Thesis and proposal of bank for BBS 4th year student finance group
CHAPTER I
INTRODUCTION
Background of the Study
According
to Wikipedia “Nepal is an officially called the Federal Democratic Republic
of Nepal is a landlocked central Himalayan country in South Asia. It has
33.4 million since last census 2001 A.D and is the 93rd largest
country by area. Bordering China in the north and India in the south, east, and
west, it is the largest sovereign Himalayan state.” The progression of economic
development of this country depends upon various factors. Financial institutions
among others are viewed as vehicle in the process of economic improvement and enlargement.
They play significant responsibility in mobilizing saving, and put them into
productive use. Commercial banks are most essential financial institution,
occupying vital place in the economy of a country because the deposits
collected by them provide much needed capital for the development of industry,
trade and commerce and other sectors, thereby contributing to the economic intensification
of the nation. However, investment actions are not without risks. They have to
follow sound Principles of investment policy, the rules and regulations,
directives issued by the Central Bank. The performance evaluation of a commercial
bank is usually related to how well the bank can use its assets, shareholders’
equities and liabilities, revenues expenses. The performance evaluation of
banks is important for all parties including depositors, investors, bank
managers and regulators. The evaluation of a firm’s performance usually employs
the financial ratio method, because it provides a simple description about the
firm’s financial performance in comparison with previous periods and helps to
improve its performance of management (Lin et al., 2005). Moreover, the ratio
analysis assists in determining the financial position of the bank compared to
other banks.
1.1.1 Profile of Concerned Banks
The profile of
NABIL and NEPAL SBI BANK LTD. are presented below for reference to research.
NABIL Bank Limited
NABIL Bank Ltd, the first commercial bank was incorporated in 1984. Dubai Bank Ltd. Was the initial joint venture partner with 50% equity investment. The shares owned by Dubai Bank Ltd. (DBL) were transferred to Emirates Bank International Ltd. (EBIL) Dubai. Later on EBIL sold its entire stock to national Bank Ltd, Bangladesh (NBLB). The present configuration consists of 50% share capital by National Bank Ltd, Bangladesh. 10% NIDC, 9.66% Rastriya Beema Sansthan, 0.34% Nepal Stock Exchange and 30% Nepalese public. At present 40 branches of this bank are operating in different parts of the country. Authorized capital and paid up capital of NABIL Bank Ltd are Rs. 1600 million and Rs. 965.74 million.
NABIL Bank Ltd. undertakes the following activities and services:
Tele Banking, Credit card Facilities, SWIFT, Deposit Locker, Western Union Money Transfer, ATM, International Trade and Bank Guarantee
It was awarded as “Bank of year 2004”.
Nepal State Bank of India (SBI)
Nepal State Bank of India (SBI) Ltd, was established in 1993, under the company Act 1964. This is the joint venture of State Bank of India and Nepalese promoters. This Bank has 34 branches and 3 – extension counter in operation. The authorized capital and paid up capital of the bank is Rs. 1600 million and Rs. 875.28 million respectively.
The following activities and services are provided by SBI including normal functions:
Tele Banking, Credit card Facilities, SWIFT, Deposit Locker, ATM, Mobile ATM, International Trade and Bank Guarantee
1.2
Focus of the Study
The main focus of the study is to emphasize the financial ratios analysis of commercial banks with the expectation that the study can link the gap between deposits and investments. On the other hand, the study would provide information to management of the bank that would help them to take united actions. It is well known that the achievement and affluence of the bank profoundly depends upon the successful investment of collected resources to the important sectors of the economy. Successful formulation and effective execution of investment policy is the prime requisite for the successful performance of commercial banks. There are a variety of problems in effective financial performance of commercial banks of Nepal, which affect their demonstration to the immense level. CB’s performance does not seem satisfactory in terms of utilizing its resources competently in productive sectors. Hence, the main significance of this study if financial ratios analysis of Nepalese commercial banks is to help how to minimize risk on investment and maximize financial performance. Correspondingly, the study of commercial bank’s investment trend, risk return pattern, portfolio management, credit management and effect on investment decision on earning will endeavor to disclose the internal weakness of the banks and equip the ideas for advance. Therefore, the researcher has undertaken this study to analyze the existing investment portfolio of Nepalese commercial banks and point out their various weaknesses and package of suggestions for its improvement.
1.3
Statement of the Problem
Establishment and expansion of a number of banks and other financial institutions in Nepal has formed keen competition among themselves. This has created a lot of challenges to them. The problems which commercial banks are facing include the problems of resources mobilization, poor investment climate, heavy regulatory procedure, uncertain government policy, and NRB’s directives etc.
What are the lack of commercial banks not utilizing its deposits that is making loan for a profitable project? How this stipulation may even lead the commercial banks to the position of liquidation?
How
commercial banks invest their funds in limited areas to achieve highest amount
of profit? Why they are set up to be more fascinated to invest in less risky
and highly liquid sectors? i. e. on treasury bills, development bonds and other
securities like major sectors include tourism, garments, and trading as well.. Why
there is indecision to invest on long-term projects for the reason that
commercial banks are much more safety minded? So, they seem to follow conventional
and un-effective investment policy.
The
main factors for success of any organization are the secured position. On one
occasion the economic and political situation is stabilized then only
commercial banks can deem rationally as to where they should invest and grow? So,
security problem is the big hitch for every commercial bank to invest their
funds in any sectors. They generally rely upon the instructions and guidelines
of Nepal Rastra Bank. They do not have clear outlook towards investment policy.
Furthermore, why implementation of policy is not done in an effective way? What
is the lack of vision in policy formulation? Why there is absence of strong
commitment towards its proper implementation and what may cause many problems
to commercial banks?
1.4 Research Objectives
The main objective of this research is to scan the investment policy of two JVBs, namely NABIL and Nepal SBI Bank are:
a) To evaluate the liquidity and profitability of NABIL’s in comparison to SBI bank.
b) To analyzing the data for concrete decision making improvement for future reference
for this bank.
c) To providing suggestions on the basis of the major findings of this study.
1.5 Organization of the
Study
This
study has organized into the following five chapters:
CHAPTER – I: INTRODUCTION
This
chapter includes background of the study, focus of the study, statement of the
problems, objectives of the study, significance of the study and limitations of
the study.
