INVESTMENT POLICY ANALYSIS OF COMMERCIAL

BANKS
(A Comparative Study of Himalayan Bank Ltd. & Nepal SBI Bank Ltd.)

By:
VANDANA ATAL
Shanker Dev Campus
T.U. Registration No: …………..
Campus Roll No: 1017/060

A Thesis Submitted to:

Office of the Dean
Faculty of Management
Tribhuvan University

In partial fulfillment of the requirement for the Degree

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

Kathmandu, Nepal
January, 2010
 RECOMMENDATION
This is to certify that the Thesis

Submitted by:
VANDANA ATAL

Entitled:
INVESTMENT POLICY ANALYSIS OF COMMERCIAL
BANKS
(A Comparative Study of Himalayan Bank Ltd. and Nepal SBI Bank Ltd.)

has been prepared as approved by this Department in the prescribed format

of the Faculty of Management. This thesis is forwarded for examination.

…..……..…….……… .……………....……………. ……….………….………

Prof. Snehalata Kafle Prof. Bisheshwor Man Shrestha Prof. Dr. Kamal Deep Dhakal
(Thesis Supervisor) (Head of Research Department) (Campus Chief)

…..……..…….………
Govinda Bahadur Thapa
(Thesis Supervisor)
2
Recommendation
TABLE OF CONTENTS
Viva-Voce Sheet
Declaration
Acknowledgement
Table of Contents
List of Tables
List of Figures
Abbreviations

Page No.
CHAPTER – I INTRODUCTION
1.1 General Background of the Study 1
1.2 Brief Profile of Sample Companies 3
1.3 Statement of the Problem 4
1.4 Objectives of the Study 7
1.5 Significance of the Study 7
1.6 Limi
tations of the Study 8
1.7 Organization of the Study 8

CHAPTER – II REVIEW OF LITERATURE

2.1 Con
ceptual Framework 10
2.1.1 Banking in Nepal 15
2.1.2 The Commercial Bank 16
2.1.2.1 Functions of Commercial Banks 18
2.1.3 Concept of Investment 20
2.1.4 Principles of Sound Investment Policy of Banks 25
2.1.4.1 Liquidity 26
2.1.4.2 Profitability 27
3
 2.1.4.3 Safety 28
2.1.4.4 Diversification 28
2.1.4.5 Marketability 29
2.2 Review of Previous Studies 30
2.2.1 Review of Articles 30
2.2.2 Review of Research Papers 35
2.2.3 Review of Thesis 36
2.3 Research Gap 46

CHAPTER – III RESEARCH METHODOLOGY

3.1 Introduction 48
3.2 Research Design 48
3.3 Population and Sample 48
3.4 Nature and Sources of Data 49
3.5 Data Presentation and Analysis Techniques 49
3.6 Tools for Analysis 49
3.6.1 Financial Tools 50
3.6.2 Statistical Tools 56

CHAPTER – IV DATA PRESENTATION AND ANALYSIS

4.1 Analysis of Investment Sectors 61
4.2 Financial Analysis 64
4.2.1 Analysis of Liquidity Position 64
4.2.2 Analysis of Assets Management 72
4.2.3 Analysis of Profitability Position 78
4.2.4 Analysis of Risk 87
4.2.5 Growth Analysis 90
4.3 Statistical Analysis 96
4.3.1 Correlation Analysis 96
4.3.2 Trend Analysis 102
4.4 Major Findings 108
CHAPTER – V SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary 112
5.2 Conclusion 115
5.3 Recommendations 117

Bibliography
Appendix
 LIST OF TABLES

Table No. Title Page

No.
4.1 Investments Pattern of Himalayan Bank Ltd 61
4.2 Investments Pattern of Nepal SBI Bank Ltd 62
4.3 Current Ratio of HBL and NSBI 65
4.4 Cash and Bank Balance to Total Deposit Ratio of HBL and NSBI 66
4.5 Cash and Bank Balance to Current Assets Ratio of HBL and NSBI 68
4.6 Investments on Government Securities to Current Assets Ratio of
HBL and NSBI 70
4.7 Loan and Advance to Total Deposit Ratio of HBL and NSBI 72
4.8 Total Investments to Total Deposit Ratio of HBL and NSBI 74
4.9 Total OBS Operation to Loan and Advances Ratio of HBL and NSBI 75
4.10 Loan Loss Ratio of HBL and NSBI 76
4.11 Return on Loan and Advance Ratio of HBL and NSBI 78
4.12 Return on Total Assets Ratio of HBL and NSBI 80
4.13 Return on Equity Ratio of HBL and NSBI 81
4.14 Total Interest Earned to Total Outside Assets Ratio of HBL and NSBI 83
4.15 Total Interest Earned to Total Operating Income Ratio of HBL and NSBI 85
4.16 Total Interest Paid to Total Deposit Ratio of HBL and NSBI 86
4.17 Credit Risk Ratio of HBL and NSBI 87
4.18 Capital Risk Ratio of HBL and NSBI 89
4.19 Growth Ratio of Total Deposit of HBL and NSBI in Rupees 90
4.20 Growth Ratio of Total Deposit of HBL and NSBI in Percentage 91
4.21 Growth Ratio of Loan and Advance of HBL and NSBI in Rupees 92
4.22 Growth Ratio of Loan and Advance of HBL and NSBI in Percentage 92
4.23 Growth Ratio of Total Investments of HBL and NSBI in Rupees 93
4.24 Growth Ratio of Total Investments of HBL and NSBI in Percentage 93
4.25 Growth Ratio of Net Profit of HBL and NSBI in Rupees 95
4.26 Growth Ratio of Net Profit of HBL and NSBI in Percentage 95
4.27 Correlation between Total deposit and Total Investment of HBL and NSBI 97
4.28 Correlation between Loan and Advances and Net Profit of HBL and NSBI 98
4.29 Correlation between Total Deposits and Net Profit of HBL and NSBI 99
4.30 Correlation between Total Investments and Net Profit of HBL and NSBI 100
4.31 Correlation between Total Investments and Loan and Advance of
HBL and NSBI 101
4.32 Correlation between Total Deposits and Loan and Advance of
HBL and NSBI 102
4.33 Trend Values of Total Deposits of HBL and NSBI 103
4.34 Trend Values of Total Investments of HBL and NSBI 104
4.35 Trend Values of Total Investments of HBL and NSBI 105
4.36 Trend Values of Net Profit of HBL and NSBI 107
 LIST OF FIGURES

Figure No. Title Page No.

4.1 Investments Pattern of Himalayan Bank Ltd 62
4.2 Investments Pattern of Nepal SBI Bank Ltd 63
4.3 Current Ratio of HBL and NSBI 65
4.4 Cash and Bank Balance to Total Deposit Ratio of HBL and NSBI 67
4.5 Cash and Bank Balance to Current Assets Ratio of HBL and NSBI 69
4.6 Investments on Government Securities to Current Assets Ratio of
HBL and NSBI 71
4.7 Loan and Advance to Total Deposit Ratio of HBL and NSBI 72
4.8 Total Investments to Total Deposit Ratio of HBL and NSBI 74
4.9 Total OBS Operation to Loan and Advances Ratio of HBL and NSBI 75
4.10 Loan Loss Ratio of HBL and NSBI 77
4.11 Return on Loan and Advance Ratio of HBL and NSBI 79
4.12 Return on Total Assets Ratio of HBL and NSBI 80
4.13 Return on Equity Ratio of HBL and NSBI 82
4.14 Total Interest Earned to Total Outside Assets Ratio of HBL and NSBI 83
4.15 Total Interest Earned to Total Operating Income Ratio of HBL and NSBI 85
4.16 Total Interest Paid to Total Deposit Ratio of HBL and NSBI 86
4.17 Credit Risk Ratio of HBL and NSBI 88
4.18 Capital Risk Ratio of HBL and NSBI 89
4.19 Total Deposits 91
4.20 Loan and Advance 92
4.21 Total Investments 94
4.22 Net Profit 95
4.23 Trend values of Total Deposits of HBL and NSBI 103
4.24 Trend values of Total Investments of HBL and NSBI 105
4.25 Trend values of Loan and Advances of HBL and NSBI 106
4.26 Trend values of Net Profit of HBL and NSBI 107
 ABBREVIATIONS

B.S. : Bikram Sambat

C.V. : Coefficient of Variation
e.g. : Example
Etc. : Extra
viz. : Namely
FY : Fiscal Year
Govt. : Government
HBL : Himalayan Bank Limited
i.e. : That is
JVB’s : Joint Venture Banks
Ltd. : Limited
Nabil : Nabil Bank Limited
No. : Number
NRB : Nepal Rastra Bank
NSBI : Nepal SBI Bank Limited
P.Er. : Probable Error
r. : Coefficient of Correlation
Rs. : Rupees
S.D. : Standard Deviation
T.U. : Tribhuvan University
 CHAPTER - I
INTRODUCTION

1.1 General Background of the Study

An investment policy is any government regulation or law that encourages or
discourages foreign investment in the local economy. A sound investment policy is
very essential in a nation’s economy for economical as well as financial growth of a
country. Investment, in its broadest sense, means the sacrifice of current currencies and
resources for the sake of future currencies and resources. An investment is one of the
decisions of finance function that involves the decision of capital to establish
commercial or industrial venture. In other words it involves commitment of funds into
long-term assets that would yield benefits in coming future period.

The well-organized financial system of a country plays a great role in the economic
development of that country, as it transfers financial resources from savers to those
who need them. As part of the financial system, financial institutions such as
commercial banks, finance companies and financial cooperative societies are important
vehicles for the development of economy, trade and business and other productive
sectors that contribute to the economic growth of the nation. The mobilization of
financial resources, capital formation, and their proper utilization play key role in the
economic development of the country. Among them, the role of commercial banks is
perhaps the most important in the economic development in the country.

Commercial banks provide capital for the development of industry, trade and business
by investing the saving collected as deposits from the public. They render various other
services to their customers facilitating to improve their economic and social life. They
are the most important instruments for the country’s development. Therefore, a
competitive and reliable banking system is essential to every country to develop.

The word ‘investment’ connotes the investment of income, saving or other collected
funds. Investment is possible only when there is adequate saving. If all the incomes are
consumed now for fulfilling basic needs, then there is nothing to investment.
Therefore, both the saving and investment are interrelated. A distinction is often made
between investments and saving, saving is defined as foregone consumption;
investment is restricted to real investment of the sort that increases national output in
the futures. It is always true that all people want to invest their money in the most
profitable opportunities for good return, but there is always risk associated with it.

Francis (1983) states, "Investing involves making a current commitment of funds in

order to obtain an uncertain future return. It is a risky business that demands
information. To process information effectively and select the best investment requires
goals that are clear cut and realistic. In simple term investment is making a current
commitment of funds that is expected to generate additional money in future.
Nevertheless, in the broadest sense it means the sacrifice of current rupees for future
rupees that take place at present and certain time.” Similarly, Sharpe (1986) defines
“Investment in the actual sense refers to the sacrifice of current dollars for future
dollars". Investment involves two attributes, time and risk. The sacrifice takes place in
the present and is certain. The reward comes later, if at all and the magnitude of which
is uncertain. In some cases, the element of time predominates (for example, call option
on common stock). In yet others, both time and risk play a dominant role (for example,
share of common stock).

Therefore, it can be said that investment is concerned with the management of the
investor's wealth. Funds to be invested come from trade assets already owned,
borrowed money, and saving or foregone consumption. By foregoing consumption
today and investing the saving, investors expect to enhance their future consumption
possibilities, i.e. they are invested to increase wealth.

Investors also seek to manage their wealth effectively by obtaining the most profit
while protecting it from inflation, taxes and other factors. Thus investment policies are
the strategies of finding out the answers of where to invest? How much to invest?
When to invest? However, there are no specific rules regarding investment policy of a
bank and thus it has to keep increasing the safety and liquidity of its resources to meet
the potential demand of its customers. Since the objective of profitability conflicts with
those of safety and liquidity, the wise investment policy is to strike a judicious balance
between them. Therefore, a bank has to lay down its investment policy in such a
manner to ensure the safety and liquidity of its funds and at the same time maximizing
its profits.

Investment promotes economic growth and contributes to a nation's wealth. When

people deposit money in the saving account of a bank, the bank may invest by lending
the funds to various entrepreneurs’ business firms. These firms in return may invest the
money in new establishments to enhance their production. In addition to borrowing
from banks, most companies issue stocks and bonds that they sell to investors to raise
capital needed for business expansion. Government also issues bonds to obtain funds
to invest in major projects of national interests, such as the construction of dams,
roads, irrigation, educational institutions, etc. Nepal Rastra Bank on behalf of the
Government of Nepal issues bonds, treasury bills to finance the long-term and short-
term needs of the government. All such investments by individuals, firms and
government involve getting an expected future benefit. As a result of which,
investment helps in raising the living status of common citizen of the nation.

1.2 Brief Profile of Sample Companies

Two sample companies have been taken to conduct the study. A brief description of
sample companies viz. Himalayan Bank Ltd and Nepal SBI Bank Limited has been
presented below.

a) Nepal SBI Bank Limited

Nepal SBI Bank Limited was established in 1993, under the company Act. It is a
foreign joint venture bank and the foreign partner is State Bank of India, holding the
55% of equity share of Nepal SBI Bank Limited, is managing the Bank under joint
venture and technical services agreement signed between it and Nepalese promoters.
There are 32 branches of Nepal SBI Bank Limited at present in operation. Authorized
capital and paid-up capital of Nepal SBI Bank Limited is Rs.200 crores and Rs.131.76
crores respectively and current number of staffs is 325. Fifty five percent of the total
share capital of the Bank is held by the SBI, fifteen percent is held by the Employees
Provident Fund and thirty percent is held by the general public. The business hour for
public is from 10 a.m. to 3 p.m. from Sunday to Thursday and up to 1 p.m. on Friday.
Besides this, the bank provides 365 days banking and also evening counter deposit
facility with fixed hours in some of its branches. Nepal SBI Ltd provides following
products and services.
i. Deposit Products
ii. Loans
iii. Remittance
iv. Card Services
v. Internet Banking

b) Himalayan Bank Limited

Himalayan Bank was established in 1993 in joint venture with Habib Bank Limited of
Pakistan. This is the first Joint venture Bank managed by Nepalese Chief Executives.
There are 24 branches of HBL in operation with 14 branches outside the valley and the
rest inside the Kathmandu valley including a Card Center. Himalayan Bank Limited
provides SMS banking, internet banking as well as “Any branch banking facility” to its
customers. It also provides Evening counter facility to its customers. Himalayan Bank
Limited provides following products and services.
i. Deposit Products
ii. Loans
iii. International Banking(LC)
iv. Remittance
v. Safe Deposit Lockers
vi. Card Services
vii. SMS Banking
viii. Internet Banking

1.3 Statement of the Problem

The main economic goal of developing countries is to accelerate the present growth
rate. Although most of the developing countries are predominantly agricultural;
industrial development is crying need of these countries for their economic
development and investment is the dominant factor for it. But rate of investment in
Nepal is very low. The main cause behind it is political instability, low investor
confidences, lack of knowledge on Investment management, lack of improved
prospectus to investors, restriction on foreign portfolio investment of Nepal, lack of
efficient capital market and slow privatization process.

After the restoration of democracy, the first elected government in 1991 adopted
liberalized and market-oriented economic policies followed by liberalization in the
financial sector and its reforms. As a consequence, many commercial banks,
development banks, financial institutions, financial cooperative societies and NGOs
operating in micro finance have mushroomed in the country. There are substantial
numbers of commercial banks, development banks and other financial institution that
is operating to assist the process of economic development of the country.

All commercial banks play vital role in the mobilization of financial resources by
accepting deposits from the public and providing loans and advances to industrial and
trading organizations, and as such they gear up the development of business in the
country. The economic development of the country thus depends on the volume of
investments made by the commercial banks. However, due to the growing
competitions among the commercial banks themselves and with other financial
institutions they seem to be unable to enhance their investments vis-à-vis the large
amount of deposits raised from the public. In other words, commercial banks seem to
be unable to formulate and implement strategic investment policy to invest their funds.
Meanwhile, they are also facing some criticism that these banks serves only richer
community of limited urban areas and not the poor communities in the vast rural areas
of the country, and thus they do not seem to be able to invest their funds in vast areas
of the country. Their investment policies generally seem to be guided by the
philosophy of “be less risky and high liquid”. Therefore, all banks and financial
institutions tap the same market for their investment of funds, which is really a risky as
well as less profitable affair. They have to redesign their investment policy and
strategy to explore new markets for investment.

Effective utilization of fund is possible only through the formulation and

implementation of sound investment policy and strategy of these banks. Due to the
lack of formulation of sound investment policy and strategy of commercial banks,
these banks seem to be fallen in the trap of risk. They seem to be failed to make proper
analysis of various types of risk such as financial risk, interest rate risk, liquidity risk,
business risk, and so on.

Besides, it seems that the most of Nepalese commercial banks have not formulated
their investment policy in an organized manner. They simply seem to be relying the
instructions and guidelines issued by Nepal Rastra Bank. It seems that they do not have
clear view of their investment policy. Commercial banks seem to have prompted to
invest their funds in limited areas for higher profits. This may be regarded as very risky
affair, which may lead them to lose profits as well as their investment. Although profit
is important, however, the investment must be safe in the first place and then
profitability. Therefore, the formulation of an appropriate investment policy is a must
in all the commercial banks, joint venture and other financial institutions.

Financial system of Nepal is still in its preliminary stage of development. Small and
fast growing financial sector comprises of commercial banks and other financial
institutions like development banks, finance companies, cooperatives, insurance etc.
So, for development of financial services in the country is uneven commercial bank are
more emphasized to be making loan in short term basis against movable merchandise.
There is less interest to invest on long-term project because they are much more safety
minded. Therefore, they follow conservative loan policy, which is based on strong
security.
The present study has sought to answer the following research questions about the
selected joint venture banks:
 What is the relationship between investment and loans and advances with total
deposits and total net profit?
 Does the investment decision affect the total earning of the bank?
 Are the available funds properly utilized?
 What are the trends of their deposits, loans and advances, investment and net
profits?

1.4 Objectives of the Study

The main objective of this study is to assess the investment policy of Himalayan Bank
Ltd and Nepal SBI Bank Ltd. The specific objectives of this study are as follows.
1. To analyze the trend of investment, deposit, loan and advances and net profit of
sample commercial banks.
2. To identify investment sector of Himalayan Bank and Nepal SBI Bank
3. To evaluate the liquidity, assets management efficiency, profitability and risk
position and growth of Himalayan Bank in comparison to that of Nepal SBI
Bank.
4. To study the relationship between investments, deposits, loan and advances and
net profit of the sample commercial banks.
5. To provide valuable recommendations on the basis of finding of the analysis for
future studies and development.

1.5 Significance of the Study

A sound investment policy of a bank is such that its funds are distributed on different
types of assets with good profitability on the one hand and provide maximum safety
and security to the depositors and banks on the other hand. So the investment policy of
commercial banks should be in accordance with the spirit of the economic
advancement of the people and also called it as the life-blood of any financial
institution because only deposit collection carries no meaning, there should a proper
policy of investment also. If it is utilized in a proper investment then only better return
and sustainability is possible. Therefore, to this significance on account this study on
behalf of the firm's investment policy and its relationship is justified as a specified
subject matter.

Nepal is one of the least developed countries with poorest economic condition of the
world. As the financial services industry becomes more complex, the financial
information is more difficult to understand. Quality governance is impossible without
effective analysis and evaluation of financial information. In the context of Nepal,
there are less availability of research work, articles and journals in investment policy of
commercial banks and their financial institutions. The study will certainly help to the
management of the concerned banks to improve their performance and would help
them to take corrective actions. Thus, this study lies mainly in filling a research gap on
the study of investment policy of commercial banks. The study is basically confined to
reviewing the investment policy of commercial banks in the five years periods.

This study is expected to definitely provide a useful feedback to the policy makers of
commercial banks of Nepal and also to the government and the NRB in formulating
appropriate strategies for the improvement in the financial performance. This study is
also expected to be beneficial for the related persons in the field of investment and
institution. And also help to find out the causes of failure and success of the bank by
using the various financial and statistical tools. This research reports helps to gain and
share some practical knowledge of banking and management of the commercial banks
in the perspective of improving financial performance.

Similarly, depositors can take decision to deposit on their money, also useful to more
people and organization such as trade creditors, investors, academicians, general
public, stockbrokers etc. It will prove to be an important value for the entire individual
interested in commerce and banking field.

1.7 Limitations of the Study

The limitations of the study are as follows:
1. The scope of the study is limited within the frame work of investment policy only
2. The study intends to explore only five years analysis i.e. from fiscal year 2003/04
to 2007/08 and its comparative study
3. Since the study is fully based on the secondary data collected from various
sources, their relevancy will depend upon the authenticity of the publishers
4. Only two joint venture banks are selected for the study, which are HBL and
NSBL
5. This study deals with limited financial and statistical tools. Hence, the drawbacks
and weakness of those tools are the limitations of the study as well.
1.7 Organization of the Study
This study has been presented in the following order;

Chapter - I: Introduction
This is the very first segment of the study. This chapter consists of general background
of the study, focus of study, statement of the problem, objectives of the study,
significance of the study, limitations of the study and organization of the study. A brief
profile of sample companies has also been given.

Chapter - II: Review of Literature

The second chapter, Review of Literature, reviews of available relevant studies. It
includes the conceptual review and review of the related books, journals and the
published and unpublished research works as well as thesis in separate segments to
show what types of studies were made in this field and what conclusions ware drawn
by the previous researchers.

Chapter - III: Research Methodology

The chapter contains research design, sources of data, population and sample, method
of data collection and analysis. Various financial and statistical tools are defined which
have been used in the analysis of data.

Chapter - IV: Data Presentation and Analysis

This chapter is the heart of study which consists of presentation and analysis of data
and major findings of the study. Analysis has been done as per described in chapter 3
and the calculated results have been presented in a tabulated form and graphical
presentation has also been made along with the interpretation of the calculated figures.

Chapter - V: Summary, Conclusion and Recommendations

The fifth and last chapter lists the summary and conclusions, and offers
recommendations and suggestions based on the analysis and interpretation of the data.
Bibliography and appendices are also included at the end.
 CHAPTER - II
REVIEW OF LITERATURE

The purpose of this chapter is to review the relevant literature regarding the investment
policy of commercial banks in Nepal so as to formulate the appropriate research
problem, hypotheses and the research gap between the previous research studies and
the present study. Such a review has been made from various sources of literature
available in different libraries, documentation centre, Nepal Stock Exchange Ltd.,
other information bureaus and the concerned commercial banks’ websites. This chapter
first presents the conceptual review, review of articles, research papers and previous
research studies relevant to this study, and the research gap.

2.2 Conceptual Framework

Conceptual review of various different literature provided by different authors,
research scholars, practitioners, etc. have been presented in the following sections:

The term ‘bank’ derives from the Latin ‘Bancus’, which refers to the bench on which
the bankers would receipts money and his records. Some persons trace its origin to the
French 'Benqee' or to the Italian 'Benca’, which means a bench for keeping lending and
exchanging of money or coins in the market place by moneylenders moneychangers.
With the gradual development of bank, its functions are also increasing. It only dealt
with the exchanges of money in its preliminary phase, but later it started accepting
deposits from the public against interest and providing them in the form of loans to the
needy persons were the basic functions defined. Today, however, banks cover wide
range of activities. The Bank of Venice", the first public banking institution was
established in Italy in 1157 A.D. Subsequently, “Bank of Barcelona" of Spain, the
world’s second bank was established in 1401 A.D., and “Bank of Geneva" of
Switzerland was established in 1407 A.D. “Bank of Amsterdam'” The Netherlands was
set up in 1609 A.D. was among the very popular commercial banks in the world. The
Bank of 'Hindustan', regarded as India’s first commercial bank, was established in
1770. As so in 1694 A.D., "The Bank of England" was established, which changed the
process of establishing the banking institutions remarkably. This was a big landmark in
the history of banking development. The idea of commercial banks was rapidly spread
to all over the world only after the establishment of this bank.

In course of time, banks are among the most important financial institutions in the
economy and essential business in thousands of local town and cities. In this context,
there is much confusion about exactly what a bank is? Certainly, banks must be
identified by the functions they perform in the economy. However, the word bank is
generally used to denote a certain kind of trading in money, which mainly consists the
exchanging of money, the lending of money, the depositing of money and the
transmitting of money.

