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Chapter 1

INTRODUCTION
1.1 Background of the study
Financial analysis is the process of extracting and studying information in financial statements for use in management decision making. “The financial statements provide a summarized view of the financial position and operations of the bank”. Therefore, much can be learnt about a firm from a careful examination of its financial statements as invaluable documents or performance reports.

The focus of financial analysis is an essential figure in the financial statement and the significant relationship that exists between them. The analysis of financial statement is a process of evaluating relationships between component parts of financial statements to obtain a better understanding of the firm‟s position and performance. The first task of the financial analyst is to select the information relevant to the decision under consideration from the total information contained in the financial statement. The second step involved in financial analysis is to arrange the information in a way to highway significant relationships. The final step is interpretation and drawing of inferences and conclusions. According to I.M Pandey, “Financial analysis is the process of identifying the financial strengths and weakness of the firm by properly establishing relationship between the items of the balance sheet and the profit and loss account”.

Financial analysis involves the use of various financial statements. These statements do several things. First the balance sheet summarizes the assets, liabilities and the owner‟s equity of a business at a moment in time, usually the end of the year or a quarter. Next the income statement summarizes the revenues and the expenses of the firm over a particular period of time, usually a year a quarter. Though the balance sheet represents a snapshot of the firm‟s financial position at a moment in time the income statement depicts a summary of the firm‟s profitability over time.

From these two statements (plus, in some cases, a little additional information), certain derivate statements can be produced such as a statement of retained earnings, 1

sources and uses of funds statements can be produced, such as a statement of retained earning sources and uses of funds statements of cash flows. In analyzing financial statements, we may use a computer spread sheet program. For repetitive analysis, such a program permits changes in assumption and simulation to be done with ease. Analyzing various scenarios allows richer insight than otherwise would be the case. In fact, financial statement is an ideal application or these powerful programs and their use for financial statement analysis (both external and internal) is quite common.

1.2 Ratio analysis
Meaning Ratio may be defined as the mathematical expression of the relationship between two accounting figures. However, these figures must be related to each other to produce a meaning and useful ratio. For example, the figures of turnover cannot be said to be significantly related to the figure of share premium. It indicates the quantitative relationship, which the analyst may use to make qualitative judgment about the various aspect of the financial position and performance of the concern. It may be expressed as a rate or a pure ratio.

Ratio analysis is a very important tool of financial analysis. it is the process of establishing the significant relationship between the items of financial statements to provide a meaningful understanding of the performance and financial performance of a firm.

In other words, ratio analysis is the process of determining and interpreting numerical relationship between the figures of the financial statements. An absolute figure often does not convey much meaning. Generally, it is only in the light of the other information that the significance of a figure is realized. One must work out the ratio between figures having cause add effect relationship. The precise relationship of profit earned to capital employed has been worked out. Such ratios are called accounting ratios. We can thus define accounting ratio as a relationship expressed in ratio terms, between figures, which have cause, and effect relationship or which are connected to each other in some other manner.

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Types of ratios Ratios can be classified from various points of view. In reality, the classification depends on the objectives and available data. Ratios may be based on the figures in balance sheet, in profit and loss account or in both. Thus, they may be worked out on the basis of figures obtained in the financial statement and thus, may be classified as follows.

a) Liquidity Ratio It is the solvency test ratio for the payment of the short-term liabilities. It is the relation between the short-term assets and the short-term liabilities. There are two types of liquidity ratio. They are:  Current Ratio

The relation between the current assets and current liabilities is the current ratio. Current Ratio = Current Assets Current liabilities 

Quick Ratio:

Quick ratio helps to find out the ability to make payment of current liabilities immediately. Quick ratio = Quick Assets Current liabilities

b) Leverage Ratio Leverage ratio is the solvency test ratio for the payment of long-term liabilities. It is also known whether the amount of borrowed capital is more or owner‟s capital is more. Thus a relation between the owner‟s capital and the borrowed capital is known as leverage ratio. Leverage ratio includes:

Debt Equity Ratio= Long term Debt Total Debt Share Holder‟s Equity

Debt to Total Capital Ratio = Long term Debt Total Capital

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Interest Coverage Ratio = Net Profit before Interest & Tax Interest

Fixed coverage Ratio = Net Profit before Interest & Tax Fixed Change

c) Activity Turnover Ratio This ratio evaluates sales in relation to different investments and activities. Different types of activity ratio are as follows: Inventory Turnover Ratio = Cost of Goods sold Average Inventory

Debtors Turnover Ratio = Credit Sales Average Debtors

Fixed Assets Turnover Ratio = Sales_______ Total Assets d) Profitability Ratio Profitability ratio evaluates the profit in relation to sales or return on sales and return on investment. The various types of profitability ratio are as follows: Gross Profit Margin = Gross Profit Sales

