (LABP)

(ii) Other Investments

LABP includes all loans, advances, overdraft, bills purchased/discounted and other
types of loan availed to the borrowers of the bank in return of which the bank earns
interest income. Other investment includes investment shares, treasury bills,
placement of fund on call market etc.

60
 3. Deployment in other assets:
This includes the deployment of the resources towards the non yielding assets such as
fixed assets, other capital expenditure subject to write off in future course of
time, income receivable; advance payments, sundry debtors etc. Following table
shows the status of resources deployed by the bank over the study period.
Table 4.6
Status of Resource deployed
Amount in Rs „000‟
Resource Deployed 63/64 64/65 65/66 66/67 67/68
Cash and Bank Balance 3,689,320 3,623,997 5,207,651 4,161,405 4,808,953
% Share 9.71 8.30 10.50 7.94 8.12
LABP 27,252,333 30,589,428 32,603,095 33,876,956 34,459,918
% Share 71.72 70.10 65.77 64.64 58.20
Investment 3,177,460 4,757,096 4,896,061 4,540,083 7,267,285
% Share 8.36 10.90 9.88 8.66 12.27
Fixed assets 788,867 781,149 803,332 968,744 1,022,893
% Share 2.08 1.79 1.62 1.85 1.73
Other assets 3,090,629 3,885,081 6,064,397 8,861,692 11,655,022
% Share 8.13 8.90 12.23 16.91 19.68
Total 37,998,609 43,636,751 49,574,536 52,408,880 59,214,071
Source: Auunal report of ADBL

LABP was the major area for deployment of resources of the bank. After
LABP, investment and other assets were the second major area for deployment of
resources. The bank has been investing mainly in the Treasury Bills and Security
Bonds issued by Nepal Govt. The Banks seems to have maintained certain amount as
cash and bank balance as well.

From the above analysis, it could be said that the bank has increasing deployment of
resources significantly. The bank could able maintained to balance the cash and bank
balance within limit prescribed by NRB guidelines of at least of 20% of
deposit collection. Likewise, LABP and Investment are major deployment sector of
the bank. In this study, deployment has been segregated into following three
categories:
 Deployment in LABP
 Deployment in Investment

61
  Deployment in other portfolio (OP)

4.3.1 Deployment in loans, advance and bills purchase (LABP)

Table 4.7
Deployment in loans, advance and bills purchase (LABP)
Amount in Rs „000‟
Fiscal year LABP Change in LABP % Change
63/64 27,252,333.00 - -
64/65 30,589,428.00 3,337,095 12.25
65/66 32,603,095.00 2,013,667 6.58
66/67 33,876,956.00 1,273,861 3.91
67/68 34,459,918.00 582,962 1.72
Source: Auunal report of ADBL

Figure 4 .5
Deployment in loans, advance and bills purchase (LABP)

35,000,000.00
30,000,000.00
25,000,000.00
Amount

20,000,000.00
LABP
15,000,000.00
10,000,000.00
5,000,000.00
-
63/64 64/65 65/66 66/67 66/68
Year

Source: Table 4.7

The table 4.7 and figure 4.5 shows that total amount of LABP is fluctuating every
year. In F/Y 2066/067, it was increased by 3.91% and 1.72% in the F/Y 2067/68 than
previous year. The main reason of increasing was political and business environment
of the country. Due to political stability and market share, LABP was in increasing

62
trend over the period of study but the increment is in the decreasing trend in each year
as shown in the table.

[Link] Trend analysis of LABP

Table 4.8
Trend analysis of LABP
Amount in Rs „000‟
Trend value
Fiscal Year LABP (actual value) Yc= a+bx
63/64 27,252,333.00 28215806
64/65 30,589,428.00 29986076
65/66 32,603,095.00 31756346
66/67 33,876,956.00 33526616
67/68 34,459,918.00 35296886
68/69 37067155
69/70 38837425
70/71 40607695
71/72 42377965
72/73 282700616
Source: Annex- 6
Figure: 4.6
Trend analysis of LABP

45000000
40000000
35000000
30000000
25000000
20000000
15000000
10000000 Trend value Yc= a+bx
5000000
0

fiscal years

Source: Table 4.8

63
The table 4.8 and figure 4.6 show that the trend analysis of LABP from the fiscal
years 2063/64 to 2071/72. The trend analysis of LABP is increasing trend from the
starting years to last years. Its show the good result for present and future.
4.3.2 Deployment in Investment
Investment was the major area for deployment of resources of the bank. Increase in
investment will increase return so bank should try to invest in secured sector.

Table 4.9
Resource deployed in investment
Amount in Rs „000‟
Fiscal Year Investment Change in investment % Change
63/64 3,177,460
64/65 4,757,096 1,579,636 49.71
65/66 4,896,061 138,965 2.92
66/67 4,540,083 -355,978 -7.27
67/68 7,267,285 2,727,202 60.07
Source: Auunal report of ADBL

Figure 4.7
Resource deployed in investment

8,000,000

6,000,000
Amount

4,000,000

2,000,000 Investment

0
63/64 64/65 65/66
66/67
67/68
Year

Source: Table 4.9

The table 4.9 and figure 4.7 show that the investment is increasing in decreasing trend
and became negative in the F/Y 066/67. It might be because of the political instability,

64
global recessions and unfavorable business environment in the country as well as
investment policy of the bank. This also indicates that bank invest in secured sectors
only. Increase in investment in secured sectors will increase the return of the bank.

