Chapter I

1. Introduction
The development of any country largely depends upon the economic health (i.e. trade,
industry, agriculture etc) and condition of the country. To develop these sectors a
continuous and adequate supply of resources is required. Now a days the financial
institution are viewed as catalyst in the process of the economic growth. The
mobilization of the domestic resources is one of the key factors in the economic
development of the country. Commercial banks and other financial institutions collect
immobilized money in the form of deposits from every corner and parts of the
country. This will provide capital for the development of the industry, trade and
business and other resources deficit sectors. Integrated and speedy development of the
country is only possible when competitive and reliable banking services are reached
and operated every corner of the country. Commercial banks formulate sound
investment policies to make it more effective, which eventually contribute to the
economic development of the country. Formulation of sound investment policies and
coordinated and planned efforts pushes forward the forces of economic growth.

It has been fully established that economic development if any country can be active
only through a balanced growth in the field of industry, trade, commerce and
agriculture. It has equally self-evident that the development in these fields cannot be
made possible without the existence of sound banking system in the country. Many
countries, aspiring for the rapid economic development have developed several
banking and non-banking specialized financial institutions with objectives of meeting
the financial needs of their economy.

There are various concepts among the economists about the origin of word ‘Banking’.
The term bank derives from the Latin Bancus, which refers to the bench on which the
banker would keep its money and his records. Some persons trace its origin to the
French word ‘Banque’ and Italian word ‘Banea’ which means a bench for keeping,
lending and exchanging go money in the market.
The first bank called the ‘Bank of Venica’ was established in Venica, Italy in year
1157 AD. and 1407 AD respectively. In England the banking began with English
goldsmith only after 1640. The bank of Amsterdam was the great bank in seventeenth
century.

Bank is a financial intermediary accepting depositing and granting loans. It offers the
widest menu of services of any financial institution. In fact, a modern bank performs
such a variety of functions that it is difficult to give a precise and general definition of
a bank. At present context bank is not only confined to accepting deposits and
disbursing loan. In addition to this, a bank may be engaged in different types of
functions such as remittance, exchange currency, joint venture, underwriting, bank
guarantee, discounting bills etc.

Bank plays a predominant role in under developed economy in many ways as they
promote capital formation by developing banking habit of people and collection
saving. People have mobilized them in productive channels. Thus their role in the
economic development is to remove the deficiency of capital by stimulating saving
and investment.

1.1 Commercial Bank and Investment Policy

Commercial bank is an entity, which accepts deposits and makes short-term loans to
business enterprises, regardless of the scope of its other services.
American Institution of Banking, 1972:345-346)

Commercial banks are major financial institutions, which occupy quite an important
place in the framework of every economy. Commercial banks render numerous
services to their customer in view of facilitating their economic and social life. All the
economic activities of each and every country are greatly influenced by the
commercial banking business of that country. Commercial banks, by playing active
roles, have changed the economic structure of the world. Thus, commercial banks
have become the heart of financial system.
Commercial bank in current year presents a new picture a picture of innovation in
practice of wider horizon and of new enterprises. The most remarkable diversification
of banking function in the banks increasing participation in medium and long term
financing industries and other sector so they are not only financial institution of
finance agriculture and industry and other economic activities but are more than
financial institution in the sense that they help saving, create deposits and make the
subsequent distribution of such accumulated funds.

In addition to the acceptance of deposits, lending and investing they provide a

multiple of services including accepting traveler’s cheque and underwriting, purchase
and sales of securities, government bonds of customers, buy and sale of foreign
exchange, the insurance of commercial letter of credit supply of timel credit and
market information, providing remittance facilities and so on.

Commercial Bank act 2031 B.S. defines “A Commercial Bank is that bank which
exchange money, accepts deposits, grants loan and performs banking function.”

For the poor and least developed countries like Nepal, having low per capita income
and GDP, faces many economic problems such as inflation and deflation of monetary
trade, trade deficit and budget deficit. Commercial banks play important role in
removing such problems by capital formulation for deficits spending units (trade and
industry as well as general public). They also finance in small and cottage industries
and agricultural sector under priority sector investment scheme to serve the marginal
people.

The American Institute of Banking has laid down the four major functions of the
commercial banks such as receiving and handling deposits, handling payments for its
clients, making loans and investment and creating money by extension of credit.
Nepal commercial bank act 2031 B.S. has defined commercial bank as stated earlier
and it has also emphasized on their functions. Major of them is as follows:-
1. They accept custody of funds with or without interest and open fixed accounts
and saving accounts in the name of depositions.
 2. They supply loans (Short term debt as well as long term debts whatever
necessary for trade and commerce) or make investment.
3. They help to issue shares and debentures of any company or any others
corporate body, guarantee or underwrite such shares or debentures and
undertake any agency business but not become a managing agent.
4. Conduct transactions in bonds, provisionary notes or bills of exchange foreign
exchange relating to commerce or corporation as are redeemable within the
kingdom.
5. They grant overdraft.
6. They issue letter of credit draft and traveler’s cheque.
7. They remit or transit fund to different place with in or outside kingdom.
8. They purchase, sell or accept the securities of HMG.

Besides this, the commercial bank arranges the amount of foreign exchange required
by various organizations and travelers. Moreover foreign trade transactions are
facilitated through the issuance of letter of credit. Bank also provides locker facilities
or the customers to keep valuable ornaments and documents. Bank also provides
reference abut the financial position of their customers as and when required. The
bank works as an agent of its customers to receive and make payments, pay and
collect rent, pay insurance premium etc. In case of joint venture commercial bank it
issues internationally valid credit cards, ATM cards, Tele banking etc. Besides bank
has many more functions and roles in the development of national economy.

Commercial banks must mobilize its deposits and other funds to profitable, secured,
stable and marketable sector. Then only it can earn more profit as well as it should be
secured can be converted into cash whenever needed. But, commercial banks have to
pay due consideration while formulating investment policy regarding loan and
investment. Investment policy is one facet of the overall spectrum of policies that
guide bank’s investment operations. A healthy development of any bank depends
heavily upon its investment policy. A sound and viable investment policy attracts both
borrowers and lenders, which helps to increase the volume and quality of deposits,
loan and investment. Commercial bank should be careful while performing the credit
creation function. The bank should never invest its funds in those securities, which are
subject to too much depreciation and fluctuations because a little difference may
cause a great loss. It must not invest its funds into speculative businessman who may
be bankrupt at once and who may earn millions in a minute.

Commercial banks must follow the rules and regulation as well as different directions
issued by the central bank, ministry of finance, ministry of law and other regulatory
bodies while mobilizing its funds. So, the ban should invest its funds in legal
securities only. Diana Mc Naughton in her research paper ‘Banking Institutions in
Developing Market’ states that investment policy should in corporate several
elements such as regulatory environment, the availability of funds the selection of
risk, loan portfolio balance and term structure of the liabilities (MC
Naughton;1994:19). Thus commercial banks should incorporate several elements
while making investment policy. The loan provided by commercial bank is guided by
several principles such as length of time, their purpose profitability, safety etc. These
fundamental principles of commercial bank’s investment are fully considered while
making investment decisions.

In developing countries especially like ours, there is always a dearth of capital. The
government cannot contribute to the economic development all alone. Nevertheless,
the private sector also cannot reinforce due to low per capita income and higher
propensity to consume of the people. Hence due to low income, saving is low which
on the other hand results in low capital formation. Thus, investment is one of the vital
aspects in the improvement of the economic condition of a country.

An investment is a commitment of funds made in the expectation of the positive rate

of return. If the investment is properly undertaken the return will be commensurate
with the risk, the investor assumes. Investment is concerned with the management of
an investors’ wealth, which is the sum of current income and present values of all
future income funds to be invested, came from assets already owned borrowed money
and saving or foregone consumption by the investor.

In general investment means to pay out money to get more and is generally uncertain.
Investment has to undergo various types of risk eg. Business risk, possibility of being
wane in earning power of investment due to competition, uncontrollable cost, change
in demand etc., market risk, possibility of change in market price and collateral value
of securities and real properties. Therefore investment is a very risky job for a
purposeful safe and profitable investment, making an investment is not sufficient one
should follow sound investment policy. The fundamental principle of investment must
be followed thoroughly for profitable investment. Investment policy should ensure
maximum amount of investment to all sectors with proper utilization. There is high
liquidity in the market and it seems no profitable place to invest these. Investment
policy provides the bank several inputs through which they can handle their
investment operation efficiently ensuring the maximum return with minimum risk,
which ultimately leads the bank to the path of success to achieve its organizational
objectives of shareholders wealth maximization.

This is a common factor that investment is possible only when there are adequate
savings. If all of the income is spend on for daily usage, there will be no amount left
for making investment. So, collection and investment are always inter-related and go
hand in hand. Every people wish to collect or save their income and invest in highly
return firm. In terms of bank, collection means deposits, borrowing, income saving of
customers etc.

Investments are made in assets. Assets generally are of two types. Real assets (land,
building, factories etc) and financial assets (Stocks, bonds, T-bill etc). These two
types of investments are not competitive but complementary, highly-developed
institutions for financial investment greatly facilitating real investment.
Investment policy fixes responsibilities for the investment deposition of the bank
assets in term of allocation funds for investment and loan establishing responsibility
for day to day management of those assets.
James [Link]
1987:124)

Investment by individual, business and government involves a present sacrifice of

income to get on expected future benefit; as a result investment raises a nation’s
standard of living.
The World Book Encyclopedia,1976;232)
Investment is the sacrifice of current dollars for future dollars and time and risk is
involved in investment. A sacrifice takes place in the present and is certain. The
reward comes later, it at all, and the magnitude is generally uncertain. In some case
the element of time predominates. In other cases risk is the dominant attribute.
William [Link], Alexander, Gorden [Link] Jeffery [Link].
1994:1

An investment is a commitment of money that is expected to generate additional

money. Every investment entails some degree of risk, it requires a present certain
sacrifice for a future uncertain benefit.
[Link], 1991:1

According to Sharpe, Alexander and Bailey (1999), “Investment can be categorized

as real investments and financial investments. Real investments generally involves
some kinds of tangible assets such as land, machinery or factories. Financial
investments involve contracts written on pieces of paper, such as common stocks and
bonds.”

William [Link] and Alexander [Link] (1998) define investment as,

“Investment in its broadest sense, means the sacrifice of certain present value for
(possible uncertain) future value.”

Above mentioned definition about the investment clarifies the investment means to
trade money for exceed the current cash out flow which is the benefits to the investors
for sacrificing the time and commitment or due to uncertainty and risk factors.
Financial institution must be able to mobilize their deposits collection funds in
profitable, secured and marketable sector so that they can earn good return to their
investment.

The bank and finance companies are such type of financial institutions which deal in
money and substitute of money, or deal with credit and credit instrument. Good
management of credit and credit instrument in very important for the banks and
financial institutions to collect funds and utilize it in good investment sector. Any way
the goal of investment is the maximization of the owner’s economic welfare.
Intelligent investors always search for the project with minimum risk and higher
return.

Investment in its broadest sense, means the sacrifice of current rupee (dollars) and
resources for the sake of future rupee (dollars) and resources. In other words, it is a
commitment of money and other resources that are expected to generate additional
money and resources in the future. Such a commitment takes place in the present and
is certain to occur but the reward comes in the future and always remains uncertain.
Therefore, every investment entails some degree of risk.

1.2 Features of Sound Investment Policy.

The income and profit of the bank depends upon its lending procedure, lending policy
and investment of its fund in different securities. The greater the credit created by the
bank, the higher will be the profitability. A sound lending and investment policy is not
only pre-requisite for profitability, but also crucially important for the promotion of
commercial savings of backward country like Nepal. Many authors as under have
given some necessities for sound lending and investment policies, which most of the
bank must consider:

- Safety and Security

The bank should never invest its funds in those securities, which are subject to
too much depreciation and fluctuation because a little difference may cause a
great loss. It must not invest its funds into speculative businessman who may
be bankrupt at once and who may earn million in a minute also. The bank
should accept that type of securities, which are commercial, durable and
marketable and have high market prices. In this case, “Mast” should be
applied for the investment. Where,
M=Marketability.
A=Ascertainity.
S=Stability.
T=Transferability
- Profitability
A commercial bank can maximize its volume of wealth through maximization
of return on their investment and lending. So, they must invest their funds
where they gain maximum profit. The profit of commercial bank mainly
depends on the interest rate, volume of loan, its time period and nature of
investment in different securities.

- Liquidity
People deposit money at the bank in different account with confidence that the
bank will repay their money when they need. To maintain such confidence of
depositors, the bank must keep this point in mind while investing its excess
funds in different securities or at the same time of lending. So that it can meet
current o r short-term obligations when they become due for payment.

- Purpose of Loan
Why is customer in need of loan? This is very important question for any
banker. If borrower misuses the loan granted by the bank, they can never
repay and the bank will possess heavy bad debts. Detailed information about
the scheme of the project or activities would be examined before lending.

- Diversification
“A bank should not lay all its eggs on the same basket.” This saying is very
important to the bank and it should be always careful not to grant loan in only
one sector. To minimize risk, a bank must diversify its investment on different
sectors. Diversification of loan helps to sustain loss according to the law of
average because if securities of a company deprived, there may be
appreciation in the securities of other companies. In this way, the loss can be
recovered.

- Tangibility
Though it may be considered that tangible property doesn’t yield an income
apart from satisfaction of possession of property, many times, intangible
securities have lost their value due to price level inflation. A commercial bank
should prefer tangible security to intangible one.
 - Legality
Illegal securities will bring out many problems for the investor. A
development bank must follow the rules and regulation as well as different
directions issued by Nepal Rastra Bank, Ministry of Law and other mobilizing
its funds.

Other factors affecting the investment policies

Beside above mentioned basic principles, some basic factors really affect the
investment policies and composition of the components. However, their degree of
affecting power may vary. These other factors that have significant affecting power
are given as follows:

- Regulatory Provision
Regulatory Provision has the maximum impact upon the investment policies
and the composition of portfolio. Usually, in every state there will be the legal
restrictions for the investors to invest their funds in various components. Such
restrictions might be in the form of the limitation of the investible amount on
particular securities or the allowed sectors of the investment.

- Management Perception
Another factor affecting the investment policy and component will be the
management’s attitude as well as the self imposed limitation from their side. If
management wishes to increase the yield, investment policy will be to divert
the fund to the high yielding portfolios, rather than the more safe but low
yielding components or vice-versa. Beside this, the management may impose
self –limitation of investment components according to the condition of the
business and it also capable of changing the investment portfolio.

- Present composition of the investment portfolio

Investment policy and the composition are also affected by the size, maturity
stage, and interest or return rate on the capital etc. if it already holds the
component having mid- term maturity, then the consideration of upcoming
 investments will be on the long or short term maturing components. Thus the
composition of the investment in hand also affects the investment policy.

- Availability and accessibility of the investment components

When best-suited investment components are not available or accessible, then
also the investment policy can be affected. When best-suited investment sector
will not be available, then a strong search for the investment area should be
made. We can take the example of present condition of our Nepal in which the
investment horizon has gone to minimum the situation is because of the
political condition in the country.

1.3 Objectives of the study.

The main objectives of this study is to evaluate the investment policy of Nepal
Investment Bank Ltd. (NIBL) and Nabil Bank Ltd. and to recommend corrective
measures, if any, in order to improve its performance. Besides, these may be other
objectives too.
i) To determine the growth rate of bank in terms of deposits, loans and
advances, investment and profitability of the bank.
ii) To determine the proportion of investment in risky and risk free assets and
to evaluate the off balance sheet operating of the bank.
iii) To evaluate the liquidity, assets management, profitability and risk position
of NIBL and NABIL.
iv) To analyze the investment policy of NABIL & NIBL.

Need of the study

In the context of Nepal there are less availability of research work, journals and
articles in investment policy of commercial banks as well as other financial
institutions. As it is being well known fact that the commercial banks can effect the
economic conditions of the whole country the effort is made to highlight the
investment policy of joint venture banks expecting that the study can be bridge to the
gap between deposits and investment.

Limitations of the study

Significance and scope of the study can be observed through the importance of the
study also. It has been tried to make this study more comprehensive and clear by
collecting tabulating, compiling and presenting recent information as far as possible.
Till now, very little work has been done in this subject matter. The other limitations of
the study are as under:

i. Study was for the period of five year starting from fiscal year 2003/04 to
2007/08
ii. This study is mainly based on annual reports and other publication of
NIBL and Nabil Bank, publication of NEPSE, and publication of other
authorities regarding the investment and other aspect of the bank.
iii. Out of the numerous affecting factors, this study concentrates only on
those factors, which are related with investment policy, and available in
the form required for analyzing the different issues.
iv. Data used in the study are secondary nature.
v. The study was carried out on the financial statement and records of official
data. Therefore the decision methods of the bank are not analyzed.
vi. Although efforts were made focus on the activities and investment policy
of the Nepal Investment Bank Ltd and Nabil Bank Ltd. it may not cover all
important and pertinent investment procedure of the corporation.
vii. Due to wide range of data deficiencies only simple technique have been
used for the analysis of the data.

Statement of Problem
Mushrooming of private sector banks is the present situation of Nepalese financial
sector. The fast growth of such organization has contributed the prorate increment in
collecting deposits and their investment. They collect adequate amount from the mass,
however they could not find or locate new investment sectors required to mobilize
their funds on the changing context of Nepal. Only few commercial banks are getting
regular profits. Most of them are unable to satisfy their shareholders and customers in
earning profit and ensuring their safe deposit. Some banks are incurring losses in early
establishment years. It is not that they do not have potential clients or adequate
deposits but they cannot find profitable sectors or opportunities to invest the deposit
collection. They have always feared with high degree of risk and uncertainty.