Due to the rapid modernization and industrialization of the world, banking institutions
have been indispensable for the resource mobilization and all round development of
the country as they are important to individuals and institutions such as the public,
businesses, organizations, government and other institutions. It provides resources for
economic development that maintains economic confidence of various segments and
expands credit to people. The bank accumulates surplus money form the public, who
cannot use the money at the time and lends to those who are in need of that to use for
productive purposes. It refers to any institution that deals in money. However, today
banks are established for specific purpose such as commercial bank, industrial bank,
merchant bank, development bank, rural bank, and so on. When the bank lends the
loan to the customers for earning interest, the bank draw the money from institution or
individual or people pay the interest amount by the certain interest rate. There are
different types of bank focus on different types of service to their customers although
the basic principle is sane i.e. mobilize idle resources from productive sectors to the
growth of trade, industry and commerce. Today, banks in different countries render
various different services to the people for strengthening the whole country's economy.

Legislative environment has significant impact on the commercial banks established,

their mobilization and utilization of resources. All the commercial banks have to
conform to the legislative provisions specified in the commercial bank act 2031 and
the rules and regulation formulated to facilitate the smooth running of commercial
banks.

Compulsory Cash Reserve Ratio (CRR) and Refinancing

Under the provision in Nepal Rastra Bank, (NRB) Act 2002, the NRB has formulated
and implemented five annual monetary policies so far. The focus of monetary policy
has been to insure price, external and financial sector stability so as to create the
environment supportive for high and sustainable economic growth. NRB issues new
monetary policy on July 23, 2007 for fiscal year 2007/08 (Monetary Policy; 2007: 10).
The provisions under this policy are as follows:
i. The compulsory cash reserve ratio (CRR) has been kept unchanged at
minimum 5 percent on account.
ii. The bank rate has been kept unchanged at 6.25 percent. This rate has been used
to impose penalty on the amount of shortfall if any commercial bank fails to
maintain the CRR.
iii. The refinance rate on export credit in Nepalese currency has been lowered by 1
percentage point to 2.5 percent from 3.5 percent. The refinance rate to rural
development banks however has been kept unchanged at 3.5 percent.
iv. The sick industries refinance rate has been kept unchanged at 1.5percent.
v. The sick industry refinance facility of Rs. 2.0 billion has been continuing for
2007/08 as well. The sick industry refinance facility has been put in place since
2002/03.
vi. NRB will continue the refinance facility of Rs. 500milliion, similar to sick
industry refinance, on the loans used by dalits indigenous, backward, madeshi,
and marginalized group as defined by the GON and on the loans used for
foreign employment with objectives of providing relief to these sections of
society and promoting foreign employment.
vii. In the context of commercial banks providing substantial amount of short -term
credit to the development banks and finance companies, the penal rate has been
increased from 1.5 percent to 2 percent to check the misused of standing
liquidity facility (SLF).
Policy Guidelines on the Establishment of the Commercial banks
Under the act of bank and financial institution 2063 NRB issue new policy to
establishment of bank and financial institution on 2063/03/29 and timely changed on
2063/12/13 as follows: (Banking Khabar Patra, 2007: 1)
1. Paid up Capital: To establish a commercial bank of national level the paid up
capital must be at Rs. 2000 million.
2. Share Capital: In general, the share of commercial banks will be available for the
promotes (70 percent) and general public (30 percent). To operation joint venture
of the foreign banks and financial institution could have a maximum of 85
percent to minimum 20 percent share investment on the commercial banks of
national level. In order to provide adequate opportunity for investment to the
Nepali promoters in national level banks, only 15 percent of total share capital
will be made available to general public on the condition that the foreign bank
and financial institutions are going to acquire more than 50 percent of the total
share. Within 15 percent the bank and financial institution put off provision 5
percent for its staff.
3. Banks already in operation: Banks that is already in operation and those who
have already acquired letter of intent before the enforcement of these provisions
have to bring their capital level within seven years, i.e. by 30Ashad 2070, as per
the recently declared provision.
4. Legal procedure: Banks to be established with foreign promoters’ participation
have also to be registered fulfilling all the legal processes prescribed by the
prevalent Nepal laws.
5. Promoter’s share payment procedures: Of the total committed sharer capital, the
promoters has to deposit in NRB an amount equal to 5 percent along with the
application and another 45 percent at the time of receiving the letter of intent on a
interest fee basis. The bank should put into operation within one year of receiving
the letter of intent. The promoters have to pay fully the remaining balance of
committed total share capital before the bank comes into operation. Normally,
within 4 months from the date of filling of the application, NRB should give its
decision on the establishment of the bank whether it is in favor or against it. If it
 declines to issue license, it has to inform in writing with reasons to the concerned
body.
6. Promoters’ qualification and experience: Action on the application from
promoters will not be initiated if it is proved that their collateral has been put on
auction by the bank and financial institution as a result of non-payment of loans
in the past, who have not cleared such loans or those in the black list of the Credit
Information Bureau and 3 years have not elapsed from the date of the removal of
their name from such list. The application will be deemed automatically
cancelled irrespective of it being on any stage of process for license issuance if
the above events are proved. Of the total promoters, one – third should be at least
a graduate of Tribhuvan University or recognized institutions with major in
economics or accountancy, finance, law, banking or statistics. Likewise, one-
fourth promoters should have the work experience of bank or financial institution
or similar nature. 7. Promoters’ share: Promoter Group’s share can be disposed or
transferred only on the condition that the bank has been brought in operation, the
share allotted to the general public has been floated in the market and after
completion of 3 years from the date it has been registered in the Stock Exchange.
But before the disposal of such shares it is mandatory to get approval from NRB.
The share allotted to general public has to be issued and sold within 3 years from
the date the bank cannot issue bonus shares or declare and distribute dividends,
shareholders of the promoters group and their family members cannot have
access to loans or facilities from the same institution.
7. Disqualify from becoming director: An individual who is already serving as a
director in one of the bank or financial institutions licensed by NRB cannot be
considered eligible to become the director in other banks or financial institutions.
Also, stock brokers, market makers and also an individual and institution
involved as an auditor of the bank and institutions carrying on financial
transactions cannot be a director.
8. Investment: One person, family, firm, invest maximum 15 percent of a firm and 1
percent of another firm.
9. Promoter: No more than one promoter from one family in one firm.
2.1.1 Banking in Nepal
The history of organized banking in Nepal is not very old. In the past, however,
indigenous individuals, wealthy agriculturists, lenders, merchants and traders
conducted some banking activities along with their other business occupations. These
activities were fragmented and mostly localized. The creation of "Kaushi Tosha
Khana" as a banking agency during the regime of King Prithvi Narayan Shah could be
regarded as first step towards development of banking in Nepal. However, the
establishment of "Tejarath Adda" around 1877 A.D., during the Prime Ministership of
Ronoddip Singh to provide credit facilities to public at a very confessional rate of
interest could be regarded as a primer foundation of modern banking in Nepal. The
Tejarath Adda was set up to provide credit; it did not accept deposits from the public.
Therefore, the concept of saving was loan existence in Nepal until the establishment of
the first ever commercial bank, i.e. "Nepal Bank Limited" under the Nepal Bank Act,
1937 with Rs. 10 million Authorized Capital. Thereafter, the then government felt the
need for a central bank and established "Nepal Rastra Bank (NRB) as the central bank
of the country under the Nepal Rastra Bank Act 1956 A.D. in 1956 A.D. It played
important role in the monetization and the development of banking sector in the
country. Likewise, due to the increasing popularity of the banking functions and rising
needs of banking operations in different areas of the country, NRB suggested for the
establishment of another commercial bank and in 1966 A.D., Rastriya Banijya Bank
was established as a fully government-owned commercial bank whose branches are
scattered all over country.

Apart from the commercial banks, NRB also initiated the incorporation of some
development banks in the country. As a result, Nepal Industrial Development
Corporation was established in 1959 A.D. and Agricultural Development Bank
established in 1976 A.D. After the then government adopted the liberalization and
privatization economic policy during 1980s, Nepal welcomed the foreign banks to
operate joint venture banks in the country. Consequently, Nepal Arab Bank Ltd.
(NABIL) was the first joint venture bank established in 1984 A.D., a joint venture of
United Arab Emirates Bank. Then two other banks Nepal Indosuez Bank Ltd. with
Indosuez Bank of France and Nepal Grindlays Bank Ltd. with Grindlays Banks of
London were established in 1986 A.D., but recently these banks’ name have been
changed as Nepal Investment Bank Ltd. and Standard Chartered Bank Nepal Ltd.
respectively. And other commercial banks, development banks and financial
institutions are continued to establish and are contributing to the economy and the
banking sector in Nepal.

After the restoration of democracy in Nepal in 1990 A.D., the government took a
liberal policy in the banking sector. As an open policy of the government to get
permission to invest in banking sector from private and foreign investors under
Commercial Bank Act. 1975 A.D. (2031 B.S.), different private banks were provided
permission to establish with the joint venture of other countries. Nowadays, there are
26 commercial banks operating in the Nepalese financial market along with 9 joint
venture with foreign investors, 20 development banks and 5 rural development banks,
57 finance companies, 44 NGOs and 116 post office saving banks are operating in
Nepal. The open and liberal policy in the financial sector has helped in establishing
many commercial banks and financial institutions in the country.

2.1.2 The Commercial Bank

The most important kind of banks is the commercial bank. Besides it is the most
common kind of Bank with which almost every one of us comes so often in contact.
As its very epithet suggests this bank has its connection with the commercial class of
people. It collects their floating capital and finances, the temporary needs of
commercial transaction. Its deposits are purely demand obligation and hence it is by
mature quite incompetent to often any long-term accommodation. It has, rather need a
rule amongst this class of bank not to grant permanent loan and provide capital for
investment purpose. Nor does it furnish the whole fixed capital for trading purposes
but it supplies as much as is occasionally needed for carrying on business or making
investment in it. It has to distinguish between a genuine borrower and speculative
investor as well.
Commercial banks deal with other people's money. They have to find ways of keeping
their assets liquid so that they could meet the demands of their customers. In their
anxiety to make profit, the banks cannot afford to lock up their funds in assets, which
are not easily realizable. The depositor's confidence could be secured only if the bank
is able to meet the demand for cash promptly and fully. The banker has to keep
adequate cash for this purpose. Cash is an idle asset and hence the banker cannot afford
to keep a large portion of his assets in the firm of cash. Cash brings no income to the
bank. Therefore, the banker has to distribute his assets in such a way that they can have
adequate profits without sacrificing liquidity.

The commercial banks in Nepal are one of the two components in financial sector
basically known as the banking sector component. The other component, nonbanking
sector, includes co-operative, regional rural development banks, development banks,
financial companies and NGOs. Banks play predominant role in under developed
economy in many ways as they promote capital formation by developing banking habit
of people and collection saving. People have mobilized them in productive channels.
Thus, their role in the economic development is to remove the deficiency of capital by
stimulating saving and investment. Commercial bank in current year presents a new
picture - a picture of innovation in practice of wider horizon and of new enterprises.
The most remarkable diversification of banking function is increasing participation in
medium- and long-term financial industries and other sectors; so, they are not only
financial institution of finance agricultural and industry and other economic activities
but are more than financial institution in the sense that they help saving create deposits
and make the subsequent distribution of such accumulated funds.

Commercial Bank Act 2031 B.S of Nepal has defined that,"A commercial bank is one
which exchanges money, deposits money, accepts deposits, grant loans and performs
commercial banking functions and which is not a bank meant for co-operative,
agriculture, industries or for such specific purpose." (Commercial Bank Act, 2031 B.S)
This Act has laid emphasis on the function of commercial bank while defining it.
Commercial banks provide short-term debts necessary for trade and commerce. They
take deposits from the public and grant loans in different forms. They purchase and
discount bills for exchange, promissory notes and exchange foreign currency. They
discharge various functions on the behalf of their customers provided that they are paid
for their services.

Optimal investment decision plays a vital role in every organization. Financial

activities are necessary for the economic development of the country and commercial
banking is the heart of financial system. The sound knowledge of investment is a must
especially for the commercial banks and other financial institutions, because this
subject is relevant for all surrounding that mobilize funds in different sectors in view of
return.

As it is concerned to the commercial banks and other financial institutions, they must
mobilize (i.e., investment on different sectors) their collections (deposits) and other
funds towards the profitable, secured and marketable sectors so that they remain in
profit. For this purpose, these banks and financial institutions should gather sufficient
information about the firm (client) which is supposed to be invested. This information
includes financial background, nature of business as well as its ability to repay the loan
back. These all information should be gathered from the viewpoint of security.

2.1.2.1 Functions of Commercial Banks

The commercial banks in every nation of the world have key role in the pursuit of
attaining the goal of rapid economic development. Commercial banks are the heart of
financial sector, which occupy important place in the framework of the economy. They
hold deposits of the people, government and business units. They make funds available
through their lending and investing activities to borrowers like individual, business and
government sector. Therefore, as they provide capital for the development of the
industry, trade, business and services they contribute large portion on the economic
growth of the nation commercial banks make sound investment in various sectors of
the economy, which boost the quality of investment as well as achieves, its own
objectives of profit maximization. Thus, well-formulated and sound investment
policies- coordinated and planned efforts accelerate the pace of economic growth.

Commercial banking as we have seen grew but of the need for a safe place of deposit
when the people of London entrusted their savings to the goldsmiths. It did not take
much time for them to realize that the business could be made profitable by re-lending
what was receives, provided it could be returned before it was required. Gradually,
they learnt that the daily payments were more than counter balanced by the daily
receipts and hence there was no necessity of this stipulation. It is obvious that
borrowing and lending are two leading functions of banking business. There are a few
other functions as well which are now performed by these banks. They include the
following:

1. Receiving Deposits
Deposits are received under different heads of accounts, the most important of which is
the current account, others being the fixed deposit account, the saving bank account,
the home safe account, etc. The first deposits received were, however, under fixed
deposit account but "the goldsmith found by experience that they could take deposits
withdrawal not at a fixed future date, if such deposits were on a large scale, a sufficient
proportion of them would always be left untouched for a certain period to enable the
holder to lend up to something like that proportion. These have become the foundation
of the 'current account' on which the depositor can draw at his will”.

2. Lending Money
The second major function of a commercial bank is to lending of money, which it
receives by way of deposits. Direct loans and advances are given to\ all types of
persons against the personal security of the borrowers of against the security of
movable and immovable properties. Loans are granted by banks in four forms i.e.
overdrafts, cash credit, direct loans and discounting bills of exchange.
3. Agency Functions
Bankers also act as agents of their customers in various ways. They collect and pay
their cheques, bills, promissory notes, coupons, dividend warrants, subscriptions, rents,
income tax, insurance premier and other periodical receipts and payments. They
purchase and sell on their behalf shares, stocks, debentures and bonds; etc, on the stock
exchanges, and other valuables in other markets. They also act as administrators,
trustees, executors and attorneys.

4. Miscellaneous Functions
Under miscellaneous functions may be included a number of functions performed by
the bankers.
 They receive their customers' valuables ornaments and jewels, documents and
deeds, etc. for safe custody and also act as their referee.
 They also make confidential enquiries about the creditworthiness of a prospective
customer to enable their customers to enter into important business dealings with
them.
 They issue letters of credit of various kinds and bank drafts to their customers for
the transfer of money from one place to another.

2.1.3 Concept of Investment

Investment is a present sacrifice for the sake of future benefits. Therefore, investment
always involves risk. Present decision about selecting the best alternatives should
always take the future risk into consideration. The few alternatives of investment in the
past have new expanded into hundreds. Hence, the complexity of investment has also
been increasing day by day. To select the best alternative and to construct an efficient
portfolio, a wise analysis and decision is required. Before making any decision on
investment we must be well informed about the factors, which affect investment.
Investment decision related with saving, capital formation, capital market, risk involve
with it, return, inflation etc.
The banks are such types of institutions, which deal with money and substitute for
money. They deal with deposit, credit and credit instruments. Good circulation of
credit is very much important for financial institutions and banks. Unsteady and
unevenly flow of credit harms the economy and the profitability of the commercial
banks. Thus to collect fund and utilize it in good investments is the prime objective of
commercial banks. Diverse and safe investment of fund is the question of stability and
existence of the bank. Nowadays, the financial institutions are viewed as catalyst in the
process of the economic growth. The mobilization of domestic resources is one of the
key factors in the economic development of a country.

Banking industry has acquired a key position in mobilizing resources for finance and
social economic development of the country. No function is more important to the
economy and it constitutes than financing. "Bank assists both the flow of goods and
service from the products to the consumers and financial activities of the government.
Banking provides the country with a monetary system of payment and it is important
part of the financial system, which makes loans to maintain and increase the level of
consumption and production in the economy" (American Institute of Banking, 1972:
1162).

Generally, investment means to flow cash in different sector with profit motive. In a
broad sense, however, investment means to sacrifice current rupee in the present and
certain for the future purpose rupees, which comes later and is uncertain. The concept
of investment and profitability mentioned by different authors in their books and paper
are summarized in the paragraphs that follow:

Baidya (1997) has given his view on sound investment policy. He has said that, "A
sound investment policy of a bank is such that its funds are distributed on different
types of assets with good profitability on the one hand and provides maximum safety
and security to the depositors and bank on the other hand, Moreover risk in banking
sectors trends to be concentrated in the loan portfolio. When a bank gets into serious
financial trouble its problem usually spring from significant amounts of loan that have
become uncollectible due to mismanagement, illegal manipulation of loan misguided
lending policy or unexpected economic downturn. So the bank investment policy must
be such that it is sound and prudent in order to protect public funds."

Chandler (1973) says in this regard, "A banker seeks optimum combination of earning
liquidity and safety, while formulating investment policy." Emphasizing the
importance of investment policy puts the importance of investment policy in this way,
"Lending is essence of commercial banking, and consequently the formulation and the
implementation of sound policies are among the most important responsibilities of
bank director's and management. Well conceives lending function effectively and
minimize the risk inherent in any extension of credit”. He further adds, the formulation
of sound lending policies for all bank should have adequate and careful consideration
over community needs, size of loan portfolio, character of loan, credit worthiness of
borrower and assets pledged to security borrowing interest rate.

Cheney and Mosses (1995) are concerned with the objective of investment and indicate
that the risk is in proportion with the degree of returns. They write, "The investment
objective is to increase systematically the individual wealth, defined as assets minus
liabilities. The higher level of desired wealth, the higher must be received. An investor
seeking higher return must be willing to face higher level of risk"

According to Jones (1991) "Investment is the commitment of funds to one or more

assets that will be held over some future time period. Investment is concerned with
managing an investor's wealth, which is the sum of current income and present value
of all future incomes".

In the words of Valla and Tutesa (1983) "There are basically three concepts of
investment.
 Economic investment that is an economist's definition of investment,
 Investment in a more general or extended sense, which is used by ‘the man on the
street’, and
  The sense in which we are going to be very much interested namely financial
investment".

They further maintain, "Banks are those institutions which accepts deposit from the
public and in turn provide credit to trade, business and industry that directly makes a
remarkable impact on the economic development of a country. To collect fund and
collect as a good investment is very risky job. Ad hoc investment decision leads the
bank out of the business thereby drawn the economic growth of a country. Hence,
sound investment policy is another secret of a successful bank"

In view of Chone (1997), "Investment has many factors. It may involve putting money
into bond treasury bills, or notes or common stocks, or paintings of real estate, or
mortgage or oil ventures, or cattle or the theater. It may involve specially in bull
markets or selling short in bear markets. It may involve options, straddles, rights,
warrants, convertibles, margin, gold, silver, mutual funds, money market funds, index
funds and result in accumulation of wealth or dissipation of resources diversity and
challenge characterize the field. For the able or lucky, the rewards may be substantial.
For the uniformed results can be disastrous".

Sharpe and Gorden (1999) define investment in this way: "Investment in its broadest
sense, means the sacrifice of certain present value for (possible uncertain) future
value". In the view of Sharpe and Gorden, the investment is the venture that the return
is uncertain. Therefore, they have presented their view in the books that bank should
look for the safe and less risky investment.

Pandey (1999) defines in this way, "In investment decision expenditure and benefits
should be measured in cash. In investment analysis, cash flows are more important
than accounting profit. It may also be pointed out that investment decision affects the
firm's value. The firm's value will increase if investments are profitable and add to the
shareholders wealth. Thus, investment should be evaluated on the basis of a criterion,
which is compatible with the objectives of the shareholder's fund maximization.
Investments will add to the shareholder's wealth if it yields benefit in excess on the
minimum benefit as per the opportunity cost of capital".

In the words of Singh and Singh (1983), "The investment (credit) policies of bank are
conditioned, to great extent, by the national policy framework; every banker has to
apply his own judgment for arriving at a credit decision, keeping of course his banker's
credit policy also in mind". As per the above definition, government and central bank
have to make a sound policy about the investment policies of commercial banks.

They further state, "The field of investment is more challenging as it offers relatively
greater scope to bank or for judgment and discretion in selecting their loan portfolio.
But this higher degree of freedom in the field of credit management is also
accompanied by greater risk. Particularly, during recent years, the credit function has
become more complex".

Shrestha (1995) in her book "Portfolio behavior of commercial bank in Nepal" holds
that "The commercial banks fulfill the credit needs of various sectors and the lending
policy of commercial bank is based on profit maximizing of the institution as well as
the economic enhancement of country".

Radhaswami (1979) says that a bank must strike a balance sheet between liquidity,
profitability and safety. "The secret of successful bank is to distribute resource between
the various forms of assets in such a way as to get a sound balance between liquidity
and profitability so that there is cash (on hand quickly realizable) to meet every claim
and at the same time, enough income for the bank to pay its way and earn profits for its
shareholders".

From the above definitions and views of various authors it is clear that an investment
means to trade, a known rupee amount today for some expected future stream of
payments or benefits. That will exceed the current outlay by an amount that will
compensate the investor for the time the fund are committed for the expected change in
prices during the period of uncertainty involve in expected future cash flows. Thus,
investment is the most important function of commercial banks. Therefore, a bank has
to be very cautious while investing funds in various sectors. The success of a bank
heavily depends upon the proper management of it’s invest able funds.

Investment management of bank is guided by the investment policy adopted by the

bank. Investment policies can be varied from bank to bank. Few banks accept higher
risk on investment and other is more conservative for their investment decision. The
investment policy of the bank helps the investment function of the bank, which makes
the investment efficient and profitable by minimizing the inherent risk. Therefore, that
an investment word is attached to economics risks and returns theory of future result
(Frank and Reily, 1986:92).

The basic factors that will determine the objectives of a bank's investment policy are
its income and its liquidity needs, and management's willingness to trade liquidity for
greater income opportunities and vice-versa, which means accepting greater or lesser
degrees of risk. Formulation of investment policy must give cognizance to the entire
risk exposure that bank management is willing to assume as well as the risk carried by
the securities that comprise the investment account. One of the acceptable methods of
reducing risk in the investment portfolio of a commercial bank is by diversification, a
basic and important rule of any investment policy.

Risks cannot be completely avoided by diversification, but they can be reduced .A

commercial bank is most concerned with quality and maturity diversification to
minimize the risk. A statement of investment policy should designate the person
responsible for handling the investment program. This is fundamental to the efficient
operation of an investment portfolio, in that "too many cooks may spoil the stew".
Since the board of directors is responsible for the proper investment of the bank's
funds, periodic reports regarding the investment portfolio should be prepared for the
board's use in evaluating investment management and establishing investment policy.
The investment policy of a bank should be reviewed occasionally and modified as
economic conditions change.
2.1.4 Principles of Sound Investment Policy of Banks
The commercial banks are inspired with the goal of earning profit. There are many
reasons for having profit as their goal. A bank is like a legal person where shareholders
are the owners of the bank, the board of directors is the agent of the bank that operates
the bank. There are many employees who were appointed to run the banks and to run
the banks, it needs a great amount of expenses, whether it is direct or indirect, there is
continuous expense in the bank. The main aim of any person or institution to invest the
money in the bank is to earn more profit only. There is only one bank i.e. central bank
which is established without the aim of gaining profits. Other banks are inspired with
the objective of earning profit and helping the economic development and finally to
take the social responsibility. They should have the ability to use the policy of banking
investment and to implement it much more carefully otherwise a bank may be
unsuccessful in its goal (Bhandari, 2003:126).