Net Profit Margin = Net Profit Sales

Return on Assets = Net Profit after Tax + Interest Total Assets

Return on Capital Employed = Net Profit after Tax + Interest Capital Employed

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Return on Shareholder‟s Equity = Net Profit after Tax + Interest Shareholder‟s equity

d) Other Ratios Other ratio includes the following ratio: Earning Per Share = Net Profit After Tax – Preference Dividend Number of Equity Shares

Dividend per Share = Total Dividend Number of Shares

Earning Per Ratio = Earning Per Share Market Value per Share

1.3MEANING OF COMMERCIAL BANKS
The commercial banks are those banks, which pool together the savings of the community and arrange for their productive use. They supply the financial needs of the modern business by various means. They accept deposits from the public on the condition that they are repayable on demand or on a short notice. Commercial banks are restricted to invest their funds in corporate securities. Their business is confined to financing the short-term needs of trade and industry such as working capital financing. They cannot finance in fixed assets. They grant loans in the form of cash credit and overdrafts. Apart from financing they also render services like collection of bills and cheques, safe keeping of the valuables financial advising financial advising etc to their customer. As per the commercial Bank Act, 2031 “A commercial bank means the bank which deals in exchanging currency, accepting deposits, giving loans and doing commercial transactions”. The commercial banking in Nepal started from 1937 AD (30 Baishak 1994 B.S) with the establishment of Nepal Bank Limited. It was established with 51% ownership of His Majesty‟s Government and 49% equity participation from private sector. Nepal Bank limited has Herculean responsibility of attracting people

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towards sector form predominant Sahu Maharjan‟s transaction and introduction of banking services as well.

Nepal bank limited was started with the paid up capital of RS 845000. The balance sheet figure on the first year of Nepal Bank Limited was RS 2851000. It started its business by accepting deposits from the public by collecting RS 1702000 in the initial year, which was considered as an indication of success. Later, the Nepal Rastra Bank was established on 2013, which has helped to make banking system more systematic and dynamic during that time.

As time passed, the Rastriya Banijya bank was established on 2022 in order to play a major role not only in domestic banking services but also in foreign trade. After the establishment of this bank, there was progress in the banking system in Nepal.

1.4 PRESENT SITUATION OF COMMERCIAL BANKS IN NEPAL
Today, Nepal can take legitimate pride in the remarkable growth and progress in the banking industry. Nepal has opened its door to foreign commercial banks to operate in the kingdom almost a decade back consequently; Nepal Arab Bank was established on 2041 under Commercial Bank Act, 2031. Similarly, the Nepal Indosuez Bank was established as a joint venture between Nepal and France on 2042 and Nepal Grindlays Bank on 2043. As the country followed economic liberalization, there was massive entrance of foreign banks in Nepal. The establishment of Himalayan Bank as joint venture with Pakistan Bank; Nepal SBI bank as joint venture with reputed bank in India, State Bank Of India; Nepal Bangladesh bank as a joint venture bank with Bangladesh bank; Everest Bank as a joint venture bank with Punjab National Bank; Nepal Sri Bank as joint venture with Sri Lankan Bank are the examples of expansion of banking industry in Nepal.

The legitimate entry of foreign commercial banks with full fledged banking functions led to rapid growth of the banking system, accompanied by the great sophistication due to diversity of instrument handling different modes of raising funds and development funds. 6

Not with standing its many shot coming, the system has shown dynamism and innovative in meeting the challenges of mobilizing the resources for country‟s development. The government‟s liberalization policy led to dozen of commercial banks actively playing in the financial market of the country.

Banking market in any country is determined by a number of favors- political, economic and social. However, the levels of economic development, real economic growth, banking awareness, growth and habits of population, international activity of the banks in the country, services provided by the banks, level of urbanizations, income distribution pattern etc are the key indicators. Banking market tends to develops in a country where higher level of economic development and free market is followed than in a country having lower of economic development and state controlled economy.

1.5 INTRODUCTION OF THE ORGANIZATION
Nepal State Bank of India (SBI) was registered on 28 April 1993. The letter of intent to the establishment of the Bank was received from Nepal Rastra Bank and was registered in the office of the registrar of companies. Nepal State Bank was inaugurated in, July 1993 by the Prime Minister G.P Koirala. This bank commenced its operation since 8 July 1993.

There are altogether 23 commercial banks in Nepal. Nepal State Bank of India is the first Joint venture Bank of Nepal and India. Its corporate office is located at Hattisar sadak, Kathmandu and main branch at Durbar Marg, Kathmandu. Nepal state bank of India has 14 branches. It has authorized capital of RS 1,000,000,000 and issued capital of RS 650,000,000. It has paid up capital of RS 647,798,000.

