1

Background of the study

Finance is the process of creating, moving and using money, enabling the flow of
money through a company in much the same way it facilitates global money flow.
Money is created by the sales force when they sell the goods or services the company
produces; it then flows into production where it is spent to manufacture more products
to sell. The strategic use of financial instruments, such as loans and investments, is
key to the success of every business. It can also be said that finance is the elixir that
assists in the formation of new businesses, and allows businesses to take advantage of
opportunities to grow, employ local workers and in turn support other businesses and
local, state and federal government through the remittance of income taxes. Financial
trends also define the state of the economy on a global level, so central banks can plan
appropriate monetary policies.

Banks represent a major component of the country's financial system and play a key
role in enhancing the overall economic growth of the country (Allen & Carletti, 2008)
The banking industry plays an essential role in the economy in terms of resource
mobilization and allocation and, is by far, the most important part of the financial
system in developing economies, accounting for the bulk of the financial transactions
and assets.

Banking has become an important feature, which renders service to the people in
financial matters, and its magnitude of action is extending day by day. It is a major
financial institutional system in Nepal, which accounted for more than 70% (Poudel,
2005) of the total assets of all the financial institutions. A profitable and sound
banking sector is at a better point to endure adverse upsets and adds performance in
the financial system (Athanasoglou et al., 2008). Banking system is also important
because any instability in it, has the possibility to lead to a financial instability and
economic crisis. Therefore, a well-functioning banking system is regarded as a
foundation of a market economy. That is why the policymakers are always there
trying hard to ensure that banking system is stable besides ensuring that it is
competitive and efficient (Kocabay, 2009).
 2

A commercial bank is a type of financial institution that accepts deposits, offers

checking account services, makes various loans, and offers basic financial products
like certificates of deposit (CDs) and savings accounts to individuals and small
businesses. A commercial bank is where most people do their banking, as opposed to
an investment bank. Commercial banks make money by providing loans and earning
interest income from those loans. The types of loans a commercial bank can issue
vary and may include mortgages, auto loans, business loans, and personal loans. A
commercial bank may specialize in just one or a few types of loans.

In Nepal, the commercial banks are currently considered to be a key driver of

financial institutions. Financial services had commenced with the establishment of
Nepal Bank Limited as one of the first commercial banks of Nepal in 1937 (Baral,
2005). After the liberalization in the mid-1980s, the government permitted the
opening of commercial banks in joint venture with foreign banks. Since then, the
Nepalese financial system has undergone rapid structural changes, with a large
number of financial institutions exposed and display of financial products and
services.

As of mid-April, 2018, there are 28 commercial banks including foreign joint

ventures, 33 development banks and 25 finance companies. According to nepjol.info
at present there are 7 joint venture banks operating in Nepal which include Nepal SBI
Bank, Everest Bank, NABIL Bank, Standard Chartered Bank, Nepal Bangladesh
Bank, Himalayan Bank and NMB Bank.

A joint venture (JV) is a business arrangement in which two or more parties agree to
pool their resources for the purpose of accomplishing a specific task. This task can be
a new project or any other business activity. In a joint venture (JV), each of the
participants is responsible for profits, losses, and costs associated with it. However,
the venture is its own entity, separate from the participants' other business interests.
 3

Performance evaluation is the important approach for enterprises to give incentive and
restraint to their operators and it is an important channel for enterprise stakeholders to
get the performance information (Sun, 2011). The performance evaluation of a joint
venture banks includes how well the bank can use its assets, shareholders’ equities
and liabilities, revenues and 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.

Financial performances of the bank can be evaluated under various models. However
CAMEL model is one of the popular and reliable method being adopted nowadays by
many countries. It was developed in USA to describe the bank’s overall condition. It
is applied to approximate 8000 institutions i.e. covering every bank and credit union
in USA and now being implemented in other parts of the world by various banking
supervisory regulators. CAMEL comprises five parameters namely capital adequacy
(C), Assets (A), management (M), Earnings (E) and Liquidity (L). There are more
approximately seventeen ratios that can be assessed to evaluate the bank’s
performance under this framework. Out of those ratios return on assets (ROA), return
on equity (ROE), capital adequacy ratio (CAR) ， nonperforming loan ratio (NPL),
interest expense to total loans (IETTL), net interest margin (NIM), credit to deposit
ratio (CDR), will be evaluated to analyze the financial data of Nepalese joint venture
banks for the period 2014 to 2018. These ratios would help to indicate the condition
of capital, assets quality, management, earnings and liquidity position of different
joint venture banks.