4.3.3 Deployment in other portfolio (OP)

Deployment in other portfolio includes cash and bank balance, fixed assets and
other assets.
Table 4.10
Resource deployed in other portfolio
Amount in Rs „000‟
Fiscal Year Other Portfolio Change in Portfolio % Change
63/64 7,568,816 - -

64/65 8,290,227 721,411 9.53

65/66 12,075,380 3,785,153 45.65

66/67 13,991,841 1,916,461 15.87

67/68 17,486,868 3,495,027 24.97

Source: Auunal report of ADBL

Figure 4.8
Resource deployed in other portfolio

18,000,000
16,000,000
14,000,000
12,000,000
Amount

10,000,000
8,000,000
Other Portfolio
6,000,000
4,000,000
2,000,000
0
63/64 64/65 65/66 66/67 67/68

Year

Source: Table 4.10

65
The table 4.10 and 4.8 figure shows that the other portfolio is in fluctuating trend.

4.4 Actual deposit collection vs. Actual LABP Status of ADBL

As it is understood that the major source for resources mobilization of the bank is the
customer deposit and similarly, the major outlet for deployment portfolio is for loan,
advance and bills purchase (LABP), it is desirable to analyze the comparative status
of the same.

Following table shows the actual balance of customer deposit collection by the
bank and actual position of deployment towards LABP and the ratio of LABP to
deposit (CD ratio) for the corresponding fiscal year

Table 4.11
Actual deposit collection vs. Actual LABP Status of ADBL
Amount in Rs „000‟
Fiscal Year Actual deposit Actual LABP LABP to deposit (%)
63/64 32,416,358.40 27,252,333 84.07
64/65 32,553,827.50 30,589,428 93.97
65/66 35,159,610.20 32,603,095 92.73
66/67 32,472,568.50 33,876,956 104.32
67/68 34,394,627.50 34,459,918 100.19
Source: Auunal report of ADBL
Figure 4.9
Actual deposit collection vs. Actual LABP

40,000,000.00
30,000,000.00
Amount

20,000,000.00
10,000,000.00 Actual deposit
- Actual LABP
63/64 64/65
65/66 66/67
67/68

Fiscal Year

Source: Table 4.11

66
From the table 4.11 and figure 4.9 show it was observed that the LABP to Deposit
ratio (CD ratio) was very high. The average CD ratio over the period of the
study was above 90%. This implied that the bank was able to lend to customers from
the deposit collection from the customers to the extent of average percentage of 90%.
The study indicates that LABP to deposit ratio and actual deposit were fluctuating
trend and outstanding LABP amount is increasing trend. LABP covers more than 90%
of customer‟s deposits. Deposits are deployed in major two sectors. One is LABP
and another is investment. The main reason of fluctuation was deployment policy of
the bank.

The diagram shows that both actual deposit and LABP were in increasing trend. It is
satisfactory for the bank. It is important to analyze the relationship between
actual deposit and LABP. In order to find out the variability of actual deposit
and LABP of different years, researcher has to calculate arithmetic mean,
standard deviation and coefficient of variance technique. The detail calculations of
these statistical tools are presented in Annex 1.

Table 4.12
Result of statistical analysis of Actual Deposit Vs LABP
Statistical Tool Actual Deposit (x) Actual LABP (y)

Mean 3,399,398.42 31,756,346.00

Standard Deviation 33,419,240.78 31,863,768.32
Coefficient of Variance 1.000594093 1.003382704

Coefficient of Correlation 0.506950861

Probable Error (PE) 0.224122907

6PE 1.344737444

Source: Annex-1

Since, the actual LABP is lower than that of actual deposit. The actual LABP are more
variable than actual deposits. Another statistical tool, coefficient of correlation was
used to analyze the relationship between actual deposit and actual LABP. Karl
Pearson‟s coefficient of correlation is denoted as r. By calculating r it can be
examined whether correlation between actual deposit and actual LABP is positive or

67
not. The value of r ranges -1 to +1. If the value of r is -1, then the relation is
perfectly negative and if the value is +1, then the relation is perfectly positive,
whereas 0 value denote no relation at all. The actual LABP will change the same
direction as actual deposit if the correlation value is near to +1. For this purpose,
actual deposit be denoted by X an independent variable and actual LABP be
denoted by Y a depended variable. So that increase in actual deposit is support to
increase in actual LABP or vice versa.
The calculated value of r is 0.50 and probable error is 0.22. Since, r<6PE i.e.
0.50<1.34, the value of r is significant and there is insignificant relation between actual
deposit and actual LABP

4.5 Expenditure planning of ADBL

Planning for expenses is the most essential to maintain reasonable level to support the
objectives and planned programs of the bank. Expenses planning focus on the
relationship between expenditure and the benefits derived from this expenditure. The
following table shows the status of expenditure incurred by the bank for the study
period

68
 Table 4.13
Expenditure incurred
Amount in Rs ‘000’
Fiscal Year 63/64 64/65 65/66 66/67 67/68
Interest
expenses 1,605,867 1,641,207 1,157,070 1,507,997 2,116,489
% Share 42.71 24.88 17.83 19.87 27.26
staff expenses 1,306,804 1,849,133 2,486,716 2,679,861 2,209,114
% Share 34.75 28.03 38.32 35.32 28.46
other
overhead
expenses 277,546 288,019 300,690 330,022 376,622
% Share 7.38 4.37 4.63 4.35 4.85
provision for
doubtful debt 337,782 2,677,476 2,184,687 2,582,233 2,504,030
% Share 8.98 40.59 33.67 34.03 32.25
provision for
staff bonus 95,593 59,979 127,409 143,417 158,013
% Share 2.54 0.91 1.96 1.89 2.04
income tax
provision 136,473 80,498 232,476 344,201 398,984
% Share 4 1 4 5 5.14
Total
expenses 3,760,065 6,596,312 6,489,048 7,587,731 7,763,252
Fiscal Year 63/64 64/65 65/66 66/67 67/68
Interest
expenses 1,605,867 1,641,207 1,157,070 1,507,997 2,116,489
% Share 42.71 24.88 17.83 19.87 27.26
staff expenses 1,306,804 1,849,133 2,486,716 2,679,861 2,209,114
% Share 34.75 28.03 38.32 35.32 28.46
other
overhead
expenses 277,546 288,019 300,690 330,022 376,622
% Share 7.38 4.37 4.63 4.35 4.85
provision for
doubtful debt 337,782 2,677,476 2,184,687 2,582,233 2,504,030
% Share 8.98 40.59 33.67 34.03 32.25
provision for
staff bonus 95,593 59,979 127,409 143,417 158,013
% Share 2.54 0.91 1.96 1.89 2.04
income tax
provision 136,473 80,498 232,476 344,201 398,984
% Share 4 1 4 5 5.14
Total
expenses 3,760,065 6,596,312 6,489,048 7,587,731 7,763,252
Source: Annual Report of ADBL