Nepal State Bank of India is the first Bank of its kind established under the commercial Bank act, 2031. Pursuant to the liberalized economics policy of His Majesty‟s Government of Nepal, in early 1980 and particularly after the restoration of democracy in Nepal, in 1990 almost all the private sector joint venture banks established their Head Office at Kathmandu and confined their activities within the valley. 7

However, rapidly progressing Nepal offers tremendous potential outside the Capital, as well. In order to provide the necessary impetus to the economic progress of Nepal, through banking support international standards, Nepal SBI Bank established its Head Office at Hattisar. The capital structure is as fallows:

Nepal SBI bank is at the apex by a Board of Directors (BOD) whose names are given below: Mr. B.K Shrestha Mr. S.K Hariharan Mr. V.P Dani MR. TCA Ranganathan Mr.S.P Malla Mr. Manoj Kumar Agrawal - Chairman (SBI Nominee) - Director (SBI Nominee) - Managing Director (SBI Nominee) - Director (EPF Nominee) -Director (Elected by Public Shareholders) - Director (Elected by Public Shareholders)

The BOD consists of six members. Among these six members, three persons are SBI nominees, and person is EPF nominee and the public shareholders elect two persons. Management of the bank has two parts:   Policy forming Executing

The board of directors does policy forming. There are six members in the BOD. The BOD establishes working procedures and policies for smooth running of the bank in accordance with the various the various Acts like Company Act 2053, Commercial Bank Act 2031, Negotiable Instrument Act and directives from Nepal Rastra Bank. Every policy of the bank has to be approved by the BOD. The bank has to arrange a minimum of 12 meeting of BOD every year and at least one meeting in every two months. The policies formulated by the BOD and executed by management teams and staffs of State Bank of India.

1.5.1 ORGANIZATION STRUCTURE
The structure of the head office and the main branch of State Bank of India is such that it has one Managing Director, who is responsible for the operation of Nepal SBI 8

Bank as a whole and one General Manager who is the chief of the main branch. Then it has the following seven departments:  Operation Department  Credit Department  Foreign Exchange Department +  Personnel & Administration Department  Establishment and Protocol Department  Computer System  Managing Department

1.5.2 MARKETING DEPARTMENT
State Bank of India has a Separated marketing departments, which was created after 2-3 months of the establishment of the bank. This department is responsible for bringing in all the deposits of the bank and promoting the bank. It is also responsible for attracting interested parties for taking loans if required. Marketing Department has another important function of attracting people for non-funding business like opening letter of credit, giving bank guarantee, foreign currency exchange and other foreign exchange business covering imports, exports and remittance. The bank is trying to difference itself by providing unique services for the customers. The bank has many differentiated products and services which it can promote and attract a large number of customers through various mediums like advertisements, door to door approach and personal relationship marketing. The marketing function of the bank is the specialized functions of the marketing departments as well as a shared responsibility of all other departments and staffs of the bank.

1.5.3 OPERATION DEPARTMENT
The major functions of operation department if to facilitate day-to-day operation of the bank by performing general banking transactions. Besides this, the department also has the responsibility of keeping central account of the bank. The operation department of the SBI Bank is divided into three sections. They are as follows:    Account Section Cash Section Account Opening and Clearing Section 9

1.5.4 CREDIT DEPARTMENT
Credit department is the important department of the SBI Bank whose function is to flow credit to various people and parties for various purposes. This department invests the money, which depositors have deposited and the bank earns its income from performing this function. The department gives approval for credit by examining the credit worthiness of the client. The responsibility of disbursement of credit also lies with this department.

The major credit facilities provided by SBI Bank are as follows: a)   Fixed capital investment Import and export facility Project financing

b)  

Working capital investment Hire purchase facilities Personal loan

1.5.5 FOREIGN EXCHANGE DEPARTMENT
They also provide the services of remittance to the customers. This department fixes the rate of foreign exchange based on demand and supply and international rates.  Fund management:currency. On

Another function of this department is fund management of foreign  Issue of traveler‟s cheques:

the basis of ups and downs on the money market they manage the foreign currency. They also issue and discount traveler‟s cheques of the customers.

1.5.6 PERSONAL & ADMINISTRATION DEPARTMENT
This department has three separate broad functions. They are as follows:  Personal function:

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This department deals with people from the recruitment to the retirement stage. Under the personal function, the department has the responsibility for the acquisition and development function. 

Acquisition function:

SBI Bank first identifies how many people and at which level they require. Then they give advertisement in the newspaper inviting qualified people to apply for the vacant post. Then their selection process starts. 

Development function:

SBI Bank has conducted various training for the employees which includes: a. Orientation b. General banking course training c. Advance level banking The bank feels that it is not yet ready to spend the amount on training. The bank further feels that the internal training is much more efficient and effective as it involves less cost.