CHAPTER - II: REVIEW OF LITERATURE
This
chapter reviews the existing literature on the concept of financial performance
analysis. It also contains reviews of journals and articles, and earlier thesis
related to the subject.
CHAPTER - III: RESEARCH METHODOLOGY
This
chapter expresses the way and technique of the study applied in the research process.
It includes research design, population and sample, data collection procedure
and processing, tools and method of analysis.
CHAPTER – IV: DATA PRESENTATION
AND ANALYSIS
In this chapter collected and processed data are presented, analyzed and interpreted by using financial tools as well as statistical tools include arithmetic mean, standard deviation and coefficient of variances.
CHAPTER – V: DISCUSSION &
CONCLUSION
In this
chapter, discussion for summary of the whole study and conclusion will be
incorporated according to findings of the data analyzed in previous chapter.
Some implication for suggestion on fact of research finding is also mention.
At the end of this report, BIBLIOGRAPHY
consist references sources information and APPENDICES for details
calculation table are presented to verify the analysis of information to
complete the research report.
1.6 Limitation of the Study
Every
research has more or less limitation. Lack of experiences, time, financial
resources and accurate information are some of limitation of the study. For the
completion of this study, some facts are to be considered as the limitation.
Limited variable has been selected. Only two bank comparison has been deemed.
Some qualitative factors are not included due to unavailability of facts and
their study.
CHAPTER II
REVIEW OF LITERATURE
2.1 Conceptual Review
B.N.
Ahuja (1998), “Financial Performance analysis is a study or relationship among
the various financial factor in business a disclosed by a single set of
statement and a study of the trend of these fact as shown in a series of
statements. By establishing a strategic relationship between the item of a
balance sheet and income statements and other operative data, the financial
analysis unveils the meaning and signification of such items.”
According
to R.W. Metcalf and P.H. Tatar (1996), “Financial Performance analysis is a
process of evaluating the relationship between components parts of a financial
statement to obtain a better understanding of a firm’s
position and performance.”
Similarly,
Khan and Jain have defined that (1990) “The ratio analysis is defined as the
systematic use of ratio to interpret the financial performance so that the strength
and weakness of firm as well as its historical performance and current
financial condition can be determined.”
In the
word of Van Horne (1994) “Financial ratio can be derived from the balance sheet
and the income statement. They must be analyzed on a comparative basis. Ratio may
also be judged in comparison with those of similar firms in the same line of
business and when appropriate, with an industry average and we can look to
future progress in this regard.”
A
comparative study of financial performance is a basic process, which provides information
on profitability, liquidity position, earning capacity, efficiency in
operation, sources and use of capital, financial achievement and status of the
companies. These information will help to determine the extent of efficiency
and effectiveness of the company in respect of deploying financial resources in
the profitable manner.
Profitability
is a measure of firm’s efficiency (Khan & Jain, 1998). It is also a control
measure of the
earning power of a firm as well as operating efficiency. Weston & Copland (1998)
described profitability as net result of a large number of policies and
decisions. Ratios are used to measure profitability and these give final
answers about how effectively the firm is being managed. Therefore, management,
creditors and owner of the company are also interested in the profitability
ratio of the firm (Pandey, 1995).
Lippman and McCall (1986) define asset liquidity as the time it takes to sell an asset or convert it into cash. They argue that when using the time to determine an asset’s liquidity it must be clear what the length of time is and how to measure it, so it will be able to compute liquidity. The length of time is influenced by four factors. First is the amount of bidders, for it will take longer to locate a buyer when the number of sellers is larger than buyers. Second, when the transfer of the legal title has many obstructions, such as the time it takes to exchange legal ownership of the asset and the right of disposing the asset, selling the asset will take relatively long. Moreover, the cost for holding assets determines how fast an asset is sold. Finally, the price at which the seller is willing to sell.
Liquidity is also defined as the position or capability of a bank to meet the current obligation of customers such as payment of cheque. Payment of demand drafts, disbursement of approved loan etc. Bank needs to maintain some reasonable level of liquidity to fulfill different commitments such as provide money to depositors when they demand for administrative expenses, for maintaining cash bank’s capacity to pay cash in exchange of deposits. Liquidity is crucial in the business like banking. Because if the bank has high liquidity, it can no earn a desire profit and if the bank has the shortfall of the liquidity it cannot satisfy its customers. Inadequate liquidity may lead to collapse of the banks while excess liquidity is detrimental to bank’s profitability. In order to remove demerits associated with maintaining inadequate and excess liquidity, banks should maintain an optimum level of liquidity. This possible only when bank’s liquidity needs is correctly predicted. Prediction covers in present outflows of liquidity. If prediction shows more outflows, bank should be prepared to cover the shortfall by borrowing or by liquidating assets. If inflow greater than outflow, bank should plan where to invest so that income can be increase. Banks attach great importance short term and long term predictions. Prediction of liquidity need should be in the firm of primary and secondary reserves so that bank generates income and at the same time does not compromise to liquidity. Nepal Rastra Bank, as the central bank of Nepal, had made it mandatory for commercial bankers to maintain liquidity as under:
Balance at Nepal Rastra bank – 7% current and saving deposit liabilities. 4.5% of fixed deposit liabilities. Cash in vault – 2 % of deposit liabilities
2.2 Review
of Empirical Research
Prior to
this study, the several researchers have found various studies regarding
financial performance of commercial and joint venture banks. In this study,
only relevant subject maters are reviewed which are as follows: -
A thesis conduct by Shakya , Suman
(2010) in “Financial Performance Of Nepal SBI Bank Limited And Everest Bank
Limited.” analyzed different ratio of NSBIBL and EBL for the period of five
years till fiscal year 2008. Here, in some cases the liquidity position of EBL
is slightly stronger where as in some cases the ratio of NSBIBL is higher. It concludes
that liquidity position of these two banks is sound. NBBL has better
utilization of resource in income generating activity than EBL. They are on
decreasing trends while interest earned to total assets and return or net worth
ratio of EBL is better than NSBIBL. It seems overall profitability position of
EBL is better than NSBIBL and both banks are highly leveraged.”