The table 4.13 shows that each type of expenses was in fluctuating trend. Interest
expenses and staff expenses covered large portion of total expenditure. It is more than
50% each year. The increase and decrease in interest expenses would be affected
accordance of the deposit collection amount during the year. Interest expenses fully

69
depends upon the customer deposits so higher the customer deposit, it should be
higher the interest expenses as well.

Provisions for possible losses are made as per NRB directive to cover the risk
inherent in Bank s loan provision. The proportion of provision for staff bonus was
fluctuating trend but the amount of provision for staff bonus is increasing every
year. The staff bonus is based on net profit of the bank therefore, if bank earns more
profit, staff bonus is increased subsequently.

The tax expense is also based on the profit of the bank. The proportion of provision
for income tax was in fluctuating trend but the amount of Income tax provision was
increasing every year. The bank has the profit in increasing trend therefore, the
amount of income tax provision is also increasing rate

4.5.1 Interest Expenses to Total Deposit

Interest expenses are the expenditure incurred for making payment of interest to the
deposit collected by the bank. As the customer deposit holds a major share on total
resources of the bank, interest is also highest among others in total expenses of the
bank. The customer deposit is one of the major sources for resources mobilization by
the bank. There are various kinds of deposit account from non-interest bearing
account to interest bearing accounts. The average cost incurred by the bank for
making interest payment to the depositors is called as the cost of deposit (CoD) of the
bank. For a bank lower CoD refers to better position in terms of profitability.
Table 4.14
Interest Expenses to Total Deposit
Amount in Rs „000‟

Fiscal year Interest Exp. Total Deposit (Interest Bearing) COD

63/64 1,605,867 30,153,498 5.33
64/65 1,641,207 30,156,425 5.44
65/66 1,157,070 32,912,867 3.52
66/67 1,507,997 30,056,805 5.02
67/68 2,116,489 31,465,426 6.73
Source: Auunal report of ADBL

70
From the table 4.14 it was observed that cost of deposit (CoD) almost remains same
over the study period except in F/Y 2065/66. It was 5.33%, 5.44%, 3.52% 5.02% and
6.73% in F/Y 2063/064 to 2067/068 respectively. In F/Y 2067/68 the CoD seems to
be little bit higher than of other year. The reason might be due to the bank policy to
collect the deposit and increasing marketing competition among banks.

Figure 4.10
Interest Expenses to Total Deposit

35,000,000
30,000,000
25,000,000
Amount

20,000,000 Interest Exp.

15,000,000
10,000,000
Total Deposit (Interest
5,000,000 Bearing)
0
63/64 64/65 65/66 66/67 67/68

Fiscal Year

Source: Table 4.14

It is important to analyze the relationship between interest expenses and
interest bearing deposit. In order to find out the variability of interest expenses
and total deposit of different years, researcher has to calculate arithmetic mean,
standard deviation, coefficient of variance and coefficient of correlation
technique. The detail calculations of these statistical tools are presented in Annex 2.
Table 4.15
Result of statistical analysis of Interest Expenses to Total Deposit
Statistical Tool Actual Total Deposit (x) Interest Expenses (y)
Mean 33,399,398.42 1,605,726.00
Standard Deviation 33,419,240.78 1,634,916.56
Coefficient of Variance 1.000594093 1.018179044
Coefficient of Correlation (r) -0.124787829
Probable Error (PE) 0.296948345
6PE 1.781690068
Source: Annex-2

71
The table 4.15 shows the coefficient of variation of interest expenses is higher
than actual deposit. Hence, the actual interest expenses are more variable than actual
deposit. The calculated value of r is -0.326 which shows that there is imbalance in the
deposit mix of ADBL. The value of r as tested with PE shows about negative
correlation between deposit and interest expenses. Since, r<6PE (-0.326<1.61), the
value of r is more insignificant and there is imperfect correlation between actual
deposit and actual interest expenses.

4.5.2 LABP Vs Provision for doubtful debts

As per the directives of Nepal Rastra Bank, the commercial banks are required to
set aside some amount form their operating profit at a fixed ratio against the
outstanding LABP of the bank as prescribed by NRB from time to time. Such
amount provided by against the LABP is based on the classification of the loans. As
per NRB current directives, banks are required to classify their outstanding
LABP on the basis of aging into four categories and the amount of provisioning
that have to be made with effect from F/Y 2058/059 which are follows:

Pass:
Advances include in this category are those loan accounts which are within the
validity or past due up to a period of three months. Amount of loan loss to be
provided for is 1% of the outstanding loan failing under this category.

Substandard:
All loans and advances those are past due for a period of three months to six
months shall be included in this category. The required provisioning is 25% of the
outstanding loan falling under this category.

