IMPACT ANALYSIS OF TOTAL LIABILITIES, LOAN & ADVANCES, COST OF

CAPITAL ON THE PROFITBAILITY OF COMMERCIAL BANK (WITH

REFERNCE OF RASTRIYA BANIJYA BANK LIMITED)

A Dissertation
Submitted to the Research Department of Damak Multiple Campus
Faculty of Management in Partial Fulfillment of the Requirements for the
Master’s Degree in Business Studies (MBS)

By

Sujan Khatri
Exam Roll No.: 28156/20
T.U. Registration No: 7-2-0218-0045-2012
Damak Multiple Campus

January, 2024
Damak, Jhapa
1.1. Background of the Study

The banking sector serves as a critical component of the financial system,

playing a vital role in promoting economic growth and development.
Commercial banks, as the primary financial intermediaries, facilitate the
mobilization of funds from various sources and direct them towards
productive investments, thereby contributing to economic expansion. The
profitability of banks is a fundamental indicator of their financial health and
sustainability, making it essential to understand .

In conclusion, comprehending the impact of total liabilities, loans &

advances, and the cost of capital on bank profitability is crucial for various
stakeholders. Policymakers require this knowledge to formulate effective
banking regulations and policies that promote financial stability and
sustainable profitability. Banking professionals can utilize these findings to
enhance their strategic decision-making processes, improve risk management
practices, and optimize resource allocation. Additionally, investors and
shareholders can make informed investment decisions by assessing the
profitability potential of commercial banks based on these factors. Overall, a
deep understanding of these factors empowers banks to navigate the complex
financial landscape and strive for long-term profitability and success.
1.2. Profile of Sample Rastriya Banijya Bank
• Rastriya Banijya Bank Limited (RBBL) has a history of serving its customers far
and wide across the nation for more than half a century. The bank then fully
owned by Government of Nepal, was established on 10 Magh 2022 (23 January
1966) under the special statute "Rastriya Banijya Bank Act, 2021" and had
operated under "Commercial Bank Act,2031” until it was re-registered as public
limited company on 6 Baishak 2063 (19 May 2006). At present, the Bank
operates as "A" class financial institution licensed by Nepal Rastra Bank and
carries out commercial banking activities as per the provisions of the "Bank and
Financial institutions Act 2073," (2017).
• RBBL endured many stressful years of business and faced existential questions at
some point of time in the past. But learning the lessons from the events and
craving towards the brighter future, the Bank successfully implemented a
restructuring plan; and now it stands as one of the most preferred bank with the
highest number of customers all 77 districts and 7 provinces of the country. The
Bank has been able to imprint its presence in national economy through efficient
allocation of resources in all sectors of economy thereby enhancing production
and generating employment opportunities within the country. The unflinching
faith and goodwill bestowed by our customers continued support from the
Government, well wishers and general public has been the reason for us to stand
1.3. Problem Statement

The primary objective of this study is to examine the relationship between total
liabilities, loans and advances, cost of capital, and the profitability of Rastriya
Banijya Bank Limited. By conducting a detailed analysis, the research aims to
identify the key drivers that significantly affect the bank's profitability. Furthermore,
this study intends to explore whether the relationship between these variables is
linear or exhibits non-linear patterns.
The findings of this research will contribute to the existing literature on commercial
banking profitability, specifically focusing on Rastriya Banijya Bank Limited. By
gaining insights into the impact of total liabilities, loans and advances, and cost of
capital, the bank's management and stakeholders will be equipped with valuable
information to make informed decisions and formulate effective strategies.
Moreover, the study will also provide a foundation for future research in the field of
banking profitability analysis.
Ultimately, the results obtained from this research will help Rastriya Banijya Bank
Limited enhance its financial performance by identifying areas for improvement
and implementing appropriate measures. Additionally, the study's insights may have
broader implications for the entire commercial banking industry, aiding in the
development of best practices and benchmarks for maximizing profitability in
similar contexts.
1.4. Objectives of the Study
The objectives of the study were exactly matched with its
research question. Therefore, the objectives of the study as per
the research questions were:
i. To identify the position of Total Liabilities of Rastriya Banijya
Bank Limited.
ii. To identify the position of Loan & Advances of Rastriya
Banijya Bank Limited.
iii. To identify the position of Cost of Capital Rastriya Banijya
Bank Limited.
iv. To identify the position of profitability of Rastriya Banijya
Bank Limited.
v. To examine the relationship between Total Liabilities, Loan &
Advances and Cost of Capital on profitability of commercial
bank with reference of Rastriya Banijya Bank Limited.
1.5. Hypotheses
• Hypothesis Testing is a type of statistical analysis in which you put your assumptions
about a population parameter to the test. It is used to estimate the relationship between two
statistical variables.

• Hypothesis 1:
Null Hypothesis (Ho) = There is no significant relation between Total Liabilities &
profitability (ROA & ROE) of RASTRIYA BANIJYA Bank Ltd.
Alternative Hypothesis (Ho) = There is significant relation between Total Liabilities &
profitability (ROA & ROE) of RASTRIYA BANIJYA Bank Ltd.