Kishor Poudel (2002)., in
his thesis paper “Liquidity and investment position of Joint Venture Commercial
Banks in Nepal” has made an attempt to evaluate liquidity and investment of
joint venture banks special reference to Everest Bank Ltd and NABIL Bank Ltd.
He has concluded that liquidity position of EBL is better than that of NABIL’s.
Growth rate of investment is higher in EBL than NABIL. He further found that
the banks do not have constant and consistent liquidity and investment policy.
There is no standard and uniform rate or ratio for maintaining liquid assets by
the commercial banks. A commercial bank at its own judgment may decide to
maintain an appropriate level of liquid assets. So he has recommended exploring
such investment and to increase its investment on share and debenture and the
bank should have laid down policy for timely review of portfolio and to
maintain risk and return.
Mr. Pragun Shrestha (2002) in his study, “A comparative Analysis of Financial performance of the Selected commercial Banks”, Concluded that many of the banks are of the view that political instability in the country is mainly responsible for the decline of the lending opportunities. Few banks ascribed it to the economic crisis that occurred in Asia pacific region .No one felt that higher rates on interest on lending to be a major factor. At the some time it should target not only the urban sector, it should go to the rural sector also. They have to explore all the potential sectors like tourism etc. in order to generate high rate of profits.
Mr. Gurung’s ( 2003) Study on “ A Financial Study of Joint Venture Banks in
Nepal”. A Comparative Study of NGBL and NIBL. In this study, he has analyzed financial position of
the banks measuring various ratios to elaborate the financial performance.
The liquidity, profitability and dividend payout ratio of two banks are on
favourable position. But NIBL seems to be slightly better position in terms of
liquidity, profitability and capital structure compared to the NGBL. In this
evidence he has concluded that the NIBL promises a better future than NGBL .
Chapter
III
Research Methodology
The rationale behind the study is to
evaluate and assess the financial position or performance of the two newly
operated joint venture banks viz. NABIL Bank and Nepal SBI Bank Limited. Thus,
this chapter includes those methods and techniques used for finding out a fore
said purpose.
Research methodology refers to the
various sequential steps (along with the rationale of each step) to he adopted
by a researcher in studying a problem with certain objective in view. It is a
way to systematic solve the research problem it may be understood as a science
of studying how search is done scientifically. Includes the various steps that
are generally adopted by a researcher studying his/ her research problem along
with the logic behind them, it would be appropriate to mention here that
research project are not meaningful to any one unless they are in sequential
order which will be determined by the particular problem at hand therefore,
this study aims at analyzing and interpreting the purpose of comparative
financial performance or appraisal of two JVBs. This chapter focuses and deals
with the following aspects or methodology.
- Research design
- Population and Sample
- Source of data
- Data collection procedure
- Method
of Date analysis
3.1 Research
Design
Research
design is the task of defining the research problem. In other words, "A
research design is the arrangement of conditions, for collection and analysis
of data in a manner that aims to combine relevance to the research purpose with
economy in procedure. In fact, the research design is the conceptual structure
within which the research is conduct. General objective; of this research study
is to examine and evaluate the financial performance of joint venture banks
especially that of NABIL and SBI in order to achieve the objective, both descriptive
and analytical research design has been followed. The study focuses on the
examination of relationship between those variables that influence financial decisions
of the sampled batiks hence; it is an ex-post factor research.
3.2 Population
and Sample
There are altogether 28 commercial banks functioning in the country and most of their stocks are traded actively in the stock market. In this study, NABIL’s investment policies have been compared with that of SBI bank. Among them NABIL bank and SBI bank of Nepal are undertaken for study. Their data relating to financial ratios are studied and compared.
3.3 Sources
of Data and Data collection
The report is mainly based on secondary data with negligible information and data collected from primary sources. The data required for the analysis are directly obtained from the balance sheet and P\L account of concerned banks’ annual reports. Supplementary data and information are collected from number of institutions and regulating authorities like NRB, SEBON, NEPSE, Ministry of Finance, and budget speech of different fiscal years and economic survey.
All the secondary data are complied, processed and tabulated in the time series as per the need and objectives of the study. Likewise various data and information are collected from the economic journals, periodicals, bulletins, magazines and other published & unpublished reports and documents from various sources. Formal and informal talks with the concerned authorities of the banks are also very helpful to obtain the additional information of the related problem.
3.4 Data
Processing and Presentation
Data obtained from the, various sources
cannot be directly used in their original form further they need to be verified
and simplified for the purpose of analysis. Data information, figure and facts
so obtained need to be checked, rechecked edited and tabulated for computation.
According to the nature of data, they have been inserted in meaningful tables, which
will be shown in appendix. Homogenous data will be sorted in one table and similarly
various tables will be prepared in understandable manner odd data excluded from
the table. Using financial and statistical tools will be analyzed and
interpreted.
3.5 Data Analysis Tools
The financial, accounting and statistical tools will be used to make the analysis more effective, convenience, reliable and authentic. The analysis of data is will be done according to the pattern of data available because of limited time and resources. Simple analytical statistical tools. Similarly, some accounting tools such as ratio analysis will also be used for financial analysis. The various tools applied in this study have been briefly presented as under:
Financial
Tools
Financial
tools are those which are used for the analysis and interpretation of financial
data. These tools can be used to get the precise knowledge of a business which
in turn are fruitful in exploring the strengths and weaknesses of the financial
policies and strategies. For the sake of analysis following various financial
tools have been used in order to meet the purpose of the study.
(i) Profitability ratios are designed to highlight the
end-result of the business activities, which in the imperfect world of ours, is
the sole criterion of cover all efficiency of business unit. A company should
earn profit to survive and grow over a long period. It is a fact that sufficient
profit must be earned to sustain the operations of the business, to able to
obtain funds from investors for expansion and growth; and to contribute towards
the social overheads for the welfare of society. The profitability ratios are
calculated to measure the operating efficiency of the company. Management of
the company, creditors and owners are interested in the profitability of the
firm. Creditors want to get interest and repayment of principal regularly.
Owners want to get a reasonable return from their investment. It includes return on asset and return on
equity.
