CHAPTER I

INTRODUCTION

1.1 Background of the Financial Analysis

Financial analysis is a method of determining the performance and
appropriateness of organizations, programs, budgets and other financial bodies.
Financial analyzes are usually used to determine whether the corporation's
worth to be monetary investment safe, solvent, liquid or profitable is adequate.
When a particular business is analyzed, a financial analyst analyzes the income
statement, the balance sheet and the cash flow statement by concentrating on
them.
The wealth of a bank is equivalent to the liabilities of the bank. It is the margin
through which the investors are covered by liquidating the assets and paying
off their liabilities. The financial health of a bank is its capital / asset ratio that
must be greater than a minimum prescribed. Banks cannot legally lend their
entire deposited money on a one-time basis. We must always hold in reserve a
certain proportion of their deposits, ensuring that customers can withdraw their
money when needed. For consumer loans, the remaining funds that are not
subject to reserves. Investment requirements apply to liable capital size and
composition.
The banks run the risk of the borrowers being unable to service the loans
(credit risk), while, in principle, the depositors run the risk of the bank failing
before the deposits have been withdrawn. However, the latter risk is sought
limited by several means, such as public supervision of the banks, deposit
insurance schemes and a requirement for the banks' equity ratio to be higher
than a specified limit.

1.1.1 Profile of sample

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 Laxmi Bank Limited (LBL):
Laxmi Bank was born in 2002 in the southern plains of Nepal, in one of the
oldest and most vibrant industrial and commercial cities of the country –
Birgunj.

In 2005 it upgraded to a national level Bank and subsequently moved our head
office to the country’s capital – Kathmandu. Along the way it merged with
HISEF Limited, a significant milestone in the country’s corporate history as the
first ever merger in Nepal.

It is listed in the Nepal Stock Exchange with over 13,000 shareholders,

represented by some of the country’s most respected business houses, Citizens
Investment Trust (a Nepal Government undertaking) and the general public.
Fourteen years of Responsible Banking at Laxmi Bank it has truly believe that
the most meaningful contribution it has made to our society is by being good at
what we do – Banking. Embracing ‘Responsible Banking’ as our corporate
responsibility ensures that we firmly remain on track to reach our aspiration of
becoming the best managed and most respected financial institution in the
country. Currently bank has been facilities its customers by 72 branches and 74
ATM in entire Nepal.

Currently it has following capital position:

Share Capital
Authorized Capital 10,00,00,00,000
Issued Capital 8,219,653,000
Paid Up Capital 8,219,653,000

However, according to NRB directives, it has been working to fulfill its capital
plan through various plans (Merge, acquisition, right issue and distribution of
bonus).

2
1.2 Statement of the Problem
Financial institutions assist in the economics development of the country.
Commercial bank being the financial institution plays significant role of
collecting scattered surplus finds and deploy theses fund in directly related to
the volume of investment made and returned obtained by the bank. Investment
problem has become very serious of the least development country like Nepal.
This is due to lack of sound investment policy of commercial bank.

The main focus of the statement of the problem is the matter related to
investment policy of the commercial banks and this study focus mainly on the
loan and advances and investment in share and securities.
 Are NRB directives and analyses investment policy of commercial
banks?
 Why analyze the liquidity & Operational issue of LBL?
 How to find out whether NRB guideline is actually being implemented
of LBL?

1.3 Objectives of the Study

The major objective of this study is to analyze the NRB directives regarding
operation policy of commercial banks.
The specific objectives are:
 To examine the liquidity & operation position of LBL.
 To analyze the relationship between total deposit and loan and advance,
total deposit and total investment of LBL.

1.4 Rationale of the Study

The success and prosperity of the bank heavily depends upon the successful
implementation and investment of collected resources, which develops the
economy of the country. Good investment policy of the bank has positive
impact on economic development of the country and vice-versa.

3
  The analysis on investment practice would help the bank to further
improve the investment policy.
 The study would help to analyze the current position how bank is
investing its collecting funds.
 This study will help NRB to formulate the new investment policy.
 More over it will prove to be an important value for the entire
individuals who interested in Nepalese banking field.

1.5 Organization of the Study

This study has to be finished within the design offered by the research
department of the college. Accordingly, the research is organized in the
following five chapters.
Chapter - I: Introduction
The Chapter Include the introduction of the main topic of the study like general
background, profile of the organization, events, activities, etc: objectives of the
study; rational; method of the study; review of literature; limitation study.
Chapter - II: Results and Analysis:
In this chapter briefly explain the methodology of the study i.e. research carried
out in this size and shape. For this purpose various financial, limitation of the
study and statistical tools and technique are define, which will be use for the
analysis of the presented data of study bank.
Chapter - III: Summary and Conclusion:
It is the final chapter of the study, which consist a brief summary of the report,
and conclusion based on the findings of the report.

