CHAPTER I

INTRODUCTION

1.1 Background of the Study

Fund means deposits placed into an account at a depository institution to increase the
credit balance of the account. From the point of view accounting, deposits are termed
as bank’s obligations and are shown to the liability side of the balance sheet. Thus,
deposit is a claim of customer over bank on his account. From the point of financial
sustainability, commercial banks must have sufficient funds. The banks mobilize
deposit by making finances and investing in various financial markets. Commercial
banks are those institutions, which deals in accepting deposit of individual and giving
loans. These banks provide working capital needs of trade, industry and even to
agriculture sectors. They transfer monetary sources from savers to users. Commercial
bank is a corporation, which accepts demand deposits subject to check and makes
short-term loans to business enterprises, regardless of the scope of its other services.
Commercial banks are the heart of financial system. A commercial bank must
mobilize its deposits and other fund in profitable, secured and marketable sector. Fund
mobilization is an integral part of banking activity. Mobilization of savings through
intensive deposit collection is regarded as the major task of banking in Nepal.
Acceptance of deposits is the primary function of commercial banks. As such, fund
mobilization is one of the basic innovations in current Nepalese banking activity.
Hence, an attempt is made to evaluate the trend and growth in deposit mobilization of
scheduled commercial banks in Nepal. Desai 1967
Higher growth rate of deposit mobilization is the sign of good working of these
banks. Thus, survival, progress and sustainability of commercial banks depend upon
how they attract and mobilize more and more deposits. Normally, the organization
that transacts money is called bank. Bank and banking has always played a significant
role for the financial activities in the different financial sectors. Therefore, bank is the
major need for various developments. Bank collects fund as a saving from the
community and invest them into most desirable and highly yielding sector as a full to
a process of economic development. It develops saving habits of people. The

1
importance of the banking as the nerve center of economic development cannot be
over emphasized and it is said that bank which are the need of and great wealth of
country have to be kept very scared. Just as water for irrigation, good banks are for
the country’s industry and trade Desai 1967

The main objectives of the bank are collection of amount from public in a form of
saving and providing short-term loan (for the development of industry, trade, and
business) to the ones in need. The development of country’s economy is impossible
without expansion of banking function in both rural and urban area of the country.
Development of trade and industry is dependent upon the development of banking
facilities. Therefore, it is said that the bank is backbone of economic development in
modern society. Banking institutions are inevitable for mobilizing resources, for
finance and social economic development of a country and which is important to all
parties i.e. generally public, business, organization, government and other small
financial institutions. The development of a country is always measured by its
economic development through economic indices. That is why every country has
given emphasis on boost up its economy.

At present, 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. Bank is an institution, which helps in
collection and mobilization of savings. The role of commercial banks in uplifting the
economic growth of the country is very important. The uplifting of the development
of a nation largely depends upon the development of its economic growth. The
development of the economy is greatly influenced due to the internal management of
the bank.

Generally, fund mobilization means to flow the cash in different sectors with profit
motive. Investment in its broadest sense means the sacrifice of certain present value
for (possibly uncertain) future value. In pure financial sense, the subsequent use of the
term investment will be in the prevalent financial sense of the placing of money in the
hands of other for their use, in return for a proper instrument entitling the holders to
fixed income payment or the participation in expected profits. It can define the terms
of investment at manufacturing and trading forms those long-term expenditures that
aim at increasing plant capacity of efficiency or at building up goodwill, there by

2
producing an increased return over a period. Experts define the terms of investment
from economic viewpoint that investment as a productive process by means of which
additional are made to capital equipment. It is finding to clear the terms of investment
at different points of view. However, it needs to clear the terms of investment in
financial point of view as related to this study.

This research focuses on the comparative study of fund mobilization of three joint
venture banks; Siddhartha Bank Ltd., Laxmi Bank Ltd. and Machhapuchhare Bank
Ltd. These three banks are compared as per their fund mobilization procedure by
taking 5years’ data from the year 2014/15 to 2018/19.

1.2 Profile of Banks

1.2.1 Machhapuchhare Bank Limited

Machhapuchhare Bank Limited (MBL) registered in 1988 as the first regional

commercial bank from the western region of Nepal. The ‘A’ class commercial bank
started its banking operations from its own head office located in the foothills of
Machhapuchhare Mountain peak in the picture square town of Pokhara since year
2000.
The Bank facilitates its customer needs by delivering the best of services in
combination with the latest state of the art technologies and prudent international
practices. The bank is the pioneer in introducing the latest technology in the banking
industry in the country. It is the first bank to introduce centralized banking software,
GLOBUS BANKING SYSTEM of Temenos NV, Switzerland. The bank provides
modern banking facilities such as Any Branch Banking, Internet Banking,
Mobile(SMS) Banking, Safe Deposit, Locker facilities, Utilities Bill payment
(Telephone & Mobile), ATM (VISA Debit cards and debit card associated with SCT
Network) to its valued customers. Besides these, the Bank is providing 365 Days
banking and Evening Counter services to the customers through many of its offices.
The Bank has been promoted by highly renowned Non- Residential Nepalese,
prominent business man and industrial lists with a vision and dedication to provide
the best financial products and services in the most efficient and professional manner.

3
 Organization Structure

Board of Directors

Recommendations
Recommendations

Resolutions
Risk and Assets and
Board of Directors
Liabilities
Audit Committee management
Management Committee of Board
Board

Evalution of Internal
Control System and
preparation of
Recommendations Performance of Resolutions

Internal Audit Heads and Officers Compliances Services

Services of Structural
Subdivision

Development of
corrective action plan
Capital Structure.

Authorized Capital NPR 10,000,000,000

Issued Capital NPR 8,055,693,000

Paid Up Capital NPR 8,458,477,650

No of Branches: 131 (Including Extension counter)

No of Employees: 1195

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1.2.2 Siddhartha Bank Limited

Siddhartha Bank Limited (SBL) commenced operations in 2002. The Bank was
promoted by a group of highly reputed Nepalese dignitaries having wide commercial
experience. This bank provides a full range of commercial banking services through
its 41 branches established in Kathmandu and outside the Kathmandu. The
environment of Nepalese banking sector is undergoing a rapid transformation. With
liberalization i2 financial markets and integration of domestic market with external
markets, bank operations have become more complex and dynamic. It geared to meet
the challenges and keep abreast with the changes. The Vision statement of the Bank
describes the core values and purposes that guide the Bank as well as an envisioned
future. Fundamentally, in all dealings SBL earnestly believes in transparency,
financial soundness, efficiency and better technology. Similarly, the Bank has
established a dedicated payment solutions department to look into alternative delivery
channels such as Card Services, Internet Banking, ATMs and Mobile Banking. With
this set-up, the Bank has been able to delivery technologically driven products and
services to its Customers.

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Organizational Structure

Capital Structure:

Authorized Capital NPR 10,500,000,000

Issued Capital NPR 8,887,604,540

Paid Up Capital NPR 8,887,604,540

No of Branches: 159 (Including Extension counter)

1.2.3 Laxmi Bank Limited

Laxmi Bank Limited (LBL) was incorporated in April 2002 as the 16th commercial
bank in Nepal. In 2004 Laxmi Bank merged with HISEF Finance Limited, a first

6
generation financial company which was the first and ever merger in the Nepali
corporate history. Laxmi Bank is a Category ‘A’ Financial Institution and re-
registered in 2006 under the “Banks and Financial Institutions Act” of Nepal. The
Bank’s shares are listed and actively traded in the Nepal Stock Exchange (NEPSE).
We are a technologically driven progressive Bank with strong risk and corporate
governance foundations. We are known for our innovation and claim to many “firsts”
in the Nepalese financial market. We have the best asset quality among all financial
institutions in the country and our technology has been rated “Highly Secure” by an
independent internationally accredited information system auditor. Laxmi Bank’s
award winning Annual Reports has set the standards for quality, presentation and
disclosure for the Nepalese corporate sector to follow since 2005. Laxmi Bank
promotes a separate life insurance company – Prime Life Insurance Limited which
came into operation in 2009. Laxmi Bank is a Category ‘A’ Financial Institution and
re-registered in 2006 under the “Banks and Financial Institutions Act” of Nepal. The
Bank’s shares are listed and actively traded in the Nepal Stock Exchange (NEPSE).