In the dawn of new millennium, towards the end of 2005 A.D., there are 17
commercial banks. All these banks have created a cutthroat competition in the
financial sector. Fluctuating and low interest rates on deposits, poor deposit
mobilization etc. has affected on the return of fund, total assets, total deposits and
shareholders’ wealth position. Since liberalization policy of the government, various
banks and financial institutions have been established with a view to reinforce the
economic growth of the country. They have played an indispensable role by accepting
deposits and granting loans. Investment of the collected funds is the most important
factor for both shareholders and the bank as they are the source of earning. Credit
extended by these banks is directly related to the national interest. Therefore, the
banks should have a sound investment policy.

There are various problems in resources mobilization by financial institution in Nepal.

The most important problem is poor investment climate prevailing in Nepal due to
heavy regulatory procedure, uncertain government policy, NRB’s stringent directives,
unsecured social environment etc. Lack of sound investment policy is another reason
for a commercial bank not to properly utilizing its deposits that is making loan and
advances or lending for a profitable project. This condition may the commercial bank
to the position of liquidation. Commercial banks are more interested in providing
loans on short-term basis against movable collaterals. They are reluctant to invest in
huge and long term projects due to safety and security of their loans. Thus, they are
following conservative loan policy based on strong security. Similarly, these banks do
not have a well-organized investment policy. They rely much on the instructions and
guidelines of Nepal Rastrya Bank. Even if they have formulated some guidelines, they
fail to implement it due to poor supervision and lack of professionalism. Project
appraisal method followed by commercial banks is not scientific and appropriate.
Granting loan against insufficient deposits, overvaluation of goods pledged, land and
building mortgaged, risk-averting decision regarding loan recovery and negligence in
recovery of overdue loans are some of the drawbacks of unsound investment policy.
Similarly, loan supervision and follow-up mechanism is lacking in many commercial
banks. Due to this, the portion of non-performing assets on total loans and advances
has been increasing rapidly.
As with everything in Nepal, every commercial bank has an investment in the same
sectors. They are in consumer lending, tourism, garments and in trading sector. They
are the major sectors. But given the current situation of the country, it is not up to
them to them to decide which sector they want to go into. The main factor for success
of any organization is the security situation. Once the security situation stabilizes,
then only commercial banks consider rationally as to where they should to invest and
grow. So, security problem is the burning problem for every commercial bank to
invest their funds in our any sectors.

Nepal being an agricultural country needs more investment in this sector.

Nevertheless, commercial banks are rather concerned in industrial and foreign
projects. As a result, the credit extended to this sector is unsatisfactory. Besides, they
are not even fulfilling the NRBs regulation of 12% investment of their total loans to
the priority sectors like agriculture, cottage and small industries and services.
Similarly, the banks are not following the diversification principle i.e. they are not
considering the investment portfolio position. A good portfolio theory indicates
diversification of investable funds to reduce risks. Hence, the principle “do not put all
the eggs in one basket” really does not apply in context of Nepalese commercial
banks. As a result, many banks today could not recover their loan because, in the past,
a major portion of their investment were made in garment, carpets and hotel sectors
that has now come to brink of extinction.

Thus, the study mainly focuses on analyzing the different aspects of the bank and
finding the answers to questions such as
- Is the bank able to utilize the available funds effectively?
- How aggressively is the bank lending?
- What is the proportion of risk free and risky investment on total investment
made by the bank?
 - What is the proportion of Non- performing assets on total loans and advances
of the bank?
- What is the relationship of total deposit on total investment and total
investment on total net profit of the bank?
- What steps should be taken to improve the investment policy of the bank?
- Is the bank maintaining sufficient liquidity, profitability and risk position?
- Does the investment decision affect the total earning of the commercial bank?

Focus and Significance of the Study

The main focus of the study is to highlight the investment policies of commercial
banks expecting that the study can be bridge the gap between deposits and investment
policies. On the other hand, the study would provide information to management of
the bank that would help them to take collective action. Further from the study, the
shareholders would get information to make decision while making investment on
shares of various banks.

Having completed the basic analysis required for the study, the researcher must point
out the mistakes and errors and also correct them by giving suitable suggestions for
further improvement. Since researcher has the banking experience of about four years
which also includes working in the “Assets Liability Management Committee
(ALCO)” of a commercial banks, the recommendations prescribed herewith will have
more practical touch. Therefore, this summarized and recommended tasks of the
researcher of the study would be meaningful to the top management of the bank to
initiate the action and achieve the desired result.

In the context of Nepal there is less availability of research work, Journal and Articles
in investment policy of commercial banks as well as other financial institution. As it
is a well known fact that the success and prosperity of the bank relies heavily upon the
successful investment of collected resource to the important sectors of economy.
Successful formulation and effective implementation of investment policy is the
prime requisite for the successful performance of commercial banks.
There are various problems in effective investment of commercial banks of Nepal,
which affect their performance to a greater extent. Performance of commercial banks
does not seem so satisfactory in terms of utilizing its resource efficiently in productive
sectors. Hence the main significance of this study of investment portfolio analysis of
Nepalese commercial banks is to help how to minimize risk of investment and
maximize return through portfolio analysis. Similarly, the study of commercial banks
investment trend, risk return pattern, portfolio management, credit management and
effect on investment decision on earning will strive to disclose the internal weakness
of the banks and furnish the ideas for improvement. Therefore, the researcher has
undertaken this study to analyze the existing investment portfolio of Nepal Investment
Bank and point out the various weaknesses of defects inherent in it and provide
package of suggestions for its improvement.

Organization of the Study

The whole study has been divided into six chapters. First is introduction chapter,
which includes general background, statement of the problem, focus & signification
of the study, objectives of the study and limitations of the study and chapter plan.
Second chapter deals with the review of available literatures in the field of the study
being conducted. This includes review of the theories of the concerned topic, review
of supportive text, review of books, review of bulletins and annual reports published
by bank, review of related articles and review of previous thesis. Third chapter
explains the research methodology employed to conduct the study and tools and
techniques used in analysis of the data as well. This chapter includes, research design,
sources of data, population and samples, method of data analysis, various financial
and statistical tools. Fourth chapter is devoted to the presentation and analysis of data
through definite course of research methodology. The main working of this chapter is
to analyze different financial ratios related to the investment and fund mobilization of
NIBL. Major findings of the study are also included in this chapter. Fifth is the last
chapter of the study, which provides summary and conclusion, suggestions and
recommendations for improving the future performance of the sample banks. Besides
these, bibliography and appendices will also present at the end of the thesis. Similarly,
acknowledgement, table of contents, list of tables, list of figures, abbreviations are
included in the front part of the thesis report.
 Chapter II

2. Review of Literature
The word literature refers to writings on specific subject or printed information. It is
an analytical expression on the concerned topic. Review of Literature refers to the
analyzing, assessing, reevaluating and reexamining the previously written works. It is
a stocktaking of available literature in the field of research. Thus, in the preparation of
this thesis various books, articles, thesis etc. has been consulted and reviewed which
are discussed below. This chapter is further divided into conceptual framework and
review of related studied.

2.1 Conceptual Framework Review

“The business of banking is collection of funds from the community and extension of
credit to people for useful purposes. Banks have played a pivotal role in making
money from lenders to borrowers. Banking is a profit seeking business, not a
community to carry profit seeker, expected to pay dividend and otherwise, add to
wealth of shareholders.”
(Ronald Grywinshki, The New Fashioned Banking (Harvard Business Review: May-June 1993,p.87)

“Banking institutions are inevitable for the resource mobilization and all-round
developing of the country. It is resource for economic development; it maintains
economic confidence of various segments and extends credit to people.”
(Robert [Link], “Financial Institution” (New York: Mc Graw Hill, 1980)

“A commercial bank is a business organization that receives and holds deposits of

funds from others, makes loans and extends credits and transfers funds by written
order of deposits.”

“American Institute of Banking has defined commercial banks as a corporation which

accepts demand deposits subject to repeated or short term loans to business
enterprises, regardless of the scope of its other services.”
(American Institute of Banking, Principles of Banking Operation, 1972 A.D.,p.76.)
Commercial banks are the vital aspects in accelerating the pace of the economic
development of a country. “They are organized on a joint stock company system,
primarily for the purpose of earning profit. They can be either of the branch banking
type, as we see in most of the countries, with a large network of branches, or of a unit
banking type, as seen in the USA, where a banks’ operations are confined to a single
office or to a few branches within a strictly limited area.”
Commercial bank Act 2031 BS of Nepal has defined that, “A commercial bank is one
which exchanges money, deposits money, accepts deposits, grant loans and performs
commercial banking functions and which is not a bank meant for co-operative,
agriculture, industries or for such specific purpose.
(Commercial Bank Act 2031 BS)
As mentioned in former chapter (introduction) it is cleared that optimal investment
decision plays vital role in each and every organization. But especially for the
commercial banks and other financial institutions the sound knowledge of investment
is the must because this subject is relevant for all surrounding that mobilize funds in
different sectors in view of return.

As it is concerned to the commercial banks and other financial institutions, they must
mobilize (i.e. investment on different sectors) their collections (deposits) and other
funds towards the profitable, secured and marketable sectors so that they will be in
profit.

For this purpose these banks and financial institutions should gather the sufficient
information about the firm (client) to which supposed to be invested. These
information include as financial background, nature of business as well as its ability to
repay the loan back. These all information should be gathered for the viewpoint of the
security.

The income and profit of the bank depend upon the lending procedure applied by the
bank. As well as lending policy and investment in different securities also affect the
income and profit. In the investment procedures and policies it is always taken in
mind that “greater the credit created by the bank, higher will be the profitability.”
Sound lending and investment policies helps commercial banks maximize both the
quality and quantity of investments and thereby achieve their objective of profit
maximization and social welfare. Commercial banks should be careful while
performing the credit creation function. Investment policy should ensure minimum
risk and maximum profit from lending.

[Link] (1963) has said, “Commercial banks should consider the national
interest followed by borrower’s interest and the interest of the bank itself before
investing to borrowers.” To clarify this, bank’s lending must be for such purposes of
the borrowers that are keeping with the national policy and bank’s overall investment
policy. A bank’s overall investment
- Should be short term oriented
- Should be well spread
- Should be repayable on demand
- Must be profitable
- Should have adequate security

Functions of Commercial Bank

Generally, commercial banks have the two most essential functions i.e. borrowing and
lending of money. They borrow money on various kinds of deposits: current, saving
and fixed. Under current deposits, the banker incurs the obligations of paying legal
tender on demand, while on fixed deposits the banker incurs the obligation of paying
legal tender after the expiry of a fixed period or to pay the customer an agreed rate of
interest on it in return for the right to demand from him on agreed period of notice for
withdrawal.
“The American Institute of Banking has laid down four major functions of
commercial banks such as receiving and handling of deposits, handling payments of
its clients, making loans and investments and creating money by extension of credit.”

Thus, a commercial bank mobilizes the savings of the society through current or fixed
deposit account. It then provides this money to those who are in need of it by granting
overdrafts or fixed loans or by discounting bills of exchange or promissory notes.
Hence, the primary function of commercial bank is that of a broker and a dealer in
money. Apart from this, it performs a profusion of function, which is grouped under
two distinct categories namely, the agency services and the general utility services.
A. Agency Services
Commercial banks provide a wide range of investment services. Customers
can arrange for dividends to be sent to their bank and paid directly to their
bank accounts. The banks’ brokers will also purchase or sell stocks on behalf
of their customers and provides opinions on securities or list of securities.
Similarly, the bank will also send application for allotments of shares and
obtain share certificates and other documents.

The bank also provides services like payments of rent, electricity, telephone
charges, subscriptions collection of cheques, bills, promissory notes etc. It
infact acts as a correspondent or representative of its customers, business
organization, financial companies and other banks. Most of these banks have
an executor and trustee department with which various companies may have
affiliation. Thus, they provide a complete range of trustee, executor or
advisory service for a small charge.
B. General Utility Services
Under this, the banker does not act as an agent for his customers; rather they
provide services like issue of credit instruments like L.C. and travelers’
cheques, acceptance of bills of exchange, safe custody of valuables and
documents, transaction of foreign exchange business. It also acts as a referee
as to the respectability and financial standings of customers and provide
specialized advisory services to its clients. Some banks even have budget
accounts for credit worthy customers. The bank guarantees, for a specific
charge, a certain type of annual bills (e.g. Fuel bills, rates etc.) promptly as
they become due, whilst repayments are spread over a 12 monthly period from
the customer’s current account.

C. Overseas Trading Services

Due to growing trend of international trade, commercial banks have set up
branches specializing in the finance of foreign trade in different countries.
These banks provide a comprehensive network of services for foreign banking
services through its subsidiary. They help in the settlement of debts between
traders both at home and abroad for the goods they buy and sell. They also
 provide credit and enable the company to release the capital, which would
otherwise be tied up in the goods exported.
D. Information and Other Services.
In present scenario, information plays a crucial role in the upliftment of the
economy. Banks, one of the major sources of information on overseas trade,
assists by providing regular bulletin on trade and economic conditions, special
reports on commodities and markets, price and interest level fluctuation, rate
of poverty and economic growth etc. On request, banks obtain confidential
opinions on financial aspects of the firm, companies or individuals for its
clients. They also provide legal information for the formation of company, tax
requirements, exchange control, insurance and help to establish contact with
local banking organization.
For this reason, it is not worthwhile to state that the services rendered by
modern commercial banks are of inestimable value. It is the very essence of
advanced economic society. In the word of Walter Leaf, “The banker is the
universal arbiter of the world’s economy.”

2.1.1 Rules of mobilizing funds as per NRB Directives.

In order to mobilize the collected fund of different commercial banks towards
different sectors and part of the country, Nepal Rastra Bank has formulated and issued
directives in the sense of fund mobilization. Every commercial bank should follow the
norms of the directive while mobilizing the funds. In this heading the effort has been
made to present some glimpses in terms of provision for maintaining minimum
liquidity, provision for investment towards deprived sector and provision for credit
towards priority sector.

 Provision for maintaining minimum liquidity

Commercial banks should maintain minimum level of liquidity as given below at any
cost.
 Commercial banks should deposit 8% of total of current and saving deposits
and 6% total fixed deposit at Nepal Rastra Bank as minimum liquidity. Expect
these banks should keep 3% of total deposit in the own vault of the bank.
  In case of failure to meet the level of minimum liquidity, banks are liable to
pay the penalty as per the sub-clause (2) of clause 32 of Nepal Rastra Bank
Act 2012.

 Provision for investment towards Priority and Deprived Sector.

In NRB Directive it is clearly mentioned and directed that all the commercial banks
(under NRB) should invest 12% of its total investment to the priority sectors. Out of
this 12% they should invest 3% to the deprived sectors throughout the kingdom.
Limitation of loan towards deprived sectors for the commercial banks are given as
follows :
Loans limits towards deprived sectors
Sn Name of Banks Total Remaining Loan %
1. Nepal Bank Limited 3%
2. Rastriya Banijya Bank 3%
3. Nepal Arab Bank Limited 3%
4. Nepal Indoseuz Bank Limited 3%
5. Nepal Grindlays Bank Limited 3%
6. Himalayan Bank Limited 2%
7. Nepal SBI Bank Limited 2%
8. Nepal Bangladesh Bank Limited 2%
9. Everest Bank Limited 2%
10. Bank of Kathmandu Limited 1.75%
11. Nepal Bank of Ceylon Limited 0.75%
12. Other New Banks 0.25%
(Source : NRB, Annual Report 2063/2064)

In case of unable to meet the requirement of NRB as mentioned in above table these
banks are liable to pay the penalty as per sub-clause 2(KA) of clause 32 of NRB Act
2012.
2.1.2 Some Important Terms
In this section of the study, efforts have been made to clarify the meaning of some
important terms frequently used in this study. They are given as:

a. Loan & advances

 Loan, advances and overdrafts are the main source of income for a bank. Bank
deposits can be crossed beyond a desired level but the level of loans, advances
and overdrafts will never cross it. The facilities of granting loan, advances,
and overdrafts are the main services in which customers of the bank can enjoy.

Funds borrowed from banks are much cheaper than those borrowed from
unorganized moneylenders. The demand for loan has excessively increased
due to cheaper interest rate. Further, an increase in economic and business
activities always increase the demand or funds. Due to limited resources and
increasing for loans, there is some fear that commercial banks and other
financial institution too may take more preferential collateral while granting
loans causing unnecessary botheration to the general customers. Such loans
form these institutions would be available on special request only and there is
a chance of utilization of resources in economically less productive fields.
These are the undesirable effects to too low interest rate.

In addition to this, some portion of loan, advances and overdraft includes that
amount which is given to staff of the bank as house loan, vehicle loan,
personal loan and other. In mobilization of commercial bank’s fund, loan,
advances and overdrafts have occupied a large portion.

b. Investment on government securities, shares and debenture.

Though a commercial bank can earn same interest and dividend from the
investment on government securities, shares and debentures, it is not the major
portion of income. But it is treated as a second source of banking business. A
commercial bank may extend credit by treated as a second source of banking
business. A commercial bank may extend credit by purchasing government
securities bond and shares for several reasons, some of them are given as:
 It may want to space its maturates so that the inflow of cash coincide
with expected withdrawals by depositors or large loan demands of its
customers.
  It may wish to have high-grade marketable securities to liquidate if its
primary of reserves become inadequate.
 It may also be forced to invest because the demands for loans has
decreased or is not sufficient to absorb its excess reserves.