Finally, bibliography and appendix are represented at the end of the study.

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1.6 Conceptual Review
Real investment generally involves some kind of tangible assets such as land,
machinery or factories. Financial investment involves contracts written on
pieces of paper such as common stock and bonds. In the primitive economies
most investment is of the real variety, where as in a modern economy reach
investment is of the financial variety.

Banking industry has acquired a key position in mobilization resources for

finance and social economics development of the country. No function is more
important to be economy and its constitute than financing. The Bank assists
both the flow of goods and service from the government. Banking provides the
country with a monetary system of payment and is in important part of the
financial system which makes loans to maintain and increase the level of
consumption and product in the economy

Central Bank of Nepal, Directives of Commercial Banks and Financial

Institutions, Publication of Nepal Rastra Bank, Banking and Financial
Statistics, Press Communiqué foreign Currency Loan Policy, Finance
Companies Development Banks, Cooperatives, Commercial Banks, Main
Economic Indicator, Economic Review Occasional Paper, Economic Report,
Recent Macroeconomic Situation of Nepal, Monetary Policy, Long and Short
Term Consultancies, Invitation for Bid NBL, Finance Companies in Nepal
,Sources and Uses of Funds of Commercial Banks, Securities and Cash
Reserve Position of Commercial Banks, Quarterly Economic Bulletin, Main
Indicators of Non Bank Financial Institution, Interest Rates Structure of
Commercial Banks and ADBN, Interest Rates Structure of Commercial.

In appearance the main distinction between a central bank and a commercial

bank is that now a day, the central bank does not involve much in banking, but
the more fundamental different is one of aim. The commercial bank thinks

5
primarily of making a profit, where as the central bank thinks the effect of its
operations on the working of the economic system. A commercial bank has its
share holders and is expected to do the best it can for them. But the government
by contrast, usually owns the central bank. The most commercial bank may be
few or many and they are to the found doing business with the general public
all over the country. There is only one central bank market operation are
mainly impersonal and confined to what is necessary for influencing the
country’s financial business in the directed by economic policy.

1.7 Review of NRB directive

Nepal Rastra Bank has issued twenty-one directives on the code of conduct for
board director and employees of banks and non-banks financial institutions
(unified directives). These directives are issued as authorized by section 79 of
the NRB act. The section 79 of NRB act read as “The bank may issue
directives from time to time to commercial banks and financial institutions
regarding banking operations, currency and credits. It shall be the duty of
commercial bank and financial institutions to comply with such directives.”
These kinds of directives as such are new from the regulator side. Ethical
standard in any financial institutions is normally set at the time of
establishment of the entity. Such regulation may be governed by the personal
rule in the case of employee and law or by oath to the directors.

1.8 Review of Articles

In this section, attempt has been made to review some relevant articles in
different economic/finance journals, The World Bank Bulletins, dissertation
papers, magazines, newspapers and other related literature

Shrestha, (2006) in his article entitled “Financial Liberalization Index for

Nepal” conclude that the financial liberalization index for Nepal has been
constructed by including eight different policy measures implemented during

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 the liberalization process. The liberalization index is based on principal
component method and also takes into account the partial liberalization policy
measures. Previous studies failed to properly include this part. Most of the past
studies either treated the partial financial liberalization as the full liberalization,
or excluded it by taking only the full liberalization date. This is misleading,
especially during the impact evaluation. The financial liberalization index for
Nepal shows that the decade of 1984 – 1994 was the period during which most
of the financial liberalization measures were implementation in Nepal.

The only necessary condition for this mechanism to work is that holding and
extending equity is more costly than the risk free interest rate in the (interbank)
capital market. Because of this effect of capital adequacy regulation there exists
an incentive for banks to engage in active risk management, i.e., hedging, if
regulatory rules accept such hedging operations as risk reducing which part of
the proposal of the New Basel Capital Accord. In this case the banks fully
hedge their exposure to risk and can separate decisions on interest rates from
hedging decisions. Otherwise hedging is not beneficial for banks and thus there
is no need for performing such activities.

1.9 Review of Previous Report

Yadav, (2015) in his thesis “Financial Policy NRB Directive in the
Commercial Bank of Nepal”
The Main Objectives of Study are:
 To find out the importance of central bank in the modern dynamic economy.
 To make necessary suggestions & recommendations
The Major Findings of the Study are:
 Proper co-ordination with NRB and other regulatory bodies in the coming days.