Organizational Structure

7
Capital Structure:

Authorized Capital NPR 10,500,000,000

Issued Capital NPR 8,920,508,000
Paid Up Capital NPR 8,920,508,000

No of Branches:115 Branches in 48 district,4 Hospital service counter & 2 Extension

counter.

No of Employees:1018

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1.3. Statement of the Problems

The economic development of the country is mainly based on the different financial
sectors established in the country. The success of these institutions will lead to the
development of the economy of the country. Nepal being listed among least
developed countries, commercial banks has played a catalytic role in the economic
growth. Its investments range from small scale cottage industries to large-scale
industries. In making investment in loans and government securities it may always
wonder which investment is better.

It can be therefore hypothesized that bank portfolio like loans, investment, cash
reserve, deposit and borrowing affects the national income. And also how the
government policy affects these variables, such as the effects of interest on the bank
portfolio variables is of great concern. Therefore, monitoring money and credit
conditions, the central bank has to keep an eye on the bank portfolio behavior.

The term loan plays a crucial role in the development of the any commercial bank.
The problem of lending has become very serious in the country like Nepal. This is due
to lack of sound investment policy of commercial banks. Commercial banks are
nowadays investing only in less risky business. They are not investing in proportion to
that of their deposit amount which is much higher than that of investment
opportunities. They are being safety minded rather than in considering the profit
margin. Nowadays, commercial banks mainly focus on nonperforming assets that
mean they invest the fund as giving loan for non performing activities like house loan,
land loan, educational loan, travelling loan etc. So they don’t seem to be capable to
invest their funds in more productive sectors. They dip high liquid assets and flow
lower funds to the productive sectors, which results into lower profitability to
commercial banks and ignorance to the national economic growth process. This is due
to the effect of the economic, political, demographical & geographical condition of
the nation, so this is the main reason for crisis in the commercial banks and in the
whole national economy as well. Nepalese commercial banks have not formulated
their investment policy in an organized manner. They mainly rely upon the
instructions and guidelines of Nepal Rastra Bank. They don’t have clear view towards
their own investment policy. Furthermore, the implementation of policy is not
practiced in an effective way. Lack of farsightedness in policy formulation and

9
absence of strong commitment towards its proper implementation has caused many
problems to commercial banks

Thus the present study makes a modest attempt to analyze investment policy of LBL,
MBL and SBL. Some of the research questions relating to investment function of the
commercial bank of Nepal have been presented briefly as under.

 What are the sources of raising funds?

 What are the major areas of investment of the funds?

 How effective and efficiently the banks are utilizing their funds?

 What is the relationship of investment and loan and advance with total deposit
and total net profit?

 What is the cash flow position of the banks?

1.4 Objectives of the Study

The objectives are as follows:

 To study and examine the fund mobilization and investment practice of the
concerned banks.

 To analyze the liquidity, asset managing, investment, growth and risk of

concerned banks.

 To evaluate the relationship between deposits and loans and advances, deposit
and total investments, outside assets and trend analysis of the above variables.

1.5 Rationale of the Study

The financial sector plays an important role for every country. The economic
development of the country depends upon the performance of the financial
institutions. The success and prosperity of the bank relies heavily on the successful
investment of collected resources to the important sector of economy. Successful
formation and effective implementation of investment policy is the prime requisite for
the successful performance of commercial banks. Good investment policy has a
positive impact on economic development of the country and vice versa. Therefore,
the effort is made to highlight the investment policy of commercial banks expecting

10
that the study can be bridge gap between deposits and investment policies. On the
other hand, the study would provide information to management of the bank that
would help them to take collective action. Similarly, from the study, the shareholders
would get information to make decisions while making investment on shares of
various banks.

The study of existing investment policy of the LBL, MBL and SBL will help to
analyze the position of the Bank among the commercial banks to invest and provide
package of suggestions for its improvement. Customers saving should be invested in
proper way to get return like in business, industries, development infrastructures etc.
which directly or indirectly influences the economy of the country. So it is very
important to study the investment policy of the Banks.

1.6 Limitations of the Study

The research has some limitations which will weaken the heart of study. Basically, the
study is done for the partial fulfillment for Masters of Business Studies. Inadequate
coverage, time constraints, lack of research experience, asymmetry, reliability of
financial and statistical tools used and financial problems are the main limitations.

Other limitations are:

 There are many factors that affect investment decision and valuation of the
firm. Studies. Inadequate coverage, time constraints, lack of research
experience, asymmetry, reliability of financial and statistical tools used and
financial problems are the main limitations.

 Mostly secondary data are analyzed and only a period of 5-years trend is
considered i.e. from 2014/15 to 2018/19 hence the conclusion drawn confines
only to the above period.

 The truth of research result is based upon the available data from the bank.

 Three banks are only taken for the study. So the outcomes are suggestive
rather than prescripts.

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1.7 Organization of the Study

The study has been organized into the following five chapters:

Chapter I: Introduction

This chapter deals with subject matters of the study consisting background of the
study, origin and development of bank, introduction of sample organizations,
statement of the problems, objectives of the study, rationale of the study and
limitations of the study.

Chapter II: Review of Literature

This chapter deals with review of the different literature of the study field. Therefore
it includes conceptual framework along with the review of major books, journal,
research works and thesis etc.

Chapter III: Research Methodology

This chapter deals with research methodology and it includes research design,
population and sample, source and technique of data collection, data analysis tools
and limitation of the methodology.

Chapter IV: Data Presentation and Analysis

The main part of research is Data Presentation & Analysis. This chapter deals with
analysis and interpretation of the data using financial and statistical tools described in
chapter three. This chapter also includes the major findings of the study.

Chapter V: Summary, Conclusion and Recommendations

This chapter deals with summary of the study held, the conclusion made and the
possible suggestions. Thereafter bibliography and appendices are also included.

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 CHAPTERII

REVIEW OF LITERATURE

In this chapter, the focus has been made on the review of literature relevant to the
investment policy of commercial banks. Every possible effort has been made to grasp
knowledge and information that are available from the libraries, document collection
centers, other information managing bureaus and concerned commercial banks.

This chapter has been planned as followings.