However, investment portfolio of commercial bank is established and

maintained primarily with a view to nature of banks’ liabilities i.e. since
depositors may demand funds in great volume without previous notice to
banks, the investment must be of a type that can be marked quickly with little
or no shrinkage in value.

c. Investment on other company’s shares and debentures

Due to excess fund but least opportunity to invest those funds in much more
profitable sector and to meet the requirement of Nepal Rastra Bank’s
directives many commercial banks have to utilize their funds to purchase
shares and debentures of many other financial and non-financial companies.
Nowadays most of the commercial banks have purchased regional
development bank’s, NIDC’s and other development bank’s shares.

d. Other use of funds.

A commercial bank must maintain the minimum bank balance with NRB i.e.
6% for fixed deposit and 8% for each of current and saving deposit account in
local currency. Similarly 3% cash balance of local cash balance of all local
currency accounts must be maintained in the vault of the bank. Again a par of
the funds should be used for bank balance in foreign bank and to purchase
fixed assets like land, building, furniture, computers, stationery etc.

e. Off- balance sheet activities

Off-balance sheet activities involve contracts for future purchase or sale of
assets and all these activities are contingent obligations. These are not
recognized as assets or liabilities on balance sheet. Some good examples of
these items are letter of credit (L.C), letter of guarantee, bills for collections
 etc. Nowadays such activities are stressfully highlighted by some economists
and finance specialists to expand the modern transaction of a bank.

f. Deposits
For a commercial bank, deposit is the most important source of the liquidity.
For bank’s financial strength, it is treated as a barometer. In the word of
Eugene, “A bank’s deposits are the amount that it owes to its customer.”
Deposits are the lifeblood of the commercial banks. Though they constitute the
great bulk of bank liabilities the success of a bank greatly depends upon the
extend to which it may attract more and more deposits. For accounting and
analyzing purpose, deposits are categorized in three headings. They are:
 Current Deposits
 Saving Deposits
 Fixed Deposits

2.2 Review of Books (Conceptual Review)

Banks are those institutions whose primary chore is to deal in money and substitute
for money. They deal with cash, credit and credit instruments. Effective circulation
and transaction of credit is the essence for those institutions. Unstable, unsteady and
unevenly flow of credit with ad-hoc decision may harm the economy as well as the
bank. As a result, banks should properly utilize its funds in various investment
avenues with a view to sustain and earn profit.

Investing involves making a current commitment of funds in order to obtain an

uncertain future return. It is a risky business that demands information. To process
information effectively and select the best investments requires goals that are clear-
cut and realistic.

Investment in its broadest sense means the sacrifice of current dollars for future
dollars. Two different attributes are generally involved time and risk. The sacrifice
takes in the present and is certain. The reward comer later, if at all and the magnitude
is generally uncertain. In some cases the element of time predominates (for example,
government bonds). In other cases risk is the dominant attribute (for example, call
option of common stocks). In yet others, both time and risk are important (for
example, shares of common stock)

An investment may be defined as the current commitment of funds for a period of

time to derive future flow of funds that will compensate the investing unit for the time
the funds are committed for the expected rate of inflation and also for the funds.

Investment is the employment of funds with the aim of achieving additional income
or growth in value. The essential quality of an investment is that it involves “waiting”
for a reward. It involves the commitment of resources, which have been saved or put
away from current consumption in the hope that some benefits will accrue in future.
There are basically three concepts of investment:
a. Economic investment – that is, an economist’s definitions of investment
b. Investment in a more general or extended sense which is used by “the man of
the street” and
c. The sense in which we are going to be very much interested, namely financial
investment.

In this way, going through the above definitions and ideas given by different authors
it is cleared that an investment of a known rupee today, produces some additional
amount in the future, in the form of profit. But sometimes that investor has to face
loss too, due to unfavorable circumstances and lacking of sound knowledge of
investment opportunities.

2.2.1 Review of Research Papers and Articles

This part of the study deals with the examination and reviewing of some related
research papers, articles and journals published in different magazines, newspapers,
World Bank discussion papers and economic journals and other related books and
publications. There are not sufficient articles related to investment management
published in Nepalese perspective. However, some personalities have given short
glimpse of investment management. Some of them are as follows:

Shrestha (1998), has presented a short scenario of investment management from his
article, “Portfolio management in commercial banks; theory and practice.” He has
stressed in the following issues. The portfolio management is essential both for
individuals and for institutional investors. Investors would like to select a best mix of
investment assets subject to following aspects:
 Higher return which is comparable with alternative opportunities available
according to the risk class of investor.
 Good liquidity with adequate safety of investment
 Certain capital gains
 Maximum tax concession
 Flexible investment
 Economic efficient and efficient investment mix

In the view of these aspects, investors are expected to develop following strategy
 Do not hold any single security. Try to have a portfolio of different securities.
 Do not pull all the eggs in the one basket i.e. to have a diversified investment.
 Choose such a portfolio of securities which ensures maximum return with
minimum risk or lower of return but with added objective wealth
maximization.
However, [Link] has also presented following approach to be adopted for
designing a good portfolio and its management:
 To find out the risk of the securities depending upon the attitude of investor
towards risk.
 To identify securities for investment to refuse volatility of return and risk.
 To find out the invisible assets (generally securities) having scope for better
returns depending upon individual characteristics like age, health, need,
liquidity, tax liability, disposition.
 To develop an alternative investment strategy for selecting a better portfolio
that will ensure a trade- off between risk and return with a view to attach the
primary objective of wealth maximization at lower risk.

In the light of analysis used in portfolio management Mr. Shrestha added that
investment analysis for the selection of equity shares could be done with the help of
either Fundamental Analysis or Technical Analysis. He has suggested that the banks
having international network can also offer access to global financial markets. He has
coded that the requirements of skilled manpower, research and development
department or team, which could be able to conduct intensive, fundamental and
proprietary research on both macro and micro economic trends. Moreover, a strong
and effective backroom operations including proper Management Information System
(MIS) is required to provide and collect appropriate information about check and
balances to communicate the statements or results of clients and maintain accounts of
the portfolio’s performance is required for successful portfolio management.

As so, in favor of Portfolio Management in Nepalese banks Mr. Shrestha expressed

that “Nepalese Commercial Banks at present, the portfolio management activities are
in nascent stage. However, on the other hand, most of the banks are not doing such
activities so far because of the following reasons:
 Unawareness of the clients about the service available
 Hesitation of taking risk by the clients to use such facilities
 Lack of proper techniques to run such activities in the best and successful
manner.
 Less developed capital market and availability of fewer financial instruments
in the financial markets.

At last Mr. Shrestha has concluded that “in this competitive and market oriented
economy each and every bank has to play vital role in the development of the country.
But the survival of the banks depends upon its’ own financial health, and its’ various
activities. If we look at the present banking scenario the capital adequacy requirement
will increase if the banks concentrate more on on-balance sheet activities, which
obviously carries costs. On the other hand, banks also have to maintain loan loss
reserve, which relatively curtails the net profit of the bank. Thus, the off-balance sheet
activities have been exercised predominantly in world’s most of the commercial
banks. Out of them the portfolio management activity is picking up day by day. Thus,
in order to develop and expand the portfolio management methodology, portfolio
manager should reflect high standards and give their benefits of global strengths, local
disciplined and systematic approval to the selection of appropriate countries. As well
as financial assets and the management of various risks, the portfolio manager could
enhance the opportunity for each investor (client) to earn superior returns over time.
Thus, the Nepalese banks having greater network and access to go for portfolio
management of their fee-based income as well as to enrich the client base and to
contribute in national economy.”

Pradhan (1996) has presented a glimpse on investment in different sectors, its

problems and prospects through his article, “Deposit mobilization, its problem and
prospects.” On his article, he has expressed that, “Deposit is the lifeblood of any
financial institution, and be it commercial bank, finance company, co-operative or
non-government organization.” He also added, in consideration of 10 commercial
banks and nearly three dozens of finance companies, that latest figure does produce a
strong feeling that a serious review must be made of problems and prospects of
deposit sector. Except few joint venture banks, other organization rely heavily on the
business deposit receiving and credit disbursement.

In the light of this, Mr. Pradhan has pointed out following problems of deposit
mobilization in Nepalese perpective:
1. Due to the lack of education most of Nepalese people do not go for
saving in institutional manner. However, they are very much used of
saving, be it in the form of cash, ornaments or kind. There reluctance
to deal with institutional system are governed by their lower level of
understanding about financial organizations, process requirements,
office hours withdrawal system, availability of depositing facilities and
so on.

2. Due to lesser office hours of banking system people prefers for holding
the cash in the personal possession.
3. Unavailability of the institutional services in the rural areas.
4. No more mobilization and improvement of the employment of
deposits in the loan sectors.
Mr. Pradhan has not only pointed out the problems but also suggested for the
prosperity of deposit mobilization. They are given as:
1. By cultivating the habit of using the formal sector for transactions must
be a priority and continuous educational program.
2. By adding service hours system will definitely be an appropriate step.
 3. By providing sufficient institutional service in the rural areas. If
deposit mobilization materializes, that should be taken as major
achievement as this generated fund can be used somewhere else by the
bank. Nepal Rastra Bank could endorse this deposit collection by
continuing to subsidize overhead cost for little longer period. A full
scale of field office system could be taken back and modes manpower
strength deputed to cut down overhead cost.
4. Nepal Rastra Bank could also organize training program to develop
skilled manpower.
5. By spreading co-operative to the rural areas mini banking services are
to be launched.
6. The scheme of mobilizing the deposits in the form of free personal
accident insurance, deposit insurance may be fruitful. Not only waiting
for potential customer it is better to reach to the potential depositors.
At last Mr. Pradhan mentioned. “Deposit mobilization carried out effectively is in the
interest of depositors, society, financial sector and the nation. Lower level of deposit
raising allows squeezed level of loan delivery leaving more room to informal sector.
That is why higher priority to deposit mobilization has all the relevance.

Bhattarai (2003) has presented an article about the “Non-Performing Assets (NPA)
Management”. According to him, a loan is a very easy term for a borrower when he
has already taken and for a lender not availed. It is equally difficult for a borrower to
avail and for lender to recover. From a banker’s view, it is just like a stone to roll
down from the top of the hill while sanctioning, but too difficult to roll back the same
stone to the top of the hill while recovering. A loan not recovered within the given
timeframe either in the form of interest servicing or principal repayment is called non-
performing loan. There are other parameters as well to quantify a NPL. Security not to
the extent of loan amount with specified safety margin, value of security not
realizable, possession not as per the requirement of bank, conflict of charges are some
of the reasons which causes difficulties while recovering the loan.

According to him, NPL of a bank is like a cancer in a human body, which will
collapse the entire bank if not taken care in time. This is an important discipline in
banking to prevent the entire NPL or avoid situation for a loan to turn into NPL. Loan
for banks is very essential to generate revenue for operational expenses a well as to
provide return to the shareholders.

When a loan advanced from good money turns into a bad loan, the chances of when a
loan advanced form good money turns into a bad loan, the chances of shareholders
return as well as the survival of the bank is at stake. Ailing banks cannot portray a
better image in public. When a public looses the confidence on a bank and does not
deposit, the bank will be in the verge of extinction. Therefore, deposits are the essence
for a bank. A loan disbursed as good loan does not turn into bad overnight. It has
certain course to turn into bad. An efficient bank management can recover the loan
before turning it into bad and can save itself from the unwanted catastrophe. A
general survey reveals following reasons why a good loan turns into a bad one:
Situational Problems.
- Poor analysis of project and its capital requirement leading to a situation of
over/under capitalized.
- Problem in managing the unit.
- Faulty evaluation of loan and security.
- Mismatch in demand and supply leading over inventory or under inventory.
- Actual modus operandi is very different from the projection and unit unable to
cope with the situation.
- Sudden change in internal and external environment and project not being able
to run according to its plan.
- Collection of receivables unnecessarily delayed resulting delay in re-order and
chances of business penetration by other competitors.
Intentional Problems
- Intention to flee without settling the loan.
- Intention to cheat the bank.
- Intention to auction the property.
- To relieve from other debts.
- Malicious acts of both the bank staffs and the borrower.
- To show other creditors of his bankruptcy, which is unmanageable.
- To waive interest/penal interest or avail discount on loan if paid in later stage
when bank offers such facilities.
In conclusion, a borrowing may reflect one or all the above signals that may cause
harm to the bank. There are few ways to protect bank from intentional defaulter but
for those default caused by situations we can reschedule or restructure their facilities
and help them to meet their debt obligation as per the cash flow they having. Even an
authentic loan that has been sanctioned with a good intention may turn into bad due to
lack of proper management and carelessness. The bank will have to face heavy
consequences in such a case. When a good loan, with all effort to protect it, turns into
bad and the borrower’s ability is not sufficient to repay it, he then tries to hide it from
the bank and wants to be relieved temporarily. Such situations give some signals to
the bank and these signals are called danger signals.
A bank must be one-step further than its customers must. It must collect all the
relevant information that are required by the borrower for the establishment of a
business and be rigid to give loan than to give his own money without any security.
When a borrowing unit is not able to serve the debt from the source explored, the
documentations are merely a decree to enforce legal action against him. Nevertheless,
what gets realized when everything is lost. A jail and punishment does not satisfy the
interest of bank. Therefore, he is of the view that the bank should always keep in mind
the formula “Know your customers” (KYC) before giving loans.
The security given by a borrower may be ample for the exposure. However, the
borrower from other source of business may not be able to generate substantial
earning to service the debt. Bank has the right to auction the property and liquidate the
loan but in doing so realization form the auction of the property is always less than the
value of the assets. This will serve neither the purpose of bank nor the borrower
instead cause loss to both.
2.2.2 Review of Thesis Work
In the light of this dissertation, several thesis works (as are supposed to be relevant)
have been conducted by previous students have also been considered. Main theme of
some of these dissertations are given as:
Poudyal in his research, “Investment in priority sector with special reference to Nepal
Bank Ltd.” has put forward following objectives:
1. To analyze the repayment position of the priority sectors.
2. To find trends of priority sectors loan.
3. To analyze how far Nepal Bank Ltd. Has been able to grant credit
to priority sectors.
 4. To examine the impact of loan on priority sectors.
5. To analyze the impact of probable cause of misuse of the loan by the
borrowers.
Similarly, the major findings of the study were as follows:
a) The procedure of loan sanctioning is rather slow and clumsy.
b) Bank was not able to fulfill the purposed target of corresponding loan to the
priority sector.
c) Banking procedures are so complicated that a layman is not able to understand
it completely.
d) Loan repayment was more satisfactory from agriculture sector than the cottage
industries and service sector.
e) Short-term credit was important for rural people.
f) Loan repayment was mainly due to the miss utilization of loan, other
important causes are linked with social expenses like expenses in marriage
ceremony, medical treatment, cremation etc.
g) Loan in priority sector has significantly generated the employment
opportunity.
h) Loan in priority sector has increased the rural banking system in the rural
areas bank branch expansion.
i) The investment amount and percentage of priority sector investment on total
deposits have up-going trend.
j) A sort of pressure groups like local people, politicians, administrators etc
affect in loan granting process.
Khatri, in his research, has found that NIDC has supposed to be invested the highest
percentage of loan as direct loan and the least percentage as guarantee loan. NIDC has
given high priority towards Central Development Region and least to Far Western
Development Region. During his study period he also found that NIDC has allocated
highest percentage of financial assistance to hotel, lodge and tourism based industrial
sector and the nominal amount has been allocated to cottage, health, education and
other industrial sector. In the recommendation column he has recommended that
NIDC has to finance all development region and other prior sectors giving equal
priority to minimize industrial imbalance among the different regions.
Manandhar has conducted a thesis research on, “A comparative study in investment
policies of finance companies in the context of Nepal.”
He has pointed out the following objectives:
a) to evaluate the trends of deposit utilization and its projection for the next five
years in case of these companies.
b) To evaluate the liquidity, assets management efficiency and profitability
position in relation to fund mobilization of above listed companies.
c) To evaluate the growth ratio of loans and advance and total investment with
respective growth rate of total deposits and net profits of the companies.
d) To find out relationship between deposits and total investment, deposit and
loans and advance and net profit and outside assets of the listed companies.
e) To discuss the fund mobilization and investment policy of these companies in
respect to its fee based off-balance sheet transactions and fund based on-
balance sheet transactions.
f) To suggest and recommend some measures on the banks of comparative fund
mobilization and investment policy of these companies for the improvement of
financial performance in future.
The findings of the research were as follows:
a) The liquidity position of National Finance and NEFINSCO are comparatively
better than of other companies. Nevertheless, that of Goodwill finance and
Union finance seems to be quite weaker.
b) Most of the finance companies are successful in on-balance sheet utilization as
well as off-balance sheet operation. Among them, NEFINSCO and Goodwill
comes ahead of all.
c) Profitability position of most of the companies is comparatively not better.
d) Most of the finance companies are able to maintain the growth ratios among
them. Nepal share markets seem to be more successful to increase their source
of funds and mobilization as well as net profit.
e) There is significant relationship between deposits and loans advances of all
finance companies. Similarly, there is no significant relationship between
deposits and total investment of all companies except NEFINSCO and
Goodwill Finance Co. Ltd. There is also no significant relationship between
outside assets and net profit of all companies except Union Finance Co. and
National Finance Co. Ltd. The trend value of total investment to total deposit
ratio and loans and advances to total deposits ratio in increasing trend.
Khanal in his thesis entitled, “Investment in priority sector by commercial banks (a
study of commercial banks of Kathmandu valley)” has put forward following
objectives.”
a) To analyze the trend of investment in priority sector.
b) To find out extent of profitability affected in this sector.
c) To measure the efficiency of the program in the rural and urban sectors.
d) To evaluate the banking procedures and services in disbursing loans.
e) To explore the reasons for low investment.
The main findings of the research were as follows:
a) The investment in priority sector has an increasing trend.
b) Banks are giving due consideration to increase investment in the priority
sector.
c) Due to low interest rate, overhead cost increased in administration and showed
low profitability.
d) The regression analysis had shown a negative relationship between profit and
investment.
e) The chi-square test has shown that the investment program in rural and semi-
urban areas is more effective than in urban areas.
f) Banking procedure regarding loan disbursement in priority sector is much
more complicated.
g) There is wide gap between demand and supply of loan.
h) Due to security and lack of proper legal documents most loan requesters have
been rejected and even cancelled some of the projects in different sectors.
Ojha has concluded in her thesis that the banks are unable to meet the requirement of
12 % lending in priority sectors as per NRB Directives. As she has analyzed the trend
of five years period, she ahs further found that low interest rate in priority sector but
increasing trend of overdue and its miss utilization. So, she has recommended for the
improvement of sound supervision, evaluation of borrower’s paying capability and
reduction of overdue through integrated program of priority sector loan.