(ii)
Liquidity ratios will be used to judge the firm's ability to moot
short-term
obligation. These ratios give insights
into the present cash solvency of the firms and its ability to remain solvent
in the event of adversities. It is the comparison between short-term obligation
and the short –term resources available to meet these obligations. These ratios
are calculated to find the ability of banks to meet their short-term
obligation, which are likely to mature in the short period. The following
ratios are developed and used for our purpose to fin the liquidity positions of
the two joint venture banks. It includes current ratio.
Statistical Tools
Various statistical tools can be used to analyze the data available to
the researcher.
These tools are used in research in order to draw the reliable
conclusion through the
analysis of financial data.
The tools are: Arithmetic mean, Standard deviation and Coefficient of
variation
3.6 Variables
Variables are characteristics of person,
things, and groups and object. Nature of the business, number of employees in business sector, family support, capital
availability, risk bearing capacity, entrepreneurship, age, education are
variables under study.
Dependent
Variable
A variable is called
dependent variable if its values depend upon the other variables. The
researcher’s purpose is to identify the variability in the dependent variable.
Here dependent variables are: growth, nature of business.
Independent
Variable
A variable is called independent variable if its value is not influenced
by any other variable under study. Any change in the independent variable
either positive or negative, leads to change in the dependent variable. Thus,
the independent variables are those, which are used as the basis of prediction
and the dependent variables are those variable that is being predicted are:
Women’s age, qualification, ethnicity and women's inspiration like profit
potentiality, extra income and social status.
CHAPTER IV
Data Presentation and Analysis
In this chapter an attempt has been made to analyze and evaluate major financial items, which have an impact on financial management and fund mobilization of NABIL and SBI bank. A number of financial ratios that are crucial in evaluating the fund mobilization system of commercial banks have been calculated and analyzed in this chapter. After this, the financial ratios of the banks have been explored.
4.1 Financial Analysis
We have tried to analyze and evaluate those major financial items, which are mainly related to the investment management and fund mobilization of NABIL and SBI bank. The ratios are designed and calculated to highlight the relationship between financial items and figures. It is a kind of mathematical procedure to derive relationship between two or more variables. The important financial ratios, which are to be calculated for this study, are as follows:
4.1.1 Liquidity
ratios
This ratio measures the ability of the firm to meet its current obligations. A commercial bank must maintain its satisfactory liquidity position to meet the credit need of the community, to meet demands for deposits, withdraws, pay maturity obligation in time and convert non-cash assets into cash to satisfy immediate needs without loss to bank and consequent impact in long run profit. In fact, it analyzes liquidity needs, which is helpful for the preparation of cash budget and fund flow statement.
The following ratios are evaluated and interpreted under liquidity ratio:
i) Current Ratio
Current ratio indicates the ability of a bank to meet its current obligation. This is the broad measure of liquidity position of the financial institutions. The widely accepted standard of current ratio is 2:1 but accurate standard depends on circumstances in case of banking and seasonal business ratio such as 1:1 etc.
We have,
Current Ratio =
Where, current assets consist of cash and bank balance, money at call or short-term notice, loan advance investment in government securities, other interest receivable and miscellaneous current assets whereas, current liabilities consist of deposits, loan and advances, bills payable, tax provision, staff bonus, dividend payable and miscellaneous current liabilities
|
Table 1.1 Current Ratio (times) |
|||
|
S.N |
Fiscal Year |
NABIL |
SBI |
|
1 |
2005\2006 |
0.76 |
1.02 |
|
2 |
2006\2007 |
0.81 |
1.05 |
|
3 |
2007\2008 |
0.92 |
1.06 |
|
4 |
2008\2009 |
0.94 |
1.07 |
|
5 |
2009\2010 |
0.96 |
1.09 |
|
Total |
|
4.39 |
1.058
|
|
Mean |
0.878 |
1.0585.29 |
|
|
S.D. |
|
0.079 |
0.02315 |
|
C.V. |
0.0895 |
0.022 |
|
. Source: Appendix 1 ‘A’
The above table no.1,1 shows that the current ratio of these commercial banks. Total mean standard deviation and coefficient of variation have also been calculated.
Although the current ratio of NABIL has been fluctuating it is always around one or less than one. Current ratio of SBI, on the other has always remained at 1:1. In fact, the ratio of both the banks seems to be appropriate. But, the lower ratio of NABIL indicates that it may often not be in a proper liquidity position. SBI’s liquidity position is better than that of NABIL’s.
The coefficient of variation between the current ratio of NABIL is 8.95% that is greater than that SBI i.e.2.2%. It shows that current ratio of NABIL is fewer consistencies than that of SBI bank.
(ii) Cash and Bank Balance to Total Deposit Ratio (CRR Ratio)
Cash and bank balance are the most liquid assets. This ratio measures the ability of the bank to meet the unanticipated cash and all types of deposits.
We have,
Cash and Bank Balance to Total Deposit Ratio =
Where,
Cash and bank balance includes cash on hand, foreign cash on hand, cheques and other cash items, balance with domestic and abroad banks whereas the total deposits include current deposits, saving deposits, fixed deposits, money at call and short-term notice and other deposits.
Table 1.2 Cash and Bank Balance to Total Deposit Ratio (%)
|
S.N |
Fiscal Year |
NABIL |
SBI |
|
1 |
2005\2006 |
5.13 |
29.42 |
|
2 |
2006\2007 |
6.78 |
29.07 |
|
3 |
2007\2008 |
8.51 |
20.44 |
|
4 |
2008\2009 |
6.87 |
12.01 |
|
5 |
2009\2010 |
5.38 |
10.43 |
|
Total |
32.67 |
101.37 |
|
|
Mean |
6.534 |
20.274 |
|
|
S.D. |
1.215 |
8.078 |
|
|
C.V. |
0.186 |
0.398 |
|
Source: Appendix 1 ‘B’
The table no.1.2 shows the total mean, standard deviation and co-efficient of variation of cash and bank balance to total deposit ratio of these two commercial banks.
It is clear from the above table that CRR of the banks quite fluctuating, although SBI’s CRR is quite high as compared to that of NABIL’s. It indicates that NABIL bank is maintaining appropriate CRR ratio if SBI bank can maintain a consistent CRR, the remaining fund can be used for further investment.