 Conceptual Framework
 Review of Journals and Articles
 Review of Thesis

2.1 Conceptual Framework

It may be said that a bank must strike balance between liquidity, profitability and safety.
“The secret of successful banking is to distribute resumes between liquidity and
profitability so that there is cash (on hand modifiable) to meet every claim and at the
same time, enough income for the bank to pay its way and earn profits for its
shareholders.”(Commercial Bank Act; 2058)

“The business in banking is one of the collecting funds from the community and
extending credit making loans, to people for useful purpose. Banks have played a pivotal
role in moving money role from the lenders to borrowers. Banking is a profit seeking
business not a community charity. As a profit seeker it is expected to pay dividends and
otherwise add to wealth of its shareholders” (Commercial Bank Act; 2058)

“A bank is a business organization that receives and holds deposits of funds from other
make loans or extends credits and transfer funds by written orders of others and
depositors.”(Joshi; 2007)

13
“Principally commercial banks accept deposits and provide loan, primary to business
firms, there by facilitating the transfer of funds in the economy” (Van Horne; 2007)
“Commercial bank is a financial institution which accepts demand deposits subject to
cheque and makes short term loans to business enterprises, regardless of the scope of its
other services.” (Commercial Bank Act; 2058)

“Commercial banks are required to lend 12% of their loan portfolio to the sector out of
which a ratio of 2.5 to 3% should be diverted to the deprived sector. The commercial
banks are being penalized for short fall on priority and deprived sectors lending
requirement by their maximum lending interest rate.”(http:\\www.nrb.org.np\directives)

“Default risk arises firms may eventually go bankrupt. Some default risk is
undiversifiable because it is systematically related to the business cycle, which affects
almost all investments. However, some default risk may be diversified away in a
portfolio of independent investment.” Chandler says in this regard, “A bankers seeks
optimum combination of earning liquidity and safety, while formulating investment
policy.”( Anthoni Saunders;2007)

Commercial Bank Act,2031 has defined commercial bank in following way,

“Commercial Bank means a bank which operates currency exchange transactions, accepts
deposits, provide loans and performs dealing relating to commerce, and other than those
books which have been specified for the co-operative, agriculture, industry of likely any
other specific objective.”(Commercial Bank Act; 2058)

The commercial banks are established under the commercial bank act 2031 in Nepal that
has been amended regularly. It has been amended for six times till today. Now
commercial bank act, 2058 is active.

Banks play vital role in economic growth of a country. Banking, when properly
organized, aids and facilitate the growth of trade and industry and hence of national

14
economy. In the modern economy, banks are to be considered not as dealers of money
but as the leader of development. Banks are not just the share houses of the country’s
wealth but are the reservoirs of resources necessary for economic development.

“A banker is one who in the ordinary course of business honors cheque drawn up on him
by persons from and for whom it receives money on current account.”
(Herbert; 2004)

“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 its anxiety
to make profit, the bank cannot afford to lock up their funds in assets, which are not
easily releasable. The depositors must be made to understand that the bank is fully
solvent. The depositor’s confidence could be secured only if the bank is able to meet the
demand for cash properly and fully. The banker cannot afford to keep a large possession
of his assets in the form of cash. Cash brings in no incomes to the bank. Therefore the
banker has to distribute its assets in such a way that it can have adequate profits without
sacrificing liquidity.” (Joshi; 2008)

Commercial bank act,2058 BS of Nepal has defined that a commercial bank is one which
exchanges money, accept 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.

2.1.1 Feature of Sound Lending and Investment Policy of Bank

Every commercial bank has its own goal, purpose and outputs. The commercial banks are
mainly motivated with the goal of earning profit. There are many regions for gaining the
goal of earning profit. A bank is a legal person. The shareholders are the owner of the
bank. The board of directors is the agent of the bank. It operates the bank. To run the
banks many employee are appointed. It needs a great amount of expenses to run the bank,
whether it is direct or indirect, there is continuing expenses in the bank. In addition to it,

15
the aim of any person or institution to invest the money to the bank is to earn more profit
only. A bank established without the aim of gaining the profit is the central bank. Other
banks are inspired with the object 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 (Ghimire, 2013).

Investment is the prime factor of earning profit. So, after the establishment of bank, it
collects much deposit and gets the deposit in the form of the current, saving and fixed
deposit accounts. In this way, the bank apart from the amount deposited from such
accounts, collects the capital by selling its share. The bank can take loans. Thus, a great
capital fund is formed in the bank from different source. It is not better to keep such
capital fund inactive. The bank should be able to define its investment policy by making a
deep study on the subjects 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.

a. Liquidity

Liquidity is the most important policy of investment. A bank should not forget the
principle of liquidity while it is following its investment policy. Liquidity means the
whole stock in the economy. In 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 the short terms,
current account, and short-term government and business security and Treasury bill.

The commercial banks are considered to be as financial mediators. The commercial

banks have liability to the deposits and they immediately should give it in the time when
the depositors asked. For this purpose, the banks should keep adequate liquid funds. And
also they should gain profit by utilizing the deposit as a loan and advances. If the bank
can’t return the deposits at the time of demand is may lose the customers and theirs trust.
If adequate liquid fund is kept they can return the deposit at will of the depositors but
such bank can loan for a long time. In same way, if they invest the whole deposit loan

16
and advances, they can’t give it at the time of demand by the depositors, so, the
commercial bank tried to move the liquidity and profit together. It is the great challenge
for the manager of the bank.

The commercial bank should attract deposits because a deposit is called raw material of
banking, without which bank can’t run. It is important thing in which sectors the amount
of each deposit is to be invested. The interest is not given for the amount of 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 recorded in 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 co-ordination between the property and liquidity by keeping some parts
of it own property, as a liquid property to provide loan and to invest it is the success of
the commercial banks. The central bank pays attention to this realty to give directions on
liquidity to the commercial banks (Bhandari, 2003).

b. Profitability

The objective of the 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 bank should
not keep its means and materials inactive; it should keep on investing the means and
materials in appropriate and safe area. The banks 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 much risk is there, is much
profit. But sometimes, it may create a situation where the bank should face the great
economic loss, by loss of the investment of the risky sector. So the profit and liquidity are
two opposite principles. If the bank pays its attention only for profit, the liquidity
becomes less, if it pays its attention on the liquidity, it can’t be a long-term investment
and the bank doesn’t get profit. So it should maintain equality in it. The profit of the bank
is the 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 (Bhandari, 2003).

17
c. Safety

A bank should pay a special emphasis on safety. If the invested area is unsafe, it isn’t
good omen for the bank. The bank should pay much emphasis on the principle 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 on an unsafe sector with the hope of gaining much 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 follow the long-
term loan including these all reasons will make unsafe of the bank’s investment. They
should be avoided as much as can be. There will be no loss to the bank, if it invests in
profitable sector. So the bank should seriously study whether there is a possibility of
investment or not. It should invest in a safe sector. If the property taken as the securities
are ruined, securities is low in standard or low valued and if there is no possibility of sale
of the security, the bank suffers from loss. The bank should follow the principle of safety,
and the short-term loan and should invest in profitable sector. In such conditions, there
will be no possibility of loss. The secured sectors mean the securities of the inland and
foreign, company’s shares, debentures and government bond etc (Bhandari, 2003).

d. 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, certainly its investment policy will not be successful.
The bank by studying and analyzing the different sectors where it is possible to earn more
from little investment should extend its investment. If it invests in many sectors, id
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 other sectors. There may loss
too in some sectors. On the whole, a bank should be able to be a competent itself. If it
happens so, 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

18
policy of investing various fields. So, there is a statement “a bank should not lay all its
eggs in the same basket”. By following this principle, on the basis of gold, silver,
diamond, development bond, shares of company, debentures, goods, imports and export
bills and other appropriate securities, the banks have moves a head of their investment
policy. The bank always gets success in their working capacity from such investment.
And the bank becomes successful in its goal (Bhandari, 2003).

e. Marketability

A bank should adopt the principle of marketability in investment policy. In certain way,
the bank moves its investment or 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 of Nepal is small. In such a small market in order to livingness to its banking
transaction, a bank should flow its loan by taking the first class securities. The bank
should keep in mind the main principle of marketability while it makes investment. Are
the goods taken as securities 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 the
attention to the different aspects, it should study the market evaluate of the goods which
are taken as security. The bank should do such things, which would help earn the profit
and make the investment policy successful. 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. The bank should take
as far as possible such goods which keeps may be 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 etc. can’t be sold in time. So, if the provides loan by taking
reasonable goods as security it can be sold in the market easily and the bank can be saved
from becoming insecure (Bhandari, 2003).

f. Tangibility

A commercial bank should prefer tangible security to an intangible one. It may be

considered that tangible property doesn’t yield an income apart from intangible securities,
which have lost their value due to price level inflation.