Chapter III
3. Research Methodology
3.1 Introduction
Research methodology describes the methods and process as applied in the entire
subject of the study. It is a way to systematically solve the research problem. Research
methodology refers to the various sequential steps to adopt by a researcher in studying
a problem with certain objectives in view [Link], 1989. The research
methodology adopted for the present study is mentioned in this chapter which deals
with research design, sources of data, data collection, sample and population.
3.2 Research Methodology
Research Methodology describes the methods and process applied in the entire
subject of the related study. Every research should follow the systematic research
methodology to solve the research problem. The research methodology is wider
concept. The research methodology considers the logic behind the methods used in
the context of research study and explains why particular method or technique is used.
Research Methodology is a way to solve systematically about the research problems,
which includes many tool, if it is necessary in each and every steps of this study. The
main objectives of the study are to analyze, examine, highlight and interpret the
investment situation of the banks. Research methodology refers to the various
sequential steps to be followed and adopted by a researcher in studying a problem
with certain objectives in view.
3.2.1 Research Design
Research is a systematize effort to gain new knowledge. Research design is the
conceptual structure within which research is conducted. It constitutes the blueprint
for the collection, recording, interpretation, reporting and analysis of data. Descriptive
and analytical research designs have been used to achieve the objective of this study.
Descriptive techniques have been applied to evaluate investment performance of
NABIL and compare it with NIBL as well as some statistical and financial tools have
been adopted to examine facts. The study is design as to give a clear picture of the
bank's investment circumstances with the help of available data and with some useful
suggestions & recommendation.
3.2.2 Population and Sample
Number of Commercial Banks in Nepal
S.N. Commercial Banks Established Date Head Office
1. Nepal Bank Ltd. 1937/11/15 Kathmandu
 2. Rastriya Banijya Bank 1966/01/23 Kathmandu
3. Nabil Bank 1984/07/16 Kathmandu
4. Nepal Investment Bank Ltd. 1986/02/27 Kathmandu
5. Standard Chartered Bank 1987/01/30 Kathmandu
6. Himalayan Bank Ltd. 1993/01/18 Kathmandu
7. Nepal Bangladesh Bank 1993/06/05 Kathmandu
8. Nepal SBI Bank Ltd. 1993/07/07 Kathmandu
9. Everest Bank Ltd. 1994/10/18 Kathmandu
10. Bank of Kathmandu Ltd. 1995/03/12 Kathmandu
11. Nepal Credit and Commercial Bank 1996/10/14 Kathmandu
12. Lumbini Bank Ltd. 1998/07/17 Naryanghat
13. Nepal Industrial and Commercial Bank Ltd. 1998/07/2 Biratnagar
14 Macchapuchhre Bank Ltd. 2000/10/03 Kathmandu
15. Kumari Bank Ltd 2001/04/03 Pokhara
16. Laxmi Bank Ltd. 2002/04/03 Kathmandu
17. Siddhartrha Bank Ltd 2002/12/24 Kathmandu
18 Agricultural Development Bank Ltd. 1968/01/02 Kathmandu
19 Global Bank Ltd. 2007/01/02 Birgunj, Parsa
20 Citizen Bank Ltd. 2007/06/21 Kathmandu
21 Prime Bank Ltd. 2007/09/24 Kathmandu
22 Sunrise Bank Ltd. 2007/10/12 Kathmandu
23 Bank of Asia Nepal Ltd. 2007/10/12 Kathmandu
24 Nepal Development and Credit Bank Ltd 2008 Kathmandu
25 NMB Bank 2008 Kathmandu

From these samples two banks i.e. NABIL and NIBL has been selected and its data
related to investment policy are comparatively studied.

3.2.3 Nature and Source of data

The study is based on the secondary data relating to the study of investment analysis
of NABIL & NIBL banks as they are available at NABIL & NIBL. Determining the
sources of data is an important step in the collection of data. Basically this study is
conduct on the basis of secondary and analyzed data. For analysis, the data are
collected from Bank's Financial Statement & Annual Reports of these two banks and
another related data are collected from many institutions and regulating authorities
like NRB, Security Exchange board, Nepal Stock Exchange Ltd., Economic Survey,
Ministry of Finance, Budget Speech of different fiscal years, T.U. Central Library,
SDC library, various articles published in the newspaper, websites, magazines,
journals, reports etc.

3.2.4 Method of Data Presentation and Analysis

The data presentation and analysis are 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. In the same way, some strong financial tools
such as ratio analysis and trend analysis have also been used for financial analysis.
The data extracted from annual report, financial statement and other available
information are processed and tabulated in various tables and charts under different
headings according to their nature. .

3.3 Financial Tools

Financial tools, like ratio analysis have been used to examine the financial strength &
weakness of banks in this study. From the help of ratio analysis the quantitative
judgment can be done. It basically helps to analyze the strength and weakness of the
firm. In this study different ratios which are related to the investment operation of the
bank are calculated which are given below.

3.3.1 Liquidity Ratios

Liquidity means the ability of a firm to satisfy its short-term obligations as they come
due. It measured by the speed with which bank assets can be converted into cash to
meet deposit withdrawal and other current obligations. The following ratios are
evaluated under liquidity ratio:
a) Current ratio:
The calculation of current ratio is based on a simple comparison between current
liabilities. It measures short-term solvency, so it is often called liquidity solvency ratio
and working capital ratio. Current ratio is calculated by applying following formula.
b) Cash and Bank Balance to Current Asset ratio:
Cash and bank balance to current assets ratio reflects the portion of cash and bank
balance in total of current assets. Cash and bank balance are highly liquid assets than
other in current assets portion so this ratio visualizes higher liquidity position than
current ratio. This ratio can be calculated by using the following formula:

c) Cash and Bank Balance to Total Deposit Ratio:

Cash and bank balance are the current assets. It includes cash on hand and foreign
cash on hand; cheques and other cash items, balance with domestic banks and balance
held in foreign banks. Total deposit includes current, saving and fixed deposit, money
at call & short notice & other deposits. This ratio is calculated by dividing cash and
bank balance by total deposit. This can be presented as,

d) Investment on Government Securities to Current Asset Ratio:

Investment on government securities includes treasury bills and development bond. This ratio is
calculated by dividing investment on govt. securities by current assets. This can be presented as,

Here investment on government securities includes treasury bills and development

bond etc.
e) Loan and Advances to Current Assets Ratio:
Loan & advances are current assets, which generates income for the bank and show
the percentage of loan and advances in the total assets. Loan & advances include
loans, advances, cash credit, loan & foreign bill, purchase & discounted. This ratio
can be computed by dividing loans and advances by current assets. This can be states
as,

3.3.2 Asset Management Ratio

Asset management ratios are employed to evaluate the efficiency with which the firm
manage & utilizes its assets. It is also called turnover ratios because it indicates the
speed with which assets are being converted or turnover. The following ratios are used
in this asset management ratio:
a) Loan & Advances to Total Deposit Ratio
This ratio shows how successfully the banks are utilizing its total deposits on loan &
advances for generating profit. Higher ratio implies the better utilization of total
deposits. Mathematically it is presented as,

b) Total Investment to Total Deposit

This ratio implies the utilization of firms deposit on investment in government
securities and share, debentures of other companies and bank. Mathematically it is
presented as,

The numerator consists of investment on government securities, investment on

debenture and bond, shares in subsidiary companies, shares in other companies and
other investment.

c) Loan & Advances to Total Working Fund Ratio

Loan & advance is the major component in total working fund (total assets) which
indicates the ability of bank to canalize its deposits in the form of loan & advances to
earn high return. This can be obtained by dividing loan & advances by total working
fund. Mathematically it is presented as,

Here, the denominator includes all assets of on balance items. In other words this
includes current assets, loans for development banks and other miscellaneous assets
but excludes off balance sheet items like letter of credit, letter of guarantee etc.

d) Investment on Government Securities to Total Working Fund Ratio

This ratio shows the banks investment on government securities in comparison to the
total working fund. This ratio is calculated by dividing investment on government
securities by total working fund. This is presented as,

e) Investment on Shares and Debentures to Total Working Fund Ratio

This ratio shows the banks investment in shares and debenture of the subsidiary and
other companies. This ratio can be derived by dividing investment on shares and
debentures by total working fund. This is presented as,

Here the numerator indicates investment on debentures, bonds and shares of other
companies.

3.3.3 Profitability Ratios

Profitability ratios are very helpful to measure the overall efficiency of operations of a
firm in term of profit. It is true indication of financial performance of any institutions.
Higher the profit ratio, the higher will be the efficiency bank and vice versa.
Profitability position can be evaluated through following different ways:
 a) Return on Loan and Advance Ratio
This ratio indicates how efficiency the bank has employed its resources in the form of
loan & advances. This ratio is computed by dividing net profit (loss) by loan and
advances. This can be expressed as,

b) Return on Equity Ratio (ROE)

Net worth refers to the owner's claim of a bank. The excess amount of total assets
over total liabilities is known as net worth. This ratio measures how efficiently the
banks have used the funds of owners. Total investment earned to total outside assets
ratio. This can be stated as,

c) Total Interest Earned to Total Outside Asset Ratio

This ratio measures the interest earning capacity of the bank through the efficient
utilization of outside assets. Higher ratio implies efficient use of outside assets to earn
interest. This ratio is calculated by dividing total interest earned by total outside assets.
This can be presented as,

3.3.4 Risk Ratios

Risk taking is the prime business of banks investment management. It increases
effectiveness and profitability of the bank. These ratios indicate the amount of risk
associated with the various banking operations which ultimately influences the banks
investment policy. The following ratios are evaluated under this topic:
a) Liquidity Risk Ratio
This ratio measures the level of risk associated with the liquid assets i.e. cash, bank
balance that are kept in the bank for the purpose of satisfying the deposit demand for
 cash. This ratio is calculated by dividing total cash and bank balance by total deposits.
It can be stated as,

b) Credit Risk Ratio

It measures the possibility that loan will not be repaid or that investment will
deteriorate in quality or go into default with consequent loss to the bank. By
definition, credit risk ratio is expressed as the percentage of non-performing loan to
total loan & advances. Here, dividing total loan and advances by total assets derives
this ratio. This can be stated as,

3.3.5 Growth Ratios

Growth ratios are directly related to the fund mobilization & investment management
of commercial bank. It represents how well the commercial bank is maintaining its
economic & financial position. To examine and analyze the expansion and growth of
the bank following growth ratios are calculated in this study.
a) Growth ratio of total deposits.
b) Growth ratio of loan and advance.
c) Growth ratio of total investment.
d) Growth ratio of net profit.

3.4 Statistical Tools

To achieve the objective of this study, some important statistical tools are used such
as mean, Standard deviation, co-efficient of variation co-efficient of correlation, trend
analysis and test of hypothesis (t– Statistic) which are as follows:

a) Standard Deviation
Standard deviation is an important and widely used to measure dispersion. A standard
deviation is the positive square root of the arithmetic mean of the squares of the
deviations of the given observations from their arithmetic mean. It is denoted by the
letter σ (sigma).In this study standard deviation of different ratios are calculated.
b) Co-efficient of variation
The co-efficient of variation is the most commonly used measure of relative variation.
It is the relative measures of dispersion, comparable across distribution, which is
defined as the ratio if the standard deviation to the mean expressed in percent. It is
used in such problems where the researcher wants to compare the variability of data
more than two years. It can be shown as,

c) Co-efficient of Correlation
This analysis interprets and identifies the relationship between two or more variables.
In the case of highly correlated variable, the effect on none variable may effects
another correlated variable. This study tries to find out relationship between the
following variables.
a) Co-efficient of correlation between deposit and loan and advances.
b) Co- efficient of correlation between total deposit and total investment.

This tools analyze the relationship between these variables and help the bank to make
appropriate policy regarding deposit collection, fund utilization and maximization
profit.

d) Trend Analysis
These analysis analyze the trend of deposit, loan and advances, investment and net
profit of NABIL and NIBL and make the forecast for the next 5 years.

i. Trend analysis of total deposit

ii. Trend analysis of loan and advance
iii. Trend analysis of total investment
iv. Trend analysis of net profit
The trends of related variable can be calculated as, Y = a+bx
 e) Test of Hypothesis
The objective of the test is to get the significant different regarding the parameters the
population on the basis of sample drawn from the population. This test has been
conducted on the various relations related with the banking business.
i. Test of hypothesis on loan & advances to total deposit ratio of
NABIL and NIBL.
ii. Test of hypothesis on total investment to total deposit ratio of
NABIL and NIBL.

Chapter IV
4. Presentation and Analysis of Data
4.1 Presentation and Analysis of Data
In this chapter the researcher has analyzed and evaluated those major financial
performances, which are mainly related to the investment management and fund
mobilization of NABIL and NIBL comparison thereof has been made of the two
banks.

4.2 Financial Analysis

In this topic employing some financial tools such as liquidity ratio, asset management
ratio, profitability ratio and other ratios are used to achieve the objective of the study.
Only those ratios are calculated and analyzed which are very important to evaluate
fund mobilization of a commercial bank. They are as follows:
4.2.1 Liquidity ratio
Liquidity ratios measure the ability of the firm to meet its current obligations.
Difference between current assets and current liabilities is known as working capital,
which provides liquidity in business organizations. A commercial bank must maintain
its satisfactory liquidity position to satisfy the credit needs of the community, to meet
the demands for deposits withdrawal, pay maturity obligation in time and convert non
cash into cash to satisfy immediate needs without loss to the bank and without
consequent impact on long-run profitability of the bank. The liquidity position of
NABIL and NIBL has been calculated from the following ratio:
a) Current Ratio
The calculation of current ratio is based on a simple comparison between current
assets and current liabilities. This is the broad measure of liquidity position of the
bank. The standard of current ratio is 2:1 for banking and 1:1 for seasonal business so
on.
We have,

Where, current assets consists of cash and bank balance, money at call or short-term
notice, loan and advances, investment in government securities and other interest
receivable and other miscellaneous current assets.
Current liabilities consists of deposits, loan and advances, bills payable, tax provision,
staff bonus, dividend payable and miscellaneous current liabilities.
Current Ratios of NABIL and NIBL from fiscal year 2003/2004 to 2007/2008 are
given below in Table-1.
Table-1
Current Ratio (times)
Fiscal Year

Banks 2003/04 2004/05 2005/06 2006/07 2007/08 Mean [Link] C.V%

NABIL 0.91 0.93 0.96 1.01 0.80 0.92 0.07 7.58

NIBL 0.89 0.89 0.92 0.92 0.94 0.91 0.02 2.14
Source : Appendix A (1)
Above table indicates that both banks are not capable to pay their current obligation.
The comparative table has revealed that both of the banks have more current liabilities
than current assets except in Fy. 2006/07 NABIL bank has more current assets than
current liabilities. In average, NABIL has maintained higher current ratio than NIBL
ie. 0.92% > 0.91%, but the liquidity position of both banks are not so satisfying. The
co-efficient of variation between current ratio is 7.58% in terms of NABIL and 2.14%
in terms of NIBL.
The above ratios are not consistent because the optimal standard ratio should be 2:1,
but 1:1 is also considers for the banks. This ratio represents the relationship between
cash & other current assets to its current obligation.
b) Cash and Bank Balance to Current Assets Ratio
Cash and Bank Balance to Current Ratio reflects the portion of cash and bank
balance in total of current assets. Cash and bank balance are the most liquid current
assets. This ratio measures the percentage of most liquid fund with the bank to make
immediate payment.
Where,
Cash and Bank Balance is composed of cash on hand including foreign cheques,
other cash items and balance with domestic banks and abroad.
Current assets consists of Cash and Bank Balance, money at call or short-term notice,
loan and advances, investment in government securities and other interest receivable
and other miscellaneous current assets.
Table-2
Cash and Bank Balance to Current Assets Ratio (%)
Fiscal Year

Banks 2003/04 2004/05 2005/06 2006/07 2007/08 Mean [Link] C.V%

NABIL 8.25 6.82 3.74 3..05 6.89 5.75 2.00 34.80

NIBL 12.32 11.00 9.60 13.04 10.35 11.26 1.26 11.20
Source : Appendix A (2)
The above table shows that the comparative cash and bank balance to current assets
ratio, which is in fluctuating trend for both NABIL & NIBL. NIBL’s higher ratio is
13.04% in FY. 2006/07 and lower is 9.60% in FY.2005/06. Similarly, Nabil’s higher
ratio is 8.25% in 2003/04 and lower is 3.05% in 2006/07. The mean ratio of NABIL
is lower than that of NIBL i.e. 5.75% < 11.26%.On the basis of co-efficient of
variation it can be conclude that NIBL’s ratios are consistent than that of NABIL i.e
11.20% < 34.80%. The above analysis helps to conclude that the cash and bank
balance position of NIBL with respect to current assets ratio is better than Nabil. It
implies the better liquidity position of NIBL.
c) Cash and Bank Balance to Total Deposit Ratio
Cash and Bank balance includes cash on hand, foreign cash on hand, cheques and
other cash items, balance with domestic bank and balance held aboard. This ratio is
calculated by dividing cash & bank balance by total deposit.
The following table shows the cash and bank balance to total deposits ratio of NABIL
and NIBL. Through this table cash and bank balance to total deposit ratio are
analyzed & standard deviation, mean & C.V is calculated by using the formula.
 Table-3
Cash and bank balance to total deposit ratio (%)
Fiscal Year

