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1.1 BACKGROUND OF THE STUDY
Nepal, being a developing country, seeks an investor who can invest in different development projects and in most profitable sectors. There are very few people in Nepal who solely invest in high amounts. So for country like Nepal, one of the major sources of investment is bank. A business establishment that safeguards people’s money and use it to make loan and investment is known as bank. Bank is an institution which deals with money and credit widely known as manufacturer of credit and machines for facilitating exchanges. In other words, a bank is an institution that deals with money and by accepting various types of deposits, disbursing loan and rendering other financial services. Since banks are rendering a wide range of services to the people of different walks of life, they have become an essential part of modern society. Nepal investment bank was established in the year 1986. For my field work, investment strategy of INVESTMENT bank is chosen due to the outstanding performance and services to the customers, cooperativeness of the staff personnel and electronic availability of the required data. A number of its branches in different locations add my interest to study it. Furthermore, as the bank was rewarded as “Bank of the year 2008”. I am keenly interested in studying its investment strategy as it is major source of income generation required for sound functionalism of the bank. This research has been carried out mainly as to know investment strategy of INVESTMENT Bank Limited. Thus, it helps to study the sources and uses of funds of INVESTMENT Bank , to evaluate the percentage of investments done in different sectors, and to calculate rate of return on investment on government securities. Also, through this study , we will be able to know about the contribution of investment to its total income and henceforth, the profit position of the bank.
1.2 BACKGROUND OF BANKING SECTOR
Besides, development of trade, commerce and industry in the country, for the attainment of the economical, social or political goals of the proper management of the financial resources of the country is needed. The size of the money supply and the methods of controlling it have become highly crucial factor for the government in pursuing their economic policies. One of the major financial institutions of the country which help to utilize and control the supply and demand of money is Bank of the country. A bank is an financial institution, which deals with money and credit. It accepts deposits from the public and mobilizes the fund to productive sectors. Many economist and constitution of the country has defined the banks in there own ways, some of them are written below: According to US Law “Any kind of institution offering deposits subject to withdrawal on demand and making loans of a commercial or business nature is a bank.” According to R.S Sayers “ordinary banking business consists of changing cash for bank deposits and bank deposits for cash; transferring bank deposits from one person or corporation to another; giving bank deposits in exchange for bills of exchange, government bonds, the secured or promises of businessmen to repay, etc.” According to Oxford Dictionary “Bank is an organization or place that provides a financial service.” In conclusion we can say a bank is an financial institution which accepts deposits from the public and in turn, advance loan to business and personal customers. It offers the widest range of financial services like credit, saving, payment sources and perform the widest range of financial functions of any business firm in the economy. Bank is the most important source of any business firm, in the economy and financial activities. Cash collecting from the saver and provides loan to the investor is the measure function of bank. It is an agent or say act as bridge between the savers and investors.
1.2.1 History of Banking Sector In the ancient time people like merchants, money lenders and goldsmiths used to perform the work of the banking in every country. They use to exchange gold, silver coins and deposits with written document like Goldsmith’s Note which was considered as equivalent to money. This type of exchange was rapacious, money lender use to exploit the borrowers greatly. But without a doubt the services they provide was necessary and had great importance. Seeing the importance of lending and borrowing of the financial resources, demand and supply of money,
the concept of banking must have been developed. Banks does the same function and regulates the same services that goldsmith and merchants use to provide but in more systematic way. Bank does not exploit the borrowers it give the loan in reasonable interest. Banks doesn’t only provide loan but it accept deposits and give interest to depositer, it also carry out the works of creating credit, issuing notes’ bills of exchanges and promissory note etc. The derivation of the word “Bank” according to Thomson’s Dictionary of banking is done from Italian word “Banco” meaning a bench. However Macleod does not agrees and says that word bank is derived from the German word “Back” which mean join stock fund and the German word “Bank” came to used as its Italian equivalent “Monti” and was Italianized into “Banco” and the loans were called in differently “Monti” or “Banchi”. Hence “Back” in Germany language,”Banco”in Italian, “Banke in French and “Bank”in England was used. The first bank in the world was established in 1157 A.D in Italy know as “Bank of Venice” After that a lot of other banks were established in different place of the world. Some of them are “Bank of Barcelona” in 1401 A.D.; “Bank of Genoa” in 1407 A.D.;”Bank of Amsterdam” in 1606 A.D.; “Bank of England” in 1694 A.D and “Bank of Hindustan” was established in year 1770 A.D. After the establishment of ” Bank of England” the idea of establishing commercial banking rapidly spread all over the world. To make the task much easier various types of other banks emerged in banking industry specializing in different functional areas. Some of such specializing banks are development banks, co-operative banks, industrial banks, agricultural banks, saving banks, merchant funds, pension funds, housing bank, equipment bank, building banks, etc. The head of all banks is central bank of the country. It develops the policy for all the banks and makes regulations also which are to be followed by every other bank. Central bank is the father of other banks. Central bank alone can not function well, commercial banks also play very important role in mobilizing the resources in any developing countries by removing the habit of hoarding, developing the banking habit among the people, collecting the scattered resources in one bulk and utilizing them in further productivity purpose and rendering other valuable services to the country.