1.5.7 COMPUTER SYSTEM DEPARTMENT
SBI Bank is one of the commercial bank in Nepal. Being one of the commercial banks, it has great challenge as how to attract a large number of customers, with some remarkable difference. It is because of this reason; SBI Bank has decided to make it a bank with fully computerized system. This offers a wide of customers with great facilities like: a) Less time taken for any kind of banking activities b) Qualitative and upgrade services c) High reliability

1.5.8 THE MISSION OF THE BANK
“SBI Bank Ltd., having local roots, aims to achieve excellence in banking services, by providing financial products, in keeping with the best international practices, to all categories of people for their own progress as well as the economic development of the Nation”. 11

1.5.9 THE OBJECTIVES OF THE BANK
    To play an important role in facilitating the growing Nepal- India support of large network of branches of SBI in India. To provide a whole range of international banking services to facilitate Nepal‟s trade and tourism. To participate in the emerging industrial scenario on Nepal where SBI‟s age- old exposure, experience and expertise would come in handy. To play a meaningful support role in the socio- economic development of Nepal. with the

1.5.10 THE SERVICES PROVIDED BY THE BANK
The SBI Bank facilities its customers by providing them with the following services:

 Deposits – Current, Saving, Fixed and Call Deposits.  Remittances / Money Transfer to and from more than 300 branches of SBI in
India and worldwide

 Bank started issuing VISIA debit cards during the year and has also linked its
ATM with about 8000 ATMs of SBI in India. This would immensely help the customers visiting India for higher studies, medical treatment, and pilgrimage.  With a view to enabling the millions of Nepalese settled in India to remit funds to their dependents in Nepal, bank has launched, in concert with SBI and a popular money transfer company in Nepal, a new product called „SBI-Nepal Express Remit‟. The product provides safe, quick and affordable option for remittance of funds from India to Nepal and the beneficiaries in Nepal can get instant cash through more than 280 payment outlets of the money transfer company located across the remote areas of Nepal.        Loans and Advances/ Priority and Deprived Sector Lending. Consortium Lending Trade Finance –Letter of credit, Import/ Export Bank Guarantees/ Bid Bonds Sales and Encashment of Foreign Currency, Traveler‟s Cheques Sales and Encashment of SBI Rupee Traveler‟s Cheques Housing loans, Car Financing and Education loans. 12

Bills collection- In-Land (Nepal and India) and Overseas.

1.5 IMPORTANCE OF THE STUDY
Following are the points, which highlight the importance of this fieldwork report:       This fieldwork is prepared to fulfill the objectives set forth by newly designed course of design of “bachelor of Business Studies” (BBS) 3rd year. This fieldwork report might be useful for those who are willing to known about the financial situation of the Nepal SBI bank. This fieldwork report might be useful for the library purpose so that any student wanting to prepare a report on such field can have some idea and basic guidelines. This fieldwork report can be used as a guideline while preparing small project report. This report may help to provide necessary documentary information to the existing and the new companies to be operated in the near future. This report helps to gain and share some practical knowledge of banking to the leaners of the students of “Financial Management”.

1.6 STATEMENT OF THE PROBLEM
According to the Nepal Rastra Bank, latest directives, commercial banks are required to maintain their capital fund at minimum 8% (minimum 6% to be maintained by mid July 1992 and thereafter) of the risk adjusted assets, of which minimum 4% must towards the core capital, the core capital includes paid up capital, preferences share capital, share premium, undistributed profit and general reserves. To arrive at the assets the transactions of the commercial banks have been categorized into a balance sheet and off balance sheet items. According to risk involved amount of balance sheet transactions as per balance sheet are multiplied by suitable risk weights, which vary from zero to 100%.

The investment planning of the commercial banks in Nepal heavily depend upon the rules and regulation provided by the central bank. The composition of the assets portfolio of the banks is influenced by the policy of the central bank. The competition is the burning issue, at this time, in the country due to the emergence of 65 finance 13

companies and about a dozen of rural banks and corporate societies in a short span of time. It has also warned the commercial banks to improve and manage their productivity. The credit policy, the discount rate policy, the interest rate ceiling percentage of deposits to be lent to productive sectors, all these policies affect the investment decision of the commercial banks.

1.7 OBJECTIVE OF THE STUDY
The general objective of this study is to identify the financial situation of Nepal SBI Bank Limited. The specific objectives of the research are as follows: a) To study the existing financial situation of Nepal SBI Bank Limited. b) To evaluate the investment and advances portfolio of Nepal SBI Bank Limited. c) To evaluate the financial performance of Nepal SBI Bank Limited. d) To provide suggestive package based on the analysis of the data.

1.9 LIMITATIONS OF THE STUDY
There are many limitation faced while preparing this project work report. Some of them are as follows: a) Accuracy of the data: The project work has been done on the basis of the secondary data. The analysis made on the basis of this data may not be fully accurate. b) Lack of time: The project work has been prepared under the constraint of the limited time. Thus, it was not possible to analyze each and aspect of the bank. c) Cost constraint: As a student, I completed the project work within the constraint of the limited budget. d) Ignores other aspect of the bank: The project work is focused on the financial analysis of the bank. As a result, other various aspects of the bank such as marketing strategies, employees‟ motivation programs etc. are neglected. e) Not suitable for future: The project work was done on the basis of past financial records. Therefore, the future projections of the bank as per the fieldwork may not be effective.

