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0cc49 A Comparative Study of Nepal Bank Limited
0cc49 A Comparative Study of Nepal Bank Limited
0cc49 A Comparative Study of Nepal Bank Limited
A Comparative Study of
Nepal Bank Limited and Nabil Bank Limited
By
S.No.
1.
2.
3.
4.
5.
Name
Roll No.
Abhishek Kharel
125
Dhurba Khadka
125
Dipendra Bhandari 542
Dhanesh Giri
451
Madhav Ghimire
541
S.No.
6.
7.
8.
9.
10.
Name
Roll No.
Prakash Shakya
125
Rabin Rana
125
Subash Karki
542
Sujan
451
Sukra Raj Shrestha 541
Assignment Submitted to :
Madam Prerana L. Rajbhandari
Kathmandu
June, 2005
ACKNOWLEDGEMENT
Table of Contents
Chapter 1 : INTRODUCTION
1.1
General Background
1.2
Function of Commercial Bank
1.3
Nepal Bank Limited: A Glance
1.4
NABIL Bank Limited: A Glance
1.5
Restructuring of NBL
1.6
Statement of the problem
1.7
Objective of the study
1.8
Significance of the study
1.9
Limitation of the study
1.10
Chapter Plan
1-5
1
1
2
2
3
4
4
5
5
5
6-8
6
7
7
8
9-14
9
9
9
9
10
15-33
15
15
20
23
28
31
34-35
34
34
35
37
BIBLIOGRAPHY
38
List of Tables
Table 1
Table 2
Table 3
Table 4
Table 5
Table 6
Table 7
Table 8
Table 9
Table 10
Table 11
Table 12
Table 13
Table 14
Table 15
Table 16
Table 17
Page No.
Current Ratio
16
Cash and Bank Balance to Total Deposit Ratio
17
Cash and Bank Balance to Non-Interest Bearing Deposit Ratio
18
Cash and Bank Balance to Interest Bearing Deposit Ratio
19
Loan and Advances to Total Deposit Ratio
21
Total Investment to Total Deposit Ratio
22
Long Term Debt to Net worth Ratio
24
Total Debt to Total Assets Ratio
25
Capital Adequacy Ratio
26
Total Debt to Net worth Ratio
27
Return on Investment Ratio
29
Commission and Discount Income to Personnel Expenses Ratio 29
Interest Income to Interest Expenses Ratio
30
i) Return on Shareholders Equity of NBL
31
ii) Return on Shareholders Equity of NABIL
31
Price Earning Ratio
32
Dividend Payout Ratio
32
Market value per share to Book value per share
33
List of Figures
Figure 1
Figure 2
Figure 3
Page No
16
17
18
20
21
23
24
26
27
28
ABBREVIATIONS
BVPS
CRR
DPS
EPS
FY
: Fiscal Year
JVBs
MVPS
NBL
No.
: Number
NPR
: Nepalese Rupee
NRB
RBB
SLR
CHAPTER 1
INTRODUCTION
1.1. Background
As survival, development and prosperity of any organization depend on number of factors.
Every organization should give prime concern to those factors. However one of the major
determinants for effective running of a business entity is its financial operation system.
Optimum utilization of the organizations financial resource, leads the organization to the
ultimate target fulfillment so it is very important to analyze the accounting and financial
statements to know whether the financial position is sound and what kind of measures should be
applied.
In recent years due to liberal economic policy of the Government many private banks are
coming into operation. The foreign joint venture banks are enjoying competitive advantageous
factors like highly skilled personnel, modern and advanced banking technology, customer
oriented modern banking services, management expertise and global banking network.
Bank in general means an institution that deals with money. Concept of banking had developed
from the ancient history us with the effort of ancient history with the effort of ancient Goldsmith
who practiced storing peoples gold and valuables. Bank was originated from French word
Banque. In the developing countries like Nepal, Banks play vital role for domestic resource
mobilization and economic development of a country. The first commercial bank was Bank of
England (1694), central bank of Britain. The first commercial bank in Nepal is Nepal Bank
Limited, which was, established in 1937 A .D. Commercial banks are the suppliers of finance
for trade and industry and play a vital role in the economic and financial life of the country. By
investing the saving in the productive areas they help in capital formation.
According to Gillian and Soal, A sound banking system is important because of the key roles it
plays in the economy: intermediation, maturity, transformation, facilitating payment flows,
credit allocation, and maintaining financial discipline among borrowers. Banks provide
important positive externalities as gathering of saving, allocation of resources and providers of
liquidity and payment services.
Commercial Banks play the vital role in economic development of any nation. Capital is the
most important factor and foundation for not only the economic development but also for the
overall growth and prosperity of the nation.
customer-related services, i.e. issue of bill of exchange, hundis etc.. to invest on government
bond and securities, to carry out agency functions and to act banker to the government.
Committee (CC), Relation Management Division (RMD), Credit Administration and Review
Division (CARD), Special Asset Group (SAG), and several Task Forces have been established
to create, apply and reinforce internationally accepted norms and modalities in the bank. The
norms and modalities are focused towards identifying bank risk and enhance the loan risk rating
systems in the bank. New Credit Policy Guide, Guidelines for Credit Decision Process, Problem
Loan Guide have been prepared and implemented last year. A continuous negotiation and
dialogue with big defaulters have been initiated and around Rs. 490 million of loan as
categorized on NPA has been recovered and restructured within the one half years of period.
New accounting manual and chart of accounts have been introduced. Around 300 staff in the
NBL have received the Accounting Training. The pending audits of FY 2000/01, 2001/02 have
been completed last year and the financial audit of 2002/03 has also been completed in time this
year. A detail Human Resource Master Plan has been prepared and accordingly to get the bank
in the right size first phase VRS has been launched which has reduced the staff by 1462. The
loss position of the bank has been reduced to Rs.250 million in FY 2002/03 from that of
Rs.3070 million of FY 2001/02. Its is expected that the restructuring effort would be successful
to introduce a new credit culture, sound HR development program , scientific and modern
IT/MIS platform to instill profit oriented atmosphere , an inbuilt self monitoring mechanism and
customer service culture within the contract period in NBL .
The basic objective of this study is to analyze the financial performance of the two banks by
conducting a comparative study between NBL and NABIL through the use of different ratios.
The specific objectives of this study are as follows:i. To analyse the risk and return of NBL in comparison to NABIL
ii. To analyse the liquidity position of the selected banks.
iii. To evaluate the financial ratios to calculate efficiencies, valuation, profitability, capital
structure ratios.
iv. To recommend measure for the improvement of the financial performance and efficiency
on the basis of the conclusions drown from the research.
Chapter Four data has been presented and analyzed in accordance with the selected research
methodology.
Chapter 5 Presents the major findings and provides some suggestions. The bibliography and
appendixes have been incorporated at the end of the study.
Chapter 2
Review of Literature
This chapter highlights and deals with the literature relevant to this study. It comprises review of
book, previous studies received, article review and review of policy documents.
Ratio Analysis
Ratio analysis is the systematic use of financial information of the firms strength and weakness
as its historical performance, and current financial condition can be determined.