• Hypothesis 2:
Null Hypothesis (Ho) = There is no significant relation between Loan & Advances &
profitability (ROA & ROE) of RASTRIYA BANIJYA Bank Ltd.
Alternative Hypothesis (Ho) = There is significant relation between Loan & Advances &
profitability (ROA & ROE) of RASTRIYA BANIJYA Bank Ltd.

• Hypothesis 3:
Null Hypothesis (Ho) = There is no significant relation between Cost of Capital &
profitability (ROA & ROE) of RASTRIYA BANIJYA Bank Ltd.
Alternative Hypothesis (Ho) = There is significant relation between Cost of Capital &
1.6.Rational of the Study

 The banking industry plays a crucial role in the economic development of a

country. Commercial banks, being key financial intermediaries, facilitate the flow of
funds from surplus units to deficit units and support various economic activities. In
this context, understanding the factors that influence the profitability of commercial
banks is essential for policymakers, investors, and stakeholders.

 The cost of capital is another critical determinant of a commercial bank's

profitability. It encompasses the cost of debt, equity, and other forms of financing
utilized by the bank. Understanding the relationship between the cost of capital and
profitability will provide insights into the bank's efficiency in deploying its resources
and generating returns. Furthermore, it will help assess the bank's ability to manage
its capital structure and optimize its funding mix to maximize profitability.

 By conducting this study on sample Bank Limited, we aim to shed light on the
impact of total liabilities, loans and advances, and the cost of capital on the bank's
profitability. The findings of this study will not only contribute to the existing body
of knowledge in banking and finance but will also provide valuable insights for the
bank's management, investors, and regulators. Ultimately, this research will support
evidence-based decision-making and help enhance the overall performance and
2.3 Emperical Review

• An empirical review refers to a type of research study or literature review that relies
on empirical evidence or data to examine a specific research question or topic.
Empirical research involves collecting and analyzing data to test hypotheses,
explore relationships between variables, or draw conclusions based on observed
evidence. Empirical reviews aim to provide a systematic and objective evaluation of
existing studies, experiments, or data sets to contribute to the body of knowledge in
a particular field.

2.3.1. Review of Books

• Evans (2017) examined the liability management and the profitability of Listed
Banks in Ghana. For the purpose of determining the impact of liability management
on profitability, a random effect model was used. It was decided to utilize the return
on asset as the dependent variable, while valuing everything else as an independent
variable, including the value of all liabilities, as well as macroeconomic variables
such as GDP and interest rate. Finally, the findings show that total assets have a
positive impact on bank profitability, whereas total liabilities, primarily savings and
fixed time deposits, have a negative impact on profitability. However, the
macroeconomic variable, interest rate, has no significant impact on bank
2.3.2. Review of Article and Previous Dissertation

Ms. Anju Khadka (2019) has carried out research on “A Comparative Study on Investment Policy of
Commercial Banks” with an objective to find out the relationship between deposits, investment, loans
and advances and net profit. She has made the following conclusion while comparing the performance
of NBL with NABIL, SCBNL and NIBL.
• She concludes “NBL is comparatively less successful in on balance sheet as well off-balance sheet
operations than that of other CBs. It predicts that in the coming days if it could not mobilize and utilize
its resources as efficiently as other CBs to maximize the returns, it would lag behind in the competitive
market of banking. Profitability positions of NBL are comparatively worse than that of other CBs. It
predicts that NBL may not maintain the confidence of shareholders, depositors and its all customers if
it cannot increase its volume even in future.”
• As the banks experience many difficulties in recovering the loans and advances and their large amount
in being blocked as non performing assets, she suggested that there is an urgent need to work out a
suitable mechanism through which the overdue loan can be realized.

• Mr. Dev Raj Adhikari (2020) of his study on “Evaluating the financial performance of Nepal Bank
Limited”. The main objectives of the study are to examine the deposit trend, costs of deposits,
mobilization, assess the investment portfolio of the bank, credit operation of the bank, liquidity and
profitability, earning and dividend paying ability of the bank and finally provide suggestion based on
the findings.
• The major findings are, the fixed deposit had the highest share of deposit in the bank with the current
deposit share remaining the lowest in share. The growth in total deposit, average growth in total
deposits, average growth in cost of deposit loans and advances share in the investment, investment
portfolio on government securities increases (risk less asset portfolio) which is not principal of the
commercial banks. Liquidity position of the bank is not so bad, return on capital, EPS is in declining
3. Research Methodology
In according with the basic objectives other sub-objectives are also formulated and research methodology is followed to
achieve the objective of the research study. The major contests of research methodology followed in course of this study
are as followed.

3.1 Research Design

In order to make any type of research planned and systematic research design is necessary which fulfill the objectives
of the study. Generally, research design means defining procedures and technique which guide to study and propound
design is the arrangement of conditions for collection and analysis of data in such a manner that it aims to combine
relevance to the study purpose with economy in procedure.