Acharya, (2016) in his thesis, "Investment Policy and Analysis of Commercial
Banks in Nepal" made a comparative study of SCBNL. with NIBL and NB
Bank.

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 The Main Objectives of the Study are:
 To discuss fund mobilization and investment policy of SCBL in respect to its
fee based off-balance sheet transaction and fund based on balance sheet
transaction.
 To evaluate the quality, efficiency and profitability and risk position.

The Major Findings of the Study are:

 Mean current ratio of SCBL is slightly higher than that of NIBL is lower than
NIBL and NBBL.
 Mean ratio of cash and bank balance to total deposits of SCBL is lower than
NIBL and NBBL.
 Liquidity position of SCBL is comparatively better than NIBL and NBBL. It
has the lowest cash and bank balance to total deposit and cash and bank
balance to current ratio.

1.10 Research Gap

Investment in different sectors is made on the basis of the directives and
instructions of Nepal Rastra Bank as well as the investment policy and
guidelines of the concerned commercial bank itself. Commercial banks should
follow these directives and circulars. Furthermore, their own investment
guidelines and policies should be in line with NRB directives and circulars.
Therefore, the up to date study over the change of time frame has been a major
concern for the researcher, concerned organization as well as the banking
industry as a whole. This study covers the more recent financial data, NRB
guidelines and instructions than those of studies previously conducted.

8
 CHAPTER II
RESULT AND ANALYSIS

2.1 Introduction of Research Method:

Therefore the research operation is an alert or seeks to find or expand
understanding, systemically and consistently. The research process includes a
number of important activities throughout the collection, recording, review and
evaluation of the data, so that solutions to the problem can be identified. The
whole process is based on the research methodology, concepts and the theory.
We find out precision, validity and safety through a research methodology. The
rationale for this analysis, the methods applied, will be used. A research
methodology helps us to find out accuracy, validity and suitability. The
justification on the present study, the applied methodology will be used. The
research methodology used in the present study is briefly mentioned below.
2.2 Sources of Data:
This study is primarily based on the secondary source of data. So, the necessary
data for the study are collected mainly from the concerned institutions. The
study is concerned with the guidelines of NRB on investment policy of Laxmi
Bank Limited. For this purposes commercial banking statistic, annual report,
quarterly economic bulletins published by published by the different
commercial banking bulletins published by the different commercial banks.
These include annual reports for last three years end report of each year and
various other websites and periodicals.

2.3 Population and Sample:

Population refers to the industries of the same nature and its service and
product in general. The total number of commercial bank in Nepal is the
population of the study. There are 27 commercial banks operating in the
country which are the population of this research study. For this study, one

9
commercial bank is taken as the sample i.e. NBB. The impact of directives
issued by NRB investment policy procedure of the banks is studied. Hence, 28
Commercial banks is taken as sample for the study because the study has been
made only few researchers to collect accurate and total information to carry out
this thesis effectively and efficiency.

2.4 Data Collection Procedure & Data Analysis:

Before analyzing the data, the data and information have been presented
systematically in the formats of Tables, Graphs and Charts which will explain a
lot about the data and information collected.
For the analysis of the research study, the following financial tools and
statistical tools are used.
2.1.1 Financial Tools
Financial analysis is the process of analyzing various items of financial
statements to assess a firm’s comparative strength and weaknesses. In other
word, financial assess a firm’s comparative strengths and weaknesses. In other
words, financial analysis involves analyzing financial statement prepared in
accordance with generally accepted accounting principles to ascertain
information concerning the magnitude, timing and riskiness of future cash
flows.
As we know there is various type of ratio. We have grouped these ratios into
five types i.e. Liquidity, Activity, Profitability, Risk, and Growth ratios. None
of single ratio gives us accurate information about financial condition and
performance of a firm. Hence, we are analyzing a group of ratios to make
reasonable judgment. Following ratios are calculated from the calculated data.

2.1.2 Liquidity Ratio

The ability of a firm to meet its short-term obligation is known as liquidity. It
reflects the short-term financial strength of business, current and quick ratios
are calculated for this purpose. Current ratio shows the relationship between

10
quick assets and current liabilities. Quick ratio can be obtained by deducting
the stock and prepaid from current assets.
Total Assets
Current Ratio =
Total Liabilities

Total Assets−Inventory
Quick Ratio =
Total Liabilities

2.1.3 Activity Ratio

One of the leading ratios in investment is activity ratio, which is also called
management ratio. It shows the relationship between sales and resources. Thus,
it reflects the degree of effectiveness in the use of resource or funds by a firm.
Following ratios are calculated:

Total Credit
Total Credit to Total Deposit =
Total Deposit

Total Investment
Total Credit to Total Deposit =
Total Deposit

Credit∧Investment
Total Credit to Total Deposit =
Total Deposit

2.1.4 Profitability Ratio:

Profit maximization is the objective of each and every business concern. A
profitability ratio is related to profit. It shows the overall efficiency of the
business. The earning capability of business is measured by profitability ratio.
Following ratios are calculates:

Net profit
Return on Equity (ROE) =
Total Equity Capital

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 Net profit
Return on Loan Advance Ration =
Loan∧ Advance

2.1.5 Risk Ratio:

There is always risk in the business. Risk ratio is very essential element. Risk
ratio measures the risk associated with the banking variables. Banks arises
associated capital, accepts deposit and finally grants the loan. These entire
things come along with it. Higher the ratio, higher will be profit and vice versa.
The following ratios are calculated:

Total Loan∧ Advance

Credit Risk Ratio =
Total Assets

Total Interest Earned

Interest Earned to Total Operating Income Ratio =
Total Working Fund

2.1.6 Growth Ratio

Growth ratios always related to fund mobilization and investment management
of commercial banks. It represents how well the commercial bank maintains
the economic and financial position. Under this topic following ratios are
analyzed:
Growth Ratio to Total Deposit: it is calculated by summed of all the
deposit during the analysis period and indifference with average deposit,
percent change and standard deviation.
Growth Ratio of Loan and Advances: it is calculated by summed of all
the loan and advance during the analysis period and indifference with
average deposit, percent change and standard deviation.
Growth Ratio of Total Investment: it is calculated by summed of all the
total investment during the analysis period and indifference with average
deposit, percent change and standard deviation.

12
 Growth Ratio of Net Profit: it is calculated by summed of all the net
profit during the analysis period and indifference with average deposit,
percent change and standard deviation.
2.5 Limitation of the Study
The limitations of the study are as follows:
 Though there are so many directives issued by NRB for commercial
bank, this study includes on the directives regarding Investment
policy of commercial banks.
 This study is limited to the case study of Laxmi Bank Limited Ltd.
only. This research does not reflect anything about other commercial
banks of the country.
 This study basically depends on secondary data (i.e. LBL annual
reports, journals and NRB, financial statement, articles, journals and
publications.etc.) are used.
 A three years trend is considered. The study is from 2016/17 to
2018/19 only.
 Only limited financial tools and technique are used for analysis, so
study may not be sufficient for depth analysis


2.6 Financial Analysis

Under this chapter various financial ratios are calculated to evaluate and analyzed the
performance of LBL. Study of all types of ratio is not done only those ratios that are
important from the point of view of the fund mobilization and investment for this
purpose are given below:
2.6.1 Liquidity Ratio
Liquidity ratios measure the ability of the firm to meet its current obligations.
Difference between current assets and current liabilities is known as working capital,
which provides liquidity in business organization. A commercial bank must maintain
a fair meet demands for deposit withdraws, pay matured obligation in time and

13
convert non-cash in to cash to satisfy immediate needs without loss to the bank and
without consequential impact on long run profitability of the bank.
Cash and Bank Balance to Total Deposit Ratio (Cash Reverse Ratio)
Cash and Bank balance is said to be the first defuse of every banks. The ratio between
the cash and bank balance to total deposit measure the ability of the bank to meet the
unanticipated cash and all types of deposits. Higher the ratio, the greater will the
ability to meet current demand of deposits, pay interest on deposits. This will also
maximize the cost of fund to the bank. It can calculate follows:

Cash∧Bank Balance
Cash and Bank Balance to Total Deposit Ratio ¿
Total Deposits
Cash and Bank Balance to Total deposit ratio of LBL from the three fiscal years
2016/17 to 2018/19 are given below table

Table 2.1
Cash and Bank Balance to Total Deposit Ratio
(Rs. in Million)
Years Cash and Bank Balance Total Deposits Ratio (%)
2016/17 4,936.67 30,592.05 16.14
2017/18 5,005.88 39,991.81 12.52
2018/19 6,202.92 59,190.95 10.48
Mean 13.04
Standard Deviation 2.34
CV 0.18
Sources: Annual report of LBL

Figure 2.1
Cash and Bank Balance to Total Deposit

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 Sources: Table 2.1

The table and figure 2.1 shows that the cash and bank balance to total deposit of LBL
are in the fluctuating trend. It represents the LBL has stable Cash & Bank Balance
ratio during the year.

Cash and Bank Balance to Current Assets Ratio

This ratio examines the banks liquidity capacity on the basis of its most liquidity
assets i. e. cash and bank balance. The ratio reveals the ability of the bank to make the
quick payment of its customer deposits. A high ratio indicates the sound ability to
meet their daily cash requirements of their customer deposit vice versa.