After calculating various ratios, we need to compare with the certain standard and draw out the
conclusion of the result. The comparison classified by Weston and Brigham into six types viz ,
(i)Liquidity ratios (ii) leverage ratios, (iii) Activity ratios (iv)profitability ratios (v) Growth
ratios and (vi) Valuation ratios .
In this study the following ratios are analyzed.
1. Profitability Ratio
2. Liquidity Ratio
3. Efficiency Ratio
4. Capital structure Ratio
5. Investment ratio
The details of the ratios will be discussed in detail in the next chapter.
The preamble of Nepal Bank Act 1994 clearly states the need of commercial bank in the
country, In absence of any bank in Nepal the economic progress of the country was being
hampered and causing inconvenience to the people and therefore with the objective of fulfilling
that need by providing services the people and for the betterment of the country, this law is
hereby promulgated for the establishment of the bank and its operation.
A bank shall be established under the Company Act with the recommendation of the Rastra
Bank. The bank may determine the location of its head office with the approval of the Rastra
Bank. The bank shall be an autonomous corporate body with the perpetual succession. It may
sue or be sued in its own name. Subject to this Act and other current Nepal law, the bank may
acquire, use and sell movable and immovable property. Any bank may open or shift the location
of, or close branches depots or other offices with the approval of the NRB.
In case any foreign commercial bank desires to open a branch, representative office or liaison
such branch under the company Act with the approval of NRB, and provisions of the act shall
apply to such foreign bank The NRB shall obtain the consent of His Majestys Government
before granting approval. While granting approval, NRB may prescribe condition according to
the need, and the foreign bank shall company with the conditions thus prescribed by the NRB.
Chapter 3
Research Methodology
Evaluating the financial performance of the selected banks in a micro level and to highlight the
efforts of the financial decisions of these banks in the economy at the macro level forms the
basic objective of this research.
3.1.
Research Design
Keeping in mind the objective of the study, descriptive cum analytical research design has been
followed. The study is based on the wide range of variables and factors influencing financial
decisions of the banks. Comparative data banks are presented in such a way so as to make the
report informative to the reader. Financial tools (Ratios) have been used to analyze and interpret
the balance sheet, income statement and other accounting information.
The considerable assistance of Financial Ratios and Income and Expenditure analysis has been
taken to measure the strength and weaknesses of the NBL and NABIL.
Liquidity Ratio
Profitability Ratio
Valuation ratio
Liquidity Ratio
Liquidity Ratio reflects the short-term obligation of the firm. This ratio shows that if firm need
cash amount in short period without any notice, can firm fulfill its need or how it manage the
need.
Commercial banks need liquidity to meet loan demand and deposit withdrawals. Liquidity is
also needed for the purpose of meeting Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio
(SLR) requirements prescribed by the central Bank. The following ratios are calculated under
the liquidity ratios.
a)
Current Ratio
It is the ratio of total current assets to current liability. Lower current ratio creates difficulties in
meeting short run commitments as they mature. If the ratio is too high, the bank has an
excessive investment in current assets or is under utilizing short- term credit.
Current Assets
Current Ratio =
Current Liabilities
b)
Cash and Bank Balance to Total Deposit Ratio
The proportion of the bank's idle money with total funds collected is indicated by this ratio.
High ratio means high idle money, which shows the inefficiency of management, as well as
increased cost of capital.
Cash and bank balance
Error!
Cash and Bank Balance to Total Deposit Ratio =
Total Deposit
c)
Cash and bank balance to Non-interest Bearing Deposit Ratio: This ratio indicates the proportion of liquid assets to meet non-interest bearing liabilities, which
are free cost of source of NBL and RBB. This ratio is calculated as.
Cash & Bank Balance
d) & Bank
Cash Balance
and Bank
to Interest
Bearing
(excluding
Cash
to Balance
Non-Interest
Bearing
Deposit
Ratio = Fixed ) Deposit Ratio
Non-This
interest
deposits.
Saving deposit is the fixed interest bearing short-term liabilities.
ratiobearing
id calculated
to
d) Cash and bank balance to interest Bearing Deposit Ratio: Cash & Bank Balance
Cash & Bank Balance to Interest Bearing Deposit Ratio =
Interest bearing deposit
Interest bearing fixed deposit is excluded being long-term liabilities. It is inappropriate to use
current assets to meet long term high interest bearing liabilities, i.e., fixed deposit.
Activity or Turnover Ratio
Activity ratio is a function of the efficiency with which the various assets components are
measured. It measures the degree of effectiveness in use of resources or funds by an enterprise.
a)
Loan and Advances to Total Deposit ratio:
Loan and advances are the major resources of investment to generate income in the commercial
banks. Deposits are used to grant loans and advances. Therefore, the bank should manage its
deposits efficiently. This ratio is calculated to determine the utilization of deposits for profit
generating purpose on the loans and advances. This ratio is calculated as;
Loan and Advances
Loan and Advances to Total Deposit Ratio
b)
Total Investment to Total Deposit Ratio
Investment is one of the major forms of credit created to earn return. It measures the utilization
of deposits in investment. Higher the ratio, better the utilization of collected fund and generates
regular income to the banks. This ratio is calculated as:
It measures the proportion of long-term debt and equity used in the capitalization of the
banks. It is calculated as:
Long Term Debt
Long Term Debt to Net Worth Ratio =
Net Worth
b)
Commission and Discount Income to Personnel Expenses Ratio
This ratio measures the efficiency of the staff or cost paid for taking services from staff to earn
income by providing services to the customers.
Commission and Discount income to Personnel
Commission and Discount Income
Expenses Ratio
=
Personnel Expenses
c) Interest Income to Interest Expenses Ratio
This ratio measures the effective use of deposit to earn revenue in proportion of the expense accrued
on collected deposits. Bank has to pay interest on interest bearing deposits and receive interest
through its investment on loans, advances and others.
Interest Income
Interest Income to Interest Expenses Ratio =
Interest Expenses
d) Return on Common Equity Ratio( ROCE)
This ratio is also called Investors Ratio'. It measures the effectiveness of the management with
respect to both its operating and financial decision.
Net Profit after tax
Return on Common Equity Ratio=
Shareholders Equity
Valuation Ratios
These ratios result the overall performance of the bank measuring the combined effect of risk
and return. The valuation ratios indicate the market value of the firm as compared to the book
value and measure the stock price relative to earnings. The following ratios are calculated.
a) Price Earning Ratio(P / E Ratio)
Price earning Ratio is widely used by the security analyst to value the firms performance as
expected by investors. It shows how much investors are willing to pay per dollar of reported
profits. This ratio is calculated as:
Market Value Per Share
Price Earning Ratio=
Earning Per Share
Earning per share is calculated by dividing profit after tax by total number of common shares
outstanding.
Chapter Four
The current ratio for the bank is slightly low in the contrast of industry average due to the nature of
the bank. The calculation of the current ratio for the NBL and NABIL can be shown by the table.