Without investment, a bank cannot gain profit. The bank cannot be successful until it
gains profit. Therefore after the establishments of bank it collets much deposit, get the
deposits from the current, saving and fixed deposit account. In this way, the bank apart
from the amount deposited from such accounts, collects the capital by selling its
shares. The bank can take loans thus; a great capital fund is formed in the bank from
different sources. It is not better to keep such capital fund inactive. The bank should
able to clear the policy of its investment by making a deep study on the subject that
which sector would be the more trust worthy and dependable to invest the amount
collected in the bank. If the bank applies following investment policies or principles it
can be successful in its goal.

The guiding principals of sound investment are as follows:

2.1.4.1 Liquidity
Liquidity means the whole stock in the economy. In the case of Nepal the money in
use, the money in the accounts of current, saving and fixed period and the money in
margin account refer to liquidity. The liquid property means cash stock of the
commercial banks, the amount of short term, current account and short-term
government and business security and the Treasury bill. A bank should not forget the
principle of liquidity while it is following its investment policy. The commercial banks
are considered to be as financial mediators. They have liability to deposit and also
quick deliver of the money at the time when depositors asked. For this purpose, the
bank should deep adequate liquid fund. And also they should gain profit by utilizing
the deposit as a loan and advances. If bank cannot keep their promises such as cannot
return the deposits at the time of demand then it may loose the customer and their trust.
And if adequate liquid fund is kept, then they can return the deposits as per the demand
but such bank cannot run for a long time. In a same way, if they invest the whole
deposit as loan and advances, they cannot give it at the time of demand by the
depositors. So, the commercial banks try to maintain the liquidity and profit together. It
is a great challenge for the manager of the bank.

The commercial banks should attract their customer to deposit because a deposit is
called raw materials of banking, without which bank cannot run. It is important thing
in which sectors the amount of each deposit is to be invested. There is no interest in
current account but as it has to give payment immediately, plenty of liquidity is
necessary for it. From the viewpoint of property, loan and advances are more income
generating sectors but they are less liquid able. The amount would not be recovered at
the time of want. Similarly keeping more money in the bank is very more liquid able,
but does not generate income to the bank. The quantity of liquidity is less for
investment so maintenance of coordination between the property and the liquidity
properly to provide loan and to invest it is the success of the commercial banks. The
Central bank pays attention to this reality to give direction on liquidity to the
commercial banks.

2.1.4.2 Profitability
The main objective of any commercial bank is to earn profit. The bank should follow
the objective by focusing it on the sectors in which it can earn much profit. The
investments or granting loan and advances by the bank is highly influenced by profit
margin. The bank should not keep its means and materials inactive; it should keep on
investing the means and materials in appropriate and safe area. The bank can gain
much profit from the safe and long-term investment. But there is less liquidity in such
investment. It may loss the investment in the sector where profit is not gained. Where
there is more risk, there is more profit. But sometimes it may create a situation where
the bank should face the great economic loss. So, the profit and liquidity are the two
opposite principles. If the bank pays its attention only for profit, the liquidity becomes
less, and if it pays its attention towards liquidity then it cannot be a loan-term
investment and cannot get profit. So, it should be maintained. The profit of the bank
estimates interest rate and the bank charge. So, the bank should always think to apply
an appropriate investment policy in such sector from which can earn much.

2.1.4.3 Safety
Safety would be the major guiding principal of a bank, so far as its advances and
investment are concerned, because the very existence of a bank depends on the safety
of its outstanding, which should never therefore be sacrifice to the profit earning
capacity of its advances. A bank should pay special emphasis on safety. Why people
are encouraging to deposit their valuable ornaments, jewellery, important document,
and money in the bank for the sake of safety. So, if the invested area is unsafe, it isn’t
good sign for the bank. So, the bank should pay much emphasis on the principles of
safety, to follow the investment policy. There will be no doubt of loss whether it is
great or little if the bank has not invested in a safe sector. The bank should think it with
much sensibility. To invest in an unsafe sector with the hope of gaining much profit is
to accept the security of low quality. To invest large loan against less securities by
receiving commission, to invest in new places without care, observation and to flow
the loan-term loan including these all various reasons will make unsafe of the banks
investment. They should be avoided as much as they can. There will be no loss, if the
banks invest in profitable sector. So, the bank should seriously study whether they are
as a possibility of investment or not. It should invest in a safe sector. If the property
held as security is ruined, a security is low in standard or low valued and if there is no
possibility of sale of the security, the bank suffer from loss. Therefore, the bank should
follow the principle of safety, short-term loan and invest in profitable sector. In such
conditions there will be no possibility of loss. The secured sectors mean the securities
of the domestic and foreign company’s share debentures and government bonds, etc.

2.1.4.4 Diversification
The principle of diversification means, the banking policy of investing the money in
the various sectors. The bank should not follow the policy of investment only in one or
two sectors. If it follows such policy, then its investment policy will not be successful
one. The bank should invest only after the studying and analyzing the different sectors
of different alternatives to earn more profit from little investment. If it invests in many
sectors it becomes successful to keep it in balance. There will be less profit from
investment of some sector and there will be maximum profit from some another sector.
And there may be loss too in some sector. On the whole a bank should be able to be a
competent. If it happens, the banking transaction does not go up and down. It can run
the bank comfortably and smoothly. In the case of earning profit, the bank should
follow the policy of investing various fields. So, there is a statement: “A bank should
not lay all its egg in the same basket.” By following this principles, on the basis of
gold, silver, diamond, development bond, shares of company, debentures, goods.
Imports and export, bills and other appropriate securities, the bank has to move a head
of their investment policy. The banks always get success in their working capacity
from such investment and the bank becomes successful in its goal.

2.1.4.5 Marketability
A bank should adopt the principle of marketability in investment policy. In certain
way, the bank moves its investment of flows loan against security. To invest the
money, the bank should follow the policy of taking the security of high quality as far
as possible, the market if Nepal is small, in such market in order to livingness to its
banking transaction, a bank should flow its loan by taking first class securities. The
bank should keep in mind, the main principle of marketability while doing investment.
And the goods which are taken as securities will be saleable in the market or not? Can
the loan be recovered by selling it in the market or not? The bank should adopt the
investment policy by paying attention to the different aspects; it should be study how
the market will evaluate the goods which is taken as security. The bank should not
invest money by taking the securities of goods, which are not saleable in the market
and though they are sold but not fetch the reasonable price, and there is no value of
such things. As far as possible the bank should take such goods which can be keep
safely and freshly in the market and the loan will be recovered like gold, silver,
diamond, company’s shares certificates, debentures, development bond and other
similar types of securities of immovable property like house, land cannot be sold in
time. Therefore, if the bank provides loan by taking reasonable goods as security, then
make sure that they are easily saleable in the market and the bank feels secured as well.

2.2 Review of Previous Studies

2.2.1 Review of Articles
In this section, attempt has been made to review some relevant articles in different
economic/finance journals, The World Bank Bulletins, dissertation papers, magazines,
newspapers, websites and other related literature.

According to Yadav Pant (2007), in “Info Himalayan” wrote that a bank is a service-
oriented institution, which provides many kinds of services for its customer, all of
which are equally important. Moreover, the quality of services should be up to the
mark to meet the customer’s requirement. Customers are the key players for a service
organization, without whom such organization can ever exist.

Pradhan and Yadav (2007) wrote in “Economic Journal of Nepal”, saving is income
not consumed. It is one the important and perhaps the chief sources of Investment. In
developing countries about 45% of the incremental saving is invested domestically,
while in developed countries about 75% of the incremental saving is invested
domestically. This suggests that capital is more mobile in developing countries than in
developed countries. Saving are of great significance in a country’s development.
While saving results in high economic growth rate, rapid development leads in turn
high savings. Nepal’s saving rate is lower as to other developing countries, however,
even to achieve 5 to 6 percent economic growth rate, more than 25 percent annual
Investment of GDP is considered necessary. As the country’s current domestic saving
are about 14% the economic resources are short by nearly 11% in proportion of the
GDP. The situation is such that huge portion of Investment has still to be made with
external resources. The amount of saving of a typical household in Nepal is small
because of the people have limited opportunities for Investment. They prefer to spend
saving on commodities rather than on financial assets. This restricts the process of
financial intermediation, which might otherwise bring benefits such as reduction of
Investment risk and increase in liquidity. When capital is highly mobile international,
saving from aboard can also finance the Investment needed at home. When capital is
not mobile internationally, saving form abroad will limit investment at home.

Wherever there is Investment there must be Capital formation. The development of an

economy requires expansion of productive activities, which in turn is the result of the
capital formation, which is the capital stock of the country. The change in the capital
stock of the country is known as Investment. Therefore Capital formation is closely
related to investment. Investment generally takes two forms:

i. Financial Investment and

ii. Physical Investment

Physical Investment related to real Investment in the economy or industry, which is

known as capital formation. Capital formation shows the change in gross fixed assets
of productive units of manufacturing industries. Capital formation refers to the creation
of physical productive facilities such as building tools, equipment and roads. The
process of adding to the amount of stock of the real assets produces growth in the
economy. It means increasing a country’s stock of real capital. It implies additions to
the existing supply of capital goods in a country. It represents an additional of new
capital stock to existing stock after deducting depreciation, damage and other physical
deterioration of the existing capital stock. Economic progress in country depends upon
its rate of capital formation. Hence, a key factor in the development of an economy is
the mobilization of domestic resources. In the process of capital formation, the
capacity to save by certain classes of people and institution becomes quite important.
These people have varied asset-preferences, which change from time to time. The need
of entrepreneurs who actually use savings for productive purpose also varies over time.

Shrestha (2006) has presented a short scenario of investment management from his
article "Portfolio management in commercial bank, theory and practice".
He has stressed in the following issues, in case of investors having lower income,
portfolio management may be limited to small saving incomes. But on the other hand,
portfolio management means to invest funds in various schemes of mutual funds like
deposits, shares and debentures for the investors with surplus income. Therefore,
portfolio management becomes very important both for an individual as well as for
institutional investors. Large investors would like to select a best mix of investment
assets and subject to the following aspects.
 Higher return which is comparable with alternative opportunities available
according to the risk class of investor.
 Good liquidity with adequate safety on investment.
 Certain capital gains.
 Maximum tax concession.
 Flexible investment.
 Economic and efficient investment.

In the view of these aspects, investor's are expected to develop the following strategy.
 Do not hold any single security; try to have a portfolio of different securities.
 Do not put all the eggs in one basket i.e to have a diversified investment.
 Choose such a portfolio of securities, which ensures maximum return with
minimum risk or lower return with added objective wealth maximization.
In order to prepare structure and modus operandi of effective portfolio management,
Mr. Shrestha has presented the following approaches to be adopted.
 To find out the investing assets (generally securities) having scope for better
returns depending upon individual characteristics like age, health need deposition
liquidity and tax liquidity etc.
 To find out the risk of securities depending upon the attitude of investor towards
risk.
 To develop alternative investment strategies for selecting of better portfolio
which will ensure a trade off between risk and return so as to attain the primary
objective of wealth maximization at lowest risk.
 To identify variety of securities for investment to refuse volatility of returns and
risk.

Shrestha has presented two types of investment analysis techniques one is fundamental
analysis and another is technical analysis. And this analysis technique is necessary to
consider any securities such as equity, debenture or bonds and other money and capital
market instruments. He has stressed the requirements of skilled manpower, research
and analysis team and proper management information system (MIS) in any
commercial bank to get success in portfolio management and customer’s confidence.
At last, Shrestha has put out the following remarks:
 For the survival of every bank it has to be depends upon its own financial health
and various activities.
 Portfolio manager of investment management methodology have to reflect.
 High standard in order to develop and expand the portfolio management activities
successfully and have to give their clients the benefits of global strength, local
insight and prudent philosophy.
 To always earn superior return, a portfolio manager has to enhance the
opportunity for each investor (client) with disciplined and systematic approve to
the selection of appropriate countries, financial assets and the management of
various risk.
  The Nepalese banks having greater network and access to national and
international capital market have to go for portfolio management activities.
 The increment of their fee based income as well as to enrich the client based and
to contribute in national economy.

Sharma (2006) with the title of ‘Banking the future on competition’ wrote in Business
age that the commercial banks are establishing and operating mostly in urban areas.
From his studies he found that: - Commercial banks are establishing and providing
their service in urban area only. They don’t have interest to establish in rural areas.
Only the branch of Nepal Bank Ltd and Rastriya Banijya Bank Ltd. are running in
those sectors.
 They have maximum tax concession.
 They don’t properly analyze the credit system.
He found that due to the lack of Investment avenues, banks are tempted to invest
without proper credit appraisal and personal guarantee, whose negatives side effects
would show colors only after four or five years.

Shrestha (1998) in her article, “Lending operation of commercial banks of Nepal and
its impact on GDP” has presented the objectives to make and analysis of contribution
of commercial banks lending to the Gross Domestic Product (GDP) of Nepal. She has
set hypothesis that there has been positive impact of lending of commercial banks to
the GDP. In research methodology, she has considered GDP as the dependant variable
and various sectors of lending viz. Agriculture, Industrial, Commercial, Service and
general and social sectors as independent variables. A multiple regression technique
has been applied to analyze the contribution.

The multiple analyses have shown that all the variables except service sector lending
have positive impact on GDP. Thus, in conclusion she has accepted the hypothesis i.e.,
there has been positive in GDP by lending of commercial banks in various sectors of
economy, except service sector investment. Likewise, Dr. Shrestha has analyzed the
financial performance of commercial banks using both descriptive and diagnostic
approach. In her study, she has concluded the following points:
 The structures of commercial banks shows that bank invest on the average 75%
of their total deposit on the government securities and the resources.
 The analysis of resources position of commercial banks showed quit high
percentage of deposit as cash reserve.
 Return ratio of all the banks show that most of the time foreign banks have
higher risk of Nepalese banks.
 The debt equity ratios of commercial banks are more then 100% in the most of
the period under study period. It led to conclude that the commercial banks are
highly leveraged and highly risk. Joint venture banks had higher capital adequacy
ratio but has been dealing everyday.
 Income of analysis of the management achievement foreign banks has
comparatively higher total management achievement index.
Thus comparing all the banks through the time period financial condition and
performance are better in joint venture banks than local banks.

2.2.2 Review of Research Papers

There are not many research papers or articles published on the investment policy of
commercial banks in Nepal. In the context of Nepal, there is a need of research of
investments in commercial banks and financial institutions as their routine work. And
some of the author who did research on relevant topic (investment policy) is given
below:

Pradhan, (1992) in one of the research papers entitled “Financial Management and
Practices in Nepal” has inquired about financial functions, sources and types of
financing, financing decisions involving debt effect of change in taxes on capital
structure, financial distress, dealing with banks and dividend policy. The major
findings of the study related to financial management are presented below:
 Bank and retained earnings are the two must widely use financing sources.
  The enterprises have a definite performance for bank loans at a lower level of
debts.
 Generally, there is no definite time to borrow and issue stocks, that is, majorities
of respondents are unable to predict when interest rate will low or go up or are
unable to predict when the stock will go down or up.
 Most enterprises do not borrow from one bank only and they do switch over
between banks whichever offer most attractive interest rates.
 Most enterprises find that banks are flexible in interest rates as per their
convenience.

To sum up, it can be said that out of numerous studies in the capital market in Nepal,
this study is established itself as a milestone and an outstanding one.

Dr. Shrestha (1993) in her research paper entitled “Investment planning of commercial
banks in Nepal”, has made remarkable efforts to examine the investment planning of
commercial banks in Nepal. Based on her study, she concludes that bank portfolio
(loans and investment) of commercial banks has been influenced by the variable
securities rates. Investment planning of commercial banks in Nepal is directly traced to
fiscal policy of the government and heavy regulatory procedure of Nepal Rastra Bank.
Therefore, the investments are not made in professional manner. Investment planning
and operation of commercial banks in Nepal has not been found satisfactory in terms
of profitability, liquidity, safety, productivity and social responsibility. To overcome
this problem, she has suggested that “…commercial banks should take their investment
function with proper business attitude and should perform lending and investment
operation efficiently with proper analysis of the projects”.

2.2.3 Review of Thesis

A number of researchers who conducted their research study on the investment policy
of commercial banks. The following are the review of those studies:
Dhakal (2008) conducted a study on "Investment Policy of Commercial Banks in
Nepal" with the objectives that are as follows:
 To find out the relationships between total investments, loan and advances,
deposit, net profit and outside assets.
 To identify the investment priority sectors of sampled commercial banks.
 To assess the impact of investment on profitability.
 To analyze and forecast the trend and structure of deposit utilization and its
projection for five years of commercial banks.
 To provide suggestions and possible guidelines to improve investment policy and
its problems.

The study was conducted based on the primary and secondary data. The research
findings of the study were the following:
 The liquidity position of Everest Bank Ltd. (EBL) was comparatively better than
that of Nabil Bank Ltd. (NABIL) and Bank of Kathmandu Ltd. (BOK). All the
three banks had met the normal standard current asset ratio to meet the short-term
obligations of their customers.
 EBL had invested the most in Government Securities, followed by BOK and
NABIL. BOK had mobilized a huge sum its funds to earn the profit.
 From the analysis of assets management ratio, EBL was in better position than
NABIL and BOK.
 The loans and advances to total deposit ratio, loan and advances to total working
fund ratio of EBL lied in between those of NABIL and BOK.
 EBL had invested the highest portion of its total working fund on government
securities as compared to NABIL and BOK. Investment on shares and debentures
to total working fund ratio was higher in BOK. Overall analysis of profitability
ratios showed that EBL was on an average profitable in comparison to other bank
i.e. NABIL and BOK.
 The return on loan and advances ratio and return on assets of EBL was lowest of
all. The degree of risk was average on EBL. EBL had shown its good
performance by increasing earnings by providing loan to clients.
  The trend of the total investment, total deposit, loan and advances and net profit
of EBL showed better position than that of NABIL and BOK.

Maharjan (2008) conducted a study on “Investment Analysis of Commercial Banks in

Nepal (A Case Study of Nepal Investment Bank, Himalayan Bank, Nepal SBI Bank,
Everest Bank and Bank of Kathmandu” with the following objectives:
 To study and analyze percentage of Investment made by selected commercial
banks in total Investment made by commercial banks.
 To analyze Investment trend and their projection for next five years of selected
commercial banks.
 To identify Investment sector of selected commercial banks.
 To study the relationship between Investment and Deposit of the banks.
 To make the suggestion, recommendation of the study.

The study was conducted on the basis secondary data. The research findings of the
study were as follows:
 Mean ratio of HBL’s investment to total commercial banks investment is 9.96%
which is extremely higher than that of other banks to total commercial banks.
The portion of HBL’s investment is increasing every year in the total investment
of Commercial banks.
 NSBIBL had invested most of there fund in government securities than other
banks. Likewise EBL, BoKL, HBL and NIBL. HBL, EBL and NIBL had started
to invest in other sector from FY 2062. All the banks had invested fewer funds to
share and capital of other company.
 The mean ratio of investment on government securities to total assets ratio of
NSBIBL is 20.45% which is higher than other banks NSBI uses most of its fund
from deposit on investment and loan and advances and less on share and
debentures.
 NIBL has used its maximum fund on share and debenture of other companies
than other banks. And the mean ratio of total investment to total assets ratio of
NIBL is 24.6% which is greater than other banks. Similarly BoKL has fewer
ratios than other banks.
  From the growth ratio analysis, it seems that all the banks are increasing their
investment, deposit and loan and advance, whatsoever, the growth ratio of NIBL
is highest amongst all in terms of investment, deposit and loan and advance.
 From Multiple regression analysis, in case of HBL, NIBL, EBL, BoKL and
NSBI, profit is highest when investment plus loan and advance is changed,
deposit is constant and it is lowest when investment plus loan and advance is
constant, deposit is changed except NSBI. In case of NSBI, profit is lowest when
deposit is constant , Investment plus loan & advance is changed.
 The test of hypothesis shows that there is significant difference between two
mean i.e investment plus loan and advance to total deposit of HBL and NIBL,
investment plus loan and advance to total deposit of EBL and NSBIBL and
investment plus loan and advance to total deposit of EBL and BoKL.
 From correlation analysis, it is clear that total investment and total deposit of all
five banks has positive relation.
 Total investment of five banks is also in increasing trend. The estimated
investment of HBL is higher than that of other banks and that of BoKL is less
than other banks.

Basnet (2008) conducted a study on “Investment Policy of Commercial Bank (a

comparative study of Nabil Bank Ltd &Himalayan Bank Ltd.)with the objectives that
are as follow:
 To examine the fund mobilization fund and investment policy of HBL and
NABIL selected for the study.
 To assess the liquidity, profitability, risk positions in asset management of these
commercial Banks.
 To evaluate the growth ratios of loan and advances, total investment with respect
to growth rates of total deposits and net profit of these banks.
 To find out the relationship between the banks’ total deposits and loans and
advances, total deposit and total investment and total outside assets and net
profit.
  To examine, interpret and forecast the trend of their deposits and loan and
advances, investment and net profit.

The study was conducted on the basis of primary and secondary data. The research
findings of the study were as follows:
 The liquidity position of HBL is better than NABIL HBL is more stable and
consistent and able to meet the daily cash requirement of their customers.
 NABIL has made lesser investment in government securities as it has injected
more funds on other productive sectors.
 NABIL is strong in terms of mobilization of its total deposit as loan and advances
when compared to HBL.
 The mean ratio of total investment to total deposits of HBL is higher than that of
NABIL and variability of HBL is also lowest which shows stability. NABIL's
variability of ratio is highest which indicates high instability in terms of total
investment and HBL's utilization of total deposit, as investment is better than
NABIL.
 From the analysis the mean ratio of return on total working fund ratio of NABIL
is greater than that of HBL which shows that NABIL is successful in utilization
of its working fund for profit generating activities.
 NABIL has more uniformity on earning return form loan and advances or it has
been more successful in maintaining its higher return on loan and advances.
 The mean ratio of total interest earned to total outside assets of NABIL is slightly
higher than that of HBL which shows that it has been successful in earning
higher amount of interest on its outside assets in comparison to HBL.
 HBL has higher credit risk in comparison to NABIL.
 The mean of capital risk ratio of NABIL is higher than that of HBL. It indicates
that NABIL is successful to attract the deposit and inter bank funds, which help
to increase the volume of profit.
 HBL has been successful in collecting deposit over the six year period whereas
the performance of NABIL to grant loan and advances is better in compared to
HBL.
  HBL is successful to take higher investment policy but NABIL has maintained
better profit than HBL.
 The coefficient of correlation analysis between different variables of NABIL and
HBL revealed HBL has mobilized its deposits in better way for profit generating
activities as well as capable to earn net profit mobilizing its outside asset.
 From the trend analysis, it is found that the deposits collection of HBL is better
than the NABIL. The loan and advances of both banks are in fluctuating trend
whereas the total investments of both banks are in increasing trend. Similarly, the
net profit of NABIL is in fluctuating trend while the net profit of HBL is in
increasing trend.
 By the testing of hypothesis it is found that there is no significance difference
between mean ratios of total investment to total deposit , loan and advances to
total deposits, investment on government securities to current assets ratios , loan
and advances to current assets ratio and total interest earned to total outside ratio
of NABIL and HBL while there is a significance difference between mean ratios
of total investment to total deposit of NABIL and HBL.
 On the analyzing the primary data collected from the respondents regarding the
investment policy of the banks, it revealed that the banks follow standard formats
while formulating the investment policy of the banks and implementation of the
investment policy is higher as they maintain close monitoring and tight control.
 Banks are able to collect the deposits from the public for investment policy. If
not, they launch different kinds and types of schemes to attract depositors for
acquiring funds.

