JSCKJNDKC

INVESTMENT POLICY OF
JOINT VENTURE BANKS IN NEPAL

(A Comparative Study of Nepal SBI Bank Ltd And NABIL Bank Ltd)
Submitted By:
Samartha Upreti
Thakur Ram Multiple Campus
T.U. Reg.No. 7-2-360-47-2001
Campus Roll No.: 30/063
A Thesis Submitted to:

Office of the Dean
Faculty of Management
Tribhuvan University
Kathmandu
In partial fulfillment of the requirements of the

Degree of
Masters of Business Studies (M.B.S.)
December, 2012
RECOMMENDATION
This is to certify that the thesis

Submitted by:
Samartha Upreti
Entitled
“Investment Policy of Joint Venture Banks in Nepal

(A Comparative Study of Nepal SBI Bank Ltd. and NABIL Bank Ltd.)”
Has been prepared as approved by this Department in the prescribed format of faculty
of management. This thesis is forwarded for examination.
………………………… …………………………
Mr. Ganesh Pd. Niraula Dr. Deepak Shakya
(Thesis Supervisor) Head of Research Department
…………………….
Campus Chief
Birgunj, Parsa
Date:……………
2
VIVA VOCE SHEET
We have conducted the viva-voce examination of the thesis presented by
Samartha Upreti
Entitled
“Investment Policy of Joint Venture Banks in Nepal

(A Comparative Study of Nepal SBI Bank Ltd. and NABIL Bank Ltd.)”
and found the thesis to be the original work of the student and written
according to the prescribed format. We recommend the thesis to be
accepted as partial fulfillment of the requirement for
Masters of Business Studies (M.B.S.)
Viva-Voce Committee
Head of Research Department : …………………………………………...
Member (Thesis Supervisor) : ……………………………………………
Member (External Expert) : ……………………………………………
Date:-
3
DECLARATION
I hereby declare that this dissertation entitled “INVESTMENT POLICY OF JOINT

VENTURE BANKS IN NEPAL (A Comparative Study of Nepal SBI Bank Ltd. and
NABIL Bank Ltd.)” submitted of Office of the Dean, Faculty of Management, Tribhuvan
University is my original work done in the form of partial fulfillment of the requirement for
the degree of Master of Business Studies (M.B.S.) under the supervision and guidance of Mr.
Ganesh Prasad Niraula, Thakur Ram Multiple Campus, Tribhuvan University.
___________________________
Samartha Upreti
(Researcher)
Campus Roll No.: 30/063
T.U. Regd. No.: 7-2-360-47-2001
4
ACKNOWLEDGEMENTS
First of all I would like to thank the department of Business Studies of T.U. for containing
such practical requirement in partial fulfillment of the degree of MBS level. I found myself
that it is really challenging and interesting job that makes me confident to use theoretical
concept in the practical life and to enhance my ability on the thesis writing. I enjoyed writing
this report very much. Now, I should be grateful to say that the standard of our master level
has become the international master level.
I would like to express my deep respect and sincere gratitude to my respected supervisor
Ganesh Prasad Niraula for his valuable guidance, supervision, suggestion and spiritual
encouragement during the preparation of this dissertation and has made me enable to bring
this research in this form.
I would also like to express my heartfelt thanks to all my respected teachers and librarians of
Thakur Ram Multiple Campus, who helped, inspired and supported me directly and
indirectly to shape out this research. I would like to show my inclinations towards my
seniors and peers who supported me with countless valuable tips and hints during my
complications and data collection period. My thanks to, all co-operative staffs of NABIL &
Nepal SBI Bank Ltd.
I am very thankful to my parents who headed me towards the light of education and path of
truth. Due to their non-stopping effort for guidance and valuable inspirations, today I come
in this position. So, I would like to share the credit of my success with them. I am really
indebted by them. Last but not the least, I must remember all my beloved friends from the
core of my heart for their direct or indirect co-operation and support in preparing this thesis.
Thanking You
Samartha Upreti
5
TABLE OF CONTENTS
Page No.
Recommendation
Viva-Voice Sheet
Declaration
Acknowledgement
Table of Contents
List of Tables
List of Figure
List of Abbreviation
CHAPTER-I
INTRODUCTION
1.1 Nepal a Short Profile 1
1.1.1 Banking and Financial System in Nepal 1
1.1.2 Role of Banking/Financial Institution in Nepal 4
1.1.3 Investment Policy of Commercial Bank 6
1.2 Focus of the Study 8
1.3 Statement of the Problem 8
1.4 Objectives of the Study 9
1.5 Need and Importance of the Study 9
1.6 Assumption and the Limitations of the Study 10
1.7 Organization of the Study 11
CHAPTER-II
REVIEW OF LITERATURE
2.1 Introduction of Conceptual Review 13
2.1.1 Banks and Banking 15
2.1.2 The Structure of Modern Banking System 20
2.1.3 Liquidity Management 21
2.1.3.1 Demand for Bank Liquidity 22
2.1.3.2 Supply of the Bank Liquidity 24
2.1.4 Cash Management 25
2.1.4.1 Cash and Marketable Securities Management 25
2.1.5 Portfolio Management 26
6
2.1.6 Introduction to the Investment 27
2.1.7 Investment Objectives 28
2.1.8 The Evolution of the Investment Environment 30
2.1.8.1 Securities 30
2.1.8.2 Security Markets 30
2.1.8.3 Finical Intermediaries 30
2.1.9The Investment Process 31
2.1.9.1 Security Analysis 31
2.1.9.2 Portfolio Construction 31
2.1.9.3 Portfolio Revision 32
2.1.9.4 Portfolio Performance Evaluation 33
2.1.10 Specialization versus Investment 35
2.1.11 Features of an Investment Programme 36
2.1.12 Investment Policy of Bank 40
2.2 Review of Related Studies 42
2.2.1 Review of Books 42
2.2.2 Review of Articles/Journals 44
2.2.3 Review of Old Thesis (Unpublished) 44
2.3 Research Gap 50

CHAPTER-III
RESEARCH METHODOLOGY
3.1 Introduction 51
3.2 Research Design 52
3.3 Population and Sample 52
3.4 Nature and Sources of Data 53
3.5 Data Processing Procedure 54
3.6 Method of Data Analysis 54
3.6.1 Financial Tools 54
3.6.1.1 Ratio Analysis 54
3.6.1.2 Growth Ratio Analysis 56
3.7 Limitation of the Research Methodology 60
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CHAPTER-IV
DATA PRESENTATION AND ANALYSIS
4.1 Financial Ratios 62
4.2 Assets Management Ratio 70
4.3 Profitability Ratio 73
4.4 Growth Ratio 78
4.5 Correlation Analysis 82
4.5.1 Correlation between Total Deposit and Total Investment 82
4.6 Student T-test 84
4.6.1 Relationship between Total Deposit and Total Investment of NABIL 85
4.6.2 Relationship between Total Deposit and Total Investment of Nepal SBI Bank 85
4.6.3 Relationship between Total Investment and Loan and Advances of NABIL 86
4.6.4 Relationship between Total Investment and Loan and Advances of Nepal SBI Bank 86
4.7 Major Findings of the Study 87
4.7.1 Financial Ratio 87
4.7.2 Assets Management Ratio 87
4.7.3 Profitability Ratio 88
4.7.4 Growth Ratio 88
4.7.5 Coefficient of Correlation Analysis 89
4.8 Major Findings Under inferential Analysis or Student's T-test Analysis 89
CHAPTER-V
SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary 91
5.2 Conclusion 92
5.3 Recommendations 93
BIBLIOGRAPHY
APPENDIXES
8
LIST OF TABLES
Table No Page No.
4.1 Current Ratio of NABIL and SBI 63
4.2 Cash and Bank Balance to Current Assets Ratio 64
4.3 Cash and Bank Balance to Total Deposit 65
4.4 Investment on Government Securities Ratio 67
4.5 Loan and Advances to Current Assets Ratio 69
4.6 Loan and Advances to Total Deposit Ratio 70
4.7 Total Investment to Total Deposit Ratio 72
4.8 Return on Loan and Advances Ratios 74
4.9 Return on Total Assets Ratio 75
4.10 Return on Equity Ratio 77
4.11 Growth Ratio of Total Deposit 78
4.12 Growth Ratio of Loan and Advances 79
4.13 Growth Ratio of Total Investment 80
4.14 Growth Ratio of Net Profit 81
4.15 Coefficient of Correlation, Coefficient of Determination with their students T-test of
Total Deposit and Total Investment of NABIL 85
Total Deposit and Total Investment of Nepal SBI Bank 85
Total Investment and Loan and Advances of NABIL 86
Total Investment and Loan and Advances of Nepal SBI Bank 86
9
LIST OF FIGURE
Figure No Page No.
2.1 Portfolio Construction 32
4.1 Current Ratio of NABIL and SBI 63
4.2 Cash and Bank Balance to Current Assets Ratio 64
4.3 Cash and Bank Balance to Total Deposit 66
4.4 Investment on Government Securities Ratio 67
4.5 Loan and Advances to Current Assets Ratio 69
4.6 Loan and Advances to Total Deposit Ratio 71
4.7 Total Investment to Total Deposit Ratio 72
4.8 Return on Loan and Advances Ratios 74
4.9 Return on Total Assets Ratio 76
4.10 Return on Equity Ratio 77
4.11 Growth Ratio of Total Deposit 79
4.12 Growth Ratio of Loan and Advances 80
4.13 Growth Ratio of Total Investment 81
4.14 Growth Ratio of Net Profit 82
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CHAPTER - I
INTRODUCTION
1.1 Nepal a Short Profile
Nepal is one of the least developed, agricultural, mountainous and landlocked secular
Kingdom with a very unique physical setting lies between India and China. It is an
independent Kingdom never colonized by a foreign power. It is made up of an assortment of
races and tribes living in different language and dialects. Nepal can be divided into four main
regions with wide variations in altitude and climate, such as Himalayan region and inner
Himalayas, Sub – Himalayas or the Mountain region, Valley basin or inner Terai and the
Terai region. For administrative purpose, Nepal is divided into five development region, 14
zones and 75 districts. Each district has been further divided into different administrative
units, which consists 99 municipalities and 3754 village development committee
(nepalnews.com) a total area of 1, 47,181 square kilometer. Nepal is known as one of the
most beautiful country of the world endowed with both natural scenic beauty and rich
heritage.
1.1.1 Banking and Financial System in Nepal

The modern Nepalese financial system began in 1937 with the establishment
of Nepal Bank Limited (NBL) as the first commercial bank of Nepal in
November 1937. It was established under the Nepal Bank Act, 1937. The
establishment of NBL started the modern financial system in the country.
Prior to the establishment of NBL, the Tejarath Adda, which was
establishment in 1880, used to disburse credit to the people. It used to
provide loans against the collateral securities of gold and silver. It rendered
commercial banking services such as the acceptance of deposits, delivery of
credit facilities and other commercial banking services to its
customers/clients.
In the last 74 years of the development of the modern financial system, the country has
experienced with several types of financial institutions. There are all types of financial
institutions in the country and they have been providing different types of financial services.
These financial institutions can be categorized in two broad sub-headings.
i. Banking Financial Institutions, and
ii. Non - Banking Financial Institutions
i. Banking Financial Institutions (BFI’s)

By banking financial institutions, we mean commercial banks. Commercial banks are the
major players in the financial markets of the country. They dominate in the financial markets
11
with various types of deposit and loan products. They represented about 80.0% of the total
deposits and 70% of the total loans and advances of the Nepalese financial markets at mid-
July 2008. There are altogether 26 commercial banks in operation licensed by NRB. After
the establishment of NBL in 1937, the Rastriya Banijya Bank (RBB) was establishment as
the second commercial bank of the country in 1966. It was established under the Rastriya
Banijya Bank Act, 1966. The establishment of RBB greatly helped in the expansion of
commercial banking services in the country.
The RBB is still fully government-owned commercial bank of Nepal. But the majority share
of NBL i.e. 59% is owned by the private sector and 41% is still owned by the government.
Out of 51% of the shares of NBL, the government sold 10% shares to the general public.
The Nepal Arab Bank Limited (NABIL) was established in 1984 as the first joint-venture
commercial bank of Nepal with 50.0% equity participation of foreign bank. After the
establishment of NABIL, many joint-venture commercial banks and fully Nepalese private
sector owned commercial banks were established and they have been providing banking
services to their customers/clients.
ii. Non - Banking Financial Institutions (NBFL’s)

There are four types of non-bank financial institutions licensed by NRB for financial
operations. They are: (a) development banks, (b) finance companies, (c) financial co-
operative societies, and (d) financial intermediary NGOs. In addition to these non-bank
financial institutions, there are various types of other non-bank financial institutions such as
insurance companies/corporations, insurance board, employee's provident fund citizen trust
fund, deposit insurance and credit guarantee corporation, stock exchange, security board, and
post office saving banks.
HMG/N implemented the First year plan during 1956 to 1961. During this plan period, it
mainly emphasized non-bank financial institutions in the country. To enable the rural
populace of the country get institutional rural credit services, the government registered rural
co-operative societies since 1956. It registered 17 such co-operative societies in the first
year. The government established the industrial Development Bank in 1957 to provide
industrial credit. It was later converted into the Nepal Industrial Development Corporation in
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1959 under the Nepal Industrial Development Corporation Act, 1959. The Employees
provident fund was also established in 1962 to mobilize long-term financial resources.
The government has established the co-operatives bank to provide agricultural credit to farm
and co-operators. The government also established the Land Reform and savings
Corporation (LRSC) in 1966. But the establishment of the co-operative bank and LRSC
could not provide the required agricultural credits to farms. So the government established
the Agricultural Development Bank in 1968. The co-operative bank was set up in 1964 under
the co-operative bank Act, 1964. The National insurance corporation was established in 1967
and the Nepal Insurance Corporation in 1968 to provide insurance services to the Nepalese
people. The Co-operative bank and the Land reform savings corporation were later merged
with the agricultural Development Bank (ADB/N) in 1968 and 1973 respectively.
The credit Guarantee Corporation was established in 1974 to provide credit guarantee
services to small credit and later priority sector credits extended by NBL and RBB. The
Securities Marketing Center, which was established in 1977, was converted into the
securities exchange center in 1984. It was also later converted into the Nepal Stock
Exchange Limited (NEPSE) in 1992 to develop capital market in Nepal.
NRB, since mid-eighties has adopted financial liberalization policy. NRB has played a
crucial role in the establishment and development of several commercial banks both foreign
joint ventures and private commercial banks. This policy further led to the amendment of the
commercial Bank act in 1974, the enactment of the finance company act, 1985 and the
development Bank act, 1972. The amendment and enactment of these Acts has given a
required legal framework in the establishment of several commercial banks, finance
companies and development banks. As of mid-July 2011 the number of commercial banks in
the country reached to 31 and there were 79 finance companies, 87 development banks, 21
macro development banks and several other NBFLs which have listed with Nepal Stock
Exchange.
1.1.2 Role of Banking / Financial Institution in Nepal

Nepal, being a developing country, is trying to embark upon the path of economic
development by economic growth rate and developing all sectors of economy. Even though
the process of economic development depends upon various factors, however economists are
13
convinced that capital formation and its proper utilization plays a vital role. The network of a
well organized financial system of the country has a great bearing in this regard. It collects
scattered financial resources from the masses and inverts them among than engaged in
commercial and economic activities of the country. In this way, the financial intuitions
provide saver highly liquid divisible assets at lower rate while the investors receive a large
pool of resources. Integrated and speedy development of the country is possible only when
competitive service reaches hooks and corners of the country. It has been well established
that the economic activities of any country can hardly be carried forward without the
assistance and support of financial institutions. Financial institutions have catalytic role in
the process of economic development.
It is true that the proper development and functioning of financial institutions, that is the
commercial banks and non-banks financial institutions have their profound effect on the
economy. The commercial bank deals with the activities of trade, commerce, industry and
agriculture. The establishment of financial institutions depends upon the level of economic
activities and monetary transactions. Because of growing financial and business activities
within the nation and institutional progress in the neighbouring countries, had forced Nepal
to think of new establishment of financial institutions. Consequently, Nepal bank act 1936
having elementary functions of a commercial bank. Later, in 1956, the first central bank
named as the “Nepal Rastra Bank” was set up with an objectives. Another commercial bank
fully owned by the government named as “Rastriya Banijya Bank” was established in
1966A.D. to spread banking services to both rural and urban areas. In 1963, a cooperative
bank was established that was converted later into agricultural Development Bank in 1967.
The pace of financial sector, development enhanced rapidly after the financial liberalizations
policy introduced by government in 1984 A.D. Since then, various financial institution i.e.
JVB is domestic commercial banks, development banks, finance companies, cooperative
banks, credit guarantee corporation, employee provident fund, national insurance
corporation. Nepal stock exchange has come into existence to cater the financial needs of the
country there by assisting financial development of the country. So commercial banks are the
heart of our financial system. They hold the deposit of millions of persons, government and
business units.“They make fund available through their investing and lending activities to
borrow individual business units and government”(Wetal, 1978:1-9).
14
They facilitate to flow the goods and services from the producers to consumers and other
financial activities to government. They provide information related to finance and trade
which affected monetary policy of overall nation.
They collect the deposit from the public and flow them or mobilized them to different kind
of sector like commercial and industrial sector, agricultural sector, deprive sector and other
productive sector due to which the overall development of nation goes on success.
The facts show that the commercial banking system of the nation is important to the
functioning of our economy. The ability of the commercial bank system to perform its tasks
efficiently and in harmony with national needs and economic goals depends on large
measures on efficient management. The management of bank is not only involved with
personal management, material management, but also its primary functions are the
management of money. The management influence the capital, assets structure of a bank.
The management of money in bank is the main function that makes a bank profit and
maximum utilization of national resource.
In short, banks are extremely necessary for the healthy and prompt progress of a country, its
citizens and the societies it has. By creating and mobilizing the capital and rendering various
financial services, banks are contributing to establishment and development of so many small
and large scale industries and domestic as well as international trade and commerce. “Banks
provide an effective payments and credit system, which facilitates the channelling of funds
from the surplus spending units (savers) to the deficit spending units (investors) in the
economy” (Garhal,1993: 25).
By accepting deposits, the banks promote the habit of thrift and saving among the people.
These savings are the people later result in capital formation, which is the basis of economic
progress in the country. Moreover, banks also encourage industrial innovations and business
expansions through the funds provided by them to the entrepreneur. Bank exercises
considerable influence on the level of economic activity through their ability to create money
in the economy. Banks performs an indispensable task to intermediating between the deficit
spending individuals or institutions in order to raise funds and then loaning those funds to
deficit spending individuals. In addition, another contribution banks make is their
willingness to accept risky ventures such as loans from borrowers while issuing low risk
15
securities to their depositors. The various utility functions performed by banks are of great
economic significance for the economy, which can influence the course and direction of
economic activity within the economy. They pool together the savings of the community and
arrange for their production use by providing short as well as long term loans in different
forms necessary for the trade and commerce. “They discharge various functions on behalf of
their customers and in turn they are paid for their services”.
1.1.3 Investment Policy of Commercial Bank