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g. Legality

Illegal issued securities may cause problems to the investors. Therefore, all commercial
banks should follow the directives of NRB, Ministry of Finance and other relevant
organization at the time of mobilizing funds.

2.1.2 Principle of a Good Investment Policy

a. Principle of Safety

The safety sought in investment is not absolute or completes the word means, rather
protection against loss under reasonable likely. It calls for careful review of economic
and industrial trends before choosing any type of investment or the time to invest. Thus,
this principle recognizes that errors are unavoidable and requires extensive diversification
(American Institute of Banking, 1972).

b. Adequate Liquidity and Collateral Value

An investment is a liquid asset if it can be converted into cash without delay at full
market value in any quantity. For an investment to be liquid, it must be I) reversible or II)
marketable. The difference between reversible and marketability is the process whereby
the transaction is reversed or terminated while marketability involves the sale of the
investment in the market for cash. To meet emergencies, every investor must have a
sound portfolio to be sure for the additional funds, which may be needed for the business
opportunities. Whether money is rising is to be done by sale or by borrowing it will be
easier if the portfolio pursues a planned proportion of higher grade and readily saleable
investment.

c. Stability of Income

Stability of income must be looked at different ways just as was security of principle. An
investor must consider stability of monetary income and stability of the purchasing power
of income. However, emphasis on income stability may not always be consistent with
other investment principles. If the income stability is stressed, capital growth and
diversification will be limited.

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d. Capital Growth

Capital appreciation has today become an important principle. Recognizing the

connection between corporation and industry growth and very large capital appreciation,
investors and their advisors constantly are seeking “ growth stock”. It is exceedingly
difficult to make successful choice. The ideal “growth stock” is the right issue in the right
industry, bought at the right time.

e. Tax Status

To plan an investment program without regarding to one’s tax status may be costly to the
investor. There are really two problems involved here that, one concerned with the
burden of income taxes upon that income. When investors’ incomes are small, they are
anxious to have maximum cash returns on their hand, investors who are not posses for
cash income often find that income taxes deplete certain types of investment incomes less
than others.

f. Purchasing Power Stability

Since an investment nearly always involves the commitment of current funds with the
objective of the investor should consider receiving greater amounts of future funds, the
purchasing power of the future funds. For maintaining purchasing power stability,
investors should carefully study I) the degree of price level inflation they accept, II) the
possibility of gain and loss in the investment available to them and III) the limitations
imposed by personal and family considerations.

g. Conceivability

To be safe from social disorders, government confiscation or unacceptable levels of

taxation, property must be conceivable and level no record of income received from its
use of sale. Gold and precious stones have long been estimated for purposes because they
combine high value with bulk and are readily transferable (American Institute of
Banking, 1972).

21
2.1.3 Some Important Terms

Several terms related with banking are to be explained by commercial banks. The study
in this section comprises of some important banking terms for which efforts have been
made to clarify the meaning, which frequently used in this study, are given hereunder:

a. Deposits

The deposit is the most important source of the liquidity for the commercial banks. For a
bank’s financial strength, it is treated as a barometer. In the word of Eugene, “A banks
deposits are the amount that it owes to its customers”. Deposit is the livelihood of the
commercial bank. Though they constitute the great bulk of bank liabilities, the success of
a bank greatly depends upon the extent to which it may attract more and more deposits,
for accounting and analyzing purpose; deposits are categorized in three headings. They
are:

a) Current deposits

b) Saving deposits

c) Fixed deposits

b. Loans and Advances

Loans and advances are also the most important terms to be clearly defined. The Loans
and advances are the main source of income for a bank. Bank deposits can cross beyond a
desired level but the level of loans and advances can never cross the desired level. The
facilities of granting loan, advances and overdrafts are the main service in which
customers of the bank can enjoy.

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

22
resources in economically less productive fields. There lies the undesirable effect of low
interest rate. Some portion of loan and advances include that amount of which is given to the
staff of the bank for house loan, vehicle loan, personal loan and others, in mobilization of
commercial banks fund, loan advances and overdraft have occupied a large portion.

c. Investment on Government Securities, Shares and Debentures

Though a commercial bank can earn some interest and dividend from the investment on
government securities, shares and debentures, it is not the major portion of income, but it
is treated as a second source of banking business. A commercial bank may extend credit
by purchasing government securities bond and shares for several reasons. Some of them
are given as:

i) It may want to space its maturate so that the inflow of cash coincide with
expected withdrawals by depositors or large loan demands of its customers.

ii) It may wish to have high-grade marketable securities to liquidate if its

primary reserve becomes inadequate.

iii) It may also be forced to invest because the demand for loans has decreased
or is not sufficient to absorb its excess reserves.

However, investment portfolio of commercial bank is established and maintained

primarily with a view of nature of banks liabilities that is since depositors may demand
funds in great volume without previous notice to banks. The investment must be of a type
that can e marketed quickly with little or shrinkage in value.

d. Investment on Other Company’s Shares and Debentures

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

23
2.1.4 Sources of Funds of the Investment

There are different sources of funds for the investment of the bank.

a. Capital

Capital is the live blood of the trade and commerce. Therefore, capital is needed for the
operation of the bank as in other business. The capital terms consists of the two elements like.

i. Issuing shares

ii. General reserves

i. Issuing shares: - Banks issues its share for the collection of capital. So
this is one of the sources of fund to invest. By increasing in the issue of
shares the bank can increase it capital.

ii. General reserves:- Reserves are kept by the bank separated from the
profit. This reserve is also invested at the time of contingency and to
cover the loss in future.

b. Accumulated Profit

If the capital is not sufficient and there is need of more money to invest in that case the
bank use the accumulated profit to invest. In the time of contingency also, the bank
invests its accumulated profit for recovering its future loss.

c. Deposits

Deposits are the main sources of funds. By providing certain rate of interest, commercial
bank calls for the deposits from the customer. Mainly, three types of the deposits are
accepted by the bank like current deposit, fixed deposit and saving deposits. These
different types of deposits are used for lending the money to different sector like
agriculture, production, trade services sector and other industry. The deposits will lead to
increase the working capital of the bank.

24
d. External and Internal Borrowings
The funds can be collected by borrowing money through different banks or different
institution. In a developing country like Nepal, those types of borrowing are very important.
The commercial banks may not have sufficient funds to invest in different sector. In that case
it has to borrow from other bank or other financial institutions. Generally the commercial
bank borrows from two sources i.e. external and internal. Generally external borrowing
means the borrowing from foreign banks, and foreign government. Internals the commercial
banks borrow mainly from inter banks and Nepal Rastra Banks. So the commercial bank
cannot provide loan or investment without the funds from the funds collected from above
different sources the commercial bank grants loan.

e. Other use of funds

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

f. Off Balance Sheet Activities

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

2.1.5 Review of Legislative Provisions

This section includes some reviews of legislative framework under which the commercial
banks operate. Legislative provision influences on a bank’s establishment, mobilization
and utilization of resources. A commercial bank should specify the legislative provisions
indicated by other financial institutions and rules and regulations formulated by NRB.