1.2.2 Origin of Banking Sector in Nepal
For developing countries like Nepal, bank plays a significant role in the country for its economy soundness. Like in other countries, Nepal’s banking history begins with goldsmith an d merchants. In 1933 B.S. an institution was established for the financial transaction knows as Tejarath Adda”. This institution provided loan but didn’t accept deposits. Later in true sense, banking function in Nepal started with the establishment of Nepal Bank Ltd”, in year 1994 B.S., 30th Kartik. After wards”Nepal Rastra Bank” the central bank of Nepal
was established in 2013 B.S. 14th Baisakh under Nepal Rastra Bank Act 2012 B.S. But this Act has been replaced and the Nepal Rastra Bank Act 2058 B.S.(2002 A.D.) has been enacted by the parliament.”Rastriya Banijaya Bank” was established in 2022 B.S., 10th Magh as fully government owned commercial bank and “Agricultural Development Bank” was established on 2024 B.S., 7th Magh. After democracy, there is tremendous development in banking sector. Rural Development Banks like Eastern Rural Development Bank Ltd.” In Biratnagar, Far Western Rural Development Bank Ltd.” In Dhangadhi, “Western Rural Development Bank Ltd.” In Butwal, Mid Western Rural Development Bank Ltd.” In Nepal gung,” Middle Rural Development Bank Ltd.” in Janakpur were also established. Other banks like exchange bank, cooperative banks are also established in Nepal. Commercial banks are the heart of financial system of the country. They held the deposit of many persons, government establishment and business units. They make fund available to borrowers, individuals, and business firm and government establishment. In doing so, they assist both the flow of goods and policy is affected. This facts shows the commercial banking system of the nation is important to the function of the economy. First commercial bank that was established in Nepal was “Nepal Bank Limited” in year 1994 B.S. This bank was fully owned by the government. After the year 2040 B.S. many Joint Venture commercial banks were opened. The first joint venture commercial bank of Nepal is “Nepal Arab Bank Ltd”. Then afterwards many other banks like “Nepal Investment Bank Ltd”, Standard Chartered Bank Nepal Ltd”, “Nepal Bangladesh Bank Ltd”, Everest Bank Ltd”,and many more were established under the commercial bank Act. Number of banks and financial institutions and their branches is constantly increasing. List of some different licensed commercial banks that has been established in Nepal under the Commercial bank Act 2031 are given below
TABLE-1 LIST OF COMMERCIAL BANKS IN NEPAL S.N 1 2 3 4 5 6 Names Nepal Bank Limited Rastriya Banijaya Bank Agricultural Development Bank Ltd. Nabil Bank Ltd. Nepal Investment Bank Ltd. Standard Chartered Bank Ltd.
Operation Date (A.D) 1937/11/15 1966/01/23 1968/01/02 1984/07/16 1986/02/27 1987/01/30
Head Office Kathmandu Kathmandu Kathmandu Kathmandu Kathmandu Kathmandu
7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Himalayan Bank Ltd. Nepal Bangladesh Bank Ltd. Nepal SBI Bank Ltd. Everest Bank Ltd. Bank Of Kathmandu Limited Nepal Credit And Commerce Bank Limited NMB Bank Ltd. Nepal Industrial And Commercial Bank Ltd. Machhapuchhre Bank Ltd. Lumbini Bank Ltd. Development Credit Bank Ltd. Kumari Bank Ltd. Laxmi Bank Ltd. Siddhartha Bank Ltd. Global Bank Ltd. Sunrise Bank Ltd. Bank Of Asia Nepal Ltd. Citizens Bank International Ltd. Prime Bank Ltd.
1993/01/18 1993/06/05 1993/07/07 1994/10/18 1995/03/12 1996/10/14 1996/11/26 1998/07/21 2000/10/03 1998/07/17 2001/01/23 2001/04/03 2002/04/03 2002/12/24 2007/01/02 2007/10/12 2007/10/12 2007/06/21 2007/09/24
Kathmandu Kathmandu Kathmandu Kathmandu Kathmandu Rupendehi Kathmandu Morang Pokhara Chitwan Kathmandu Kathmandu Birgung Kathmandu Birgunj Kathmandu Kathmandu Kathmandu Kathmandu
Source:www.nepalstock.com 1.3 INTROUCTION OF INVESTMENT BANK LIMITED Nepal Investment Bank Limited (NIBL) previously Nepal Indosuez Bank Ltd, was established in 1986 as a joint venture between Nepalese and French partners. The French partners holding 50%of the bank was credit Agricole Indosuez, a subsidiary of one of the largest banking group in the world. The name of the bank has been changed to Nepal Investment Bank Ltd upon the approval of bank’s annual general meeting, Nepal Rastra Bank and Company Registrar’s office with the following shareholding structure. A group of companies holding 50% of the capital. Rashrtiya Banijaya bank holding 15% of the capital. Rastriya Beema Sansthan holding the 15% percentage. The remaining 20% being held by the general public. Over the past 7 years, this bank has grown to become one of the biggest commercial bank in Nepal. This bank has helped to fulfill growing requirements of credit and collects deposits for the development project and support in the business. It is the no .1 lender in Nepal with total loan and advances of NRs 36.83 Billion.velop products and
Every bank has its definite objectives. These banks also have some strategic objectives which are as follows: To develop the customer oriented service culture with special emphasis on customer care and convenience. To increase a market share by following the disciplined growth strategy. To develop innovative products and services that attracts our customers and market segments. To continue to develop products and services that reduces cost of our funds. To explore new avenues for growth and profitability.
