CHAPTER I

INTRODUCTION

1.1 Concept of Commercial Banks

Financial intermediaries play significant role for the development of national
economy. They influence savings and surpluses considerably, which results
investments. Financial intermediaries collect financial resources and supply
them to the productive sectors that boosts the trade and industry and at last
development of the country's economy.

Commercial banks are also financial intermediaries they mediate people who
save money and who want to secure the use of money by accepting the
deposits, borrowing funds and advancing loans. In addition to these primary
functions, commercial banks, collect checks and bills, open letter of the credit,
guarantee on behalf of customers, undertake capital and other many activities,
exchange foreign currencies etc.

A commercial bank is one which exchanges money, deposits money, accept

deposits, grants loan and performs commercial banking functions and which is
not a bank meant for co-operative, agriculture industries or for such specific
purpose (Nepal Commercial Bank Act, 2031).

Commercial Banks are heart of financial system they hold the deposits of many
person, government establishment business unit. They make fund available
through their lending and investing activities to borrowers, individuals,
business firms and services for the producers to customers and the financial
activities of the government. They provide the large portion of the medium of
exchange and they are media through which monetary policy is affected. These
facts show that the commercial banking system of nation is important to the
functioning of the economy (Weston and Bringham, 2003).

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In the context of Nepal, commercial banks are operated under "Commercial
Bank Act 2031 B.S.", In addition to Commercial Bank Act, Nepal Rastra Bank
also lays down other many directives.

1.2 Review of Literature

Profit in the accounting sense is the excess of revenue receipts over the costs
incurred in producing this revenue. This concept of profit is also known as
residual concept. But, in economics, both implicit and explicit costs are
deducted from total sales revenue in determining profits (Cavery, 1997: 87).
Profitability is the ratio to measure the performance of the company. It is a
main aspect in a company’s financial reporting. The profitability of a company
shows a company's ability to generate earnings for a certain period at a rate of
sales, assets and certain of capital stock. Understanding the determinant
profitability is the key factors that help managers in developing an effective
profitability strategy for their company (Margaretha and Supartika, 2016:1).

1.3 Functions of Commercial Bank

Regarding the function of commercial banks, a Commercial Bank Act state that
a commercial bank is one that exchanges money, accept deposits, grants loans,
and performs commercial banking functions. The functions and services of
modern commercial banks are classified under the following headings;

(i) Accepting Deposits

A commercial bank accepts deposits from customers in the forms of current,
saving and fixed deposits. These deposits are repayable on demand. The
depositors other than current A/c are paid interest.

(ii) Granting Loans and Deposits

The second main function of the commercial bank is to grant loans and
advances to businessman, the industrialist, the individuals, the different

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organizations etc. in the forms of term loans, cash credit, overdraft, trust
receipts, hire purchase loans etc. Banks charge interest on such loan and
advances, which is the largest source of total income.

(iii) Agency Service

A modern commercial banks act as an agent of individual customers, business
institutions and different organization. The agency services of banks may
involve collection of interest and dividends on debt and share capital. A bank
buys and sells securities on behalf of the customers. Bank also collects
cheques, drafts promissory notes etc and receives their payments. Sometimes, it
makes payments of insurance premium, bills of electricity, telephone etc. It
takes commission for the services rendered.

(iv) Guarantee on Behalf of Customers

The need of bank guarantee arises in business. Generally, business customers
enjoy this service. Sometimes, personal customers may also need a bank
guarantee. A guarantee is a definite and irrevocable undertaking by a bank on
behalf of its customers to make payments up to a specified sum of money to the
beneficiary on demand in case of default by its customers.

(v) Issuance of Traveler's Cheque

The people traveling outside the country want to reduce the fear of getting
money stolen during the travel. Bank sells the traveler's cheque. The unique
feature of the traveler's cheque is that unless the purchaser of traveler's cheque
signs for encashment it cannot be enchased.

(vi) Letter of Credit Facility

A letter from a bank guaranteeing that a buyer's payment to a seller will be
received on time and for the correct amount is called a letter of credit. Today
letter of credit has become very popular in foreign business. The letter of credit
is established /opened by the bank on the request of the customers.

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(vii) Remittance Function
Sending and receiving fund to /from various places is the necessity of today.
The remittance service of bank has benefited both business and personal
customers. Funds transfers are made through various modes like demand drafts,
telegraphic payment order, swift, and fax and mail payment orders.