Problem statement and research questions

For the economic growth and development of any economy, an efficient banking
system is distinguished as a basic requirement. Banks contribute in uplifting the
 4

finance of the country by mobilizing the savings of community into productive

channels. The banking system of Nepal is featured by a large network of bank
branches, serving many kinds of financial needs of the people. Commercial banks are
considered to be the pillars of economy of the country. Joint venture banks as the
components of commercial banks also play vital role in contributing to such
development of the economy. Thus, it is very important that one should have a good
knowledge regarding financial health of those banks. The health check-up conducted
on the basis of publicly available financial data says that their health is better than the
other commercial banks. In addition, the perusal of indicators of different components
of CAMEL indicates that the financial health of joint venture banks is not so strong to
manage the possible large scale shocks to their balance sheet and their health is fair.
In context of Nepal, the Joint Venture banks established are mainly confined to the
urban areas like Kathamandu, Birgung, Pokhara etc. However, the overall socio-
economic development of the country is not confined to the development of urban
areas only and rural areas cannot be overlooked. There is a need that joint venture
banks expand their services also to the rural areas. In spite of the fact that the joint
venture banks should invest 10% of their total investment in the rural areas as stated
by the rule made by the central bank of Nepal, NRB, these banks are reluctant to
invest their resources to less profitable sector rather shows their preference towards
paying fines. In Nepal many banks and financial companies have been came into
operation within a span of few years. There is indeed a high flow of money in the
market but less viable and investable projects. The condition of the banks is not as
expected as it should be. There exist a problem of mismatch of deposit and investable
funds of banks. As there are very few sectors to be invested that would give
reasonable profit, the potential customers are attracted to operate their money into
banks as few commercial banks are continuously satisfying their shareholders and
returning them adequate profit. Therefore, commercial banks have a lot of deposits
but a very little investment opportunity.

Although joint venture banks have managed to perform better than other local
commercial banks within the short period of time, they have been facing a neck
competition against one another. Therefore, it is necessary to analyze the financial
 5

performances of joint venture banks time to time. Thus, this study will make an
attempt to analyze the financial performances of joint venture banks and make a
comparative analysis among themselves.

Purpose of the study

The main purpose of the study are:

To study the financial performance of joint venture banks of Nepal.
To compare the financial performance of joints venture banks of Nepal.

Significance of the study

Financial soundness of the bank means the ability of the bank to meet its long term
fixed expenses and acquiring its long term expansion and growth plans. Banking
system should be sound and healthy as its financial state has great impact on the
development of whole country’s economy. Every business firm performs economic
activities. These activities affect the economic condition of state and financial
condition of the firm. So while forming any economic policy of the state these things
should be kept under consideration. A sound financial performance is important for
the growth of business enterprises and financial institution. It is necessary that
financial management of an institution must be appropriate to yield a fair rate of
return on capital employed in them. Any mistake made in financial management
adversely affects the financial condition of an institution. In this regard it is required
to measure and analyze the financial performance of the commercial banks from time
to time.

Sound financial health of a bank is the guarantee not only to its depositors but is
equally significant for the shareholders, employees and whole economy as well
(Aspal & Malhotra, 2013). A sound banking system proves to be one of the pillars of
economic, social and industrial growth of a country. The financial performances of
 6

any firms or business can be improved when they possess a virtue of competition
among themselves.
At this situation, therefore, the commercial banks should be more competitive and
should be more focused on becoming financially strong and healthy. And they have to
shape their plans and strategies accordingly.
Thus, the present study tries to evaluate the financial soundness of Nepalese joint
venture banks. This study will also be an important support to the management owner
clients, steak holders and policy makers and other interested groups in analyzing the
bank's economic strength and performance efficiency. It will be helpful to the policy
makers while formulating the policy regarding these joint venture banks and people
can understand how they are benefitted by such banks. Besides policy makers this
study is also expected to be a useful feedback to the government and central bank
(NRB) to formulate the appropriate strategies for improvement in the performance of
joint venture banks. Moreover, this study can also be used as reference point by the
international organizations.