Both higher and lower ratios are not desirable. The reason is that interest on deposits
and some earning may be lost. In contrast if a bank maintain low ratio of cash, it may
fails to make the payment for presented cheques by should be maintained properly. It
can calculate follows:
Cash∧Bank Balance
Cash and Bank Balance to Current Assets Ratio= Current Assets

Table shows the cash and bank balance to current assets ratio of LBL from three fiscal
years 2016/17 to 2018/19.
Table 2.2
Cash and Bank Balance to Current Assets Ratio
(Rs.in Million)

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 Years Cash and Bank Balance. Current Asset Ratio (%)
2016/17 4,936.67 6,072.42 81.30
2017/18 5,005.88 5,654.91 88.52
2018/19 6,202.92 6,319.92 98.15
Mean 89.32
Standard Deviation 6.90
CV 0.08
Sources: Annual report of LBL

Figure 2.2

Cash and Bank Balance to Current Assets

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 Sources: Table 2.2

The table and figure 2.2 shows that ratios are in the increasing trend of report. The
mean ratio, standard deviation and coefficient of variance of cash and bank balance to
current assets.

Investment on Government Securities to Current Assets Ratio

The ratio examines Share of a commercial banks current assets which invested in
different government securities i.e. treasury bills and government bonds. Commercial
banks are interested to invest their collected fund on different securities issued by
government to utilize their excess fund. Even governments securities are not so liquid
as cash and bank balance of commercial bank they can easily be sold in the market or
it can also be converted into cash in other ways. The ratio is computed as follows:

Investment onG . S .
Investment of government securities to current asset ratio = Current Assets
The table shows the ratio of investment on government securities to current assets of
LBL for the three fiscal years from 2016/17 to 2018/19.

Table 2.3

Investment on Government Securities to Current Assets Ratio

(Rs.in Million)
Year Investment on govt. Current Assets Ratio (%)
securities
2016/1 4,700.41 6,072.42
7 77.41
2017/1 6,454.36 5,654.91
8 114.14
2018/1 6,777.08 6,319.92
9 107.23
Mean 99.59
Standard Deviation 15.94
C/V 0.16
Sources: Annual report of LBL

Figure 2.3

Investment on Government Securities to Current Assets

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 Sources: Table 2.3

The table and figure 2.3 shows that investment in government securities to current
assets ratio of LBL is in fluctuating trend during the period. The mean ratio, standard
deviation and coefficient of variance of investment in govt. securities to current asset
are 99.59%, 15.94% and 0.16 % respectively.

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Loan and Advance to Total Assets Ratio
Loan and Advance are also including in the total Assets of Commercial Banks
because generally it provides short-term loan, advance, overdraft, cash-credit, local&
foreign bill purchased and discounted.
To make a high profit and for mobilizing its fund in the best way a commercial bank
should not keep its all collected funds as cash and bank balance but they should be
invested as loan and advances to the customers. In the present study loan and
advances represent to local and foreign bills discounted and purchased and loans, cash
credit and overdraft in local currency as well as in convertible foreign currency. The
ratio is computed as follows:
Loan∧ Advance
Loan & Advances to Total Assets Ratio (%) =
Total Assets
The table shows the ratio of loan &advance to total assets of LBL for three fiscal
years from 2016/17 to 2018/19.

Table 2.4

Loan and Advance to Total Assets Ratio

(Rs.in Million)
Year Loan & Advance Total Assets Ratio (%)
2016/1 21,584.39 34,983.50
7 61.70
2017/1 27,381.31 45,580.21
8 60.07
2018/1 30,119.44 46,828.11
9 64.32
Mean 62.03
Standard Deviation 1.75
C/V 0.03
Sources: Annual report of LBL

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 Figure 2.4
Loan and Advance to Total Assets
50,000.00
45,000.00
40,000.00
35,000.00
30,000.00
25,000.00 Loan & Advance
Total Assets
20,000.00
15,000.00
10,000.00
5,000.00
0.00
2016/17 2017/18 2018/19

Sources: Table 2.4

The table and figure 2.4 shows that the ratio of loan and advance to total assets is
decreasing trend. The mean ratio, standard deviation and coefficient of variance are
represented respectively.

2.2.1 Assets Management Ratio (Activity Ratio)

Assets management ratio measures the efficiency of the bank to manage its asset in
profitable and satisfactory manner. A commercial bank must manage its asset
properly so as to earn high profit. The following ratio reveals how the LBL has
managed its resources efficiency.