Table#1
Current Ratio Table
(In million)
NBL
NABIL
Year
Current
Assets
Current
Liabilitie
s
Ratio
(Times)
1997/98
33876.43
32635.80
1998/99
36793.18
1999/00
Average
Ratio
(Times)
Current
Assets
Current
Liabiliti
es
Ratio
(Times)
1.0380
10802.12
10132.27
1.0661
37977.19
0.9688
11961.95
11249.94
1.0633
37893.67
41603.39
0.9108
14788.91
13977.29
1.0581
2000/01
37513.28
43239.47
0.8676
13161.68
17226.21
0.7640
2001/02
39168.99
47787.80
0.8196
13313.40
16384.73
0.8125
0.9209
Average
Ratio
(Times)
0.9528
From the above table, the average current ratios of the two banks are for below the satisfactory
level. NBL has the declining Trend of current ratio, from 1.0380 times the to 0.8196 times in the
study period of five years keeping the average ratio 0.9209 times. The shows that NBLs current
assets have been declining in comparison to its current liabilities. This means that this banks ability
to meet its short-term obligations is declining over the period of Last five years. Like NBL, NABIL
has the declining trend of current ratio, from 1.0661 times to 0.8125 times in the study period of
five years keeping the average ratio as 0.9528 times. This also shows the NABILs current assets
have declining in comparison to its current liabilities. This means that this banks ability to meet its
short-term obligations is declining over the period of Last five years.
The comparative graph of current ratios of the selected banks has been presented below.
Year
2001/0
2
2000/0
1
1999/0
0
1998/9
9
1.5
1
0.5
0
1997/9
8
Current
Ratio(Times)
NBL
NABIL
Figure No. 1
b) Cash and Bank Balance to total deposit ratio: - Cash and bank balance are the most Liquid
Assets, so this ratio measures the banks ability to immediately fund the withdrawal of their
depositors. A high ratio represents a greater ability to cover their deposits and vice versa. This ratio
is determined by dividing cash and bank balance by total deposits.
Table#2
Cash and Bank Balance to Total Deposit Ratio Table
( Rs. In million)
NBL
Year
NABIL
Cash &
Bank
Balance
Total
Deposit
Ratio
(%)
Average
Ratio
(%)
1997/98
6495.49
28138.26
23.0842
1153.75
8737.76
13.2042
1998/99
5415.76
33188.48
16.3182
630.94
9464.28
6.6665
1999/00
5471.89
35768.26
15.2982
1088.75
12779.51
8.5195
2000/01
6266.79
35618.59
17.5942
812.90
15839.01
5.1323
2001/02
6627.11
34264.84
19.3408
1051.82
15506.44
6.7831
18.3271
Cash &
Bank
Balance
Total
Deposit
Ratio
(%)
Average
Ratio
(%)
8.0611
The above table shows the cash and bank balance to total deposit ratio of NBL is in decreasing and
again slowly increasing in the year 2000/01 and 2001/02. The maximum was in the FY 1997/98
which was 23.08% minimum was in the FY 1999/00 which was15.30% The average for the review
period was 18.33% .The cash and bank balance of NABIL Bank is moving in a zigzag trend,
firstly decreasing and increasing and soon. The maximum was in FY 1997/98 which was 13.20%
and minimum was in the FY 2000/01 which was 5.13% .The average for the review period was
8.06%.
This analysis helps us to conclude that cash and bank position with respect to its total deposit of
NBL is better than NABIL. The customer of NBL bank has more safety. The graph of cash and
bank balance to total deposit ratio of the banks have been presented below.
Year
2001/0
2
2000/0
1
1999/0
0
1998/9
9
30
20
10
0
1997/9
8
Ratio(%)
NBL
NABIL
Figure No. 2
c) Cash and Bank Balance to Non-Interest Bearing Deposit Ratio:- This ratio indicates the
proportion of liquid assets to meet non-interest bearing liabilities, which are cost free source of the
banks.
Table#3
Cash and Bank Balance to Non-Interest Bearing Deposit Ratio
( Rs. In million)
NBL
Year
Cash &
Bank
Balance
NonInterest
Bearing
Deposit
1997/98
6495.49
4753.06
1998/99
5415.76
1999/00
NABIL
Ratio
(%)
Average
Ratio
(%)
Cash &
Bank
Balance
NonInterest
Bearing
Deposit
136.66
1153.75
2531.66
45.57
4745.09
114.13
630.94
2691.38
23.44
5471.89
5414.94
101.05
1088.75
3351.05
32.49
2000/01
6266.79
5389.21
116.28
812.90
3254.33
24.97
2001/02
6627.11
4678.45
141.65
1051.82
8087.53
13.00
121.95
Ratio
(%)
Average
Ratio
(%)
21.40
The above table shows that the cash and bank balance to non-interest bearing deposit ratio of NBL
is very high. It is maximum in the FY 2001/02 which was 141.65% and the minimum was 101.05%
in the FY 1999/00. The average ratio was 121.95%. The cash and bank balance to non-interest
bearing deposit of NABIL Bank is fluctuating throughout the period. The ratio ranged between
23.44% to 45.57%. The average ratio was 21.40%. The comparative graph of the above table is
presented below.
Ratio(%)
NBL
NABIL
50
/0
2
20
01
/0
1
20
00
/0
0
19
99
/9
9
19
98
19
97
/9
8
Year
Figure 3
The above analysis helps us to conclude that NBL was better in liquidity position for the payment of
its current non-interest bearing obligations. NBL Bank had enough liquidity to refund its whole
non-interest bearing deposit at any time. On the other hand, NABIL was utilizing its cost free
deposit in profit generating purpose, which yields high return as well as risk of insolvency for the
bank.
d)Cash and Bank Balance to Interest Bearing Ratio:- The cash and bank balance to interest
bearing ratio is calculated by dividing cash and bank balance by interest bearing deposits(excluding
fixed deposits). A bank must insure that it is liquid enough to face heavy deposit withdrawal. It has
to maintain adequate balance in the form of cash and bank balance in order to honor large
withdrawals by its customers.
Cash and bank balance to interest bearing deposits of NABIL and NBL tabulated in table No. 4.
Table#4
Cash and Bank Balance to Interest Bearing Deposit Ratio
( Rs. In million)
NBL
Year
Cash &
Bank
Balance
Interest
Bearing
Deposit
Ratio
(%)
Average
Ratio
(%)
NABIL
Cash &
Bank
Balance
Interest
Bearing
Deposit
Ratio
(%)
1997/98
6495.49
11112.78
58.45
1153.75
2456.79
46.96
1998/99
5415.76
14281.04
37.92
630.94
3352.62
18.82
1999/00
5471.89
18066.25
30.29
1088.75
4150.19
26.23
2000/01
6266.79
20058.24
21.24
812.90
4917.14
16.53
2001/02
6627.11
19855.12
33.38
1051.82
4972.06
21.15
38.26
Average
Ratio
(%)
25.94
The above table shows the ratio of NBL is in decreasing trend, the review period ranged between
58.45% in the FY 1997/98 to 16.53% in the FY 2000/01. The average ratio was 25.94%.On
average again NBL has better liquidity position than that of NABIL. However, very high ratio of
NBL indicates the unwise investment decision, i.e., inability of the bank to invest in more
productive sectors like government securities, treasury bills etc to enhance its profitability. So this
analysis helps us to conclude that the depositors of NBL Bank have more margin of safety than that
of NABIL.