Shrestha (2007) conducted a study on "A Comparative Analysis on investment

performance of commercial banks in Nepal" with the following objectives:
 To analyze the investment activities and fund mobilization with respect to fund
based on-balance sheet transactions and fee based off-balance sheet transactions
 To study the asset utilization system, profitability and risk position of
commercial banks under study
 To assess the deposit utilization trends and its projection for the future
  To evaluate the growth ratios of loan and advance and total investment and
respective growth rate of total deposit and net profit
 To appraise the suggestion on the basis of findings for further growth of the
banks under study

The study was conducted on the basis of secondary data. The research findings of the
study were as follows:
 The liquidity position of NIBL was stronger than NABIL and HBL. At the same
time, liquidity position of NIBL was highly fluctuating, which showed that NIBL
bore higher risk than other two banks.
 NIBL had the least investment in Government Securities, which considered the
least risky asset.
 From the analysis of assets, management ratio of NIBL in comparison to NABIL
and HBL was more successful regarding asset management and deposit
mobilization.
 NIBL's investment on shares and debentures was high in comparison to the other
two banks but its performance regarding total investment has been very poor.
 In the profitability analysis, none of the three banks' profitability position was
clearly better. However, NABIL was slightly better profitability. Therefore, their
profitability ratios were in moderate position.
 From the risk point of view, NABIL and NIBL were facing higher risk than
HBL, but the risk level of all three banks seemed almost the same.
 From the analysis of growth ratios, NIBL's collection of deposit, granting of
loans and advances and net profit were better but in terms of investment, HBL is
better.
 The coefficient of correlation analysis between different variables of NABIL,
NIBL and HBL revealed that NABIL was weaker regarding mobilization of
deposits as loans and advances and NIBL was performing extremely well
regarding earning profits from outside assets.
  From the trend analysis study, it was found that all banks were mobilizing their
total deposits into loans and advances in increasing trend, which was the
indication of efficient mobilization.

Regmi (2006) conducted "A Comparative Study on Investment Policy of Everest Bank
and Himalayan Bank Limited" with the objectives as given below:
 To find out the relationship between total investments, deposits, loans and
advances, net profit and assets and compare them.
 To evaluate the liquidity, asset management, efficiency, profitability and risk
portion of EBL and HBL.
 To analyze the deposit utilization trend and its projection for five years of HBL
and EBL
 To provide package of a workable suggestions and possible guidelines to
improve investment policies.

The study was carried out the basis of secondary data. The research findings of the
study were:
 The liquidity position of EBL was comparatively better than HBL. EBL had the
highest cash and bank balance to total deposit ratio, cash and bank balance to
current assets ratio than that of HBL.
 Both EBL and HBL had almost same pattern of investment on government
securities, but fluctuating ratios showed the unstable policy of investment.
 EBL has higher loan and advances to current assets ratio and successful in
deposit collection as well. The assets management ratios of both banks are
satisfactory.
 Both bank EBL and HBL had provided its most portion of deposit as loan and
advances. Moreover, EBL had invested its more portions as loan and advances, in
case of investment in other sectors, HBL had adopted diversified investment
policy. EBL invested its working fund in government securities and other
companies share and debentures than that of HBL; So HBL was less effective in
comparison to EBL.
  In profitability analysis, HBL had maintained high profit margin regarding
profitability position. HBL was more successful to generate income through loan
and advances and operating income and it had earned more from total outside
assets and total working fund.
 From the study, it was concluded that profitability of HBL was better than that of
EBL.
 From the risk point of view, HBL had borne lower liquidity risk and credit risk in
comparison to EBL regarding various aspects of banking activities. It could be
said that HBL had followed a stable liquidity policy justified by lower coefficient
of variation.

Joshi (2005) conducted a study on "Investment Policy of Commercial Banks in Nepal:

A Comparative Study of Everest Bank Limited with NABIL Bank Limited and Bank
of Kathmandu" with the objectives that are as follows:
 To discuss fund mobilization and investment policy of EBL, NABIL and BOK
Ltd.
 To evaluate the liquidity, efficiency and profitability and risk position
 To evaluate the growth ratios of loan and advances, total investments with other
financial variables.
 To analyze the trend of deposits utilization towards total investment and loan and
advances
 To conduct hypothetical test to find whether there is significant difference
between the various important ratios of EBL, NABIL and BOK.

The secondary data were used to conduct the study. The research findings of the study
were:
 The liquidity position of the EBL was better than NABIL and BOK. EBL had the
highest cash and bank balance to total deposits and cash and bank balance to
current assets ratio. NABIL had the lowest liquidity position.
 EBL had good deposit collection and made enough investment on Government
Securities, but it maintained a moderate investment policy on loans and advances.
  From the analysis of assets management or activity ratio, it was concluded that
EBL was average, or in between NABIL and BOK. The total investment of EBL
was in between the other two banks. In the study, loans and advances to total
deposit was higher in BOK, but total investment to total deposit was higher in
NABIL.
 Investment on shares and debentures to total working fund ratio was higher in
BOK. However, the coefficient of variation was higher in EBL.
 In analysis of profitability, total interest earned to total outside assets of EBL is
lowest at all. However, overall analysis of profitability ratios showed that EBL
was an average in comparison to other compared banks i.e., NABIL and BOK.
 From the viewpoint of risk ratio, EBL had higher capital risk ratio, but average of
credit risk ratio of NABIL and BOK.

Pandit (2004) has conducted on “Investment Policy Analysis of Joint Venture Banks
with Special Reference to Nepal SBI Bank, Bank of Kathmandu and Everest Bank
Limited" with the following objectives:
 To evaluate whether the liquidity management assets management, efficiency,
profitability position, risk position and investment practices of Nepal SBI Bank,
BOK and EBL.
 To find out the relationship between deposit and total investment, deposit and
loan and advances and net profit and outside assets.

The study used secondary data for its conduction. The research findings of the study
were as follows:
 Liquidity position of SBI Bank was slightly good as compared to BOK and EBL.
However, the liquidity positions of the banks under study were not so
satisfactory. Therefore, banks should improve their liquidity position to meet
their current obligations.
 The study of assets management ratio showed that SBI Bank was not in a better
position regarding its on balance sheet activities.
  The profitability position of SBI was not as good as of other banks. Risk ratio of
BOK was the highest and the capital risk ratio of EBL was the highest of all. It
indicated that BOK and EBL must be careful about risk.
 Growth ratio of SBI and BOK had not successful to increase their source of
funds. EBL had succeeded to maintain its higher growth rate of total deposit.
 Trend analysis of total deposits, loan and advances, total investment and net
profit and projection of the next 5 years of SBI, BOK and EBL revealed that SBI
had increasing trend values in total deposit, total investment and loan and
advances of BOK and EBL had an increasing trend value of all types of trend
analysis.

Shrestha (2004) conducted a study on "Nepal Rastra Bank Guidelines on Investment

Policy of Commercial Banks in Nepal (A Case Study of Nepal Investment Bank
LTD)" with objectives presented below:
 To highlight the NRB directives regarding investment policy (loan, advances and
investment).
 To analyze the liquidity of NIBL.
 To find out the relationship between total deposit and loan and advances, total
deposit and total investment.
 To make the trend value analysis of deposit utilization and its projection for next
five years.
 To find out whether NRB guidelines are actually being implemented.

The study was conducted on the basis of secondary data. The main findings of the
study were as follows:
 The bank was in good liquidity position to meet the daily cash requirements as it
maintained the average cash and bank balance in respect to total deposit.
 The performance of NIBL regarding deposit collection, granting loan and
advances and investment was quite satisfactory but did not seem to follow a
definite policy.
  NABIL had not efficiently utilized its equity capital; hence, return on equity was
not satisfactory because of the lack of around investment policy for mobilization
of its equity capital.
 Interest earned to total operating income of NIBL was high. However, bank
failed to maintain net profit.
 The analysis of coefficient of correlation showed that there was positive and
significant relation between total deposits and loan and advances and current
assets and current liabilities and loan loss provision and loans and advances, but
there was negative and no significant relationship between outside assets and net
profit.
 Trend analysis and projection for next five year of total deposits, loan and
advances, investment and net profits were in increasing trend.

While reviewing the books and articles and past studies, it is found that banks are not
just the storehouse of the country’s wealth but are the reservoirs of resources necessary
for economic development and employment generation. There are still different
obstacles in the effective operation of the commercial banks in Nepal. Therefore these
obstacles should be eradicated for the economic development of Nepal.

The review of above relevant literature helps to better understand the Investment
policy of Commercial banks and its main drawbacks and problems. On the basis of
feedback derived from the literature review further analysis of the study had been
under track.

2.3 Research Gap

Investment in different sectors is made on the basis of the directives and instructions of
Nepal Rastra Bank as well as the investment policy and guidelines of the concerned
commercial bank itself. Commercial banks should follow these directives and
circulars. Furthermore, their own investment guidelines and policies should be in line
with NRB directives and circulars. Therefore, the up to date study over the change of
time frame has been a major concern for the researcher, concerned organization as well
as the banking industry as a whole.

This study covers the more recent financial data, NRB guidelines and instructions than
those of studies previously conducted. Portfolio management is the major part of the
bank's investment policy and it is the major concern of stakeholders to know the
portfolio behaviors of the bank. To reduce the default risk of credit, there should be the
optimum diversification of loan and advance. This study puts its effort to find out the
proportion to total loan and advances of the bank disbursed to different sectors of
economy and analysis the diversification of its investment.

Not much more research study has been conducted in this topic. A very few study
based on only one bank has been conducted before 2003, but this study is based on
comparative analysis of two joint venture listed commercial banks namely NSBI and
HBL starting from financial year 2003/04 to 2007/08. So, this research work is very
much centered to identify responsible causes, to analyze them and recommend
improvement measures for the betterment of the banks under study and to analyze the
investment position of the two leading banks.
 CHAPTER - III
RESEARCH METHODOLOGY

3.1 Introduction
Research methodology refers to the various sequential steps to be adopted by a
researcher
in studying a problem with certain objectives in view. In order to achieve the objective
of the study, certain method of research has to be used. Research methodology
describes the methods and process applied in the entire subject of the study. This
chapter is, therefore, devoted to describe the methods used for carrying out the
research and attempts to have an insight into the Investments policy adopted by
Himalayan Bank Ltd. and Nepal SBI Bank. The following methodology has been
followed to conduct the present study.

3.2 Research Design

A research design is purely and simply the framework or plan for a study that guides
the collection and analysis of data. Research design is the plan, structure and strategy
of investigation conceived so as to obtain answer to research question and to control
variances. A true research design is basically concerned with various steps to collect
the data for analysis and draw a relevant conclusion. It is the arrangement of conditions
for collection and analysis of data that aims to combine relevance to the research
purpose with economy in procedure.

To achieve the objective of the study, descriptive and analytical research design has
been used. Some financial and statistical tools have been applied to examine facts and
description techniques have been adopted to evaluate investments policy of Nepal SBI
Bank Ltd. and Himalayan Bank Ltd.

3.5 Population and Sample

Since new commercial banks are being incorporated every year, the number of
commercial banks in Nepal has been increasing rapidly. Some have already been
started and others are in the process of starting their business, however, there are 26
commercial banks functioning all over the country at present and most of their stocks
are traded actively in the stocks market. Although there are 26 commercial banks
operating in Nepal at present, only two banks, Himalayan Bank Ltd. and Nepal SBI
Bank have been selected for the study and their data related to investments
performance have been comparatively studied.

3.6 Nature and Sources of Data

Mainly, the study is conducted on the basis of the secondary data. The data required
for the analysis are directly obtained from the balance sheet and the P/L account of the
concerned bank’s annual reports. Supplementary data and information are collected
from the number of institutions and regulating authorities like NRB, Economic Survey
and national planning commission etc. All the secondary data are compiled, processed
and tabulated in the time series as per the need and objectives.

Likewise, various data and information are collected from the economic journals,
periodicals, bulletins, magazines and other published and unpublished reports and
documents from various sources.

3.5 Data Presentation and Analysis Techniques

The data presentation and analysis are focal part of the study. A number of financial
and statistical tools are used to analyze the collected data and to achieve the objectives
of the study. The analysis of the data has been done according to pattern of data
available. Because of limited time and resources, simple analytical statistical tools such
as graph, percentage, Karl Pearson's coefficient of correlation, regression analysis and
the technique of least square are adopted in this study. In the same way, some useful
financial tools such as ratio analysis and trend analysis have also been used for
financial analysis. The data extracted from annual reports, financial statements and
other available information are processed and tabulated in various tables and charts
under different headings according to their nature.

3.6 Tools for Analysis

Financial as well as the statistical tools are used to make the analysis more convenient,
reliable and authentic. Their ratios, percentages, mean, standard deviations and
coefficients of variations are then calculated and presented in the tables. To study the
relationship between two or more variables, correlation coefficients are also calculated.
Likewise, trend analysis is also used to know the trend of various ratios. Following are
the brief introductions of the financial and statistical tools used in this study.

3.6.1 Financial Tools

Financial ratios have been calculated to ascertain the financial condition of the firm.
Financial tools have been used to examine the financial strength and weakness of bank.
It is the relationship between financial variables contained in the financial statements
(i.e., balance sheet, profit and loss account and income statements). There are several
financial to spot out the financial strength and weakness of the firm. There are several
financial tools, which could be applied in order to analyze the investment policy of
commercials banks. The financial tools used in this study are as follows: Liquidity
Ratio, Activity Ratio, Profitability Ratio, Risk Ratio and Growth Ratio.

A. Liquidity Ratio
Liquidity ratio measures the ability of the firms to meets its currents obligations. In
facts, analysis of liquidity needs the preparation of cash budgets, cash and fund but
liquidity ratios, by establishing a relationship between cash and other currents assets to
currents obligation, provide a guide measures of liquidity. Liquidity is measured by the
speed with which a bank’s asset can be converted into cash to meet deposit withdrawal
and other currents obligations.

Liquidity of any business organization is directly related to working capital or current

assets and current liabilities of that organization. A high degree of liquidity shows
inability of proper utilization of funds where as the lack of liquidity shows the signal of
poor credit worthiness loss of creditors confidence or even in legal tangles resulting in
the closure of the company. Therefore, commercial banks need liquidity to meet loan
demand and deposit with drawls. Without good liquidity, bank is not able to operate its
function. To measure the bank's solvency position or ability meet its short-term
obligation, various liquidity ratios are calculated.
The followings ratios are evaluated under liquidity ratios:
i. Current Ratio
The currents ratio is the ratio of total currents assets and currents liabilities. It shows
the relationship between currents assets and currents liabilities.
Mathematically it is represented as:
Total Current Assets
Currents Ratio
= Total Current Liabilitie
Where, s

Currents assets include cash and bank balance, money at call or short-term notice,
loans and advance, investments in government securities and other interest receivables
and miscellaneous currents assets where as currents liabilities include deposit and other
accounts of short-term loan, bills payable, tax provision, staff bonus, dividend payable
and miscellaneous currents liabilities.

The widely accepted standard currents ratio is 2:1 but accurate standard depends on
circumstance in case of seasonal business ratio.

ii. Cash and Bank Balance to Total Deposit Ratio (Cash Reserve Ratio)
This ratio is computed by dividing cash and bank balance by total deposits. This can be
stated as,
Cash and Bank Balance
Cash Reserve Ratio =
Total Deposits

Where,

Cash and bank balance includes cash on hand, foreign cash on hand, cheques and other
cash items, balance with domestic bank and balance held abroad. The total deposit
consists of currents deposit, savings deposits, fixed deposits, money at calls and short
notice and other deposits.

iii. Cash and Bank Balance to Current Assets Ratio

This ratio is computed by dividing cash and bank balance by currents assets
We can state it as:

Cash and Bank Balance to Current Assets Ratio = Cash and Bank
Balance Currents Assets
iv. Investments on Governments Securities to Currents Assets
An investment on government securities includes Treasury bill and development bonds
etc. The ratio can be computed by dividing investments on government securities by
currents assets. This can be mentioned as:

Investments on Governments Securities to Currents Assets

Investment s on Government s Securities

= Total Currents Assets

B. Assets Managements Ratios (Activity Ratios)

Assets managements or activity or turnover ratios are employed to evaluate the
efficiency with which the firm manages and utilize its assets. They indicate the speed
with which assets are beings converted or turned over. Thus, these ratios are used to
measures the bank’s ability to utilize their available resources.

i. Loan and Advances to Total Deposit Ratio

This ratio can be calculated by dividing loan and advances by total deposits.
This ratio can be stated as:

Loan and Advances to Total Deposit Ratio Loan and Advances

Total Deposit
=

ii. Total Investments to Total Deposit Ratio

This ratio can be calculated by dividing loans and advance by total deposits.
Mathematically:
Total Investment
Total Investments to Total Deposit Ratio
Total Deposit
Where =
,
A total investment includes investments in government securities, investments in
debentures and bonds, share in subsidiary companies, shares in other companies and
other investments.
iii. Total OBS Operation to Loan and Advances Ratio
This ratio can be calculated by dividing total off the balance sheet items by loans and
advance. Mathematically:

Total OBS Operation to Loan and Advances Ratio = Total OBS Operation
Loan and Advances

iv. Loan Loss Ratio

This ratio can be calculated by dividing Loan loss provision by loans and advance..
Mathematically:

Loan Loss Ratio = Loan Loss Provision

Loan and Advances

C. Profitability Ratios
Profit is only appeared when there is positive difference between total revenues and
total cost over a certain period of time. Profitability ratios are very helpful to measures
the overall efficiency of operations of firm. It is a true indication of the financial
performance of each and every business organizations. Here profitability ratios are
calculated and evaluated in terms of the relationship between net profit and assets.

The followings ratios are taken into accounts under this heading.

i. Return on Loan and Advance Ratio

When net profit is divided by loan and advances the ratio is called return on loan and
advances.
Mathematically it is presented as:
Net Profit
Return on Loan and Advance Ratio =
Loan and Advances

ii. Return on Total Assets Ratio

This ratio is calculated by dividing net profit by total assets.
This can be stated as:

Return on Total Assets Ratio = Net Profit

Total Assets
The numerator indicates with portion of income left to the internal equities after all
costs, charges have been deducted

iii. Return on Equity Ratio

This ratio can be calculated by dividing net profit by total equity. Mathematically:
Net Profit
Return on Equity Ratio =
Total Equity

iv. Total Interest Earned to Total Outside Assets Ratio

This ratio is calculated by dividing total assets earned by total outside assets and can be
stated as:

Total Interest Earned to Total Outside Assets Ratio = Total Interest Earned
Total Outside Assets

The denominator includes loan and advance and all types of investment. The
numerator comprises total interest income from loans, advance, cash credit, overdraft,
government securities, inter bank and other investments.

v. Total Interest Earned to Total Operating Income Ratio

This ratio is calculated by dividing total interest earned by total operating income. This
can be stated as:

Total Interest Earned to Total Operating Income Total Interest Earned

Ratio= Total Operating Income

vi. Total Interest Paid to Total Deposit Ratio

When total interest paid is divided by total deposit, total interest paid to total deposit is
produced.
This ratio can be stated as:
Total Interest Paid
Total Interest Paid to Total Deposit Ratio =
Total Deposit
Where
,
Total interest paid includes, total expenses on deposit liabilities, loan and advance
(borrowing) and other deposits.
D. Risk Ratio
Risk taking is the prime business of bank’s investment managements. It increases
effectiveness and profitability of the bank. These ratios indicate the amount of risk
associated with the various banking operations, when ultimately influences the bank
investment policy.

The followings ratios are evaluated under this topic:

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

Credit Risk Ratio = Total Loan and Advances

Total Assets

ii. Capital Risk Ratio

The capital risk ratio of a bank indicates how much assets values may decline before
the position of depositors and other creditors jeopardize. The capital risk is directly
related to the return on equity (ROE). Higher the ratio, lower is the capital risk. This
ratio is computed by dividing capital (Paid up capital + reserves) by risk-weighted
assets as computed under BASLE committee’s Formula this can be mentioned as:

Capital (Paid up  Reserves)

Capital Risk Ratio =
Risk Weigh ted Assets (RWA)

E. Growth Ratios
Growth ratios are directly related to the fund mobilization on investments
managements of a commercial bank. Growth ratio represents how well the commercial
bank is maintaining its economic position.
The followings ratios come under above the headings:
 Growth ratio of total deposit
 Growth ratio of loan and advances
 Growth ratio of total investments and
 Growth ratio of net profit

3.6.2 Statistical Tools

Statistical tools help to find out the trends of financial position of the bank and to
analyze the relationship between variables that helps banks to make appropriate
investment policy regarding to profit maximization and deposit collection, fund
utilization through providing loan and advances or investment on other companies. In
this study, statistical tools such as coefficient of correlation between different
variables, trend analysis of important variables have been used for analyzing and
interpreting the financial data. The basis of statistical analysis related to this study is
discussed below:

A. Arithmetic Mean
The mean or average value is a single value within the range of the data that is used to
represent all the values in the series. Since an average is somewhere within the range
of the data, it is also called a measure of central value. Average value is obtained by
adding together all the terms and by dividing this total by the number of items. The
formula is given below:

X =

X
N
Where,
X = Arithmetic average

X = Sum of values of all items,

and N = Number of term

B. Standard Deviation
The standard deviation is the measure that is most often used to describe variability in
data distributions. It can be thought of as a rough measure of the average amount by
which observations deviate on either side of the mean. Denoted by Greek letter σ {read
as sigma}, standard deviation is extremely useful for judging the representatives of the
mean.

Standard deviation is represented as: S.D. (  ) =

 X  X 2
N

Where,
X = Arithmetic average
 = Standard deviation
N = Number of items

C. Covariance
The covariance is the ratio of standard deviation to the mean for a given sample used
to measure spread. It can also be thought of as the measure of relative risk. The larger
the coefficient of variation, the greater is the risk relative to the average.

Mathematically,

C.V. =
X
Where,
C.V = Covariance
 = Standard deviation and
X = Arithmetic average

D. Coefficient of Correlation Analysis (r)

“Correlation it is the statistical tools that we can use to describes the degree to which
one variable in linearly related to another.” (Richard I Levin and David S. Rubin,
Statistics for managements (New Delhi: Prentice Hall of India Pvt. Ltd. 1991; 505).
The coefficient of correlation measures the degree of relationship between two sets of
sigma. Among the various methods of finding out coefficients of correlation, Karl
Pearson’s method is applied in the study. The result of co-efficient of correlation is
always between +1 or -1. When r= +1, it means there is perfect relationship between
two variables and vice versa. When r=0. It means there is no relationship between two
variables.

The Pearson’s formula is: -

r=  XY
2 2
X Y

E. Coefficient of Determination (R²)

The coefficient of determination is a measure of the degree of linear association or
correlation between two variables one of which happens to be independent and other
being dependent variable. In other words coefficient of determination measures the
percentage total variation independent variables explained by independent variables.
Zero to one is the ranging measurement of this coefficient of multiple determinations.
If R² is equal to 0.75, which indicates that the independent variables used in, regression
model explained 75% of the total variation in the dependent variable. If the regression
line is a perfect estimator R² will be equal to +1, when there is no correlation the value
of R² is zero.

F. Probable Error of Coefficient of Correlation(r)

The probable error is a measure of as certainty the reliability of the value of a Person’s
coefficient of correlation. If the probable error is added to and subtract from the
coefficient of correlation, it would gives two such limits within which we can
reasonably accept the value of coefficient of correlation to vary. The formula for
finding out the probable error of the Karl Pearson’s coefficient of correlation is:

1  r 
2

P.E (r) = 0.6745 ×

n
Where,
P.E(r) = probable error of coefficient of correlation.
r = Coefficient of
correlation. n = No. of pairs
observation.
If r < 6 P.E(r), the value of ‘r’ is not significant no matter how high r value. i.e. there is
no evidence of correlation between the variables.
If r > 6 P.E(r), the value of r is significant, i.e. correlation is significant.

G. Trend Analysis (The Least-Square Method)

Trend analysis describes the average relationship between two series where the one
series relates to time and other series to the value of a variable. It generally shows that
the line of best-fit or straight line is obtained or not. The line of the best fir describes
the change in a given series accompanying a unit change in time. In other words, it
gives that best possible mean value of dependent variable for a given value of
independent variable.

For the calculation of the “line of best fit” following equations should be kept in mind.

Yc = a + bx
Where,
Yc = the estimated value of ‘Y’ for given value of x obtained from the line of
regression of Y on x.
a = “Y-intercept” or mean of ‘Y’ value.
b = Slope of trend line or rate of change.
x = the variable in times series analysis represents time.

There are two normal equations estimating for ‘a’ and ‘b’
are; ΣY = na + bΣx....(i)
ΣXY=aΣx + bΣx²….........(ii)

Since, Σx= 0

Then the above equation becomes,

 a = Y
n
and b =  XY
X 2
The term best fit interpreted in accordance with the principle of least square which
consist in minimizing the sum of the square residual or errors of estimate i.e. the
deviations between the given observed value of the variables and their corresponding
estimated values as given by the line of best fit.