25
2.1.6 Investment Management Regulation

A commercial bank decides to invest in shares and securities but such investment is
restricted to 10% of paid up capital. However, such investments in all companies in
which the bank has financial interest shall be limited to 20% of paid up capital of the
bank. But, the total amount of investment in shares and securities of organized institution
is restricted to 30% of the paid up capital of the bank (NRB Directives). Commercial
banks are not allowed to invest in any shares, securities and hybrid capital instruments
issued by any financial institutions licensed by NRB. A commercial bank is related to the
fund collected as paid up capital, fund needed to expand the branches, and flexibility of
NRB rules and regulations. The main provisions of NRB are discussed hereunder:

i) Provisions for investment in the deprived sector

Investment in shares of the rural development bank by CBs, which used to be counted for
the priority sector lending, is only now the deprived sector lending. According recent
provisions effective from 1997/98, NBL, RBBNABIL, NGBL, NIBL are required to 3%
invest, HBL, NSBL, NBBL, EBL, are required to invest 2%, BOK is required to invest
1.75%, NBCL is required to invest 0.75% and new commercial banks are required to
invest 0.25% of their total loans and advances to the deprived sector.

ii) Provisions for credit tot the priority sector

Commercial banks are required to extend loans and advances at 12 p.c. of their total
outstanding credit to the priority sector (agriculture, cottage and small industries and
service, which are counted commercial bank’s loan to the cooperatives licensed by the
NRB is also to be counted as the priority sector credit from 1995/96 onwards.

iii) Provision for the investment in productive sector

NRB directs the commercial banks they should extend at least 40 p.c of their total credit
to the productive sectors. Productive sector investment includes loans to priority sector,
agriculture sector, industrial sector etc.

26
iv) Provision for the single borrower limit

NRB directs commercial banks to set an upper limit of loan financed to an individual,
firm, company or group of companies. The single borrower limit should not exceed 25%
in the case of fund-based credit and 50% in the case of non-fund based credit such as the
letter of credit, guarantee, acceptance letter, and commitment in a fixed proportion of
capital funds of the bank. Similarly, NRB has graded NABIL, NGBL, NIBL, HBL, SBI,
and NBBL as class ‘A’ banks, which have been kept outside the provision of the single
borrower credit limit. Likewise, commercial banks are permitted to extend an additional
10% credit above the limit fixed by NRB as before in the case of consortium financing.

v) Provision for minimizing liquidity risk

A gap found between maturing assets and maturing liabilities is the liquidity risk. They
are monitoring their assets and liabilities on the basis of maturity period. Maturity periods
such as 0-90 days, 91-180 days, 181-270 days, 271-365 days and above 1 year are
classified for the purpose of matching the assets liability maturity.

vi) Cash reserve requirements (CRR)

Commercial banks are required to have maximum CRR to ensure adequate liquidity, to
meet the depositor’s demand for cash at any time and to inject the confidence in
depositors regarding the safety of their deposited funds. NRB directs them to deposit at
Nostro accounts maintained with NRB minimum 5% of total deposit of two weeks. Cash
kept at bank’s vault is not considered as a part of CRR.

vii) Loan classification and loan provision

NRB directs commercial banks to classify their outstanding loan and advances,
investment and other assets into four categories viz Pas loan) performing loan),
substandard loan, doubtful and bad loan when making loan loss provision (LLP) of 1%,
25%, 50% and 100%, respectively.

viii) Directives regarding Interest Rate Spread

The difference between interest charged on loan and advances and the interest paid to the
depositors is Interest Rate Spread. Previously, NRB directed the commercial banks to
have Interest Rate Spread at maximum of 5% but now there is no regulation though NRB

27
official including governor used to give pressure on banks for reducing the Interest
Spread Rate on different forums and meetings.

2.2 N.R.B. Directives Based on Investment Policy

(http://www.nrb.org.np/directives)

According to the N.R.B. directives following directions are notable for the source of
financial investment of the permitted organization (permission granted by Nepal Rastra
Bank).
 Application of Investment policy & Work process with only acceptance.
 Permitted organization should apply the investment policy & work process in the
government securities, N.R.B. securities, organizational shares and debentures
with accepting through organizational committee.
 Investment Management in Government Securities and N.R.B. Securities.
 There is no prohibition to permitted organization to invest government securities
and N.R.B. securities.
 Investment Management of Share and Debenture of Organization.
 Permitted organization should sale the shares to the public and should invest in
shares and debentures of that organization which is listed in the share market. If
the organization invests in shares and debentures of non listed organization in
share market then these investments i.e. share and debenture should be listed
within one year otherwise equal amount of investment should be collected in
corporate fund. The amount in this fund should not be used until or unless the
share and debenture is listed.
 While investing in shares and debentures of any organization by the permitted
organization it should not be greater than 10% of own primary capital and shares
and debentures of all organization should not greater than 30% of own primary
capital in maximum. If the investment is greater than the limit then the more
amount of investment will be deducted by the primary capital and rest become
capital fund. But the financial company should invest up to 20% of its primary

28
 capital. The capital fund of financial company is the deduction of investment in
shares and debentures by primary capital.
 Share and Debenture issue management.

2.3. Review of Related Studies

2.3.1. Review of Journals and Articles

In this section, effort has been made to examine and review some of the related articles in
different journals.

Dr. (Smt.) RajeshwariM.Shettar (2014), in her study “Deposit Mobilization and

Socio- Economic Impact: A Case Study of Union Bank of India”, the result found that
remarkable growth of mobilization of all kinds of deposit in Union Bank of India, and the
bank as a good corporate citizen, has stepped into the area of counseling the common
man to help them and leas a decent and honorable life in the future days to come.
Through the have made good progress in technology, the challenge lies in quickly
disseminating these productsamongst their clientele and also present themselves as a
techno-savvy bank, particularly to the younger generation of the society.

John, Isaac and Nathaniel (2017) examine credit risk, deposit mobilization and
profitability of Ghanaian banks. Panel regression analysis was adopted for this study,
variable include Return on Asset while Non performing loan ratio, deposit mobilization,
capital adequacy ratio, total asset of bank, inflation and growth in interest income are the
independent variables. The result reveals a significantly positive relationship between
credit risk, deposit mobilization, growth in interest income, capital adequacy ratio and
profitability of Ghanaian banks. This study fails to carry out diagnostic test such as
normality test, multicollinearity test.

Mamo (2017) conducted an investigation of determinants of deposit mobilization in

commercial banks of Ethiopia. Multiple linear regression was adopted for this study, the
variables are competitors, interest, branches and loan while dependent variable is Total

29
deposit. The result of the econometric indicates that loan provision, branch expansion and
number of customers are found to have significant positive impact to induce deposit
mobilization. The study fails to carry out all the necessary residuals test to fulfill
regression assumption before running the regression.

Ogar and Oka (2017) examine the impact of financial deepening on capital formation in
Nigeria. Ordinary least square model, multiple regression Analytical technique and Desk
survey method were adopted for this study. Variable include Gross fixed capital
formation while broad money supply to GDP, gross domestic investment to GDP, credit
to private sector to GDP and interest rate spread are independent variables. They found
out that financial deepening has a positive impact on capital formation. However, the
study failed to capture total deposit liability and lending rate and this could affect the
validity of the study.

Oka and Adesola (2017) Determine Deposit money banking financing and its effect on
real sector output in Nigeria: Evidence from trade and Agricultural sectors. Vector error
correction mechanism and Augmented Dickey fuller was used for the study. Variables
includes Deposit mobilization bank, private sector credit, Banks holding of treasury bills
and interest rate spread while Agricultural sector output and Trade sector output are
dependent variables. The study found that the deposit money banks financing has a long
run significant effect on trade sector output but an insignificant long run effect on
agricultural sector output in Nigeria. However, the study failed to document various
diagnostic tests such as normality test model specification test, serial auto correlation test
among others.