20
01
/0
2
20
00
/0
1
19
99
/0
0
NBL
NABIL
19
98
/9
9
70
60
50
40
30
20
10
0
19
97
/9
8
Ratio(%)
The comparative graph of cash and bank balance to interest earning deposit ratio has been presented
below.
Year
Figure No. 4
4.1.1.2. Activity or Turnover Ratio
The ratios indicate the efficiency with which a corporation employs its resources. Activity ratios are
employed to evaluate the efficiency with which the firm manages and utilizes its assets. From these
ratios it is known that whether the funds employed have been used efficiently in the business
activities or not. These ratios are also called turnover ratios because they indicate the speed with
which assets are being converted or turned over into profit generating assets. Following ratios are
used under activity ratio.
a) Loan and Advances to Total Deposit ratio: - Loans and advances to total deposit ratio is
calculated by dividing total loan and advances by total deposit. The core banking function is to
mobilize the funds from the depositors to the borrowers. Banks make profit by lending or utilizing
the deposited funds by charging a higher rate of interest to the borrowers than they pay to the
depositors. Hence they are known to be efficient in utilizing the funds if they can advance a greater
proportion of the deposited fund into risk assets.
The comparative ratios of the two banks have been tabulated below.
Table#5
Loan and Advances to Total Deposit Ratio
(Rs. In million)
NBL
Year
Loan &
Advances
Total
Deposit
1997/98
17039.89
28138.26
1998/99
17206.89
1999/00
NABIL
Ratio
(%)
Average
Ratio
(%)
Loan and
Advances
Total
Deposit
60.56
5224.07
8737.76
59.79
33188.48
51.85
5788.93
9464.28
51.17
14922.01
35768.26
41.72
7334.76
12779.51
57.39
2000/01
11918.94
35618.59
33.46
8324.44
15839.01
52.56
2001/02
8638.43
34264.84
25.21
7437.90
15506.44
47.97
42.56
Ratio
(%)
Average
Ratio
(%)
55.78
The above mentioned table shows that NBL has decreasing trend of loan and advances to total
deposit ratio. It was maximum in the FY 1997/98 which was 60.56% and minimum in the FY
2001/02 which was 25.21%. The average ratio was 42.56%. The NABIL bank has the credit deposit
ratio of 55.78% only fluctuating betweens 59.79% in the FY 1997/98 to 47.97% in FY 2001/02.
80
60
40
20
0
/0
2
20
01
20
00
/0
1
/0
0
19
99
19
98
19
97
/9
9
NBL
NABIL
/9
8
Ratio(%)
Year
Figure 5
This analysis helps us to conclude that NABIL had the moderate ratio over the review period of
five years. This signifies that NABIL Bank had been able to efficiently use the outsiders fund
in profit generating purpose. It had been successful in advancing the favorable position of its
deposit towards loans and advances. But NBL had not been able to use the outsiders fund in
profit generating purpose.
b)Total Investment to Total Deposit Ratio:-This ratio is calculated by dividing total
investment by total deposits. Investment function or funds management is gaining widespread
importance in the banking sector. Treasury of the bank is involved in investing the surplus fund
with the bank in the income generating investments. In order to fill this gap between borrowing
lending, bank rather go for investments such as treasury bills, government securities,
development bonds, overseas placement and inter bank lending.
These investments earned a lower rate of return in comparison to loans and advances but under
most circumstances they generate higher rate of return than their cost of funds. Hence prove to
be beneficial for the bank.
Table#6
Total Investment to Total Deposit Ratio
( Rs. In million)
NBL
Year
Total
Investment
Total
Deposit
NABIL
Ratio
(%)
Average
Ratio
(%)
Total
Investment
Total
Deposit
Ratio
(%)
1997/98
4495.08
28138.26
15.97
954.15
8737.76
10.92
1998/99
5124.96
33188.48
15.44
1420.36
9464.28
15.01
1999/00
562.07
35768.26
15.27
1250.94
12779.51
9.78
2000/01
6776.33
35618.59
19.02
7704.31
15839.01
48.64
2001/02
7151.38
34264.84
20.87
8199.51
15506.44
52.88
17.314
Average
Ratio
(%)
27.45
The above table shows that the total investment to total deposit ratio of NBL was constant between
the FY 1997/98 in the FY 2001/02, which was 20.87%, and the minimum was in the FY 15.27% in
the year 1999/00. The average ratio was 17.314%. The ratio of NABIL was fluctuating
immoderately. NABIL had maintained the highest ratio of 52.88% in the FY 2001/02 and lowest
ratio in the FY 1999/00, which was 9.78%, and the average ratio was 27.45%. The comparative
graph of the above table is presented below.
60
40
20
0
/0
2
20
01
/0
1
20
00
/0
0
19
99
19
98
19
97
/9
9
NBL
NABIL
/9
8
Ratio(%)
Year
Figure No. 6
This analysis helps us conclude that NBL is not relying significantly in investment to mobilize the
surplus deposit than NABIL bank. The bank with larger volume of foreign currency deposit relies
more on investment, as these deposits cannot be utilized into loans and advances easily.
The leverage ratio shows how much of a firm assets are financed by debt and equity. By studying
them, one can asses the prospects for future financing. If the firm has employed excessive debt in its
capital structure, additional debt financing will be difficult in future. The firm might have to pay
higher rate of interest. On the other hand, if the firm has employed no debt , or little debt, it reveals
the failure to use cheap borrowed capital and raise the shareholders rate of return. The use of debt
also enables the owners to maintain their control over the firm. If the capital is raised through equity
then the owners will lose control. The firm with high leverage ratios is subject to higher risks and
this would, in turn, increase their chances of getting high return. Conversely, the firm with low
leverage ratio is subject to lower risks and would in turn, decrease their return.
a)Long Term Debt to Net Worth Ratio:- Bank total fund which is invested in various income
generating assets consists of debt as well as shareholders fund. Debts for the bank usually include
deposits and borrowings from the customer whereas shareholders fund includes equity capital and
reserves.
Long-term debts in the form of fixed deposits are high cost liabilities for the bank. High ratio will
be favorable if the bank utilizes the funds on long-term loans and advances. Idle long-term debt
incurs losses due to high cost. This ratio measures the relative proportion of long-term debt in
relation to net worth. Long-term debt to net worth ratio of the selected banks has been tabulated
below.
Table#7
Long Term Debt to Net Worth Ratio Table
( Rs. In million)
NBL
Year
Long
Term
Debt
Net
Worth
Ratio
(Times)
1997/98
704.82
753.03
1998/99
577.11
1999/00
NABIL
Average
Ratio
(Times)
Long
Term
Debt
Net
Worth
Ratio
(Times)
0.9360
40.51
828.49
0.0489
-1538.18
-0.3752
56.37
877.73
0.0642
718.87
-4209.54
-0.1708
62.84
984.07
0.0639
2000/01
853.70
-6350.68
-0.1344
78.10
1062.83
0.0735
2001/02
1159.49
-9553.88
-0.1214
98.10
1146.42
0.0856
0.1342
Average
Ratio
(Times)
0.0672
The above table shows that the long-term debt to net worth ratio of NBL is very poor. The ratios
were in negative trend. The average ratio is 0.1342 times. The maximum ratio was in the FY
1997/98, which was 0.936. But NABIL had fluctuating ratio over the review period. NABIL had the
average ratio of 0.0672 times.