Mean and standard deviation of NABIL bank is less that of SBI bank. C.V. ratio of NABIL and SBI bank are 0.186 and 0.398 respectively. From this, we can conclude that NABIL has better maintained its liquidity than SBI bank.
4.1.2 Profitability Ratios
Profitability ratios are very help ful to measure the overall efficiency of operation of financial institutions. Here, profitability ratios are calculated and evaluated in terms of the relationship between net profit and assets. Higher ratio shows the higher efficiency of the bank.
The following profitability ratios are taken into account under this heading.
i) Return on Total Working Fund Ratio
This ratio measures the profit earning capacity of the bank by utilizing its available resources i.e. total asset. Return will be higher if the banks’ working fund is well managed and if efficiency is utilized. Maximizing taxes within the legal options available will also improve the return.
We have,
Return on total Working Fund Ratio =
|
Table 1.3 Returns on Total Working Fund Ratio (%) |
|||
|
S.N. |
Fiscal year |
NABIL |
SBI |
|
1 |
2005/2006 |
1.59 |
0.17 |
|
2 |
2006/2007 |
1.54 |
0.58 |
|
3 |
2007/2008 |
2.51 |
0.64 |
|
4 |
2008/2009 |
2.72 |
0.72 |
|
5 |
2009/2010 |
3.15 |
0.96 |
|
Total |
11.51 |
3.07 |
|
|
Mean |
2.302 |
0.614 |
|
|
S.D |
0.405 |
0.257 |
|
|
C.V |
0.176 |
0.418 |
|
Source: Appendix 2 ‘A’
Table no. 1.3 shows the total mean, S.D. and C.V. of return on total working fund ratio of NABIL bank and SBI bank.
In the above table, return on total working fund ratio of NABIL has decreasing trend in FY 2005/2006 and 2006/2007 i.e. 1.59 and 1.54 respectively. Then after, it has increasing trend. The ratio of SBI bank has increasing trend from 2005/2006 (0.17) to FY 2009/2010 (0.96).
Mean ratio of NABIL is higher than that of SBI bank i.e. 2.302 > 0.614.Whereas, C.V. of NABIL is lower than that of SBI bank i.e.0.176 < 0.418.
From the mean ratio analysis it is found that NABIL bank is successful to maintain the higher ratio in return on total working fund. The C.V. of NABIL is lower than that of SBI bank, which indicates that return on total working fund ratio of NABIL is stable and consistence. It also reveals that investment policy of NABIL bank is efficient and affordable.
ii)
Return on Loan and Advances Ratio
It measures the earning capacity of a commercial bank on its deposits mobilized on loan and advances. Higher the ratio greater will be the return and vice-versa
We have
Return on Loan and Advances Ratio =
Where, loan and advances includes loan cash credit, overdraft bills purchased and discounted.
Table
1.4 Return on Loan and Advances Ratio (%)
|
S.N. |
Fiscal year |
NABIL |
SBI |
|
1 |
2005/2006 |
3.50 |
0.30 |
|
2 |
2006/20067 |
3.65 |
0.95 |
|
3 |
2007/2008 |
5.37 |
1.09 |
|
4 |
2008/2009 |
5.56 |
1.18 |
|
5 |
2009/2010 |
5.96 |
1.63 |
|
Total |
2404 |
5.15 |
|
|
Mean |
4.808 |
1.03 |
|
|
S.D |
1.026 |
0.430 |
|
|
C.V |
0.213 |
0.418 |
|
Source:
Appendix 2 ‘B’
Table no. 1.4 shows the total mean, S.D, and C. V. of return on loan and advances ratio of NABIL and SBI bank.
In the above table, return on loan and advances ratio of NABIL bank has increasing trend from the FY 2005/2006 to 2009/2010. i.e. 3.50 to 5.96. The ratio of SBI bank has also increasing trend from the FY 2005/2006 to 2009/2010 i.e. 0.30 to 1.63.
Mean ratio of NABIL is greater than that of SBI bank i.e. 4.808 > 1.3 whereas, C.V. of NABIL is less than that of SBI bank i.e. o.213 < 0.41.
From
the above analysis, it is found that NABIL bank has maintained higher ratio
than SBI bank, which indicates that it is successful to earn high return on its
loan and advances. It also indicates that investment policy of NABIL bank is
more effective than other banks. Moreover, NABIL has consistency investment
policy return than other banks.’
4.1.3
Risk Ratio
The possibility of risk makes banks’ investment a challenging task. Bank has to take risk to get return on investment. It increases effectiveness and profitability of the bank. If a bank expects high return on its investment, it has to accept the risk and manage it efficiently.
Through following ratios, effort has been made to measures the level of risk.
i) Liquidity risk ratio
The liquidity ratio measures the level of risk associated with the liquid assets i.e. cash, bank balance, etc that are kept in the bank for the purpose of satisfying the depositor’s demand for cash. Higher the ratio, lower the liquidity risks.
We have,
Liquidity risk ratio =
Table 1.5 Liquidity Risk Ratios (%)
|
S.N. |
Fiscal year |
NABIL |
SBI |
|
1 |
2005/2006 |
8.52 |
29.42 |
|
2 |
2006/20067 |
5.13 |
29.07 |
|
3 |
2007/2008 |
6.78 |
20.44 |
|
4 |
2008/2009 |
8.51 |
12.01 |
|
5 |
2009/2010 |
6.87 |
10.96 |
|
Total |
35.81 |
101.90 |
|
|
Mean |
7.162 |
20.38 |
|
|
S.D |
1.267 |
7.950 |
|
|
C.V |
0.77 |
0.390 |
|
Source:
Appendix 3 ‘A’
Table no.1.4 shows the total mean, S.D. and C.V. of liquidity risk ratio of NABIL and SBI bank.
In the above table, liquidity ratios of these commercial banks are in fluctuating trend. NABIL bank has maintained a highest ratio of 8.52 in the FY 2005/2006. Similarly, SBI bank has maintained a highest ratio of 29.42 in the FY 2005/2006. They have maintained a lowest ratio of 5.13 and 10.96 in the FY 2006/2007 and 2009/2010 respectively.