Doubtful:
All loans and advances those are past due for a period of more than six months to
one year are included in this category and require provisioning of 50% of
outstanding LABP falling under this category.

72
Loss:
All loans and advances chose are past due for a period of more than one year, are
included in this category which shall to be provided for 100% of the LDO falling
under this category.

All classified loans except Pass are called non-operating loan. The higher amount of
non-performing loan consumes the profit of the bank, as they require higher
amount of provisioning toward loan loss. Therefore, banks have to make
reasonable effort for regularizing their loan to keep them performing in order
to reduce the amount of provisions for those losses to enhance the profit.
Further, internationally accepted standard rate of percent for total loan loss
provision to total loan is as 3%.
Table 4.16
LABP Vs Provision for doubtful debt
Amount in Rs „000‟
Provision for Doubtful Prov. for Doubtful
Fiscal Year Debt LABP Debt to LABP
63/64 337,782 27,252,333 0.01
64/65 2,677,476 30,589,428 0.09
65/66 2,184,687 32,603,095 0.07
66/67 2,582,233 33,876,956 0.08
67/68 2,504,030 34,459,918 0.07
Source: Auunal report of ADBL
Figure 4.11
LABP Vs Provision for doubtful debt

40,000,000
30,000,000
Amount

20,000,000 provision for

10,000,000 doubtful debt

0
63/64 64/65
65/66 66/67
67/68
Fiscal Year

Source: Table 4.16

73
 The table 4.16 and figure 4.11 show that the percentage of provision for doubtful
debts to total LABP was fluctuating over the years. Provision for doubtful debt to
LABP is below 0.06% in average. This indicates that the bank in lending their
deposits securely. This is the good sign for the bank. Both the directives of NRB and
management are responsible to control loss provisions.

4.6 Revenue planning of ADBL

Bank generates its revenue from its income earning activities. Such activities are
mostly fund based, that is generated out of the deployment of fund and some
portion from non-fund based business activities. Income of bank can be broadly
categorized into two types viz. and other income. Interest income is the interest
earned from loan, advances and overdrafts provided to the borrowers,
investments in government bonds etc. Interest income holds major share in total
portfolio of the bank. Other income consist the income other than interest income,
which are Income from commission and discounts, Dividend received from
investment in shares, Foreign exchange gain and Various kinds of service fees and
charges
Table 4.17
Revenue structure of ADBL
Amount in Rs „000‟
F/Y 63/64 64/65 65/66 66/67 67/68
Interest income 4,623,095 3,961,131 4,231,143 5,464,856 6,101,187
% Share 95.94 54.52 56.07 56.58 60.24
commission and discount 49,818 71,139 90,044 279,555 261,740
% Share 1.03 0.98 1.19 2.89 2.58
forex income -14,060 11,954 22,096 -5,576 -1,268
% Share -0.29 0.16 0.29 -0.06 -0.01
other income 159,662 3,221,328 3,203,367 3,919,109 3,767,075
% Share 3.31 44.34 42.45 40.58 37.19
Total income 4,818,515 7,265,552 7,546,650 9,657,944 10,128,734
Source: Auunal report of ADBL

74
The table 4.17 shows that the revenue was increasing every year. Income from
interest was the highest among the others in total revenue for each year. The
average proportion of interest is above 50% of total revenue. It seems every year
share of income from interest amount is decreasing for the bank. Overall,
generation of interest income of ADBL is satisfactory. The interest income is
based on the amount of LABP amount was also increasing every year. ADBL
gives loan, advance and bill purchase in higher rate of interest and gives lower rate of
interest to its depositors. The above table shows that commission & discount is in
fluctuating trend but it was nominal fluctuation. This can be regarded as normal
fluctuation only. The income from forex is very minimal. In the year 063/64, 066/67
and 067/68 there was a loss of in forex.

4.6.1 Interest Income to LABP

As interest income contributes the major portion of Total revenue mix, this study
attempts to analyze the interest income amount with other relevant data.
Interest income is generated out of the loan and advances made by the bank.
Therefore, this proudly called Yield of Fund (YOF). Bills discounting is also one
form of advances therefore, for this study purpose, researcher has grouped the
outstanding loan, advances and overdraft and the bills discounted together to
call LABP and have included commission too into the total interest income
amount (YOF). Now researcher shall analyze the comparative status of total YOF
with the total LABP with the help of following table and bar diagram.

4.6.1 Interest income to LABP

Table 4.18
Status of Interest Income to LABP
Amount in Rs „000‟
Fiscal Year Interest income LABP Interest Income to LABP
63/64 4,623,095 27,252,333 0.17
64/65 3,961,131 30,589,428 0.13
65/66 4,231,143 32,603,095 0.13
66/67 5,464,856 33,876,956 0.16
67/68 6,101,187 34,459,918 0.18
Source: Auunal report of ADBL

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 Figure 4.12
Status of Interest Income to LABP

35,000,000
30,000,000
25,000,000
20,000,000
15,000,000 Interest income
10,000,000
LABP
5,000,000
0
63/64 64/65
65/66
66/67
67/68

Source: Table 4.18

From the table 4.18 and 4.12 observed that the yearly YOL of ADBL range form 13%
to 17% in various years. The yield on LABP was 17% in F/Y 2063/064. The average
YOF for the period of study was 15%. Due to poor market system, political situation
and other instability, the bank is unable to increase its interest rate to mobilize its
deposits. It is significant to analyze the relationship between interest income
and total LABP. In order to find out the variability of interest income and
total LABP of different years, arithmetic mean, standard deviation, coefficient of
variance and coefficient of correlation technique have to be calculated. The detail
calculations of these statistical tools are presented in Annex 3.
Table 4.19
Result of statistical analysis of Interest Income to Total LABP

Statistical Tool Actual LABP (x) Interest Income (y)

Mean 31,756,346.00 4,876,282.40
Standard Deviation 31,863,768.32 4,940,754.42

Coefficient of Variance 1.003382704 1.013221552

Coefficient of Correlation (r) 0.598304194
Probable Error (PE) 0.193666136
6PE 1.161996819
Source: Annex- 3

76
 The table 4.19 shows the coefficient of variation of total LABP is looks similar
to interest income. Hence, the total interest incomes are more variable than LABP.
The calculated value of r is 0.5983and probable error is 0.193. The value of r as tested
with PE shows about insignificant correlation between total LABP and interest
income. Since, r<6PE i.e. 0.5983<1.16, the value of r is more insignificant and there
is unsatisfactory correlation between total LABP and interest income.