The following trend value analyses for the next five years i.e. till 2013 have been used
in this study.
i. Trend analysis of total deposit
ii. Trend analysis of loan and advances
iii. Trend analysis of total investment
iv. Trend analysis of net profit
 CHAPTER - IV
DATA PRESENTATION AND ANALYSIS

The chapter four consists of two segments. The first segment of the chapter deals with
presentation and analysis of data collected from various sources while the second part
deals with major findings of the study.

4.5 Analysis of Investment Sectors

The investment of sample banks i.e. HBL and NSBI in different sectors such as HMG
securities, Nepal Rastra Bank bonds, shares; debentures and other investments have
been presented in the following tables and analyzed accordingly.

Table 4.1
Investments Pattern of Himalayan Bank Ltd
Nepal Share,
HMG Other
Rastra Bank Debentures
Sectors/Year Securities % % % Investments %
Bonds and Bonds
(in ‘000) (in ‘000)
(in ‘000) (in ‘000)
2003/04 3431729 36.93 - - 34266 0.37 5828108 62.70
2004/05 5469729 46.78 - - 39909 0.34 6182704 52.88
2005/06 5144313 47.24 - - 39908 0.37 5706151 52.39
2006/07 6454873 54.60 - - 73424 0.62 5294687 44.78
2007/08 7471668 56.01 - - 89558 0.67 5778951 43.32
X 48.31 - 0.47 6182704 51.22
S.D. 109.09 - 1.11 115.56
CV 2.26 - 2.33 2.26
(Source: Annual Report of HBL and NSBI from 2003/04 to 2007/08)
 Figure 4.1
Investments Pattern of Himalayan Bank Ltd

Table 4.2
Investments Pattern of Nepal SBI Bank Ltd

Nepal Share,
HMG Other
Sectors/ Rastra Bank Debentures
Securities % % % Investments %
Year Bonds and Bonds
(in ‘000) (in ‘000)
(in ‘000) (in ‘000)
2003/04 1889635 99.06 - - 17886 0.94 - -
2004/05 2588141 99.25 - - 19539 0.75 - -
2005/06 3591773 95.54 - - 19539 0.52 148200 3.94
2006/07 2345580 88.20 - - 31939 1.20 281934 10.60
2007/08 3035554 98.27 - - 32822 1.06 20512 0.67
X 96.06 0.89 3.04
S.D. 215.01 2.07 11.33
CV 2.24 2.31 3.73
(Source: Annual Report of HBL and NSBI from 2003/04 to 2007/08)
 Figure 4.2
Investments Pattern of Nepal SBI Bank Ltd

Table 4.1and figure 4.1 represents the investments pattern of HBL whereas table no.
4.2 and figure 4.2 explains the investments pattern of NSBI. Similarly, the mean ratios,
standard deviation and covariance of investments in HMG securities, Nepal Rastra
Bank Bonds, Shares, debentures and other investments from fiscal year 2003/04 to
fiscal year 2007/08 have also been calculated and presented in the above tables. The
investment by NSBI in HMG securities and shares, debentures and bonds is higher
than HBL whereas other investments are lower in comparison to HBL. Both the banks
have not invested in Nepal Rastra bank bonds. NSBI has high investments in HMG
securities while HBL has invested more in other sectors regardless HMG securities.

As per table no. 4.1, HBL has invested Rs. 3432 million in HMG securities, Rs. 34
million in shares, debentures and bonds and Rs.5828 million in other sectors in the
year 2003/04. The share in HMG securities has gradually increased each year reaching
up to Rs. 7472 million in the year 2007/08 which was more than double than that of the
year 2003/04. It seems that the bank is increasing its investment in HMG securities as
they are risk free than other sectors. Similarly, the investment in share, debenture and
bonds shows an increasing trend in the overall period starting from Rs.34 million in the
year 2003/04 reaching up to Rs. 90 million in the year 2007/08. Similarly, investment
in other sectors that included certificates of deposit, mutual funds, foreign bank
deposits, local bank deposits, deposits with Nepal Rastra Bank, and so on is decreasing
year by year marking up to Rs. 5779 million in the year 2007/08.

When analyzing the investment pattern of NSBI, it revealed that it gave the highest
priority to the investment Government Securities followed by other investments, and
shares and debentures during the period of the study. The table shows that the bank has
invested maximum amount in HMG securities of its total investment. The share in
HMG securities is fluctuating over the study period starting from Rs. 1890 million in
the year 2003/04 and ending up to Rs. 3036 million in the year 2007/08 marking
highest in the year 2004/05 i.e. Rs. 2588 million. Similarly, the share in shares,
debentures and bonds is also fluctuating over the study period. It is Rs. 18 million, Rs.
19 million, Rs. 19 million, Rs. 32 million and Rs. 33 million in the year 2003/04,
2004/05, 2005/06, 2006/07 and 2007/08 respectively. Regarding other investments,
NSBI has not invested anything in the first two years of the study period. The
investment in the year 2005/06 was Rs. 148 million which drastically increased to Rs.
282 million and then there was a sharp decline in the year 2007/08 which remained at
Rs. 21 million.

4.6 Financial Analysis

4.6.1 Analysis of Liquidity Position
Liquidity position of a bank can be identified with the help of liquidity ratios. Liquidity
ratios measure the ability of the firm to meet its current obligations. Difference
between current assets and current liabilities is known as working capital, which
provides liquidity in business organizations. A commercial bank must maintain a fair
liquidity position to satisfy the credit needs of the community, to meet demands for
deposit withdrawals, pay matured obligations in time and convert non-cash into cash to
satisfy immediate needs without loss to the bank and without consequential impact on
long-run profitability of the bank.
Current Ratio
The calculation of current ratio is based on a simple comparison between current assets
and current liabilities. This is the broad measure of liquidity of the bank. The standard
of current ratio for banking companies is 2:1, which means the bank has to maintain
total currents double of its total current liabilities.

Current ratios of NABIL and HBL, and their means, standard deviations and
coefficients of variation during the period of study between 2001/2002 and 2006/2007
are presented in Table 4.3.
Table 4.3
Current Ratio of HBL and NSBI
(In times)
Fiscal Year C.V.
Banks Mean S.D.
2003/04 2004/05 2005/06 2006/07 2007/08 %
HBL 1.09 1.09 1.08 1.08 1.07 1.08 0.01 0.5
NSBI 1.05 1.03 1.04 1.04 1.04 1.04 0.01 0.81
(Source: Annual Report of HBL and NSBI from 2003/04 to 2007/08)

Figure 4.3
Current Ratio of HBL and NSBI
In the above table, current ratios from fiscal year 2003/04 to 2007/08 of HBL and
NSBI are presented (Details in Appendix 1). Similarly, a chart is also presented for a
quick view of trend of current ratio. The above table reveals that the total current assets
of both banks exceed the total current liabilities. This indicates both banks are capable
of discharging their current obligations during the study period.

Current ratio of HBL shows a decreasing trend and so does NSBI’s. The current ratio
of NSBI has decreased in the second year; however, it has increased in the third year
and maintained constancy. Both the banks have maintained the currents ratio higher
than the standard of 1:1 in all the fiscal years. HBL has maintained a higher ratio in
comparison to NSBI. Both have maintained the same level of SD. The CV of HBL is
comparatively lower than that of NSBI. It shows that the current ratios of HBL are
more homogeneous than that of NSBI.

Cash and Bank Balance to Total Deposit Ratio (Cash Reserve Ratio)
The ratio between the cash and bank balance and total deposits measures the ability of
bank to meet the banks immediate funds to cover their current margin, call margin and
saving deposits. Higher the ratio, the greater will be the ability to meet sudden demand
of deposit. However, a very high ratio is not desirable since banks have to pay interest
on deposits. This will also maximize the cost of fund to the bank. The total deposits
include current, saving and fixed deposits as well as call money deposits and certificate
of deposits. Table 4.4 shows the cash and bank balance to total deposits ratio of
NABIL and HBL
Table 4.4
Cash and Bank Balance to Total Deposit Ratio of HBL and NSBI (%)
Fiscal Year C.V.
Banks Mean S.D.
%
2003/04 2004/05 2005/06 2006/07 2007/08
HBL 9.09 8.12 6.48 5.85 4.55 6.82 1.62 23.71
NSBI 12 8.36 10.16 9.81 9.8 10.03 1.17 11.65
(Source: Annual Report of HBL and NSBI from 2003/04 to 2007/08)
 Figure 4.4
Cash and Bank Balance to Total Deposit Ratio of HBL and NSBI

In the above table, cash reserve ratio from fiscal year 2003/04 to 2007/08 of HBL and
NSBI is presented (Details in Appendix 2) and a chart is also presented.

Cash reserve ratio of HBL reveals a decreasing trend. It shows that the bank is able to
efficiently utilize its resources in the later periods. However, it also can’t be neglected
that the bank is heading towards the operational risks. The ratio of NSBI is showing a
fluctuating trend. The CRR is decreased in the second year while showing an increase
in the third year and again declining in the fourth year. The CRR of HBL is found
tremendously declining over the study period with higher operational risks in
comparison to NSBI. It also shows that HBL is well capable of utilizing the available
resources to maximum extent and operating in high riskier way in meeting the demand
of depositors at any point of time.

NSBI has maintained a higher cash reserve ratio than of HBL. This states a better
liquidity position of the bank than that of HBL. The co-efficient of variance of NSBI is
lower than that of HBL, which shows that the ratios of NSBI are more stable and
constant than that of NSBI and HBL has less cash reserves.
Cash and Bank Balance to Current Assets Ratio
This ratio shows the banks’ liquidity position in terms of the most liquid assets i.e.
cash and bank balance. A high cash and bank balance to current ratio indicates high
proportion of the most liquid assets in total current assets. This further indicates the
banks’ ability to meet daily cash payments for the requirement of their depositors.
However, much higher of this ratio is not preferred as the bank has to pay interest on
deposits and will increase the cost of fund that might impair their profitability.
Likewise, lower of this ratio is detrimental to the bank, as the bank will have hard
times to make the payments against the cheques presented by customers. Therefore,
bank has to strike a balance of cash and bank balance, which is just adequate for the
customers demand against deposit when required, and less interest payable against the
cash deposit.

Table 4.5 shows the cash and bank balance to total current assets of NABIL and HBL,
and their means, standard deviations and coefficient of variation during FY 2003/04 to
2007/08.
Table 4.5
Cash and Bank Balance to Current Assets Ratio of HBL and NSBI (%)
Fiscal Year C.V.
Banks Mean S.D.
%
2003/04 2004/05 2005/06 2006/07 2007/08
HBL 7.87 7.05 5.72 5.21 4.01 5.97 1.36 22.8
NSBI 10.92 7.49 8.79 8.26 7.97 8.69 1.19 13.76
(Source: Annual Report of HBL and NSBI from 2003/04 to 2007/08)
 Figure 4.5
Cash and Bank Balance to Current Assets Ratio of HBL and NSBI

Table 4.5 represents the cash and bank balance to current assets ratio of HBL and
NSBI from fiscal year 2003/04 to 2007/08(details in appendix 3) and the figure shows
the trend of the ratio over the fiscal years.

The cash and bank balance to current assets ratio of both the banks are better as they
show their ability to manage the deposit withdrawal from the customers. The ratio of
HBL is decreasing while that of NSBI is fluctuating. The ratio of NSBI on an average
is higher than that of HBL, which indicates that the liquidity position of NSBI is better
in this regard. The coefficient of variance of NSBI i.e. 13.76% is also lower than HBL
i.e. 22.8%. This shows that the position of NSBI is more stable and consistent than
HBL.

The cash and bank balance to current assets ratio of both the banks are more or less
consistent; however, NSBI has maintained a higher ratio, which depicts that the bank is
capable to make quick payments of its deposits. But it doesn’t necessarily mean that it
has mobilized its fund in profitable sector. On contrary, HBL may have mobilized its
fund more productively.
 Investments on Government Securities to Current Assets Ratio
The commercial banks mostly invest its funds collected in various government
securities issued by government because they consider them most liquid, that is, they
can realize cash at short notice and without much loss in capital invested. And also
such securities would serve as the basis for loan from the central bank at the bank rate.
The government securities are the safest place to invest the funds. They can be easily
sold in the market or they can be converted into the cash in other ways. But they are
not so much liquid as cash and bank balance. Here an effort is made to examine the
position of a bank’s total assets that is invested on different government securities.
This ratio is very important to know the extent of which the banks are successful in
mobilizing their total working fund on different types of government securities to
maximize the income. All the deposits of the bank should not be utilized in loan and
advances and other credit from security and liquidity point of view. Therefore, to some
extent, commercial banks seem to be interested to utilize their deposits by purchasing
government securities. A high ratio indicates better mobilization of fund as Investment
on government securities and vice-versa.

This ratio is calculated by dividing Investment on government securities by current

assets. The following table shows the ratios of Investment on government securities to
current assets ratio of HBL and NSBI.

Table 4.6
Investments on Government Securities to Current Assets Ratio of HBL and NSBI (%)
Fiscal Year C.V.
Banks Mean S.D.
%
2003/04 2004/05 2005/06 2006/07 2007/08
HBL 13.49 19.14 17.13 19.13 20.68 17.91 2.48 13.85
NSBI 23.87 26.77 28.24 17.26 18.12 22.83 4.47 19.6
(Source: Annual Report of HBL and NSBI from 2003/04 to 2007/08)
 Figure 4.6
Investments on Government Securities to Current Assets Ratio of HBL and NSBI

In the above table, investments in government securities to current assets ratio of HBL
and NSBI are presented from fiscal year 2003/04 to 2007/08(detail in appendix 4) and
a figure is also presented.

It is clear from the study that both banks have invested in the government securities.
The ratio of investment by HBL is fluctuating and lesser in comparison to NSBI;
however, the increase in the investment in the year 2007/08 is 20.68%, which is an
increase of 7.19% from the first year. Similarly, the ratio of investment by NSBI is
increasing in the first three years with 28.24%, the highest in the year 2005/06 with a
decrease in the fourth year and then a slight increase in the fifth year. There has been a
decrease in the ratio of investment from the first year till the last year by 5.75%.

On an average, NSBI has maintained a higher ratio of investments in the government

securities than that of HBL. It means that NSBI has invested higher portion of current
assets in government securities than HBL. Coefficient of variance of HBL is found to
be lower than NSBI, which represents that HBL is more consistent in investment of
current assets in government sectors whereas NSBI is less consistent in maintaining the
ratio.
4.6.2 Analysis of Assets Management
Assets management is another important aspect of a commercial bank’s investment
policies. Unless its assets are properly and judiciously managed, it cannot have the full
benefits of its investment policies. In order to assess the effectiveness of the assets
management of the selected commercial joint venture banks, a number of ratios have
been calculated and presented below.

Loan and Advance to Total Deposit Ratio

This ratio measures the extent to which the banks are successful to mobilize their total
deposits on loan and advances for profit generation. Therefore, the higher the ratio, the
better is the mobilization of total deposits in terms of loan and advances. However,
higher the ratio the better only from the point of view of liquidity, as the loans and
advances are not as liquid as cash and bank balance.
Table 4.7
Loan and Advances to Total Deposit Ratio of HBL and NSBI (%)
Fiscal Year C.V.
Banks Mean S.D.
%
2003/04 2004/05 2005/06 2006/07 2007/08
HBL 58.70 54.21 59.50 59.22 63.37 59 2.91 4.94
NSBI 71.46 71.80 69.32 82.66 92.70 77.59 8.87 11.43
(Source: Annual Report of HBL and NSBI from 2003/04 to 2007/08)
Figure 4.7
Loan and Advances to Total Deposit Ratio of HBL and NSBI (%)
The table 4.7 shows the loan and advance to total deposit ratio of HBL and NSBI of
five fiscal years starting from 2003/04 to 2007/08 (detail in appendix 5). Similarly, a
figure is also presented to show the trend of the ratio.

The table shows that there has been a fluctuating trend in the ratio of HBL and NSBI
ranging from 58.7% to 63.37% and 71.46% to 92.7% respectively. The table also
shows that the ratio of loan and advance to total deposit ratio of HBL is more or less
consistent in the third and fourth fiscal year and so is with NSBI in the first two years.
NSBI has maintained a higher ratio than HBL on an average. It reveals that NSBI has
utilized more deposit into loan and advance in comparison to HBL and also shows that
NSBI has strong position regarding the mobilization of total deposit on loan and
advance and acquiring higher profit as compared to HBL.

The coefficient of variance of HBL is 4.94% which is very low than that of NSBI
which is 11.43%. It depicts that the loan and advance of HBL is more stable and
consistent than that of NSBI. Maintaining a high ratio in terms of mobilization of
deposit is good but it cannot be regarded as good from the point of view of liquidity as
the loan and advance is not liquid as cash and bank balance. HBL might have utilized
high portion of deposit in various investments or cash and bank balance.
Total Investments to Total Deposit Ratio
This ratio measures the extent to which the banks are able to mobilize their deposits in
investments in various securities and other investments. Higher ratio indicates the
success in mobilizing deposits in securities and vice versa. This ratio can be computed
by dividing the total investment by total amount of deposits collections. The table 4.8
shows the ratio of total investment to total deposits of HBL and NSBI from the fiscal
year 2003/04 to 2007/08, where total investments include investment on government
securities, debentures and bonds, shares in subsidiary companies, shares in other
companies and other investments.
 Table 4.8
Total Investments to Total Deposit Ratio of HBL and NSBI (%)
Fiscal Year C.V.
Banks Mean S.D.
2003/04 2004/05 2005/06 2006/07 2007/08 %
HBL 42.22 47.12 41.10 39.35 41.89 42.35 2.59 6.12
NSBI 26.50 30.13 32.82 23.24 22.52 27.04 3.95 14.62
(Source: Annual Report of HBL and NSBI from 2003/04 to 2007/08)

Figure 4.8
Total Investments to Total Deposit Ratio of HBL and NSBI

In the above table, total investments in to total deposit ratio of HBL and NSBI are
presented (detail in appendix 6) and a figure is also presented to show a trend of the
calculated ratio.

The ratio of investment to total deposit of both the banks are fluctuating, however, the
ratio of HBL is higher than that of NSBI. HBL has maintained highest ratio in the year
2004/05 whereas the highest ratio of NSBI is in the year 2005/06 which is 32.82%.
Considering the average, HBL has higher average than NSBI which shows that HBL
has invested higher amount of the total deposits in securities and shares than NSBI.
NSBI has lower percentage of total deposit in securities and shares which indicates that
the bank is able to invest in more profitable sectors besides investing in lower return
sector.
The coefficient of variance of HBL is lower than that of NSBI which depicts the
consistency of the bank in maintaining the ratio throughout the period.

Total OBS Operation to Loan and Advances Ratio

This ratio measures the extent to which the banks are able to mobilize their off-the-
balance sheet items on loan and advances for the generation of profit. This ratio can be
computed by dividing the total OBS operation by loan and advances. Table 4.9 shows
the total OBS operation to loan and advances of HBL and NSBI, and their means,
standard deviations and coefficient of variation during FY 2003/04 to 2007/08.
Table 4.9
Total OBS Operation to Loan and Advances Ratio of HBL and NSBI (%)
C.V.
Banks Fiscal Year Mean S.D.
%
2003/04 2004/05 2005/06 2006/07 2007/08
HBL 48.22 57.38 41.74 38.52 53.88 47.95 7.10 14.80
NSBI 16.39 25.63 25.62 29.78 24.86 24.46 4.39 17.94
(Source: Annual Report of HBL and NSBI from 2003/04 to 2007/08)

Figure 4.9
Total OBS Operation to Loan and Advances Ratio of HBL and NSBI
The table no. 4.9 shows the total OBS operation to loan and advances ratio of HBL and
NSBI of five fiscal years starting from 2003/04 to 2007/08(detail in appendix 7) and
the chart shows the trend of the ratio over the mentioned fiscal years.

The above table reveals that the ratio of HBL and NSBI are fluctuating though there is
an increase in the ratio of both the banks in the last year than in the fiscal year 2003/04.
The ratio of HBL in the first year is 48.22%, and 57.38%, 41.74%, 38.52% and
53.88% in the second, third, fourth and fifth years respectively. Similarly, the ratio of
NSBI in the five years are 16.39%, 25.63%, 25.62%, 29.78% and 24.86% in the first,
second, third, fourth and fifth years respectively.

On an average, the ratio of HBL is higher than that of NSBI and the coefficient of
variance between the ratios of HBL is comparatively lower than that of NSBI which
shows that the ratios of HBL are more stable than NSBI’s.

Loan Loss Ratio

The loan loss ratio is used to define the quality of banks’ assets and how well it
protects itself from losses caused by problematic loans Loan loss ratio can be
computed by dividing loan loss provision by loan and advances. Loan loss provision is
a non-cash expense for banks to account for future losses on loan defaults. . The higher
this ratio is, the better the bank is handling itself in regards to loans.

Table 4.10
Loan Loss Ratio of HBL and NSBI (%)
Fiscal Year C.V.
Banks Mean S.D.
%
2003/04 2004/05 2005/06 2006/07 2007/08
HBL 6.52 7.19 6.51 6.29 3.94 6.09 1.12 18.33
NSBI 7.55 8.46 6.23 6.50 4.76 6.70 1.25 18.70
(Source: Annual Report of HBL and NSBI from 2003/04 to 2007/08)

Figure 4.10
Loan Loss Ratio of HBL and NSBI

The above table represents the loan loss ratio of HBL and NSBI of five fiscal years
starting from 2003/04 to 2007/08(detail in appendix 8) and the figure shows the trend
of loan loss ratio.
As per the above table, the loan loss ratios of both the banks show a fluctuating trend.
The ratio of HBL in the first year is 6.52% and increased in the second year then again
a decline in the third, fourth and fifth year, and 3.94% being the lowest. Similarly, the
ratio of NSBI is highest in the second year with 8.46% and lowest in the fifth year. The
ratio of NSBI is higher than HBL on an average. It states that the position of NSBI is
poorer than HBL in this regard. The coefficient of variance of loan loss ratio of NSBI
is 18.70% which is greater than that of HBL of 18.33% which reveals that the loan loss
ratio of NSBI are more inconsistent. It can be concluded that the performance of NSBI
in terms of recovery of loan is weaker in comparison to HBL due to higher loan loss
ratio. Similarly, NSBI doesn’t have stability in making provision for loan loss
throughout the study period while HBL is more stable in making provision for loan
loss.

4.6.3 Analysis of Profitability Position

Profit is the difference between total revenue and total expenses over a period of time.
Profit is the end result of a commercial bank operations and it will have no future of it
if it fails to make sufficient profits. Therefore, one of the important objectives of the
commercial bank is to earn profits, as all stakeholders such as stockholders,
management, and creditors of the bank expect the bank has to earn reasonable return.
In addition, the bank’s efficiency is also measured in terms of its profit and
profitability. In order to measure the profitability of the selected banks, profitability
ratios have be calculated and analyzed, as they indicate the banks have won public
acceptance of their service even in an intense competitive situation and earned profits.
In this study, the profitability ratios are computed on the basis of profits of banks vis-à-
vis their investment. To measure and analyze of profitability of NSBI and HBL
following ratios have been computed and presented

Return on Loan and Advance Ratio

Return on loan and advances ratio measures how efficiently the banks have utilized
their resources to earn good return on loans and advances provided. Put it another way,
it measures the earning capacity of commercial banks on its deposits used in the form
of loans and advances.