Having given a short background information of the economy origin and history, growth of
banking and also highlighting the development of financial sector, its importance and
performance the study concentrates the whole energy and efforts to commercial banks
regarding how they perform with specific forces on investment policy.
Commercial banks are major financial institutions, which occupy quite important place in
the frame work of every economy because they provide capital for the development of
industry, trade and business and other resources sectors by investing collected deposits.
Thus, they contribute to economic growth of nation. Besides this, commercial banks render
numerous services to their customers in view of facilitating their economic and social life.
All the economic activities of each country are greatly influenced by the commercial
banking business in that country. In this way, commercial banks have become heart of
financial system.
“Commercial banks bring into being the most important ingredient of the money supply
demand deposit, through the creation of credit in the form of loan and investment”
(Crosse,1980:110).
Commercial bank also provides the flexibility and mobility to the customers because the
payment can be mostly speedily and efficiently carried out. “The commercial bank permitted
to accept demands deposit” (Hanks and Suki1980:159).
The role of commercial banks in economy is obviously prime requisite in the formulating of
banks policy. A key factor in the development in the country is the mobilization of domestic
resources and their investment for productive use to the various sectors. To make it more
effectively, commercial banks formulate sound investment policies, which eventually
16
contribute to the economic growth of a country. The sound policies help commercial bank to
achieve their own objective of profit maximization and social welfare.
Investment operation of commercial banks is very risky one. For this, commercial banks pay
due consideration while formulating investment policy regarding loan and investment.
Investment policy is one face of the overall spectrum of policies that guide banks investment
operations. A healthy development of any bank depends heavily up on its investment policy.
A good investment policy attracts both borrowers and lenders, which helps to increase the
volume and quality of deposits, loan and investment. The loan which is provided by
commercial bank is guided by several principles such a length of time, their purpose,
profitability, safety etc. Mainly all commercial bank must take a security like land and
building (immovable properties) and share, plant and machinery, Bank guaranty (Movable
properties) to minimizing the risk factor while financing. The NRB has segregated the
investment area like deprive sector, agricultural sector, industrial sector (Manufacturing and
Trading), and other sector where all commercial bank can invest. On the other hand NRB has
just regulated all banks to not finance over 25% of total portfolio to real state and that
portion will down to 15 % of total portfolio on FY 2067/068. According to NRB this
regulation has issued to minimize the risk of liquidity position of financial position, from
which all financial institution are affected. These fundamental principles of investment are
fully considered by all commercial bank while making investment policy.
The investment policy should be carefully analyzed. So, commercial bank should be careful
while performing credit creation function. Investment policy should ensure minimum risk
and maximum profit from lending. Commercial banks have to consider government and
Nepal Rastra Bank‟s instructions and upliftment of the national economy can be solved
through formation of sound investment policy. Sound investment policy can be minimize
interest rate of deposit and ensure maximum amount of investment to all sectors with proper
utilization with effective rate of interest.
1.2 Focus of the Study

The major focus of the study is on the investment operation including deposit mobilization
of two joint venture banks of Nepal that is NABIL and Nepal SBI. The detail profile of these
two banks is in appendix.
17
1.3 Statement of the Problem
Investment means using money, time and investment them in something to earn interest or
bring profit or to generate venture. The term investment, with question of 'who invest?' and
'where to invest?' clarify that, not only public makes investment but the bank also makes
investment like investment to people in purchasing shares of banks or the other
manufacturing company or the social institution and the banks itself invest in the share of
other banks.
Investment of commercial banks, when we analyzed individually was observed that Nepalese
domestic banks invest in government securities, national saving board, debenture and
corporate shares as well as the security issued by NRB time to time with a handsome interest
rate. The leading policies of commercial banks are based on the profit maximization of the
institution as well as the economic enhancement of the country. Effective mobilization of
available funds is one of the important activities of any commercial bank. Commercial banks
set certain criteria for investment purpose according to which the banks under commercial
bank should act and it is one of the major decisions for the entire bank.
This study will try to answer the following questions:

 Do the investment of commercial bank on securities and loans verify the objectives of
maximization of the profit?
 Do the investments of commercial banks mobilize its available funds effectively?
 Whether the investment of commercial banks is contributing to the performance of the
commercial banks?
1.4 Objectives of the Study

The main objectives of the study are to evaluate the investment policy of NABIL and NSBL.
The specific objectives of the study are as follows:
a. To study the leading policies and deposit and investment trends of the sample bank
(NABIL and NSBL)
b. To study the impact of loan and advances and deposit mobilization in total investment
of NABIL and NSBL.
18
c. To study the investment decisions of NABIL and NSBL in the context of existing
regulation.
1.5 Need and Importance of the Study

The needs and importance of this study has been felt for some important reasons. First, the
economic development of any country depends upon the effective mobilization of the
available funds which are collected from reliable sources. Investment is a backbone of
economic development. Functioning of a bank should be measured in various terms to know
the contribution to the economy. The NABIL and Nepal SBI bank needs to the national
economy are highly influenced by the investment policy of the bank. The study of
investment policy helps to improve the situation and correction can be made accordingly.
Secondly, the study has theoretical significance as it helps to add the existing literature of the
Nepalese financial management, particularly to the literature of investment policy
management in the Nepalese context.
Thirdly, the study has also practical significance. The findings and conclusion of the study
can be used by management of bank as guide in the financial and investment policy
management of the bank, the government for making policies regarding joint venture banks
and used by teachers and students as reading materials.
In case of investment alternatives and portfolio management, there are so many alternatives
like commercial and industrial sector, agricultural sector, deprive sector, manufacturing and
trading sector and other productive sector under the regulation of NRB. Form this study
commercial bank come to know, how to cope their portfolio so that the risk can be minimize
and return can be maximized.
1.6 Assumption and the Limitation of the Study

Since this study deals merely with NABIL and Nepal SBI bank limited, the confusion
derived from the study may or not be applicable to other commercial bank. This Study will
be based on secondary data. It is apparent that the secondary data are crucial for the study.
Even the financial statement of Nepalese commercial banks published by them will not
sufficient for this study because they publish only summary of their financial statement, they
treats as confidential of its details. Though it will try to provide completeness to the study as
19
far as possible, some limitation appeared there by different causes. This study has been
carried out within certain assumptions and limitation which are as follows.
a. The study is based especially on secondary data like annual reports of the bank under
review, journals, unpublished as well as published thesis works and other published
articles and reports.
b. The balance sheet, profit and loss account and accompanying notes have been basically
considered as the subject matters of the study and they are assumed to be correct and
true.
c. The study is covering seven year period that is from Fiscal year 2004 to 2011.
d. The study is related to only joint venture banks namely Nepal SBI bank limited and
NABIL bank limited.
e. The study will be focusing on comparative investment policy of NABIL and Nepal SBI
bank.
f. Analysis will be mostly based on the tools developed in context of efficient market
condition.
g. Due to time constraints all the concerned areas are not possible to conduct. So only
major areas are covered.
h. The investment policy of NRB varies time to time so that the study may not have a
long time implication.
i. As a research student the studies will not be biased but resources and time period is
limited.
i. Some important tools and technique has been used while analyzing the data. So, the
summary of the study and conclusion as well as recommendation based on the
technique used.
1.7 Organization of the Study

This study has been divided into five chapters as introduction, review of literature, research
methodology, presentation and analysis of data, comparative analysis of investment policy of
NABIL and Nepal SBI bank and summary, conclusions and recommendations.
Chapter – I Introduction
In the first chapter introductory part is presented such as general background of commercial
bank and banking system, focus of the study including the introduction of sample bank 20
(NABIL and NSBL), statement of the problem, objectives of the study, needs of the study,
hypothesis of the study, statement of research study including security approach, need
oriented and person oriented approach and profit oriented approach and also relationship
between the variables and the assumption and limitation of the study.
Chapter – II Review of Literature

Chapter two deal with review of literature relevant to the investment policy of commercial
banks. It also deals with the structure of modern banking system, liquidity management, cash
and marketable security management, overview of investment policy, portfolio overview etc.
The conceptual framework from books, research papers, annual reports, articles have
reviewed.
Chapter – III Research Methodology

Chapter three deal with research methodology including few lines of introduction of
financial ratios, research design, population procedure, nature of data collection with method
of data analysis.
Chapter – IIV Data Presentation and Analysis

Chapter four deal with presentation and analysis of data with investment policy of NABIL
and NSBL bank through a use of research methodology. This chapter deals with different
financial ratios, growth ratios, t-test and coefficient as correlation as statistical tools relevant
to the investment and fund mobilization of two sample banks (NABIL and NSBL) regarding
the finding of the study.
Chapter – V Summary, Conclusion and Recommendations

Finally, chapter five discuss the summary derived from the comparative analysis of NABIL
and Nepal SBI bank, conclusion of the study and provide necessary recommendation for the
further important of investment operation of NABIL and Nepal SBI bank Ltd.
21
CHAPTER - II
REVIEW OF LITERATURE
2.1 Introduction of Conceptual Review

Review of literature is an essential part of all studies. It is a way to discover what other
research in the area of our problem has uncovered. It is also a way to avoid investigating
problems that have already been definitely answered. For e.g. a social scientist is interested
to study the impact of social mobilization program on poverty alleviation. From his
knowledge and experience in the field, he knows that a body of knowledge exists about the
methods and policies of social mobilization.
The Primary purpose of literature review is to learn, not to accumulate. It enables the
researcher to know.
1. What research has been done in the subject
2. What others have written about the topic
3. What Theories have been advanced
4. The approach taken by other researchers.
5. Areas of agreement or disagreement.
6. Whether there are gaps that you can fill through proposed research.
The purpose of literature review is, thus, to find out what research studies have been
conducted in the one's chosen field of study, and what remains to be done. It provides the
foundation for developing a comprehensive theoretical framework from which hypothesis
can be developed for testing.
This section focuses on the review of literature of relevant to the investment policy of
commercial banks the conceptual framework given by different authors, research scholars is
received from the books, research papers and annual reports.
Banks are such types of institutions, which deal in money and substitute for money. The
most essential and important thing for bank is its good circulation of credit fluctuation in the
flow of credit and weak decision harms the whole economy and the bank as well. Thus to
22
collect fund effectively and its well utilization is very challenging task for the bank. The
decision of an investment of fund may be the questions of life and death for the bank.
"Commercial bank is the corporation which accept demand deposits subject to check and
makes short-term loans to business enterprises regardless of the scope of its other sources"
(American Institute of Banking, 1992: 345).
Commercial banks are designed primary to finance the production, distribution and sales of
goods that is to lend short term funds. The built of deposit commercial bank consist of
demand deposit, which are invested in short term loans. National and state banks are the best
examples of commercial banks, although in most states trust. Companies are also permitted
to engage in commercial banking private banks are usually commercial banks"
(Woeltel1999: 223).
"An organization which exchanges money, deposits money, accepts deposits, grand 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).
These facts show that the commercial banking system of the nation is important to the
functioning of our economy. "The name commercial bank was first and to indicate that loans
extended were short term loans to business, though loans later were extended to consumers,
government and other non-business institutions as well. In general, the assets of commercial
banks tend to be more liquid and carry less risk than the assets held by other financial
intermediaries" (The New Encyclopaedia Britannia, 1991: 489).
The term full service banking has been promoted in recent years as a more description term
because of the diversification of commercial banks into many operations other than
commercial lending including consumer banking, mortgage banking, saving banking,
commercial sales, financing and factoring, international banking and foreign exchange,
underwriting and trading to us government and state, state and municipal obligations, travel
service, travellers cheques, money order and so forth" (Woelfel, 1999: 223).
Commercial banking is different from investment banks, securities, firms and commercial
financial services institutions. Government authorities closely regulate commercial banking
operations to control deposit growth and to ensure the safely of customer deposits and the 23
soundless of the bank. Government regulators require cash reserves against deposits; specify
maximum interest rate bank can pay on deposits, set minimum capital requirements and
place limits on the size of loans to borrowers. Federal banking law, further limits bank
operations to activities closely related to banking. Commercial banks can be federally or
state chartered. Commercial bank can be classified either as unit bank with all operating
housed in a single office or branch banks with multiple offices. Bank holding companies or
organization that own controlling interest in one or more commercial banks (Woelfel,1999:
223).
Lending is difficult. Generally, it involves risk. To manage the risk, it is needed to acquire
and process information, to draw up a contact with the borrower with due attention to the
incentives, this creates and to monitor compliance liquidity too may be a problem.
Dr. Sunity Shrestha, in her book "Portfolio behaviour of commercial bank in Nepal",
said-"The commercial banks fulfil the credit needs of various sectors. The lending policy of
commercial banks is based on, the profit maximizing of the institution as well as the
economic enhancement of the country" (Portfolio Behaviour of Commercial Banks in Nepal,
1995).
2.1.1 Banks and Banking

The main variety of modern industrial word is commercial banking and central banking. And
commercial banker is a dealer in money in substitutes for money, such as cheques or bills of
exchange. The banker also provides a variety of financial services. "The basis of the banking
business is borrowing from individuals firms and occasionally governments, ie. Receiving
"deposits" from them, with these resources and also with the banks own capital. The banker
makes profit by borrowing at one rate of interest and lending at higher rate and by charging,
commission for services rendered (The New Encyclopaedia Britannia, 1991: 221).
Bank is able to exceed the sums available only as long as the public believes the bank can
and will honour its obligations, which are then accepted at face value and circulate as money,
so long as they remain outstanding, these promises as obligation constitute claims that bank
and can be transferred by means of cheques or other negotiable instruments from one party to
another.
24
In the past, banks used to be just an intermediary between the servers and user of found. In
other words they use to collect deposit and grant loans. However, banks have today emerged
as an integral part of the society. No individuals can escape from the magnetic are of the
bank. Let alone business houses, they mainly offer following services and verify of
functions.
I. Acceptance of Deposit
The bank accepts various types of deposits from the public or the customers. Depending
upon the nature of deposit, interest rate is determined. Even in the deposits where interest is
not offered, bank keeps them safely and repays on demand.
Fixed Deposit
Money in this account is accepted for a fixed period and cannot be withdrawn before the
expiring of that period.
Current Deposit
The depositor can withdraw money from this account whenever he requires it. So, it is
known as demand deposit. Generally, the bank grants no interest on this account. On the
contrary, it can charge a small amount on the customers for the service rendered by it.
Saving Deposit
Some restrictions are imposed on the depositor under this account. For example, he can
withdraw only a specific sum of money in a week.
Recurring Deposit
The purpose of this account is to encourage regular savings by the public, particularly by the
fixed income group. Generally, money in these accounts is deposited in monthly instalment
for a fixed period and is repaid to the depositors along with interest on maturity.
Call Deposit
It incorporates the characteristics of current and saving deposit. Current in the sense, deposit
is withdrawn at call and saving in sense the deposit earns interest. It's a hybrid type of
account. Interest rate on call deposit is negotiable between the bank and the depositors and
hence it is normally not announce in public.
25
II. Advancing of loans
Banks give loans to the needy customers for productive purpose. Loans are given to the
business customers to meet their working capital and long term requirement. Personal
customers take loan against their fixed deposit and for customer's credit. Small loan for
productive purpose is also given to personal customers. Banks are now offering various types
of customers' loans to personal customer home loan, auto loan etc. The various types of loans
and advances are as follows:
Cash Credit
Under this account, the bank gives loans to the borrower against securities to meet their
working capital for their business enhancement.
Overdraft
The bank allows its respectable and reliable customers to overdraw their accounts through
cheques. The customers, however, pay interest to the bank on the account overdrawn by them
or EMI basic or the method determined by the bank.
Discounting of Bills of Exchange

If the holder of an exchange bills need money immediately, he can get it discounted by the
bank. After deducting its commission, the bank pays the present price of the bill to the
holders. When the bill matures the bank can secure its payment from the party, which had
accepted the bill.
Money at call and short notice

Such loans are very short period loans and can be called by the bank at very short notice of
one day to 14 days. These loans are generally made to another banks and financial
institutions.
III. Agency Functions of Bank

The various agency services rendered by the bank are as follows:
26
Transfer Funds
The bank helps its customers in transferring funds from one place to another through an
instrument known as bank draft.
Collecting Customer's Fund

The bank collects the funds of its customers from banks and credits them to their accounts.
Purchase and Sales of Share and Securities for the Customers

The bank buys and sells stocks and shares of private companies as well as government
securities on behalf of its customers.
Collecting Dividends on the Shares of the Customers

The bank collects dividends as well as interest on the shares and debentures of the customers
and credits them to their account.
Payment of Insurance Premium

The bank pays premium of the insurance company on behalf of its customers.
Trustee and Executor

The bank preserves the wills of the customers and executes them after their death.
 Modern bank allows customers to deposit and draw money through their account
through ATM.
 Acts as correspondent: The bank may also act as a correspondent agent or a
representative of its customers.
IV. Purchase and Sale of Foreign Exchange

The bank also carries on the business of buying and selling foreign currencies. In developed
countries, it is done by exchange bank but in our country it is done by commercial banks.
V. Creation of Credit
Creation of credit by the bank means when the bank grants loans to its customers, it creates a
deposit or a liability against itself. Since the deposit of the bank circulates as money, the
27
creation of such deposit leads to net increases in the money stock of the economy. This is
known as creation of credit by bank (Welshans & Melicher, 1980:44).
VI. Miscellaneous Function of Bank