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1.8 SCOPE OF THE STUDY
This report is only confined to the Nepal SBI Bank, Along with this, this report deals with some aspects of financial performances of the bank. Published reports of the bank are the source used for the data. Hence, the scope of the report has been narrowed for the convenience and due to the lack of the time.

1.9 RESEARCH METHODOLOGY
1.11.1 Introduction of the research methodology: In order to draw relevant data and information on the market interest rate and its impact on the investment, different measures have been embraced here. While collecting and interpreting relevant data, facts and figures with view, to systematize data collection and data interpretation, the simple statistical tools as well as some financial tools as well as some financial tools will be applied. To derive the conclusion some hypothesis will formulated and tested. This chapter presents the hypothesis and the testing tools as well. In spite of these all, the chapter also deals about the limitation and the organization of the study.

For preparing the report, the annual balance sheet and the profit and loss account were provided by the bank. Then after consulting few books and publications, various informations are collected by observing the organization, consulting with various managers, employees, observing the organization culture, work style, satisfaction of the job etc. Ratios are computed by dividing a variable by another, represented in either percentage or times so as to find numerical relationship between the variables and interpret the result thus obtained.

1.11.2 Research design The present study is mainly based on two of research design i.e. descriptive and analytical. The descriptive research design presents the general pattern of the interest rate, profit share investment in primary market and in secondary market. The analytical research design makes the analysis of the gathered facts and information and makes a critical evaluation of it.

1.11.3 Nature of the data 15

The nature of the data is mainly of two types. They are as follows: a) Primary Source The primary data are collected from face to face dealing with the investors and field work. b) Secondary Source The secondary data will be collected from the journals, periodical, economic bulletins, annual report etc.

1.11.4 Population and samples Nepal State Bank of India has been selected for the present study. The latest five-year financial statements have been taken as sample for this purpose. Various tables for deposit, liability investment, loan and advances, total assets etc. have been prepared to show the financial ratios of the same period.

1.11.5 Research tools To test hypothesis mentioned in the hypothesis to be tested, various financial as well as statistical tools will be employed. 1.11.6 Source of information Most of the data we used here are secondary in nature. For collecting information relating to the research we carried out some personal discussions and interviews with related persons like investors. We try to understand where they intend to invest their investing funds. Whether they want to deposit it in bank or invest into shares? Is this decision influenced by the interest rates? The secondary data will be obtained by various publications of NRB, publications of Security Board Nepal (SEBO), Nepal Stock Exchange (NEPSE), various annual reports of sample commercial bank as well as financial institutes economic survey, development plans, various national and international journals, newspapers, previous dissertations etc.

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CHAPTER - II

PRESENTATION AND ANALTSIS OF DATA
Financial statements of business are the matters of interest for various groups. Among these the major groups interested are the firm‟s creditors, firm‟s investors, management and academicians and students.

The data presentations in such statements have some limitations. The users and analysts should know such limitations for the proper use of information presented in financial statements. The limitation may be due to the recorded facts or rules or conventions or even due to various assumptions made while presenting the data in financial statements.

Financial ratio analysis is the most widely used tools of financial analysis through which the financial health of a firm can be x-rayed. So, to fulfill the objectives of the report three types of ratios have been used to analyze SBI Bank.

In this chapter the researcher analysis and interprets the relevant available data of Nepal State Bank of India according to the research methodology as mentioned in the previous chapter. The different types of ratios used are as follows:

2.1 LIQUIDITY RATIO

Liquidity ratio measures the ability of a firm to meet its short-term obligations and reflects the short-term financial solvency of a firm. This ratio is found out by dividing the current assets by the current liabilities.

2.1.1 Cash and Bank Balance to Fixed Deposit Ratio This ratio shows the ability of the bank‟s immediate funds to cover the current deposit. A high ratio represents greater ability to cover this current deposit and viceversa. However, a very high ratio is not suitable due to idle funds cannot earn return.

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Table 1 Cash and Bank Balance to Fixed Deposit Ratio

Year 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 Average Mean Return Standard Deviation

Cash and Bank Balance 1357797230 890018854 1945141662 1619962112 1333533855 149290743

Fixed Deposit 2100218551 2420298451 2929350603 3132677403 3337574782 2784023958

Ratio 64.65% 36.77% 66.40% 51.71% 40.05% 51.34% 52.00% 12.14%

Source: 17th Annual Report

Cash and Bank Balance to Fixed Deposit Ratio
70.00% 60.00% Percentage 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 2005/2006 2006/2007 2007/2008 Year 2008/2009 2009/2010 Ratio

Dividing cash and Bank balance compute the ratio calculated in Table 1 by the fixed deposit. This ratio shows the fluctuating trend. Liquidity ratio should be 2:1. But in this bank the ratio is below the standard for the whole study period. It means that the bank does not maintain sufficient cash and bank balance to meet its obligations. The fixed deposit has been increased but the cash and bank balance has not been increased in proportion. This reflects that the bank has succeeded to invest its current deposit in the productive areas. The standard deviation is high which shows high deviation between cash and bank balance and fixed deposit ratio. 18

2.1.2 Cash and Bank Balance to Saving Deposit Ratio This ratio shows the ability of the bank‟s funds to cover the saving deposit. High ratio represents greater ability of the bank to cover the saving deposit.