Limitations of the Study

1. The study is based on the secondary data and the limitation of using
secondary data may affect the results.
2. The secondary data will be taken from the annual reports of the selected
banks. It may be possible that the data shown in the annual reports may be
window dressed which does not show the actual position of the banks.
3. A whole study is based on the data of five years period i.e. from fiscal year
20014 to 2018 and hence the conclusion drawn confines only to the above
period.
4. The evaluation will be done under few ratios only under CAMEL model
instead of using all the ratios.
 7

Literature review

A case study was done by Suvita Jha (2013) on a comparison of financial

performance of commercial banks in Nepal. The objective of this study was to
compare the financial performance of different ownership structured commercial
banks in Nepal based on their financial characteristics and identify the determinants of
performance exposed by the financial ratios, which were based on CAMEL Model.
Eighteen commercial banks for the period 2005 to 2010 were financially analyzed.
Out of eighteen commercial banks six joint venture banks were taken for analysis.
The study found that over the study period, there was a positive trend in ROA. The
last position was belonged to NBL bank with average ROA equaled to 1.84% but
ROA values computed during the study period were found positive. SCBL was
maintained first place with ROA equaled to 2.51% among joint venture banks, while
the second position was for NABIL bank (2.48%) and the last position belonged to
NSBI (1.13%).
In this study the average ROEs for the JVB were noted better than PSB and stood
positive over the period of 2005 to 2010. While ranking the JVBs based on this ratio,
SCBL was the first one; it has an average ROE of 33.83%. The second position was
for NABIL with ROE equaled to 31.87%, and the last position was belonged to
NBBL with ROE equaled to 8.44%. It shows that JVB had satisfactory earning profit
and the shareholders earn better return on their investment.
Average capital fund ratio of joint venture banks during the study period was higher
than the minimum ratio specified by NRB. This clearly implies that joint venture
banks are complying with the directive of NRB on the requirement of the capital base
of commercial banks.
NPL indictors show that joint venture banks were improving the quality of their assets
year by year. Average NPL ratio of LBL was superior to other domestic private
banks.
As per the interest margin, the profitability of the banks was not satisfactory.
Among the six joint venture banks, the average CDR of NBBL was higher than other
JV banks. In an average, the bank has been able to utilize two-third portion of the
depositors fund in the form of credit.
 8

A study was conducted by Joshi, Archana (2008) on “A Comparative Study on

Financial Performance of Nepal SBI bank ltd. & Nepal Bangladesh bank Ltd.” with
the following objectives.
 To highlight various aspects of relating to financial performance of Nepal
Bangladesh bank and Nepal SBI bank.
 To analyze various aspects of relating to financial performance through the
use of appropriate financial tools.
 To show the cause of change in cash position of the two banks.
According to her research the following findings have been presented:
The analysis of liquidity of these commercial banks was done and it shows different
position regarding these commercial banks. The average current ratio of NSBI is
found to be greater than that of NBBL. Thus, it indicates that the liquidity position of
SBI is in normal position. From the analysis of turnover of these banks, NBBL has
better turnover than NSBI in terms of loans and advances to total deposit ratio. Thus,
it can be said that NBBL has better utilization of resources income generating
activities than NSBI bank, which definitely lead to increase in income and this
making an increment profit for the organization.

A thesis research was conducted by Bhandari, Mukunda on a comparative financial

performance analysis of Himalayan Bank Ltd. and Everest Bank Ltd. with the
objective to evaluate and analyze the financial performance of these two joint venture
banks and to recommend the suitable suggestion for improvement. The research was
done with the secondary data from 2004/05 to 2008/09.
The liquidity position of the banks in term of current ratios shows that the ratios of
both banks EBL and HBL are always below the normal standard (i.e. 2:1) where as
HBL average ratio is lower than EBL. It shows that the liquidity position in term of
current assets to current liabilities of EBL is better than HBL. So, it is concluded that
EBL is better short-term solvency position as compared with HBL. The Liquidity
position of cash and bank balance to deposit ratio of EBL is higher than that of EBL
(i.e. 12.89% >7.11% on an average). So, it is concluded that EBL has sufficient cash
 9