Henry, Lucky and Anyamaobi (2016) examine Banking sector development and capital
formation in Nigeria: A multivariate Analysis. Capital formation to Gross domestic
product as dependent variable while Bank credit to GDP, Bank investment to GDP, Bank
deposit to GDP, Bank total assets to GDP and prime lending rate are independent
variables. The study employed ordinary least square, augmented dickey fuller unit test,
Granger causality test and Vector error correction model as method for this study. The

30
study revealed a static regression result that all the independent variables have positive
relationship with the dependent variable except prime lending rate which confirms the
expected results in the study. The study conclude from the findings that the banking
sector development have significant effects on Nigerian Capital.

Venkati (2016) examined the impact of banks deposit mobilization and credit financing
on capital formation in Ethiopia. Ordinary least Square method was adopted for this
study, Gross fixed capital formation was used as dependent variable while independent
variables includes Bank credit, bank deposit and bank investment. The study found that
bank deposit, bank credit and national saving have a great role on capital formation in
Ethiopia. However, but the finding of the study cannot be extrapolate into the Nigeria
context due to time and difference in peculiar factors.
Pascal, Chibueze and Callistus (2016) examined bank credit and capital formation in
Nigeria and adopted Error correlation Model, Co-integration test and multiple regression
method. They use Gross fixed capital formation as dependent variable while bank credit,
interest rate, exchange rate, government expenditure and monetary supply as independent
variables.

2.3.2. Thesis Review

Many theses were reviewed in course of preparation of this thesis. Among them, some
were relevant and some were not. Here, the researcher has tried to include only the
relevant theses that are significant for this research. Every research thesis has a long list
of its findings, summary, conclusion and recommendations. However, the researcher has
tried to edit them for brevity.

A Study done by Bhattarai, (2011), entitle on “An Investment Analysis of

RastriyaBanijya Bank (In Comparison with Nepal Bank Ltd.)” with the main objectives:
 To evaluate liquidity, activity & profitability ratio of RBB in comparison with NBL
& industry average.

31
  To use trend analysis to compare loan and advances, total investment, total deposits
and net profit of RBB and compare the same with others two.
 To analysis relationship of loan and advances and total investment with total deposits
and net profit of RBB and to compare it with that of NBL and industry average.
 To examine the loan loss provision of RastryaBanijya Bank & NBL.
 To provide suggestion and recommendation on the basis of findings.

The findings of the researcher are as follows:

 RBB has good deposit collection, enough loan and advances and small investment in
government securities.
 The assets management ratio of RBB is not better than that of NBL.
 The profitability position of RBB is worse in comparison with NBL due to low
return on working fund, loans and advances and outside assets.
 The fund collection and mobilization position of RBB is satisfactory in comparison
to NBL while considering growing rate.
 In relation to fund flow analysis, the RBB has poor loans and advances issued.
 RBB has better positive relationship between net profit, return on loans and advances
and return on investment but RBB has worse performance in income as
commission and discount and exchange income.
 There is significant relationship between deposit and loan and advances but there
is no significant relation between deposit and investment of both banks RBB and
NBL. There is no relationship between outside assets and net profit.

A Study done by Poudyal, (2012), entitle on “Investment in Priority Sector with Special
Reference to Nepal Bank Ltd.” Has the following major objectives.
 To analyze the repayment position of the priority sectors.
 To find trends of priority sectors loan.
 To analyze how far Nepal Bank Ltd. Is able to grant credit priority sectors.
 To examine the impact of loan on priority sectors.

32
 To analyze the impact of loan, probable cost of misutilization of the loan by the
borrowers.

The major findings of the study are as follows:

 The procedure of loan sanction is rather slow and clumsy.
 Bank was not able to fulfill the proposed target of corresponding loan to the priority
sector.
 Banking procedures are so complicated that the laymen are unable to understand
it completely.
 Loan repayment was more satisfactory from agriculture sector than the cottage
industries & service sector.
 Loan repayment was mainly due to the misutilization of loan, other important
courses are linked with high social expenses in marriage¸ ceremony, medical
treatment etc.
 Loan in priority sector has increased the rural banking system in the rural areas
and bank branch expansion.
 The investment amount and percentage of priority sectors investment on total
deposit have up growing trend.
 A sort of premier groups like local people, politicians and administrators etc.
effect in local granting process.

A Study done by Kayastha, (2011), entitle on “An Analysis of Deposit Mobilization of

RBB, Lahan Branch, Siraha District, Nepal” has following objectives:

 To analyze the effectiveness of deposit mobilization of RBB, Lahan branch.

 To analyze the deposit projection for next five years of RBB, Lahan branch.
 To find out the relationship between deposit, and loans & advances, total
investment, net profit.
 To examine the loan loss provision of RastryaBanijya Bank.

33
  To provide a package of possible guidelines to improve investment policy, it’s
problems and way to solve some problems and provide suggestions and
recommendation on the basis of the study.

The major findings of the researcher are as follows:

 Interest rate has not influenced the deposit collection as well as lending sector of
the banks. And due to the lengthy lending, the credit experience is unsatisfactory.

 The procedure of loan granting is very slow and time consuming.

 The Bank has good deposit collection, enough loan and advances and small
investment in securities.
 The profitability position of RBB is low due to low return on working fund, loans
and advances and outside assets.
 The credit ratio has also increased by the nominal percentage. So, the deposit was
not efficiently utilized.

A Study done by Subedi, (2013), entitle on “A Comparative Study of Financial

Performance between Himalayna Bank Ltdand Everest Bank Ltd.”Of the period form
2006/07 to 2011/12 with the main objectives as:

 To compare investment policies of the sample banks and discuss the fund
mobilization of the sample bank.
 To analyze the deposit utilization and its projection for next five years of HBL and
EBL.
 To find out relationship between total investment, deposit and loans & advances, net
profit and outside assets and to compare them.
 To evaluate comparatively the profitability and risk position, liquidity, asset
management efficiency of HBL and EBL.
 To provide a package of possible guidelines to improve investment policy.
He outlined his major findings as follows:

34
The mean of total loans and advances to total saving deposits ratio of EBL is greater than
that of HBL and the coefficient of variation between the ratios of HBL is less than EBL.
It means at the variability of the ratios of HBL is more uniform than EBL. The analysis
found that EBL is more employing its saving deposits in term of loans and advances than
that of HBL. So, loans and advances to total saving deposit ratio appear better in EBL
than HBL.

The mean ratio of total investment to total deposits of EBL is significantly greater then
that of HBL but the coefficient of variation between the ratios of HBL is less than EBL. It
means that the variability of the ratios of HBL is more consistent than that of EBL.
According to analysis, it is found that EBL is more successful in utilizing its resources on
investment. However, he failed to give his overall conclusion regarding the superiority of
the financial performance of these two banks during the period of his study.

A Study done by Kandel, (2014), entitle on “Investment Policy of Commercial Banks in

Nepal” with the main objectives:
 To evaluate the liquidity, assets management, efficiency and the profitability and risk
position of Nepal Bank Ltd.
 To discuss fund mobilization & investment policy of Nepal Bank Ltd. With respect
to its fee based off balance sheet transaction and fund based on balance sheet
transaction in comparison to joint venture bank.
 To find out the empirical relationship between various important variables i.e.
deposits, loans and advances, investment, net profit etc. and compare them with
the joint venture banks.
 To analyze the deposit utilization and its projection for next five years of the Nepal
Bank Ltd. And compare it with other joint venture banks.
 To provide a package of workable suggestions and possible guidelines to improve
investments policy of Nepal Bank Ltd. And joint venture banks based on the
findings of the analysis for the improvement of financial performance of Nepal
Bank Ltd. In future.