Table 4.11 shows the return on loans and advances of HBL and NSBI during the fiscal
year 2003/04 and 2007/08. Mostly loans and advances include loan cash credit,
overdraft, bills purchased and discounted.
Table 4.11
Return on Loan and Advance Ratio of HBL and NSBI (%)
Fiscal Year C.V.
Banks Mean S.D.
%
2003/04 2004/05 2005/06 2006/07 2007/08
HBL 2.04 2.29 2.90 2.76 3.25 2.63 0.41 15.50
NSBI 1.18 0.92 1.53 4.01 3.01 2.13 1.18 55.53
(Source: Annual Report of HBL and NSBI from 2003/04 to 2007/08)

Figure 4.11
Return on Loan and Advance Ratio of HBL and NSBI

The above table represents the return on loan and advance ratio of HBL and NSBI
from fiscal year 2003/04 to 2007/08(details in appendix 9). Similarly, figure no.4.11
indicates the trend of this ratio over the mentioned period.
The ratios of both the banks are fluctuating while HBL has higher return on loan and
advance ratio than NSBI. The ratio of HBL has increased from fiscal year 2003/04 to
2004/05 and 2005/06 with a slight decrease in 2006/07 i.e. from 2.90% to 2.76% and
again an increase in the last year maintaining a ratio of 3.25%. The ratios of NSBI have
decreased from 1.18% to 0.92% in the second year which is below 1%. Then, it has
gained a rise in the third and fourth year, 4.01% being the highest and again a decline
in the fifth year by 1%. The ratio of HBL is higher than that of NSBI and the
coefficient of variance of HBL is lower than that of NSBI. It depicts that the return on
loan and advances of HBL are more consistent throughout the study period than NSBI,
however, the ratios of both the banks are not satisfactory.

Return on Total Assets Ratio

This ratio measures the profit earning capacity by utilizing available resources of
banks. In the present study, this ratio is calculated and analyzed to measure the
profitability of all financial resources invested in the bank's assets. A high ratio usually
indicates the efficiency and utilization of its overall resources, and vice versa. This
ratio is computed by dividing net profit by total assets.
Table 4.12
Return on Total Assets Ratio of HBL and NSBI (%)
Fiscal Year C.V.
Banks Mean S.D.
%
2003/04 2004/05 2005/06 2006/07 2007/08
HBL 1.02 1.07 1.50 1.43 1.73 1.35 0.27 19.78
NSBI 0.72 0.59 0.90 2.73 2.23 1.43 0.87 60.85
(Source: Annual Report of HBL and NSBI from 2003/04 to 2007/08)

Figure 4.12
Return on Total Assets Ratio of HBL and NSBI
The above table represents the return on total assets ratio of HBL and NSBI of five
fiscal years starting from 2003/04 to 2007/08(detail in appendix 10) and a figure is also
presented to give a quick view of the ratio from FY 2003/04 to 2007/08.

The ratios of HBL show an increasing trend while the ratios of NSBI are a bit
fluctuating than HBL. The ratio of HBL has increased from 1.02% to 1.07% and
1.50% in the second and third year respectively. It has a slight decline in the third year
by 0.7% and again maintained up to 1.73% in the year 2007/08. Similarly, the ratio of
NSBI has decreased from 0.72% to 0.59% in the second year and again increased up to
0.90% in the third year. The ratio has been highest in the year 2006/07 i.e. 2.73% and
again declined by 0.50% in the year 2007/08.

On an average, the return on total assets ratio of NSBI is higher than HBL which
indicates that the position of bank is good to some extent in this regard. Considering
the coefficient of variance, NSBI’s is 60.85% which is higher than HBL of 19.78%.
This states that HBL has been able to maintain a stable and consistent return on total
assets in comparison to NSBI.

Return on Equity Ratio

Return on equity ratio measures the rate of return on the ownership interest or
shareholders' equity of the common stock owners. It measures a firm's efficiency at
generating profits from every unit of shareholders' equity. ROE shows how well a
company uses investment funds to generate earnings growth. This ratio is computed by
dividing Net profit by total equity. Total equity or shareholder’s equity is calculated as
net assets or assets minus liabilities.
Table 4.13
Return on Equity Ratio of HBL and NSBI (%)
Fiscal Year C.V.
Banks Mean S.D.
%
2003/04 2004/05 2005/06 2006/07 2007/08
HBL 11.48 12.02 15.85 16.72 19.90 15.19 3.13 20.59
NSBI 9.71 8.33 12.04 22.1 17.64 13.96 5.16 36.97
(Source: Annual Report of HBL and NSBI from 2003/04 to 2007/08)
 Figure 4.13
Return on Equity Ratio of HBL and NSBI

The above table and figure represent the return on equity ratio of HBL and NSBI of
five fiscal years starting from 2003/04 to 2007/08(detail in appendix 11).

After studying the above table, it is clear that the return on equity ratios of HBL is
increasing while those of NSBI are fluctuating. The ratios of HBL are 11.48%,
12.02%, 15.85%, 16.72% and 19.90% in the first, second, third, fourth and fifth year
respectively. The ratio of NSBI has decreased in the second year from 9.71% to 8.33%.
It has then increased to 12.04% in the third year and again a tremendous increase in the
year 2006/07 resulting with a decline to 17.64% in the year 2007/08. The average ratio
of return on equity of HSBI is lower than that of HBL while the coefficient of variance
of ratio of NSBI is 36.97%, which is higher than that of HBL of 20.59%.

The study shows that HBL has higher return ratio, which indicates that the bank has
efficiently utilized its equity capital and is more consistent in the utilization of its
equity capital than NSBI.
Total Interest Earned to Total outside Assets Ratio
This ratio measures the capacity of the firms for earning interest on total outside assets.
Outside assets represent the assets that are owned by a firm but lie outside the domain
of the firm’s area. This include loan and advance and all types of investment Total
interest earned comprises total interest income from loans, advance, cash credit,
overdraft, government securities, inter bank and other investments. This ratio is
calculated by dividing total interest earned by total outside assets.

Table 4.14
Total Interest Earned to Total Outside Assets Ratio of HBL and NSBI (%)
Banks Fiscal Year C.V.
Mean S.D.
2003/04 2004/05 2005/06 2006/07 2007/08 %
HBL 5.86 5.60 6.36 6.16 5.98 6.07 0.17 2.82
NSBI 7 6.56 6.31 6.86 6.38 6.62 0.27 4.05
(Source: Annual Report of HBL and NSBI from 2003/04 to 2007/08)

Figure 4.14
Total Interest Earned to Total Outside Assets Ratio of HBL and NSBI

The above table exhibits the total interest earned to total outside ratio of HBL and
NSBI and the figure shows the trend of the ratio of five fiscal years starting from
2003/04 to 2007/08(detail in appendix 12).
The ratio of HBL is fluctuating while that of NSBI is decreasing. The table reveals that
the ratio of HBL has followed a decreasing trend from the fiscal year 2003/04 to fiscal
year 2004/05 from 5.86% to 5.60% respectively but in the year 2005/06, the ratio
increased up to 6.36%. It again declined in the year 2006/07 and 2007/08 maintaining a
ratio of 6.16% and 5.98% respectively. The ratio of NSBI has continuously decreased
from 7% in the fiscal year 2003/04 to 6.31% in the year 2005/06. It again rose to
6.86% in the fiscal year 2006/07 with a decline of 0.48% in 2007/08.

On the average, the total interest earned to total outside ratio of NSBI is higher than
that of HBL which depicts that the bank is able to earn interest from outside assets in
comparison to HBL. The coefficient of variance of ratio of NSBI is 4.05% which is
higher than that of HBL of 2.82%. It means the condition of HBL is more stable while
NSBI has better position with respect to the income earned from total outside assets.

Total Interest Earned to Total Operating Income Ratio

This ratio measures the capacity of the firms for earning interest on total operating
income. Total operating income is the difference between operating revenues and
operating expenses. Total interest earned comprises total interest income from loans,
advance, cash credit, overdraft, government securities, inter bank and other
investments. This ratio is calculated by dividing total interest earned by total operating
income.

The following table shows the total interest earned to total operating income ratio of
HBL and NSBI of five fiscal years starting from 2003/04 to 2007/08(detail in appendix
13). The figure below shows the trend of the ratio over the same fiscal years.
 Table 4.15
Total Interest Earned to Total Operating Income Ratio of HBL and NSBI (%)
Fiscal Year C.V.
Banks Mean S.D.
2003/04 2004/05 2005/06 2006/07 2007/08 %
HBL 121.58 120.95 116.72 127.43 122.92 121.92 3.45 28.98
NSBI 125 142.41 152.45 155.78 152.1 145.55 11.2 8.93
(Source: Annual Report of HBL and NSBI from 2003/04 to 2007/08)

Figure 4.15
Total Interest Earned to Total Operating Income Ratio of HBL and NSBI

The ratio of NSBI shows an increasing trend from the fiscal year 2003/04 to 2006/07
from 125% to 155.78% but it has slightly declined in the year 2007/08 resulting up to
152.1%. Similarly, the ratio of HBL has declined from 121.58% in the fiscal year
2003/04 to 116.72% in the year 2005/07. It has again rose up to 127.43% in the fourth
year resulting a decline in the year 2007/08 and marking 122.92%.The average ratio of
HBL is 121.92%, which lower than NSBI. The coefficient of variance ratio of HBL is
comparatively higher than NSBI. This indicates that the total interest earned to total
operating income ratio of HBL is highly variable. The ratio of NSBI is stable and
consistent. It is also clear that NSBI has better position regarding the mobilization of
interest bearing assets. However, the magnitude of interest income in total income of
both the banks is high i.e. more than 70%, though the investment has more risk.
Total Interest Paid to Total Deposit Ratio
This ratio measures the percentage of total interest expenses and its interest on fixed
deposits, call deposits, saving deposits and interest on borrowing. A high ratio
indicates higher interest expenses on total deposits and vice versa. This ratio is
computed by dividing total interest paid to total deposit.

Table 4.16
Total Interest Paid to Total Deposit Ratio of HBL and NSBI (%)
Fiscal Year C.V.
Banks Mean S.D.
2003/04 2004/05 2005/06 2006/07 2007/08 %
HBL 2.23 2.27 2.45 2.55 2.59 2.42 0.14 5.97
NSBI 3.56 2.99 3.04 3.60 3.32 3.3 0.25 7.68
(Source: Annual Report of HBL and NSBI from 2003/04 to 2007/08)

Figure 4.16
Total Interest Paid to Total Deposit Ratio of HBL and NSBI
The above table shows the total interest paid to total deposit ratio of HBL and NSBI
from 2003/04 to 2007/08(detail in appendix 14). The figure 4.16 shows the trend of the
ratio over the same fiscal years.
The ratios of HBL show an increasing trend in its ratios whereas the ratios of NSBI are
fluctuating in the whole period. The ratio of HBL has increased from 2.23% in the
fiscal year 2003/04 to 2.59% in the fiscal year 2007/08. In the same manner, the ratio
of NSBI has decreased from 3.56% to 2.99% from the fiscal year 2003/04 to 2004/05.
In the year 2005/06, it has again risen to 3.04% and 3.60% in the year 2006/07. But in
the year 2007/08, it has declined to 3.32%. The average ratio of NSBI is greater than
HBL which means that NSBI has paid higher interest on total deposits than HBL
which shows the position of NSBI is not so good in comparison to HBL. The CV ratio
of HBL is also lower than NSBI which shows the stability of the bank in paying
interest on total deposit.

4.6.4 Analysis of Risk

Risk means variations in actual returns on investment than expected. There is a
positive relationship between risk and return, viz. higher the risk, higher the return and
vice versa. Therefore, a bank has to take high risk, if it expects high return on its
investment. Thus, the banks have to face the challenge posed by the presence of risk in
investment. This ratio examines the degree of risk involved in the banks’ investment
and other financial operations. Through the following ratios, efforts have been made to
measure the banks’ level of risk during the period of study.

Credit Risk Ratio

Credit risk ratio helps to check the profitability of loan non-payment or the possibility
of loan to go into default or it is also said that is measures the risk behind making
investment or granting loan. The ratio is calculated by dividing the total loans and
advances by the total assets of the bank and is expressed in percentage.

Table 4.17
Credit Risk Ratio of HBL and NSBI (%)
 Fiscal Year C.V.
Banks Mean S.D.
2003/04 2004/05 2005/06 2006/07 2007/08 %
HBL 50.21 46.59 51.54 51.85 54.75 50.99 2.65 5.20
NSBI 60.94 64.27 58.51 68.05 73.97 65.15 5.46 8.38
(Source: Annual Report of HBL and NSBI from 2003/04 to 2007/08)
 Figure 4.17
Credit Risk Ratio of HBL and NSBI

The above table shows the credit risk ratio of HBL and NSBI of five fiscal years
starting from 2003/04 to 2007/08(detail in appendix 15) and the figure shows the trend
of the ratio over the mentioned years.

The above table exhibits the ratio of HBL that has fluctuated in the first three fiscal
years and increased in the last two fiscal years ranging from 50.21% in the first year to
54.75% in the last fiscal year over the study period. The ratio of NSBI is fluctuating
over the five fiscal years ranging from 60.94% in the first fiscal year to 73.97% in the
fiscal year 2007/08 over the study period. The mean ratio of NSBI is higher than HBL
which means that NSBI has higher credit risk in comparison to HBL. The coefficient
of variance ratio of NSBI is also higher than that of HBL which indicates towards the
unstable credit policy of NSBI as compared to HBL.

Capital Risk Ratio

Capital risk ratio measures banks ability to attract deposits and inter bank funds. It also
determines the level of profit a bank can earn it. Bank chooses to take high capital risk
and it will not be higher and vice versa. Therefore, a bank must maintain adequate
capital in relation to the nature and condition of its assets, its deposits liabilities and
other corporate responsibilities.
Table 4.18
Capital Risk Ratio of HBL and NSBI (%)
Fiscal Year C.V.
Banks Mean S.D.
%
2003/04 2004/05 2005/06 2006/07 2007/08
HBL 11.87 8.41 8.87 9.81 9.81 9.75 1.19 12.18
NSBI 9.56 8.76 10.73 10.7 10.12 9.97 0.74 7.47
(Source: Annual Report of HBL and NSBI from 2003/04 to 2007/08)

Figure 4.18
Capital Risk Ratio of HBL and NSBI

The above table and figure show the capital risk ratio of HBL and NSBI of five fiscal
years starting from 2003/04 to 2007/08(detail in appendix 16).

The capital risk ratio of HBL is 11.87% in the fiscal year 2003/04. It has decreased in
the FY 2004/05 to 8.41% and again increased to 8.87% in FY 2005/06. The capital risk
ratio in the year 2006/07 and 2007/08 are consistent marking up to 9.81%. Regarding
the capital risk ratio of NSBI, the ratio has decreased in the fiscal year 2004/05
to8.76% from the FY 2003/04 of 9.56%. In the third and fourth year, the ratio is more
or less consistent and has decreased in the year 2007/08 reaching 10.12%.

On the average, the capital risk ratio of NSBI is slightly higher than that of HBL which
indicates that HBL has slightly higher capital risks than NSBI. The coefficient of
variance of ratio of HBL is higher than that of NSBI which means the degree of capital
risk in HBL is riskier than NSBI.

4.6.5 Growth Analysis

A firm seeks not only to survive by generating profits, but also to achieve growth. A
growing firm is, therefore, regarded as a successful firm in the end. Therefore, in order
to assess the success or potential for achieving success in the end, it is essential to
analyze the growth that the bank has achieved in terms of deposits it has received,
loans and advances it has provided, investments it has made, and its profitability. Here
those growth ratios are analyzed and interpreted which are directly related to the fund
mobilization and Investment management of a commercial bank. The high ratio
generally indicated better performance of a bank and vice-versa.

Growth Ratio of Total Deposit

The bank collects its deposit from public. The growth ratio of deposits represent
whether the banks had been able to increase its deposit collection or not.

Table 4.19
Growth Ratio of Total Deposit of HBL and NSBI in Rupees
(Rs. In ‘000’)
Fiscal Year Growth Ratio
Banks
(%)
2003/04 2004/05 2005/06 2006/07 2007/08
HBL 22010333 24814012 26490852 30048418 31842789 9.67
NSBI 7198327 8654774 11002041 11445286 13715395 17.49
(Source: Annual Report of HBL and NSBI from 2003/04 to 2007/08)
 Table 4.20
Growth Ratio of Total Deposit of HBL and NSBI in Percentage
Fiscal Year
Banks Growth Ratio
2003/04 2004/05 2005/06 2006/07 2007/08
HBL 2.16 1.13 1.07 1.13 1.06 9.67
NSBI 5.96 1.20 1.27 1.04 1.19 17.49
(Note: The ratio for the year 2003/04 has been driven by taking in the figures for
the year 2002/03)
Figure4.19
Total Deposits

Growth ratio of total deposit of HBL and NSBI from fiscal year 2003/04 to 2007/08 is
presented in the above tables. Similarly, a graph is also prepared to perceive the growth
rate of total deposits of both banks.

The growth ratio of HBL in the five years is 9.67% which is lower than the growth rate
of NSBI i.e. 17.49%. It indicates that the performance of NSBI to collect deposit is
much better year by year in comparison to HBL. As per the above chart, the growth
ratio of both HBL and NSBI is in increasing trend; however, the growth ratio of HBL
is lesser than NSBI.
Growth Ratio of Loan and Advance
Loan and Advances growth ratio shows whether the banks are increasing its loan and
advances or decreasing.
Table 4.21
Growth Ratio of Loan and Advance of HBL and NSBI in Rupees
(Rs. In ‘000’)
Fiscal Year
Banks Growth Ratio (%)
2003/04 2004/05 2005/06 2006/07 2007/08
HBL 12919631 13451168 15761977 17793724 20179613 11.79
NSBI 5143662 6213878 7626736 9460451 12713698 25.39
(Source: Annual Report of HBL and NSBI from 2003/04 to 2007/08)

Table 4.22
Growth Ratio of Loan and Advance of HBL and NSBI in Percentage
Fiscal Year
Banks Growth Ratio
2003/04 2004/05 2005/06 2006/07 2007/08
HBL 1.19 1.04 1.17 1.13 1.13 11.79
NSBI 1.15 1.21 1.23 1.24 1.34 25.39
(Note: The ratio for the year 2003/04 has been driven by taking in the figures for
the year 2002/03)
Figure 4.20
Loan and Advance
In the above table, growth ratio of loan and advances of HBL and NSBI is presented
from fiscal year 2003/04 to 2007/08. Similarly, a graph is also prepared to observe the
growth rate of loan and advances of both banks.

The above tables figure out that the growth ratio of loan and an advance of HBL is
lower than NSBI. The growth ratio of HBL is 11.79% whereas that of NSBI is 25.39%.
This depicts that the state of HBL to grant loan and advances is not as good as NSBI;
however, the trend is increasing for both the banks.

Growth Ratio of Total Investment

This ratio shows whether the sample bank increased the Total Investment or decreased
the Investment.

Table 4.23
Growth Ratio of Total Investments of HBL and NSBI in Rupees
(Rs. In ‘000’)
Fiscal Year
Banks Growth Ratio (%)
2003/04 2004/05 2005/06 2006/07 2007/08
HBL 9292103 11692342 10889031 11822985 13340177 9.46
NSBI 1907520 2607680 3610775 2659453 3088887 12.81
(Source: Annual Report of HBL and NSBI from 2003/04 to 2007/08)
 Table 4.24
Growth Ratio of Total Investments of HBL and NSBI in Percentage
Fiscal Year
Banks Growth Ratio
2003/04 2004/05 2005/06 2006/07 2007/08
HBL 0.91 1.26 0.93 1.09 1.13 9.46
NSBI 1.58 1.37 1.38 0.74 1.16 12.81
(Note: The ratio for the year 2003/04 has been driven by taking in the figures for
the year 2002/03)
 Figure 4.21
Total Investments

In the above table, growth ratio of total investments of HBL and NSBI is presented
from fiscal year 2003/04 to 2007/08. Similarly, a graph is also prepared to perceive the
growth rate of total investments of both banks.

The above tables show that the growth ratio of total investments of NSBI is higher than
that of HBL. The ratio of HBL is 9.46% whereas that of NSBI is 12.81%. The growth
ratio of both banks is fluctuating as it is clearly shown in the above figure. Both banks
should try to improve the growth rate in an increasing trend in order to increase the net
profit.
Growth Ratio of Net Profit
This ratio shows whether the sample bank increased or decreased the net profit over
the period of study.
Table 4.25
Growth Ratio of Net Profit of HBL and NSBI in Rupees
(Rs. In ‘000’)
Fiscal Year
Banks Growth Ratio (%)
2003/04 2004/05 2005/06 2006/07 2007/08
HBL 263052 308277 457458 491822 635869 24.69
NSBI 60851 57386 117001 379049 382837 68.37
(Source: Annual Report of HBL and NSBI from 2003/04 to 2007/08)

Table 4.26
Growth Ratio of Net Profit of HBL and NSBI in Percentage
Fiscal Year
Banks Growth Ratio
2003/04 2004/05 2005/06 2006/07 2007/08
HBL 1.24 1.17 1.48 1.08 1.29 24.69
NSBI 1.25 0.94 2.04 3.24 1.01 68.37
(Note: The ratio for the year 2003/04 has been driven by taking in the figures for
the year 2002/03)
Figure 4.22
Net Profit
Growth ratio of Net profit of HBL and NSBI from fiscal year 2003/04 to 2007/08 is
presented in the above tables. Similarly, a graph is also prepared to perceive the growth
rate of net profit of both banks.

The above tables figure out that the growth ratio of net profit of HBL is lower than
NSBI. The growth ratio of HBL is 24.69% whereas that of NSBI is 68.37%. The
growth ratio of HBL is not satisfactory even if the rate is increasing. NSBI has a better
position than HBL comparing the growth ratio of net profit. This NSBI’s state of
increasing net profit is far better than that of HBL over the study period.

4.7 Statistical Analysis

Statistical tools help to find out the trend of financial position of the bank and to
analyze the relationship between variables that helps banks to make appropriate
investment policy regarding to profit maximization and deposit collection, fund
mobilization through providing loan and advances or investment on other company. In
this study, statistical tools such as coefficient of correlation between different variable
and also hypothesis test have been used for analyzing and interpreting the financial
data.

4.7.1 Correlation Analysis

Correlation analysis means the relationship between two variables where the changes
in known as coordination. The degree of relationship between the variables under
consideration is measured through the correlation analysis. It is the technique used in
measuring the closeness of the relationship between the variables. To measure the
correlation between the total deposits and total investments, co-efficient of
determination is calculated in the study.

Correlation between Total Deposits and Total Investments

The co-efficient between total deposit and total investment measures the degree of
relation between the respective variables. In the correlation analysis, total deposit is
independent variable while the total investment is a dependent variable.

Table 4.27
Correlation between Total deposit and Total Investment of HBL and NSBI
Banks Correlation (r) r2 P.E (r) 6 P.E. Relationship
HBL 0.8901 0.7923 0.06264 0.3759 Insignificant
NSBI 0.7018 0.4925 0.1531 0.9186 Insignificant

Correlation between total deposits and total investment of HBL and NSBI are
presented in the above table. (Details in appendix 17)

In the above table, we can see that the correlation coefficient between total deposits
and total investment of HBI and NSBI are 0.8901 and 0.7018 respectively. So, there is
positively perfect correlation between total deposit and total investment of both the
banks. In order to measure the degree of change on dependent variable (investment)
due to a change on independent variable (deposit), value of co-efficient of
determination is calculated. The value of co-efficient of determination of HBL is
0.9180 which means 91.80% Investment is depend on deposit and 8.20% investment
decision depends on other variables. Similarly, the value of co-efficient of
determination of NSBI is 0.7164 which means 71.64% Investment is depend on
deposit and rest investment decision depends on other variables.
Similarly, probable error (P.E.) is 0.06264 and 0.1531 of HBL and NSBI respectively
and 6 P.E. is 0.3759 and 0.9186 of HBL and NSBI respectively. Since r is less than 6
P.E, the relationship between these two variables is insignificant.

Correlation between Loan and Advances and Net Profit

The coefficient of correlation between loan and advances and net profit measures the
degree of relationship between these two variables. In this analysis, loan and advances
is independent variable (X) and net profit is dependent variable(Y).
 Table 4.28
Correlation between Loan and Advances and Net Profit of HBL and NSBI
Banks Correlation (r) r2 P.E (r) 6 P.E. Relationship
HBL 0.9864 0.9864 0.0082 0.04903 Insignificant
NSBI 0.9051 0.8192 0.05454 0.3272 Insignificant

In the above table, correlation between loan and advances and net profit of HBL and
NSBI are presented. (Details in appendix 18)

In the above table, we can see that the correlation coefficient between loan and
advances and net profit of HBL and NSBI are 0.9864 and 0.9051 respectively. So,
there is positively perfect correlation between loan and advances and net profit of both
the banks. In order to measure the degree of change on dependent variable (net profit)
due to a change on independent variable (loan and advances), value of co-efficient of
determination is calculated. The value of co-efficient of determination of HBL is
0.9864 which means 91.64% net profit is depend on loan and advances and 8.36%
depends on other variables. Similarly, the value of co-efficient of determination of
NSBI is 0.8192 which means 81.92% net profit is depend on loan and advances and
18.08% depends on other variables.