Banks 2003/04 2004/05 2005/06 2006/07 2007/08 Mean [Link] C.V%

NABIL 8.51 6.87 3.83 3..26 5.99 5.69 1.94 34.10

NIBL 11.69 10.65 9.40 12.34 9.97 10.81 1.08 9.10
Source : Appendix –3
It is observed that total cash and bank balance to total deposit of both NABIL and
NIBL are in a fluctuating trend. NABIL higher ratio is 8.51% in 2003/04 and the
lower ratio is 3.26% in F/Y 2006/07. The mean ratio of NIBL is higher than of
NABIL. The higher mean ratio of cash and bank balance to total deposits of NIBL
reveals that its liquidity position regard to its total deposits is more satisfactory than
NABIL The standard deviation of NABIL is higher than NIBL. On the basis of co-
efficient of variation it can be concluded that NABIL's ratios are less consistency than
that of NIBL because it's higher C.V i.e. 34.10 > 9.10%
d) Investment on Govt. Securities to Current Asset Ratio
This ratio examines that portion of commercial banks current assets, which is inverted
on different government securities. More or less, each commercial bank is interested
to invest their collected fund on different types of securities issued by government at
different times to utilize their excess fund and have other purpose. Though,
government securities are not so liquid a cash and bank balance of commercial bank,
they can be easily sold in the market or converted into cash in other ways.
This ratio shows that out of total current assets, how much percentage of it has been
occupied by the investment on government securities. The ratio is calculated by
dividing investment on government securities by total current assets. The ratios are
presented in the following table.
Table- 4
Investment on govt. securities to current asset ratio
Fiscal Year
C.V %
Banks 2003/04 2004/05 2005/06 2006/07 2007/08 Mean [Link]
NABIL 25.88 25.78 16.13 11.15 23.66 20.52 5.89 28.7
NIBL 5.32 17.96 13.95 14.09 13.81 13.03 4.18 32.09
Source : Appendix-B
 The above table reveals that the mean ratio of investment on govt. securities to current
assets of NABIL is higher than the mean ratio of NIBL i.e. 20.52 >13.03 NABIL has
followed the fluctuating trend but NIBL'S performance is poor from this point of
view. From the analysis we can say that NABIL & NIBL investing position of current
assets as government securities indicates that it wants to invest more in other
productive sector.

e) Loan and Advance to Current Assets Ratio

Loan and advances are the current assets of commercial bank, which includes loan
and advances, cash, credit, overdraft, loan and foreign bill purchase and discount. A
commercial bank should not keep its all collected fund as cash and bank balances but
they should be invested a loan and advance to the customer because they must earn
high profit by mobilization funds for long life banking. They should pay interest on
these deposit funds even they don't generate loan and advances and may lose some
earning. But high loan and advances may be harmful because they need sufficient
liquidity.
The ratio is calculated by dividing loan and advances to current assets. The ratios are
presented in the following tables.
Table- 5
Loan and advances to current assets ratio (%)
Fiscal Year
Banks Mean [Link] C.V %
2003/04 2004/05 2005/06 2006/07 2007/08
NABIL 55.93 57.50 70.72 62.61 76.49 64.65 7.85 12.15
NIBL 76.78 63.98 72.50 71.35 71.35 71.58 4.21 5.89
Source : Appendix C
The above table shows that both banks loan and advances to current assets ratio are in
a fluctuating trend. The highest ratio of NABIL is 70.72% (F/Y 2005/06) and NIBL is
76.78% (F/Y 2003/04) respectively.
In case of the mean ratio, NIBL has maintained high ratio in comparison to NABIL.
The higher mean ratio of loan and advances to current assets of NIBL reveals that its
liquidity position with regard to its current asset is more satisfactory than of NABIL.
Loan and advance to current assets ratio of NABIL and NIBL are graphically shown
below in figure 1:
 Figure 1: Loan and advance to current assets ratio of NABIL and NIBL

4.2.2 Analysis of the Asset Management Position of the banks

A commercial bank should be able to manage its assets very well to earn high profit,
to satisfy its customers and for its own existence. This ratio measures how efficiently
the bank manages the resources at its commands.
The following ratios are measured the assets management ratio of the NABIL and
NIBL in comparison.
a) Loan and advances to total deposit ratio
This ratio actually measures the bank's ability to utilize the depositors fund to earn
profit by providing loan and advances. This ratio is compute by dividing loan and
advances by total deposit. A high ratio of loan and advances indicates better
mobilization of collected deposits and vice-versa. But it should be noted that too high
ratio might not be better from its liquidity point of view.
The following table reflects loan and advances to total deposit ratio of NABIL and
NIBL
Table No. 6
Loan and advances to total deposit ratio (%)

Banks
Fiscal Year
Mean [Link] C.V %
2003/04 2004/05 2005/06 2006/07 2007/08
NABIL 57.68 58.01 72.57 66.79 66.60 64.33 5.72 8.89
NIBL 72.86 61.87 71.04 67.50 70.59 68.77 3.86 5.60
Source : Appendix-D
The above table shows that NABIL and NIBL loan and advances to total deposit ratio
have fluctuating trend during the study period. The highest ratio of NABIL and NIBL
are 72.57% (F/Y 2005/06) and 72.86% (F/Y 2003/04) respectively. An average, the
ratio of NIBL is higher than that of NABIL (i.e. 68.77 > 64.33). It shows that NIBL
seems to be strong to mobilize its total deposit as loan and advances in comparison to
NABIL. On the basis of co- efficient of variation, we can say that NIBL loan and
advances is more consistent that of NABIL because of its lower C.V. i.e. 5.60<8.89.
It is concluded that NIBL is successful mobilize its total deposit as loan and advance
and also NABIL is found slightly weak in comparison to the NIBL.
b) Total investment to total deposit ratio
A commercial bank may mobilize it deposit by investing its fund in different
securities issued by government and other financial and non-financial companies.
Now the effort has been made to measure the extent to which the banks are successful
in mobilize the deposits on investment. In the process of portfolio management of
banks assets various factors such as availability of fund, liquidity requirement, central
banks norms etc are to be considered in general. A high ratio is the indicator of high
success to mobilize the banking fund as investment and vice versa.
The following table shows the ratio of total investment to total deposits of NABIL and
NIBL
Table No. 7
Total investment to total deposit ratio (%)

Fiscal Year
Banks Mean [Link] C.V %
2003/04 2004/05 2005/06 2006/07 2007/08

NABIL 44.85 41.33 29.27 31.93 38.32 37.14 5.79 15.59

NIBL 21.52 33.51 27.60 29.60 26.57 27.76 3.92 14.12
Source : Appendix E
Above table reveals that both bank's total investment to total deposit ratios are in
fluctuating trend. NABIL's has highest ratio in F/Y 2003/04 i.e. 44.85% and lowest
ratio in F/Y 2005/06 i.e. 29.27%. NIBL's has highest ratio in F/Y 2004/05 i.e. 33.51%
and 21.52% lowest ratio in F/Y 2003/04.
On the basis of mean ratios, it can be said NIBL's capacity to mobilize its deposits on
total investment is not so good as its mean ratio is lower than of NABIL. On the other
hand, observing the C.V of ratios, we can say that NIBL's loan and advances ratio is
more consistent than NABIL, because of its lower C.V. i.e. 14.12%. Total deposit,
loan and advances and total investment of NABIL and NIBL are presented in the bar
diagram as follows.

Figure 2: Total investment to total deposit ratio (%)

c) Loan and Advances to total working fund ratio

A commercial bank's working fund should play a very significant role in profit
generation through fund mobilization. The ratio reflects the extent to which the banks
are successful in mobilizing their total assets of loan and advances for the purpose of
income generation. A high ratio indicates a better fund mobilization as loan and
advances and vice-versa.
The ratio is calculated by dividing loan advances by total working fund. The
following ratio shows the ratio of loan and advances to total working fund.
Table No.8
Loan and advances to total working fund ratio (%)

Fiscal Year
Banks Mean [Link] C.V %
2003/04 2004/05 2005/06 2006/07 2007/08
NABIL 46.83 48.91 61.60 57.87 57.04 54.45 5.63 10.33
NIBL 64.03 53.79 62.22 59.90 62.65 60.52 3.62 5.98
Source : Appendix F
Above table no 8 shows that NABIL's ratio has a fluctuating trend. It has the highest
ratio in the F/Y 2005/06 i.e. 61.60% and the lowest ratio is 46.83%in F/Y 2003/04. In
case of NIBL also it has a fluctuating trend; it maintained the highest ratio in F/Y
2003/04 i.e.64.03% and the lowest in F/Y 2004/05 i.e.53.79%

From the above analysis, it is concluded that NIBL has that NIBL is not in weak
higher mean ratio than NABIL. It is clear condition to mobilize its working fund as
loan and advance than NABIL. The coefficient of variation of NIBL is high consistent
than that of NABIL i.e. C.V. of NIBL is 5.98% and C.V. of NABIL is 10.33%
d) Investment on Government Securities to Total Working Fund Ratio
This ratio reflects the extent to which the banks are successful in mobilizing their total
working fund on different types of government securities to maximize the income. All
the deposits of the bank should not be utilized in loan and liquidity point of view,
Therefore, commercial banks seem to be interested to invite their deposit by
purchasing government securities. A high ratio shows that better mobilization of
funds as investment on government securities and vice-versa. This ratio is calculated
by dividing investment on government securities by total working fund and this ratio
of NABIL and NIBL is presented in the following table.
Table No. 9
Investment on government securities to total working fund ratio (%)
Fiscal Year
Banks Mean [Link] C.V %
2003/04 2004/05 2005/06 2006/07 2007/08
NABIL 21.67 21.93 14.05 10.31 17.64 17.11 4.47 26.12
NIBL 4.44 15.10 11.97 11.82 11.80 11.03 3.52 31.95
Source : Appendix G

The above comparative table shows that the ratio of both banks is fluctuating trend in
the study period. The mean ratio of NABIL is more than NIBL i.e. 17.11 >11.03

The comparison mean ratio of NABIL and NIBL reveals that NABIL is strong to
mobilize their working funds as investment in government securities. The coefficient
of variation of NIBL's is higher than that of NABIL i.e.31.95 >26.12. It indicates that
NIBL's ratios are less consistent than that of NABIL. Likewise NIBL's variability
between ratios during the study period is greater than that of NABIL.

From the above analysis, it can be concluded that NABIL has invested its more
portion of working fund on government securities than NIBL.

e) Investment on Shares and Debentures to Total Working Fund Ratio (%)

Investment on shares and debentures to working fund ratio reflects the extent to which
banks are successful to mobilize their working fund in purchasing shares and
debentures of other companies to generate income and utilize extra fund. The high
ratio indicates the more portion of working fund investment on share and debenture
and vice-versa.
Table No.10
Investment on shares and debentures to total working fund ratio Percentage
Fiscal Year
Banks Mean [Link] C.V %
2003/04 2004/05 2005/06 2006/07 2007/08
NABIL 0.13 0.13 1.50 0.14 0.25 0.43 0.53 124.86
NIBL 0.15 0.10 0.11 0.09 0.14 0.118 0.023 19.36
Source : Appendix-H
From the above comparative table, it is found that the NABIL and NIBL have
invested nominal percentage to total working fund into shares and debentures of other
companies. NABIL ratios are in rising trend but NIBL ratios are in a fluctuating trend
showing the lack of efficient and uniform investment policy.

The comparison of mean ratios of NABIL and NIBL, it reveals that NABIL has
invested higher amount in shares and debenture than that of NIBL. Moreover, C.V. of
NABIL is highest than of the NIBL i.e. 12.486>19.36. Higher C.V. of NABIL ratio
states that its ratios are less consistent than of NIBL

4.2.3 Analysis of the profitability position of the banks

The main objectives of commercial banks are to earn profit providing different types
of banking services to its customers. To meet various objectives, like to have a good
liquidity position, meet fixed internal obligation, overcome the future contingencies,
grab hidden investment opportunities, expand banking transactions in different places,
finance government in need of development funds etc a commercial bank must have
to earn sufficient profit.

Of course, profitability ratios are the best indicators of overall efficiency. These ratios
are calculated to measure the operating efficiency and overall performance of the
financial institution. Here, mainly those ratios represented and analyzed which are
related with profit as well as fund mobilization. Through the fall ratios, effort has
been made to measure the profit earning capacity of NABIL in comparison to NIBL.
The following ratios are calculated under this profitability ratio topic:
a) Return on Loan and Advances Ratio
This ratio measures the earning capacity of the commercial banks through its fund
mobilization as loan and advances. A high ratio indicates greater success to mobilize
fund as loan and advances and vice versa.
This ratio calculated by dividing net profit by total amount of loan and advances . The
following table shows the return on loan and advances ratio of NABIL and NIBL of
study period.
Table No.11
Return on Loan and Advances Ratio Percentage

Fiscal Year
Banks Mean [Link] C.V %
2003/04 2004/05 2005/06 2006/07 2007/08

NABIL 5.37 5.56 4.90 4.92 4.34 5.02 0.43 8.66

NIBL 2.02 2.14 2.29 1.85 2.04 2.07 0.15 7.00
Source : Appendix-I
From the above comparative table, it shows that the ratios of both NABIL and NIBL
are in fluctuating trend. During the study period, the highest ratio of NABIL is in F/Y
2004/05 i.e.5.56% and the lowest ratio is 4.34% in F/Y 2007/08. In case of NIBL, the
highest ratio is 2.29% in F/Y 2005/06 and the lowest ratio is 1.85% in F/Y 2006/07.

On the other hand, when the mean ratios are observed, NABIL has higher ratio than
NIBL (i.e. 5.02% >2.07%).Likewise, high C.V. of NABIL i.e. 8.65% indicates high
variability of ratios than that of NIBL. Moreover, NABIL's significantly high C.V.
shows its less homogeneous ratios during the study period.
In conclusion it can be said that NIBL to be failure to earn high return on its loan and
advances in comparison to the NABIL. So, NIBL has to invest their fund in
productive sector to increase return ratio.
b) Return on Equity Ratio (ROE)
Equity capital of any bank is its owned capital. The prime objectives of any bank is
wealth maximization or in other words to earn high profit and thereby, maximizing
return on its equity capital. ROE is the measuring the role of profitability of bank. It
reflects the extent to which the bank has been successful to mobilize or utilize it
equity capital. A high ratio indicates higher success to mobilize its owned capital
(equity) and vice versa. This ratio is calculated by dividing net profit by total equity
capital including paid up capital, P/L a/c, various reserves, general loan loss provision
etc. This ratio has been shown in the following table.
Table No. 12
Return on equity (%)
Fiscal Year
Mean [Link] C.V %
Banks 2003/04 2004/05 2005/06 2006/07 2007/08
NABIL 31.67 30.73 31.29 33.88 32.76 32.06 1.12 3.5
NIBL 18.3 20.94 19.68 24.77 26.68 22.07 3.15 4.30
Source : Appendix J
From the above table shows, that the return on equity ratios of both banks are
fluctuating trend for the year of study period. NABIL has maintained highest ratio i.e.
33.88% in F/Y 2006/07 and the lowest ratio i.e. 30.73% in F/Y 2004/05. Similarly,
NIBL has highest ratio i.e. 26.68% in F/Y 2007/08 and lowest ratio i.e. 18.3% in F/Y
2003/04.
On the basis of mean ratio, it can be said that NABIL hasn't been weaker to earn high
profit to it's SH's in comparison to NIBL which can be viewed by the higher mean
ratio i.e. 32.06>22.07. The coefficient of variation of NIBL is higher than NABIL i.e.
14.30%>3.50% which indicates that NIBL has low degree of stability than that of
NABIL. Thus, it can be concluded that NIBL has not been able to earn high profit
through the efficient utilization of its owned capital. Moreover, its low C.V. shows its
quite homogenous ratios during the study period, which shows efficiency investment
policy for the mobilization of capital resources.
 c) Total Interest Earned to Total outside Asset Ratio
The outside assets have played a significant role in commercial banks as a main asset
which includes loan and advances, investment on government securities, investment
on share and debentures and all other types in investment. A high ratio indicates high
earning on total outside assets and vice versa.
This ratio is calculated by dividing total interest earned by total outside assets. The
ratio of NABIL and NIBL over the study period has been tabulated below.
Table No. 13
Total Interest Earned to Total outside Asset Ratio (%)
Fiscal Year
Banks Mean [Link] C.V %
2003/04 2004/05 2005/06 2006/07 2007/08
NABIL 7.38 7.14 7.21 6.86 6.48 7.01 0.29 4.22
NIBL 6.15 6.65 6.31 6.38 6.66 6.43 0.19 3.08
Source : Appendix K
From the above comparative table both banks ratio's are in fluctuating trend during
the period under study. On the other hand, when mean ratios are observed, NIBL
seems to have earned lower amount of interest on their outside assets in comparison to
NABIL i.e.6.43<7.01%. Moreover, C.V. of NIBL is significantly lower than that of
NABIL i.e. 3.08<4.22%. Total interest earned to total outside asset ratios of NABIL
and NIBL are graphically presented as follows:

Figure 3: Total interest earned to total outside asset ratio (2003/04 to 2007/2008)
4.2.4 Risk Ratios
The possibility of risk makes bank's investment a challenging task. Bank has to take
risk to get return on investment. The risk taken is satisfied by the increase in profit. A
bank has to take high risk if the expects high return on its investment. So, the banks
operating for high profit have to accept the risk and manage it efficiently. Through
following ratios efforts has been make to measure the level of risk essential in the
NABIL and NIBL comparatively.

a) Liquidity Risk Ratio

The liquidity risk of the bank defines its liquidity need for deposit. The ratio of cash
and bank balance to total deposit is the indicator of bank liquidity needed. The cash
and bank balance are the most liquid assets and they are considered as banks liquidity
sources and deposits as the liquidity needed. A higher liquidity indicates less risk and
less profitable bank and vice versa.
This ratio is calculated by dividing total cash and bank balance by total deposits. The
following table shows the liquidity ratio of NABIL and NIBL in comparison.
Table No. 14
Liquidity risk ratio (%)
Fiscal Year
Banks Mean [Link] C.V %
2003/04 2004/05 2005/06 2006/07 2007/08
NABIL 8.51 6.87 3.83 3.26 5.99 5.7 2.06 36.07
NIBL 11.69 10.65 9.40 12.34 9.97 10.8 1.08 10.00
Source : Appendix L
From the above table shows that the liquidity risk ratios of both banks have
fluctuating trend. In case of NABIL, its highest ratio is 8.51%in F/Y 2003/04 and the
lowest ratio is 3.26% in F/Y 2005/06. Whereas, the NIBL has maintained the highest
ratio is 12.34% in F/Y 2006/07 and the lowest ratio is 9.40% in F/Y 2005/06.