1.3.1 Head office, Branches and their address of Investment Bank Head office of investment Bank Durbar Marg, kathmandu P.O. BOX 3412 kathmandu Phone no: 4228229, 4242530 Fax no- 977-1-4226349, 4228927 Web site: www.nibl.com.np, swift NIBLNPKT TABLE-2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 SEEPADOLE BRANCH: Suryabinayak, Bhaktapur BIRGUNJ BRANCH: Adarshanagar BANEPA BRANCH: Banepa, Kavre PULCHOWK BRANCH: Pulchowk, Lalitpur JEETPUR BRANCH: Jeetpur, Bara NEWROAD BRANCH: Newroad, Kathmandu BIRATNAGAR BRANCH: Golchat Chowk, Biratnagar BUTWAL BRANCH: Traffic Chowk, Butwal BHAIRAHAWA BRANCH: Maitri Road, Bhairahawa POKHARA BRANCH: Chiple Dunga,Pokhara PUTALISADAK BRANCH: Putalisadak, Kathmandu NARAYANGARH BRANCH: Pulchowk, Narayangarh JANAKPUR BRANCH: Mills Area, Janakpur NEPALGUNJ BRANCH: Dhamboji, Nepalgunj
15 16 17 18 19 20 21 22 23 24 25 26 27 28 29
THAMEL BRANCH: Chaksibari, Thamel KALIMATI BRANCH: Kalimati Chowk, Kalimati BATTISPUTALI BRANCH: Batti sputali, Kathmandu BIRTAMOD BRANCH: Traffic Chowk, Birtamod DHANGADI BRANCH: Chauraha Chowk, Dhangadi GONGABU BRANCH: Gongabu Chowk, Kathmandu SURKHET BRANCH: Neta Chowk, Surkhet JUMLA BRANCH: Khalanga Bazaar, Jumla BOUDHA BRANCH: Boudha, Kathmandu HETAUDA BRANCH: Bank Road, Hetauda PALPA BRANCH: Tansen,Palpa LUKLA BRANCH: Chaurikharka, Lukla DHUMBARAHI BRANCH: Pipalbot Chowk, NAYA BANESHWOR BRANCH: Naya Baneshwor, BHOTAHITI BRANCH: Bhotahiti , Kathmandu
31 32 33 34 35 36 37 38 39 40
TULSIPUR BRANCH: Tulsipur, Dang
RIPURESHWOR BRANCH: Tripureshwor, Kathmandu DAMAULI BRANCH: Safasadak, Damauli MAHARGUNJ BRANCH: Maharajgunj, LALBANDHI BRANCH: Lalbandhi, Sarlahi GAIGHAT BRANCH:Gaighat, Udaypur LAZIMPAT BRANCH, Lazimpat PARSA BRANCH, Parsa MAHARAJGUNJ BRANCH, Maharajgunj LAGANKHEL BRANCH, Lagankhel, Lalitpur BATTISPUTALI BRANCH, Battisputali Kathmandu
1.3.2 Board of directors and Management Team Without a Leader and effective management no organization can run forever or we can say it cannot survive in the absence of leadership and experienced management. In case of Investment Bank Board of Directors governs it. There is one chairman and seven directors in Bank. The bank is managed by highly experienced personals. Names of the Board of Directors And Management Team of INVESTMENT Bank have been given below.
Chairman MR. PRITHVI BAHADUR PANDEY
Board of Directors: MR. PRAJANAYA RAJBHANDARI MR.DEEPAK MAN SHERCHAN MR.JANARDAN DEV PANT MR.KRISHNA PRASAD SHARMA MR.BINOD ARYAL MR. DAMODAR PRASAD SHARMA PANDEY Public Director MR. SURENDRA BAHADUR SINGH Senior Management Team JYOTI P PANDEY (General Manager) MR. BIJENDRA SUWAL (Assistant general manager) RAJAN AMATYA (Assistant general manager) Management Team ANUJ TIMILSINA (Head Corporate Banking) DEEPAK.K.SHRESTHA (Head Trade Finance) DEEPAK SHRESTHA (Head Legal) RABIN SIJAPATI (Head Operation) SHREE CHANDRA BHATTA (Head Branch Coordination Cell) BIKASH THAPA (Head cards and Remittance) SACHIN TIBREWAL (Head accounts And Budgeting) SANJEEV KARKI (Head Cash Transfer) TUL JUNG PANDEY (Head reconciliation) PRABIR SJB RANA (Head Human Resources)
SAMMIT BHATTARAI (Head Credit Administration) SHIVANATH BAHADUR PANDEY (Head Research And Development) BINOD UPADHAYA (Head Internal Audit and Compliance) There are others many other highly experienced and professional personnel in the management team of INVESTMENT BANK. Because of highly effective management and heartily effort of these staffs INVESTMENT Bank has been able to reach where it is today.
1.4 INVESTMENT Investment can be derived as to employ money to generate more money in future.Person who invests is called investor it can be natural or artificial person. When investor does the investment they have to consider two major aspects one is Risk and other is Return. Return can be considered as the primary motive for the investment, whereas risk is obstacle to reach the target. Risk and profit are inter-related, higher the risk higher the profit and vice versa. Investor can buy stock, bonds of companies or deposits into bank; buy a land, gold or silver, all these activities involve sacrificing of present money in the expectation of future return so they are all investment. The objective of the investment is to maximize Profit and Wealth of the investor. Investment can be of two types Real Investment or Financial Investment. If investment is done in tangible assets like land and machinery is real investment. It has productive capacity. Investment is financial assets like common stocks and a bond is financial investment. It does not directly possess productive capacity. The value of financial assets is derived from the values of the real assets of the firm. True investor is interested usually in long term investment with a good rate of return earned on a consistent basis with a low risk as possible but there may be some irrational investor in the market. People seek opportunities promising high rate of return, earned rather quickly, or say abnormal rate of return than the moderate rate of return, so investment period may be a few days to few months. People invest with their saving money in case of bank its source of funds are deposit equity capital and sometime even loans is borrowed from other bank to invest. Deposit is one of the bank’s important sources of funds. Deposit is the investment for the depositor as he receives interest from bank for his deposit. Bank mobilizes its funds accumulated from different sources in various investment alternatives such as government, corporate securities, mutual fund, industrial project, by providing loans, advances, overdrafts, etc. Even though profit and risk is important factor while investing they are not only the factor that investor has to consider. There are other factors that investor has to take in account. They are
taxes, market environment, Govt. rules and regulations, etc. The word investment brings forth vision of profit, risk, speculation and wealth.