The mean ratio of NABIL is lower than that of SBI bank i.e. 7.162>20.38 which, indicates that SBI banks’ liquidity risk lower than that of NABIL bank. But C.V. of NABIL is lower than that of SBI bank i.e. 0.77<0.390 which, indicates that NABIL’s liquidity position is consistence than that of SBI bank.
4.2 Statistical Tools
A important statistical tools is used to achieve the objective of this study. In this study, statistical tools such as trend arithmetic mean, standard deviation, coefficient of variance, co-efficient of correlation between different variables have been used which are as follows:
4.2.1 Co-efficient of Correlation analysis
This analysis identifies and interprets the relationship between the two or more variables. In the case of highly correlated variables, the effect on one variable may have effect on other correlated variable under this topic. Karl Pearson’s co-efficient of correlation has been used to find out the relationship between the following variables.
i.) Co-efficient of correlation between deposit and loan and advances.
This tool analyzes the relationship between these variables and helps the banks to make appropriate policy regarding deposit collection, fund utilization (loan & advances and investment) and maximization of profit.
Co-efficient of correlation between deposit and loan and advances measures the degree of relationship between these two variables. The purpose of correlation analysis between deposit and loan and advances is to find out whether the deposit is significantly used as long and advances or not. In this analysis, deposit is considered as independent variables, (x) and loan and advances as dependent variables (y)
Table 1.6 Co-efficient of Correlation between deposit and loan and advances
|
Evaluation Criteria |
NABIL |
SBI |
|
r |
0.45 |
0.88 |
|
r² |
0.20 |
0.78 |
|
P. E. r |
0.11 |
0.03 |
|
6P.E.r |
0.65 |
0.18 |
Source: Appendix 5 ‘A’
In the table no. 1.5 the value of r, r², P. E. r and E. r between deposit and loan and advances of NABIL and SBI bank for the period of 2005/2006 to 2009/2010 are tabulated.
From the above table, it is found that the co-efficient of correlation (r) between deposit and loan & advances of NABIL and SBI bank are 0.45 and 0.88 respectively. It shows the highly positive relationship between these two variables. However, co-efficient of determination i.e. r² of NABIL bank is 0.20, which means that the 20% of dependent variable i.e. loan and advances has been explained by the independent variable i.e. deposit.
Co-efficient of determination i.e. r² of SBI bank is 0.78, which means that the 78% of dependent variable i.e. loan and advances has been explained by the independent variable i.e. deposit. Moreover, while considering the probable error, in case of NABIL bank r² < 6P.E.r i.e. 0.20 < 0.65 and in case of SBI bank r² > 6P.E.r i.e. 0.78 > 0.18.
From the above analysis, it can be concluded that the value of ‘r’ is significant. There is significant relationship between deposit and loan and advances of NABIL and SBI bank. It also reveals that these two banks are successful in mobilizing their deposit as loan and advances. SBI bank has higher value of ‘r’ indicating that it has better position in mobilizing deposit as loan and advances in comparison to NABIL bank.
4.3
Major Findings of the Study
The main findings of the study are derived with the help of analysis of financial data of NABIL and SBI bank.
1. Liquidity Ratio
The liquidity position of NABIL and SBI bank reveals that:
ü From the analysis of current ratio, it is found that NABIL bank has maintained lower current ratio than that of SBI bank, which indicates that liquidity position of SBI is better than that of NABIL bank.
ü The mean ratio of cash and bank balance to total deposit of NABIL bank is less than that of SBI bank. It states that liquidity position of SBI bank is better than that of NABIL bank.
The above result shows that the liquidity position of NABIL is comparatively lower than SBI bank.
2.
Profitability Ratio
The analysis of profitability ratio of NABIL and SBI bank shows that:
ü The mean ratio of return on loan and advances of NABIL is higher than that of SBI bank. There is consistency in return of NABIL than that of SBI bank.
ü The mean ratio of return on total working fund ratio of NABIL is higher than that of SBI bank and it is more consistent. NABIL bank is successful to maintain higher ratio investment return on total working fund.
3. Risk Ratio
The mean ratio of liquidity risk of NABIL is lower than that of SBI bank.
4. Coefficient
of correlation analysis
Coefficient of correlation analysis between different variables of NABIL and SBI bank shows that:
ü Coefficient of correlation between deposit and loan and advances of these two banks has positive relationship between the variables. NABIL has the lower value of coefficient of correlation between deposit and loan and advances than the SBI bank. This indicates that SBI bank's position is better than NABIL bank in mobilizing the deposit as loan and advances.
CHAPTER V
SUMMARY AND CONCLUSION
In this chapter we present the summary and conclusions nutshell from the analysis in the earlier preceding chapter. Then, based on the finding and our conclusion we suggest certain measures for further improvement. With the help of some important financial as well as statistical tools, the researcher has made a comparative analysis of various financial ratios of the concerned commercial banks.
After completing the basic analysis required for the study, the researcher has tried to point out some problems and errors and also has some suggestions for further improvement. This study may be helpful for the management of concerned bank to initiate the action and achieve the desired result.
5.1
Summary
The economic development of a country depends upon the development of the commerce and industry. There is no doubt that banking promotes the development of commerce because banking sector itself is the part of commerce. The process of economic development depends upon various factors. However, economists are now convinced that capital formation and its proper utilization play a paramount role for rapid economic development.
The evolution of the organized financial system in Nepal has recent history than in any other countries of the world. In Nepalese context, the history of banking is hardly seven decade. However, after the announcement of liberal and free market economy based policy, Nepalese banks and financial sectors started having greater network and access to national markets. Commercial banks play a vital role, which deals with other people’s money, and stimulate saving by mobilizing idle resources to those sectors where the objectives opportunities as available. Modern banks provide various services to their customers in view of facilitating their economic and social life.
The objective of the commercial banks is always to earn more profit by investing or granting loan & advances to the profitable, secured and marketable sectors. But they should be careful while performing the credit creation function; the banks should never invest its funds in those securities, which are of fluctuating nature. And, commercial banks must follow the rules and regulations as well as different directions issued by central bank and ministry of finance while mobilizing the funds. For the purpose of the present study two commercial banks namely NABIL and SBI, were taken.