The mean ratio of NIBL is higher than that of NABIL i.e. 10.8%>5.7%. But, the C.V
of NABIL is higher than that of NIBL i.e. 36.07%>10.00%. It indicates that NIBL's
liquidity risk ratios are less variable than that of NABIL.
From the above analysis, it can be said that has NIBL maintains higher liquidity
which means it operates with lower risk, which decrease profitability. Whereas
NABIL has maintained low liquidity policy proved by higher coefficient of variation.

b) Credit Risk Ratio

Bank utilizes its collected funds in providing credit to different sectors. There is risk
of default or non-repayment of loan. While making investment, bank examines the
credit risk ratio shows the proportion of non-performing assets (NPAs) in the total
loan and advances of a bank. But due to unavailability of the relevant data, here we
presented the credit risk as the ratio of total loan and advances to total assets. The
following table shows the credit risk ratio of NABIL and NIBL in comparison.

Table No.15
Credit risk ratio (%)
Fiscal Year
Banks Mean [Link] C.V %
2003/04 2004/05 2005/06 2006/07 2007/08
NABIL 46.68 48.90 61.60 57.87 57.04 54.42 5.76 10.42
NIBL 64.03 53.79 62.23 59.89 62.65 60.52 3.45 5.77
Source : Appendix-M
The above table shows that both banks have fluctuating trend. In case of NABIL, its
ratio reached to 61.6% in 2005/06 and lowest ratio i.e. 46.68% in F/Y 2003/04
whereas the ratio of NIBL subject to highest i.e. 64.03% in F/Y 2003/04 and the
lowest i.e.53.79% in F/Y 2004/05.
On the basis of mean ratio, it can be said that credit of NABIL is lower than NIBL i.e.
54.42<60.52%. On the other hand, it has higher C.V. than NIBL i.e. 10.42>5.77%
which shows that NABIL's credit risk ratios are more variable than that of NIBL.
From the above analysis, it can be concluded that the degree of credit risk is higher
and its risk ratios are more variable. Credit Risk Ratio is graphically presented below.
 Figure 4: Credit Risk ratio (2003/04 to 2007/2008)

4.2.5 Growth Ratios

Growth ratios are analyzed and interpret which are directly related to the fund
mobilization and investment of a commercial bank. It represents how well the
commercial banks are maintaining their economic and financial position. Under this
topics four types of growth ratio are studied which as follows:
a. Growth ratio of total deposit
b. Growth ratio of loan and advances
c. Growth ratio of total investment
a) Growth ratio of Total Deposit
This ratio can be calculated by dividing the last period figure by the first period figure
then by referring to the compound interest tables. The high ratio generally indicates
better performance of a banks and vice-versa.
Table No.16
Growth ratios of total deposits (%)
(Rs. in millions)
Banks Fiscal Year Growth
2003/04 2004/05 2005/06 2006/07 2007/08 rates
NABIL 13447.65 14119.03 14586.61 19347.40 23342.285 14.78
NIBL 7922.75 11524.75 14254.57 18927.30 24488.85 32.59
Source : Appendix N(1), N(2)
The above table shows that the growth ratio of total deposits of NIBL is higher than
the NABIL. The growth ratio of NIBL's total deposit is 32.59% whereas the same of
the NABIL is 14.78%. It indicates that NIBL can successful in increasing deposit
funds in comparison to NABIL.
Table No.17
Growth Ratios of Loan and Advances (%)
(Rs. in millions)
Banks Fiscal Year Growth
2003/04 2004/05 2005/06 2006/07 2007/08 rates
NABIL 7755.90 8189.99 10586.17 12922.54 15545.78 18.98
NIBL 7772.14 7130.13 10126.05 12776.21 17286.43 22.12
Source : Appendix N(1), N(2)
The above comparative table reveals that the growth ratio of loan and advances in
case of NIBL are significantly higher than NABIL. It indicates that NIBL is more
successful in utilizing its collection fund as loan and advances in comparison to
NABIL. From the above analysis it can be said that the performance of NIBL to grant
loan and advance in compare to NABIL is better year-by-year.
Table No.18
Growth Ratios of Total Investment (%)
(Rs. in million)
Banks Fiscal Year Growth
2003/04 2004/05 2005/06 2006/07 2007/08 rates
NABIL 6031.17 5836.07 4269.66 6178.533 8945.31 10.36
NIBL 1705.24 3862.48 3934.19 5602.87 6505.66 39.75
Source : Appendix O(1), O(2)
The above table reveals that the growth ratio of investment of NIBL is higher than the
NABIL. The growth ratio of NIBL's investment is 39.75% whereas the same of the
NABIL is 10.36%. It indicates that NIBL performance is better on investment of
different sectors in comparison to NABIL. Growth Ratio of Total Investment is
graphically presented below.
 Figure 5: Growth Ratios of Total Investment (2003/04 to 2007/2008)

4.3 Statistical Analysis

In this topic, some statistical tools such as co-efficient of correlation analysis between
different variables, trend analysis of deposit, loan and advances, investment and net
profit as well as hypothesis test (t-statistical) are used to achieve the objectives of the
study. They are presented below:

4.3.1 Co-efficient of correlation analysis

Under this topic, Karl's person coefficient of correlation is used to find out the
relationship between deposit and loan and advances, total deposit and total investment
and net profit and total outside assets.

a) Co-efficient of correlation between deposit and loan and advances

Deposits have played very important role in performance of a commercial bank and
similarly loan and advances are very important to mobilize the collected deposits. Co-
efficient of correlation between deposit and loan and advances measure the degree of
relationship between these two variables. In this analysis, deposit is independent
variable (x) and loan and advances are dependent variable (y). The main objective of
computing 'r' between these two variables is to justify whether deposits are
significantly used as loan and advances in proper way or not.
The following table shows the value of r, r2, P. Er. and 6 [Link]. between total deposit
and loan and advances of NABIL and NIBL during the study period. For detail see
appendix-N (I) and N(II).
Table No.20
Co-relation between Deposit and Loan and Advances
Banks Évaluation Criterions
r r2 [Link]. 6 [Link]

NABIL 0.154 0.02371 0.29449 1.7669

NIBL 0.5377 0.2891 0.2144 1.2864

Source : Appendix N (1) and N (2)
From the above table, it has been seen that correlation between deposit and loan and
advances is 0.154 in case of NABIL. It means positive relation between two variables.
True value of coefficient of determination (r2) is 0.02371 and it means 2.37% of
variation of the dependent variable (loan and advances) has been explained by the
independent variable (deposit). Similarly, considering the value of ‘r’ i.e. 0.154 and
comparing it with 6.P.E.r. i.e. 1.7669. Since that the value of r is less than 6. [Link],
which shows that the value of ‘r’ is insignificant. In other word, there is no significant
relationship between deposit and loan and advances in the case of NABIL.

Likewise, in the case of the NIBL, the co-efficient of correlation between deposit
(independent variables) and loan and advances (dependent variable) is 0.5377 which
indicates positive co-relation between two variables. Similarly, the value of co-
efficient of determination (r2) is to be found 0.2891, which shows that 28.91% in the
dependent variable has been explained by the independent variable. Moreover,
considering the [Link]. i.e. 1.2864, which mean the relationship between deposit and
loan and advances is insignificant.

In conclusion from the above analysis of NABIL and NIBL, there is a positive
relationship between deposits and loan and advances. The relationship is insignificant
and the value r2 shows low degree of explanation. This indicates that both banks are
unsuccessful to mobilize their deposits in proper way as loan and advances.
b) Co-efficient of correlation between deposit and total investment
Co-efficient of correlation between deposit and total investment measures the degree
of relationship between these two variables. The purpose of calculating this analysis is
to find out whether deposit is significantly used as investment or not. Here, deposit is
independent variable (x) and total investment is dependent variable (y). For detail see
appendix-O (I) and (II).
Table No. 21
Correlation between Deposit and Total Investment
Banks Evaluation Criterions
r r2 [Link]. 6 [Link]
NABIL 0.8231 0.6774 0.0978 0.5836
NIBL 0.967 0.9350 0.0195 0.1174
Source : Appendix O(1) and O(2)

From the table in case of NABIL it is found that coefficient of correlation between
deposit (independent) and total investment (dependent) value of 'r' is 0.8231, which
shows the positive relationship between these two variables. Moreover, when we
consider the value of determination'r2' it is 0.6774 which indicates that 67.74% of the
variation in the dependent variable is explained by the independent variable. When
analyze the value of 'r' and comparing with [Link] we can find that r is much greater
than value [Link]. that reveals there is significant relationship between deposit and
total investment.

Similarly, the coefficient of correlation between deposit and total investment in case
of NIBL is found to be 0.967, which shows the positive relation between these two
variables. If we again consider the value of coefficient of determination (r2) it is
0.9350 which means that 93.50% in the dependent variable is explained by the
independent variable. When analyze the value of 'r' and comparing with [Link] we can
find that r is much greater than value 6 [Link]. that reveals there is significant
relationship between deposit investments.

In conclusion, NABIL and NIBL have the positive correlation between deposit and
total investment. The relationship is significant and the value of r2 shows high percent
in the dependent variables, which has been explained by the independent variable.
While considering [Link]., the both banks are higher than six times probable error. They
have significant relation between these two variables.

4.3.2 Trend Analysis and Projection for next five years

This topic is to analyze the trend of deposit collection, its utilization and net profit of
NABIL and NIBL. To utilize deposits, a commercial bank may grant loan and
advances and invest some of the funds in government securities and shares and
debentures of other companies. The topic analyzes the trend of deposit, loan and
advances, total investment and net profit are forecasting for next five years. The
projections are based on the following assumption.
 The main assumption is that other things will remain unchanged.
 The forecast will be true only when the limitation of least square method is
carried out.
 The bank will in present stage.
 Nepal Rastra Bank will not change its guidelines to commercial banks.
 The economy will remain in the present stage.

a) Trend Analysis of total deposit

The trend values of deposit of NABIL and NIBL for five year from 2000 to 2008 are
given below and forecast for next two years from 2009 and 2010 is done. (For detail
see appendix- P (I) and P (II). Regarding this topic, an effort has been made to
calculate the trend values of deposit of NABIL and NIBL:
 Table No. 22
Trend value of total deposit of NABIL and NIBL (2000-2010)
(Rs. in million)
Trend value of Trend value of
Year
NABIL NIBL
2001 15478.19 2957.27
2002 15088.97 5691.93
2003 14699.75 8426.59
2004 14310.53 11161.26
2005 13921.31 13895.92
2006 13532.08 16630.59
2007 13142.86 19365.25
2008 12753.64 22099.91
2009 12364.42 24834.58
2010 11975.20 27569.24

The above table that total deposit of NABIL is in decreasing trend and NIBL is in an
increasing trend. The total deposit of NABIL in 2001 is 15478.19 and the NIBL in
2010 is predicted 27569.242.

Figure 6: Trend value of total deposit of NABIL and NIBL (2000-2010)

a) Trend Analysis of Loan and Advance
Here the trend value of loan and advances of NABIL and NIBL have been calculated
for eight years from 2001-2008 and forecast for next two years till 2010 has also been
done.
The following table shows the trend value of loan and advances for 10 years from
2001 to 2010 of NABIL and NIBL.
Table No. 23
Trend value of loan and advances of NABIL and NIBL
(Rs. in million)
Year Trend value of Trend value
NABIL of NIBL
2001 7403.79 1612.41
2002 7931.33 3608.38
2003 8458.89 5604.36
2004 8986.44 7600.33
2005 9513.99 9596.30
2006 (Rs.10041.55
in million) 11592.28
2007 10569.11 13588.25
2008 11096.66 15584.23
2009 11624.22 17580.20
2010 12151.77 19576.17

The above comparative table reveals that the trend value of loan and advances of both
banks are in increasing trend. The loan and advances of NABIL in 2010 will be Rs
12151.77 million which are highest under the study period. Similarly the same of
NIBL will be Rs 19576.17 million.

From the above analysis, it is clear that NABIL will be successful to loan and
advances amount in comparison to NIBL. The above calculated trend values of loan
and advances of NABIL and NIBL are fitted in the trend lines given below:
 Figure 7: Trend values of loan and advances of NABIL and NIBL

b) Trend Analysis of Total Investment

Under this topic, the trend value of total investment for eight years from 2001-2008
have has been calculated and forecast for next two years from 2009 and 2010. The
following table shows the trend value of total investment for ten years from 2001 to
2010 of NABIL and NIBL
Table No. 24
Trend value of total investment of NABIL and NIBL
(Rs. in million)
Trend values of Trend values of
Year
NABIL NIBL
2001 8254.69 1465.24
2002 7331.42 2062.05
2003 6408.14 2658.87
2004 5484.87 3255.68
2005 4561.60 3852.5
2006 3638.32 4449.32
2007 2715.05 5046.13
2008 1791.77 5641.95
2009 868.5 6239.76
2010 54.77 6836.58
From the shown comparative table, it is found that the trend value of total investment
of NABIL is in decreasing trend and the trend value of NIBL is in increasing trend.
The total investment of NABIL in 2008 will be Rs 54.77 million which is the lowest
under the study period. The total investment of NIBL in 2008 will be Rs 6836.58
million which is the highest under the study period. The above calculated trend values
of total investment of both banks are fitted in the trend lines given below:

Figure 8: Trend values of total investment of NABIL and NIBL

c) Trend Analysis of Net profit

Under this topic the trend value of net profit for five years from 2001-2005 have has
been calculated and forecast for next five years from 2006 to 2010. The following
table shows the trend value of net profit for ten years from 2001-2010 of NABIL and
NIBL.
 Table No- 25
Trend values of net profit of NABIL and NIBL (2001-2010)
(Rs in million)
Year Trend value Trend value of
of NABIL NIBL
2001 262.998 33.60
2002 326.82 78.31
2003 390.64 123.02
2004 454.46 167.73
2005 518.28 212.44
2006 582.10 257.15
2007 645.92 301.86
2008 709.74 346.57
2009 773.57 391.28
2010 837.39 435.99
The above comparative table shows that the trend values of net profit of both banks
are in increasing trend. The net profit of NABIL in 2010 will be Rs 837.39 million.
Similarly, the net profit of NIBL in 2008 will be Rs 435.99 million.
From the trend analysis we can say that NABIL's net profit trend is comparatively
better than that of the NIBL. The above calculated trend values of net profit of both
banks are fitted in the trend lines given:
 Figure 9: Trend values of net profit of NABIL and NIBL
4.3.3 Test of Hypothesis
It is an assumption about the population, which may or may not be true; to determine
whether it is true or not by taking or not by taking some sample with followed some
procedure is called testing of hypothesis. The test of hypothesis discloses the fact
whether the difference between the computed statistic and hypothetical parameter is
significant.
a) Test of hypothesis on loan and advances to total deposit ratio
Here, mean ratio of loan and advances to total deposit of NABIL and NIBL are taken
and carried out t-test of significance difference.
Let loan & advances to total deposit of NABIL and NIBL be X and Y respectively.
Table No- 26
Hypothesis Test on Loan and Advances to Total Deposit Ratio

S. x =(X- y = (Y-
Year X x2 Y y2
N 64.33) 68.77)
1 2003/04 57.68 -6.65 44.22 72.86 4.09 16.73
2 2004/05 58.01 -6.32 39.94 61.87 -6.9 47.61
3 2005/06 72.57 8.24 67.90 71.04 2.27 5.15
4 2006/07 66.79 2.46 6.05 67.50 -1.27 1.61
5 2007/08 66.60 2.27 5.15 70.59 1.82 3.31
x=0 x2 y=0.01 y2=74.41
=163.26

We know that,

1  x
2
  y  
2

 x    y  
2 2 2
S =
n1  n2  2    n  
  n    

1  0.01 
2 2
 0 
S2 = 163.26     74.41   
5  5  2   5  5  

=
1
163.26  0  74.41  0.000004
8
= 29.70
 Here,
Null Hypothesis (HO): ux=uy i.e. There is no significant difference between mean
ratios of loan and advances to total deposit of NABIL and NIBL