Total Investment to Total Deposit Ratio

A commercial bank may mobilize its bank deposit by investing its fund in different
securities issued by government and other financial or non-financial companies. Now
effort has been made to measure the extent to which the banks are successful in
mobilizing the total deposit in investment.
In the process of portfolio management of bank assets, various factors such as
availability of fund, liquidity requirement, central bank's norms etc. are to be

20
considered in general. A high ratio is the indicator of high success to mobilize the
banking funds as investment and vice versa.This ratio is calculated as follows:
Total Investment
Total Investment to Total Deposit Ratio = Total Deposit

The table shows the total investment to total deposit ratio for three fiscal year years
from 2016/17 to 2018/19.
Table 2.5
Total Investment to Total Deposit Ratio
(Rs.in Million)
Years Total Investment Total Deposits Ratio (%)
2016/1 4700.42
30,592.05
7 15.36
2017/1 6454.36
39,991.81
8 16.14
2018/1 9,439.81
59,190.95
9 15.95
Mean 15.82
Standard Deviation 0.33
C/V 0.02
Sources: Annual report of LBL

Figure 2.5

Total Investment to Total Deposit

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 Sources: Table 2.5

The table and figure 2.5 shows that, the total investment to total deposit ratio are in
the constant trend. The bank has maintained mean ratio, standard.

Loan &Advance to Total Deposit Ratio

This ratio measures how successfully the banks are able to mobilize the total
deposit on loan and advances for profit generating purpose higher the ratio
indicates the better mobilization of total deposits, but too high is not be better
from its liquidity point of view. The ratio calculated as follows:

Loan∧ Advance
Loan & advances to total deposits ratio =
TotalDeposit
The table below is the three year of loan and advances in relation to total
deposits.
Table no 2.6

Loan &Advance to Total Deposit Ratio

(Rs.in Million)
Years Loan & Advance Total Deposits Ratio (%)
2016/1 21,584.39
30,592.05
7 70.56
2017/1 27,381.31
39,991.81
8 68.47
2018/1 30,119.44
59,190.95
9 50.89
Mean 63.30
Standard Deviation 8.82
C/V 0.14
Sources: Annual report of LBL

Figure 3.6
Loan &Advance to Total Deposit Ratio

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 Sources: Table 2.6

The table and figure 2.6 shows that, that the mean ratio of loans & advance to total
deposits. LBL have recorded good ration during the study period.

2.3.1 Profitability Ratio

Profitability ratio is very helpful to measure the overall efficiency of operation of
financial institutions. Profit is the indicator of efficient operation of a bank. The banks
acquire profit by providing different services to its customer or by making investment of
different kinds. Sufficient profit is must to have good liquidity, grab investment
opportunity, expand banking transaction, finance government in need of development
fund, overcome the future contingencies and need fixed internal obligation for a bank.
Profitability ratios measure the efficiency of bank. Higher the profit ratio, the higher will
be the efficiency of the bank.

Return on Total Working Fund Ratio:

It measures the profit earning capacity by utilizing available resources i.e. total assets
return will be higher if the banks working fund is well managed and are efficiently
utilized , minimization of taxes with the legal framework will also improve the return.
The ratio calculated as follows:
Net Profit
Return on total working fund ratio =
Total Working Fund
The table shows the ratio of net profit to total working fund for three fiscal years from

23
20014/15 to 2018/19.
Table 2.7
Return on Total Working Fund Ratio
(Rs.in Million)
Years Net Total working fund Ratio (%)
Profit
2016/1 474.86 42,524.92
7 1.12
2017/1 416.20 52,808.08
8 0.79
2018/1 1006.63 58,088.89
9 1.73
Mean 1.21
Standard Deviation 0.39
C/V 0.32
Sources: Annual report of LB

Figure 2.7
Return on Total Working Fund

Sources: Table 2.7

The table and figure 2.7 shows that net profit to total working fund ratio are decreasing
trend. This exhibits that net profit of LBL is not stable and it is inconsistent during the
year.
Return on Loan Advance Ratio
Return on loan & advance ratio measures the earning capacity of the commercial banks
on its deposits mobilization on loan and advances. Mostly loan & advances includes loan

24
cash credit, overdraft bill purchased and discounted. The ratio is calculated as follows:

Net Profit
Return on Loan & Advance Ratio =
Loan∧ Advance
The table shows the return on loan and advance ratio for three fiscal years 2016/17 to
2018/19.
Table 2.8
Return on Loan Advance Ratio
(Rs. in Million)
Years Net Loan & Advance Ratio (%)
Profit
2016/1 474.86 21,584.39
7 2.20
2017/1 416.20 27,381.31
8 1.52
2018/1 1006.63 30,119.44
9 3.34
Mean 2.35
Standard Deviation 0.75
C/V 0.32
Sources: Annual report of LBL
Figure 2.8
Return on Loan Advance

Sources: Table 2.8

The table and figure 2.8 shows that ratio is in fluctuating trend.. Net profit in respect to
loan and advance is unable and LBL is not able to earn much from loan and advances.