Similarly, probable error (P.E.) is 0.0082 and 0.05454 of HBL and NSBI respectively
and 6 P.E. is 0.04903 and 0.3272 of HBL and NSBI respectively. Since r is less than 6
P.E, the relationship between these two variables is insignificant.

Correlation between Total Deposits and Net Profit

The coefficient of correlation between total deposits and net profit measures the degree
of relationship between these two variables. In this analysis, a total deposit is
independent variable (X) and net profit is dependent variable(Y).
 Table 4.29
Correlation between Total Deposits and Net Profit of HBL and NSBI
Banks Correlation (r) r2 P.E (r) 6 P.E. Relationship
HBL 0.9581 0.9180 0.0247 0.1485 Insignificant
NSBI 0.8464 0.7164 0.8555 0.5133 Significant

In the above table, correlation between total deposits and net profit of HBL and NSBI
are presented (Details in appendix 19).

In the above table, we can see that the correlation coefficient between total deposit and
net profit of HBL and NSBI are 0.9581 and 0.8464 respectively. So, there is positive
correlation between total deposits and net profit of both the banks. In order to measure
the degree of change on dependent variable (net profit) due to a change on independent
variable (total deposits), value of co-efficient of determination is calculated. On the
basis of co-efficient of determination, it is found that when there is a change in total
deposits, it brings 91.80% change in net profit of HBL due to total deposit and rest due
to other variables. Similarly, when there is a change in total deposits, it brings 71.64%
change in net profit of NSBI due to total deposit and 28.36% due to other variables.

Similarly, probable error (P.E.) is 0.0247 and 0.8555 of HBL and NSBI respectively
and 6 P.E. is 0.1485 and 0.5133 of HBL and NSBI respectively. Since r of HBL is less
than 6 P.E, the relationship between these two variables is insignificant while the
relationship between the two variables of NSBI is significant as the r is greater than 6
P.E.

Correlation between Total Investments and Net Profit

The coefficient of correlation between total investments and net profit measures the
degree of relationship between these two variables. In this analysis, total investment is
independent variable (X) and net profit is dependent variable(Y).
 Table 4.30
Correlation between Total Investments and Net Profit of HBL and NSBI
Banks Correlation (r) r2 P.E (r) 6 P.E. Relationship
HBL 0.8227 0.6769 0.0975 0.5848 Insignificant
NSBI 0.2644 0.0699 0.2806 1.6833 Insignificant

Correlation between total investment and net profit of HBL and NSBI are presented in
the above table. (Details in appendix 20)

In the above table, we can see that the correlation coefficient between total investment
and net profit of HBL and NSBI are 0.8227 and 0.2644 respectively. So, there is
positive correlation between total investment and net profit of both the banks. In order
to measure the degree of change on dependent variable (net profit) due to a change on
independent variable (investment), value of co-efficient of determination is calculated.
On the basis of co-efficient of determination, it is found that when there is a change in
total investment, it brings 67.69% change in net profit of HBL due to total investment
an.32.31% due to other variables. Similarly, it is found that when there is a change in
total investment, it brings 6.99% change in net profit of NSBI due to total investment
and rest due to other variables.

Similarly, probable error (P.E.) is 0.0975 and 0.2806 of HBL and NSBI respectively
and 6 P.E. is 0.5848 and 1.6833 of HBL and NSBI respectively. Since r is less than 6
P.E, the relationship between these two variables is insignificant.

Correlation between Total Investments and Loan and Advance

The coefficient of correlation between total investments and loan and advance
measures the degree of relationship between these two variables. In this analysis, total
investment is independent variable (X) and loan and advance is dependent variable(Y).
 Table 4.31
Correlation between Total Investments and Loan and Advance of HBL and NSBI
Banks Correlation (r) r2 P.E (r) 6 P.E. Relationship
HBL 0.8229 0.6772 0.0974 0.5843 Insignificant
NSBI 0.5017 0.2527 0.2257 1.3544 Insignificant

Correlation between total investment and loan and advance of HBL and NSBI are
presented in the above table. (Details in appendix 20)

In the above table, we can see that the correlation coefficient between total investment
and loan and advance of HBL and NSBI are 0.8229 and 0.5017 respectively. So, there
is positive correlation between total investment and loan and advance of both the
banks. In order to measure the degree of change on dependent variable (loan and
advance) due to a change on independent variable (investment), value of co-efficient of
determination is calculated. On the basis of co-efficient of determination, it is found
that when there is a change in total investment, it brings 67.72% change in loan and
advance of HBL due to total investment and.32.28% due to other variables. Similarly,
it is found that when there is a change in total investment, it brings 50.17% change in
loan and advance of NSBI due to total investment and rest due to other variables.

Similarly, probable error (P.E.) is 0.0974 and 0.2257 of HBL and NSBI respectively
and 6 P.E. is 0.5843 and 1.3544 of HBL and NSBI respectively. Since r is less than 6
P.E, the relationship between these two variables is insignificant.

Correlation between Total Deposits and Loan and Advance

The coefficient of correlation between total deposits and loan and advance measures
the degree of relationship between these two variables. In this analysis, a total deposit
is independent variable (X) and loan and advance is dependent variable(Y).
 Table 4.32
Correlation between Total Deposits and Loan and Advance of HBL and NSBI
Banks Correlation (r) r2 P.E (r) 6 P.E. Relationship
HBL 0.9748 0.9502 0.015 0.0901 Insignificant
NSBI 0.9645 0.9303 0.021 0.1261 Insignificant

In the above table, correlation between total deposits and loan and advance of HBL
and NSBI are presented (Details in appendix 20).

In the above table, we can see that the correlation coefficient between total deposit and
loan and advance of HBL and NSBI are 0.9748 and 0.9645 respectively. So, there is
positive correlation between total deposits and loan and advance of both the banks. In
order to measure the degree of change on dependent variable (loan and advance) due to
a change on independent variable (total deposits), value of co-efficient of
determination is calculated. On the basis of co-efficient of determination, it is found
that when there is a change in total deposits, it brings 97.48% change in net profit of
HBL due to total deposit and rest due to other variables. Similarly, when there is a
change in total deposits, it brings 96.45% change in net profit of NSBI due to total
deposit and 3.55% due to other variables.

Similarly, probable error (P.E.) is 0.015 and 0.021 of HBL and NSBI respectively and
6 P.E. is 0.0901 and 0.1261 of HBL and NSBI respectively. Since r of both banks is
less than 6 P.E, the relationship between these two variables of both banks is
insignificant.

4.3.2 Trend Analysis

In this section, an attempt has been made to analyze and interpret the trend of deposits,
loans and advances, investments and net profits of HBL and NSBI to forecast them for
next five years period. The following trend value analysis has been used in the study.

Trend Analysis of Total Deposits

Under this topic an attempt is made to analyze the trend of deposits of HBL and NSBI
and forecast the trend for next 5 years. The following table shows the trend values of
total deposits of HBL and NSBI for five years from FY 2003/04 to 2007/08 and
forecasted the same till FY 2012/2013.
Table 4.33
Trend Values of Total Deposits of HBL and NSBI
(Rs. in million)
Fiscal Year Trend Values HBL Trend Values NSBI
2003/04 22010 7198
2004/05 24814 8655
2005/06 26491 11002
2006/07 30048 11445
2007/08 31843 13715
2008/09 34511.2 15150.2
2009/10 37001.2 16732.6
2010/11 39491.2 18315
2011/12 41981.2 19897.4
2012/13 44471.2 21479.8

When analyzing the above table, it is clear that the total deposits of HBL and NSBI are
in increasing trend. Other things remaining constant, the total deposits of HBL and
NSBI in FY 2012/2013 will be Rs. 44471.2and Rs. 21479.8 respectively. From the
above trend analysis, it is found that the deposits collection position of HBL is better
than NSBI (Details in Appendix 19).
Figure 4.23
Trend values of Total Deposits of HBL and NSBI
Trend Analysis of Total Investments
Under this topic an attempt is made to analyze the trend of investments of HBL and
NSBI and forecast the trend for next 5 years. The following table shows the trend
values of total investments of HBL and NSBI for five years from FY 2003/04 to
2007/08 and forecasted the same till FY 2012/2013.
Table 4.34
Trend Values of Total Investments of HBL and NSBI
(Rs. in million)
Fiscal Year Trend Values HBL Trend Values NSBI
2003/04 9292 1908
2004/05 11692 2608
2005/06 10889 3611
2006/07 11823 2659
2007/08 13340 3089
2008/09 13875.3 3498.9
2009/10 14698 3740.2
2010/11 15520.7 3981.5
2011/12 16343.4 4222.8
2012/13 17166.1 4464.1

When analyzing the above table, it is clear that the total investments of both HBL and
NSBI are in fluctuating trend. Other things remaining constant, the total investments of
HBL and NSBI in FY 2012/2013 will be Rs. 17166.1and Rs. 4464.1 respectively.
From the above trend analysis, it is found that the total investments position of HBL is
better than NSBI. (See Details in Appendix 19)
 Figure 4.24
Trend values of Total Investments of HBL and NSBI

Trend Analysis of Loan and Advances

Under this topic an attempt is made to analyze the trend of loan and advances of HBL
and NSBI and forecast the trend for next 5 years. The following table shows the trend
values of loan and advances of HBL and NSBI for five years from FY 2003/04 to
2007/08 and forecasted the same till FY 2012/2013.
Table 4.35
Trend Values of Total Investments of HBL and NSBI
(Rs. in million)
Fiscal Year Trend Values HBL Trend Values NSBI
2003/04 12920 5144
2004/05 13451 6214
2005/06 15762 7627
2006/07 17794 9460
2007/08 20180 12714
2008/09 21680.3 13747.6
2009/10 23566.6 15586.2
2010/11 25452.9 17424.8
2011/12 27339.2 19263.4
2012/13 29225.5 21102
When analyzing the above table, it is clear that the loan and advances of both HBL and
NSBI are in increasing trend. Other things remaining constant, the loan and advances
of HBL and NSBI in FY 2012/2013 will be Rs. 29225.5and Rs. 21102 respectively.
From the above trend analysis, it is found of HBL has mobilized loan and advances
well than NSBI. (See Details in Appendix 19)
Figure 4.25
Trend values of Loan and Advances of HBL and NSBI

Trend Analysis of Net Profit

Under this topic an attempt is made to analyze the trend of net profit of HBL and NSBI
and forecast the trend for next 5 years. The following table shows the trend values of
net profit of HBL and NSBI for five years from FY 2003/04 to 2007/08 and forecasted
the same till FY 2012/2013.
 Table 4.36
Trend Values of Net Profit of HBL and NSBI
(Rs. in million)
Fiscal Year Trend Values HBL Trend Values NSBI
2003/04 263 61
2004/05 308 57
2005/06 457 117
2006/07 492 379
2007/08 636 383
2008/09 710.2 489.2
2009/10 803.2 585.8
2010/11 896.2 682.4
2011/12 989.2 779
2012/13 1082.2 875.6

When analyzing the above table, it is clear that the net profits of both HBL and NSBI
are in increasing trend. Other things remaining constant, the net profit of HBL and
NSBI in FY 2012/2013 will be Rs. 1082.2 and Rs. 875.6 respectively. From the above
trend analysis, it is found of HBL is in better position in terms of net profit than NSBI.
(See Details in Appendix 19)
Figure 4.26
Trend values of Net Profit of HBL and NSBI
4.8 Major Findings
The major findings of this study are as summarized as follows:
 Investment of HBL and NSBI reveals that HBL has invested its major portion in
other investments such as foreign banks, local banks, etc whereas NSBI has
invested maximum percentage in HMG securities. Investment of HBL is lower
than NSBI in shares, debentures and bonds. Both the banks have not invested in
Nepal Rastra Bank Bonds over the study period.
 The mean currents ratio of HBL is higher than NSBI. It means that HBL has
maintained higher liquidity whereas NSBI has maintained lower liquidity and
higher risks in comparison to HBL.
 NSBI has maintained a higher cash reserve ratio than of HBL. NSBI possesses
higher ability to meet its deposits than that of HBL The co-efficient of variance of
NSBI is lower than that of HBL which shows that the ratios of NSBI are more
stable and constant than that of HBL.
 The average ratio of cash and bank balance to current assets ratio of NSBI is
greater than HBL which indicates that NSBI is in a better position to maintain its
cash andbank balance to meet its daily requirements to make the payments on
customers deposit withdrawals.
 The mean ratio of investment on government securities to current assets of HBL is
lower than NSBI and the variability of NSBI is higher than HBL. It states the poor
position of HBL in investment on government securities but more consistent in its
investment than NSBI.
 The mean ratio of loan and advances to total deposit of NSBI is higher than HBL
but the consistency in the ratio is lower than that of HBL. It concludes that NSBI
has strong position regarding the mobilization of total deposit on loan and advance
than HBL.
 The ratio of investment to total deposit of HBL is higher than that of NSBI
whereas the ratios of NSBI are more variable than HBL. This shows that HBL has
invested higher amount of the total deposits in securities and shares than NSBI.
 The mean ratio of OBS operation to loan and advances of NSBI is lower as well as
highly variable than that of HBL.HBL is more consistent in maintaining the ratios
over the study period.
 NSBI has maintained a higher ratio of loan loss in comparison to HBL. It can be
concluded that the performance of NSBI in terms of recovery of loan is weaker in
comparison to HBL due to higher loan loss ratio.
 The mean ratio of return on loan and advance of HBL is higher than that of NSBI
and the return on loan and advances of HBL are more consistent than NSBI.
 The return on total assets ratio of NSBI is higher than HBL on an average, which
indicates that the position of bank is better than HBL; however, HBL has been
able to maintain a stable and consistent return on total assets in comparison to
NSBI.
 The average ratio of return on equity of HBL is higher than that of NSBI while the
coefficient of variance of ratio of NSBI is higher than that of HBL. HBL has
higher return ratio which indicates that the bank has efficiently utilized its equity
capital and is more consistent in the utilization of its equity capital than NSBI.
 The mean ratio of total interest earned to total outside assets of NSBI is higher
than that of HBL which depicts that NSBI has better position with respect to the
income earned from total outside assets. But the condition of HBL is more stable
than NSBI.
 The ratio of total interest earned to total operating income of HBL is lower as
well as highly variable than NSBI. It is clear that NSBI has better and stable
position regarding the mobilization of interest bearing assets than HBL. However,
the magnitude of interest income in total income of both the banks is high i.e.
more than 70%, though the investment has more risk than fee based activities.
 The average ratio of total interest paid to total deposit ratio of NSBI is greater than
HBL which means that NSBI has paid higher interest on total deposits than HBL.
This reveals that the position of NSBI is not so good in comparison to HBL but
there is stability of the bank in paying interest on total deposit.
 The mean credit risk ratio and the CV ratio of NSBI is higher than HBL which
means that NSBI has higher credit risk in comparison to HBL as well as unstable
credit policy in comparison to HBL.
 The average capital risk ratio of NSBI is slightly higher than that of HBL which
indicates that HBL has slightly higher capital risks than NSBI. The degree of
capital risk in HBL is also slightly riskier than NSBI.
 The growth ratio of NSBI is higher than that of HBL. The growth ratio of total
deposits of HBL is 9.67% whereas of NSBI is 17.49% which indicates that the
performance of NSBI to collect deposit is much better year by year in comparison
to HBL.
 The growth ratio of loan and an advance of HBL is lower than NSBI. The growth
ratio of HBL is 11.79% whereas that of NSBI is 25.39%. This depicts that the
state of HBL to grant loan and advances is not as good as NSBI; however, analysis
shows that the trend is increasing for both the banks.
 The growth ratio of total investments of NSBI is higher than that of HBL. The
ratio of HBL is 9.46% whereas that of NSBI is 12.81%. The growth ratio of both
banks is fluctuating.
 The growth ratio of net profit of HBL is lower than NSBI. The growth ratio of
HBL is 24.69% whereas that of NSBI is 68.37%. NSBI has a better position of
increasing net profit and much satisfying growth ratio than HBL over the study
period.
 Coefficient of correlation analysis between total deposits and total investments of
HBL and NSBI shows that there is positively perfect correlation between total
deposit and total investment of both HBL and NSBI. When there is a change in
total deposit, it brings 79.23% change in total investment of HBL and 49.25%
change in total investment of NSBI. The relationship between these two variables
is insignificant.
 Coefficient of correlation analysis between HBL and NSBI shows that there is
positively perfect correlation between loan and advances and net profit of both the
banks. When there is a change in loan and advances, it brings 97.29% change in
net profit of HBL and 81.92% change in net profit of NSBI. In this analysis also, r
 is less than 6 P.E which shows that the relationship between these two variables is
insignificant.
 Coefficient of correlation analysis between HBL and NSBI shows that there is
positive correlation between total deposits and net profit of both the banks. When
there is a change in total deposits, it brings 91.80% change in net profit of HBL
and 71.64% change in net profit of NSBI. The relationship between these two
variables of HBL is insignificant while the relationship between the two variables
of NSBI is significant as the r is greater than 6 P.E.
 Coefficient of correlation analysis between HBL and NSBI shows that there is
positive correlation between total investment and net profit of both the banks. On
the basis of co-efficient of determination, it is found that when there is a change in
total investment, it brings 67.69% change in net profit of HBL and 6.99% change
in net profit of NSBI. The relationship between these two variables is
insignificant.
 Coefficient of correlation analysis between HBL and NSBI shows that there is
positive correlation between total investment and loan and advance of both the
banks. On the basis of co-efficient of determination, it is found that when there is a
change in total investment, it brings 67.72% change in loan and advance of HBL
and 50.17% change in loan and advance of NSBI. The relationship between these
two variables is insignificant.
 Coefficient of correlation analysis between HBL and NSBI shows that there is
positive correlation between total deposit and loan and advance of both the banks.
On the basis of co-efficient of determination, it is found that when there is a
change in total deposit, it brings 97.48% change in net profit of HBL and 96.45%
change in net profit of NSBI. The relationship between these two variables is
insignificant.
 From the trend analysis, it is clear that the total deposits of HBL and NSBI are in
increasing trend, however, it is found that the deposits collection position of HBL
is better than NSBI.
 The trend of total investments of both HBL and NSBI are in fluctuating trend.
From the trend analysis, it is found that the total investments position of HBL is
better than NSBI.
 The loan and advances of both HBL and NSBI are in increasing trend. From the
trend analysis, it is found of HBL has mobilized loan and advances well than
NSBI.
 The trend of net profits of both HBL and NSBI are increasing, however, it is found
that HBL is in better position in terms of net profit than NSBI.
 CHAPTER - V
SUMMARY, CONCLUSION AND RECOMMENDATIONS

This chapter presents the summary of the study, conclusions derived from the analysis
of data and their interpretation and recommendations offered for the improvement of
the investment policies of the banks under study. Thus, the chapter is divided into three
sections. The first section of this chapter focuses on summarizing the whole study; the
second section draws conclusions from the analysis of data and interpretation of the
results thereof; and the third section offers recommendations for improvement of the
investment policy of the concerned bank.

5.1 Summary
A sound investment policy is very essential in a nation’s economy for economical as
well as financial growth of a country Commercial banks play an important role for the
economic development of the country as they provide finance for the development of
industry, trade and business by investing the saving collected as deposits from public.
They render their various services to the customers facilitating their economic and their
social life. They are the most important ingredients for integrated and speedy
development of a country. So, nowadays-financial institutions are viewed as catalyst in
the process of the economic growth and effective mobilization of domestic resources.
Investment operation of commercial banks is a risky affair. It is the most important
factor for the shareholders and bank management. For this, commercial banks have to
pay due consideration while formulating their investment policy. A healthy
development of any commercial bank depends upon its investment policy. The word
investment conceptualized the investment of income, saving or other collected fund. It
is a well known fact that an investment is only possible where there is adequate saving.
If all the incomes and saving are consumed to the problem of hand and mouth and to
other basic needs, then there is no existence of investment. So both saving and
investment are interrelated. It is concerned with the management of an investor's
wealth, which is the sum of current income and present values of all future incomes to
be invested come form assets already owned borrowed money and saving or foregoes
consumption by the investors. The main objective of their investment is to secure
financial benefit in future. Anyway the goal of investment is the maximization of
owners' economic welfare.

Although several banks have been established in the country within short period of
time, stable, strong and appropriate investment policy has not been followed by the
commercial banks to sufficient return. They have not been able to utilize their funds
more effectively and productively. Thus, proper utilization of the resources has
become more relevant and current issue for the banks. The directions and guidance
provided by Nepal Rastra Bank mare the major policy statements for the Nepalese
commercial banks. However, a long term and published policy about their operation is
not found even in the joint venture banks. Commercial bank in current year, present a
new picture, a picture of innovation practice of wider horizon and new enterprises.
The most remarkable diversification of banking function is increasing participation in
medium and-long term financial industries and other sector. Therefore, they are not
only financial institutions of finance agriculture and industry and other economic
activities, but are more than financial institution in the sense that they help saving
create deposits and make the subsequent distribution of such accumulated funds. The
primary objective of these joint venture banks is always to earn profit by investing or
granting loan and advances to people associated with trade, business and industry, etc.
That means they are required to mobilize their sources properly to acquire profit. How
well a bank manages its investment has a great deal to do with the economic health of
the country because the bank loans support the growth of new business and trade
empowering the economic activities of the country. The income and profit of the bank
depends upon its lending procedure, lending policy and investment of its fund in
different securities. The greater the credit created by the bank, the higher will be the
profitability. A sound lending and investment policy is not significant for the
promotion of commercial savings of a backward country like Nepal.

The main concentration of the study is to diagnose the investment policy of NSBI and
HBL to suggest measures to improve the investment policy of the banks. An effort has
been made to analyze investment trend, deposit trend, loan and advances and net profit
and their projection of ten years Himalayan Bank and Nepal SBI Bank and also to
identify investment sector of Himalayan Bank and Nepal SBI Bank .Similarly, an
attempt has also been made to evaluate the liquidity, assets management efficiency,
profitability and risk position and growth of Himalayan Bank in comparison to that of
Nepal SBI Bank as well as to study the relationship between investments, deposits,
loan and advances and net profit of the banks.

The study is based on the secondary data from FY 2003/2004 to 2007/2008. The data
required for the analysis are directly obtained from the balance sheet and the P/L
account of the concerned bank’s annual reports. Likewise, various data and
information are collected from the economic journals, periodicals, bulletins, magazines
and other published and unpublished reports and documents as well as the websites of
concerned banks.

Two joint venture banks Himalayan Bank Limited and Nepal SBI Bank have been
taken for the conduction of study among 26 commercials banks. Himalayan Bank was
established in 1993 in joint venture with Habib Bank Limited of Pakistan. This is the
first Joint venture Bank managed by Nepalese Chief Executives. There are 24 branches
of HBL in operation with 14 branches outside the valley and the rest inside the
Kathmandu valley including a Card Center. Nepal SBI Bank Limited was established
in 1993, under the company Act. It is also a foreign joint venture bank and the foreign
partner is State Bank of India, holding the 50% of equity share of Nepal SBI Bank
Limited, is managing the Bank under joint venture and technical services agreement
signed between it and Nepalese promoters. These are 32 branches of Nepal SBI Bank
Limited in operation. Both banks have many common products such as deposit, loan,
remittance, card services, internet banking etc.

Financial as well as statistical tools have been deployed in order to analyze and
interpret the data and information. Under financial analysis, various financial ratios
related to the investment function of commercial banks i.e. liquidity ratio, assets
management ratio, activity ratio, profitability ratio, risk ratio and growth ratio have
been analyzed and interpreted. Under statistical analysis, some relevant tools i.e. mean,
standard deviation, coefficient of correlation, coefficient of determination, trend
analysis have been used for the analysis and interpretation of data. This analysis gives
clear picture of the performance of the bank with regard to its investment operation.