The modern bank provides facilities to its customers for which it charges them an annual
rental. The customers keep their valuable documents and ornaments in bank. For this, bank
provides safe locker services.
 Issuing of travellers cheque
 Bank can pass on reliable information about their credit worthiness to other parties at
other place.
 The banks accept exchange bills on behalf of their trusted customers. It becomes
rending discountable in the money market.
 Bank gives useful advice to its customers of financial matters.
 Modern banks allow customers to deposit and draw money from their account through
ATM.
The American institutes of Banking has concluded the four function of commercial banks as
"receiving and handling of payments of money (payment function) and creation of money by
extending credit (money function) (American Institute of Banking, 1972).
Commercial bank Act 2031 B.S. of Nepal laid emphasis on the function of commercial
banks, which provide short-term debts necessary for the trade and commerce. They take
deposit to provide short term loans in different forms. They purchase and discount bill of
exchange, promissory notes and exchange foreign currency. They discharges various
function on the behalf of their customers and in exchange they are paid for their services
(Vaish, 1989: 680).
2.1.2 The Structure of Modern Banking System

"The banking systems of the world have many similarities, but they also differ, sometimes in
quite material respect. The principle differences are in the details of organization and
technique. The differences are gradually becoming less pronounced because of the growing
efficiency of international communications and the tendency in each country to emulate
practices that have been successful elsewhere" (Vaish,, 1989: 680). Banking system may be
28
classified in terms of their structure or unit banking, branch banking or hybrid of the two,
e.g. France, West Germany and India, where banks that are national scope are supplemented
by regional or local banks. Some of they have hybrid system are changing slowly with their
character, they becoming fewer in number and individually larger, with a large number of
branches.
In Nepal, There Exist a Branch Banking System;"The branch banking system is by for the
most important commercial banking system. In this system, a single bank operates in the
country through a country wide network of branches. While in smaller banks may restrict
their operation to a certain region of the country, the large sized banks have their vast
country wide network of branches" (Vaish, 1980: 267).
Another writer opinion about branch banking is that, "Branch banks are those banking office
that is controlled by a single parent bank. One board of directors and one group of stock
holders control the home office and the branches" (Vaish, 1989: 267).
In addition to the matter of safety, a system of branch banks may provide more adequate
banking service to the local community than the independently owned unit bank, of course,
may have access to larger banks for assistance when requests are made for loans beyond the
capacity of the bank.
Although branch banking does result in some degree of concentration of control competition
remains intense in branch banking areas. With respect to delays in loans approvals, most
branch bank managers have the authority to approve practically all loan applications coming
to them and can facilitate approval of most of the remaining applications by telephone. Since
branch managers establish a successful record of operation through co-operation with and
service to the communities which they serve, it is doubtful that lack of interest in local
affairs would exist. Finally, the flow of funds from rural areas to the cities in country, the
normal expectations, typically the higher interest rates prevailing in rural result in a flow of
funds from the cities to these areas.
Like all financial intermediaries, the commercial bank acquires funds from one group of
surplus spending units and makes these funds available to other deficit units. In essence bank
raise funds by accepting deposits, borrowing funds and issuing equity in the banking firm.
The bank uses these funds to buy securities and to make loans to other individuals and 29
corporations. In the process, commercial banks provide benefits for society such as risk
reduction.
2.1.3 Liquidity Management

The concept of liquidity refers to the case with which is an assets can be converted into cash
specially, a liquid asset must meet the dual requirement of being easy to sell on short notice
and of selling of a price that is very close to its market value. There should not be undue
transactions costs from selling liquid assets with in a very short period of time. Thus money
market instruments are extremely liquid because they can be converted into cash very
quickly, often with in minutes, at a fair market price. By contrast, real estate investments are
not normally very liquid since their convertibility into cash usually takes fairly long period of
time" (Koch & Ricardo, 1996: 365).
Thus it is very easy to sell a real assets, or any other asset almost immediately with illiquid
assets, however, this can usually only be done by offering a heavy discounts relative to their
fair market value. Liquidity needs of commercial bank are unique because in no other types
of business there will be such a large proportions of deposits payable of demand. Inadequate
liquidity does damage credit-standing of those organizations but it banks fails to repay the
deposit on demand, the bank loses the trust of the public this lead to "runs in the bank and
probably bankruptcy there of".
For commercial banks, liquidity management is of all most importance because many of
banks liability owners can demand their convertibility into cash on very short notice,
sometimes on demand. Thus, commercial bank must hold sufficient liquid assets to meet an
uncertain demand for cash. If a bank is facing an unexpected liquidity crunch, it has access
to the discount window at Federal Reserve. Many banks, especially large ones also have
access to the money market where they can quickly obtain the amount of funds needed to
save their liquidity crises.
Of course, converting non cash assets into cash requires transaction costs. These transaction
costs include clerical and managerial time and broker's fees. In addition, if an asset sold for
cash is not very liquid, the transaction costs include the price discount from the assets market
value. In addition, to transaction costs holding liquid assets usually entails the opportunity
cost of forgone interest, since liquid investment. The most oblivious example is cash itself,
30
which has a zero rate of return to the bank. Thus banks must sacrifice some profitability in
order to maintain liquidity.
In general, short term assets are more liquid than long term assets. Vault cash is the most
liquid of assets. Reserve held at the fed and deposits at correspondent banks are also
extremely liquid. Treasury bill held by the bank is less liquid to some extent, as well as other
some short term securities in the bank's portfolio. Loans made by the bank are even less
liquid but more profitable than the more liquid assets.
2.1.3.1 Demand for Bank Liquidity

Liquidity is the life line of the bank, so demand for bank, so demand for bank's liquidity
arises for following purposes.
a. Deposit Withdrawal or Repayment Of Borrowing

Banks takes various types of deposits from the customers in different currencies. Same way
deposits are repayable on demand with interest at fixed maturity. If cheques are presented
over the counter, cash in the vault is required. If the cheques are presented through clearing
house, balance should be maintained in the account with clearing house (bank balance).
Similarly, liquidity is required to pay off maturing borrowing from other financial
institutions.
b. Disbursement of Loans and Advances

Banks earn profit by giving loans and advances. Some loans are disbursed at once while
some loans are withdrawn by the customer as per requirement. Banks need to maintain
liquidity to the approval limit so that commitment made can be honoured.
c. Off Balance Sheet Liabilities

Banks carryout of balance sheet activities like letter of credit, acceptances guarantee,
forward exchange control etc.
Payment under letter of credit is to be made when stipulated and complaint documents are
presented. Payment under guarantee is to be made in case of invocation due to non-
performance or default by the customer. And banks make forward exchange contract to
31
deliver specified sum of money on fixed future date. Similarly, banks accept bills of
exchange and are liable to pay the proceeds of such instrument on due date.
d. Other Contingencies
Demand for liquidity arises to meet unexpected liabilities like penalties, fine etc in case of
cash reserve ratio shortfall banks are penalized. Banks are also required to invest certain
percentage of their credit to priority and derived sector.
e. Miscellaneous Liabilities
Banks purchase various assets of short term and long term nature. So, payments have to be
made to the vendors and salary and allowances are also paid to the staff. Out off profit,
statutory tax is to be paid to the government, bonus to the staff and dividends to
shareholders. Banks transfer fund from one place to another. The receiving bank executes
fund transfer instruction only when there is sufficient balance in the account.
f. Regulatory Requirement
Central banks, the world over make banks maintain a certain level of liquidity to total deposit
liabilities in the form of cash and bank balance (primary reserve) and treasury bills of
government or central bank bonds (secondary reserves.) Such liquidity requirement is also
called statutory liquidity ratio (SLR). Primary reserve is also known as cash requirement.
Banks have to meet SLR requirement even it their transactional liquidity requirement is less.
In case of shortfall, they are penalized.
2.1.3.2 Supply of the Bank Liquidity

Bank liquidity is supplied to be met their demands on various ways.
a. Receipt of Primary Deposit

Whenever, banks receive deposit from the customers in the form of cash or cheques and
remittance from the other banks. If deposit of customers increase by way of purchase of
cheques, negotiations of documents and disbursement of loans, the liquidity is not supplied
because they are derived deposits. Liquidity will be supplied to the bank only after their
realization.
32
b. Capital
Liquidity is supplied to the bank by issuing ordinary and preference shares to the public. Out
of net profit a certain percentage is transferred to reserve and retained percentage is
transferred to reserve and retained earnings. Similarly, banks are required to put aside a
certain amount for possible losses. They all strengthen banks liquidity.
c. Borrowing
Liquidity is supplied to the bank through borrowings from the market (Inter-bank taking)
form the correspondent banks (lines of credit) and from central bank (refinance). They all are
normally for the short term.
d. Repayment of Loan
Loans are payable on demand as they earn interest as well. Banks receive liquidity when
interest on loan is paid, when instalment (interest + Principal) is received and when loan is
liquidate or settled.
e. Miscellaneous
Banks render various types of services like collection of cheques, fund transfer, insurance of
letter of credit, guarantee etc. They take some commission against rendering those services.
Banks receive cash by selling assets. They are also the sources of bank liquidity.
In this way, banks supplied their demand of liquidity arises in the short period of time.
2.1.4 Cash Management

Vault cash is the most liquid of bank assets. Even though cash does not earn interest, all
banks must keep some cash in their vaults since customers have the right to withdraw their
demand deposit at will. Of course, in the normal operation of a bank, most customers will
not entire there at the same time. Therefore, the banks must hold sufficient cash to
accommodate their customer's normal cash needs, without holding excessively high cash
levels. In this way banks pay an important role in assisting many businesses in managing
their cash better. So, non banking enterprises must consider some important financial
33
advantages just as early collection of cash, or slow payment of cash etc. (Koch & Rodriguez,
1990:115).
2.1.4.1 Cash and Marketable Securities Management

The management of the firm's liquidity position are involved by several issues. One is to
develop efficient system for the management of cash inflows and cash outflows. Efficient
cash gathering and disbursal has become a major area of managerial finance. Cash and
marketable securities are related together because marketable securities can be quickly
converted into cash with only small transaction costs and hence can be regarded as a form of
back-up cash business firms, like individuals, now hold their 'cash' mostly in the form of
some kind of an account that earns interest in a financial institution.
Since, investments in cash and marketable securities represent assets with less risk than
product or project investment; they may be expected to have returns less than the weighted
average returns on all of the assets of a firm. Investments in marketable securities to cover
their proportionate cost of capital in relation to the liquidity function that they perform for
the firm. In general, the highly competition and efficient nature of the financial markets, It
would not expect that investments, it is the investment in projects that hopefully will earn
positive NPV's and their by increase the value of the firm. Business and individuals have
four primary motive for holding cash and cash-back-up in the form of marketable securities.
1. The transaction motive
2. The precautionary motive
3. To meet future needs
4. To satisfy compensating balance requirements
The most two techniques for identify the optional amount of vault cash for bank to hold.
Both models recognize that holding too much cash represents an opportunity cost to the
bank, whereas holding to little cash requires too many transactions and this too is costly.
Consequently, there must be an optional amount of vault cash to hold.
a. The Baumol Model

The baumol model assumes that the bank uses cash at a known constant rate. The banks
incur holding costs by keeping cash in its vault since it is forgoing interest income. Since
these costs increase with the level of cash in the bank, focusing on this factor alone would
lead the bank to hold the least amount of cash possible.
34
b. The Millier –Orr model
The Millier Orr model explicitly incorporates the randomness feature of actual cash flow
usage. This technique is also known as the "control limit method." The essential idea of the
Millier Orr model is that the cash level is allowed to fluctuate freely with in an upper bound
u and a lower bound l. Whenever the cash level reaches the upper bound u, the banks
management reduces the cash level down to a predetermined target level z, by investing the
excess cash, usually in short term securities that are highly liquid. If the cash level reaches
the lower bound l, then the bank increases the cash level back to target level z. normally, this
will be done by selling marketable securities. In this way the cash flow will always fluctuate
between the upper and lower bounds u and l, respectively.
2.1.5 Portfolio Management

A portfolio management, it is defined as a combination of assets. Portfolio theory deals with
the selection of optional portfolio that is portfolios that provide the highest possible return
for any specified degree of risk or the lowest possible risk for any specified rate of return.
Since, portfolio theory has been developed most thoroughly for financial assets, stock and
bonds. (Weston & Copland, 2000: 366).
A fundamental aspect of portfolio theory is the idea that the riskiness inherent in any single
assets held in a portfolio is different from the riskiness of that assets held in isolation
(Weston J.F. & Copland, 2001: 367).
If one holds the position that it is impossible to forecast interest rates, portfolio management
has little appeal. The portfolio management know hat how to alter a portfolio to take
advantage of an expected shift in interest rates (Rodriguez, 1996: 425).
Portfolio managers use various multifactor models of security returns. So far our analytical
framework for portfolio management sums to rest on the validity of the index model
(Marcus, 2002: 931).
The macro economic forecast for the portfolio is used to determine the optimal risky
portfolio, which will be a combination of the passive and active portfolio (Kane, Marcus &
Trippi, 1996: 423).
35
2.1.6 Introduction to the Investment
The word "investment" brings forth vision of profit, risk speculation and wealth, for the
uniformed investing may result in disaster. For the knowledge able, the investment process
can be financially rewarding and exciting investment, in its broadest sense, means the
sacrifice of current dollars for future dollars. Two different attributes are generally involved
i.e. time & risk. The sacrifice takes place in the present and is certain. The reward comes the
later, it at all, and the magnitude is generally uncertain, In some cases the element of time
predominates as a government bonds. In other cases risk is the dominant attribute as call
options on common stocks. In yet others, both time and risk are important, for example,
share of common stock. Like individuals, financial institutions, find it desirable to choose
banks, life insurance companies and savings and loan associations need investments which
are almost exclusively payable in dollars. They must also have items which are very safe and
free from excessive market price fluctuation because their obligation customarily total
between 90 and 95 percent of their total assets and relatively small shrink age in asset values
would end anger their solvency. Banks and savings banks and to a lesser degree the life
insurance companies must also consider the ready marketability of a portion of their
investments, since their customers have the right to demand the prompt return of the money
in their custody and it is important that such demands be met without the necessity of selling
securities or property at a less. Other institutions, such as endowed hospitals and colleges and
trust companies administering the funds the funds of others for a fee are under less pressure
to secure price stability but usually feed bound to obtain long-rain security and in an age of
continual price inflation a sufficient long term rise in income and capital values to offset a
depreciating dollar.
The investment policies of most financial institutions are regulated to some extent by public
authority and custom and precedent also exert great influence. It must be concluded therefore
that the investment policies of financial and endowed institutions are likely to very greatly
with the type of business conducted, the legal restrictions imposed, and the customers of the
business as well as with the preferences of their management (Christy & Clendemin, 1974:
19).
2.1.7 Investment Objectives

The investment objectives are to increase systematically the individual's wealth defined as
assets minus liabilities. Investing requires that an individual invest money in assets that will
36
generate the desired wealth when it is needed for retirement, children's education or other
financial goals. Consequently, most investments are undertaken to provide on increase in
wealth.
The higher level of desired wealth the higher return that must be received. An investor
seeking higher returns must be willing to face higher level of risk, however while wealth
maximization may remain an investor's investment objective over a lifetime, age or family
circumstances will necessarily force the investors to change his or her investment approach.
Twenty five years ago, when they were first married and had to children, their investment
objective should logically have been wealth maximization just as it is today. In their earlier
year however they would have been willing to face high level of risk to achieve this
objective.
Consider further the example of bill and Martha Stanton. Most investors do not necessarily
have a single investment objective at any point in time. In the case of Stanton's, they have at
least two simultaneous investment objectives. College education for their children and
retirement, these two objectives will help dictate the composition of their investment
portfolio. As to the first objective, the Stanton must be certain that the funds will be available
when students need them for college. The Stanton may consider bonds that have maturities
matching these needs a portion of their investment portfolio. A third investment objective the
Stanton should consider is the establishment of an emergency fund equal to some proportion
of their annual living expenses. Thus investment objective would dictate that a portion of
their investment portfolio be invested in very safe (Christy & Clendemin, 1974: 19).
In the board and customary sense of term, an investment is any assets or property right
acquired or held for the purpose of conserving capital or earning an income. This
comprehensive definition does not distinguished between safe and hazardous investments
tangible and intangible investments or between directly owned assets and institutionally
managed ones, such as saving accounts and life insurance. It simply recognizes that saving
account bonds, mortgages, life insurance, corporation stocks, real estate, business equities
and other earning assets. All fulfil the save basic function that of employing their owners
funds. Further more, this definition doesn't limit. The term investment to property intended
to return on cash income or cash profit. Indeed, the most satisfactory investments held by
37
many people are their homes, which field their returns in family satisfaction and in
exemption from sent payments.
The merit of this broad definition of investment will become clear when the problem of
investment programming or portfolio planning is discussed. This discussion will show that
the proper balancing of any investor's resources among various types of assets is a
completely unified problem. Different kinds of investment serve different purpose. A saving
account or a saving bond, for example, assures the owners of the ready money for
emergencies, while common stocks or real estate are better protection against inflation. Thus,
in meeting the investor's full range of needs, sound policy will probably overall balance
(Christy & Clendenin, 1974: 19).
2.1.8 The Evolution of the Investment Environment

2.1.8.1 Securities
When someone borrows money form a pawn broker, he or she must leave some item of value
as security. Failure to repay the loan (plus interest) means that the pawn brokers can sell the
pawned item to recover the amount of the loan (plus interest) and perhaps make a profit. The
terms of the agreement are recoded via pawn tickets.
In general, only a piece of paper represents the investor rights to certain prospects or
property and the conditions under which he or she may exercise those rights, is called a
security. It may be transferred to other investors and with; it will go all its rights and
conditions. For example, treasury bills long term bonds and common stocks are securities
(Francis, 1998: 2).
2.1.8.2 Security Markets

Security market exist in order to bring together buyer's and sellers of securities, meaning that
they are mechanisms created to facilitate the exchange of financial assets there are many
ways in which security markets can be distinguished. One way has already been mentioned-
primary and secondary markets.
Another way of distinguishing between security markets considers the life span of financial
assets. Money markets typically involve financial assets that have life spans of more than
one year. Thus, treasury bills are traded in a money market, and treasury bonds are traded in
a capital market (Francis, 1998: 9).
38
2.1.8.3 Financial Intermediaries
Financial intermediaries, also known as financial claim against themselves (meaning that
they sell financial assets representing claims on themselves in return for cash) and use the
proceeds from this issuance to purchase primarily the financial assets of others. Since,
financial claims simply represent the right hand side of the balance sheet for a by
organization, the key distinction between financial intermediaries and other types of
organization involves what is on the left hand of the balance sheet (Francis, 1998: 19).
2.1.9. The Investment Process