The findings of the study are as follows:

35
  The liquidity position of NBL is comparatively better than that of joint venture
banks. Highly fluctuating liquidity position shows that the bank has not
formulated any stable policy. It can also be concluded that NBL has more portion
of current assets as loan and advances but less portion or investment on
government securities.
 The mean ratio of total investment to total deposit of NBL is lower than that of the
joint venture banks. The mean ratio of total off balance sheet operation to loan
and advances of NBL is found significantly lower than that of joint venture banks.
So it is concluded that NBL is comparatively less successful in balance sheet as
well as off balance sheet operations than that of the joint venture banks. It hasn’t
followed any definite policy with regard to the management of its assets.
 There is comparatively higher risk in NBL than that of the joint venture banks
regarding various aspects of banking function.
 It has been found that there is significant relationship between deposits and loans and
advances. There is negative relationship between deposits and investment in case
of NBL and positive in case of the joint venture banks.

A Study done by Parajuli, (2015), entitle on “Investment Practice of Joint Venture Banks
in Nepal with Special Reference to Nepal Arab Bank Ltd., Standard Chartered Bank Ltd.,
and Nepal SBI Bank Ltd.” With the following objectives as:

 To compare investment policy of concerned banks and discusses the fund

mobilization of the sample bank.
 To find out empirical relationship between total investment, deposit and loans &
advances and net profit and outside assets and compare them.
 To analyze the deposit utilization and its projection for next five years of SCBNL
and NABIL.
 To evaluate comparatively the profitability and risk position, liquidity, asset
management efficiency of SCBNL and NABIL.

36
  To provide a package of possible guidelines to improve investment policy, it’s
problems and way to solve some problems and provide suggestions and
recommendation on the basis of the study.

The findings of the researcher are as follows:

 It can be concluded that both have good deposit collection. NABIL has the highest
cash and bank balance to total deposit, cash and bank balance to current ratio.
This makes the bank to be in good position to meet the daily cash requirement.
 SCBNL has successfully maintained and managed its assets towards different
income generation activities. SCBNL has made high portion of total working fund
in investment on government on share and debentures of other companies.
 The profitability of SCBNL is comparatively lower than NABIL. It indicates that
NABIL has maintained its high profit margin regarding profitability position and
SCBNL does not have a better position in comparison. It must maintain high
profit margin for the well being in future.
 There is comparatively lower risk in SCBNL than NABIL regarding various aspects
of banking function.
 The SCBNL has not been more successful to increase in source of funds i.e. deposit
and mobilization of loan and advances and total investment.
A Study done by Shakya, (2015), entitle on “Comparative study of Investment Policy of
Standard Chartered Bank Nepal Limited and Everest Bank Limited” and highlighted the
main objectives as:
 To compare investment policy of concerned banks and discuss the fund mobilization
of the sample bank.
 To find out empirical relationship between total investment, deposit and loans &
advances and net profit and outside assets and compare them.
 To analyze the deposit utilization and its projection for next five years of SCBNL
and EBL.
 To evaluate comparatively the profitability and risk position, liquidity, asset
management efficiency of SCBNL and EBL.

37
  To provide a package of possible guidelines to improve investment policy, it’s
problems and way to solve some problems and provide suggestions and
recommendation on the basis of the study.
The findings of the researcher are as follows:
 It can be concluded that both have good deposit collection. EBL has the highest cash
and bank balance to total deposit, cash and bank balance to current ratio. This
makes the bank to be in good position to meet the daily cash requirement.
 SCBNL has successfully maintained and managed its assets towards different
income generation activities. SCBNL has made high portion of total working fund
in investment on government on share and debentures of other companies.
 The profitability procession of SCBNL is comparatively better than EBL. It indicates
that SCBNL has maintained its high profit margin regarding profitability position
and EBL does not have a better position in comparison. It must maintain high
profit margin for the well being in future. The finding shows EBL even though
paying high interest to the customers for different activities.
 There is comparatively lower risk in SCBNL than EBL regarding various aspects of
banking function.
 The SCBNL has not been more successful to increase in source of funds i.e. deposit
and mobilization of loan and advances and total investment. It seems SCBNL has
not made any effective strategy to win the confidence of shareholders, depositors
and its all customers.

2.4 Research Gap

This research is an original one should be the foundation for the future researchers to
know about the pattern of Laxmi Bank Limited, Sidhartha Bank Limited and
Machhapuchchhre Bank Limited. Laxmi Bank Limited,Sidhartha Bank Limited and
Machhapuchchhre Bank Limited are selected for research. This study includes the very
recent investment pattern of concerned banks. The study particularly shows how these
companies are growing despite of critical market situation.

38
The job of conducting research and preparing report is difficult in itself especially to the
unprofessional person like a student. Researcher has tried to make this thesis as a
complete outcome of the research on mentioned topic from the best of my effort and
knowledge. Researcher wants to prove that this research is an original one and should be
the foundation for the future researchers to know about the problem of fund mobilization
procedures of commercial banks.

39
CHAPTER III

RESEARCH METHODOLOGY

3.1 Introduction

Research Methodology is a way to systematically solve the research problem. It refers to

the various sequential steps that are to be adopted by a researcher during the course of
studying a problem with certain objectives. It includes construction of research design,
nature of data, data gathering procedure, population and sample and data processing
procedure. The main purpose of this chapter is to focus on different research methods and
conditions used to conduct the study.

3.2 Research Design

The study aims to evaluate to managerial efficiency and performance regarding

investment policy of MBL, LBL and SBL. So analytical and description research design
has been following for the study. Research design is the plan, structure and strategy of
investigation conceived so as to obtain answer to research question and to control
variance. It is arrangement for collection and analysis of data. To achieve the objective of
this study, descriptive and analytical research design has been used. Some financial and
statistical tools have been applied to examine facts and descriptive techniques have been
adopted to analyze the capital adequacy framework and the loan loss provision by
commercial banks.

3.3Population and Sample

At present, Nepalese financial system comprises of 27 commercial banks, 25 finance

companies and other non-governmental organization performing limited banking
activities. It is not possible to study all of them regarding the research topic. Therefore
MBL, LBL and SBL are the reputed and well-established commercial banks having

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similar capital; taken as a sample bank for research study from population (commercial
banks).

When some of the elements are selected with the intension of finding out something
about the population, that group of elements is referred as a sample and the process of
selection is called sampling. For instance, with a single grain of rice a village housewife
tests if all the rice in the pot has boiled or not. Similarly, from a cup of tea a tea taster
determines the quality of the brand of tea.

3.4 Nature and Sources of Data

This research is mainly based on the secondary data. The secondary data have been
collected from financial statements, annual reports, unpublished official records of
concerned companies, journals and from the official web site of NRB.

3.5 Data Analysis Tools

Analysis of data involves a number of closely interrelated operations that are performed
to get answers to the research questions. Analysis and presentation of data is the core of
the study. This study needs some financial and statistical tools to accomplish the
objectives. The financial and statistical tools are most reliable. To achieve the objective
of the study, various financial, statistical and accounting tools have been used in this
study.

Collected data are to be processed and analyzed for a scientific conclusion and for
ensuring that all relevant data are used for making contemplated comparisons and
analysis. Processing of data implies editing, coding, classification and tabulation of
collected data.

The various results obtained with the help of financial, accounting and statistical tools are
tabulated under different heading. Then they are compared with each other to interpret
the results. Two kinds of tools have been used to achieve the purpose.