25
Return on Equity (ROE)
If bank can mobilization its capital properly, they can earn high profit. Equity capital is
the own capital of the bank. The return on equity capital measures the extent to which a
bank is successful to mobilize its equity. Higher ratio indicates the sound investment
policy for the mobilization of its equity capital. The ratio is calculated as follows:

Net Profit
Return on Equity =
Total Equity Capital
The table shows the ROE of LBL for three Fiscal Year in which 2016/17 to 2018/19 is
taken as base year.
Table 2.9
Return on Equity (ROE)
(Rs. in Million)
Year Net Profit Total Equity Capital Ratio (%)
2016/17 474.86 3,093.53 15.35
2017/18 416.20 4,799.88 8.67
2018/19 1006.63 8219.65 12.25
Mean 12.09
Standard Deviation 2.73
C/V 0.23
Sources: Annual report of LBL

Figure 2.9

Return on Equity (ROE)

26
 Sources: Table 2.9

The table and figure 2.9 shows that ratio of net profit to total equity to total equity
capital has followed the fluctuating trends.

2.4.1 Growth Ratio

Growth ratios are directly related to the fund mobilization and investment
management of a commercial bank. It represents how well the commercial bank is
maintaining the economic and financial position. Under this topic, four types of
growth ratio are studies, which are as follows:
1. Growth ratio of total deposit
2. Growth ratio of total loan and advance

Table 2.10
Growth Ratio of Total Deposit
(Rs. in Million)
Fiscal Year Total Deposits % Change in Year
2016/17 30,592.05 0
2017/18 39,991.81 23.50
2018/19 59,190.95 32.44
Mean 18.65
Standard Deviation 13.68
C/V 0.73
Sources: Annual report of LBL

Figure 2.10
Growth Ratio of Total Deposit

27
Sources: Table 2.10

The table and figure 2.10 shows that the total deposit growth rate ratio of LBL. The
total deposits are in increasing trend, the ratios are in the fluctuating trend. This shows
that deposit collection ratio of LBL are Sound but in fluctuating trend in % whereas
the total deposit value are increasing trend.

Table 2.11
Growth Ratio of Total Loan and Advance
(Rs. in Million)
Fiscal Year Total Loan and Advance % Change in Year
2016/17 21,584.39 0
2017/18 27,381.31 21.17
2018/19 30,119.44 9.09
Mean 10.09
Standard Deviation 8.67
C/V 0.86
Sources: Annual report of LBL

Figure 2.11

Growth Ratio of Total Loan and Advance

28
The table and figure 2.11 shows that the growth rate of loan and advance of LBL. In the
study, growth rate of loan and advance is increasing trend. Even though the loan and
advance is in fluctuating trend in every year but the growth rate ratios are in the
decreasing trend.

2.4.2 MAJOR FINDING OF THE STUDY

The main finding of the study derived on the analysis of financial data of LBL is
given below:
 An analysis shows that the ratio is in the fluctuating trends. The bank should
not hold excessive cash since it is an idle reserve ratio is 14% in any bank but
according to the situation of the market. However, the liquidity position in the
study is good.
 The cash & bank balance to current assets ratios are in fluctuating trends. It
indicates that liquidity position is unstable in this regard.
 Investment in government securities of the LBL has constantly decreasing
trend but highly volatile.
 Analysis shows LBL has followed the decreasing trend in loan & advance to
current assets ratio. This too depicts that LBL have mobilized of its fund as
loan & advances with respect to current assets.
 The ratio of loan & advances of LBL has decreasing trend. which sounds
excellent but trend is not comparatively good.
 The total investment of LBL has maintained the decreasing trend in respect of

29
 total deposit.
 The LBL has fluctuating trend of loan & advance in respect of total working
fund. Analysis shows that LBL has been utilizing approx. 70% of the working
as loan and advances.
 Analysis shows that net profit to total working fund are decreasing increasing
trend, it shows that net profit of LBL is not stable and inconsistent.
 During the year the total deposit is increasing trend . Although the total
deposits are in increasing trend, the ratios are in the fluctuating trend.
 Analysis shows that the loan & advance are in the increasing trend but bank
has not adequately utilized their fund to increase revenue.

30
 Chapter - III
Summary Conclusion

It is the final chapter of the study, which consist a brief summary of the report,
and conclusion based on the findings of the report.