3.2 Population and Sample

• A large group about which the generalization is made is called the population under study, or the universe and small
portion on which the study is made is called the sample of the study. Research population would be 21 Commercial
Bank in Nepal. Only one commercial bank was taken as a sample i.e. Rastriya Banijya Bank as sample for this research
study. Due to various circumstances it would not be possible to attempt all the number of research population regarding
in this research.

3.3. Nature and Sources of Data

1. Published and unpublished report
2. Articles and dissertations on the concerned subject
3. Annual report of sample Rastriya Banijya Bank Limited.
4. Various books written by expert, officers and scholars Publications, Speeches and Newspapers, such as Kantipur Daily
and so on.
5. Websites
3.4 Research Frame Work
Independent Variables Dependent Variables

Total Liabilities

Profitability (ROA,
Loan and advances ROE)

Cost of capital
• Method of Analytical Tools

• Statistical tools
 Mean
 Standard Deviation
 Coefficient of variation
 Percentage change
 Coefficient of correlation
 Coefficient of determination
 Hypothesis testing

• Financial tools
 Cost of Capital
 Profitability Ratio
 ROE
Findings of the study

1. ROA Fluctuation: Rastriya Banijya Bank's ROA varied from 1.1% to 2.23% over five years,
reflecting changes in profit generation from assets, likely influenced by economic factors or
management decisions.

2. ROE Dynamics: ROE ranged from 11.93% to 23.39%, indicating shifts in the company's ability to
yield returns for shareholders, potentially influenced by factors like net profit and equity changes.

3. Increasing Liabilities: Total liabilities consistently rose, reaching 297.56 billion in 2078/079, posing a
growing financial obligation that could impact the company's financial health.

4. Loan Growth: Nepalese Rupee loans consistently increased, hitting 217.70 billion in 2078/079,
indicating a growing allocation to loans, impacting financial performance and liquidity.

5. Debt-Heavy Structure: Total Debt significantly exceeds Equity, highlighting a high reliance on debt
financing, potentially affecting the company's operational sustainability.

6. WACC Variation: WACC ranged from 2.55% to 6.30%, with 2077/078 having the lowest and
2078/079 the highest, indicating fluctuating financial risk.

7. Liabilities-ROA Relationship: Weak positive correlation (r=0.091) between Total Liabilities and
ROA, statistically insignificant.
8 . Liabilities-ROE Relationship: Weak positive correlation (r=0.196) between Total Liabilities
and ROE, statistically insignificant.

9. Loan-ROE Link: Moderately strong negative correlation (r=-0.664) between Loan & Advances
and ROE, statistically insignificant.

10. Loan-ROA Link: Moderate negative correlation (r=-0.450) between Loan & Advances and
ROA, statistically insignificant.

11. WACC-ROE Link: Very weak negative correlation (r=-0.028) between WACC and ROE,
statistically insignificant.
Summary
1. Profitability Fluctuations: ROA and ROE fluctuated over five years, influenced
by economic conditions and management decisions.
2. Growing Financial Obligations: Total liabilities steadily increased, reaching
297.56 billion in 2078/079, indicating a growing financial burden.
3. Loan Expansion: Loan & Advances consistently grew, reaching 217.70 billion in
2078/079, impacting financial performance and liquidity.
4. Debt Reliance: Total Debt exceeded Total Equity, highlighting a reliance on debt
financing for operations.
8. WACC Variability: WACC varied, with 2077/078 at 2.55% and
2078/079 at 6.30%, indicating changing financial conditions and
risk levels.
6. Weak Correlations: Correlation analysis showed weak and
statistically insignificant relationships between total liabilities, loan
& advances, and profitability indicators (ROA and ROE).
7. Limited Impact: Financial metrics had limited direct influence on
profitability; factors like economic conditions, management
decisions, and operational efficiency played more substantial roles.
8. Holistic Approach: A holistic evaluation, considering a range of
influential variables beyond financial metrics, is essential for
understanding and optimizing a bank's performance.
9. Statistical Insignificance: While correlations exist, their statistical
insignificance emphasizes the complexity of factors shaping a
bank's profitability.
10. Multifaceted Nature: Banking profitability is an outcome of
intricate interactions among internal and external elements,
requiring a comprehensive assessment.
Conclusion

1. ROA and ROE fluctuated, influenced by economic conditions and management decisions.
2. Total liabilities reached 297.56 billion in 2078/079, indicating increasing financial
obligations.
3. Consistent rise in Loan & Advances suggested increased allocation, impacting financial
performance.
4. Total Debt exceeded Total Equity, signaling reliance on debt financing.
5. WACC ranged from 2.55% to 6.30%, indicating changing financial conditions and risk
levels.
6. Total Liabilities and Loan & Advances showed weak, statistically insignificant relationships
with ROA and ROE.
7. Examined financial factors had limited direct influence on profitability; other internal and
external factors played more substantial roles.
8. Economic conditions, market dynamics, management strategies, and operational efficiency
crucial in determining profitability.
9. Findings underscore the need for a holistic approach beyond financial metrics for evaluating
and optimizing bank performance.
10. Correlations were statistically insignificant, highlighting the complexity of factors
influencing financial health and profitability.
11. Profitability is the outcome of intricate interactions among various internal and external
elements.
 THE END

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