Table 2 Cash and Bank Balance to Saving Deposit Ratio Year 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 Average Mean Return Standard Deviation Cash and bank balance 137797230 890018854 1945141662 1619962112 1333533855 1429290743 Saving deposit 786711245 902758609 106145989 1274694694 1633027825 1131467672 ratio 172.59% 98.59% 183.48% 127.09% 81.66% 126.32% 132.68% 39.92% Source: 17th Annual Report

Figure 2 Cash and Bank Balance to Saving Deposit Ratio
200.00%

Percentage

150.00% 100.00% 50.00% 0.00% 2005/2006 2006/2007 2007/2008 Year 2008/2009 2009/2010 ratio

This ratio in Table 2 represents the ability of the bank to meet the unanticipated calls in saving deposits. The ratio measures the short-term liquidity position of the bank. In year 2005/2006 the ratio has increased i.e., 172.59%. But in the year 2006/2007 it has declined to 98.59%. Again in the year 2007/2008 and in the year 2008/2009 the ratios are in increasing trend, i.e. 183.48% and 127.09% respectively. But in the fifth year it has decreased to 81.66%. In this case the standard deviation is very high i.e. 39.92% 19

which shows high deviation between the cash and bank balance and the saving deposit ratio.

2.1.3 Cash and Bank Balance to Current Deposit ratio This ratio shows the ability of the bank‟s funds to the current deposit. High ratio represents greater ability of the bank to cover the current deposit and vice-versa. However, a very high ratio is not suitable, as the idle funds cannot earn return.

Table 3 Cash and Bank balance to Current Deposit Ratio Year Cash Balance 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 Average Mean Return Standard Deviation 1357797230 890018854 1954141662 1619962112 1333533855 1429290743 1426373496 951004571 2359993191 1086697020 1300071546 1424827965 95.19% 93.59% 82.42% 149.07% 102.57% 100.31% 104.57% 23.17% Source: 17th Annual Report and Bank Current Deposit Ratio

Figure 3 Cash and Bank Balance to Current Deposit Ratio
160.00% 140.00% 120.00% 100.00% 80.00% 60.00% 40.00% 20.00% 0.00% 2005/2006 2006/2007 2007/2008 Year 2008/2009 2009/2010

Percentage

Ratio

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The table 3 shows the fluctuating trend of cash and bank balance to current deposit ratio. In the first year the ratio is in the increasing trend i.e. 95.19%. But in the second year and third year the ratios have the decreasing trend i.e. 93.59% and 82.42% respectively. And again in fourth year it has increased to 149.07%, but in fifth year it has decreased to 102.57%. For one to third year the ratio is below 1 but in fourth and fifth year the ratio is more than 1. This shows that the bank does not maintain sufficient cash balance to meet its short-term obligations but from fourth and fifth year it can maintain sufficient cash balance. The standard deviation is also high i.e. 23.17%, which represents that there is much more deviation between cash and bank balance and current deposit.

2.1.4 Cash and Bank Balance to Total Deposit Ratio This ratio shows the ability of the bank‟s funds to cover the total deposit. Higher the ratio greater will be the ability of the bank to cover the total deposit.

Table 4 Cash and Bank Balance to Total Deposit Ratio Year 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 Average Mean Return Standard Deviation Cash and Bank Balance 1357797230 890018854 1954141662 1619962112 1333533855 1429290743 Total Deposit 4313303292 4274061631 6349489783 5494069117 6270674153 5340319595 Ratio 31.38% 20.82% 30.63% 29.48% 21.27% 26.76% 26.74% 4.70% Source: 17th Annual Report

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Figure 4 Cash and Bank Balance to Total Deposit Ratio
35.00% 30.00% 25.00% Percentage 20.00% 15.00% 10.00% 5.00% 0.00% 2005/2006 2006/2007 2007/2008 Year 2008/2009 2009/2010 Ratio

The ratio shows the percentage of deposit maintained by the bank as the liquid assets. It was calculated by dividing cash and bank balance by the total deposit. The above calculation shows that the ratio of the bank has fluctuating trend. For the first year the ratio is in the increasing trend i.e. 31.48%. But in the second year it has decreased to 20.82% and in the third year it again increased to 30.63%, and again in fourth and fifth year it has decreased to 29.48% and 21.27% respectively. Both high and low ratios are not desirable because in the case of high ratio the bank may not be able to invest the deposit in productive areas. And in the case of low ratio the bank may find difficulty in meeting unanticipated calls. The standard deviation is not so high i.e.4.70%, which means that there is not much deviation between cash and bank balance and total deposit.