1
NBL
NABIL
0.5
1/
02
20
0
20
0
0/
01
9/
00
19
9
19
9
19
9
-0.5
8/
99
0
7/
98
Ratio(Times)
1.5
Year
Figure No. 7
From the above analysis, it can be concluded that the long-term debt to net worth ratio of NBL bank
is higher compared to NABIL. Long term financing in comparison to net worth had been
considerable for the banks. Higher proportion of long term debt debts are considered to be favorable
if the same is appropriate towards long term loans and advances, failing to do so, the cost of fund of
these debts would be higher than their return on the assets and the bank would incur losses. If this is
the case, the banks should reduce the long-term debts gradually and replace it either by interest free
current deposits or by owners fund.
b)Total Debt to Total Assets Ratio: - This ratio is calculated by dividing total outsiders fund by
total assets. The ratio of debt to total assets signifies the extent of debt financing on the total assets
and measures the financial security to the outsiders or creditors. Despite of higher risk, owners of
the bank prefer a high debt ratio because it magnifies their earnings on one hand and enables them
to maintain their concentrated control over the bank. Total debt to total assets ratio of the selected
bank over the period are tabulated below.
Table#8
Total Debt to Total Assets Ratio
( Rs. In million)
NBL
Year
Total
Debt
Total
Assets
1997/98
33340.62
34093.66
1998/99
38554.30
1999/00
Ratio
(Times)
NABIL
Average
Ratio
(Times)
Total
Debt
Total
Assets
0.9779
10172.78
11001.28
0.9247
37016.11
1.0416
11306.31
12184.05
0.9280
42322.26
38112.73
1.1104
14040.13
15024.20
0.9345
2000/01
44093.17
37742.49
1.1683
17304.31
18367.15
0.9274
2001/02
48947.29
39393.42
1.2425
16482.83
17629.25
0.9350
1.1081
Ratio
(Times)
Average
Ratio
(Times)
0.9299
The above table shows that total debt to total assets ratio of both the banks are quite consistent
throughout the review period of five years. NBL had its average ratio as 1.1081 times while NABIL
has slightly lower ratio of 0.9299 times. This shows that the total debt of NBL is about 1.01081
times and that of NABIL is 0.9299 times to that the total debt covered about 110.81% of NBL and
92.99% of NBL of their total assets in average.
1.5
1
0.5
0
NBL
NABIL
19
97
/9
8
19
98
/9
9
19
99
/0
0
20
00
/0
1
20
01
/0
2
Ratio(Times)
Year
Figure No. 8
The above analysis helps us to conclude that these banks are aggressive and are using high portion
of their debt capital. About 110.81% of their assets are financed by debt capital in NBL and 92.99%
of their assets financed by debt capital in NABIL. The high total debt to total assets ratio implies the
banks success in exploiting debts to the more profitable assets. Since both the banks had been
extensively using their debt financing to finance their total assets, it can be concluded that these
banks are highly leveraged.
c) Capital Adequacy ratio:- capital adequacy ratio is calculated by dividing total capital fund(net
worth) by total deposits. Capital adequacy has remained one of the highest issues in banking
industry and The capital adequacy ratios of the selected banks have been tabulated below.
Table#9
Capital Adequacy Ratio
Rs. In Million
NABIL
NBL
Year
Net
worth
Total
Deposit
Ratio
(%)
1997/98
753.03
28138.26
1998/99
-1538.18
1999/00
Average
Ratio
(%)
Net
Worth
Total
Deposit
Ratio
(%)
2.6762
828.49
8737.76
9.4817
33188.48
-4.6347
877.43
9464.28
9.2709
-4209.54
35768.26
-11.7690 -11.8875
984.07
12779.51
7.7004
2000/01
-6350.68
35618.59
-17.830
1062.83
15839.01
6.7102
2001/02
-9553.88
34264.84
-27.88
1146.42
15506.44
7.393
Average
Ratio
(%)
8.1112
The above table shows that the capital adequacy ratio of NABIL is higher than that of NBL
throughout the review period. NABIL had maintained the highest capital ratio in FY 1997/98 as
9.48%. The average ratio of NABIL bank was 8.11% which helps us to conclude that NABIL is in
safer position to absorb unexpected losses arising from various risks that can create instability in
banks earnings compared to NBL. NBLs capital adequacy ratio is very poor. The average ratio is
11.89%. The comparative graph of the above table is presented below.
Year
Figure No. 9
20
01
/0
2
20
00
/0
1
19
99
/0
0
19
98
/9
9
20
10
0
-10
-20
-30
19
97
/9
8
Ratio(%)
NBL
NABIL
d)Total Debt to Net Worth Ratio: -Total debt to net worth ratio measures the relative claim of
outsiders and owner over the bank assets, indicating the extent of debt financing in the bank
compared to net worth financing. In other words, the debt to equity ratio indicates the relative
contribution of debt and equity fund to the total investment.
Table#10
Total Debt to Net Worth Ratio
( Rs. In million)
NBL
NABIL
Year
Total Debt
1997/98
33340.62
753.03
1998/99
38554.30
1999/00
Total
Debt
Net
Worth
Ratio
(Times)
44.2753
10172.78
828.49
12.2787
-1538.18
-25.0649
11306.31
877.73
12.8813
42322.26
-4209.54
-10.0539
14040.13
984.07
14.2674
2000/01
44093.17
-6350.68
-6.9431
17304.31
1062.83 16.2814
2001/02
48947.29
-9553.88
-5.1233
16482.33
1146.42 14.3777
Average
Ratio
(Times)
-2.9099
Average
Ratio
(Times)
14.0173
The above table shows that the total debt to net worth ratio of NABIL is quite consistent while there
is negative ratio in NBL. NABIL had average ratio 14.0173 times but NBL had average ratio as
2.9099 times. The outsiders claim of NABIL is 14.0173 times while that of NBL is 2.9099 times.
The extensive use of debt financing by these banks is attributed to increase volume of deposits.
40
20
NBL
NABIL
Year
Figure No. 10
1/
02
20
0
0/
01
20
0
8/
99
9/
00
19
9
-40
19
9
-20
7/
98
0
19
9
Ratio(Times)
60
Thus it can be concluded that the high-geared capital structure can be advantageous to the banks as
they mobilize these deposits towards the loans and advances, which pay them higher interest. But
the banks should asses the risk asset portfolios before accepting the interest bearing deposits in
order to maintain an optimum debt to net worth ratio, thereby avoiding the financial risk.
4.1.1.4 Profitability Ratio: In any firm, profitability is a major concern. Profit is the objective
of all the policies framed and decisions taken by the management. Profitability ratios reveal an
interesting picture of how the individual firm has been managed. These ratios enable one to judge
the overall performance of the firm. The various profitability ratios, which reflect the operating
efficiency of the bank, have been analyzed comparatively.
a) Return on Investment (ROI):- This ratio is calculated by dividing net operating income by total
assets. This ratio measures the profitability of all financial resources with represents the utilization
of overall resources efficiently. ROI ratios of the selected banks have been tabulated below.