1.4.1 Investment policy A bank makes investment for the purpose of earning profits. Before that they keep primary and secondary reserves to meet its liquidity requirement. So to match the liquidity position and to gain the profit also investment policy has to be made. To maintain adequate liquidity in the bank should be one of the major policies while investing One of the most important problems in the banking industry is the investing its deposits and capital in various forms of earning assets. This is also known as the portfolio management. The investment policy of bank is highly influences by the nature of funds for its investment. There are mainly two types of funds in the bank for investment i.e. capital and deposits. Deposits constitute the major portion for the investment purpose. Bank can also take loans from other bank to invest. The bank should be able to clear the policy of its investment by making deep study on the subjects that which sector would be the more trustworthy and dependable to invest by the amount collected. In usual practice loan and investment is regarded to be a synonymous. The bank gives a loan to customer for short period on condition of repayment. It is the customer who asks for loan. By advancing a loan, the bank creates credit, which is a temporary source of fund for the bank. An investment of the bank in the other hand is the outlay its funds for a long period without creating any credit. A bank makes investment in government securities and the stock of large reputed industries, in the case of loan, bank advances money against securities and bills provided by the borrower. A bank should lay down its investment policy in such a manner so as to ensure the safety and liquidity of its funds to meet the potential demand of its customers and at the same time maximize its profits. This requires adherence to certain principles. In regards to a commercial bank there are basically some major principles, which they follow while they formulate their investment policies.
1.4.2 Principle to be considered before formulating Investment policies Some important principles that a bank needs to consider while formulating investment policies. They are discussed below:
a. Principle of Profitability: Even though bank is service oriented organization it must make a profit because it ahs to pay interest to it’s depositors, it also have to pay operating and administrative expenses such as rent, stationery, repair and maintenance, salaries bank that it has to pay dividend to its shareholders. So the bank must earn profit as much as possible in order to run the bank smoothly and efficiently. The bank can gain much profit from the safe and long term investment but there is less liquidity in such investment. It can invest in place where there might be high profit but it can include high risk in this situation bank may face the great economic loss. A bank must pay attention how to equalize profit and liquidity and reduce risk as much as possible. b. Principle of liquidity. Liquidity is another important principle of investment policy of bank. Profit and liquidity are two opposite principles. To earn profit bank must invest but to earn safe profit, it must invest in long term securities but it can not do so because banks public money, which can be withdrawn at any time by depositor. They therefore advanced loans on the security into cash at a short time. It is essential because if the bank needs cash meet the urgent requirement of its customers, it should be in a position to sell some of the securities at a very short notice without disturbing their market prices much. They are certain securities such as central state and local government bond, which are easily sealable. So, the bank should make investment in government securities shares and debentures of reputed industrial houses.
c. Principle of safety: The safety of fund invested is a principle of investment policy. Safety
means that the borrower should be able to repay the loans and interest in regular interval without default. The repayment of the loans depends upon the nature of security, the character of the borrower, his capacity to repay and his financial status. The share and debenture of industrial concern are tied to their earnings which may fluctuate with business activity in the country. The bank should also take into consideration the dent repaying ability of the government which investing in their securities. It is safe to invest in the securities of a government having high tax revenue and high borrowing capacity. While investing the bank should choose securities of such govt., local bodies and industrial concerns which satisfy the principle of safety. d. Principle of Marketability: A bank should consider the principle of marketability in investment policy. To invest bank should follow the policy of taking the security of high quality as far as possible. In case of market in Nepal which is quite small, in order to give livingness to its banking transaction, a bank should flow its loan by taking the first class securities. While investing it should not forget the principle of marketability that is weather the taken securities
are sealable in the market or not? Can the loan be recovered by selling it in the market or not? Investor should study the market and evaluation must be done while investing. e. Principle of National interest: No organization or individual should forget the liability toward the society. Banks objective of gaining profit should not go against the national interest. The central Bank of Nepal have prescribed directive to all bank such as to invest where and how much according to situation and the policy and instruction. So bankers should follow these directives and contribute in country’s development. f. Principle of Price Stability: One of the major principles of investment is the principle of price stability. Price must be stable; otherwise there is possibility of amount of a bank to be sunk in the future. If the security is taken of the property which keeps the price stable it will be easy for the bank to recover its loan. The bank should make investment by keeping the securities that keep the price stable, should flow the investment also create such situation which keeps the bank free from the fear of losing its loan. g. Principle of Diversification: A bank would have to bear high risk to earn high profit. It can reduce risk by diversifying its investment. In every advance given by the bank involves a risk element no matter how secured it may look. Whole banking business is operated on calculated risk. A successful banker should access the risk and diversify it by investment over a large number of industrial sectors and over a large number of securities. A bank should not invest its large portion of fund in one security or in one industry. If bank invest its large portion of fund in one type of security a bank would be running a big risk if that type of security’s value steeply decline. Principle of diversification means “One should not lay all its eggs in the same basket”. h. Principle of Tax Immunity: Even though bank is a government bank and it should help in the incensement in the wealth of the country it should invest in such sector which is entitled to the tax immunity mainly the commercial banks who has to earn profit for its stability. By increasing the investment to tax immunized sectors the bank can achieve goal of profit maximization. Tax immunized areas like treasury bills; national bond development bonds, etc are notable examples.
1.4.3 Factors affecting Investment policies Every organization make there own investment policies and they would have been successful If other factors did not influence it, but it is always influence by various factors. It can be broadly categorized in to two.
1. Internal Factor
Internal factors are controllable in nature. It means bank’s management can control these
factors by its changing policies and forming rules and regulation. Some of the factors are as follow
Budget: To invest there should be enough budgets with firm. Budget can be capital or loan. In case of bank capital, loan, reserve and deposits are the major source of the budget for the investment. There should be appropriate budget with bank to invest. Type of deposit: People deposit in various accounts so according to kind of deposit made by the depositor bank should make its investment policy. Like if the deposit is in interest bearing account mostly in fixed account bank can invest in long term investment and if it is in noninterest bearing like current account it should invest such funds in short term investments. Management efficiency: Another major internal factor that influences the investment policies is the management efficiency. If the management efficient is high then the investment policy can be regulated easily and smoothly. For this there should be proper communication.