As mentioned previously, the investment process described how an investor should go about
making decisions with regard to marketable securities to invest in how extensive the
investment should be and when the investment should be made. A positive-step procedure for
making these decisions forms the basis of the investment process.
1. Set investment policy
2. Perform Security Analysis
3. Construct a portfolio
4. Revise the portfolio
5. Evaluate the performance of the portfolio
The initial step, setting investment policy, involves determining the investors' objectives and
the amount of his/her invest able wealth. Because there is a positive relationship between
risk and return for sensible investment strategies. It is not appropriate for an investor to say
that his/her objective is to "make a lot of money" (Francis, 1998: 10).
2.1.9.1 Security Analysis

The second step in the investment process performing security analysis, involves examining
a number of individual securities (as group of securities) with in the board categories of
financial assets are preciously identified. One purpose for conducting such examinations is to
identify, those securities that currently appear to be miss priced. Among many approaches to
security analysis, the most of two classifications are first is known as technical analysis and
second is known as fundamental analysis.
2.1.9.2 Portfolio Construction
39
The third step in the investment process, portfolio construction, involves identifying those
specific assets in which to invest, as well as determining the properties of the investors
wealth to put into each one, investors undertake the below mentioned figures to construct the
portfolio to select optimal portfolio of risky securities .
Figure 2.1
Portfolio Construction
Returns IC1
IC2
IC3
C Efficient Set
B D Optimal Portfolio
F
Inefficient Set
A G F
Attainable set
O Standard Deviations X
In the above figure, an investor selects security B at point B as optimal portfolio because the
efficient frontier tangent at point B with indifference curves 2 (IC 2). He or she chooses at
this point because the risk is minimized and the return is maximized than other sets. Curve
IC1 and IC3 are not attainable; Curve IC3 would not be selected because investors utility is
higher for portfolio on indifferences curve and IC3 is not selected because investors utility is
lower. Therefore, at point B, investors attain higher level of satisfaction (Ghimire, 2062: 58).
2.1.9.3 Portfolio Revision

The forth step in the investment process, portfolio revision concerns the periodic repetition
of the precious steps. That is, overtime the investor may change his investment objectives,
40
which in turn means that the currently held portfolio may no longer be optimal investors
should from a new portfolio by selling and purchasing certain securities that are currently
hold or not. Thus, the investors may want to add the former to his or her portfolio, while
simultaneously deleting the later.
2.1.9.4 Portfolio Performance Evaluation

The fifth step in the investment process, portfolio performance evaluation, involves
determining periodically now the portfolio performed, in terms of not only the return earned,
but also the risk experienced by the investors.
Some examples of the evaluation of the investment environment and process:

The 1950's and 1960's
During the 1950's and early 1960's the typical young adult got married, had children
purchased whole life insurance, bought a home and perhaps purchased a few stocks or bonds
for retirement when there was extra discretion of income. Most people planned to pay for
their home within 10 to 20 years and retire and live on their income from their few stocks
and bonds as well as their social security benefits.
During 1960's individual life time consumption increased dramatically. Most money was
needed for the children's education as the cost of a college education increased. Companies
expanded their pension plans to include more employees and provide higher benefits. Now
pension supplement most retires social security income, most individuals still saved some
money to invest in a few growth stocks or bonds. (Cheney, & Mosex, 1992: 21).
"The 1970's"
The investment environment began to change significantly in the 1970's; the rate of inflation
grew dramatically. The financial community, in particular, left the impact of rapidly
increasing wages and prices, as well as the restructuring of the relationship between wages
and prices. So, these changing patterns of return, risk and prices, individuals began to realize
that certain assets, such as real estate might be a good investment in an inflationary
environment. If other investment did not provide a sufficient return to offset inflation, the
financial community would responded by creating a multiple of new investment products.
Investment in money market alternatives such as certificates of deposits grew at a rapid rate
41
during this period and sometimes yielded rates of return of 15 percent or more. Individual
investors realized that the savings and loan association could not compete and shifted much
of their money to the higher yielding money market instruments. Insurance policies also saw
a drain on their whole life insurance policies at very low rate of interest and invested the
proceeds in money market alternatives. Red state partnerships began to be formed. The
traditional stock and bond investment alternatives did not appear to promise the some rate of
return as the new exciting products (Cheney & Mosex, 1992: 21).
Interest rates on borrowed money also changed in response, the mortgage market invented
adjustable rate mortgages, which had interest rates below those of fixed rate mortgages, but
carried the risk of higher interest rates and thus higher monthly payments. The world
struggled to invest new ways to deal with an inflationary environment not fully understood.
Many nowadays individuals investors interested to move from the traditional stock and bond
markets and into other markets such as precious metals, real estate and money market
securities. This shift left institutional investors, like insurance companies and pension funds,
dominant in the traditional financial market.
"The 1980's
Although the rate of inflation decreased significantly by the mid-1980's interest rates
continued to fluctuate. Rate on money market securities declined significantly to reflect the
lower rates of inflation.
Real estate prices did not rise as before and actually declined in some parts of the country.
Before the inflationary period of 1970's, the world was more complex, that time the stock
and bond markets were still dominated by large institutional investors. Once again, the
financial community responded by creating new products with different patterns of return
and risk. Mutual funds grew rapidly during this period, both in dollars size and number of
funds. Insurance companies introduced new products such as universal life insurance with
both insurance and investment features. By the tax reform act of 1986, investor had new tax
consequences to consider. Technological developments also added to the complexities.
Micro computers came into widespread use, speeding the flow of information and enabling it
to be analyzed fasters and more thoroughly. Investment decision could now be made almost
instantaneously with the arrival of new information.
The 1990's
42
Evan with many environmental changes, the individual investors still ahs the some basic
objectives to save money from current income so that more money can be spent in later
years. These investors still wants the highest level of return possible for the risk that he or
she assume. The differences are that the investment choice set has grown substantially. In
addition to a number of new, domestic investment choices the investors are becoming more
aware of the potential portfolio advantages of diversifying internationally. These changes
have created an investment environment in the 1990,s that is more complex and challenging
than ever before.
This new financial environment has been major catalyst in the creation of new industries as
well as the reformation of some old industries. The financial planners help investors plan for
their children's college education and or their retirement. While financial planners can help
frequently tax accountant are also needed to sort through the complex tax consequences of
these plans. Many investors also rely on a professional portfolio manager. These managers
may be associated with a brokerage house or may manage the investor's mutual fund. He
efficiently transfer of wealth from one generation to another may require, not only a lawyer
but a tax planner, a financial planner and an insurance broker. The individual investors
however cannot leave the decisions to the advisors. That is comparing the actual
performance of the investment with the planned performance.
In order to undertake, these activities the investor must be knowledgeable about the
fundamentals of investments. The investments environment of the 1990's offers a
challenging but potentially rewarding opportunity for individual investors. This environment
suggests a strategy of careful and informed investment decision making will be needed
(Cheney, & Mosex, 1992: 23).
2.1.10 Specialization Versus Investment

In a narrow sense, the term investment is sometimes used to suggest a commitment that is
relatively free from certain risks of loss. High quality bonds and stocks are said to be "of
investment grade ". In this sense, the label investment would be restricted to situation
promising dependable income relatively stable value a modest rate of return and relatively
little chance for secular capital appreciation. People who seek high income fields or large
capital gains are therefore said to forsake investment for speculation.
43
Speculation means the deliberate assumption of risks in ventures which offer the hope of
commensurate gains.
There is nothing immoral or undesirable about reasonable speculation. The difference

between investment and speculation is only a matter of degree of risk, and few personal
investment programmes need be confined exclusive of ultra-safe items. Indeed, the nation
would never have new industries or progress at all if speculation did not venture into untried
projects. But sensible speculation does not gamble. They choose their venture with care they
risk only what they can afford and it possible they diversity their speculation enough to
prevent errors in selection from resulting in burdensome losses. However every investment
dealer knows that many people "Speculate" heavily on the strength of idle 'tips' or gossip or
plunge into situations which they do not understand this is gambling, not speculation, even
though the commitment is of reasonable speculative (Christy & Clendenin, 1974: 20).
2.1.11 Features of an Investment Programme

While it would be foolish to assume that the investment needs of different families and
institutions conform to any standard pattern, it seems clear that all investors have tour tasks
in common. First, they must determine clearly their investment objectives, including to
combination of safety income and capital growth they are seeking. Second they must decide
upon the types of investments to be used and the proportions of each to be acquired. Third,
they must select specific investment of the desired types of making sure that quality, stability
and other features are obtained as needed. Finally, they should study the long run values of
suitable investments and time their purchases and sales with due regard for the price
behaviour of characteristically unstable investment markets. The proper handling of this four
told task is an assignment of no mean proportions. It demands technical knowledge,
diligence and some experience, but it is the essence of successful investment management
for either as individual or an institution.
In choosing specific investment the investor will need definite idea regarding a number of
features which his portfolio should pass. These features should be consistent with his general
adjectives and in addition should afford him all the incidental convenience and advantages
which are possible in his circumstances. The following eight features are suggested us the
ingredients from which many successful investors compound their selection policies. They
44
are not offered in any order denoting importance, except that the first is clearly the most
vital.
1. Safety of Principle
Although safety of principle does not necessarily require that the market prices of one‟s
investments never shrink below their cost, it does require that the investor avoid unsound and
profitless risks. It calls for careful review of economic and industry trends before choosing
types of investment or the time to invest. It demands careful selection of the individual
commitments. Finally, it recognizes that errors are unavoidable and required excessive
diversification. Adequate diversification means assortment of investment commitment is five
different ways, by industrially, geographically by management personal, by financially, that
it between dollars receivable and equities and by maturities. If this is accomplished losses
due to the decline of any company or industry, to disaster in any geographic region to error
by any management group to change in the price level and all charges in interest rates would
all be minimized. This desirable, even if it also diversities against for total gains and against
for losses. It may justify a reasonable proportion of speculative stocks is the average
portfolio or better yet. The inclusion of Investment Company stocks with a reasonable
proportion of speculative commitments.
Diversification can be wasteful it carried to extremes too many securities and real estate and
mortgage holding possibly over 20 for the average individual give him to many to watch
unless he makes a profession of supervising are uneconomic because of excessive
commission charges and other costs in transactions, securities commitments, except for items
of bed-stock quality such as governments bonds should probably range between $ 500
minimum and half a year's family income as a maximum.
2. Adequate Liquidity and Collateral Values

Every investor requires a minimum quick resource fund available to meet emergencies.
Furthermore a sound portfolio will look to the sure and quick availability of additional funds
which may be needed for business opportunities, stock market opportunities or estate taxes,
whether money raising is to be done by sale or borrowing it will be easier it the portfolio
contains a planned proportion of high grade and readily suitable investments such as
government or big corporation sounds.
3. Stability of Income
45
This factor is important in arranging an investment portfolio for an individual who depends
closely on the income. It is less important for others. Though income stability helps greatly
in stabilizing the prices of corporate stocks, it can be found to a high degree only in certain
industries and insistence upon it therefore restricts the available choices. Probably, stable
income payers also cost a trice more than other investment. Hence they should not be over
emphasized by those who do not need them.
4. Adequacy of Income after Taxes

There are really two problems involved here one concerned with the amount of income paid
by the investment and the other with the burden of income taxes upon that income. When the
investor's income is small, he is often eager to obtain maximum cash returns on his
investments and is prove to take excessive risks and to prefer immediate dividends go greater
benefit at a later data. It is unfortunate to have to choose between adequate income and
adequate security, but it is possible to same degree, to seek out good stocks which pay
practically all their earnings in dividends and real estate which nets its owner both real
earning and depreciation funds in cash.
The investor who is not pressed for cash income often finds that income taxes deplete certain
types of investment incomes less than others thus affecting his choices, for e.g. neither the
rental value of an owner occupied home nor the interest paid by a state or municipal bond is
subject to federal income tax. Further more corporate earnings which are not paid in
dividends are not taxable to the stockholders, even though, when used to add to the
company's resources, they presumable enhance the value of the stock.
5. Purchasing Power Stability

The price level hazard needs no introduction to this generation of Americans. Suffice it to
state the conclusion that the average personal or family portfolio is well balances in normal
times when it consists of one-third of dollar sum holdings, such as bank deposits, life
insurance and bonds and two-third of ownership equities, such as real estate and common
stocks. Investment making this computation some investors would regard mortgage and
other debt as negative dollars that is, as subtractions from the dollar sum investments.
From a purely theoretical viewpoint, it would appear that a portfolio consisting entirely of
real estate and stocks would balance price level changes more perfectly than the one-third
and two-third program choice in the average case. Obviously, such adequacy of insurance 46
protection the stability of personal earnings, family and estate tax hazards could affect this
ratio.
The indicated preference for as a one-third, two-third balance between dollars and equities
would not apply to an institution such as a bank or an insurance company whose assets must
be in dollars to offset obligations which are payable in dollars.
6. Possible Appreciation
It is not necessary and desirable in making investment to foreswear hope for market profits
in a search for safety. Both real estate and stock markets are highly irregular and the
individual who sticks closely to quality investments can still profit by choosing well, buying
at the right time and switching wisely form overpriced to under priced items. Not many
people will profit greatly by these devices, but reasonable acumen will be rewarded and
some of the inevitable losses can be offset. Ventures into speculative commitments may be
similarly approached, with the expectation of more and greater losses which may be
balanced by more & larger gains, if the investor has the diligence and skill which successful
speculation demands.
7. Freedom from Case

The existence of important risks in every class of investment makes it impossible to "buy
good things and forget them" constant skilled supervision is necessary to avoid losses and to
obtain good returns. But the pitfalls which await the uninitiated are much less dangerous in
commitments of investment grade them in speculations. One who wishes to minimize the
attention required by his investments should there fore make quality his watch word.
Alternatively a professional investment counsellor or the investment management service of
a trust company can be employed at a cost approximating half of one percentage per year on
sums of reasonably substantial size.
8. Legality
Investment of trusts, estates, and children and in components must consist of types approved
by trust instructions or by law. State laws and precedents very, but in all cases the plans must
include complete compliance with requirements.
47
2.1.12 Investment Policy of Bank
A sound investment policy of a bank is such that its funds are distributed on different type of
assets with good profitability on one hand and provides maximum safety and security to the
depositors and banks on other hand. More over risk in banking tends to be concentrated in
the loan portfolio. When a bank gents into serious financial trouble, its problem usually
spring from significant amount of loans that have become uncollectible due to
mismanagement, illegal manipulation of loans, misguided lending policies or unexpected
economic down turn. Therefore, the bank investment policy must be such that it ensures that
it is sound and prudent in order to protect public funds.
A bank receives funds form retained earnings, bank borrowings, share capital, reserve funds,
deposits and other liabilities. These funds are kept in the form of cash and bank balance and
invested in assets like money at call and short notice, investment in government securities,
bills purchase and discounted, loans and advances, fixed assets, different expenses and other
assets.
M. Radha Swami and S. Vasudevan's opinion "The secret of successful banking is to
distribute resources between the various forms of assets in such a way so as to get round
balance between liquidity and profitability so that there is sufficient cash to meet every
claims and at the same time enough income to its expenses and distribute profit among the
shareholders" (Dahal, & Dahal, 1999: 19).
Basically principles of investment policy of commercial banks are as follows:

1. Liquidity
Liquidity means banks capacity to exchange cash for deposit. The bank should as for as
possible keep its assets or investments in a liquid from. It the bank fails to repay customers
money on the time of demands, there will be "runs" in the bank to withdraw money. In that
case, even very strong bank collapse. Considering this fact, bank should use the liquidity
requirement and should maintain enough liquidity to meet the demand of its customers.
Banks are required to invest funds in liquid assets to extent instructed by NRB or Cash
reserve ratio (CRR) and statutory liquidity ratio (SLR).
2. Profitability
Profitability is the measurement of return on equity. The bank should invest its funds in such was
as to secure for it self an adequate and permanent in come. Bank needs sufficient income
48
to meet interest expenses, personal expenses, operating/non operating expenses, reserves and
provisions and to distribute dividend to shareholders. The objectives of bank is to earn
maximum profit and to achieve this objective, bank should invest its funds in loans and
advances and bills purchase and discounted because yield of these assets are high and helps
the bank to meet aforesaid liabilities.
"The higher the liquid assets the less profitability and vice versa, Hence banks should strike
right balance between liquidity and profitability" (Dahal & Dahal, 1999: 50).
3. Safety
Bank deals with others money which should be repaid when demanded. The loans granted
by the bank should be full secured by adequate securities. The large number of banks and
finance companies collapsed in south East Asia few years ago due to ban loans. So, safety of
the assets should not be sacrificed at any cost. Therefore, resources should be mobilized in
such a way that liability towards depositors and shareholders can be properly met.
4. Suitability
The suitability here means that loans and advances should be allowed not only to the
carefully selected and suitability borrowers but also by keeping in view the over all national
development plans chalked out by the concerned authorities. Before accommodating
borrower, the bankers should ensure that the lending is for a purpose in conformity with
current national credit policy laid down my central bank of the country.
5. Dispersal
As an investment policy, the dispersal of the amount of loans and advances should be
broadly based on the fact that large number of customer gets benefit from banker's fund.
Dispersal of loans and advances is very necessary from the point of security as well because
it reduces risk of recovery when some thing goes wrong in one particular sector or in one
yield. Therefore, the investment policy of a bank must be diversified in different sectors.
2.2 Review of Related Studies
2.2.1 Review of Books