Alternative hypothesis (H1): ux=uy i.e. There is significant different between mean
ratios of loan & advances to total deposit of NABIL and NIBL.
Under Ho, the test- statistical is:
X Y
t= with ......................... d. f = n 1 + n2 - 2
1 1 
S 2  
 n1 n 2 
64.33  68.77
=
1 1
29.70  
5 5
 4.44
=
3.4467
= -1.29
The calculated value of \t\ = -1.29
Tabulated value of ’t’ (two-tailed test) at 5% level of (n1+n2-2) d.f. i.e. 8 d.f. is 2.306
Decision:-
Since the calculated value of \t\ i.e. 1.29 is lower than its tabulated value i.e. 2.306 at
5%. Ho is accepted, i.e. there is no significant difference between mean ratio of loan
& advances to total deposit of NABIL & NIBL.
b) Test of hypothesis of total investment to total deposit of NABIL and NIBL
Here, mean ratio of total investment to total deposit of NABIL and NIBL are taken
and carried out t-test of significance difference. Let total investment to total deposit of
NABIL and NIBL be X and Y respectively.
Table No. 27
Hypothesis test on total investment to total deposit of NABIL and NIBL
X (x- Y (y-
S.N Year X X2 Y Y2
37.14) 27.76)
1 2003/04 44.85 7.71 59.44 21.52 -6.24 38.93
2 2004/05 41.33 4.19 17.55 33.51 5.75 33.06
3 2005/06 29.27 -7.87 61.93 27.60 -0.16 0.025
4 2006/07 31.93 -5.21 27.14 29.60 1.84 3.38
5 2007/08 38.32 1.18 1.39 26.57 -1.19 1.416
185.7 x=0 x2=167.45 138.8 Y=0 y2=76.81
We know that,

1  x
2
  y  
2

 x    y  
2 2 2
S =
n1  n2  2    n  
  n    

1  0
2
 0  
2

= 167.45     76.81    
5  5  2  5  5  

=
1
167 .45  76 .81
8
= 30.53
Here,
Null Hypothesis (HO): ux=uy i.e. There is no significant difference between mean
ratios of total investment to total deposit of NABIL and NIBL
Alternative hypothesis (H1): ux=uy i.e. There is significant different between mean
ratios of total investment to total deposit of NABIL and NIBL
Under Ho, the test- statistical is:
X Y
t= with ......................... d. f = n 1 + n2 - 2
1 1 
S   
2

 n1 n2 
37.14  27.76
=
1 1
30.53  
5 5
9.38
=
12.21
= 0.768
The calculated value of \t\ = 0.768
Tabulated value of 't' (two-tailed test) at 5% level of (n1+n2-2) d.f. i.e. 8 d.f. is 2.306
Decision:-
Since the calculated value of \t\ i.e. 1.44 is lower than its tabulated value i.e. 2.306 at
5%. Ho is accepted, i.e. there is no significant difference between mean ratio of total
investment & total deposit of NABIL & NIBL.
4.4 Major Findings of the Study
The preceding chapter have discussed and explored the facts and matters for the
various parts of the study. Analytical part, which is the heart of the study, makes an
analysis of various aspects of the investment policy of commercial banks by using
some of important financial as well as statistical tools.
Having completed the basic analysis required for the study, the final and most
important task of the researcher is to enlist finding issues and gaps of the study and
give suggestions for further improvement. This would be meaningful to the top
management of the banks to initiate action and achieve the desire result. The objective
of the researcher is only to point errors and mistakes but also to correct them and give
directions for further growth and improvement.
The major findings of the study that are derived on the basis of financial and
statistical data analysis of NABIL and NIBL, which are presented below:
4.4.1 Findings from the Liquidity Ratios Analysis
● The mean ratio of current ratio of NIBL and NABIL is almost equal
which shows the consistency in comparison.
● The mean ratio of cash and bank balance to current assets of NIBL is
higher than that of NABIL which shows NIBL’s ratio are less consistent than
that of NABIL.
 The mean ratio of cash and bank balance to total deposit ratio of NIBL is
higher than that of NABIL. NIBL's ratios are less consistency in comparison to
NABIL.
 The mean ratio of investment on government securities to current assets of
NABIL is higher than NIBL which shows that NABIL has good investment in
Government securities than NIBL.
 The mean ratio of loan and advances to current assets ratio of NIBL is higher
than that of NABIL which shows that the NIBL's ratios are more variable than
that of NABIL.
4.4.2 Finding from the Asset Management Ratio
The asset management ratios of NABIL and NIBL reveal that:
 The mean ratio of loan and advances to total deposit of NIBL is
higher than that of NABIL. Likewise, NIBL's ratios are more variable than
NABIL.
  The mean ratio of total investment to total deposit of NIBL is
lower than that of NABIL and the ratios of NIBL are more variable than
NABIL.
 The mean ratio of loan and advances to total working fund of
NIBL is higher than that of NABIL and NIBL's ratios are more variable than
that of NABIL in comparison.
 The mean ratio of investment on government securities to total
working fund of NABIL is higher than of NIBL. NABIL's ratios are less
variable in comparison to NIBL
 The mean ratio of investment on share and debenture to total
working fund of NABIL is higher than that of NIBL. NIBL has very nominal
investment on shares & debentures of other companies. Therefore NABIL's
ratios are less uniform in comparison to NIBL.
4.4.3 Finding from the Profitability Ratios
The profitability ratio of NABIL and NIBL reveals that:
 The mean ratio of return on loan and advances of NIBL is lower than that of
NABIL. On the other hand, NIBL's variability between ratios is lower than that
of NABIL.
 The mean ratio of return on equity (ROE) of NABIL has been found higher
than that of NIBL and NABIL's ratios are less consistent than that of NIBL.
 The mean ratio of total interest earned to total outside asset of NIBL is slightly
lower than that of NABIL. However, NABIL's ratios are more uniformity than
that of NIBL.
4.4.4 Finding from the Risk Ratios
The risk ratios of NABIL and NIBL reveal that the average liquidity risk ratio of
NIBL is higher than that of NABIL and NIBL's ratios are less variability in
comparison to NABIL.
The mean ratio of credit risk ratio of NIBL is higher than that of NABIL and NIBL's
ratios are more homogenous than that of NABIL.
4.4.5 Finding from the Growth Ratios
The growth ratios of NABIL and NIBL reveal that:
 Growth ratio of total deposit of NABIL is lower than NIBL.
 Growth ratio of loan and advances of NABIL is lower than NIBL.
  Growth ratio of total investment of NABIL is lower than NIBL.
 Growth ratio of total profit of NABIL is lower than NIBL.

4.4.6 Finding from the Co-efficient of correlation analysis

Co-efficient of correlation analysis between different variables of NABIL and NIBL
shows that:
 Co-efficient of correlation between deposit and loan and advances of both
banks has positive value and near to 1. The value of 'r' of NABIL is slightly
lower than that of NIBL. In case of both banks it has been found that there is
significant relationship between deposit and loan and advances. The increase
and decrease of total deposit of the bank strong affects the volume of loan and
advances.
 Co-efficient of correlation between deposit and total investment of both banks
has positive relationship. The value of 'r' of NIBL is slightly higher than that of
NABIL. In case of both banks it has been found that there is no significant
relationship between deposits and total investment during the study period.
4.4.7 Finding from the Trend Analysis
Trend analysis of deposit, loan and advances, total investment and net profit and
projection for next five years of NABIL and NIBL shows that:
 The trend values of total deposit of NABIL are found to be in decreasing trend
and NIBL is found to be in increasing trend.
 The trend values of loan and advances of both banks have been seen to be in
increasing trend. The trend value of NABIL in 2010 will be Rs 12,151.775
million and trend value of NIBL in 2010 will be Rs 19,576.175 million
 The trend value of total investment of NABIL is in decreasing trend but the
trend value of NIBL is in increasing trend which will be Rs 6836.58 million.
 The trend values of net profit of both banks are found to be in increasing trend.
The trend value of NABIL in 2010 will be Rs. 837.387 million and the trend
value of NIBL in 2010 will be Rs. 435.994 million.
4.4.8 Finding from the Test of Hypothesis
From the test of significant regarding the parameter of the population has been found
that:
  There is no significant difference between mean ratio of loan and advances to
total deposit NABIL and NIBL.
 There is no significant difference between mean ratio of loan and advances to
total deposit NABIL and NIBL.

Chapter V
5. Summary, Conclusion and Recommendation

5.1 Summary
Banking sector plays an important role in the economic development of the country.
Commercial banks are one of the vital aspects of this sector, which deals in the
process of channelized the available resources in the needed sector. Financial
institutions like banks are necessity to collect scattered saving and put them into
productive channels. In the absence of such institutions it is possible that the saving
will not be safety and profitably utilized within the economy. It will be diverted
aboard or channelized into unproductive conspicuous consumption including real
estate speculation.

Investment is a very well known and prestigious word in financial term. It is always
true that all people want to invest their money in the best firm of good return may be
both favorable and unfavorable. It is conceptually the investment of the collected
fund or wealth like income. It is the most important factor from the point of view of
shareholders and bank management. For this, commercial bank have to pay due
consideration while formulating investment policy. A healthy development of any
commercial bank depends upon its investment policy. A good investment policy
attracts both borrowers and lenders, which helps to increase the volume of quality
deposits, loans and investment. The major source of income of a bank is interest
income from loan and investment and fee based income.

Many of commercial banks have been established in our country within a short
period of time. Commercial banks must follow the rule and regulations as well as
different directions issued by central bank and ministry of finance while mobilization
the funds or the commercial banks should invest its funds only those securities which
are legal. The main objective of this study is to examine & evaluate the investment
policy of NABIL & NIBL banks and suggest improving the investment policy of the
bank.

The study is based on the secondary data from F/Y 2003/2004 to 2007/2008. The
data have been basically obtained from annual reports and financial statements,
official records, periodicals, journals and bulletins, various published reports and
relevant unpublished master's thesis. Besides this, personal contacts with the bank
personnel have also been made.

In this study, the word investment is conceptualized as the investment of income,

savings or other collected funds. Investment policy is a one fact of the overall
spectrum of policies that guide bank's investment operations and it ensures efficient
allocation of fund to achieve the sustainable economic development of the nation.

The objective of the commercial bank is to earn more profit by investing or granting
loan and advance into profitable and marketable sector. But commercial banks
should be careful while performing the credit creation function. The banks should
never invest its funds in those securities, which are too much fluctuating. The income
and profit of the bank depends upon its lending procedure, lending policy and
investment of its fund in different securities. The greater the credit created by the
bank, the higher will be the profitability. A sound lending and investing policy is not
significant for the promotion of commercial saving of a backward country like
Nepal.

Major findings from secondary data include the liquidity position of NIBL is
comparatively better than NABIL; NIBL manages the resources more efficiently
than NABIL; the profit of NABIL is higher than NIBL; the amount of risk associated
with the various banking operations of NIBL is higher than NABIL; the power of
expansion and growth of the banks business NABIL is higher than NIBL; co-
efficient of correlation between deposit and loan & advances of NABIL has been
found slightly lower than NIBL; co-efficient of correlation between deposit and total
investment of NIBL has been found slightly lower than NABIL. Trend analysis of
loan and advances & net profit of both banks are found increasing trend but the trend
value of total deposit & total investment of NABIL is in decreeing trend. In case of
NIBL, is in increasing trend.

Both banks are recommended to collect more amounts a deposit through large
variety of deposit scheme and facilities, cumulative deposit scheme, prize bonds
scheme, gift cheque, recurring deposit scheme (life insurance), and monthly interest
scheme. Similarly, customization of credit card, provide facility of transfer money to
their home who live in foreign country. The minimum amount needed to open on
account should be minimizes so that it will attract other small depositors.

NABIL is recommended to increase cash and bank balance to meet current

obligations and loan demand. Both banks are recommended to invest more funds in
government securities instead of keeping them idle and implement a sound collection
policy including procedures. NABIL is recommended to follow liberal lending policy
and invest more percentage amount of total deposit in loan and advances. Both banks
need to form a committee to identity to improve its profitability. Both banks should
remember interest rate while forming investment policy to get maximum profit.

5.2 Conclusion
Joint venture banks are also among the major commercial banks that contributing to
the economic development of the country. The conclusion derived from the
comparative study of the investment policy of Nepal Investment Bank Ltd. and Nabil
Bank Ltd. reveals that:
a) As shown the liquidity position of both banks has satisfactory. The liquidity
position of NIBL is comparatively better than NABIL. NIBL has the highest
cash and bank balance to total deposit ratio and loan and advances to
current assets ratio than NABIL. But NABIL investing position of current
assets as govt. securities is higher than NIBL. At last we can conclude that
NIBL has maintained moderate investment policy in liquidity position.
b) The analysis also depicts that the total investment to total deposit, investment
on govt. securities to working fund and investment on shares and debentures
to total working funds ratio are highest in NABIL but NABIL's capacity to
mobilize its loan and advances to total working fund and loan and advances
to total deposit is not so good than NIBL. Finally it can be concluded that
 asset management position of NABIL is less effective in comparison to
NIBL.
c) From this analysis it can be concluded that the profitability position of
NABIL is better than NIBL. It has highest return on loan and advances ratio,
total interest earned to total deposit asset ratio and return on equity than
NIBL. NIBL has not maintained better position in comparison to NABIL.
d) From the risk ratios point of views, it can be concluded that NIBL has higher
degree of liquidity risk and credit risk in comparison to NABIL.
e) From the analysis of growth ratio, NABIL has lower growth rate on total
deposits, loan & advances, total investment and net profit than NIBL.
Therefore NIBL has successfully collected and utilized fund amount of its
customer than NABIL.
f) From this study we can be concluded that NABIL and NIBL, there is positive
relationship between deposit & loan and advance. The relation between
deposit & loan and advances is significant. The both banks are successful to
mobilize their deposit in proper way as loan and advance whereas, relation
between deposit and total investment there is no significant different between
the both banks.
g) From the study it can be concluded that the trend analysis of total deposit and
total investment of NABIL is in decreasing trend whereas the NIBL is in
increasing trend. But the loan and advances &net profit of both banks are in
increasing trend.
h) The hypothesis test on loan & advances to total deposit, and total investment
to total deposit shows that there is no significant difference between mean
ratio of loan &advances to total deposit and total investment to total to total
deposit of NABIL and NIBL.

5.3 Recommendations
Suggestions help to take corrective actions in their activities in future. On the base of
analysis and findings of the study, following recommendations can advanced to
overcome weakness and efficiency and to improve fund mobilization and investment
policy of NABIL and NIBL.
Increase deposits ratio
The commercial bank's main source of fund is collecting deposit from public, who
don't need that fund recently. Without enough deposit collection, banks cannot
operate effectively. The growth rate of the deposits of NIBL's is higher than that of
NABIL, so it is suggested to attract depositors through variety of deposits schemes &
facilities like cumulative deposit scheme, prize bonds schemes, gift cheque scheme,
recurring deposit scheme (life insurance), monthly interest scheme etc.

Increase investment in government securities

NABIL has not invested more money in government securities than that of NIBL.
Investment on those securities issued by government i.e. treasury bills, development
bonds, saving certificates are free of risk and highly liquid in nature and have very
lower yield than other companies' securities. This also helps to maintain the sound
portfolio of the bank. It is better in regard to safety than other means of investment.
So both banks are strongly recommended to invest more funds in govt. securities.

Increase loan & advances

From the above study, NABIL has not properly used their existing funds as loan and
advances. The largest item of the bank in the asset side is loan and advances. If it is
neglected, than it could be the main cause of liquidity crisis in the bank and one of the
main reasons for a bank’s failure. So NABIL is strongly recommend to improve the
efficiency in utilizing the deposits in loan and advances for generating the profit.

Increase investment in shares &debentures of the other company

It is good to investment more on share and debenture as it encourage financial and
non –financial companies. It has been found that NABIL's investment on share and
debenture to total working fund ratios are higher than that of NIBL. So, NIBL bank is
suggested to invest its more funds in share & debenture of other different companies.
So, it can get either dividend from the existing hares & capital gain after selling those
shares & debentures in capital market after holding for some time.

Liberal Lending policy and sound credit collection policy

Loan & advances are the main source of income and also utilization resources of
commercial banks. Negligence in administrating these assets could be the cause of
liquidity crisis in the bank and one of the main reasons of bank failure. When the bank
grants loan & advances, it must be collected after a certain period. But now days there
are many difficulties in recovery loan and advances and large amount of loan is
blocked as non performing assets and which sometime reduce income. So it is
essential to exercise a suitable mechanism through with the overdue loan can be
recovered within time. To fulfill this purpose both banks are suggested the special
"Loan Recovery Act" should be enacted. Therefore both banks follow liberal policy
when sanctioning loan & advances with sufficient guarantee and implement a sound
collection policy including procedure which rapid identification of bad debtor loans,
immediate contact with borrower, continual follow up and a legal procedure if
required.

Increase profit
Profitability is the main indicator of the financial performance of every business
organization & is essential for the survival and growth of banks. But over the study
period, NABIL and NIBL are seen unable to earn a satisfactory level of profit. So,
both banks are recommended more to earn profit and adopt various measures to
improve its profitability.

Investment vision
Portfolio management is very important for each and every investor's. Forming the
efficient and optimal portfolios can minimize the risk. Both banks have been
increasing total investment in every year and total investment amount size of NIBL is
higher in comparison to NABIL. So, portfolio conditions of NABIL a well as NIBL
should be examine carefully from time to time and alternation should be made to
maintain equilibrium in the portfolio of loans & investment & make continuous
efforts to explore new, competitive and high yielding investment opportunities to
optimize the return.