4.6.2 Interest Spread

Interest spread is the difference amount obtained by subtracting total interest
expenses amount form the total interest income. In other words, it is the margin on
interest or net interest income of the bank.
Table 4.20
Yearly Spread of ADBL
Amount in Rs „000‟
Interest Interest Growth in %
F/Y Interest income Expenses Spread Amount growth
63/64 4,623,095 1,605,867 3,017,228 0 0
64/65 3,961,131 1,641,207 2,319,924 -697,304 -23.11
65/66 4,231,143 1,157,070 3,074,073 754,149 32.51
66/67 5,464,856 1,507,997 3,956,859 882,786 28.72
67/68 6,101,187 2,116,489 3,984,698 27,839 0.70
Source: Auunal report of ADBL
Figure:4.13
Yearly Spread of ADBL

7,000,000
6,000,000
5,000,000
Amount

4,000,000
Interest income
3,000,000
interest expenses
2,000,000
interest spread
1,000,000
0
63/64 64/65 65/66 66/67 67/68

Fiscal Year

Source: Table 4.20

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 The table 4.20 and figure 4.13 show that the status of interest income, interest
expenditure and spread of the bank for the study period. It was observed that, the
spread of the bank was Rs. 3,017,228,000 in F/Y 2063/064. It was Rs. 2,319,924 in
F/Y 2064/065 which was decreased by 23.11% in F/Y 063/64. But again in F/Y
2065/066 it was increased by 32.51%. The amount of interest income and interest
expenses both are in fluctuating trend. Therefore, growth of interest spread is also
fluctuating too.

Diagram shows that interest income, interest expenses and interest spread are in
fluctuating trend. ADBL has positive interest spread. This proves that the bank has
sufficient income to pay the interest of deposit collected from customers, employee
costs, operating costs, to pay capital providers etc.

4.6.3 Burden
Burden is the overall expenses of the bank except interest expenses incurred for the
payment of deposit interest. That is the operating cost of the bank excepting interest
cost is called the burden. The net burden is the net amount of burden cost obtained
which is the difference between other expenses and other income. The nature of this
cost is semi fixed where as interest cost is variable cost.
Table 4.21
Net Burden of ADBL
Amount in Rs „000‟
F/Y Other income Other expenses Net burden Growth in Amt %
63/64 195,420 2,154,198 1,958,778 - -

64/65 3,304,421 4,955,105 1,650,684 -308,094 -15.72

65/66 3,315,507 5,331,978 2,016,471 365,787 22.15

66/67 4,193,088 6,079,734 1,886,646 -129,825 -6.43

67/68 4,027,547 5,646,763 1,619,216 -267,430 -14.17

Source: Auunal report of ADBL

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 Figure 4.14
Net Burden of ADBL
7,000,000
6,000,000
5,000,000
Amount

4,000,000
other income
3,000,000
2,000,000 other expenses

1,000,000 net burden

0
63/64 64/65 65/66 66/67 67/68
Fiscal Year

Source: Table 4.21

From the table 4.21 and figure 4.14 show that the net burden of the bank in
F/Y 2063/064 was Rs. 1,958,778,000.00. it was Rs. 1,650,684,000.00 in F/Y
2064/065, which was decreased by 18.66% than the previous year. Similarly, the net
burden was increased in F/Y 2065/066 by -15.72%. It was again decreased by 6.88%
and -14.17% in the F/Y 2066/67 and in F/Y 2067/68 respectively. The major
objective of this study was to find out whether other resources of income are
maintaining the other expenses part or not. It was observed that the net burden of the
bank was in fluctuating trend over the study period with fluctuating rate. The
indication of the study showed that the other income are increasing or
decreasing in respect to other expenses.

4.6.4 Net Profit

Profit is excess of income over expenses. In this context, this study has calculated the
net profit being the excess spread over the net burden. Spread is the net interest
income (excess interest income over the interest expenses), and the net burden is the
difference amount from the other expenses and other income. Following table and
graphs shows the status of spread, burden and net profit of various year of the
study period.

79
 Figure 4.22
Net Profit of ADBL
Amount in Rs „000‟
F/Y Spread Burden Net profit Growth in Amt % Growth
63/64 3,017,228 1,958,778 1,058,450 - -

64/65 2,319,924 1,650,684 669,240 -389,210 -36.77

65/66 3,074,073 2,016,471 1,057,602 388,362 58.03

66/67 3,956,859 1,886,646 1,892,385 834,783 78.93

67/68 3,984,698 1,619,216 2,365,481 473,096 24.99

Source: Auunal report of ADBL

Figure 4.15
Net Profit of ADBL

4,000,000
3,500,000
3,000,000
2,500,000
Amount

2,000,000 spread

1,500,000 burden

1,000,000 net profit

500,000
0
63/64 64/65 65/66 66/67 67/68

Fiscal year

Source: Table 4.22

The table 4.22 and figure 4.15 indicates that interest spread and Net profit both are in
fluctuating trend. Burden of the bank is in fluctuating trend over the study period. As
researcher analyzed earlier, burden is the difference amount of other income and other
expenses and net income is the difference of total interest spread and total burden.
Following diagrams will further clarify the net profit position of the bank. This
shows the real success of the bank and bank s strategy for the expansion of

80
its business. The net profit of the bank is in increasing trend every year over
the study. This proved that the management of the bank is efficient.

