PROFIT PLANNING AND CONTROL OF

NEPALESE COMMERCIAL BANKS

(WITH REFERENCE TO NEPAL INVESTMENT
BANK AND NABIL BANK)
Shree Krishna Napit

PASUPATI MULTIPLE CAMPUS

Registration no: 7-3-278-1224-2015

Masters of Business Studies (MBS)

in faculty of Management
Tribhuvan University
Table of Contents
Chapter I:

Chapter 1: Introduction...........................................................................................................1
1.1 Introduction of the Study............................................................1
1.2 Statement of the problem................................................................3
1.3 Objectives of the study....................................................................3
1.4 Significance of the study.................................................................4
1.5 Limitation of the study....................................................................4
1.6 Organisation of the study................................................................5
Introduction.......................................................................................................................................5
Literature Review..............................................................................................................................5
Research Methodology......................................................................................................................5
Data Presentation and Analysis........................................................................................................5
Summary, conclusion and recommendations...................................................................................5
Chapter 2: Research Methodology..........................................................................................6
2.1 Research design...............................................................................6
2.2 Population Sample..........................................................................6
2.2.1 Nepal Investment Bank Ltd (NIBL)............................................................................................6
2.2.2 NABIL Bank..............................................................................................................................7
2.3 Sources of Data...............................................................................7
2.4 Data Collection Procedure..............................................................8
2.5 Data processing and Analysis.........................................................8
2.6 Tools for analysis............................................................................8
2.6.1 Accounting tools.......................................................................................................................8
2.6.2 Statistical and Mathematical Tools........................................................................................11
Bibliography............................................................................................................................15
 Chapter 1: Introduction
1.1 Introduction of the Study
Basically, Profit is the difference between cost and revenue.
Profit, one of the most important thing of any business organisation, not
only gives life but also make sure of the sound future of an organisation.
To be more precise, each and every organisation requires profit to carry
on its business and survive in the competitive market. Profits are the
primary necessity for the success of any business. In addition, the profit
margin is considered as an indicator of the economic condition of the
firm. As profit earning plays a crucial part in gaining the objectives of a
firm, it is essential to secure justifiable profit for all organisation (Töyli
et al. 2006).
Planning generally means early determining the task to be done in
near future. It involves the procedures from developing objectives and
electing the right course of steps to achieve it. Planning is most important
part of the management which must be done properly and all the further
actions are done within the structure of planning (PEGELS and
SOUTHWICK 1970).
To sum up, profit planning is the most essential means to planning
and controlling almost all business operations. Profit plan, also known as
budgeting, are financial planning done as a reference to control future
operations. It is process of pre-determining and evaluating future incomes
and expenditures and defining how it must be used so that the
organisation will achieve investment and profit requirements. (Pegels and
Southwick, 1970).
An inclusive profit planning and controlling is organised and
descriptive concept of asserting and conveying organisation’s prospects
and finishing the planning, allocating and controlling obligations of
management in such a way to utilize the given resources fully (Douglas
and Granite 2009).
This study is designed to connote the different types of budget
used, how those budgets are applied and lastly settled and how those
budgets helps in making policy and controlling financial activities.
Basically, two kinds of profit planning practices are followed in an
organisation: i) Strategic long-range profit plan (that covers profit plan of
two years or more) and ii) Tactical Short-range profit plan (that covers
the profit plan of next year). These plans have equal importance to run an
organisation smoothly however, short range plan is given more
consideration (Harris 2013).
Commercial banks also known as back bone of the economy, is
one of the crucial factor to know the present situation of the economy. To
make the crystal-clear picture of the commercial banks of Nepal, income
and expenditure status, growth trend and profitability position of NABIL
and Nepal Investment Bank ltd has been taken as the sample in this thesis
report.
1.2 Statement of the problem
PPC is still new for most of the organisation including
commercial banks in Nepal because of the infant stage of
industrialization. As already mentioned commercial bank is the back
bone of the country’s economy, hence it must produce profit to attain
the allocated responsibilities. The main job of a commercial bank
includes the deployment of resources in profitable sector to earn
incomes (Kalpana and Vasantaha Rao, 2017). This basic purpose of
this study is to investigate and examine the PPC aspect of commercial
bank citing comparative study between Nepal Investment bank ltd and
NABIL bank. In addition, it also tried to answer the given research
questions.
a. What are the main difficulties encountered by NIBL and NABIL
while developing and implementing profit planning and control?
b. What are the tactics followed by the bank in attending the results?
c. Why are the reasons behind the variation between budgeted and
actual figures?]