William F. Sharp, J. Alexander and Jeffery Bailey Jack Clark Froncishare said in Ins book
“Investment analysis and management” that investment in its broadest sense, means that
49
sacrifices of current dollars for future dollars. Two different arbutus are generally involved:
Time & Risk. The sacrifice takes place in the present & is certain. The reward comes later of
at all and the magnitude is generally uncertain.
1. Real Investment: Generally, it involves some kind of tangible assets such as: land,
machinery & factories.
2. Financially Investment: Involves contract has written on piece of paper such as:
common stocks & bonds.
Jerome B. Chome, Edword D. Zinbang & Arthur Zeiked defined the world Investment as
“Investment has many Factors. If may involve money into bonds. T-bIns or notes or common
stocks or real state or mortgage or oil venture or cattle or the theater. In may involve
specially in bull market or selling short in bear markets. It may involve options, straddles,
silver mutual funds, money market fund, index funds & result in accumulation of wealth or
dissipation of resources. Diversity and challenge characterized the field. For the able or
lackey the uninformed result can be disastrous.”
Cross & Hempal 1980, “Commercial banks bring into being the most important ingredient of
the money supply demand deposits through the creation of credit in the form of loans &
investment. Banks are the custodians of the community's money as well as the suppliers of
its liquidity, since the study is concerned with the investment activities of commercial in
Nepal, we take in to consideration exclusively the sector that are required for & relented to
the same.”
Chancy, John M. & Moses, Edulard A. Focuses on the individual investment. They states, it
is important that the investor set the appropriate investment objectives & the accompanying
investment horizon. In addition, in developing investment strategies to achieve the
objectives, the investor must understand the tax conservancies and expected risk & return
associated with the various investment alternatives per haves most importantly the investor
should recognize that acIneving & investment objective involves the creation of a portfolio
of assets and not a collection of individual assets. They further states that, individual assets
may be very risk. Combining these assets into a portfolio of other assets may actually reduce
the risk of the overall risk.
50
Frank K. Rainy in Ins book “Investment analysis management & portfolio management” has
defined the term investment, “Investment is the current commitment of funds for a period of
time to obtain a future flow of funds that will compensate the investment unit for the time
the funds are committed for the expected rate of inflation & also for the uncertainly involved
in the future flow of fund” (Investment, Japan: the oryden Press, CBS Publisher Ltd.)
Shrestha, Dr. Sunity (1995), explains in her book, “Portfolio behavior of commercial banks
sector of the economy including agriculture, industry, commercial & social service sectors.
The lending policy of commercial is based on the profit maximizing of the institution as well
as the economic enhancement of the country.”
From above definition, it is clear that an investment means to trade a know rupee amount for
some expected future steam of payment or benefits that will exceed currently outlay by an
amount that will compensate the investor for the time of uncertainly involved in expected
future cash flows. This investment is the most important function of commercial banks. It is
very challenging task for commercial banks. So, a bank has to be very cautions while
investing their funds in various sectors. The success of a bank heavily depends upon the
proper management of its investable funds.
2.2.2 Review of Articles/Journals

Article on 'monetary policy and deposit mobilization in Nepal" has concluded that
mobilization of domestic savings is one of the prime adjectives of the monetary policy in
Nepal and Commercial Banks and the more active financial intermediary generating
resources in the form of deposit of private sector providing credit to the investor in different
sector of the economy (Shrestha, 2002).
Similarly, article on "lending operation of commercial banks of Nepal and its impact on
GDP" has presented with the objective to make an analysis of contribution of commercial
banks lending to the GDP of Nepal. Sunity Shrestha has hypothesis that there has been
positive impact of lending of commercial banks to the GDP. In research methodology, she
has considered GDP as the dependent variable and various sectors of lending such as
51
agricultural, industrial, commercial, service and general and social sector as independent
variables. A multiple regressions techniques have been applied to analyze the contribution.
The multiple analyses have been shown that all the variables except service sector lending
have positive impact on GDP. Thus in conclusion she has accepted the hypothesis that is
there has been positive impact on GDP. In conclusion she has accepted the hypothesis that is
there has been positive impact by lending of commercial banks in various sector of economy,
except services sector and investment sector (Shrestha, 2002: 42).
2.2.3 Review of Old Thesis (Unpublished)

A report on "A comparative financial performance appraisal of joint venture banks" has
studied mainly three banks that is Nepal Arab Bank (NABIL), Nepal Grindlays Bank
Limited (NGBL renamed Nepal Standard Chartered Bank) and Nepal Indosuez Bank
Limited (NIBL renamed Nepal Investment Bank Limited). The main findings of this study is
that both NGBL and NABIL have mobilized the debt funds in proper way for generating
more return but NIBL could not do as good as NABIL and NGBL. This study has
recommended enhancing banking facilities in rural area by encouraging small entrepreneurs
development programs to play merchant banking role, to mobilization the deposit funds in
productive sectors and to grant more priority to the local man power" (Mandala,1998).
Similarly, a report "A comparative study of financial performance of NABIL and NIBL"
concludes that NABIL pays more attention towards the attainment of national objective
through participation in the task of economic development and being more responsive to the
national priorities like branch expansion, more employment opportunities and more
resources mobilization. So, from the view point of share holders and government, NABIL is
performing much better than NIBL.
"This study has recommended the entire commercial banks to following ways." (Acharya,
1997).
1. Increase portion of equity capital in their capital structure.
2. Control Operating Cost.
3. Increase liquidity as per the new regulation NRB.
4. Meet Social responsibility.
5. Investment in production sectors.
52
Similarly, a report on "lending policy of commercial banks in Nepal" has made no effort to
examine the lending policy of commercial banks. This study has concluded that efficient
utilization of resource is more important than collection of the same lower investment means
lower capital formation that hampers economic development of the people and the country.
So, this study has recommended that banks should give emphasis on efficient utilization of
resources (Bhattarai, 1999).
Khadka Raja Ram (2000) conducted a study on "A Study on the Investment Policy of
NABIL Bank Ltd. in comparison to Other Joint Venture Banks of Nepal" with the objective
of:
a. To evaluate the liquidity, assets management efficiency and profitability positions in
relation to fund mobilization of NABIL Bank Ltd. in comparison to other joint venture
Banks.
b. To discuss fund mobilization and investment policy of NABIL Bank Ltd. in respect to
its fee-based off-balance sheet transactions and fee-based balance sheet transactions in
comparison to other JVBS.
c. To evaluate the growth ratios of loan and advances and total investment with
respective growth rate of total deposits and total deposits and net profit of NABIL
Bank Ltd. in comparison to other JVBS.
d. To find out the relationship between deposits and total investment, deposits and loan
and advances, and net profit and outside assets of NABIL Bank Ltd. in comparison to
other JVBS.
The study was conducted using secondary data. The research findings of the study are as
follows:
a. The liquidity position of NABIL Bank Ltd. is comparatively worse than that of other
JVBS. NABIL Bank has more portions of current assets as loans and advances but less
portion as investment on government securities.
b. NABIL Bank Ltd. is comparatively less successful in on-balance sheet operation as
well as off-balance sheet operations than that of other JVBS.
c. Profitability position of NABIL Bank Ltd. is comparatively not better than that of other
JVBS. The mean ratio of return on load and advances of NABIL Bank Ltd. has been
found slightly lower than that of other JVBS and the return has been found less
homogeneous than that of other JVBS. Similarly the mean ratio of total interest earned
53
to total outside assets of NABIL Bank Ltd. has been found slightly lower than that of
other JVBS.
d. Though NABIL Bank Ltd. seems to be more successful to increase its sources of funds
as well as mobilization of it by increasing loan and advances and total investment, it
seems to be failure to maintain its high growth rate of profit in comparison to that of
other JVBS (i.e.; Nepal Grindlays Bank Ltd. and Nepal Indosuez Bank Ltd.).
Shahi Prem Bahadur (2001) conducted a study on "Investment policy of commercial banks
in Nepal" with the main objectives of:
a. To evaluate the liquidity, assets management efficiency and the profitability and risk
position of Nepal bank limited to the joint venture banks.
b. To discuss fund mobilization and investment policy of Nepal bank limited in respect to
its fee based off-balance sheet transaction and fund based on-balance sheet transaction
in comparison to the joint venture banks.
c. To find out the empirical relationship between various important variables i.e.;
deposits, loan and advances, investment, net profit, etc. and compare them with the
Joint Venture banks.
d. To analyze the deposit utilization trend and its projection for next five years of the
Nepal bank limited and compare it with that of Joint Venture banks.
The research was conducted mainly on the basis of the secondary data. The research findings
of the study are as follows:
a. The liquidity position of NBL is comparatively better than that of the JVs. Highly
fluctuating liquidity position shows that the bank has not formulated any stable policy.
It can also be conducted that NBL has more portions of current assets as loan and
advances but less portion as investment on government securities.
b. The mean ratio of loan and advances to total deposit of NBL is slightly lower then that
of the JVBs. Likewise NBL's ratios seem to be more variable than that of the JVBs.
The mean ratio of total investment to total deposit of NBL is lower then that of the
JVBs. The mean ratio of investment on government securities to total working find of
NBL is slightly lower than that of the JVBs. The mean ratio of total off-balance sheet
operation to loan and advances of NBL is found significantly lower than that of JVBs.
So it was concluded that NBL is comparatively less successful in on –balance sheet as
well as off-balance sheet operations than that of the JVBs. It hasn't followed any
definite policy with regard to the management of its assets.
54
c. Profitability position of NBL is comparatively not better than that of the JVBs. it
indicates that NBL must maintain its high profit margin in future.
d. There is comparatively higher risk in NBL than that of the JVBs regarding various
aspects of the banking function.
e. From the analysis of different growth ratios it can be concluded that NBL has not been
more successful to increase its sources of funds, i.e. deposits and mobilization of it.
i.e., loan and advances and total investment. Similarly it seems to have failed to
maintain high growth rate of profit in comparison to that of other JBBs.
f. High portion of cash and bank balance in NBL shows its negligence and infancy in its
best utilization. It has not considered the cost of fund and its opportunity costs. Higher
percentage of loan ratios shows that NBL is weak in credit collection. There is absence
of a sound credit collection policy. NBL has not followed innovative approach toward
lending. Poor quality of loan due to lack of necessary skills of project appraisal,
improper collateral evaluation, irregular supervision, etc. is a severe problem for the
bank's success.
Bhandari Manoj (2004) has conducted a study on “Investment policy of commercial banks
with special reference to Nepal SBI Bank Ltd.” with the objectives of:
a. To evaluate the liquidity, asset management, efficiency, portfolio management and
profitability position of the bank.
b. To analyze adopted utilization and its relationship with total investment and net
profit of the bank.
c. To determine the growth rate of the bank in terms of deposit, loans, and advances,
investment and probability of the bank.
d. To determine the proportion of loan-loss provision to total loans and advances and to
evaluate the non-performing assets position of the bank.
e. To determine the proportion of the investment made by the bank in risky and risk-
free assets and to evaluate the off-balance sheet operation of the bank.
f. To suggest measures to improve the investment policy of the bank.
The research was conducted mainly on the basis of secondary data. The research findings of
the study are summarized as follows:
a. Liquidity position of the bank is good enough to meet the short-term obligation but
shows the lack of additional fund management to income generating assets.
55
b. Similarly the bank does not seem to have proper policy to increase the fee-based
OBS transaction in comparison to loan and advances.
c. Bank should careful of Non-performing loans and adopting the appropriate policies
to solve the problem although bank has been able to reduce this NPA proportion
significantly to total loan advances forthcoming year after 2001.
d. Despite this Bank has been able to meet the NRB obligations it does not have
accepted prioritized priority sector in loaning even it was in increasing trend.
e. Because of decreasing profitability scenario over the year‟s accounts investment
policy adopted by the bank is not appropriate and it does impact in the growing
process negatively. Despite the substantial increment to the amount of loans &
advances, profitability has not increased enough shows the lack of overall investment
policy in income generating sectors.
Pandit Dipak (2006) has conducted a research entitled "Investment Policy Analysis of Joint
Venture Bank" with special references to NSBIL and EBL.
The objectives of the study are follows:

a. To evaluate the liquidity management, assets management, efficiency, profitability
position, risk position and investment practices of NSBIL, BOKL and EBL.
b. To find out the relationship between deposit and total investment deposit and loan and
total investments deposit and loan advances and net profit and outside assets.
In this study, major findings have been follows:

a. NSBIL has better liquidity position. It is in a good position to meet its daily cash
requirement and current obligation. Liquidity position of EBL and BOKL has not
been satisfactory.
b. NSBL's loans and advance to total deposited ratio is lower thank EBL and BOKL. It
doesn't seem to follow any definite policy regarding the management of its assets.
c. The profitability position of all the banks is not satisfactory the banks haven't
adopted sound investment policy in utilizing their surplus funds.
d. BOKL and EBL are exposed to high credit risk and capital risk.
e. NSBIL and BOKL have not been successful to increase there sources of fund. EBL
has been successful in maintaining its higher growth rate of total deposit.
56
f. There is significant relationship between deposits and total investment of BOKL and
EBL but the same is not significant of NSBIL.
Joshi Jyoti (2007) conducted a study on "Investment Policy of Commercial Banks in Nepal,
a comparative study of Everest Bank Ltd. With NABIL bank Ltd. and Bank of Katmandu”
with the objectives of:
a. To discuss fund mobilization and investment policy of EBL, NABIL and BOK ltd.
b. To evaluate the liquidity, efficiency and profitability and risk position.
c. To evaluate the growth ratios of loan & advance, total Investment with other
financial variable.
d. To analyze the trend of deposit utilization towards total investment and loan &
advances.
e. To conduct hypothetical test to find whether is significant difference between the
various important ratios of EBL, NABIL and BOKL.
In this study, major findings are as follows:

a. The liquidity position of the EBL is comparatively better than NABIL and BOKL.
EBL has the highest cash and bank balance to total deposits, cash and bank balance
to total current assets ratios. NABIL has the lowest liquidity position than out of
other two banks. EBL has good deposit collection and has made enough investment
on government securities but it has maintained moderate investment policy on loan
and advances.
b. From the analysis of assets management ratio on activity ratio, it can be concluded
that EBL has comparatively or in between successful in compared to NABIL and
BOKL. The total investment of EBL is in between in compared to other two banks.
c. In the study, loan & advances to total deposit is higher in BOKL. But the coefficient
of Variation is higher in EBL.
d. In analysis of profitability, total investment earned to total outside assets of EBL is
lowest at all. But overall analysis of profitability, EBL has average profitability ratio.
EBL is average profitable in comparisons to other banks i.e. NABIL and BOKL.
From the view point of risk ratio. EBL has higher capital risk ratio but average of
credit risk ratio in compared of NABIL and BOKL.
57
2.3 Research Gap
Research gap means the difference of findings done by earlier researcher and this
research. In the earliest time, Nepalese banking sector were growing. But now it is seen
more complicated in this sector. Many banking fraud is seen this sector. So, this is the
most important to study the investment decisions in current context. Thesis related to this
topic done earlier by the researcher had past fiscal years. But in this research, data of
current fiscal year is included. So that It shows the proper investment decisions of these
bank.
58
CHAPTER - III
RESEARCH METHODOLOGY
3.1 Introduction
Methodology is the research method used to test the hypothesis to achieve objectives and
every research study, specified methods and techniques should be followed which is known
as research methodology. Researcher has to collect the information which is required,
evaluated and verify them to reach some conclusion.
Research methodology means methods, processes, tools and techniques which are used in
any of the research or investigations till the purpose is accomplished and the aim is achieved.
"Research methodology refers to the various sequential steps to be adopted by a researcher

in studying a problem with certain objectives is view" (Kothari,1994:19).
"Research methodology is a vital and absolutely indispensable part of social scientific and
educational research without methodological research, modern social scientific and
educational research would still be in the dark age" (Kerlinejer, 1994:19).
Methodology research is controlled investigation of the theoretical and applied aspects of

measurement, mathematics and statistics and ways of obtaining and analyzing data. Without
methodology research, modern behavioural research would still be in dark ages.
This section focuses on the method of research used in this study. This chapter includes
research design, nature and sources of data, population and sample, data collection
techniques, data analysis tools and variables of the study. The main aim of the study is to
evaluate and to analysis the financial strengths and weakness of NABIL and Nepal SBI
banks.
59
3.2 Research Design
A research design is the arrangement of conditions for collection and analysis of data that
aims to combine relevance to the research purpose with economy in procedure. Research
design is the plan, structure and strategy of investigations conceived so as to obtain the
answers of research questions" (Kerlinejer, 1994: 2).
Research design is the systematic planning structure and strategy for conducting a particular
research work. It provides the frame work of the study. To achieve the objectives, the study
has collected evaluated, verified and synthesized past financial information systematically
and objectively to reach some conclusions. The procedure for assessing the investment
policy of NABIL and NSBL has been based on descriptive and comparative research design.
The data has been adopted as a research design for the study.
3.3 Population and Sample

The term "population" or "universe" for research means all the members of any well defined
class of people, events or objects (Pant, 1999: 75). Population refers to the totality of the
observation, which is selected for study. Population is whole of universe where as sample is
the number of representative which are going to be studied. A population in most studies
usually consist of large group so; it is very difficult to collect information to over come this
difficult, small unit is chosen from the total which represents the population. This sub-group
is called sampling.
There are 32 commercial banks under operation, which are the population for the study.
1. Nepal Bank Limited
2. Rastriya Banijya Bank
3. NABIL Bank Limited
4. Nepal Investment Bank Ltd.
5. Standard Chartered Bank Nepal Ltd.
6. Himalayan Bank Ltd.
7. Nepal SBI Bank Limited
8. Nepal Bangladesh Bank Ltd.
9. Everest Bank Ltd.
10. Bank of Kathmandu Ltd.
11. Nepal Credit and Commerce Bank Ltd.
60
12. Lumbini Bank Ltd.
13. Nepal Industrial & Commercial Bank Ltd.
14. Machhapuchre Bank Ltd.
15. Kumari Bank Ltd.
16. Laxmi Bank Ltd.
17. Siddhartha Bank Ltd.
18. Agriculture Development Bank Ltd.
19. Global Bank Ltd.
20. Citizens Bank International Ltd.
21. Prime Commercial Bank Ltd.
22. Bank of Asia Nepal Ltd.
23. Sunrise Bank Ltd.
24. Development Credit Bank Ltd.
25. NMB Bank Ltd.
26. Kist Bank Ltd.
27. Mega Bank Ltd
28. Janata Bank Ltd
29. Civil Bank Ltd
30. Commerce and Trust Bank Ltd
31. Century Commercial Bank Ltd
32. Sanima Bank Ltd.
The two commercial banks NABIL bank and Nepal SBI bank are being purposively selected
as sample for the study because, to ensure the efficiency of joint ventures banks.
3.4 Nature and Sources of Data