4.7 Performance Evaluation of Bank

Performance evaluation is used as an important part of comprehensive budgeting
system. All companies regardless of their size have reporting requirement to show
their overall performance. Performance reporting is an important phase of control
process. Researcher can use various techniques and criteria to evaluate performance
of bank, which are as follows:

4.7.1 Ratio Analysis

The ratio analysis is a powerful tool of financial analysis. A ratio is defined as “The
indicated quotient of two mathematical expressions” and as “The relationship between
two of more things” (I.M. Pandey). An arithmetic relationship between two figures
is known as ratio. Ratio analysis is a financial device to measure the financial
positions, major strengths and weakness of a firm. To evaluate the performance
of an organization by creating the ratios form the figures of different account
consisting in balance sheet and income statement is known as ratio analysis.
Following ratios are analyzed in this research.
 Current Ratio
 Debt Equity Ratio
 Return On Equity
 Return On Assets
 EPS

[Link] Current Ratio

The ability of a firm to meet its obligation in the short term is known as liquidity. It
reflects the short term financial strength of the firm. Now the current ratio to measure
relationship of current assets & current liabilities of ADBL were used. It is calculated
by dividing the total current assets by total current liabilities

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 Table 4.23
Current Ratio
Amount in Rs „000‟
Fiscal Year Current Asset Current Liabilities Current Ratio
63/64 34,193,881 36,513,171 0.94
64/65 38,148,501 38,094,064 1.00
65/66 46,119,340 41,295,314 1.12
66/67 48,511,394 40,593,161 1.20
67/68 50,951,182 43,508,183 1.17
Source: Auunal report of ADBL

The table 4.23 shows that the ADBL has current ratio ranging from 0.94 to 1.17
during the study period. The highest current ratio was 1.20 times in F/Y 2066/067
and the lowest current ratio was 0.94 times in F/Y 2063/064. The company has
positive working capital over the study period. It means the current assets are more
than current liabilities over the study period. The bank is unable to maintained
standard ratio 2:1. The bank has increased its investment in fixed assets that‟s
why the bank was not able to maintain standard ratio.

[Link] Debt Equity Ratio

The relationship between borrowed fund and owner‟s equity is known as debt
equity ratio. The standard ratio of debt ratio is 4:1. This shows the capital structure of
any organization. For the purpose of analysis, the amount of borrowings and
deposits liabilities of the bank has been taken as long term debt for the bank.
Following table shows the bank s debt equity ratio status.

82
 Table 4.24
Debt Equity Ratio of ADBL
Amount in Rs „000‟
F/Y Deposit and Borrowing Equity Capital Ratio
63/64 32,790,305 7,528,000 4.36
64/65 32,811,199 10,777,500 3.04
65/66 35,347,860 10,777,500 3.28
66/67 32,732,130 9,437,500 3.47
67/68 34,638,328 9,474,300 3.66
Source: Auunal report of ADBL

Figure 4.16
Debt Equity Ratio of ADBL

40,000,000.00
35,000,000.00
30,000,000.00
25,000,000.00
Amount

20,000,000.00
deposit and borrowing
15,000,000.00
equity capital
10,000,000.00
5,000,000.00
-
63/64 64/65 65/66 66/67 67/68

Fiscal Year

Source: Table 4.24

From the table 4.24 and 4.16 show that the debt to equity ratio of the bank was in
fluctuating trend. As per the guidelines given by NRB, the deposit collection
and borrowing of the bank was restricted to 10 times of capital fund. But the
current guidelines have not restricted limit for long-term debt collection by the bank.
The debt equity ratio of the bank is under the prescribed guidelines of NRB which
implied to the right proportion of debt to capital fund. The bank‟s one of the

83
major function is to accept customer deposit, it is obvious that the bank will have
higher debt equity ratio.

The debt ratio shows the proportion of a company‟s assets which are financed
through debt. If the ratio is less than one, most of the company‟s assets are
financed through equity. If the ratio is greater than one, most of the
company‟s assets are financed through debt. Companies with high debt ratios are
said to be “highly leveraged,” not highly liquid as stated above. A company with a
high debt ratio (highly leveraged) could be in danger if creditors start to demand
repayment of debt. The standard ratio of debt ratio is 4:1. ADBL seems to be
successful in maintaining standard. It shows that the bank is can easily manage the
fund if creditors start to demand repayment.

[Link] Return on equity (ROE)

It shows the overall efficiency of the organization. It also shows the profitability
position of the bank. This ratio is calculated as net income after tax divided by total
equity capital. ROE ratio, on the other hand, is a measure of the rate of return
flowing to the Bank s shareholders. It approximates the net benefit that the
shareholders have received from investing their capital in Bank.
Table 4.25
Return on equity (ROE) of ADBL
Amount in Rs „000‟
Fiscal Year Net Income Equity Capital ROE
63/64 1,058,450 7,528,000 7.11
64/65 669,240 10,777,500 16.10
65/66 1,057,602 10,777,500 10.19
66/67 1,892,385 9,437,500 4.99
67/68 2,365,481 9,474,300 4.01
Source: Auunal report of ADBL

84
 Figure 4.17
Return on Equity (ROE)

20

15
Amount

10

5 ROE

0
63/64 64/65 65/66 66/67 67/68
Fiscal Year

Source: Table 4.25

Table 4.25 and figure 4.17 show the relationship between income after tax and total
equity capital of the bank. The ROE of ADBL was in fluctuating trend. It was 7.11%,
16.10%, 10.19% 4.99% and4.01% in F/Y 2063/064 to F/Y 2067/068
respectively. It was observed that the net income and equity capital amount is
fluctuating over the study period. Any organization having more than 10% ROE is
good but its ROE level is not very satisfactory in recent year. In recent year it is in
only 4.01% which is not satisfactory. ADBL should try to satisfy its shareholder and
should maintain management efficiency of the bank.