2.2 PROFITABILITY RATIO These ratios measure the overall efficiency of a firm. It evaluates the profit of a firm in relation to sales and investment. The profitability ratios of Nepal SBI Bank are shown below:

2.2.1 Return on Total Assets Ratio

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The ratio is calculated by dividing net profit after tax by the total assets. This ratio measures the profitability with respect to the total assets. The higher ratio reflects the efficiency of the bank in utilizing its overall resources.

Table 5 Return on Total Assets Ratio Year 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 Average Mean Return Standard Deviation Net Profit 16760390 50065475 12490030 40843769 48748221 3781577 Total Assets 4812000970 5164516020 7385280312 7021141146 7566326661 6389853022 Ratios 35% 97% 17% 58% 64% 53% 54% 27% Source: 17th Annual Report

Figure 5 Return on Total Assets Ratio

2009/2010 24%

2005/2006 13%

2008/2009 21%

2006/2007 36%

2007/2008 6%

The ratios in the Table no.5 show that the mean return on the total assets ratios of Nepal SBI Bank Ltd. is not the satisfactory level. The ratios are in the decreasing

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trend throughout the study period. It is the most important tool for the evaluation of the performance of the bank. The actual performance of the bank is not at the satisfactory level. Is should be increased increasingly. The standard is low i.e. 0.27%, which shows that the deviation between the profit and the total assets is not high. 2.2.2 Return on shareholders’ Funds The ratio is calculated by dividing net profit available to equity shareholders‟ funds. The shareholders‟ funds include paid in capital, general reserves, and retained earnings of surplus and general loan loss provision. This ratio measures the capability of the bank to utilize its owner‟s funds. It reflects whether the firm has r\earned a satisfactory return its equity holders. It reflects the firm has earned a satisfactory return for its equity holders. So, higher ratio is favorable to the shareholders.

Table 6 Return on Shareholders‟ Funds Year 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 Average Mean Return Standard Deviation Net Profit 16760390 50065475 12490030 40843769 48748221 33781577 Shareholders‟ fund 310932949 197586141 226385800 424893300 425157300 316991098 Ratio 5.39% 25.34% 5.52% 9.61% 11.46% 10.65% 11.46% 7.32% Source: 17th Annual Report

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Figure 6 Return on Shareholder‟s Funds

2005/2006 9% 2009/2010 20% 2008/2009 17% 2007/2008 10%

2006/2007 44%

The Table listed in Table no.6 shows that the mean return on shareholders‟ funds ratio of Nepal SBI Bank Ltd. is in the fluctuating trend. The mean investment to total deposit ratio of /Nepal SBI Bank Ltd. is at the satisfactory level. For the year 2005/2006 and 2006/2007 the ratios are 5.39% and 25.34% respectively. But in the year 2007/2008 it has decreased tremendously at 5.52%. In the year 2008/2009 has increased to 9.61% and again it has increased to 11.46% in the year 2009/2010. The standard deviation is 7.32%, which shows less deviation between the net profit and the shareholders‟ funds.

2.2.3 Return on Loan and Advance The ratio is calculated by dividing net profit after tax by total loan advances. The ratio measures the profitability of the bank in relation to the total assets. The high ratio reflects the efficiency of the bank utilizing its all resources.

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Table 7 Return on Loan and Advances Year 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 Average Mean Return Standard Deviation Net Profit 16760390 50065475 12490030 40843769 48748221 33781577 Loan and Advances 2905258365 3502258008 4101490868 4299249275 4468719748 3855395253 Ratio 0.58% 1.43% 0.30% 0.95% 1.10% 0.88% 0.87% 0.39% Source: 17th Annual Report

Figure 7 Return on Loan and Advances

2009/2010 25%

2005/2006 13%

2008/2009 22%

2006/2007 33%

2007/2008 7%

The ratios in the above table shows that the mean return of Nepal SBI Bank is not at the satisfactory level the ratios between the net profit and the loan and advances are on the decreasing trend 0.58%. But in 2006/2007 it has increased to 1.43% and

again in the year 2007/2008 it has decreased to 0.3% and again increased to 0.95%. But in 2009/2010 it has increased to 1.10%. It is the most important tool for

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measuring the performance of the bank. The standard deviation is 0.39%, which shows consistency between the net profit and the loan advances ratio.

2.3 ACTIVITY RATIO Activity ratio is that ratio which helps in the evaluation of sales in relation to different investments and activities. The activity ratios used for the evaluation of financial position of Nepal SBI Bank are as follows.