1.3 Objectives of the study

The main objective of this study is to analyse the effectiveness
of the profit planning and control system in NIBL and NABIL. The
main objectives of this study are:

A. To analyse and test the financial performance of NIBL.

B. To study different functional estimates and planning adopted by
NIBL.
C. To investigate the difference between budgeted and actual profit of
the bank.
D. To supply solutions and suggestions for the betterment in the long-
term profitability of NIBL with reference to the study results.
 1.4 Significance of the study

Limited resources are the sources of success as well as failure if

not utilized properly. To avoid failure, it is necessary to study and plan or
develop methodologies. Healthy banking practices make the economy of
the country even better. This research study is linked with the ppc in the
commercial banks on the basis of comparison between two major
commercial banks of Nepal, with the main purpose of inspecting the
suitability of PPC system in the banks. Profit planning system remarkably
supply improvement in profitability cum financial performance utilizing
limited resources by most suitable way. Profit planning is one of the most
important function of management which judge managerial efficiency.
Thus, profit should be properly managed. Different functional budgets are
the fundamental driver for the appropriate planning of profit and their
control. Thus, this research is useful for future researchers, investors,
stake holders, financial institutions etc who wants to learn about PCC in
commercial banks.

1.5 Limitation of the study

It is universal fact that everything in this world is not free from

limitations. This research is not an exceptional case. However, the
research work has been done in such a way to avoid such limitations to
the best possible extent but still it faces following limitations:

 This study only includes financial and accounting prospects and

exclude other factors related to the NIBL and NABIL.
 The study examines the data of NIBL and NABIL of 5 years from
2069/70 to 2073/74 only.
 It is based on primary and some secondary data of both banks.
 1.6 Organisation of the study

The research work has been done by following the universal

procedures of thesis writing. It is classified into 5 major topics. They are:
Introduction
The very first part of the study is introduction. This includes
background of the study, statement of the problems that involves
research questions that need to be sorted out, objectives of the study,
significance, limitations and organisation of the study (Kothari 2004).
Literature Review
Second part deals with the review of the literature. It comprise
review of different books, journal articles, reports, news articles, articles
from websites etc citing with prescribed method of referencing (Kothari
et al. 2014).
Research Methodology
Third one is related to the methodology used in the study that
includes design of the research, data sources, population, sample and
methods of analysing data.
Data Presentation and Analysis
Fourth chapter includes the presentation and analysation of the data
and major findings.

Summary, conclusion and recommendations

The last chapter summarizes the whole report and presents the
conclusion from the study and also provides suggestions and
recommendations for the further improvement.
Just after the last part, bibliography of the cited references on
literature review are presented followed by the appendices that includes
supplementary materials for the information presented on the report.
 Chapter 2: Research Methodology

Research methodology deals with the wide area of investigation. It is

basically the process used while collecting data and information needed
to obtain the basic goals and objectives determined by the research work.
This chapter includes the research design, sample of the population,
sources of data, data collection procedures, tools used etc (Kothari et al.
2014).
2.1 Research design
Research design provides structure for the study and also provides
instructions for collecting and analysing data. Research design also
known as blue map of the house, consists of basic elements like problem,
methodology, collection and analysing of data and report writing. The
research design of this study is analytical cum descriptive. It examines
and evaluate the budgeting process which are used by NIBL and NABIL
during profit and planning process. Thus, the research closely studies how
the budgeted profit is calculated and analyse the difference between
budgeted and actual and the reason behind it.