Extend branches over the country

Both NIBL & NABIL do not have branches in the rural area of the country. Its
branches are limited only to the urban areas only. Therefore, both banks
recommended to open branches in rural areas to help in economic development of the
country. HMG/G has also encouraged the joint venture banks to expand banking
service in rural areas and communities without making unfavorable impact in their
profit.

Both NABIL & NIBL banks are taken as the one of the most leading joint venture
bank in Nepal. It is the one of the most successful bank in Nepal. Today is the world
of the competition is growing day by day in the banking sector. It must mobilize its
deposits and other fund to profitable, secured and marketable sector so that it can earn
a handsome profit as well as it should be secured and can convert into cash whenever
needed.

In the light of growing competition in the banking sector, the business of the bank
should be customer oriented. The bank is recommended to adopt new technology and
services or innovator in introducing many new products such as SWIFT, ATM card ,
international credit card, locker services, lending against gold and silver services, 24
hours service, holiday banking etc. The bank should involve in different kind of social
and community development activities. The bank has been able to provide more
personalized services and a better environment for its customer, it is an effective tool
to attract and retain the customers.

An income and profit of the bank depends upon its lending procedure, lending policy
and investment of its fund in different securities. The greater the credit created by the
bank the higher will be the profitability. NABIL Bank has achieved a success in
banking sector in term of market share and profitability compared to NIBL because of
its reliable and professional services.

In other to collection much funds, both banks are not to be surrounded and limited
only big clients i.e. multinational companies, large industries, manufacturing
companies, NGOs and INGOs etc. It should also cater the lower and middle level
people too.
Appendix – A (1)
Current Assets to Current Liabilities

NABIL
(Rs in million)
Current Ratio (Time)
FY Current Assets (Rs)
Liabilities(Rs)
2003/04 13868.30 15248.43 0.91
2004/05 14244.04 15263.80 0.93
2005/06 14969.38 15528.69 0.96
2006/07 20640.70 20420.37 1.01
2007/08 20322.65 25196.34 0.80
NIBL
(Rs in million)
Current Ratio (Time)
FY Current Assets(Rs)
Liabilities (Rs)
2003/04 7517.89 8375.70 0.89
2004/05 11144.33 12526.45 0.89
2005/06 13967.78 15093.89 0.92
2006/07 17906.12 19364.69 0.92
2007/08 23582.10 24912.72 0.94

Appendix – A (2)
Cash and Bank Balance to Current Assets

NABIL
(Rs in million)
Cash and Bank Balance Current Assets Ratio (%)
FY
(Rs) (Rs)
2003/04 1144.77 13868.30 8.25
2004/05 970.49 14244.04 6.82
2005/06 559.38 14969.38 3.74
2006/07 630.238 20640.70 3.05
2007/08 1399.825 20322.65 6.89
NIBL
(Rs in million)
Cash and Bank Balance Current Assets Ratio (%)
FY
(Rs) (Rs)
2003/04 926.53 7517.89 12.32
2004/05 1,226.92 11144.33 11.00
2005/06 1,340.50 13967.78 9.60
2006/07 2336.521 17906.12 13.04
2007/08 2441.514 23582.10 10.35

Appendix – A (3)
Cash and Bank Balance to Total Deposit Ratio

NABIL
(Rs in million)
Ratio
Cash and Bank Balance Total Deposit
FY (Time)
(Rs) (Rs)

2003/04 1144.77 13447.65 8.51

2004/05 970.49 14119.03 6.87
2005/06 559.38 14586.61 3.83
2006/07 630.238 19347.40 3.26
2007/08 1399.825 23342.285 5.99
 NIBL
(Rs in million)
Ratio
Cash and Bank Balance Total Deposit
FY (Time)
(Rs) (Rs)

2003/04 926.53 7,922.75 11.69

2004/05 1,226.92 11,524.67 10.65
2005/06 1,340.50 14,254.60 9.40
2006/07 2336.521 18927.30 12.34
2007/08 2441.514 24488.85 9.97

Appendix - B
Investment on Govt. Securities to Current Asset Ratio
NABIL
(Rs in million)
Investment on Govt. Sec. Ratio
FY Current Assets
(Rs) (Time)
2003/04 3588.77 13868.30 25.88
2004/05
3672.63 14244.04 25.78
2005/06
2413.94 14969.38 16.13
2006/07
2301.463 20640.70 11.15
 2007/08
4808.348 20322.65 23.66

NIBL
(Rs in million)
Investment on Govt. Sec. Ratio
FY Current Assets
(Rs) (Time)
2003/04
400.00 7517.89 5.32
2004/05
2001.10 11,144.33 17.96
2005/06
1948.50 13967.78 13.95
2006/07
2522.30 17906.12 14.09
2007/08
3256.40 23582.10 13.81

Appendix-C
Loan & Advance to Current Assets Ratio

NABIL
(Rs in million)
Current
FY Loan & Advance Ratio (Time)
Assets
2003/04
7755.90 13868.30 55.93
2004/05
8189.99 14244.04 57.50
2005/06
10586.17 14969.38 70.72
 2006/07
12922.54 20640.70 62.61
2007/08
15545.78 20322.65 76.49

NIBL
(Rs in million)
Current Assets Ratio
FY Loan & Advances (Rs) (Rs) (Time)
2003/04
5772.14 7517.89 76.78
2004/05
7130.13 11144.33 63.98
2005/06
10126.05 13967.78 72.50
2006/07
12776.208 17906.12 71.35
2007/08
17286.43 23582.10 73.30

Appendix-D
Loan & Advances to Total Deposit Ratio

NABIL
(Rs in million)
Total Deposit Ratio
FY Loan & Advances (Rs)
(Rs) (Time)
2003/04 7755.95 13447.65 57.68
2004/05 8189.99 14119.03 58.01
2005/06 10586.17 14586.61 72.57
2006/07 12922.54 19347.40 66.79
2007/08 15545.78 23342.285 66.60
NIBL
(Rs in million)
Total Deposit Ratio
FY Loan & Advances (Rs)
(Rs) (Time)
2003/04 5772.14 7922.75 72.86
2004/05 7130.13 11524.67 61.87
2005/06 10126.05 14254.57 71.04
2006/07 12776.208 18927.30 67.50
2007/08 17286.43 24488.85 70.59

Appendix-E
Total Investment to Total Deposit Ratio

NABIL
(Rs in million)
Total Deposit Ratio
FY Total Investment (Rs) (Rs) (Time)

2003/04 6031.17 13447.65 44.85

2004/05 5836.07 14119.03 41.33

2005/06 4269.66 14586.61 29.27

 2006/07 6178.533 19347.40 31.93

2007/08 8945.31 23342.285 38.32

NIBL
(Rs in million)
Total Deposit Ratio
FY Total Investment (Rs)
(Rs) (Time)

2003/04 1705.24 7922.75 21.52

2004/05 3862.48 11524.75 33.51

2005/06 3934.19 14254.57 27.60

2006/07 5602.87 18927.30 29.60

2007/08 6505.68 24488.85 26.57

Appendix-F
Loan & Advances to Total Working Fund Ratio

NABIL
(Rs in million)
Total Working Fund Ratio
FY Loan & Advances (Rs)
(Rs) (Time)

2003/04 7755.95 16562.61 46.83

2004/05 8189.99 16745.61 48.91

2005/06 10586.17 17186.33 61.60

 2006/07 12922.54 22329.97 57.87

2007/08 15545.78 27253.39 57.04

NIBL
(Rs in million)
Total Working Fund Ratio
FY Loan & Advances (Rs)
(Rs) (Time)

2003/04 5772.14 9014.24 64.03

2004/05 7130.13 13255.50 53.79

2005/06 10126.05 16274.06 62.22

2006/07 12776.208 21330.137 59.90

2007/08 17286.43 27590.85 62.65

Appendix-G
Investment on Govt. Securities to Total Working Fund Ratio

NABIL
(Rs in million)
Investment on Govt. Sec. Total Working Fund Ratio
FY
(Rs) (Rs) (Time)

2003/04 3588.77 16562.61 21.67

2004/05 3672.63 16745.61 21.93

2005/06 2413.94 17186.33 14.05

 2006/07 2301.463 22329.97 10.31

2007/08 4808.348 27253.39 17.64

NIBL
(Rs in million)
Investment on Govt. Sec. Total Working Fund Ratio
FY
(Rs) (Rs) (Time)

2003/04 400.00 9014.24 4.44

2004/05 2001.10 13255.50 15.10

2005/06 1948.50 16274.06 11.97

2006/07 2522.30 21330.137 11.82

2007/08 3256.40 27590.85 11.80

Appendix-H
Investment on Shares to Total Working Fund Ratio

NABIL
(Rs in million)
Investment on Shares & Ratio
FY Total Deposit (Rs)
Debentures (Rs) (Time)

2003/04 22.22 16562.61 0.13

2004/05 22.22 16745.61 0.13

2005/06 27.36 1828.36 1.50

 2006/07 27.563 19347.40 0.14

2007/08 57.853 23342.285 0.25

NIBL
(Rs in million)

Investment on Shares & Ratio

FY Total Deposit (Rs)
Debentures (Rs) (Time)

2003/04 13.89 9014.24 0.15

2004/05 13.89 13255.50 0.10

2005/06 17.74 16274.06 0.11

2006/07 17.74 18927.30 0.09

2007/08 35.235 24488.85 0.14

Appendix-I
Return on Loan and advances

NABIL
(Rs in million)

Ratio
FY Net Profit Loan & Advances
(Time)
2003/04 416.25 7755.95 5.37
2004/05 455.32 8189.99 5.56
2005/06 518.63 10586.17 4.90
2006/07 635.262 12922.54 4.92
2007/08 673.96 15545.78 4.34
NIBL
(Rs in million)

Cash and Bank Balance Ratio

FY Total Deposit (Rs)
(Rs) (Time)

2003/04 116.82 5772.14 2.02

2004/05 152.67 7130.13 2.14

2005/06 232.15 10126.05 2.29

2006/07 350.54 18927.30 1.85

2007/08 501.40 24488.85 2.04

Appendix-J
Net Profit to Equity Ratio

NABIL
 FY Net Profit(Rs) Equity (Rs) Ratio (%)

2003/04 416.235 1314.187 31.67

2004/05 455.31 1481.68 30.72

2005/06 518.635 1657.63 31.29

2006/07 635.262 1875 33.88

2007/08 673.959 2057.05 32.76

NIBL

FY Net Profit (Rs) Total Equity (Rs) Ratio (%)

2003/04 116.817 638.54 18.29

2004/05 152.67 729.047 20.94

2005/06 232.15 1180.17 19.67

2006/07 350.536 1415.45 24.76

2007/08 501.398 1878.12 26.70

Appendix-K
Total Interest Earned To Total Outside Assets
NABIL
 Total Outside Ratio (%)
FY Total Interest Earned (Rs) Assets (Rs)

2003/04 1017.87 13787.125 7.38

2004/05 1001.61 14025.94 7.15

2005/06 1068.746 13053.4 8.18

2006/07 1310.00 19101.07 6.86

2007/08 1587.76 24491.08 6.48

NIBL
Total Outside
FY Total Interest Earned(Rs) Assets (Rs) Ratio (%)

2003/04 459.5 7477.4 6.15

2004/05 713.4 10992.6 6.45

2005/06 886.8 14060.24 6.30

2006/07 1172.42 18379.08 6.38

2007/08 1584.98 23792.1 6.66

Appendix-L
Cash and Bank Balance to Total Deposit
NABIL

FY Cash and Bank Balance (Rs) Total Deposit (Rs) Ratio (Time)

2003/04 1144.77 13447.67 8.51

2004/05 970.48 14119.03 6.87

2005/06 559.38 14588.6 3.83

2006/07 630.24 19347.34 3.26

2007/08 1399.85 23342.28 6.00

NIBL

Cash and Bank Balance

FY (Rs) Total Deposit (Rs) Ratio (Time)
2003/04 11.69
926.54 7922.76
2004/05 10.65
1226.92 11524.68
2005/06 9.40
1340.5 14254.6
2006/07
2336.52 18927.3 12.35
2007/08 9.97
2441.51 24488.85
Appendix-M
Total Loan and Advances to Total assets

NABIL

Total Loan and Advances Total Assets

FY (Rs) (Rs) Ratio (Time)
2003/04 7755.95 16562.62 46.68
2004/05 8189.99 16745.48 48.90
2005/06 10586.17 17186.33 61.60
2006/07 12922.54 22329.97 57.87
2007/08 15545.78 27253.39 57.04

Total Assets
FY Total Loan and Advances (Rs) (Rs) Ratio (Time)
2003/04 64.03
5772.14 9014.25
2004/05 53.79
7130.125 13255.5
2005/06 62.23
10126.05 16274.06
2006/07 59.89
12776.2 21330.14
2007/08 62.65
17286.43 27590.85

NIBL
 Loan &
Deposit Advances
FY (X) (Y) x =( X-16968.98) y=(Y-11000.08) x² y² xy

2003/04 13447.67 7755.95 -3521.31 -3244.13 12399624.12 10524379.46 -11423587.41

2004/05 14119.03 8189.99 -2849.95 -2810.09 8122215.00 7896605.81 -8008616

2005/06 14588.6 10586.17 -2380.38 -413.91 5666208.94 171321.49 -985263.08

2006/07 19347.34 12922.54 2378.36 1922.46 5656596.30 369585.45 4572301.97

2007/08 23342.28 15545.78 6373.3 4545.7 40618952.89 20663388.49 28971109.81

N= 5 16968.98 11000.08 Σx=0.02 Σy=0.03 Σx²=72463597.25 Σy²= 39625280.7 Σxy=13125945.29

Appendix-N (1)
NABIL
 Appendix-N (2)
NIBL

Loan &
Deposit y=(Y-
FY Advances x=(X-15423.638) x² y² xy
(X) 10618.189)
(Y)
2003/04
7922.76 5772.14 -7500.878 -4846.049 56263170.77 23484190.91 36349622.33
2004/05
11524.68 7130.125 -3898.958 -3488.064 15201873.49 12166590.47 13599815.04
2005/06
14254.60 10126.05 -1169.038 -492.139 1366649.85 242200.80 575329.19
2006/07
18927.30 12776.20 3503.662 2158.011 12275647.41 4657011.48 7560941.14
2007/08
24488.85 17286.43 9065.212 6668.241 82178068.86 44465438.03 60449018.33

N= 5 15423.638 10618.189 Σx=0 Σy=0 Σx²=167285410.4 Σy²=85015431.69 Σxy=64130626.03

 Appendix-0(1)
NABIL
FY x= y=
Deposit ( X ) Total Investment ( Y ) (X-16968.98) (Y-6252.25) x² y² xy
2003/04
13447.67 6031.7 -3521.31 -220.554 12399624.12 48644.066 776639.00
2004/05
14119.03 5836.07 -2849.95 -416.18 8122215.00 173205.79 1186092.19
2005/06
14588.6 4269.66 -2380.38 -1982.59 5666208.94 3930663.10 4719317.58
2006/07
19347.34 6178.53 2378.36 -73.724 5656596.30 5435.22 -175342.21
2007/08
23342.28 8945.31 6373.3 2693.056 40618952.89 7252550.61 17163653.8
16968.98 6252.25 Σx=0.02 Σy=0.008 Σx²=72463597.25 Σy²=11410498.8 Σxy =23670360.36

Appendix-0(2)
NIBL

x= y=
FY Deposit ( X ) Total Investment ( Y ) x² y² xy
(X-15423.638) (Y-4322.09)
2003/04
7922.76 1705.24 -7500.878 -2616.85 56263170.77 6847903.92 19628672.59
2004/05
11524.68 3862.48 -3898.958 -459.612 15201873.49 211243.19 1792007.88
2005/06
14254.60 3934.19 -1169.038 -387.902 1366649.85 150467.96 453472.17
2006/07
18927.30 5602.87 3503.662 1280.78 12275647.41 1640397.41 4487420.21
2007/08
24488.85 6505.68 9065.212 2183.58 82178068.86 4768021.61 19794615.62
Σxy
N= 5 15423.638 4322.09 Σx=0 Σy=0 Σx²=167285410.4 Σy²=13618034.09 =46156188.47
NABIL

Year
(t) Total Deposit (y) X (t-2003) X² XY YC=a+bx

2001 15,839.01 -2 4 -31678.62 15478.19

2002 15,506.44 -1 1 -15506.44 15088.969

2003 13,447.65 0 0 0 14699.748

2004 14,119.03 1 1 14119.03 14310.527

2005 14,586.61 2 4 29173.22 13921.306

N= 5 73,498.74 0 10 -3892.81

Year Trend values(YC= 14699.748+(-

(t) X( t - 2003 ) 389.221)
2006 3 13532.085
2007 4 13142.864
2008 5 12753.643
2009 6 12364.422
2010 7 11975.201
N= 5
NIBL

Year
(t) Total Deposit ( Y ) X (t-2003) X XY YC=a+bx

2001 4,256.21 -2 4 -8512.42 2957.266

2002 4,174.76 -1 1 -4174.76 5691.93

2003 7,922.75 0 0 0 8426.594

2004 11,524.68 1 1 11524.68 11161.258

2005 14,254.57 2 4 28509.14 13895.922

N= 5 42,132.97 0 10 27346.64

Year Trend values( YC=

(t) X( t - 2003 ) 8426.594+(2734.664)
2006 3 16630.586
2007 4 19365.25
2008 5 22099.914
2009 6 24834.578
2010 7 27569.242
N= 5
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