For the analysis and interpretation of the data of this study, different financial & statistical tools are used. In the financial tools liquidity ratios, profitability ratios, risk ratios and growth ratios have been used. The statistical tools such as mean, standard deviation, co-efficient of variation, mainly; the secondary data are used for the analysis in this study. The data are obtained annual report of concerned banks; likewise, the financial statement of five years i.e. 2005/2006 to 2009/2010 was selected for the purpose of evaluation.
5.2 Conclusion
The above-mentioned major findings led this study to the following conclusions:
v The liquidity position of NABIL is comparatively lower than SBI bank.
v Analyzing the profitability of these two banks, we found that return on total working fund and return on loan and advances of NABIL is higher than that of SBI bank.
v Current ratio of NABIL is fewer
consistencies than that of SBI bank.
v From the viewpoint of the risk ratio, liquidity risk of NABIL is lower than that of SBI bank. SBI bank has good liquidity position and risk ratio.
5.3 Suggestions
v Profitability is the main indicator of the financial performance financial institutions. In this study, we can see that profitability ratio of NABIL is good form the angle of return but it is not able to earn higher interest through the use of outside assets and working fund. So, NABIL is recommended to increase its interest earning capacity by investing more and more fund in loan and advances and different types of securities.
v A commercial bank must maintain its satisfactory liquidity position to meet the credit need of its customers; however, internal as external factors affect the liquidity position of the banks. As NABIL has maintained lower ratio of cash and bank balance to total deposit and current assets than SBI bank, NABIL is recommended to increase cash and bank balance to meet the requirement of cash for various purposes. SBI bank is able to maintain higher liquidity ratio but it should be enough careful that it’s more than required level.
v If a bank expects high return on its investment, it has to accept risk. The risk taken by NABIL, from the angle of liquidity risk is lower than that of SBI bank. Its consistency is highly volatile which may result in higher loss. The bank should not take high risk. NABIL should carefully analyze the above risks to achieve higher returns.
v Co-efficient of correlation analysis interprets the relationship between two or more variables. Co-efficient of correlation between outside assets and net profit of NABIL is negative, which shows that there is negative relationship between these two variables. It reveals that NABIL is not able to earn net profit by mobilizing its total outside assets. So NABIL should innovate new strategy to improve its present conditions.
v In the light of growing competition in banking sector, the business of the bank should be customer oriented. The bank is recommended to adopt new technology and services. All most all commercial banks in Nepal are providing various facilities such as financial switch system (SWIFT), automatic teller machine (ATM) cards, visa electron debit card, international credit card, locker services, lending against gold and silver services, parking services, 24-hour services etc. Beside these facilities bank should be involved in different kind of social and community development activities. The bank should be able to provide more personalized services and a better environment for its customers.
v To get success in the competitive banking environment, depositor’s money must be utilized as loan and advances. The largest item of bank in the must be utilized as loan and advances. If it is neglected, then it would be the main cause of liquidity crisis in the bank. NABIL’s loan and advances to total deposit ratio and loan and advances to total working fund ratio of lower than that of SBI bank. To overcome this situation, NABIL is strongly recommended to follow liberal lending policy and invest more and percentage of total deposit and total working fund in loan and advances.
v In order to collect more funds, NABIL is suggested not to be surrounded and limited only by big clients i.e. multination companies, large industries, manufacturer companies, NGO’s and INGO’s etc. It should give emphasis to general people also. It should be able to collect small savings of people too to meet its needs for cash.
Bibliography
Bernstein, Leopoled. A and Wild, Jon J. (1998). Financial
Statement Analysis, (1st ED.) New
York, McGraw-
Hill Publication.
Definition of Nepal in introduction is retrieved from source https://en.wikipedia.org/wiki/Nepal
Khan,
M.Y, & Jain, P.K. (1998). Financial Management, Text and Problems (2nd ED.)
India:
Tata McGraw-Hill Publishing Company Ltd.
Lippman, S.A. and McCall, J.J., 1986, An Operational Measure of Liquidity, The American
Economic Review, Vol. 76, No. 1, pp. 43-55.
Panday, I.M. (2000). Financial Management, (1st
ED.) India, Vikas Publishing House Pvt.
Ltd. New Delhi.
Poudel, K. (2002), Liquidity and Investment
Position of Joint Venture Commercial Banks in
Nepal, An Unpublished Master Degree Thesis, T.U.
Van Horne, James C, (1998).Financial Management
Policy,(1st ED.) New Delhi, Prentice-
Hall of India
Private Ltd.
Van Horne, James C. (2000).Financial Management &
Policy,(1st ED.) New Delhi, Prentice
Hall India Pvt.
Ltd.
Website name.
1. http:// www.nrb.org.np
2. http:// www.nabilbank.com
3.http:// www.nepalsbi.com.np
Appendix-1
A. Current Ratio
Calculation of current ratio of NABIL and SBI Bank
|
Particular |
Fiscal year |
||||
|
2005/06 |
2006/07 |
2007/08 |
2008/09 |
2009/10 |
|
|
NABIL Bank |
|
|
|
|
|
|
Current assets |
13161.68 |
13313.40 |
13868.30 |
244.04 |
14788 |
|
Current liabilities |
17226.21 |
6384.73 |
15135.42 |
15153.13 |
15405.11 |
|
Ratio (times) |
0.76 |
0.81 |
0.92 |
0.94 |
0.96 |
|
SBI Bank |
|
|
|
|
|
|
Current assets |
7166.11 |
6787.57 |
740457 |
8345.34 |
20921.81 |
|
Current liabilities |
7043.64 |
5459.41 |
6992.43 |
7808.29 |
19194.31 |
|
Ratio (times) |
1.02 |
1.05 |
1.06 |
1.07 |
1.09 |
B. Cash and Bank Balance to Total Deposit Ratio
Calculation of cash and bank balance to total deposit ratio of NABIL and SBI Bank.