Table No. 11
Return on Investment Ratio Table
(Rs. In Million)
Date
EBIT
Total Assets
Ratio
Aug.
(%)
Ratio(%)
97/98
98/99
3188.08
2975.97
34093.66
37016.11
9.35
8.04
99/00
00/01
2904.82
2863.99
38112.73
37742.49
7.62
7.59
01/02
2142.69
39393.42
5.44
7.61
EBIT
Total Assets
Ratio (%)
Avg.Ratio
(%)
1114.03
1128.93
11001.28
12184.05
10.13
9.27
1309.11
1573.31
15024.20
18367.15
8.71
8.57
1639.11
17629.25
9.30
9.20
The above table shows that the investment or return on assets ratio of NBL is in the decreasing
trend. The highest ratio was in the FY 1998 which was 9.35% and the lowest ratio was in the FY
2002 which was 5.44%. The average ratio was 7.61%. But the ratio of NABIL is higher than that of
NBL. The average ratio of NABIL was 9.20%.
The above analysis helps to conclude that the profitability with respect to the total investment /
assets of the bank has decreased with span of time. NABIL bank has been able to utilize its asset
more efficiently to generate profit than NBL.
b) Commission and Discount Income to Personnel Expenses Ratio:- This ratio is calculated by
dividing commission and discount income by personnel expenses. Personnel expenses are the
reward provided for the staff for performing organizational task. Earning of any organization is
highly influenced by the knowledge, skill and motivation of its staff. Commission and discount
income measure the cost paid for taking services from staff to generate income by providing
services to the customers. The following table shows the commission and discount income to
personnel expenses ratio of the selected banks.
Table 12
Commission and Discount Income to Personnel Expenses Ratio Table
(Rs. In Million)
Commission&
Personnel
Ratio
Avg.
Commission &
Personnel
Discount
EXP.
(times)
ratio
Discount
Expenses
Income
Ratio(Times)
Ratio
Income
(Times)
97/98
151.11
665.33
0.2271
89.29
120.26
0.7425
98/99
208.49
763.12
0.2732
117.29
131.55
0.8916
99/00
211.35
1048.39
0.2016
139.59
152.94
0.9127
00/01
214.58
961.76
0.2231
146.84
198.46
0.7399
01/02
241.01
1227.85
0.1963
114.34
189
0.6050
0.2243
Average
0.7783
The above table shows that commission and discount income to personnel expense ratio of NBL is
quite consistent. The highest ratio was in the FY 1998/99 which was 0.2732 times and the lowest
ratio was in the FY 2002 which was 0.1963 times. The average ratio was 0.2243 times. While the
ratio of NABIL are firstly in the increasing trend and then in the decreasing trend. Still it has
average ratio as 0.7783 times higher than that of NBL.
The analysis helps us to conclude that NABIL has higher investment for its staff than NBL. Higher
investment on staff reduces the turnover of the staff.
b) Interest Income to Interest Expenses Ratio:-The ratio measures the utilization of outsiders
fund(deposit which cost interest for the bank) for lending activities that generate revenue(interest)
for the bank. Higher percentage represents the effective utilization of debt capital. Interest Income
to interest expense ratios of the selected banks are tabulated below:Table 13
Interest Income to Interest Expenses Ratio Table
(Rs. In million)
NBL
NABIL
Interest
Income
Interest
Expenses.
Ratio
(times)
97/98
2693.00
1907.50
98/99
2602.54
99/00
00/01
01/02
Avg. ratio
Interest Income
Interest
Expense
Ratio
(Times)
1.4118
899.66
433.91
2.0734
2224.70
1.1698
903.24
404.39
2.2336
2477.57
1957.23
1.2659
1047.03
432.96
2.4183
2368.35
1744.65
1.3575
1266.70
578.36
2.1902
1526.99
1713.20
0.8913
1120.18
462.08
2.4242
1.2193
Average
Ratio
2.2679
The above table shows that the both the banks have been able to maintain the interest income to
interest expense ratio quite consistently. The ratio of NABIL was increasing throughout the review
period attaining its maximum ratio as 2.42 times in the FY 2001/2002. The ratio of NABIL was also
in an increasing trend except in FY 2000/2001 when its ratio slightly dropped to 2.19 times. The
ratio of NBL was quite consistent throughout the review period but it was decreased in the FY
2001/2002 by 0.8913 times.
The above analysis helps to conclude that the interest income to interest expense ratio of NABIL
was better than that of NBL. This implies that either NABIL is using the outsiders fund properly
on the income generating activities or the fund of the bank is using in relatively less costly than that
of NBL.
d) Return to Shareholders Equity:- This ratio is calculated by dividing net profit by total
shareholders fund. One of the main objectives of any bank is its shareholders wealth
maximization. Shareholders wealth can be maximized by earning on adequate return on the
shareholders fund. This ratio expresses the capacity of the banks to utilize its owners fund. This is
an important ratio because it judges whether the firm has earned a satisfactory return for its equity
holders or not. It reveals how well the firm has deployed the resources of the owners to earn profit.
So higher the ratio, the more favorable it is for the shareholders which represents the sound
management and efficient mobilization of the owners equity. ROE ratio of the selected banks has
been tabulated below.
Shareholders equity=No of Shares Outstanding X Price per Ordinary share
Table 14(i)
Return on Shareholders Equity of NBL
(In Rs)
Net
Profit
No
of
Ordinary
Ratio(%)
after tax
Shares
Share
97/98
15920000
3803826
100
380382600
4.19
98/99
2535390000
3803826
100
380382600
-6.67
99/00
2697830000
3803826
100
380382600
-7.09
00/01
2177900000
3803826
100
380382600
-5.73
01/02
3071290000
3803826
100
380382600
-8.07
Avg.
Ratio(%)
-4.67
Table 14(ii)
Return on Shareholders Equity of NABIL
(In Rs)
Net
Profit
No
of
Ordinary
Ratio(%)
after tax
Shares
Share
97/98
174800000
4916544
100
49165400
35.55
98/99
266480000
4916544
100
49165400
54.20
99/00
329120000
4916544
100
49165400
66.94
00/01
291370000
4916544
100
49165400
59.26
01/02
271630000
4916544
100
49165400
55.25
Avg. Ratio(%)
54.24
The above table shows that the return of on shareholders equity of NABIL is in the increasing trend
except in the FY 01/02. The maximum return on shareholders equity of NBL was in FY 99/00
which was 66.94% and the average ratio is 54.24% while return on shareholders equity of NBL is
very poor . The ratio of NBL is in decreasing trend and average ratio is -4.67%
The above analysis helps us to conclude that NABIL was better than in earning a satisfactory return
for its equity holders. NABILs capacity to utilize its owners fund is very good while NBL was not
utilizing its owners fund efficiently.
4.1.1.5 Valuation Ratios:- Various valuation ratios like price earning ratio, dividend payout
ratio and market value per share to book value per share have been calculated to indicate the
market value of the bank as compared to the book value and to measure the stock price relative to
earning.
a) Price Earning Ratio(P/E ratio) :- This ratio is calculated by dividing market value per share by
earning per share. Price earning ratio indicates investors judgement or expectation about the
firms performance. Higher the ratio more the value of the stock,
P/ E ratio of the selected banks are presented below.