2.2 Population Sample

Till date there are altogether 28 class “A” commercial banks in

Nepal (NRB, 2018). This research study takes NIBL and NABIL as a
sample to study the profit planning and control of overall commercial
bank in Nepal. That is NIBL and NABIL has been selected as a sample
from population of total commercial banks in Nepal for the study of profit
planning and control. So far as the sampling methods is concerned,
Simple random sampling methods are used for the study purpose.
 2.2.1 Nepal Investment Bank Ltd (NIBL)
NIBL previously known as Nepal Indosuez Bank Ltd, was
established in 1986 as a joint venture between Nepalese and French
partners having equal amount of capital invested. Later the name was
changed to Nepal Investment bank Ltd. in 2002 after acquiring the French
share by a group of Nepalese companies. At present NIBL has 69% of
promoters share and 31% of general public shares. There are altogether
76 NIBL branches and 101 ATM locations in all over Nepal. Having
most sophisticated banking software enabled, it provides modern banking
services like online banking, SMS banking, ATM facilities and also has
the best customer service, NIBL is honoured as Nepal’s best bank 2018
(NIBL, 2018).

2.2.2 NABIL Bank

NABIL Bank, the first private sector commercial bank, was
established in 1984 with the objective of extending international standard
modern banking services to different parts of the society. Till present it
has 74 branches and 1500 remit agents throughout the country. NABIL is
fully equipped with modern technology that involves international
standard banking software which supports E-channels and E-transactions
(Nabil Bank 2018).

2.3 Sources of Data

Most of the data are secondary and few are primary data collected
from questionnaire method. Major part of the secondary data is collected
from the annual report of the related bank. Besides annual report some
other sources of secondary data are also used. They are:
 Reports from Nepal Rastra bank (NRB) collected from the official
site of NRB.
 Different news articles published related to the concerned banks.
 Journal article of concerned bank from different websites.
In addition, all the small data collected from published books,
interviews, tv shows etc will be considered in the study.
 2.4 Data Collection Procedure

As already mentioned, both primary and secondary data from NIBL

have been used for the research. Primary data are collected by using
questionnaire method of data collection which includes 20 questions and
collected from at least 100 senior and other related staffs of NIBL and
NABIL from different branches all over Kathmandu valley. Whereas,
Secondary data are collected from different journal articles, financial
statement of NIBL from the official website, books, banker’s reviews
articles, magazines and news channel etc.

2.5 Data processing and Analysis

All the data collected from both primary and secondary methods are
processed properly before analysed. The primary data and secondary
data are converted to different diagrams, tabular forms etc to change into
meaningful information. That meaningful information is then analysed
with the help of different statistical tools, accounting and financial tools.
2.6 Tools for analysis

All the information and data are collected, managed, evaluated and
presented in suitable tables and explained through different statistical, and
accounting tools.

2.6.1 Accounting tools

To achieve the goals of the study, some selected accounting tools has
been used to analyse the data. Ratio analysis used in both finance and
account sector is the most often used indicator to measure the
performance of the company. Following are some of the ratios used in
this research work.

Gross Margin Ratio ( Net Interest Margin)

It is the basically the difference between the income from issuing
loans to the customers and interest expenses on deposits. Mathematically,
Gross margin ratio= Interest income – interest expenses

Net Profit to Total Deposits ( Return on Total Deposits)

This ratio provides information about how far the organisation is
successful in mobilizing its deposits to the profit generating sector. High
ratio denotes the deposits has been utilized properly and vice-versa. It can
be presented as:
Net Profit
Net Profit ¿ total deposit ratio= × 100
Total Deposit

Operating Ratio:
Operating ratio is calculated to examine the cost of operation in
respect to revenue from operations. It can be written as:

Cost of operating revenue+Operating expenses

Operating ratio = ( Net operating revenue )
× 100

Operating expenses involves office expenses, administrative expenses,

depreciation and employee benefit expenses etc. Whereas cost of operation
includes all the costs excluding non-operating income and expenses like
loss on sale of assets, interest paid, dividend received etc.