5.2 Conclusion
After study and analysis of given data it is concluded that NSBI has invested maximum
percentage in HMG securities while HBL has invested its major portion in other
investments such as foreign banks, local banks, etc .NSBI started to invest in other
sectors since fiscal year 2005/06.Investment of HBL is lower than NSBI in shares,
debentures and bonds. Both the banks have not invested in Nepal Rastra Bank Bonds
over the study period. Considering liquidity ratios, the mean currents ratio of HBL is
higher than NSBI. Similarly, NSBI has maintained a higher average in cash reserve,
cash and bank balance to current assets and investment on government securities to
current assets. NSBI is in a better position to maintain its cash and bank balance and
investing in government securities while the position of HBL is more consistent in
maintaining the ratios than NSBI.

While analyzing the assets management ratios, it was found that NSBI has strong
position regarding the mobilization of total deposit on loan and advance than HBL.
The mean ratio of OBS operation to loan and advances of NSBI is lower as well as
highly variable than that of HBL It was also found that HBL has invested higher
amount of the total deposits in securities and shares than NSBI while the performance
of NSBI in terms of recovery of loan is weaker in comparison to HBL due to higher
loan loss ratio. The mean ratio of return on loan and advance of HBL is higher than
that of NSBI. The position of NSBI is better than HBL in earning good return on total
assets; however, HBL has been able to maintain a stable and consistent return on total
assets in comparison to NSBI.HBL is efficient and more consistent in the utilization of
its equity capital than NSBI. NSBI has better position with respect to the income
earned from total outside assets and also it has better and stable position regarding the
mobilization of interest bearing assets than HBL but it has paid higher interest on total
deposits than HBL.

When a firm wants to bear risk, the profitability and effectiveness of the firm increase.
As per the analysis of risk ratio, NSBI has higher credit risk as well as unstable credit
policy in comparison to HBL and the degree of capital risk in HBL is also slightly
riskier than NSBI.

From the trend analysis, it is concluded that clear that the trend of total deposits, loan
and advances and net profit of HBL are increasing whereas the trend of total
investments have been fluctuating .Similarly, the trend of total investments of NSBI
has also been fluctuating while the trend of total deposits, loan and advances and net
profit are following an increasing trend. It is also found that the deposits collection
position, total investments position and net profit position of HBL is better than NSBI.
HBL has also mobilized the loan and advances better than NSBI.

From the statistical analysis of financial data of both the banks, it is found that there is
positive correlation between the total deposits and total investments, loan and advances
and net profit, total deposits and net profit, total investment and net profit, total
investment and loan and advance as well as total deposit and loan and advance of both
HBL and NSBI. HBL’s 91.80% investment is dependent on deposit and 8.20%
investment decision depends on other variables and NSBI’s 71.64% investment is
dependent on deposit The relationship between these two variables of both banks is
insignificant. HBL’s 91.64% net profit is depending on loan and advances and 8.36%
depends on other variables. NSBI’s 81.92% net profit is depending on loan and
advances and 18.08% depends on other variables. The relationship between these two
variables of both banks is insignificant. Similarly, when there is a change in total
deposits, it brings 91.80% change in net profit of HBL due to total deposit and rest due
to other variables and when there is a change in total deposits, it brings 71.64% change
in net profit of NSBI due to total deposit and 28.36% due to other variables. The
relationship between these two variables of HBL is insignificant while the relationship
between the two variables of NSBI is significant. HBL’s 67.69% change in net profit is
due to total investment an.32.31% due to other variables and NSBI’s 6.99% change in
net profit of NSBI due to total investment only. The relationship between these two
variables of both banks is insignificant. Likewise, when there is a change in total
investment, it brings 67.72% change in loan and advance of HBL due to total
investment and.32.28% due to other variables. Similarly, it is found that when there is
a change in total investment, it brings 50.17% change in loan and advances of NSBI
due to total investment and rest due to other variables. The relationship between these
two variables of both banks is insignificant. In the same way, HBL’s 97.48% change in
net profit is due to total deposit and rest due to other variables and NSBI’s 96.45%
change in net profit is due to total deposit and 3.55% due to other variables. The
relationship between these two variables of both banks is insignificant.

5.3 Recommendations
On the basis of analysis, findings and conclusion, following recommendations can be
made.
 It is found from the study that HBL is not investing much in HMG securities as
compared to NSBI. Government securities are the safest medium of investment
and are free of risk as well as liquid which can be easily sold in the market.
Therefore, HBL is recommended to draw attention to increase investment in
government securities which helps to utilize funds into income generating assets
as well as minimizes risk and also help to maintain optimal level of liquidity.
 Liquidity position of NSBI is not good as compared to HBL. Hence, the bank is
advised to increase its liquidity position as liquidity position is used to judge the
ability of bank to meet its short-term liabilities that are likely to mature in the short
period.
 It is recommended to HBL to improve the efficiency in utilizing the deposits in
loan and advances for generating the profit. NSBI should try to maintain the
current position.
 Negligence in administering the assets could be the cause of liquidity crisis in the
bank and one of the major reasons for failure. Since the performance of NSBI in
 terms of recovery of loan is weaker in comparison to HBL, it is suggested that the
bank should pay more attention while granting loan and advance.
 Return on equity ratio of NSBI is in fluctuating trend over the study period which
is not a good financial indicator. It indicates that the bank is not properly managed
and hence it should find out the reasons behind it.
 Both banks should try to improve the growth rate of total investments in an
increasing trend in order to increase the net profit.
 In the light of growth competition in the banking sectors, the business of the banks
should be customer oriented. It should focus not only towards big clients but also
towards small clients.
 The banks should involve in different kinds of social and community development
activities. It should make corporate social responsibility its integral objective in
this growing competition among the banks.
 Both banks are recommended to formulate and implement sound and effective
financial and non-financial strategies to minimize their operational expenses to
meet the required level of profitability.
 The banks should fulfill some social obligations by extending their resources to
rural areas and promoting the development of poor and disadvantaged group. In
order to do so, they should open their branches in the remote areas with the
objective of providing cheaper banking services. The minimum amount to open an
account and interest rate for credits should be reduced.
 Both banks should maintain a sound portfolio management to attain maximum
yield with minimum risk.
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Websites
www.hbl.com.np
www.nepalsbi.com.np
www.nrb.org.np
 APPENDICES

Appendix 1
Current Ratio (in times)

HBL
In Rs ‘000’
Fiscal Year Current Assets Current Liabilities Ratio(Times)
2003/04 25430144 23437859 1.09
2004/05 28575521 26302948 1.09
2005/06 30038983 27694215 1.08
2006/07 33740808 31372641 1.08
2007/08 36134968 33662540 1.07

NSBI

In Rs
‘000’
Fiscal Year Current Assets Current Liabilities Ratio(Times)
2003/04 7915610 7515267 1.05
2004/05 9668418 9412675 1.03
2005/06 12718872 12238316 1.04
2006/07 13592594 13116024 1.04
2007/08 16849559 16170336 1.04
 Appendix 2
Cash and Bank Balance to Total Deposit (Cash Reserve Ratio)

HBL
In Rs ‘000’
Fiscal Year Cash and Bank Balance Total Deposit Ratio (%)
2003/04 2001184 22010333 9.09
2004/05 2014471 24814012 8.12
2005/06 1717352 26490852 6.48
2006/07 1757341 30048418 5.85
2007/08 1448143 31842789 4.55

NSBI
In Rs ‘000’
Fiscal Year Cash and Bank Balance Total Deposit Ratio (%)
2003/04 864416 7198327 12.01
2004/05 723744 8654774 8.36
2005/06 1118157 11002041 10.16
2006/07 1122690 11445286 9.81
2007/08 1342960 13715395 9.79
 Appendix 3
Cash and Bank Balance to Current Assets Ratio

HBL
In Rs ‘000’
Fiscal Year Cash and Bank Balance Current Assets Ratio (%)
2003/04 2001184 25430144 7.87
2004/05 2014471 28575521 7.05
2005/06 1717352 30038983 5.72
2006/07 1757341 33740808 5.21
2007/08 1448143 36134968 4.01

NSBI
In Rs ‘000’
Fiscal Year Cash and Bank Balance Current Assets Ratio (%)
2003/04 864416 7915610 10.92
2004/05 723744 9668418 7.49
2005/06 1118157 12718872 8.79
2006/07 1122690 13592594 8.26
2007/08 1342960 16849559 7.97
 Appendix 4
Investment on Government Securities to Current Assets Ratio

HBL
In Rs ‘000’
Fiscal Year Investment on Government Securities Current Assets Ratio (%)
2003/04 3431728 25430144 13.49
2004/05 5469728 28575521 19.14
2005/06 5144312 30038983 17.13
2006/07 6454873 33740808 19.13
2007/08 7471668 36134968 20.68

NSBI
In Rs ‘000’
Fiscal Year Investment on Government Securities Current Assets Ratio (%)
2003/04 1889634 7915610 23.87
2004/05 2588141 9668418 26.77
2005/06 3591773 12718872 28.24
2006/07 2345580 13592594 17.26
2007/08 3035554 16849559 18.02
 Appendix 5
Loan and Advances to Total Deposit Ratio

HBL
In Rs ‘000’
Fiscal Year Loan And Advances Total Deposit Ratio (%)
2003/04 12919631 22010333 58.70
2004/05 13451168 24814012 54.21
2005/06 15761977 26490852 59.50
2006/07 17793724 30048418 59.22
2007/08 20179613 31842789 63.37

NSBI
In Rs ‘000’
Fiscal Year Loan And Advances Total Deposit Ratio (%)
2003/04 5143662 7198327 71.46
2004/05 6213878 8654774 71.80
2005/06 7626736 11002041 69.32
2006/07 9460451 11445286 82.66
2007/08 12713698 13715395 92.70
 Appendix 6
Total Investment to Total Deposit Ratio

HBL
In Rs ‘000’
Fiscal Year Total Investment Total Deposit Ratio (%)
2003/04 9292103 22010333 42.22
2004/05 11692342 24814012 47.12
2005/06 10889031 26490852 41.10
2006/07 11822985 30048418 39.35
2007/08 13340177 31842789 41.89

NSBI
In Rs ‘000’
Fiscal Year Total Investment Total Deposit Ratio (%)
2003/04 1907520 7198327 26.50
2004/05 2607680 8654774 30.13
2005/06 3610775 11002041 32.82
2006/07 2659453 11445286 23.24
2007/08 3088887 13715395 22.52
 Appendix 7
Total OBS Operation to Loan and Advance Ratio

HBL
In Rs ‘000’
Fiscal Year Total OBS Operation Loan and Advance Ratio (%)
2003/04 6229899 12919631 48.22
2004/05 7718747 13451168 57.38
2005/06 6579109 15761977 41.74
2006/07 6853636 17793724 38.52
2007/08 10871940 20179613 53.88

NSBI
In Rs ‘000’
Fiscal Year Total OBS Operation Loan and Advance Ratio (%)
2003/04 843164 5143662 16.39
2004/05 1592669 6213878 25.63
2005/06 1953928 7626736 25.62
2006/07 2817299 9460451 29.78
2007/08 3160602 12713698 24.86
 Appendix 8
Loan Loss Ratio

HBL
In Rs ‘000’
Fiscal Year Loan Loss Provision Loan And Advances Ratio (%)
2003/04 842750 12919631 6.52
2004/05 967761 13451168 7.19
2005/06 1026647 15761977 6.51
2006/07 1119417 17793724 6.29
2007/08 795727 20179613 3.94

NSBI
In Rs ‘000’
Fiscal Year Loan Loss Provision Loan And Advances Ratio (%)
2003/04 388171 5143662 7.55
2004/05 525468 6213878 8.46
2005/06 475090 7626736 6.23
2006/07 614720 9460451 6.50
2007/08 604601 12713698 4.76
 Appendix 9
Return on Loan and Advances Ratio

HBL
In Rs ‘000’
Fiscal Year Net Profit Loan And Advances Ratio (%)
2003/04 263052 12919631 2.04
2004/05 308277 13451168 2.29
2005/06 457458 15761977 2.90
2006/07 491822 17793724 2.76
2007/08 635869 20179613 3.15

NSBI
In Rs ‘000’
Fiscal Year Net Profit Loan And Advances Ratio (%)
2003/04 60851 5143662 1.18
2004/05 57386 6213878 0.92
2005/06 117001 7626736 1.53
2006/07 379049 9460451 4.01
2007/08 382837 12713698 3.01
 Appendix 10
Return on Total Assets Ratio

HBL
In Rs ‘000’
Fiscal Year Net Profit Total Assets Ratio (%)
2003/04 263052 25729787 1.02
2004/05 308277 28871343 1.07
2005/06 457458 30579808 1.50
2006/07 491822 34314868 1.43
2007/08 635869 36858006 1.73

NSBI
In Rs ‘000’
Fiscal Year Net Profit Total Assets Ratio (%)
2003/04 60851 8440405 0.72
2004/05 57386 9668418 0.59
2005/06 117001 13035839 0.90
2006/07 379049 13901201 2.73
2007/08 382837 17187446 2.23
 Appendix 11
Return on Total Equity Ratio

HBL
In Rs ‘000’
Fiscal Year Net Profit Equity Ratio (%)
2003/04 263052 2291928 11.48
2004/05 308277 2568395 12
2005/06 457458 2885593 15.85
2006/07 491822 2942226 16.72
2007/08 635869 3195466 19.90

NSBI
In Rs ‘000’
Fiscal Year Net Profit Equity Ratio (%)
2003/04 60851 626683 9.71
2004/05 57386 688907 8.33
2005/06 117001 971769 12.04
2006/07 379049 1715154 22.10
2007/08 382837 2170278 17.64
 Appendix 12
Total Interest Earned to Total outside Assets Ratio

HBL
In Rs ‘000’
Fiscal Year Total Interest Earned Total Outside Assets Ratio (%)
2003/04 1245895 21243971 5.86
2004/05 1446468 24116861 5.60
2005/06 1626473 25581591 6.36
2006/07 1775583 28820982 6.16
2007/08 1963647 32837697 5.98

NSBI
In Rs ‘000’
Fiscal Year Total Interest Earned Total Outside Assets Ratio (%)
2003/04 493598 7051182 7
2004/05 578372 8821588 6.56
2005/06 708718 11237511 6.31
2006/07 831117 12119904 6.86
2007/08 970513 15202585 6.38
 Appendix 13
Total Interest Earned to Total Operating Income Ratio

HBL
In Rs ‘000’
Fiscal Year Total Interest Earned Total operating income Ratio (%)
2003/04 1245895 1024776 121.58
2004/05 1446468 1195922 120.95
2005/06 1626473 1393535 116.72
2006/07 1775583 1393362 127.43
2007/08 1963647 1597495 122.92

NSBI
In Rs ‘000’
Fiscal Year Total Interest Earned Total operating income Ratio (%)
2003/04 493598 394867 125
2004/05 578372 406142 142.41
2005/06 708718 464899 152.45
2006/07 831117 533511 155.78
2007/08 970513 638059 152.10
 Appendix 14
Total Interest Paid to Total Deposit Ratio

HBL
In Rs ‘000’
Fiscal Year Total Interest Paid Total Deposit Ratio (%)
2003/04 491543 22010333 2.23
2004/05 562964 24814012 2.27
2005/06 648842 26490852 2.45
2006/07 767411 30048418 2.55
2007/08 823745 31842789 2.59

NSBI
In Rs ‘000’
Fiscal Year Total Interest Paid Total Deposit Ratio (%)
2003/04 255919 7198327 3.56
2004/05 258430 8654774 2.99
2005/06 334770 11002041 3.04
2006/07 412262 11445286 3.60
2007/08 454918 13715395 3.32
 Appendix 15
Credit Risk Ratio

HBL
In Rs ‘000’
Fiscal Year Total loan and advances Total Working fund Ratio (%)
2003/04 12919631 25729787 50.21
2004/05 13451168 28871343 46.59
2005/06 15761977 30579808 51.54
2006/07 17793724 34314868 51.85
2007/08 20179613 36858006 54.75

NSBI
In Rs ‘000’
Fiscal Year Total loan and advances Total Working fund Ratio (%)
2003/04 5143662 8440405 60.94
2004/05 6213878 9668418 64.27
2005/06 7626736 13035839 58.51
2006/07 9460451 13901201 68.05
2007/08 12713698 17187446 73.97
 Appendix 16
Capital Risk Ratio

HBL
In Rs ‘000’
Fiscal Year Capital Risk Weighted Assets Ratio (%)
2003/04 2001184 16860638 11.87
2004/05 1541746 18321720 8.41
2005/06 1766176 19918325 8.87
2006/07 2146500 21889713 9.81
2007/08 2512992 25624467 9.81

NSBI
In Rs ‘000’
Fiscal Year Capital Risk Weighted Assets Ratio (%)
2003/04 626637 6551967 9.56
2004/05 689013 7869616 8.76
2005/06 982374 9159271 10.73
2006/07 1163291 10873279 10.70
2007/08 1414645 13975708 10.12
 Appendix 17
Calculation of Correlation between Total Deposit and Total Investment of HBL

X= Total Deposit Y=Total Investment

Rs. In ‘Million’
Fiscal
X Y x2 y2 xy
Years x(X- X ) y(Y- Y )
2003/04 22010 9292 -5031.2 25312973.44 -2115.2 4474071.04 10641994.24
2004/05 24814 11692 -2227.2 4960419.84 284.8 81111.04 -634306.56
2005/06 26491 10889 -550.2 302720.04 -518.2 268531.24 285113.64
2006/07 30048 11823 3006.8 9040846.24 415.8 172889.64 1250227.44
2007/08 31843 13340 4801.8 23057283.24 1932.8 3735715.84 9280919.04
∑X= ∑Y= ∑ x2= ∑ y2= ∑x y=
135206 57036 62674242.8 8732318.8 20823947.8

Here,
X 35206
X = = 27041.2
= 5
N
Y
Y = = 57036
= 11407.2
N
5

We Know,

Correlation (r) =  XY 20823947.8 = 0.8901

2 2 =
X Y 62674242.8 20823947.8
Coefficient of determination = r2 = 0.89012 = 0.7923

Calculation of P.E.

P.E. (r) = 0.6745 x 1  r 1-

= 0.6745 × 0.7923 = 0.06264
2
n 5
6 P.E = 6x 0.06264 = 0.3759
 Appendix 18
Calculation of Correlation between Total Deposit and Total Investment of NSBI

X= Total Deposit Y=Total Investment

Rs. In ‘Million’

Fiscal
X Y x(X- X ) x2 y(Y- Y ) y2 xy
Years

2003/04 7198 1908 -3205 10272025 -867 751689 2778735

2004/05 8655 2608 -1748 3055504 -167 27889 291916
2005/06 11002 3611 599 358801 836 698896 500764
2006/07 11445 2659 1042 1085764 -116 13456 -120872
2007/08 13715 3089 3312 10969344 314 98596 1039968
∑X= ∑Y= ∑ x2= ∑ y2= ∑x y=
52015 13875 25741438 1590526 4490511

Here,
X 52015
X = = 10403
= 5
N

 Y 13875
Y = N = = 2775
5

We Know,

Correlation (r) = 4490511

 XY
2 2 = 25741438  1590526 = 0.7018
X Y

Coefficient of determination= r2 =0.70182 = 0.4925

Calculation of P.E.

P.E. (r) = 0.6745 x 1  r 1-

= 0.6745 × 0.4925 = 0.1531
2
n 5
6 P.E = 6x 0.1531 = 0.9186
 Appendix 19
Calculation of Correlation between Loan and Advances and Net Profit of HBL

X= Loan and advances Y=Net Profit

Rs. In ‘Million’
Fiscal
X Y x2 y2 xy
Years x(X- X ) y(Y- Y )
2003/04 12920 263 -3101.4 9618681.96 -168.2 28291.24 521655.48
2004/05 13451 308 -2570.4 6606956.16 -123.2 15178.24 316673.28
2005/06 15762 457 -259.4 67288.36 25.8 665.64 -6692.52
2006/07 17794 492 1772.6 3142110.76 60.8 3696.64 107774.08
2007/08 20180 636 4158.6 17293953.96 204.8 41943.04 851681.28
∑X= ∑Y= ∑ x2= ∑ y2= ∑x y=
80107 2156 36728991.2 89774.8 1791091.6

Here,
X 80107
X = = 16021.4
= 5
N

 Y 2156
Y = N = = 431.2
5

We Know,

Correlation (r) = 1791091.6

 XY
2 2 = 36728891.2 89774.8 = 0.9864
X Y

Coefficient of determination= r2 =0.98642 = 0.9729

Calculation of P.E.

P.E. (r) = 0.6745 x 1  r 1-

= 0.6745 × 0.9729 = 0.0082
2
n 5
6 P.E = 6x 0.0082 = 0.04903
 Appendix 20
Calculation of Correlation between Loan and Advances and Net Profit of NSBI

X= Loan and advances Y=Net profit

Rs. In ‘Million’
Fiscal
X Y x2 y2 xy
Years x(X- X ) y(Y- Y )
2003/04 5144 61 -3087.8 9534508.84 -138.4 19154.56 427351.52
2004/05 6214 57 -2017.8 4071516.84 -142.4 20277.76 287334.72
2005/06 7627 117 -604.8 365783.04 -82.4 6789.76 49835.52
2006/07 9460 379 1228.2 1508475.24 179.6 32256.16 220584.72
2007/08 12714 383 4482.2 20090116.84 183.6 33708.96 822931.92
∑X= ∑Y= ∑ x2= ∑ y2= ∑x y=
41159 997 35570400.8 112187.2 1808038.4

Here,
X 41159
X = = 8231.8
= 5
N
Y 997
Y = = = 199.4
N 5
We Know,

 XY 1808038.4
Correlation (r) = 2 =
= 0.9051
2
X Y 35570400.8  112187.2

Coefficient of determination= r2 =0.90512 = 0.8192

Calculation of P.E.

P.E. (r) = 0.6745 x

1  r 1-
= 0.6745 × 0.8192 = 0.05454
2

n 5
6 P.E = 6x 0.05454 = 0.3272

Correlation between of total investment and loan and advance and total deposits and
loan and advance are also calculated according to the above formula and fed in the
corresponding tables.
 Appendix 21
Growth Ratios
Sample Calculation of Growth Rate

Growth Ratio of Total Deposit

(Rs. In ‘000’)
Fiscal Year Growth Ratio
Banks
(%)
2003/04 2004/05 2005/06 2006/07 2007/08
HBL 22010333 24814012 26490852 30048418 31842789 9.67
NSBI 7198327 8654774 11002041 11445286 13715395 17.49

Growth can be calculated as follows:

Here,
Dn = Total deposit in nth year
Do = Total deposit in initial year
g = growth rate
n= number of year

Calculation of growth rate of HBL

We have,

Dn = Do (1+g) n
5-1
D2007/2008 = D2003/2004 (1+g)
31842789= 22010333 (1+g) 4
(1+g) 4= 1.4467
1+g = 1.44671/4
1+g = 1.0967
g = 9.67%
Calculation of growth rate of NSBI

We have,
Dn = Do (1+g) n

D2007/2008 = D2003/2004 (1+g) 5-1

13715395= 7198327 (1+g) 4
(1+g) 4= 1.9054
1+g = 1.90541/4
1+g = 1.1749
g = 17.49%

Growth rate of total investment, total loans and advances and total net profit are
also calculated according to the above formula and fed in the corresponding
tables.
 Appendix 22
Trend Analysis
Sample calculation of Trend Analysis
Trend Analysis of Total Deposits of
HBL (Rs. In Million)
Fiscal years Total Deposit (y) x =t-2006 x2 xy yc=a+bx
2003/04 22010 -2 4 -44020 22061.2
2004/05 24814 -1 1 -24814 24551.2
2005/06 26491 0 0 0 27041.2
2006/07 30048 1 1 30048 29531.2
2007/08 31843 2 4 63686 32021.2
∑y=135206 ∑ x2= 10 ∑xy=24900

N=5

 y = 135206 =27041.2
a = N
5

 xy
b = 24900
= 10 =2490
x2
Trend Value of Total Deposits of HBL (2008/09-2012/13)
Year x yc= a+bx
2008/09 3 34511.2
2009/10 4 37001.2
2010/11 5 39491.2
2011/12 6 41981.2
2012/13 7 44471.2

The equation of the straight line trend is y c = a+bx

y c = 27041.2 + 2490x
Trend Analysis of total deposit of NSBI, total investment, total loan and advances and
total net profit of both banks are calculated and fed in the corresponding tables
according to the above formula.