This study is conducted on the basis of selected secondary data. The data relating to the
investment, deposit, loan and advances and profit are directly obtained from the balance
sheet, profit and loss account of concerned banks. Annual reports, supplementary data and
information are collected from regulating authority, internet etc. Official records, reports on
magazines are also used for this purpose. To support the secondary information informal
queries and interview has been conducted with authorities of related institution.
61
3.5 Data Processing Procedure
The procedures that have been adopted for collection of data are:
1. The available literature on the subject matter is collected
2. The information on deposit, loans and advances are presented.
3. On the basis of the objectives of the study, the data relating to this study are
identified and collected from different sources.
4. Interview and personally administered questionnaire are used to gather the relevant
information.
5. The data used are classified and tabulated in suitable manner.
All the secondary data are complied processed and tabulated in time series as per the need
and objectives.
3.6 Method of Data Analysis

3.6.1 Financial Tools
To achieve the objective of the study, various financial and statistical tools have been used in
this study; financial ratios, growth ratios and coefficient of correlation as an analysis tool
have been used in this study. The various calculated results obtained through financial and
statistical tools are tabulated under different headings and then compared with each other to
interpret the results.
3.6.1.1 Ratio Analysis

Ratio analysis is the calculation and interpretation of financial ratios to assess the firm's
performance and status. It is the relationship between tow accounting figures expressed
mathematically. Ratio analysis is the main tool of financial statement analysis. Ratio means
the numerical or quantitative relationship between two variables. It can be expressed as
percentage, fraction or stated comparison between numbers. Some ratios used in this study
are defined as follows.
I. Liquidity Ratio
62
It measures the liquid position of company, firms and commercial banks ability to meet
current obligations. It is used to evaluate a firm's ability to satisfy creditors in the immediate
future. These ratios compare the assets available for meeting current obligations of the
commercial banks. A very high degree of liquidity is also not good/sound because idle assets
earn nothing rather they entail opportunity cost.
II. Current Ratio

It is calculated by dividing current assets by current liabilities. It measures the firms or banks
short term solvency. A ratio greater than one means the bank has more current assets than
current liabilities.
Mathematically,
Where,
CR=Current Ratio
CA= Current Assets
CL= Current Liabilities
II. Profitability Ratio

Profit is the difference between total revenue and total expenses and is the ultimate out of a
bank. The bank therefore, should continuously evaluate the efficiency of its bank in terms of
profit. The profitability ratios are calculated to measure the operating efficiency of the
company. Following are profitability ratios related to this study are as follows.
a. Return on Loan and Advances Ratio

Return on Loan and advances ratio measures the earnings capacity of a commercial bank on
its mobilized loan and advances.
It can be calculated as:

Return on Loan and Advances  Net Profit
Loan & Advances
b. Return on Total Assets Ratio
63
Return on total assets measures the profitability with respect to each financial resources
investment of the bank assets. It can be calculated as:
Return on Total Assets  Net Profit

Total Assets
c. Total Interest Earned to Total Outside Assets Ratio

This ratio reflects the extent to which banks are successful to earn interest as a major income
on all outside assets. This ratio is calculated as:
Total Interest Earned
Total Interest Earned to Total Outside Assets  Total Outside
Assets
d. Return on Equity Ratio

Equity capital is a bank's own capital the return on equity capital measures the extent to
which a bank is successful to mobilize its equity. It measures the profitability of a bank.
This ratio is calculated as:

Return on equity Ratio  Net Profit
Total Equity Capital
3.6.1.2 Growth Ratio Analysis

Growth ratio is directly related to fund mobilization and investment management of a
commercial bank. Growth ratio represent non will the commercial bank is maintaining its
economic position.
These Growth Ratios are:

i. Growth ratios of total assets
ii. Growth ratio of loan and advances
iii. Growth ratio of total investment
iv. Growth ratio of net profit
3.6.2 Statistical Tools

Some of the statistical tools used in this study are as follows:
64
I. Arithmetic Mean X  
Arithmetic means or simply a mean is the most popular and commonly used statistical
average. It is ratio simply called "The average" Which is the sum of all the observations
derived by the number of observations.
Symbolically,
Mean X1  X2  X3................. X4
(X) 
N
Or
X
X  N
Where,
X  Arithmetic Mean
X 1 , X 2 , Y3  .......... ....Xn  Values of a variable X
N  Total no. of observations

 X  Sum of the values of variables
II. Standard Deviation

The standard deviation is also popular and widely used measure of dispersion. It is the
positive square root of the required deviations from the arithmetic mean. It is the least
possible root mean returns.
Symbolically,
X2
δ
 
N 1
Where,
δ  Standard Deviation
 X2  Sum of mean squared deviation
N  Total number of observation
 Square Root
III. Coefficient Variation
65
Coefficient of variation is the ratio of the standard deviation to the mean expressed in
percentage. When there is different mean in the bank the decision may not be correct. In this
case coefficient of variation is important. It is independent of unit it is the best means to
compare the variability two distribution. Less the coefficient of variation more will be the
uniformity, consistency etc and vice versa.
Symbolically,
δ
CV  X
Where,
δ  Standard Deviation
C.V.  Coefficient of Variation
X  Arithmetic Mean
IV. Coefficient of Correlation Analysis

This analysis identifies and interprets the relationship between two or more variables. In this
case, the effect on one variable may have effect on other correlation variable. The
relationship between two following variables has been studied.
a. Coefficient of correlation between total investment and total deposit.
b. Coefficient of correlation between total investment and loans & advances.
This analysis shows the combination the variables used in the study and focuses their
relationship to each other. The value lies in between +1 and -1. +1 means the relation
between the variables is perfectly positive and -1 means the relation between the variables is
perfectly negative. Negative relation shows that there is no combination between the
variables used or compared. When r=0, it means there is no relationship at all.
Symbolically,
  
N. XY  X. Y
r
N.X2  X2 NY2  Y2
Where,
66
r  Karl Persons Coefficient of Correlation
N  Total Number of Observations
XY  Sum of the values of two variables
 x  Sum of the variables of X.
Y  Sum of the variables of variable Y

 X 2  Sum of the squared values of variable X
 Y 2  Sum of the squared values of variable Y
V. Student t- Test
To test the validity of the assumptions, test is used when the sample size is less than thirty.
Student's t - value is calculated first to compare with the table value of 't' at a certain level of
significance for given degree of freedom.
Symbolically,
t r n2
1r2
Where,
t  Student's t - value
r  Coefficien t of Correlatio n
n  Number of observations.
On testing, the null hypothesis will be rejected. If the calculated t- value is greater than the
table value at 5% level of significance for n-2 degree of freedom. This employs that the
value of r is significant at 5% level of significance or vice versa.
VI. Diagrams
Representation the numerical values in the form of various diagrams such as pie-chart, bar
graph, trend lice etc is the easiest mean to study the effect of variables. These diagrams will
show the relationship of variables in time series. One can easily understand the effect of
variables by means of diagrams.
a. Graph
67
It means of presentation of data in the form of graph. It tries to judge the variability of one
variable in relation to the variation of another variable under taken in the study; it shows the
trend of ratios in respect to the time period.
b. Trend Line
It is the simple dotted line which is used to show the increasing or decreasing effect of the
various ratios in respect to time period.
3.7 Limitations of the Research Methodology

This study has been conducted with the following limitations
i. This research is based on comparative study of NABIL and Nepal SBI Bank Limited.
ii. Due to time constraints all the concerned areas are not possible to conduct so only
major ones are covered.
iii. Use of secondary data itself is a limiting factor.
iv. Other quantitative and qualitative variables which are not included in the study of
investment policy of two banks.
v. The round up figures in the study may not bring out the accuracy in calculation.
68
CHAPTER – IV
DATA PRESENTATION AND ANALYSIS
This chapter entitled "Presentation, Analysis and Interpretation of Data" is the crucial chapter
as it utilizes. The processed data tools and techniques of working capital analysis, as
described in research methodology go achieve the objectives of this study. Objectives of this
study are to find out the solution of the problems identified. Joint venture bank are facing
working capital management problems of current assets, fixed assets, long term & short term
solvency, profitability and value of the firm. This study aim to determining the effect of
working capital variable on the profitability and value of the firm and they are by
generalizing the result.
For this purpose the collected and organized data should be analyzed through different tools
and techniques and interpreted. The data constitute the financial information extracted from
the financial statement, i.e. income statement and balance sheet period. The fiscal years of
five years period from 2005 to 2011 are the sample year for this study. These data are
presented in the tabular, diagram or the graphical form from the analysis through different
statistical and financial tools. As per the tools used in this study, this chapter has been
divided into sub-chapters such as ratio analysis trend analysis correlations analysis and
hypothesis testing.
Analysis and Interpretation of data involves an attempt to determine the significance and
meaning of financial data, so that a judgement on past activities can be made and a forecast
may be due to the prospect for future earning ability to pay interest debt maturity both
current as well as long term and profitability.
The analysis and interpretation of data requires a comprehensive and intelligent as well as
the determining of relationship with other data to facilitate comparison.
Interpretation and analysis are closely connected because interpretation is impossible without
analysis and lack of interpretation analysis is compilation of data, ranking data as per the
relative significance, making data homogeneous and examines that the data using different
device.
69
On the other hand, interpretation of data according to the analysis is necessary because more
examination of the component does not lead to definite conclusion and statement has to be
dissected into this constituent in order to measure the relative magnitudes of the various
entities.
In this study presentation, interpretation and analysis of data has been conducted on the basis
of research question and objectives of the study.
Therefore, in this chapter, data collected from various secondary sources, are presented and
analyzed for the purpose; two types of analysis have been carried out, descriptive analysis
and inferential analysis. This chapter has, therefore been divided into two section.
Descriptive Analysis
This section attempts to analyse and compare some variables as relevant ratios of investment
policy during the period. The above analysis and interpretation have been presented with the
help of table and figures where necessary.
4.1 Financial Ratios

Ratio analysis is one of the most powerful techniques of measuring the financial activities of
business institutions and banks. Ratio analysis is defined as "the systematic use of ratio to
interpret the financial statement So that the strength and weakness of the bank as well as its
historical performance and current performance can be determined”. Liquidity ratio
measures the capacity of the firm to meet obligations of the bank. A commercial bank must
maintain its satisfactory liquidity to meet the day-to-day transaction to pay activities in time
and to convert non-cash assets to cash immediately without any loss to the banks. The
liquidity position of the sample banks are studied through the following ratio:
A. Liquidity Ratio
a. Current Ratio
Current Ratio indicates the ability of the bank to meet the current obligations of the banks. It
is calculated by dividing current assets by current liabilities.
Mathematically,
70
Current Ratio (CR)  Current Assets
Current Liabilitie s
Table 4.1
Current Ratio of NABIL and SBI
Banks 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11
NABIL 1.06 1.07 1.07 1.71 1.08 1.07 1.06
SBI 1.08 1.07 1.07 1.06 1.09 1.10 1.10
Source: Appendix A
Figure 4.1
Current Ratio of NABIL and SBI
From the above table and figure, it is clear that the current ratio of NABIL bank is superior
to Nepal SBI bank in the earlier years of the period but in the later period Nepal SBI bank
has improved its liquidity position and over come the performance in comparison to NABIL
bank. In the year of 2007/08 NABIL had maintained large volume of liquidity but in later
period it has gone slowly downward. Current ratios of NABIL and Nepal SBI bank have
followed the fluctuating trend on the basis of mean ratio.
b. Cash and Bank Balance to Current Assets Ratio
71
Current and Bank balance is the most liquidity from current Assets. This ratio measures the
proportion of cash and bank balance held by NABIL and SBI bank out of total current assets.
Cash and Bank Balance

Cash and Bank Balance to Current Assets Ratio = 
Current Assets
Table 4.2
Cash and bank Balance to Current Assets Ratio (%)
Fiscal Year
2004/00
2005/00
2006/00
2007/00
2008/00
2009/01
2010/01
Banks Mean S.D. C.V.
5
1
NABIL 2.08 2.52 5.54 8.80 10.27 3.15 5.03 5.34 3.16 59.10
SBI 7.04 6.72 6.12 4.17 4.25 8.72 10.54 6.79 2.30 33.79
Source: Appendix B
Figure 4.2
Cash and Bank Balance to Current Assets Ratio (%)
From the table and figure, it reveals that cash and bank balance to current assets ratios of
NABIL's bank and Nepal SBI bank are in fluctuating trend. Similarly, their ratios are not
satisfactory to the average. In case of average analysis, Nepal SBI has highest ratio. It has
72
better position regarding the meeting of the demand. That means it operates in lower risk
than that of NABIL. High coefficient of variation indicates its ability but very high ratio
shows the inefficiency and more risk. To build up the strong position, both the banks should
undertake the defending strategy to avoid the risks involved and to hold the strong position.
c. Cash and Bank Balance to Total Deposit Ratio

Cash and Bank balance to total deposit ratio measures the availability of a banks immediate
funds to meet its unanticipated calls on all types of deposits. A high ratio indicates the
greater ability to meet their deposits and vice versa.
Cash and Bank Balance
Total Deposit Ratio (TDR) 
Total Deposit
The following table shows the cash and bank balance to total deposit ratio of NABIL and
SBI.
Table-4.3
Cash and Bank Balance to Total Deposit (%)
Fiscal Year
2006/00
2004/00
2005/00
2007/00
2008/00
2009/01
2010/01

5
NABIL 3.83 2.87 5.93 7.33 8.90 2.56 4.47 5.13 2.36 46.00
SBI 8.36 7.91 7.38 5.19 3.92 7.62 7.87 6.89 1.67 24.24
Source: Appendix C
Figure 4.3
73
Cash and Bank Balance to Total Deposit
(%)
From the above table and figure, it reveals that the cash and bank balance to total deposit
ratios of two banks are in fluctuating trend. Both banks have followed mix trend during the
period.
In case of average analysis, Nepal SBI banks has highest ratio than NABIL bank. It has
better position regarding the demand of its customers on their deposit at any time. That
means it operates in lower risks than that of NABIL. Though, high ratio indicates its ability
but very high ratio shows the inefficiency. It has to pay more interest on deposit. Thus, Nepal
SBI bank may invest in more productive sectors like short-term marketable security, treasury
bills etc to build up a strong and efficient liquidity position and to improve the profitability.
d. Investment on Government Securities to Current Assets Ratio

The major objectives of this ratio are to examine that portion of commercial banks current
assets, which is invested on various government securities issued by government. The
government securities do not give more return to investors than other investment sectors. But
they are fully secured investment. Commercial banks invest their excess fund on government
securities for diversification of investment.
This Ratio Calculated as Follows:
74
Investmenton GovernmentSecurities
Investment on Government Securities 
Current Assets
Table 4.4
Investment on Government Securities Ratios (%)
Fiscal Year
2004/00
2005/00
2006/00
2007/00
2008/00
2009/01
2010/011
5
0
NABIL 15.34 16.30 14.71 9.08 7.11 12.76 10.53 12.26 3.46 28.19
SBI 4.90 9.19 13.69 15.16 13.93 7.69 9.59 10.59 3.77 35.61
Source: Appendix D
Figure 4.4
Investment on Government Securities Ratios (%)
The above table shows that both the banks have invested their funds to government securities
through out the periods. Both the banks followed fluctuating trend during the period. The
investment in government securities of NABIL Bank shows that the funds of investment is
not uniform, in the fiscal year 2005/006 has the highest ratio than other years but in case of
Nepal SBI Bank, is fiscal 2007/008 has the highest ratio.
75
The comparative table listed above shows that the mean ratio of investment on government
securities to current assets of NABIL is 12.26% and Nepal SBI is 10.59%. Similarly,
Standard deviation and co-efficient of variation of NABIL is 3.46% and 28.19%, Standard
deviation and coefficient of variation of Nepal SBI Bank are 3.77% and 35.61%.
In conclusion, the average ratio of NABIL bank is higher than the average ratio of Nepal SBI
Bank. It reveals that Nepal SBI bank has not invested its more portions of current assets on
government securities. It is found that both the banks have not been adopting constant policy
regarding this ratio.
e. Loan and Advances to Current Assets Ratio

A commercial bank should not keep its all collected funds as cash and bank balance. They
should be invested as loan and advances to the customers make more profit by mobilizing its
funds in the best way. It should pay interest on those utilized deposit funds and sometime
may loose some earnings. If the bank can not be granted sufficient loan and advances but
high loan and advances may also be harmful to keep the bank in the most liquid position
because they can only be collected at the time of maturity only. Thus, a bank must maintain
its loan and advances in appropriate level.
This ratio is computed as:

Loan and Advances
Loan and Advances to Current Assets Ratio 
Current Assets
Table seven (4.5) shows loan and advances to current assets ratio to current assets ratio of
NABIL and Nepal SBI Bank.
Table 4.5
Loan and Advances to Current Assets Ratio (%)
76
Fiscal Year
2004/00
2005/00
2006/00
2007/00
2008/00
2009/01
2010/01
5
1
NABIL 39.40 58.71 62.25 80.33 79.21 87.26 81.28 69.78 17.03 24.41
SBI 60.45 58.92 68.55 70.98 60.45 58.92 68.55 63.83 5.27 8.26
Sources: Appendix E
Figure 4.5
Loan and Advances to Current Assets Ratio
(%)
From the above comparative table, it is cleared that both the banks have followed fluctuating
trend on their loan and advances to current assets ratio. NABIL has highest ratio in Fiscal
year 2009/2010, i.e. 87.26% and Nepal SBI has highest ratio in Fiscal Year 2007/2008, i.e.
70.98%. Nepal SBI has lower standard deviation and coefficient of variation than that of
NABIL which indicates that high consistency of Nepal SBI banks ratio in comparison to
NABIL. In general both the banks have not maintained their uniformity in their policy of
loan and advances with respect to current assets. Beyond that we can say that the lending
portion of Nepal SBI is higher than that of NABIL bank, even the riskiness of NABIL is
higher than that of Nepal SBI Bank.
77
4.2 Assets Management Ratio
Assets management ratio measures the efficiency of the bank to manage its assets in
profitable and satisfactory manner. Commercial banks must manage its assets properly to
make high profit. In order to earn sound profit, commercial banks should formulate effective
policies. Effective policies and strategies related with management of assets result maximum
profit for the banks. Therefore management of assets by the bank is crucial.
A. Loan and Advances to Total Deposit Ratio