2. External factor:
Another important factor that affects the investment policy is external factor. This external factor cannot be control by the organization. In other words it is uncontrollable. Some of the external factor affects the investment policy is discussed below Government rules, regulation and budget: One of the major external factors which cannot be avoided is government rules, regulation and its budget. This affects the investment policy greatly. This can keep on changing according to government formed. Competition: Another major external factor which affects investment policy of the banking sector is stiff competition among the different banks. New establishment of the bank and old to survive they may lead to unhealthy competition. Market environment: One of the major factors that influence the investment policy is market environment. Some of the product may have high elasticity and some may be of low elasticity. Banks have to carefully analysis where to invest or might face the loss. Central Bank direction: This can be considered as the one of the major external factor that influences the investment policy of the bank. Central Bank is supreme body of all the banks so all the banks have to follow the direction given by the central bank regarding the investment otherwise they might have to face penalty or they are closed by the central bank.
1.4OBJECTIVE OF THE STUDY
Every people work to achieve their goal or target in other words we can say ever work has its objective. In this report I have tried to study the investment of INVESTMENT BANK LTD from which I am hoping to know their investment policies and its contribution towards the fulfillment of banks target. To achieve primary objective are also considered In this study: 1) To compare the source and uses of funds of INVESTMENT BANK LTD to total commercial banks. 2) To evaluate the percentage of investment made by the INVESTMENT bank ltd. In different sectors. 3) To calculate rate of return on investment on government securities. 4) To compare the investment made by INVESTMENT bank ltd. To total deposits. 5) To evaluate the contribution of investment to total income. 6) To find out the profit position of the bank.
1.6 SIGNIFICANCE OF THIS STUDY A developing country like Nepal needs investor who can invest in different development projects and in profitable sectors. There are very few people in Nepal who can invest in high amount so for country like Nepal one of the major sources of the investment is Bank. Many banks and financial companies are establishing each year among them some are commercial banks; some are development banks, and some finance companies and many more will be established In future. The competition has become stiff because of large no. of competitor. Many banks and financial companies are being liquidated because of various reasons. One of the major reasons for the liquidation of the organization is implementation of poor investment policies. Those banks who have implemented well studied investment policies properly have been succeeded and are thriving now. I have focused on a study of investment done by a commercial bank. I have chosen INVESTMENT bank for my study which is one of the biggest commercial bank in Nepal. This study will hopefully help to know the investment policies of the bank. It will find out the profit position as well. Investment policies are guidelines that banker should not neglect as it might
cause heavy loss to the bank and if the bank become failure it cause loss not only to itself but to the nation also.
1.7 METHODOLOGY The prime objective of research is to know about the investment policy of Investment Bank Limited. The research is always based on collection and analysis of data which are processed to create knowledge.
1.7.1 SOURCE OF DATA
In any kind of work weather it is field report or of starting new business we need lots and lots of information regarding the subject matter. Without source of information no idea or decision can be generated or we can say that we can not achieve the goal. It is source of data in which published result and conclusion will depend on. If the source of data are reliable like say mostly primary data then it is more reliable like say mostly primary data then it is more reliable but it does not mean that the secondary data are fake it also plays a vital role. Like while preparing field reports and for other purpose also. So that source of data is very important. To achieve primary objective of this study that is to know about the investment policy and their contribution from the study of investment of the INVESTMENT Bank, mostly secondary data has been provided by “Nepal Rastra Bank”. Mainly used sources of data are like web site www.nibl.com.np and “23rd Annual Report” (2066/2067 B.S) of INVESTMENT Bank are used. “Banking and Financial Statistics” form INVESTMENT has also been used. Other many sources of data for the preparation of this field report are used. They are course books like Fundamental of investment, banking and insurance are used, further sources like booklets, published journals, and articles published in newspaper and other secondary sources are also used. 1.7.2 Tools and Method Analysis Without the proper analysis of data we can not determine anything of any institution. To determine any policy or any thing of any bank we must properly analyses the data that are available. So likewise to study the investment made by the bank and to determine investment policy of the bank corrective and the proper analysis of collected data is needed for which proper financial tools and method of analysis should be used then only it can give appropriate results. For the proper tools books and previous fields report on the investment policy were consulted.
For this field report tools and methods like ratio analysis, average , percentage, trend, etc, is done. The calculated mathematical results of the data is also presented graphical figures like bar diagrams, line charts etc. so that it would be more easier to understand by the reader.
1.8 LIMITATION OF THE STUDY While writing the field report there was some limitation that I could not over come. So this report is drafted by considering those limitations. Following limitation are taken into account while writing the field report. This field report is based on annual report and other secondary data which were published by the bank. This was prepared in the limited time period. This report is concentrated in the investment of INVESTMENT bank in the securities only other investment like in credit and fixed assets has been not dealt. Only some methodology has been considered for computation and analysis of data. It may lack many other requirements necessary for this fieldwork. Data of recent year is not available.
1.9 CHAPTER SCHEME Chapter I is the introduction describing the background of the study, history of bank, introduction of Investment Bank Ltd. Including its board of directors, share capital pattern and other financial aspects and services rendered. Furthermore, this Chapter highlights the significance of the study, its objectives and methods used in collecting information and data. Lastly, the limitations of the study are enlightened. Chapter II is the Data Presentation and Analysis showing share capital and reserve structure of the bank, its overall investment strategy in risky and risk free area, net profit trend for 5 year period, its deposit and loan advancement and its comparison to other commercial bank. Chapter III highlights the Summary, Conclusion and Recommendations after the research has been carried out.
DATA PRESENTATION AND ANALYSIS
This report aims to study the investment made by “INVESTMENT Bank Ltd.” Regarding the investment in securities. For these purposes many financial tools have been used in the study. Financial tools like ratio analysis, means percentage correlation; trend line analysis etc has been the major tool in the research. Basically the research questions have been answered by the secondary data available by different sources. Amount taken in these research is not exact these are converted into million for the easy calculation.