Table 15
Price Earning Ratio table
(In Rs)
NBL
NABIL
Market Value
Earning per
Ratio
Avg.
Market value
Earning
Ratio
Average
Per
Share
(times)
ratio
Per share
Per Share
(Times)
Ratio
97/98
535.00
10.45
51.1962
430.00
44.50
9.6629
98/99
392.00
-666.54
-0.5881
700.00
67.84
10.3184
99/00
330.00
-709.25
-0.4653
1400.00
83.79
16.7084
00/01
462.00315.00
-572.56
-0.8069
1500.00
57.26
25.3122
01/02
315.00
-807.43
-0.3901
735.00
55.25
13.3032
9.7899
15.0610
The P/ E ratio of NBL is in the increasing trend except in the year 2002. The average ratio is
15.0610 times. But the average P/E ratio of NBL is 9.7892 only. P/E ratio is higher of NABIL than
that of NBL. So the value of the stock of NABIL is more than that of NBL.
b) Dividend Payout Ratio:-Dividend payout ratio is calculated by dividing cash dividend by
earning per share . Profit after tax earned by the banks has to be distributed among the
shareholders. Banks usually do not distribute 100% of their earnings, they tend to retain some
portion in order to expand their business. The retained portion in relation to the dividend payout
ratio is known as retention ratio. Cash dividends paid in relation to the earning per share constitutes
the dividend payout ratio. Profits are retained in the bank if these retained earnings can earn higher
out as dividend decreasing the shareholders fund. Higher dividend payout ratio indicates lower
retained profit and higher cash dividends to the shareholders . Dividend payout ratios of the selected
banks are tabulated below.
Table 16
Dividend Payout Ratio Table
(In Rs)
NBL
NABIL
Dividend
Earning
Ratio
Avg.
Dividend
Earning
Ratio
Average
Per
Share
per
Share
(%)
ratio
Per
Share
Per
Share
(%)
Ratio
97/98
0.00
10.45
30.00
44.50
67.42
98/99
0.00
-666.54
50.00
67.84
73.70
99/00
0.00
-709.25
55.00
83.79
65.64
00/01
0.00
-572.56
40.00
59.26
67.50
01/02
0.00
-807.43
30.00
55.25
54.30
65.71
The above table shows that NBL is not paying dividend but NABIL is paying dividend every year.
The DPS of NABIL bank is fluctuating from 30% to 55% on average NABILs DPR is higher
compared with NBL. The DPR is 65.71%.
The above analysis helps us to conclude that NABIL, being in its maturity stage is paying high
percentage of dividend while NBL is not paying dividend. The NBL is not able to pay dividend due
to loss
c) Market Value Per Share to Book Value Per Share Ratio:- This ratio is calculated by dividing
Market value per share by book value per share. This ratio is a relative measure of how the growth
option for a company is being valued opposite to its physical assets. High ratio represents greater
expected growth and value of the bank. The marker value per share to book value per share of the
selected banks is tabulated below:
Table 17
Market Value Per Share to Book Value Per Share
(In Rs)
NBL
Market
Value Per
Book
Value Per
NABIL
Ratio
(times)
Avg.
ratio
Share
Market
value Per
Book
Value Per
share
Share
Ratio(Times)
97/98
535.00
494.18
1.0826
430.00
210.92
2.0387
98/99
392.00
-404.38
-0.9694
700.00
223.45
3.1327
99/00
330.00
-1106.67
-0.2982
1400.00
250.53
5.5882
00/01
462.00
-1169.56
-0.3950
1500.00
216.18
6.9387
01/02
315.00
-2511.67
-0.1254
735.00
233.18
3.1521
-0.7054
Average
Ratio
4.1701
The above table shows that the market value per share to book value per share ratio of NABIL was
minimum in FY 1998(2.04 times) and maximum in FY 1998 which was 1.0826 times. On average ,
MVPS to BVPS ratio of NABIL is higher i.e. 4.17 times . This means that MVPS of NABIL is 4.17
times to its BVPS.
The above analysis helps us to conclude the NABIL is worth more than the funds put into it by the
shareholders. This clearly indicates that the NABIL is earning more than the requirement of
financial markets than NBL. The investors of NABIL are rational as the ratio increases as the book
value increases and vice versa. Comparatively the investors attitude towards NABIL is more
positive and NBL is the least.
Chapter 5
5.1 Summary
Financial institutions like banks are the replica of modernization of the society and play a vital role
in the development of economic growth of the country. Economic activity could not survive without
the continuing flow of money and credit in the market. The economy of all market oriented nations
depends on the efficient operations of complex and delicately balanced system of money and credit.
Banks are indispensable element in these systems. Commercial banks furnish necessary capital
needed for trade and commerce for mobilizing the dispersed saving of the individuals and
institutions. They provide the bulk of the money supply as well as the primary means of facilitating
the flow of credit.
The present study regarding the financial performance of the two banks namely, NBL and NABIL
has been conducted to highlight the hidden implications of the figures portrayed n the balance sheet
of the banks by interpreting their cause effect relationship with regard to their financial performance
and to identify their contribution to the national economy.. The financial statement of five years
from 1997/98 to 2001/02 has been examined to fulfill the objective of the study.
5.2 Findings
After summarizing the objective of the study, certain findings based on the analysis conducted
under the analytical section are going to be revealed in the following section:
To analyze the activity or turnover position, loans and advances to total deposit ratio, total
investment to total deposit ratio, loans and advances to fixed deposit ratio had been calculated.
Analysis of activity ratio indicates better turnover position of NABIL. This implies that NABIL is
efficiently utilizing its deposit on loans and advances and others. While NBL is not lending its
available deposit but holding the fund and deposits to own custody and / or other banks balance. It
shows NBL is discouraging the investment of its resources which makes adverse effect to the bank
in terms of efficiency and profitability also.
Analysis of leverage or capital structure indicates that long term debt to net worth ratio of
NBL is higher than NABIL and also total debt to total assets ratio of NBL is higher than that of
NBL. Unbalanced capital structure is the common situation of the banks. Banks are using excessive
debt capital. This proves both the banks are extremely leveraged.
Capital adequacy ratio calculated for the banks stood below the prescribed adequacy ratio by
NRB to absorb unexpected losses than can be incurred in the bank. Comparatively, NABILs
position is better than NBL.
The valuation ratios used for analysis showed the following results. The price earning ratio;
dividend payout ratio and MVPS to BVPS is better than NBL is better than NBL. So, the market
judges NABILs performance and prospects better than that of NBL. As the net profit of NBL is
negative and fluctuates each year tremendously, the earning per share also swings rapidly. It means
EPS is not predictable and uncertain.
As the dividend payout ratio of NABIL is higher, NABIL is paying higher proportion of its
earning as dividend and retaining least proportion of its earning. While NBL is not paying dividend,
the dividend per share is nil.
MVPS of all the banks are directly proportional to the EPS and dividend payout ratio.
Decreasing trend of EPS and unstable policy of dividend is the cause of decreasing trend of MVPS
of these banks. Generally NABIL prefers distributing bonus shares rather than to pay cash dividend
for wealth maximization that generates higher dividends and capital gains in the future.