Loan and advances to total deposit ratio measures the extent to which banks are successful to
mobilize the total deposits on loan and advances for generating profit. A high ratio of loan
and advances means better mobilization of collected deposit and vice versa. But it should be
noted that too high ratio might not be better from its liquidity point of view.
Loan and Advances
Loan and Advances to Total Deposit Ratio 
Total Deposit
The following table presents the ratio of loan and advances to total deposit of NABIL and
SBI.
Table 4.6
Loan and Advances to Total Deposit Ratio (%)
Fiscal Year
2004/005
2005/006
2006/007
2007/008
2008/009
2009/010
2010/011
NABIL 75.05 68.63 68.13 68.18 73.87 71.17 78.29 71.90 3.96 5.50
SBI 77.87 69.32 82.66 88.32 55.84 51.48 51.20 73.61 15.44 20.97
Source: Appendix F
Figure 4.6
78
Loan and Advances to Total Deposit Ratio
(%)
The above comparative table exhibits that the ratio of NABIL and SBI has followed
fluctuating trend. NABIL has tried its best to increase in year of 2004/005 but after that fiscal
year the ratio has downward trend. From the fiscal year 2006/007, it has increasing trend
Nepal SBI has followed near about uniformity in between the FY 2008/009 to 2010/011 but
it has decreasing trend from the fiscal year 2007/2008.
The average ratio of Nepal SBI is higher than that of NABIL. It shows that Nepal SBI bank
has highly used its deposit in the areas of loan and advances comparing to NABIL. On the
other hand the Standard deviation and coefficient of variance of Nepal SBI is higher than that
of NABIL bank. Which indicates that, the Nepal SBI bank is taking higher risk than Nabil
bank, even the lending rate to Nepal SBI is lower than NABIL bank. In conclusion, it shows
that the strengthen of NABIL bank is higher than Nepal SBI bank.
B. Total Investment to Total Deposit Ratio

A commercial bank mobilizes its deposits by investing its funds in different securities issued
by government and other financial and non-financial companies. This ratio measures the
extent to which banks are able to mobilize their deposit on investment of various securities.
A high ratio indicates the success in mobilizing deposit in securities and vice-versa.
79
This ratio is calculated as,
Total Investment
Total Investment to Total Deposit Ratio 
Total Deposit
Table 4.7 shows total investment to total deposit ratio (%) of NABIL and SBI
Table 4.7
Total Investment to Total Deposit Ratio (%)
Fiscal Year
2004/00
2005/00
2006/00
2007/00
2008/00
2009/01
2010/01
5
1
NABIL 29.31 31.93 38.32 31.14 28.99 29.35 26.29 30.76 3.78 12.30
SBI 30.13 32.82 23.24 22.52 47.52 46.73 44.59 35.32 10.86 30.75
Source: Appendix G
Figure 4.7
Total Investment to Total Deposit Ratio
(%)
The above comparative table shows that the ratios of total investment to total deposit in case
of both banks have followed up fluctuating trend during the period. The table and figure
show that NABIL bank has low portion of investment of its deposit as compared to Nepal
SBI bank. This indicates that NABIL bank must formulate liberal policy on investment to
avoid more liquidity.
80
On the basis of mean ratios, it reveals that both banks have utilized or mobilized its deposit.
In the context of Nabil bank, its capacity to mobilize its fund on total deposit is poor than
that of Nepal SBI bank. On the other hand, coefficient of variation reveals that these banks
have highly in consistency involves more risk. NABIL bank is riskier than Nepal SBI bank
on the basis of coefficient of variation during the period.
4.3 Profitability Ratio

Profit is the difference between revenues and operating and non-operating expenses of the
banks over a period of time. Profit is the ultimate output of the business enterprises and it
will have no future it. If fails to make sufficient profits. Banks are the service oriented
business organization. Their primary objective is to earn maximum profit. Moreover, the
private commercial banks are operated with the objective of earning maximum profit
together with imparting banking services to the people. They must earn sufficient profit in
order to meet the cost of operating the bank to maintain sound liquidity position to make
payments to the customers. So, the primary objective of all commercial banks is to earn
sufficient profit. Profit is the indicator of efficient operation of a bank. Banks acquire profit
by providing different services to its customers or by making investment of different kinds.
Sufficient profit is must to have sound liquidity position of the banks. Profitability ratios
measure the efficiency of a bank. Higher the ratio measures the efficiency of a bank. Higher
the ratio higher will be the efficiency of a bank.
The profitability ratios related to this study are as follows.

a. Return on loan & advances ratio
b. Return on total assets ratio
c. Total interest earned to total outside assets ratio
d. Return on equity ratio
A. Return on Loan and Advances Ratio

Return on loan and advances ratio measures the earning capacity of a commercial bank on its
mobilized loan advances. Higher the ratio greater will be the rerun. This ratio is calculated as
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Net Profit
Return on Loan and Advances Ratio 
Loan and Advances
Table 4.8
Return on loan and Advances Ratio (%)
Fiscal Year
2004/00
2005/00
2006/00
2007/00
2008/00
2009/01
2010/01
5
1
NABIL 5.32 5.24 4.62 3.96 4.02 3.47 3.73 4.34 0.73 16.89
SBI 0.87 1.53 2.69 2.05 2.03 2.18 2.14 1.93 0.58 29.86
Source: Appendix H
Figure 4.8
Return on Loan and Advances Ratio
(%)
From the above table it is clear that the ratio of NABIL is in downward trend where as Nepal
SBI is in increasing trend. Nepal SBI bank has less fluctuating than NABIL. NABIL has
highest ratio of 5.32% in fiscal year 2004/005. Similarly Nepal SBI has highest ratio of
2.69% in fiscal year 2006/007.
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In average, Nepal SBI has lowest ratio of 1.93% against 4.34% of NABIL. The coefficient of
variation of Nepal SBI bank is 29.86 that is comparatively higher than that of NABIL that is
16.89%. It states the unstable and in consistency in return of Nepal SBI bank. Thus, it reveals
that Nepal SBI is not able to earn high return on its loan and advances in comparison to
NABIL bank.
B. Return on Total Assets

Return on total assets ratio measures the profitability with respect to each financial resources
investment of the bank assets. If the bank's working fund is well managed and efficiently
utilized, return on such assets will be higher and vice-versa.
This ratio is calculated as.

Return on Total Assets Ratio  Net Profit
Total Assets
Table shows the profitability position of NABIL and Nepal SBI bank.
Table 4.9
Return on Total Assets Ratio (%)
Fiscal Year
2004/00
2006/00
2009/01
2005/00
2007/00
2008/00
2010/01

5
NABIL 3.06 3.23 2.72 2.32 2.55 2.37 2.43 2.67 0.35 13.27
SBI 0.55 0.90 1.83 1.44 1.05 1.03 1.01 1.12 0.41 36.54
Source: Appendix I
Figure 4.9
83
Return on Total Assets Ratio
(%)
From the above comparative table, it is found that return on total assets ratio have fluctuating
trend throughout the period of both bank. NABIL has maintained higher ratio in Fiscal Year
2005/006 i.e. 3.23%. Similarly, Nepal SBI has maintained highest ratio of 1.83% in Fiscal
Year 2006/007. NABIL has highest mean ratio than Nepal SBI. From the above analysis, it
reveals that both banks profit earning capacity by utilizing available resources is not
satisfactory. Moreover, Nepal SBI's earning power on its sales and investment is quite poor
and unstable comparison to NABIL. But on the other hand Nepal SBI is stable in the areas of
return on total assets, mean while NABIL is in decreasing trend.
C. Return on Equity Ratio (ROE)

The ultimate goal of every bank is to maximize profit by mobilizing its equity capital. Equity
capital refers bank's own capital. The return on equity capital measures the extent to which a
bank is successful to mobilize its equity. It measures the profitability of a bank. This ratio is
calculated as:
Net Profit
Return on Equity Ratio 
Shareholders equity Capital
Table 4.10 shows the return on equity ratio of NABIL and Nepal SBI.
Table 4.10
84
Return on Equity Ratio (%)
Fiscal Year
2004/00
2005/00
2006/00
2007/00
2008/00
2009/01
2010/01
Banks 5
Mean S.D. C.V.
1
NABIL 104.59 121.21 137.08 108.31 106.72 56.24 65.91 100.01 28.97 28.97
SBI 13.29 18.27 39.35 28.33 36.18 21.05 22.09 25.51 9.55 37.42
Source: Appendix J
Figure 4.10
Return on Equity Ratio (%)
This analysis reveals that both banks have followed fluctuating trend during the period. The
highest ratio of NABIL is 137.08 in fiscal year 2006/007 and that of Nepal SBI is 39.35 in
Fiscal year 2006/007. On return point of view to shareholders capital NABIL is superior to
Nepal SBI.
From the above comparative study, it shows that NABIL Bank has efficiently utilized its
equity capital; hence return on equity is higher than Nepal SBI bank. NABIL bank seems to
85
implement sound investment policy for mobilization of its equity capital. Mean while we can
say that the volume to equity (paid up capital) is higher than that of NSBL, So that the
portion of return on equity of NABIL seems higher than Nepal SBI. But from the view point
of coefficient of variation, we can say that Nepal SBI is running in high risk than NABIL.
4.4 Growth Ratio

The growths ratios represent how the commercial banks will are maintaining their economic
and financial position. The higher ratio is the better performance of the bank and vice-versa.
Under this section, those growth ratios are analyzed and interpreted, which are directly
related to found mobilization and investment management of commercial bank.
These ratios are:

a. Growth Ratio of Total Deposit
b. Growth Ratio of Loan and Advances
c. Growth Ratio of Total Investment
d. Growth Ratio of Net Profit
Table 4.11
Growth Ratio s of Total Deposit
(in millions)
Banks Fiscal Year Growth
Rate %
2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11
NABIL 14586.61 19347.40 23342.28 31915.05 37348.26 46340.70 49696.11 23.06
SBI 8654.77 11002.04 11445.29 13715.4 27957.22 34896.42 42415.44 33.54
Source: Appendix G
Figure 4.11
86
Trend Line of Total Deposit of NABIL & SBI
Banks
From the above analysis, it reveals that growth rate of total deposit of NSBL is higher than
NABIL bank. i.e. 33.54% > 23.06%. In this case we can say that the NSBL bank is good in
deposit collection from public as well as corporate sector. Moreover the Nepal SBI bank is
younger than NABIL bank due to which NABIL has got the opportunity to collect the
deposit from the market.
Table 4.12
Growth Ratio (%) of Loan and Advances
(Rs. in Millions)
Rate %
2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11
NABIL 10586.17 12922.54 15545.78 21365.05 27589.93 32268.87 38034.10 23.96
SBI 6213.88 7626.74 9460.45 12113.70 15131.75 17480.55 21365.77 22.95
Source: Appendix E
Figure 4.12
Trend Line of Loan & Advances of NABIL and SBI Banks
87
The above table and figure exhibit that the growth rate of loan and advances of Nabil bank is
higher than Nepal SBI bank. From the above study, both banks have maintained its upward
lending policy but in the context of Nepal SBI bank, it has not mobilised its deposit on
lending policy. So it affects profit of the organization. The lending portion of NSBL and
NABIL banks are increasing but the growth rate NABIL bank is slightly high in the
comparison to Nepal SBI Bank.
Table 4.13
Growth Ratio (%) of Total Investment
(Rs. in Million)
Rate %
2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11
NABIL 4275.23 6178.53 8945.31 9939.77 10826.38 13703.02 13081.21 21.89
SBI 2607.68 3610.78 2659.45 3088.89 13286.18 16305.63 18911.02 66.18

Source: Appendix G
Figure 4.13
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Growth Ratio of Total Investment
From the comparative table, it reveals that the investment growth rate of NSBL is very
higher than NABIL, i.e. 66.18 >21.89. It indicates that NSBL's investment growth rate is
increasing. However the investment ratio is fluctuating during the whole period as per the
above table. On the other hand, NSBL has follow the upward investment policy but NABIL
has followed down ward in early stage and again follow upward policy and has followed
downward at the end. We can say that NABIL should maintained its liquidity position.
Table 4.14
Growth Ratio (%) of Net Profit
(Rs. in Million)
Rate (%)
2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11
NABIL 518.64 635.26 673.96 746.47 1031.05 1141.05 1337.75 17.56
SBI 57.39 117 254.99 247.77 316.37 391.74 464.74 48.19
Source: Appendix H
Figure 4.14
89
Growth Rate Ratio of Net
Profit
From the above computation, Nepal SBI bank has satisfactory profit growth rate during the
period than NABIL bank, i.e. 48.19 > 17.56%. However the Profit of the Nepal SBI bank is
lower than then NABIL Bank Ltd during the entire year.
4.5 Correlation Analysis

The degree of relationship between the variables under consideration is measured through
the correlation analysis. Correlation means the relationship between two or more variables
where the changes in the value of one variable results the changes in the other variable.
Correlation is also known as co-ordinator. It is a technique used in measuring the closeness
of correlation between variables to measure the correlation between total deposit and total
investments, the total investment and loans and advances, total deposit and loan and
advances in the study.
4.5.1 Correlation between Total Deposit and Total Investment

Total deposit of the bank refers to fixed deposit, saving, current and other various deposit
retained at the time of issuance of letter of credit, bank guarantee and for other purposes and
total investment of a bank comprises of loans, overdrafts, cash, credit, discounting bills of
exchange, investment in government securities investment in shares and debenture of well
establishing industrial concern and moderate call and short notice. The investment policy of
banks is highly influenced by deposits collected by that bank. In this study correlation
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analysis between two variables that is total deposit and total investment has been carried out
in order to measure, where dependent variable is total investment and independent variable is
total deposit.
I. Computation Correlation between Total Deposit and Total Investment of NABIL

Correlation (r) =0.97
Coefficient of determination (r) 2 = 0.94
Here the value of correlation coefficient lies between +1 and -1. It means there is positive
correlation between total deposit and total investment of NABIL bank. Both the banks
maintain the relation of deposit and investment positive but it is not satisfactory. Moreover
we can say that if the level of deposit go higher, the level of investment also go up and vice
versa. Because in higher level of deposit company can investment in short term security and
bond to achieve more return in low risk (Appendix K).
II. Computation Correlation between Total Deposit and Total Investment of Nepal SBI
Correlation (r) = 0.99
Here the correlation coefficient between total deposit and total investment of Nepal SBI
bank is nearly perfectly positive.
Total investment refers to sum of long term investment and short term investment i.e.
lending of short term loans and bills purchase. The correlation coefficient of total investment
and short term investment i.e. loan and advances and deposit is positive. The investment
policy of bank is highly influenced by short term investment of bank (Appendix L).
III. Computation of Correlation between Loan and Advance and Total Investment of
NABIL

Here, the value of correlation lies between +1 and -1, so the relation between
loan and advances and total investment is positive of NABIL Bank. Total loan
and advances represent 91
the total loan and advance including short term and long term advances and the total
investment include both short term and long term investment of the banks. So that, the level
of loan and advances will be changed according to the level of investment(Appendix M).
IV. Computation of correlation between Loan and Advances and Total Investment of
Nepal SBI Bank
Here, the value of correlation coefficient is positive. It means there is perfect relation
between loan and advances and total investment of Nepal SBI bank (Appendix - N)
4.6 Student T-test

T-test is used when the sample size is less than thirty. Student t-value is calculated. This tool
is used to judge this significance of the relation between the variables. First Compared with
the table value of 't' at a certain level of significance for given degree of freedom.
Symbolically,
t r n2
1r2
Where,
t = Student t- value
r = coefficient of correlation
n = number of observations
On the event of testing, the null hypothesis will be rejected. If the calculated t-value is
greater than the table value at 5% level of significance for the n-2 degree of freedom, this
implies that the value of r is significant at 5% level or vice-versa.
92
4.6.1 Relationship between Total Deposit and Total Investment of NABIL
Table 4.15
Coefficient of Correlation, Coefficient of Determination with their student's t-test of
Total Deposit and Total Investment of NABIL
Ratio r t-value d.f. Result
r2
Total deposit to total investment 0.76 0.58 2.87 7 Significant
Source: Appendix K
Testing at 5% level of significance and d.f. r of 7, the table value of t is 2.365. Since the
calculated value of t is higher than table value. So, H0 is rejected. We conclude that
Correlation coefficient of NABIL's total deposit and total investment is statistically
significant. When the level of deposit goes up, the total investment also rise and vice versa.
Relation between Total Deposit and Total Investment of Nepal SBI Bank
Table 4.16
Coefficient of correlation, Correlation of Determination with their
student's t-test of Total Deposit and Total Investment of Nepal SBI
Bank
r2
Total deposit to total investment 0.86 0.74 4.11 7 Significant
Source: Appendix L
Testing at 5% and d.f. of 7, we found table value of t is 2.365. The calculated value is higher
than table value. H0 is rejected, we conclude that correlation coefficient of Nepal SBI bank's
total deposit and total investment is satisfactory significant.
When the level of deposit goes up, the total investment also rises and vice versa.
4.6.3 Relationship between Total Investment and Loan and Advances of NABIL
Table 4.17
Coefficient of Correlation, Coefficient of Determination with their
student's t-test of Total Investment and Loan and Advances of NABIL
93
Ratio r r2 t-value d.f. Result
Total Investment to Loan and Advances 0.59 0.34 1.77 7 Not Significant
Source: Appendix M
The calculated student's t-test is lower than the table value at 5% level of significant (2.365),
which implies that the correlation between total investment and loan and advances are not
statistically significant. Hence null hypothesis is accepted i.e. H0 is accepted. If the level of
investment goes up, the level of loan and advances goes down and vice versa.
4.6.4 Relationship between Total Investment and Loan and Advances of Nepal SBI
Bank
Table 4.18
Coefficient of correlation, coefficient of determination with their student's t-test of
Total Investment and Loan and Advances of Nepal SBI Bank
r2
Total Investment to loan and advances 0.78 0.61 3.05 7 Significant
Source: Appendix N
Testing at 5% and 7 d.f. we found table value of t is 2.365, and calculated value is 3.05
which higher than table value. Therefore, null hypothesis (H0) is rejected, which concludes
that correlation between total investment and loan and advances is statistically significant.
4.7 Major Findings of the Study
The major findings under descriptive analysis of the study are derived from the analysis of
data of NABIL and Nepal SBI banks.
4.7.1 Financial Ratio