2.1 Share Capital and Reserve Structure
Table 3 A table showing share capital reserve and retained earnings. (Rs in million) F/Y Share Capital Reserves Retained Shareholder’s earning equity 2004/05 587.738 345.668 24.923 958.329 2005/06 590.586 415.775 45.950 1052.311 2006/07 801.352 516.056 121.354 1438.762 2007/08 1203.915 655.856 67.478 1927.249 2008/09 2407.068 835.980 156.558 3399.606 Source: Annual report
Table-3 shows the capital, reserve and retained earnings of INVESTMENT bank, as a whole shareholder’s equity. If we look at the above table we can see share capital is increasing fiscal year 2004/05 to 2008/09. The reserves have been increasing from fiscal year 2004/05 to 2008/09. Retained earning is increased from fiscal year 2004/05 to 2006/07 but is decreased in the fiscal year 2008/09 which
shows retained earning is volatile. As a whole Shareholder’s equity has increased in last five year.
2.2 Net Profit Trend For Five Year Table-4
Showing change in net profit of bank
F/Y Net Profit 2004/05 232 2005/06 350 2006/07 501 2007/08 697 2008/09 901 Source: annual report Increase/Decrease amount over previous year 79 118 151 196 204
(Rs in million) %change 51.63 50.36 43.14 39.12 29.26
Increase/Decrease amount over Previous year=New Year Profit- Old Year Profit % Change=Increase or Decrease amount over previous year/previous year amount
FIG-1 Bar diagram showing trend profit of INVESTMENT bank
Table-4 and the bar diagram FIG-1 shows the net profit and net profit trend of investment bank limited. Here it shows profit is in continuous increment but the trend line shows that the profit is in declining position. In the fiscal year 2004/05 profit was 51.63%. In the fiscal year 2005/06, 2006/07, 2007/08, 2008/09 has decreased to 50.36%, 43.14% 39.12%, 29.26% respectively.
2.3 TYPES OF INVESTMENT MADE BY THE INVESTMENT BANK Every organization has to make investment to survive, to earn. Investment Bank ltd s also one of the financial organization. This bank also does investment in different sectors and securities. This organization need to invest in the form o loan or other way this is only source of income for the organization. There is no other productive sector. Some of the data where this organization has invested and analysis of the investment has been given below.
Table-5 Showing Types of investment made by investment bank S.N 1 Particulars NG Treasury bills and securities 2004/05 1948.5 Year 2005/06 2005/06 2522.3 3256.4
2 3 4 5 6 7 8
Foreign banks Shares, debenture and bonds Other investments NRB securities Total investments(1+2+3+4+5) Adjustment Net investments(6-7)
17.73 1967.95 3934.18 3934.18
3043.11 17.73 19.71 5602.85 5602.85
3194.38 35.25 19.63 6505.66 6505.66
3664.47 59.94 6879.41 5.4 6874.01
4807.54 64.27 7403.11 3.3 7399.81
Source: Annual reports Table -5 shows the types of investment made by the bank during year 2004/05 to 2008/09. According to data available by the bank we can say from fiscal year 2004/05 to 2008/09 more of the investment is done in the NG securities, and less on other investments. Later in 2005/06 more of the investment was done in foreign banks and less in NG securities. Investment done by the bank in shares, debenture and bond are increasing. FIG-2 Bar diagram showing types of investments made by investment bank
Figure 2 shows the investments of investment bank limited in different places from fiscal year 2004/05 to 2008/09. There is high difference of investment in NG securities and other securities. Investment in shares, debentures and bonds is in very low ratio so it is difficult to see
in the bar diagram till date. Bank has invested in foreign banks from 2005/06 and in very high ratio. Investment in NRB securities is negligible so its difficult to see in the bar diagram. 2.4 PROPORTION OF INVESTMENT ON RISKY AND RISK FREE AREA If the excess amounts remain inactive in the bank, then it will be the cause for decrease in the profit of the bank. Investment in securities is one of the major places for investment and from this we can generate more revenue but it doesn’t mean that we can invest in random. We must take some precaution before the investment in different securities. Portfolio of 8 securities are said to be good optimal portfolio. Bank should understand that they are using the fund of the public so they should not use the public funds to invest in maximum risk oriented projects. They must invest in safe and profit generating projects and securities. So, the bank should invest low amount in risky securities and should invest its excess amount of fund to the secure places which is like government securities, treasury bills etc. Here investment in the securities has been divided into parts that is risky and risk free. Here investment in the government securities is considered as risk free area and investment in shares, debentures of different companies and other investment have been considered as the risky area. Other investment consists of mutual funds deposits in foreign banks and banks of country and certificate of deposits. Share and debenture are considered as the risky are because the share doesn’t have fixed rate of return and debenture is kind of loan without mortgage. Interest in deposits in different bank can vary according to their policy and mutual fund returns are also not fixed. Government securities are considered as risk free because it has fixed return and public has a great faith on the government. We can see the investment made by the investment bank in risk free and risky securities in the below table from the fiscal year 2004/05 to the current financial year. Investment amount in risky area = shares of different companies+ debenture of different companies+ other investments Investment amount in risk free area = government bonds+ treasury bills Proportion in risky area = investment amount in risky area/total Proportion in risk free area = investment amount in risk free area/total
Table 6 Showing investment in risky and risk free are Fiscal year 2004/05 Investment amount Proportion 2005/06 Investment amount Proportion 2006/07 Investment amount Proportion 2007/08 Investment amount Proportion 2008/09 Investment amount Proportion Source: Annual reports Risky area (A) 1985.68 0.5047 3080.56 0.5498 3249.27 0.4995 3724.42 0.5414 4871.81 0.6581 (Rs in millions) Risk free area (B) 1948.5 0.4953 2522.3 0.4502 3256.4 0.5005 3155 0.4586 2531.3 0.3419 Total (A+B) 3934.18 1.0 5602.86 1.0 6505.67 1.0 6879.42 1.0 7403.11 1.0
N table -6, we can see different proportion of investment made by the bank on risk and risk free area. According to table, in the F/Y2004/05 the highest portion of fund invested on risky area respectively. Investment in risk area is greater then in risky area on 2006/07. While looking at the all the proportion in the table, we can conclude that in all case except in F/Y 2006/07 high portion of the investment in the risk free area. By this we can conclude that the bank is in risky investment policy. 2.5 COMPARITIVE STUDY BETWEEN DEPOSIT AND INVESTMENT Deposit is one of major source of fund for the bank. These funds should be properly invested. Bank should not invest in such place where there is greater risk and liquidity cannot be maintained. Bank should invest in such place where liquidity and profit can be made proportionally otherwise public might lose their faith from the bank in the both the conditions that is in lack of liquidity in time of withdrawal and at the time low profit. So if the bank invests its fund to the secure that is considered to be good. Investment to the total deposits is a indication of the velocity with which the funds moves through the loan and advances out of the total deposit amount. Investment is medium through which bank generally generates the revenue. Here the comparison is done between the investment in securities and the total deposits done by the public. Here investment in the form of loan and investment in fixed assets has been ignored. Below in the table and diagram the investment to the total deposit of Nepal Investment Bank Ltd is shown.