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  Financial Tools
 Statistical Tools

3.5.1 Financial Tools

Financial tools basically help to analyze the strength and weakness of a firm. Ratio
analysis is one of the important financial tools has been used in the study. It helps to
show the mathematical relationship between two accounting items or figureandcan
measure the financial performance and status of a firm with the other firms. Ratio
analysis is the part of whole process of analysis of financial statements of any business or
industrial concern especially to take output and credit decision. Although there are
various types of ratios to analyze and interpret the financial statements, only four ratios
have been taken in this study, which are mainly related to investment policy of banks.
These are as follows:

A. Liquidity Position

Banks liquidity means ability to meet withdrawal demand of the depositor’s fund to
provide loans to needy persons and institutions. The liquidity position of of a bank is
evaluated costing following types of liquidity ratios.

I. Current Ratio

It refers to the relationship between current assets and current liabilities of a firm that also
measures the short-term solvency of the firm. Current assets involve cash and bank
balance, money at call or short notice, loans and advances, overdrafts, bill purchased and
discounted investment on government securities and other interest receivables and
miscellaneous current assets. Similarly, current liabilities involve deposit and other short-
term loans, tax provision, dividend payable, bills payable, staffs bonus, and sundry
liabilities.

2:1 standard of current ratio is widely acceptable but accurate standard depends on
circumstances and nature of business. Current ratio can be measured as,

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 Current Assets
Current Ratio =
Current Liabilities

II. Cash and Bank Balance to Total Deposit Ratio

Cash and bank balance are the most liquid current assets of a firm, Cash and bank
balance to total deposit ratio measures the percentage of most liquid assets to pay
depositors immediately. This ratio is computed dividing the amount of cash and bank
balance by the total deposits. It can be computed as:
Cash∧Bank Balance
Cash and Bank Balance to Total Deposit Ratio =
Total Deposit

Where, total deposit consists of deposit on current account, saving account, fixed account
and other deposits.

III. Cash and Bank Balance to Current Asset Ratio

This ratio measures the percentage of liquid assets i.e. cash and bank balance among the
current assets of a firm. Cash and bank balance includes cash balance, cash with NRB,
balance with other commercial banks. Higher ratio shows the higher capacity of firms to
meet the cash demand. This ratio is calculated dividing cash and bank balance by total
current assets.

Cash∧Bank Balance
Cash and Bank Balance to Current Assets =
Current Assets

IV. Investment on Government Securities to Current Assets Ratio

This ratio is used to find the percentage of current assets invested on government
securities, treasury bills and development bonds. This ratio can be calculated dividing the
amount of investment on government securities by the total amount of current assets and
can be stated as follows,

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Investment on Government Securities to Current Assets Ratio

Investment on Government Securities

=
Current Assets

Where, investment on government securities involves treasury bills and development

bonds etc.

B. Asset Management Position

A bank’s success largely depends upon about how effectively the ban is managing and
utilizing its assets. The following financial positions related to investment policy are
calculated under asset management ratio and interpretations are made by these
calculations.

I. Loan and Advances to Total Deposit Position

This ratio is calculated to find out how successfully the selected banks and finance
companies are utilizing their total collection/deposits on loan and advances for the
purpose of earning profit. Greater ratio shows the better advances and can be obtained
by dividing total loans and advances by total deposits.

Loans∧ Advances
Loan and Advances to Total Deposit Ratio =
Total Deposit

II. Total Investment to Total Deposit Position

Investment is one of the major sources of earning income. This ratio indicates how
properly firm’s deposits have been invested on government securities and shares and
debentures of other companies. This ratio can be computed dividing total amount of
investment by total amount deposit collection.

Total Investment
Total Investment to Total Deposit Ratio =
Total Deposit

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III. Loan and Advances to Total Assets Working Fund Position

This ratio indicates the ability of selected banks and finance companies in terms of
earning high profit from loan and advances. Loan and advances to total assets ratio can
be obtained dividing loan and advance amount by total assets.

Loans∧ Advances
Loans and Advances to Total Assets Ratio =
Total Assets

Where, Total assets includes total amount of assets given in balance sheet which refers
to current assets, Net fixed assets, Total loan for development banks and other sundry
assets except off balance sheet items i.e., Letter of credit, Letter of guarantee etc.

IV. Investment on Government Securities to Total Assets Position

Investment on government securities to total assets ratio shows how much part of total
investment is there on government securities in percentage.

Investment on Government Securities to Total Assets Ratio

Investment on Government Securities

=
Total Assets

V. Investment on Share and Debentures to Total Assets Ratio

Investment on shares and debenture to total assets ratio shows the investment of banks
and finance companies on the shares and debentures of other companies in terms of
total assets. This ratio can be obtained dividing on shares and debenture by total assets.

Investment on Share and Debenture to Total Assets Ratio

Investment on Share∧Debentures
=
Total Assets

C. Profitability Ratio

Profitability ratios are used to indicate and measure the overall efficiency of a firm in
term of profit and financial position and performance of any institution. For better
financial performance, profitability ratios of firm should be higher. Profitability
position of the firms can be presented in the following ways:

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I. Return on Loans and Advances

Return on loan and advances ratio shows how efficiently the banks and the finance
companies have utilized their resources to earn good return from provided loan and
advances. This ratio is computed by dividing net profit (loss) by the total amount of
loan and advances.

Net Profit
Return on Loans and Advances =
Loans∧ Advances

II. Return on Total Assets (Total Working Fund)

Return on assets ratio measures the profitability position of the selected banks and
finance companies in comparison with total assets of those selected firms. It is
calculated by dividing return or net profit (loss) by total working fund or total assets.

Net Profit
Return on Total Assets =
Total Assets

III. Total Interest Earned to Total Operating Income Ratio

Interest earned to total operating income ratio is calculated to find out the ratio of
interest income with operating income of financial institution. This ratio indicates how
efficiently the selected banks and finance companies have mobilized their resources to
bear the interest on total operating income.

Total Interest Earned to Total Operating Income Ratio

Total Interest Earned

=
Total Operating Income

D. Risk Analysis

Risk is uncertainty in business transaction and investment management. If a firm bears

risk and uncertainty, the profitability and effectiveness of the firm should increase. This
ratio checks the degree of risk involved in the various financial operations. For this
study, following risk ratios are used to analyze and interpret the financial data and
investment policy.

I. Liquidity Risk Ratio

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The liquidity risk of the bank defines its liquidity need for deposit. The cash and bank
balance are the most liquid assets and they are considered as banks liquidity sources
and deposit, as the liquidity needs. The ratio of cash and bank balance to total deposit is
the indicator of bank liquidity needed. The risk will be low if funds are kept idle as
cash and bank balance but this reduces profitability. If bank flow loans, profitability
increases as well as risk. Thus higher liquidity ratio indicates less risk and less
profitable bank and vice-versa. This ratio is calculated by dividing cash and bank
balance to total deposit.

Cash∧Bank Balance
Liquidity Risk Ratio =
Total Deposit

II. Credit Risk Ratio

Credit risk ratio helps to check the probability of loan non-repayment or the possibility
of loan to go into default. Credit risk ratio is calculated in percentage dividing total
loan and advances by total assets.

Total Loans∧Advances
Credit Risk Ratio =
Total Assets

E. Investment Analysis

Here, the growth ratios represent how well the commercial banks are maintaining their
economic and financial condition. The higher ratios represent the better performance of
the selected firms to calculate, check and analyze the expansion and growth of the
selected banks. Growth ratios are directly related to the fund mobilization and
investment of those firms. The following growth ratio is calculated.

 Growth Ratio of Total Deposits

 Growth Ratio of Total Investment
 Growth Ratio of Loan and Advances
 3.5.2 Statistical Analysis
Some important statistical tools have been used, to present and analyze the data for
achieving the objective of this study. Co-efficient of variance, correlation analysis,

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Standard deviation, least square, linear trend analysis etc. have been used for the
purpose. The basic statistical analysis related to this study is discussed below:

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