and bank balance to deposit than that of EBL. Likewise, the liquidity position of EBL
in terms
of cash and bank balance to current and saving deposit ratio is found higher than HBL
(i.e. 21.90% > 10.03% in an average). This analysis shows that EBL has more cash
ideal than HBL. In the same way, fixed deposit to total deposit ratio of EBL is better
than that of HBL. The ratio of EBL is higher. So, the higher ratio of fixed deposit to
total deposit ratio indicates the strong liquidity position.
In terms of Loan and advances to fixed deposit ratio of HBL is higher than that of
EBL
(i.e. 436.98% > 346.80% in an average) which means that HBL is utilizing its
collected resources in the form of fixed deposits much more efficiently, which
definitely lead to the increase income and thus, making an increment profit for the
organization. The turnover position in term of loan and advances to saving deposit
ratio, EBL is greater than HBL within the study period of 5 years. So, it is concluded
that EBL has better turnover than HBL.
Profitability in terms of net profit to total assets ratio, net profit to total deposit ratio,
return to net worth (shareholders equity), return on net worth ratio and net profit
margin ratio, EBL average ratio is always greater than that of HBL. Thus, it can be
concluded that EBL is getting good return from its investment.

Mr. Regmi’s (2007) thesis entitled "A comparative study of the financial performance
of HBL and NBBL" , suggests that NBBL should increase its current assets because
the bank is not maintaining adequate liquidity position in comparison with HBL.
It seemed like HBL should improve the efficiency in utilizing the deposits in loan and
advance for generating the profit whereas NBBL should try to maintain present
position on this regards. Profitability position of HBL is comparatively better than the
same of NBBL. So, NBBL is recommended to utilize its resources more efficiently
for generating more profit margins. NBBL is suggested to increase its dividend
payout ratio.
(Regmi, 2001, p.29)
 10

A thesis conducted by Oli, Jhalak Bdr. (2007) entitled, “A comparative study of

financial performance of HBL, NSBIBL and NBBL” concludes that the liquidity
position of two JVBs i.e. NSBIBL and NBBL are always above than nonstandard and
HBL is always below than normal standard. Total debt with respect to shareholders
fund and total assets are slightly higher for HBL than NSBIBL and NBBL. The
researcher has found from the analysis that NBBL has been successfully utilized their
total deposits in terms of extending loan and advances for profit generating purpose
on compared to NSBIBL and HBL. But NSBIBL is also better than HBL. It has
concluded that net profit to total assets ratio in case of HBL is found better
performance by utilizing overall resources but the generated profit is found lower for
the overall resources in three JVBs.

Basnet (2005) had conducted a research on a topic “A Comparative Study on

Financial Performance between the Commercial Banks.” Two banks namely NB
Bank and Nepal SBI Bank were taken for the study. Secondary data were taken for
the study from time period of fiscal year 1998/99 to 2002/03. The study was mainly
focused on examining the financial performance of these two banks.
He drew some conclusions out of his study as follows:
i. Liquidity analysis indicated both the banks did not maintain sufficient
liquidity.
ii. The efficiency analysis showed that the ratio is in fluctuating trend for
Nepal SBI Bank and decreasing trend for NB Bank.
iii. The profitability position of NB Bank was comparatively better than that
of the Nepal SBI Bank.
iv. Capital structure ratio of both banks was highly levered.
 11

Methodology

Research design: It is a retrospective study. The study is purely an analytical

research design as it has relied basically on the secondary data of financial
information of the selected banks.

Population and sample: There are seven joint venture banks currently operating in
Nepal. So all these seven banks will be considered as the population for the study.

Sources of data: Since this is a retrospective study, secondary data will be used as the
main sources of data. The data will be mainly the annual audited financial statements
and balance sheets of joint venture banks published by the respective banks.