After pointing out the findings of the analysis, we will now go to the recommendation section.
5.3. Recommendations
From the summary of the main findings of the analysis of financial performance of the selected
banks, following recommendations can be advanced to overcome the weakness and inefficiency and
to improve the performance of these banks.
The liquidity position is more than the minimum requirement criteria of NRB to 3% of its total
deposit only. In this changing context and the situation of serious security environment, NBL has to
minimize its cash position in their vault for the sake of security and the utilization of its fund in
income generating sectors. While NABI: must strengthen the liquidity position.
Excessive use of debt capital by these banks enhances the rate of return on its shareholders fund.
High leverage cost of capital can be considered as positive development if the increased debt can be
invested on income performing assets. Failure of advancing leans and advances, these high cost
bearing debt may lead ultimately to liquidity or bankruptcy. Thus, it is recommended to increase
their equity capital by issue of shares, expanding general reserves and retaining more earning.
The activity ratio measuring the efficiency achievement towards the income generating activities
of the NBL. The bank should invest all the excess balance of liquid fund in income generating
sector.
The net profit margin of the NBL is negative which shows the bank is not able to utilize its deposit
in profitable sector. It makes more problems to pay the interest of the depositor. So, the bank should
invest its deposit in profit generation sector, which could enhance the profit margin of the bank.
The return on equity fluctuates highly of NBL which shows the bank should stabilize its return
ratio with the sound management.
The DPS and EPS of NBL must be maintained by efficient and sound management.
The loan and advances department and the loan recovery department should also be target
oriented, i.e. after advancing loan, there should be regular supervision and follow up for proper
utilization of loan in NBL.
NBL should move towards the modern banking facilities and prompt service in each branch and
provide incentive and new product to attract relative growth trend of deposit.
NBL should utilize its assets efficiently and in the same time net worth should also be maintained.
NBL should adopt efficient and modern management concept to make more capable to their
activities as well as fulfill the growing demand of current financial services.
While making any type of investment (especially advancing of loan) proposal of loan in NBL. It
should be seriously studied and the most important factor is securities against which loan is going to
be provided should be valued fairly and properly. And the persons involved in valuation of
securities should be made responsible if anything is harmed from the securities.
NBL must maintain books of account up to date. It helps the bank to reduce the manipulation of
accounts, gain the trust of customers and so on. Like wise, financial statements should be published
regularly.
It is recommended to NABIL to reduce their interest spread (margin between the interest received
from loans and advances and interest paid to the depositors) as directed by NRB. Interest spread can
only be reduced if the internal rate of return, i.e. return from assets is higher than overall cost of
capital. Therefore, the bank should search for lower cost source of fund to decrease the interest
spread.
It is recommended for NABIL to develop such a dividend policy, which divided the net earning
into dividend and retained earnings in an optimum way to achieve the objective of maximizing the
wealth of the shareholders.
The NABIL is found to be centralized in urban areas. Since profitability is not only the sole
objective of the bank, it is recommended for NABIL to expand its branches in the rural areas for the
upliftment of deprived community as well as the economy of the nation. The joint venture banks
are found to be interested to pay penalty than allocate priority sector credits. This negative attitude
must be changed and devote oneself for uplifting the economic condition of the deprived
community as its social responsibilities.
Banks are recommended to activate foreign technology and investment in Nepal by means of their
wide international banking sector and make Nepalese personnel capable of operating these banks as
efficiently as international banks.
It is suggested to develop systematic plans and programs for increasing the working efficiency of
the employees that should include incentives like training and reward, which are well and clearly
structured and implemented. These banks also require formulating new service, ideas and policies
like womens development program, small entrepreneur development program, poverty alleviation
programs, priority sector development programs etc.
5.4 Conclusion
With some seventeen commercial banks and seventeen development banks operating in Nepal, the
market seems over crowed and the banks are now finding a tough competition among themselves.
Since the entry barriers are not so high due to the governments liberal policy, this competition is
expected to be more intense in the near future, as there is always the possibility of a new player
entering this sector.
NBL has not maintained a balanced ratio among its deposit liabilities. Consequently, the bank does
not seem to be able to utilize its high cost resources in high yielding investment portfolio. The
investment portfolio of the bank has not been managed so efficiently as to maximize the returns
there from. The operational efficiency of the bank is found unsatisfactory because of the series of
operational loss over the period. Lower market value is a reflection of a weaker financial
performance of the bank. The net worth of the bank for the last four years is negative due to the
heavy loss during the years. There are negative profits for the last four years. Decreased interest
paid and earned indicates decreased operating activities of the bank during the period. The bank is
not paying dividend for the last five years due to negative profit. The EPS is negative for the last
four years which shows the worst performance of the bank. The net worth of the bank is decreasing
highly which clarifies the bank is not able to perform its activities in the way other successful banks
are performing.
Restructuring of NBL for its sound management, better technical capability and improved financial
operations is the other action currently under implementations. . In addition to taking the day-today control over the managerial processes and operational activities of the banks, the management
teams have also been responsible to stabilize the bank and restore its financial heath to an
acceptable level, maneuver the financial control process so as to increase profitability, recover the
existing loan portfolio, improve the assets and liabilities structure, make financially strong and
operationally viable, develop and strength the comprehensive human resource policies, design and
implement information technology plan and eventually preparing it for privatization in the hands of
safe and sound professional bankers of repute.
There is no doubt that NABIL has been operating smoothly and have been successful in becoming
the pillars of economic system of the country. Their direct contribution to the economy, includes
high amount of the corporate tax paid by them, good dividend to the shareholders and employment
to the qualified persons in order to make them equipped with all the technical knowledge of
banking. Indirectly, NABIL as a joint venture bank acts as a financial intermediaries which provides
a link between borrowers and lenders, there by mobilizing the idle resources towards productive
investments. Customers are benefited due to excellent services of the bank and computerized
transactions. The bank has introduced developments like Automatic Teller Machines, credit cards,
deposit schemes and others, which cannot be over sighted and therefore, considered as a very
healthy development in the economy.
Nevertheless, it will be relevant to point out some of the important loop holes or discrepancies of
the joint venture in the economy. Loans and advances of NABIL mostly go to the handful of big
corporate houses and others are deprived from the required fund to start any productive business.
Though JVBs are achieving the heights of success, living standard of the general public have not
even seen a marginal growth. The methods of earnings of JVBs have very little or no return to the
economy and results in a huge disparity between two classes of people. Therefore, the statement
Figures prosper but people suffer becomes true. NRB, the central bank in order to develop the
country uniformly has necessitated the commercial banks to invest 12% of their total credit
outstanding to the priority and deprived sectors of the country. In some cases, the JVBs were even
happy to pay the penalty, because the penalty amount is lower than their opportunity cost of the
funds to the invested in the priority and deprived sectors. Again this kind of activity leads no return
for the country.
Hence, JVBs must try to seek potential sectors, such as manufacturing, utility services. Tourism,
agriculture, etc, and at the same time abide by the economic obligation of investing in priority and
deprived sectors, so as to make profits by being instrumental in developing the country.
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