Table 7 Showing ratio of investment to total deposit of the bank (Rs in millions) Fiscal year 2004/05 2005/06 2006/07 2007/08 2008/09 Total deposits 14255 18927 24489 34452 46698 Source: annual reports Ratio = total investment/total deposit Total investment 3934.18 5602.86 6505.67 6879.42 7403.11 Ratio 0.2760 0.2960 0.2656 0.1996 0.1585
FIG-3 Bar diagram representing total deposit and investment (Rs in millions)
Table-7 and bar diagram present the total investment made by bank, total deposit and its ratio from the fiscal year 2004/05 to 2008/09. In the fiscal year 2004/05 the investment was 3934.18 million which 27 .60% of the total deposit. In the fiscal year 2005/06, 2006/07, 2007/08 the amount of investment was Rs 5602.86 million, Rs 6505.67 million, Rs 6879.42 million respectively and its ratio to total deposit was 29.60%, 26.56% and 19.96% respectively. Similarly in the F/Y the investment was Rs 7403.11 million which was 15.85% of the total deposit. 2.6 RATIO OF INVESTMENT TO TOTAL CAPITAL AND LIABILITY (SOURCES OF
Capital is another major source of fund. To start any kind of company or the organization capital is first essential part. Capital to be raised by issuing share and also by retaining profit. Liability is another source of fund. Some liability might not generate cash directly but it gives the same value like assets bought in credit. To find out the ratio of investment and total capital and liability in the below table following formula is used: Table -8 Showing ratio of investment to total sources of funds. F/Y Total source of fund Uses of funds on investment 3934.18 5602.86 6505.67 6879.42 7403.11 (Rs in millions) Ratio 0.2449 0.2627 0.2357 0.1769 0.1396
2004/05 16063.52 2005/06 21330.14 2006/07 27590.84 2007/08 38873.31 2008/09 53010.80 Source: Annual reports
Table-8 shows the ratio of uses of funds on investment to total sources of funds from fiscal year 2004/05 to 2008/09. The ratio of investment to total sources of funds from fiscal year 2004/05 to 2005/06 is increasing then it is in decreasing trend. The ratios of investment of fund from fiscal year 2004/05 to 2008/09 are 0.2449, 0.2627, 0.2357, 0.1769 and 0.1396 respectively. 2.7 LOAN AND ADVANCE TO TOTAL INVESTMENT We know that bank do not only invest in the securities but it also invest through loan. Loan and advance is one of the major investments done by the bank from which they can earn and this are where maximum of the bank fund can be used by the bank but never the less this is one of the riskiest investment area for the investment. There is always problem in getting back the loan so a bank has to make etcetera provision of loss in this sector. However, this is one of the
major funds utilizing area where bank should invest. Proportional comparison between the total investment and loan and advance is done below
Table-9 Loan and advance to total investment Fiscal year 2004/05 2005/06 2006/07 2007/08 2008/09 Investment amount Proportion Investment amount Proportion Investment amount Proportion Investment amount Proportion Investment amount Proportion Loan and advances (A) 10453 0.7265 13178 0.7017 17769 0.7320 27529 0.8000 36827 0.8326 (Rs in millions) Total investment (B) 3934.18 0.2735 5602.86 0.2983 6505.67 0.2680 6879.42 0.2000 7403.11 0.1674 Total (A+B) 14387.18 1.0 18780.86 1.0 24274.67 1.0 34408.42 1.0 44230.11 1.0
Source: annual reports Total investment = Risk free area + Risky area Ratio of loan and advance to Total investment = Loan and Advances/Total investment From the above table and graph we can clearly see that the loan and advances is gradually increasing. Investments of investment bank are also increasing throughout the years.
2.8 COMPARISON OF INVESTMENT MADE BY THE INVESTMENT BANK TO
OTHER COMMERCIAL BANKS
Commercial banks are increasing day by day and there is fierce competition among them to attract the customers. They need to invest the money collected from public in safe and high return area so that they can increase their profit as well as wealth. Every bank has its own policy to invest. Comparison on investment of investment bank and other commercial bank is shown below. Table 10 Fiscal year 2006(mid july) Investment of total commercial banks 88959.57 Investment of investment bank 3934.18
2007(mid july) 2008(mid july) 2009(mid july) 2010(mid july) Source: annual report
101888.12 120335.6 141347.3 Not available
5602.86 6505.67 6879.42 7403.11
5.49% 5.41% 4.86%
Percentage = investment of investment bank/investment of other commercial bank Table-10 above shows the comparison of the investment bank with total of other commercial banks. Investment bank has share percentage of 4.42 of the total investment of the commercial banks in mid july 2006. Investment percentage increased to 5.49 in mid july 2007 but has decreased to 5.41 % in mid july 2008 and has further decreased to 4.86% in id july 2009. Investments of the other commercial banks are in increasing order while that of investment bank is decreasing from the year 2008.