[Link] Return of Assets (ROA) of ADBL

ROA ratio is primarily an indicator of managerial efficiency. It indicates how capable
the management of the bank has been converting the firm‟s assets into net earning. It
indicates how profitable a company is relative to its total assets. ROA gives an idea
as to how efficient management is at using its assets to generate earnings.
Calculated by dividing a company‟s annual earnings by its total assets, ROA is
displayed as a percentage. Sometimes this is referred to as “return on investment” It
is measured in terms of relationship between net profit and total assets. Higher ratio
shows the higher return on the assets in the business thereby indicating effective use
of the resources available and vice versa.

85
 Table 4.26
Return of Assets (ROA) of ADBL
Amount in Rs „000‟
Fiscal Year Net Income Total Asset ROA
63/64 1,058,450 38,160,211.00 2.77
64/65 669,240 43,686,749.00 1.53
65/66 1,057,602 51,818,738.00 2.04
66/67 1,892,385 54,020,226.00 3.50
67/68 2,365,481 59,241,364.00 3.99
Source: Auunal report of ADBL

Figure 4.18
Return of Assets (ROA) of ADBL

5
Amount

ROA
0
63/64 64/65 65/66 66/67 67/68
Fiscal Year

Source: Table 4.26

The table 4.26 and figure 4.18 show that the ratio is in fluctuating trend. It was
observed that the highest ROA was 3.99% in F/Y 2067/068 and the lowest ROA
was 1.53% in FY 2064/065. The indication shows ROA level of the bank was
fluctuating trend.

[Link] Calculation of Earnings per Share (EPS)

EPS is derived dividing net profit to numbers of share outstanding. The amount of
EPS measures the efficiency of a firm in relative terms. It is a measuring tool of
organizational overall performance and how far an organization is able to use its

86
resources to generate profit. It is determined by the amount of profit it has earned.
Thus, the EPS determines the market value of share; the attitude of outsides
and high amount of EPS increases the goodwill of the organization. The following
table shows EPS of the bank for the study period.

Table 4.27
EPS of ADBL
Amount in Rs „000‟
F/ Y Net Income No. of Shares EPS
63/64 1,058,450 16,250 65.14
64/65 669,240 20,775 32.21
65/66 1,057,602 20,775 50.91
66/67 1,892,385 30,375 62.30
67/68 2,365,481 30,375 77.87
Source: Auunal report of ADBL

From the table 4.27 shows that the EPS of the bank is in fluctuating trend. It was
Rs.65.14, Rs.32.21, Rs.50.91, Rs.62.30 and Rs.77.87 in F/Y 2063/064 to 67/68
respectively.

4.8 Major Findings

4.8.1 Resource Mobilization
Major resource mobilization of ADBL was deposit.
The amount of deposit mobilized by ADBL was found to remain almost
constant over the study period.
Total deposit was Rs. 51,609,280 thousand in F/Y 2067/068

4.8.2 Resource Deployment

Major area of the resources was deployed in LABP.
Investment was in increasing trend over the research period except in the
F/Y 2066/67.
Cash and bank balance was in fluctuating trend. It was reached to Rs.4,
808, 953 thousand in F/Y 2067/068.

87
 LABP was in increasing trend over the study period. It was increased to
Rs. 34,459,918 thousand in F/Y 2067/068 from Rs.33,876,956 in F/Y
2066/067
CD ratio (credit to deposit ratio, ratio of LABP on total deposit expressed
in percentage) of the bank was high. The average CD ratio of the bank for
the study period was 100.19%.

4.8.3 Expenditure
Interest expenses were in increasing trend in F/Y 2067/68.
Staff expenses amount were the highest among the total expenses of the bank.
Staff expenses of the bank were in fluctuating trend every year.
Cost of deposit (Calculated as the ratio of total interest expenses during
a year on the outstanding deposit as of the year and expressed in percentage)
of the bank was increasing trend but the bank has maintained lower CoD. It
was 6.73 % in F/Y 2067/0678
Amount of other expenses of the bank were increasing trend every year but the
proportion on total expenses was decreasing trend.
Provision for doubtful debt to LABP ratio was in increasing trend as lots of
loans provided in past become doubtful debt. Hence it showed decreasing
trend and it reached to 0.07% in F/Y 2067/068.

4.8.4 Revenue
The amount of interest was increasing trend every year but didn‟t
showed significant correlation between interest income and LABP.
The average YOF was 18 % in F/Y 2067/068.
Interest spread was in increasing trend but net burden was in fluctuating
trend.
Net profit of the bank was positive and increasing trend over the study
period. In F/Y 2067/068, its growth was 20%.

88
4.8.5 Ratio Analysis
Liquidity ratio of the bank was 1.20:1 in F/Y 2067/068. The bank had able to
maintain at least 1:1 ratio except in F/Y 2063/064 over the study period.
Debt to equity ratio of the bank was 3.66 % in F/Y 2067/068. The bank had
maintained its debt to equity ratio as per NRB guideline.
ROE of ADBL was 4.01 % in F/Y 2067/068.
ROA of the bank was 3.99 % in F/Y 2067/68 which is considered satisfactory.
EPS were in fluctuating trend over the study period. It had Rs. 77.87 per
share income in F/Y 2067/068 which is considered very well in today‟s
business context.