3.1 Summary
Economic development implies the development of all sectors of Nation. In order to
gear up development process, high and sustainable economic growth is necessary.
Banks plays significant role in the economics development of the country. It has come
a very long way starting from 1994 B.S. to today status. In the developing countries,
Central bank has been performing both the traditional as well as development
function. The main objective of this study is to find out the “NRB directive regarding
investment policy of commercial bank.” NRB the central bank of Nepal there has
been significant growth of domestic financial sector. Deposits and loans are the major
parts of the bank. Deposits are that liability which is returnable in demand at any time
by the banks. So, commercials banks must keep some liquid fund. Similarly
investment or mobilization of collected fund as credit is also necessary for the bank to
survive. If the funds are optimally invested without prior study the bank may have
sound investment policy for the mobilization of accumulated fund.
Being the control bank of Nepal, NRB has the responsibility to give special attestation
to the interest of depositors. NRB has issued various directions in time to time to
regulate commercial bank. The direction no. 8 has been issued for related to
Investment policy of commercial bank. Investment is a commitment of money and
other resources that are expected to generate additional money and resources in the
future. This study focuses our attention to recall the investment policy of LBL.
The applied design is descriptive and core perspective because the secondary data
have been mainly applied for analysis. It includes all the process of collecting,
verifying, evaluating and comparing recent information systematically and objectively
to reach the final conclusion. Various financial parameters and effective research
technique are employed to especially identify the strength and weakness in investment
policy of the banks.

31
3.2 Conclusion
Commercial Bank of Nepal is bound by the directive of NRB. The directive is issue of
NRB time to time. Every commercial bank has to investment portion is in
unproductive sector. Commercial banks could invest in mega-projects, which create
employment opportunity and reduce the imports of the products from the foreign
countries. There was not enough investment opportunity in the market & saving
account has interest rate is increasing due to liberals banking policy of NRB and the
saving amount is also increasing at that time due to increasing banking facilities in the
country and increasing banking habit of the people.
Nepal Rastra Bank, in response to the deterioration in banks’ asset quality, has urged
all banking institutions to strengthen their risk management practices, and ensure that
they have proper mechanisms in place to continuously measure, monitor and control
the risks in their portfolios. The introduction of new service delivery channels,
through technological development, poses further challenges from supervision and
regulation aspect. These challenges are being dealt with through effective banking
supervision, especially with respect to assessing new banking risks. The supervisors
must now not only have a clear understanding of the risks and how they should be
managed, but they must also know, through the early warning systems, how to read
and react, appropriately, when serious problems eventually surface.
Nepal Rastra Bank will, of course, continue to play its role and work to ensure that
the financial sector remains stable, in the face of the challenges that lie ahead.
Consolidated supervision will be implemented in earnest. The bank will continue to
review its approaches to further strengthen the effectiveness of supervision of the
commercial banks. Nepal Rastra Bank will focus on the utilization of information
technology to achieve the objective of supervision function in an effective manner.

32
3.3 Implication
After, collecting, analyzing and making conclusion of the study, following suggestion
or recommendation can be forwarded to improve present fund mobilization and
investment policy of LBL.
LBL has invested large proportion of its deposit collection in government securities
issued by government are considered to be free of risk of default but such securities
yield the lower interest rate of a particular maturity due to low risk feature. So, LBL is
recommended to give important to the other investment sectors to increase the it's
profit.
Reforming portfolio proportion of loan & advances and investment in government
securities, LBL should try to attract investor (depositors) to collect more deposit. Data
shows that LBL has efficient administration but beside it the managerial policy should
try to collect more funds and such fund should be invested in loan & advances to
generate more overall profitability.
Similarly, recovery of loan is another important factor of investment policy. Although
effort has been made for collection of repayment, but still there is some increment in
sub-standard and doubtful loan. It should be controlled timely, if not sub-standard
loan might be converted to doubtful loan & doubtful to bad loan. LBL is suggested to
implement a sound ensure repaid identification of fake loan, immediate contact with
borrower and continual follow up until a loan is recovered in full. The recovery of
loan is the most challenging aspects to a bank. Therefore, the bank must be very
careful in formulating credit collection policy, which in formulating is associated with
some legal procedure.
LBL being a private sector bank having the share holding by the public, it should be
always careful in increasing profit in a real sense to maintain increasing the
confidence of shareholders, depositors and its customer and the goodwill of the bank.
Since the profit of LBL is fluctuating profitability position is not satisfactory. LBL
seems to fail to maintain growth rate of net profit. This shows that management is
failure to strategic investment policy. Although the goodwill of the bank is increasing,
LBL is strongly recommended to utilize its risky assets and shareholders fund so as to
maintain the goodwill for the long run.

33
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