160000 140000 120000
80000 60000 40000 20000 Investment of total commercial banks
Investment of investment bank
2006(mid 2007(mid 2008(mid 2009(mid 2010(mid july) july) july) july) july)
In FIG-5 percentage of INVESTMENT bank’s investment in comparison to other commercial bank is shown. In the fiscal year 2010 there is no comparison due to unavailable data of investment done by total commercial banks. From mid July 2006 till mid July 2009 to total commercial bank is in mid July 2007.
SUMMARY, CONCLUSION AND RECCOMENDATION
3.1 Summary Evolution of the banking sectors in the world has been centuries. In the context of Nepal also it has been many years. Banks play vital role in the boost up of the economy of the country, especially country like Nepal. There should be equal participation of public and the government sector in the banking sector to develop the economy of the country. In other words, the government banks and commercial banks both play important role to develop economic condition of the country. This field report is study of investment policy of the INVESTMENT bank limited which was established in 1986. The bank was announced the “Bank of the year 2008”. Every commercial bank needs to earn profit to survive and for it they have to invest. Main objective of this study is to find out investment policy of INVESTMENT bank limited. This study is concentrated towards the observation of Investment bank sources and use of the funds, types of investment made by the bank, comparison of investment made by investment bank ltd to other commercial banks in the country, ratio of the total deposit, investment in risk free and risky area and ratio of net profit by the investment. This report has concentrated on the real investment like NG securities, bonds and shares but not loan and advance which can be considered as one of the risky investment done by the bank on the total faith. This study is done on the base of secondary data provided by the Investment bank limited and Nepal Rastra Bank from fiscal year 2004/05 to 2008/09. The results of the study are fully dependable on these available data so that results might not be accurate as expected. 3.2 Conclusion After analyzing the data that are available and interpreting the results, I came to following conclusion: There is continuous increment of shareholder’s equity from last fiscal five years i.e. from 2004/05 to 2008/09 which is considered as the positive aspects (Table-3).
Net profit is in decreasing trend percentage change in profit were reduced in comparison to fiscal year 2004/05 the trend line shows the declining trend, which is unfavorable may be due to the situation of the country last year (Table-4, Fig-1). in five fiscal years except in fiscal year 2005/06, more of the investment were done in foreign banks and less in shares, debenture and bonds and other investments (Table5,Fig-2) while dividing the whole investment on two parts that is risk free and risky area except in F/Y 2006/07 here also it shows the investment is done in risky area, we can conclude that bank is not taking safe investment policy regarding in securities.( Table-6) Total deposit is one of the sources of fund. Here ratio to T.D total investment is increasing in F/Y 2005/06 and then decreasing. So among different source the portion of deposit must have been utilized in some other places then in investment in securities. (Table-7) The ratio of investment to total source of funds shows increase in F/Y 2005/06 and then in decreasing orders. This shows that the fund must have been utilized in some other places like to purchase fixed assets, to create credit or for working capital. (Table- 8) Proportionate comparison between total investment and loan and advance concludes that Investment bank has great faith on their customer and they follow their motto very well. The loan and advance has greater portion then of total investment. (Table-9) The comparison of investment made by the investment bank to total commercial bank cannot bank cannot give exact conclusion due to unavailable data. It seems like that investment bank has high contribution on investment then other commercial bank (Table-10, Fig-6)
3.3 Recommendation From all above data analysis and conclusion that overall performance of the bank is satisfactory, however this year the net profit growing rate has declined. Here are some suggestions, which hopefully will help to improve the position of Investment bank. Its growth percentage of net profit is reduced so to increase its net profit it has to expand the investment sector. It can support to new industry and business of the country and help in more social economic development of the well recognition of the institution. serving people with the credit facilities is the duty of the financial institution yet to invest more in loan may be problematic in the near future so the bank should gather more information as possible of the parties before granting loan. Bank should open more branches in the rural area to improve banking habit of the people.
The bank should study the market to make their transaction more capable as well as to fulfill growing demand facilities. To attract customer and to collect funds high interest rate is key points. The cash deposited by the customers mainly in fixed deposits can be used in long term investment. investment bank should publish and distribute their booklets regarding its progress reports and future plans to the interested people to gain the confidence of the people and update the website with much more information as possible and as timely as possible. There is stiff competition in the market. So investment bank should develop IT, provide more training to the staff members and should keep a close eye on unhealthy competition. The bank has highest profit on f/y 2004/05. I would recommend the bank to take same strategy of investment.
#Birsingh Hriday (2005), “Banking and Insurance”, Asia publication (P) ltd. Kathmandu. #Bhandari, Dilli Raj (2003),”Principle and Practise of Banking and Insurance”, Aayush publications, Kathmandu. #Dewett, K.K; Varma, J.D (1980),”Elementary Economic Theory”,S.Chand and Company,New Delhi #Koirala, Aatmaram; Gautam, Durgaprasad (2061),”Economic Principles”, Goodwill publications Kathmandu. #Moses, Edward A (1992),”Fundamentals of Investments”,Westgroup company, Minnesota #Nepal Rastra Bank (2008/09) ,Banking and financial statistics # Retrived from www.nibl.com.np (website of Nepal Investment Bank ltd) #Sharpe, William, F.alexander, Gordon J;Bailey, Jeffery V;(1998)”Fundamentals of Investments”,Pearson Education Inc, Singapore #Shrestha, Manohar K.Poudel,Rajan B.(2005),”Fundamentals of Investments”, Buddha Academic Publisher and distributors Pvt, Kathmandu #Whiting, D.P. (1994)”Mastering Banking”, Palgrave Macmillan, London.
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