89
 CHAPTER V
SUMMARY, CONCLUSION AND RECOMMENDRATIONS

5.1 Summary
Agricultural development is a pre-condition for the further economic development of
the country. In a developing country such as Nepal agriculture plays a vital role in
economic development. Though agriculture is the backbone of the Nepalese
economy, there are many obstacles in the field of agricultural development.
Nepalese economy is almost depended upon agriculture. 38.8% of GDP is derived
from agriculture and 78% of population is employed in this sector. Due to lack of
modernization in agriculture, Nepalese has not been able to have adequate economic
development. The prosperity of every developing country can only be ensured by its
economic growth. It is very important to improve the agriculture sector of Nepal as a
result the ADBL was established. Agriculture development bank limited (ADBL)
established in 1968 with the major objectives of improving the socio economic
status of rural peoples. The prosperity of every developing country can only be
ensured by its economic growth. The role of ADBL in the economic growth of
the nation can be fairly estimated to be very prominent. By mobilizing the
scattered idle resources from the savers, ADBL pools the fund in a sizable volume in
order to feed to the fund requirement of productive sector of the economy. Such
investments in the productive sectors promote trade and industrialization in the
country. Thereby raising the employment opportunities and earning to the labors,
material and service providers to such industries and trades, which as a chain effect,
promotes saving into the banks and more saving means more funds available in
the banks for further investment. In this way, as the chain moves rolling on, the
economy of the nation also grows. To remain as the major contribution factor to
the growth of the nation s economy, the banks also have to have sustainable
existence and growth of themselves. For the sustainable existence and growth of
the bank, it must ensure reasonable profitability. A profit earning organization can
better feed to their employee, there by enhancing the morale of employees and
motivates them for better performance. Therefore profit for the financial institution
has been defined as the lifeblood. A bank has to plan for the reasonable profit
earning; it may be in short time as well as long time. Profit planning is the planning

90
of activities in such a way that it helps in increasing the income at a
minimum possible cost or at optimum cost. This study aims at examining the
applications of profitability of ADBL. This study has tried to cover the various
aspects of profit planning in the bank for the time of five years from fiscal year
2063/64 to 2067/68.

The first introductory chapter of this study report has tried to give brief introduction
of banking and its relation to the economy, general concepts to the profits and
profit planning, its background, scope, limitation and significance. During the
research works, an extensive review of literatures through books, past thesis, journals
have been made and Internet materials from relevant web also consulted. The works
were compiled into the chapter two titled as 'Review of Literature‟ of this study
report. Research methodologies followed for this research works are mentioned in the
chapter three titled as 'Research Methodology'. Data relating to various activities of
the bank has been collected presented in tabular and various diagram form and tried to
be interpreted in the study report in logical way. Data are analyzed and interpreted
applying various financial, mathematical and statistical tools in a systematic manner.
All these works are computed in the fourth chapter, titled as 'Data presentation and
Analysis ' of this study. Finally the summary, conclusion and the recommendation
made by the researcher by this study are here by being presented in this current
chapter, chapter five titled as summary,

5.2 Conclusion
Economical development plays the significant role for the countries overall
development. In the Nepalese prospective since the establishment of financial
institution have played progressive role for the economical development of the
country. So far banks have been proved as prime movers of the economical
development in Nepalese scenario. But as a developing country Nepal need to
strengthen its economical structure to achieve rapid overall development due to
the problems of fund mobilization and investment. Similarly, Nepalese banks are
still stuck to traditional approaches for fund utilization and management. Studying
the available data, it can be concluded that major concentration of resource
mobilization of the bank is deposit collection. Deposit collection of the bank is

91
satisfactorily good but mobilization of resources other than deposit is not good.
Likewise, resource deployment for non yielding liquid assets was in fluctuating
trend each year. Major portion of resources are deployed in LABP and investments.
Interest income is the main contributor of the income sources. Likewise, staff
expenses are the major portion of the expenses. Cost of deposit of the bank is found
to be increasing trend but the bank has maintained lower CoD as far as possible. Other
expenses other than operating expenses were increasing trend every year. Other
source of income other than other income is also increasing trend. Interest spread is
to be increasing trend each year and net profit of the bank was increasing trend over
the study period. Most of the correlation shows unsatisfactory and insufficient
correlation. So ADBL must concern in the profit planning procedures and control
system so as to maintain proper relations between its variables

5.3 Recommendations
After studying the financial position of the bank and analyzing the available data the
followings suggestions are recommended to improve the profit planning system of the
bank.
From the study it seems that ADBL has been focusing in the urban side of the
country. So, it should focus on rural areas too for development of the
nation.
Corporate Social Responsibility should be maintained very seriously because
it has responsibility to change the environment around it survives.
The ADBL should follow the process of profit plan to increase its efficiency
and to increase its profitability position. Making profit plan means making
further plan for income, expenses and profit etc. This will help the bank
to increase profit, income and reduce expenses.
The bank should reduce its expenses (such as interest expenses, staff
expenses). These expenses are increasing yearly which is not favorable for the
bank.
The bank should make effort to collect noninterest bearing deposit. The
bank should make effort to utilize the available resources effectively and
implement cost effectiveness technique to reduce operating expenses. It

92
must utilize effectively its human resources to reduce its staff expenses.
Decrease in expenses will increase net profit of the bank.
The bank should increase its interest income as well as non interest income.
The bank should mobilize its fund properly to increase income.
The bank has able to maintain lower provision for doubtful debt to
total LABP over the study period. It is suggested to maintain the same level.
The bank should evaluate the project before flow the loan and granting the
loan on secured projects.

93