Interest Earned to Total Assets Ratio:

As the name suggests, it is the ratio of interest earned and total assets of the
earned which helps to know how well the bank assets is mobilized in
interest generating purpose. Mathematically,
Interest Earned ¿ Total Assets Ratio

Total Interest Income

¿ ×100
Total Assets

Loan to deposit Ratio

It is the ratio of total amount of loan provided to the bank customers
over a certain period of time and total amount of cash deposited in the
bank by its customers. Mathematically,

Total amount of loan provided

Loan ¿ deposit Ratio=
(Amount deposited )

Cost Volume Profit Analysis (CVP Analysis)

This is basically the relationship between cost, Volume, price and
profit. The most important analysis under CPV is break even analysis. It
is at what point the bank neither make profit nor make losses. It also
make sure how margin of safety of banks can be improved. ( Pandey and
Bandyopadhyaya 2017) It can be written as:

BEP=Total ¿ costs ¿
v P
(1− ∨ ratio)
s v
Where,
BEP= Break-even point
V= Variable Cost
S= Sales

In case of banks, interest paid on deposits are taken as variable

costs. On the contrary, other expenses recorded as operating expenses in
bank are treated as fixed cost. Unlike manufacturing company BEP is
expressed in two ways i.e. i) income from advance and investment ii)
other incomes resulting from ancillary services (Panday, 2017).

Margin of Safety (MOS)= Actual sales – Breakeven point

Or,
Actual sales−BreakEven Point
MOS = ( Actual Sales)

2.6.2 Statistical and Mathematical Tools

Data that are collected and presented in the study are analysed by
following statistical and mathematical tolls:
Arithmetic Mean ( x )
Arithmetic mean also known as mean or average, is the most
commonly used statistical tool all over the world. It represents whole data
by a single value. That single data provides the gist of the entire data. It is
computed by dividing total value by number of values. i.e.
X
x=
N
Where,
x = Arithmetic Mean
N = Numbers of observation
x = Total sum of observation
Standard Deviation (S.D or  )
It is another important statistic tool that measures the dispersion of a
dataset relative to its mean. The variation between every data point
relative to its mean is calculated first and then the square root of the
calculated variation or variance is the standard deviation. i.e.

¿
√ ( x−x ) ²
N−1
 Where,
= Standard Deviation

Coefficient of Variance (C.V)

C.V is the comparative calculation based on the standard deviation.
It is the ratio of S.D to the Mean in percentage. It compares the variables
of different series and the series with lower C.V. is more consistent,
uniform or stable than other series. Mathematically,

C . V = ❑ × 100
x

Where,
 = Standard Deviation
x = Mean
C.V = Coefficient of Variance

Correlation Coefficient (r)

This statistical tool measures and analyse the degree of relationship
between variables. It helps to know how those variables are linearly
related. Moving towards same direction is said to be positively correlated
whereas, negatively correlated means the series moving towards the
opposite direction. Correlation Coefficient range between +1 to -1 where,
+1 refers to perfectly correlated on the contrary, -1 refers to negatively
correlated and r= 0 refers to no correlation exists. If the value of r lies
between 0.7 to 0.999 or -0.7 to -0.999 there exist high degree of positive
and negative correlation respectively. Similarly, if r lies between 0.5 and
0.6999 there is moderate degree of correlation and finally if the value of r
is 0.5 there is low degree of correlation. Furthermore, it also finds out the
relation between the series is significant or insignificant and establish
cause and effect relation if any (Abebe et al. 2001). Symbolically,
n xy −x y
r=
√ [{n x ²−(x )² }{n y ²−( y )² }]
Probable Error (P.E)
P.E helps to explain the value of coefficient of correlation. P.E. is
the value that is added to get the upper limit or subtracted to get the lower
limit from the coefficient of correlation in which the value of correlation
lies. Generally, P.E. is measured to examine the reliability of the
coefficient value which is obtained from the random sampling.

1−r ²
P.E. = 0.6745 ×
√N
Where,
r = Coefficient of correlation
N = number of observations

The variables are said to be correlated when the value of ‘r’ is 6

times higher than P.E. which also shows ‘r’ is significant but there is no
correlation if ‘r’ is less than P.E. and also coefficient of correlation is not
at all significant.

Trend Analysis
Trend Analysis also called time series analysis is the process of
forecasting future behaviour of the variables on the basis of past and
present behaviour of that variables. Variables are presented on the graphs
and then analysed. The trend equation Y= a+bx is calculated with the help
of following two equations:

Y =na+b X …………………………. (i)

XY =a X +b X ² …………………. (ii)
Where,
Y= Variable
X= Time span
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