Liquidity Ratio
 The current ratio of NSBL is less variable than NABIL.
 The mean ratio of cash and bank balance to current assets of NABIL is lower than
Nepal SBI. It exhibits that the liquidity position of NSBL is better in this regard.
94
 The mean ratio of cash and bank balance to total deposit of Nepal SBI is higher than
NABIL. So, Nepal SBI bank may invest in more productive sectors and establish its
better position in the market.
 The mean ratio of investment on government securities to current assets of NABIL is
greater than that of Nepal SBI. Moreover, Nepal SBI seems to have more variable than
NABIL.
 The mean ratio of loan and advances to current assets of NABIL is greater than that of
NABIL. The loan and advances to current assets ratio of Nepal SBI is more stable and
consistent than that of NABIL.
 The above mentioned result indicate that the liquidity position of Nepal SBI is little
better than that of NABIL bank.
4.7.2 Assets Management Ratio

The assets management ratio of NABIL and Nepal SBI reveals that,
 The mean ratio of loan & advances to total deposit of NABIL is lower than that of
Nepal SBI. However, NABIL's ratio seems to more stable and consistent than that of
SBI.
 Similarly, the mean ratio of total investment to total deposit of NABIL is higher than
Nepal SBI. The variability of total investment to total deposit ratio of NABIL is stable
and inconsistent than that of Nepal SBI. Beside that we can say that the NABIL has
utilized its deposit by investing in different sector than Nepal SBI. But according to
deposit volume of Nepal SBI, it has also maintained its best portfolio.
4.7.3 Profitability Ratio
The profitability ratios of NABIL and Nepal SBI reveal that
 The mean ratio of return on loan and advances of NSBL is higher than NABIL. The
variability of ratios of NSBL is comparatively higher than that NABIL.
 The mean ratio of return on total assets of Nepal SBI is lower than that of NABIL and
has been found highly in consistent than that of NABIL.
 The mean ratio of return of equity of NABIL is higher than Nepal SBI bank. It reveals
that NABIL has efficiently utilized its equity capital to earn maximum return on
investment. On the other hand the equity capital of Nepal SBI bank is higher than
NABIL bank, due to which this result has been occurring. Moreover the NRB has
circulated to increase the capita of the bank in current scenarios.
95
4.7.4. Growth Ratio
Growth Ratio indicates the level of increment in deposits, loan & advances, investments and
on profit.
 The growth ratio of deposit of Nepal SBI is higher than NABIL, i.e. 9.55 > 9.15
 NSBL's growth rate of loan & advances is also higher than NABIL bank, i.e. 15.05 >
13.15
 In the areas of investment NABIL's growth rate of total investment has been found
3.23%, which comparatively highly lower than Nepal SBI, i.e. 24.85% (24.85 >
3.23%).
 The growth rate of net profit of Nepal SBI is higher than NABIL that is 45.27% >
12.48%.
 From the analysis of growth ratios of NABIL and Nepal SBI, it has found that NABIL
has not been successful to increase their sources of funds. Nepal SBI has maintained
very higher growth ratio rate of total investment. But NABIL has not been able to
maintain its positive growth ratio to investment areas as well as loan advance. On the
other hand Nepal SBI has increased its net profit ratio than NABIL by utilizing its fund
in right way as well as by maintaining its operating expenses.
96
4.7.5 Coefficient of Correlation Analysis
Coefficient of correlation analysis between different variables of NABIL and Nepal SBI
reveals that,
 It is found that there is significant relationship between total deposit and total
investment of NABIL as well as Nepal SBI Bank. It indicates that the investment level
of each bank is varying with their deposit volume. if the deposit level go up, the
investment level will be higher and vice versa.
 However, Nepal SBI has the higher value of coefficient of correlation between
investment and loan and advances which indicates the lower riskiness of Nepal SBI and
is able to mobilizing its loan and advances efficiently.
 Coefficient of correlation between investment and loan and advances of NABIL is
slightly lower than that of Nepal SBI.
 From the above results it is concluded that there is significant relationship between
deposit and loan and advances of NABIL and Nepal SBI but there is not significant
relationship between investment and loan and advances of NABIL but significant
differences of the same of Nepal SBI bank.
4.8 Major Findings Under Inferential Analysis or Student's T-test Analysis

The major findings of the study derived from inferential analysis are as follows:
a. Correlation between Total Deposit and Total Investment of NABIL

The inferential analysis shows that null hypothesis (H0) has been rejected in respect of the
correlation between total deposit and total investment as their calculated student's t-value is
higher than the table value at 5% level of significance. From this result, it can be inferred that
the correlation of total deposit and total investment is significantly correlated.
b. Correlation between Total Deposit and Total Investment of SBI

The inferential analysis reveals that total deposit have significant correlation with total
investment. It reveals that there is sound relation between deposit and investment of Nepal
SBI.
97
c. Correlation between Total Investment and Loan and Advances of NABIL
The inferential analysis shows that alternative hypothesis (H0) has been accepted in respect
of the correlation between total investment and loan and advances is not significantly
different.
d. Correlation between Total Investment and Loan and Advances of Nepal SBI Bank
The inferential analysis reveals that total investment has significant correlation with loan and
advances.
In general analysis using various tools of presentation, it can be concluded that Nepal SBI is
superior in mobilizing its fund in productive sectors. Its return is comparatively more than
NABIL bank but weakness is found in the ratio of growth rates of net profit. But on the other
areas like return of equity and return on assets of NABIL is superior in comparison to Nepal
SBI bank, because the NABIL was introduces before then Nepal SBI. So, that the NABIL
has grabbed higher area of business and include the many clients than Nepal SBI.
98
CHAPTER - V
SUMMARY, CONCLUSION AND RECOMMENDATIONS
This section highlights the summary, conclusion and recommendations derived from the data
of NABIL and Nepal SBI bank.
5.1 Summary
The commercial banking system of the nation is important to the functioning of our
economy. The management of money in bank is the main function that makes a profit and
maximum utilization of national resources. NABIL is a modern commercial bank with
modern facilities and proficient skills and lays paramount emphasis providing quality service
to all its clients. The Nepal SBI bank is to carry out modern banking business in the country
under the commercial act 1974, and provide loan on agriculture, commercial and industrial
sectors. Bank is such types of institutions, which deal with money and substitute for money
and its most essential thing is good circulation of credit. The decision of investment of fund
may be the question of life and death for the bank. The bank mainly offers different services
as functions i.e. acceptance of deposits, advancing of loans, agency function, purchase and
sale of foreign exchange, creation of credit etc. The modern banking system follow the
liquidity management, cash management and portfolio management with related to the
investment policy of bank.
The term „Investment‟, in a narrower sense is sometimes used to suggest a commitment that
is relatively free from certain risks of less and high quality bonds and stocks are said to be
"of investment grade". So, the label of investment would be restricted to situation promising
dependable income, relatively stable value a modest rate of return, and little chance for
spectacular capital appreciation. When a bank gents into serious financial trouble, its
problem usually spring from significant amounts of loans that have become uncollectible
due to mismanagement, illegal manipulation of loans, misguided lending policies or
unexpected economic down turn. Therefore, the bank investment policy must be such that it
ensures that it is sound and prudent in order to protect public's funds.
For forecasting investment policy of banks, there are different techniques viz, estimation of
current assets and current liabilities, estimation of total deposit, loan and advances and total
99
investment etc. This study aims at examining the size and growth of total deposit, loan and
advances, total investment and net profit of NABIL and Nepal SBI banks. For this
assessment, ratios of NABIL and Nepal SBI banks, this is related to investment policy of
bank. So, its component are calculated and measured. Statistical tools like arithmetic mean,
standard deviation, coefficient of variation and of correlation are also computed to evaluate
and reach certain conclusions. Correlation coefficient of different ratios was tested with the
help of student t-values which is helpful for accepting or rejecting null hypothesis.
5.2 Conclusion
Economic liberalization policy of the government has encouraged the establishment of
growth of the banks in the country with in short period of time. In a situation when the
existing financial institutions, especially governments commercial banks were unable to
meet credit needs and perform other activities, the contribution of joint venture commercial
banks have played pivotal role. However, the overall performance of JVBs is not
satisfactory.
Strengthening and the institutionalization of commercial bank are very important to have a
meaningful relationship between commercial banks and national development through shift
of credit to the productive industrial sectors. The liquidity position of sample JVBs (NABIL
and Nepal SBI) is satisfactory. Nepal SBI has higher liquidity position than that of NABIL.
The coefficient of correlation of deposit lending and investment of Nepal SBI shows that it
has better position than NABIL as NABIL has failed to maintain sufficient level coefficient
of correlation. The commercial banks have to prove that they can really contribute to the
national economy, are efficient and visible agencies for mobilization of saving and are
professionally managed and competent enough to ensure adequate rate of return on
investment and are strategically well planned. From the analysis of t-test NABIL has become
in perfect correlation is significant. Here, correlation between deposit and investment are
significances difference of both bank's student t-test.
5.3 Recommendations
On the basis of analysis and findings of the study, the following recommendations can be
advanced to overcome the inefficiency and to improve the investment operating of NABIL
and SBI.
100
1. The liquidity position of a bank is affected external and internal factors. The effecting
factors may be interest rate, position of loans and advances and savings, investment
situations, central banks directive, the lending policies, capability of management and
so forth. As NABIL has maintained the ratios of cash and bank balance to total deposit
considerably, lower than that of Nepal SBI Bank. So, NABIL is recommended to
increase cash and bank balance to meet current obligations on loan demand.
2. To get success in competitive banking environment, depositor's money must be utilized
as loan and advances. Negligence in administering these assets could be one of the
main reasons of a bank failure. It has been found from the study that Nepal SBI has
greater ratios of all because its large position of fund invested as loan and advances.
NABIL has not properly used its existing fund as loan and advances. To overcome this
situation NABIL is strongly recommended to follow liberal lending policy.
3. Commercial banks can not move away from their target that is profit and customers
satisfaction. They should be careful in increasing profit to maintain the trust of
shareholders, investors and customers. Nepal SBI profitability position is lower than
that of NABIL. So, Nepal SBI bank is recommended to utilize risky assets and
shareholders fund to gain highest profit margin.
4. Although the securities issued by government yields the lowest interest rates are
considered to be risk free. From this study, it is found that Nepal SBI has maintained
higher rate of investment in government security in comparison to NABIL. Therefore,
it is recommended to NABIL that if it has idle funds it should invest them in
government securities. It should always look from the 'something is better than nothing'
view point.
5. From the analysis of mean ratio, fluctuating decision can be inferred. However, Nepal
SBI tries to maintain the average ratios then NABIL bank bearing high risk. Therefore,
NABIL is recommended to maintain the average ratios other statistical findings shows
that NABIL is poor in maintaining the relations between the investment, loans and
advances, deposits etc. Management of this relation is crucial to formulate the sound
investment policy. So, NABIL is recommended to maintain the sound relations between
the above stated variables.
6. Cash and bank balance to current assets ratio are not satisfactory of both banks. Higher
C.V. notice the higher riskiness, so to maintain the risk involved and to hold the strong
position, both banks must undertake defending strategic.
101
7. To get the more return, both bank should invest its ideal money to short term govt
security without avoiding liquidity position.
8. NABIL's lending growth rate is lower than NSBL; moreover the involved riskiness is
higher than NSBL. So NABIL should cop its riskiness as per its lending ratio.
9. Return on loan and advance of NABIL is higher than NSBL, even the higher growth
rate has observed on loan and advances of NSBL. So, Nepal SBI should follow the
liberal policy of lending with higher rate of interest as well as it should spread out its
lending area.
10. Both banks should increase its capital to fulfil the demand of the market and get
internal strength in this competitive market.
102
BIBLIOGRAPHY
BOOKS AND JOURNALS

American Institute of Banking (1972). Principle of Banking Operation. USA
Bajracharya, B.C. (1996). Business Statistics and Mathematics. Kathmandu: M.K. Publisher
and Distributors.
Bhattarai, Gyaneshwor (1997). Brihat Gyan Kosh. Kathmandu: Ashis Pustak Bhandar.
Brealay, R.S. & Mayers, S.C. (1996). Principles of Corporate Finance. New Delhi: Tata
McGraw Hill Publishing Company Ltd.
Commercial Bank Act (2031). Nepal Ain Shangrah Khanda 4 Kha. Kathmandu: Kanun Kitab
Vyabastha Samiti.
Garhal, S. (1993). Commerce Banking & Economic Development. Jaipur: Pointer Publishers.
Ghimire, S.R. (2062). Fundamentals of Investment. Kathmandu: K.P Book Stores.
Jain, P.K. & Khan, K.Y. (2001). Financial Management. New Delhi: Tata McGraw Hill
Publishing Ltd.
Joshi, P. R. (2004). Fundamental of Financial Management. Kathmandu: Asmita Books and
Stationary.
Koch, R. W. & Ricardo (1996). Financial Institution and Market. Merle: University of
Merle.
Kothari, C.R. (1994). Quantitative Techniques. New Delhi: Vikash Publishing House Private
Limited.
Lynch, R.M. & William, R.W. (1994). Accounting for Management Planning and Control.
New Delhi: Tata McGraw Hill Publishing Company Ltd.
Marcus, B. K. (2002). Investments. New York: Tata McGraw Hill.
Merle, W. & Ronald, W. M., (1980). Finance and Introduction to financial market &
Innovations. Ohio: South Western Publishing Co.
Munakarmi, S. P. (1999). Accountancy and Auditing. Kathmandu: Educational Enterprises

Pvt. Ltd.
Pradhan, S. (1996). Basic of Financial Management. Kathmandu: Educational Enterprises
Pvt. Ltd.
Vaish, M.C. (1989). Money Banking, Trade and Public Finance. New Delhi: Wiley Eastern
Limited.
Weston, J.F. & Copland, T. E. (1999). Managerial Finance. New York: McGraw Hill.
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Weston, J.F. and Brigham, E.F. (1996). Essential of Managerial Finance. New York:
Dryden Press.
Wetal, R. E. (1975). Commercial Banking. New Jersay: Prentice Hall.
Whitney, H. J. & Ronald, S.(1980). A Study on Investment Policy. New York: Prentice Hall.
Wolf, H.K. and Panta, P.R. (2005). Social Science Research and Thesis Writing. Kathmandu:
Buddha Academic Enterprises Pvt.
UNPUBLISHED MASTER THESIS

Bhandari, M. (2004). Investment policy of commercial banks with special reference to Nepal
SBI Bank Ltd. An Unpublished Master Degree Thesis, Faculty of Management,
Tribhuvan University.
Bhattarai, R. (1999). Lending Policy of Commercial Banks of Nepal. An Unpublished
Master's Thesis, T.U.
Joshi, J. (2007). Investment Policy of Commercial Banks in Nepal, a comparative study of
Everest Bank Ltd. With NABIL bank Ltd. and Bank of Katmandu. An Unpublished
Master Degree Thesis, Faculty of Management, Tribhuvan University.
Khadka, R. R. (2000). A Study on the Investment Policy of NABIL Bank Ltd. in Comparison
to Other Joint Venture Banks of Nepal. An Unpublished Master Degree Thesis, Shanker
Dev Campus, Tribhuvan University.
Pandit, D. (2006). Investment Policy Analysis of Joint Venture Bank" with special references
to NSBIL and EBL. An Unpublished Master Degree Thesis, Faculty of Management,
Tribhuvan University.
Shahi, P. B. (2001). Investment policy of commercial banks in Nepal. An Unpublished
Master Degree Thesis, Faculty of Management, Tribhuvan University.
Websites:
www.nabilbank.com
www.nepalsbi.com.np
www.nepalstockexchange.com
www.nrb.org.np
nepalnews.com
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INVESTMENT POLICY OF

JOINT VENTURE BANKS IN NEPAL

A Thesis Submitted to:

In partial fulfillment of the requirements of the

This is to certify that the thesis

“Investment Policy of Joint Venture Banks in Nepal

We have conducted the viva-voce examination of the thesis presented by

“Investment Policy of Joint Venture Banks in Nepal

according to the prescribed format. We recommend the thesis to be

accepted as partial fulfillment of the requirement for

Masters of Business Studies (M.B.S.)

Member (Thesis Supervisor) : ……………………………………………

Member (External Expert) : ……………………………………………

I hereby declare that this dissertation entitled “INVESTMENT POLICY OF JOINT

2.3 Research Gap 50

1.1.1 Banking and Financial System in Nepal

i. Banking Financial Institutions (BFI’s)

ii. Non - Banking Financial Institutions (NBFL’s)

1.1.2 Role of Banking / Financial Institution in Nepal

1.1.3 Investment Policy of Commercial Bank

1.2 Focus of the Study

This study will try to answer the following questions:

1.4 Objectives of the Study

1.5 Need and Importance of the Study

1.6 Assumption and the Limitation of the Study

1.7 Organization of the Study

Chapter – II Review of Literature

Chapter – III Research Methodology

Chapter – IIV Data Presentation and Analysis

Chapter – V Summary, Conclusion and Recommendations

2.1 Introduction of Conceptual Review

2.1.1 Banks and Banking

Discounting of Bills of Exchange

Money at call and short notice

III. Agency Functions of Bank

Collecting Customer's Fund

Purchase and Sales of Share and Securities for the Customers

Collecting Dividends on the Shares of the Customers

Payment of Insurance Premium

Trustee and Executor

IV. Purchase and Sale of Foreign Exchange

VI. Miscellaneous Function of Bank

2.1.2 The Structure of Modern Banking System

2.1.3 Liquidity Management

2.1.3.1 Demand for Bank Liquidity

a. Deposit Withdrawal or Repayment Of Borrowing

b. Disbursement of Loans and Advances

c. Off Balance Sheet Liabilities

2.1.3.2 Supply of the Bank Liquidity

a. Receipt of Primary Deposit

2.1.4 Cash Management

2.1.4.1 Cash and Marketable Securities Management

a. The Baumol Model

2.1.5 Portfolio Management

2.1.7 Investment Objectives

2.1.8 The Evolution of the Investment Environment

2.1.8.2 Security Markets

2.1.9. The Investment Process