(viii) Other Services

Modern commercial banks are equally important in undertaking safe custody of
important valuable and documents. Banks also offer some of the bank services
at the door of highly valued customers. Few large banks conduct research and
survey in the economic conditions and they supply trade statistics and
information. In addition to these, banks also inform their customers about the
credit standing of other particles.

Bank is an institution, which deals with money & credit. It accepts deposits
from public, makes fund available to those who need them and helps in
remittance of fund from one place to another. “A bank seeks optimum
combination of earning liquidity and safety. While formulating investment
policy" (Charles, 1994:105). The more developed financial system of the
world characteristically falls into three parts, the central bank, the commercial
bank and other financial institutions.

A commercial bank is one which exchanges money, deposits money, accepts

deposits, grants loans and performs commercial banking functions and which is
not a bank meant for co-operatives, agriculture, industries, or for such specific
purpose (Commercial Bank Act,1974).

1.4 Statement of the Problem

For each and every bank or financial institution it is very crucial to analyze the
profitability and financial performance. Every banking sector cannot reach their

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objective without a good financial performance. The financial sector has not
been responsive enough for them to meet the growing resources. In this
competitive market each and every bank and financial institution need to
analyze their financial situation to develop strategies and to identify the
strengths and weaknesses. Similarly investors are also needed to evaluate the
performance of the companies for secured investment. In the Nepalese capital
market financial institutions have dominated to the other sectors. Many
researchers have been made in the field of the performance evaluation of the
commercial banks among the financial institutions. However the comparative
performance evaluation between EBL, SBL, LBL, SCBL and NIBL has not yet
been made. So it is felt to make a comparative study between the companies.

The statements of problems of this study are mentioned below:

 What are the profitability positions of sample banks?
 Are the banks operating at profits?
 What is the relationship between net profit and total deposit, interest
income and investment?
 Have the banks mobilized their investment in profitable sectors?

1.5 Objective of the Study

The main objective of this study is to make the comparative study of the
profitability analysis of the selected banks. The other specific objectives are as
follows.
 To examine the profitability situation of the banks.
 To analyze the profitability ratios, including return on shareholders’
equity, total assets, investment and deposit of the sample banks.
 To examine the relationship between net profit and total deposit, net
profit and interest income, and net profit and investment of the sampled
banks.

1.6 Limitations of the Study

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Limitations of the study are as follows:
 This research has been conducted on the requirement of partial
fulfillment of Master’s Degree in Business Study.
 It has been conducted in the limited time and resources.
 The study mainly focuses with the profitability and liquidity situation of
EBL, SBL, LBL, SCBL and NIBL.
 Generally it is mainly based on secondary data like balance sheet, profit
and loss account and other useful documents.
 It is covering the period of 5 years from 2011/12 to 2015/16.

1.7 Significations of the Study

The study is needed because it is very useful to the companies to identify the
strengths and weakness of the respective companies, students for further
researches, interested person, investors etc. Some of the reasons are
summarizes in the following:
 It is helpful to the shareholders to identify the financial performance of
the respective banks and to analyze and to compare the financial position
and productivity.
 It is useful to the students of banking and finance to study the
profitability and productivity.
 This study will be helpful to the public to analyze risk of the banks. Its
help to public to believe that their fund may secure or may not secured.
 It is useful to the overall banking management.

1.7 Organization of the Study

This study has organized into the following five chapters:

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Chapter I: Introduction
Chapter explains the background of the study, focus of the study, statement of
the problems, objective of the study, limitation of the study and organization of
the study.

Chapter II: Review of Literature

The second chapter is concern with the review of relevant subjects and includes
conceptual framework and review of articles and past studies.

Chapter III: Research Methodology

Chapter three present methodologies adopted for the research. It comprises
research design, sources of data, method of analysis and its descriptive
presentation.

Chapter IV: Presentation and Analysis of Data

The fourth chapter contains presentation and analysis of data. In this chapter
data are collected through balance sheet, profit and loss account and are
presented in tables. Analysis and interpretation of data have been performed
thereafter. This chapter consists of analysis, interpretation and major findings
of the study.

Chapter V: Summary, Conclusion and Recommendations

This is the last chapter of the study and presents summary of the study,
conclusion of the study and needful recommendations for further improvement
of the performance of the selected banks.