Data collection and processing procedure: All the data will be collected from the
official websites of the respective banks. And also various related books, booklets,
magazine, journals, newspaper and thesis made in this field will be referred for
obtaining necessary information. Besides necessary suggestions will be taken from
various experts both inside and outside the bank whenever required. Data collected
from the annual reports of the selected banks will be tabulated through the computer
spreadsheets and only CAMEL Model will be used to examine the financial strength
of the selected banks with regard to capital adequacy, asset quality, management
efficiency, earning ability and liquidity.

Data analysis tools and techniques: There are 17 ratios under CAMEL framework.
But only few ratios will be selected in our study for analyzing the financial
performances of the selected banks. Different ratios including return on assets (ROA),
return on equity (ROE), capital adequacy ratio (CAR), nonperforming loan ratio
(NPL), interest expense to total loans (IETTL), net interest margin (NIM), credit to
deposit ratio (CDR) will be evaluated to analyze the financial data of selected joint
venture banks for the period of 2014 to 2018. The appropriate statistical tool will be
used to compare and analyze various parameters
 12

Chapter Plan

The fundamental purpose of the proposed study is to fulfill the partial requirements
for the MBS Degree from Tribhuvan University. Therefore, the organization to the
study report will be made accordingly.

Chapter-I: Introduction
This chapter describes the basic concept and background of the study, commercial
bank in Nepal, joint venture banks in Nepal. Similarly, it will include problem
statement and research questions, purpose of the study, significance of the study,
limitations of the study and chapter plan. It is oriented for readers for reporting giving
them the perspective they need to understand the detailed information about coming
chapter.

Chapter-II: Review of literature

The second chapter of the study assures readers that the researcher is familiar with
important research that has been carried out in similar areas. It will include conceptual
review of the related articles, thesis, review articles of Nepal and other countries.
There will also be the inclusion of research gap.

Chapter-III: Research Methodology

Research methodology refers to the various sequential steps to be adopted by a
researcher in studying a problem with certain objectives in view. It describes about
the various source of data related with study and various tools and techniques
employed for presenting the data. It will contain research design, sampling process,
data collection procedure, analysis techniques, model, explanation of variables, and
methodological limitation will also express.

Chapter-IV: Presentation and Analysis of data

This chapter analyze the data related with study by use of appropriate statistical tools
and presents the finding of the study and also comments briefly on them.
 13

Chapter-V: Summary, Conclusion and Recommendation

On the basis of the results from data analysis, the researcher concludes about the
performance of the concerned organization for better improvement.

Bibliography and other appendixes used in statistical results will be attached at the
end of the study.
 14

References

Assefa, T., Garfield, M., & Meshesha, M. (2013). Barriers of Knowledge Sharing
Among Employees: The Case of Commercial Bank of Ethiopia. Journal of
Information & Knowledge Management, 12(02), 1350014.

Kocabay, S. A. (2009). Bank competition and banking system stability: Evidence

from Turkey. Middle East Technical University master thesis.

Majumder, M., Hossain, T., & Rahman, M. M. (2017). A camel model analysis of
selected banks in Bangladesh. Mohammed Mizanur, A CAMEL Model Analysis of
Selected Banks in Bangladesh (November 9, 2017).

Bhandari, mukunda (2010). A comparative financial performance Analysis of

himalayan bank ltd. and everest bank ltd. An Unpublished Master Degree Thesis,
Kathmandu. Central Department of Management, T.U.

Jha, S., & Hui, X. (2012). A comparison of financial performance of commercial

banks: A case study of Nepal. African Journal of Business Management, 6(25), 7601-
7611.

Ghimire, L.N.(1995). A Comparative Study of Financial Performance of HBL and

NSBIBL, Kathmandu, An unpublished master degree thesis submitted to FOM T.U.

Kaur, J., Kaur, M., & Singh, S. (2015). Financial Performance Analysis of Selected
Public Sector Banks: A CAMEL Model Approach. International Journal of Applied
Business and Economic Research, 13(6), 4327-4348.
Websites

https://studymoose.com/a-case-study-of-joint-venture-banks-in-nepal-essay

https://smallbusiness.chron.com/importance-finance-its-role-within-business-
1513.html

https://www.investopedia.com/terms/c/commercialbank.asp

https://www.export.gov/article?id=Nepal-Banking-Systems

https://shodhganga.inflibnet.ac.in/bitstream/10603/70607/10/10_chapter%202.pdf
15