|
Particular |
Fiscal year |
||||
|
2005/06 |
2006/07 |
2007/08 |
2008/09 |
2009/10 |
|
|
Nabil Bank |
|
|
|
|
|
|
Cash and bank balance |
812.90 |
1051.82 |
1144.77 |
970.49 |
3441.2 |
|
Total deposit |
15839.01 |
15506.44 |
13447.65 |
14119.03 |
63963.94 |
|
Ratio (times) |
5.13 |
6.78 |
8.51 |
6.87 |
5.38 |
|
SBI Bank |
|
|
|
|
|
|
Cash and bank balance |
1945.14 |
1619.96 |
1333.54 |
864.42 |
3874 |
|
Total deposit |
6612.29 |
5572.47 |
6522.82 |
7198.32 |
37142.85 |
|
Ratio (times) |
29.42 |
29.07 |
20.44 |
12.01 |
10.43 |
Appendix-2
Profitability Ratios
A. Return on Total Working Fund Ratio
Calculation of return on working fund ratio of NABIL and SBI bank.
|
Particular |
Fiscal Year |
||||
|
2005/06 |
2006/07 |
2007/08 |
2008/09 |
2009/10 |
|
|
NABIL Bank |
|
|
|
|
|
|
Net profit |
291.37 |
271.63 |
416.25 |
455.32 |
513.36 |
|
Working fund |
18367.15 |
17629.25 |
16562.61 |
167745.63 |
162971.4 |
|
Ratio (Times) |
1.59 |
1.54 |
2.51 |
2.72 |
3.15 |
|
SBI bank |
|
|
|
|
|
|
Net profit |
12.51 |
40.85 |
48.75 |
60.86 |
68.15 |
|
Working fund |
7284.79 |
7021.14 |
7566.33 |
8440.40 |
7098.96 |
|
Ratio (Times) |
0.17 |
0.58 |
0.64 |
0.72 |
0.96 |
B. return on Loan & Advances Ratio
Calculation of return on loan & advances ratio of NABIL and SBI bank.
|
Particular |
Fiscal Year |
||||
|
2005/06 |
2006/07 |
2007/08 |
2008/09 |
2009/10 |
|
|
NABIL Bank |
|
|
|
|
|
|
Net profit |
291.37 |
271.63 |
416.25 |
455.32 |
465.73 |
|
Working fund |
8324.44 |
7437.90 |
7755.95 |
8189.99 |
7780.704 |
|
Ratio (Times) |
3.50 |
3.65 |
5.37 |
5.56 |
5.96 |
|
SBI bank |
|
|
|
|
|
|
Net profit |
12.51 |
40.85 |
48.75 |
60.86 |
68.36
|
|
Working fund |
4188.41 |
4299.25 |
4468.72 |
5143.66 |
4193.86 |
|
Ratio (Times) |
0.30 |
0.95 |
1.09 |
1.18 |
1.63 |
Appendix-3
Risk Ratio
A. Liquidity Risk Ratio
Calculation of liquidity risk ratio of NABIL and SBI Bank.
|
Particular |
Fiscal year |
||||
|
2005/06 |
2006/07 |
2007/08 |
2008/09 |
2009/10 |
|
|
NABIL Bank |
|
|
|
|
|
|
Cash and bank balance |
1088.75 |
812.90 |
1051.82 |
1144.77 |
970.49 |
|
Total deposit |
12779.51 |
15839.01 |
15506.44 |
13447.65 |
14119.03 |
|
Ratio (times) |
8.52 |
5.13 |
6.78 |
8.51 |
6.87 |
|
SBI Bank |
|
|
|
|
|
|
Cash and bank balance |
1945.14 |
1619.96 |
1333.54 |
864.42 |
746.43 |
|
Total deposit |
6612.29 |
5572.47 |
6522.82 |
7198.32 |
6810.49 |
|
Ratio (times) |
29.42 |
29.07 |
20.44 |
12.01 |
10.96 |
Appendix-4
A. Calculation
of mean, standard deviation and coefficient of variation of current ratio of
NABIL and SBI Bank.
|
FY |
NABIL bank |
SBI bank |
||||
|
|
X1 |
X12 |
X2 |
X22 |
||
|
2005/06 |
1.06 |
1.13 |
1.02 |
1.04 |
||
|
2006/07 |
0.76 |
0.58 |
1.02 |
1.04 |
||
|
2007/08 |
0.81 |
0.65 |
1.05 |
1.10 |
||
|
2008/09 |
0.92 |
0.85 |
1.06 |
1.12 |
||
|
2009/10 |
0.94 |
0.88 |
1.07 |
1.16 |
||
|
N = 5 |
4.49 |
4.087 |
5.022 |
5.48 |
||
Where,
X1 = Total current ratio of NABIL
X2 = Total current ratio of SBI bank
Calculation of mean of current ratio of NABIL bank.
Mean =
Calculation
of standard deviation of current ratio of NABIL bank
S.D.
=
=
= 0.105
Calculation of coefficient of variation (C.V.)
C.V =
=
= 11.69%
Calculation
of mean, S.D. and CV of SBI bank is done similarly.
Appendix-5
A.
Calculation of coefficient of correlation between Deposit and Loan and Advances
of NABIL
|
FY |
Deposit (X) |
Loan and advances (Y) |
x = X- |
X2 |
y = Y- |
Y2 |
xy |
|
2005/06 |
12779.51 |
7334.76 |
(1558.82) |
2429913.56 |
(473.85) |
224531.91 |
738642.79 |
|
2006/07 |
15839.01 |
8324.44 |
1500.68 |
2252046.46 |
515.83 |
266082.65 |
774099.80 |
|
2007/08 |
15506.44 |
7437.90 |
1168.11 |
1364485.64 |
(370.71) |
137424.42 |
(433028.46) |
|
2008/09 |
13447.65 |
7755.95 |
(890.68) |
793307.30 |
(52.66) |
2772.86 |
46901.32 |
|
2009/10 |
14119.03 |
8189.99 |
(219.30) |
48091.61 |
381.38 |
145452.23 |
(83636.31) |
|
n = 5 |
|
|
|
|
|
|
|
|
Mean |
14338.33 |
7808.61 |
|
|
|
|
|
Now,
Coefficient
of correlation (r) =
=
= 0.45
Probable Error (PEr) = 0.6745
= 0.6745
= 0.11
Coefficient of correlation of SBI bank is calculated accordingly.
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