2.3.1 Investment to Total Deposit Ratio Investment to total deposit ratio is calculated by dividing investment by the total deposit. Investment includes investment in government securities, special bond of government, treasury bills and others. The total deposit consists of current deposit, fixed deposit and saving deposit. The ratio measures the extent to which the banks are successful in mobilizing the total deposit on investment. The bank cannot whole of its funds raised through deposits and borrowing into loans and advances. In order to fill this gap between borrowings and lending, the bank rather goes for investment such as government securities, special bond of government, treasury bills and others.

Table 8 Investment to Total Deposit Ratio Year 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 Average Mean Return Standard deviation Investment 202578300 201793780 373631650 595055944 1207275300 516066995 Total Deposit 4313303292 4274061631 6349489783 5494069117 6270674153 5340319595 Ratio 4.69% 47.21% 5.88% 10.33% 19.25% 9.66% 17.41% 16.59% Source: 17th Annual Report

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Figure 8 Investment to Total Deposit Ratio

50.00% 40.00% Percentage 30.00% 20.00% 10.00% 0.00% 2005/2006 2006/2007 2007/2008 Year 2008/2009 2009/2010 Ratio

The ratios listed in Table 8 are in the fluctuating trend throughout the review period. In the year 2005/2006 ratio is 4.69% and in the year 2006/2007 it has increased to 47.21%. In the year 2007/2008 it has again decreased to 5.88% and in the year 2008/2009 and 2009/2010 it has increased to 10.03% and 19.25% respectively. The mean investment to total deposit ratio of Nepal SBI Bank is in the satisfactory level. Higher rates mean that the bank could invest its funds of the deposited amount. The standard deviation in this case is 16.59%, which shows high deviation between the investment and the total deposit.

2.3.2 Loan and Advances to Total Deposit Ratio Loan and advances to total deposit ratio is calculated by dividing loan and advances by the total deposit. Loan and advances include loan, advances and overdrafts on local currency and convertible currencies. Whereas, total deposit consists of current, fixed and saving deposits.

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Table 9 Loan and Advances to Total Deposit Ratio Year Loan and Advances 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 Average Mean return Standard Deviation 2905258365 3502258008 4101490868 4299249275 4468719748 3855395253 4313303292 4274061631 6349489783 5494069117 6270674153 5340319595 67.36% 81.94% 64.59% 78.25% 71.26% 72.19% 72.68% 42.50% Source: 17th Annual Report Total Deposit Ratio

Figure 9 Loan and Advances to Total Deposit Ratio

100.00% 80.00% Percentage 60.00% 40.00% 20.00% 0.00% 2005/2006 2006/2007 2007/2008 Year 2008/2009 2009/2010 Ratio

This ratio measures the extent to which the banks are successful in mobilizing the total deposit on loan and advances. Bank cannot utilize whole of its funds raised through deposit on loan and advances. The ratios in Table 9 are in fluctuating trend. The ratio in the year 2005/2006 is 67.66% and in the year 2006/2007 it has increased to 81.94%. In the year 2007/2008 it has decreased to 64.59%, in the year 2008/2009 it has again increased to 78.25%. But in the year 2009/2010 it has again decreased to

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71.26%. The standard deviation in this case is 42.50%, which shows high deviation loans and advances and the total deposit.

2.4 STATISTICAL ANALYSIS 2.4.1 Karl Pearson’s correlation coefficient Among several statistical method of measuring correlation the Karl Pearson method popularly co-efficient is most used in practice. The Pearson co-efficient of correlation is denoted by symbol “r”, which shows the relationship between the two variables. By using this statistical tool we try to find out the relationship between cash and bank balance and total deposit. The value or “r” has always been between +1, -1 and 0 are rare. The formula for computing Pearson co-efficient of correlation is: √ Where, ( ̅) ( ̅)

Probable Error (PE) With the help of probable error, it is possible to determine the reliability of the calculated value of correlation coefficient. Formula:
( √ )

Where, r = Coefficient of correlation n = Number of observation

If value of r is less than six time P.E., there is no evidence of correlation i.e. value of r is insignificant and if value of r is more than six times P.E. then there is an evidence of correlation and it proves that correlation is significant.

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Table No. 10 Correlation between Cash & Bank Balance and Total Deposit
Year Cash and Bank Balance( X) 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010 1357.79 890.01 1945.14 1619.96 1333.53 ∑x= 7146.43 4313.30 4274.06 6349.48 5494.06 6270.67 ∑y= 26701.5 -71.45 -539.23 515.89 190.71 -95.72 5105.96 290775.46 266142.49 36370.30 9162.31 ∑x2= 607556.5 -1027.01 -1066.25 1009.16 153.74 930.35 1054757.76 1136897.60 1018416.02 23637.83 865562.29 ∑y2= 4099271.5 73386.31 574962.5 520618.6 29230.90 -89053.68 ∑xy= 1109243.09 Total Deposit (Y)

̅ ̅ Now, √ From the above table the co-efficient of correlation r= +0.754, which is near to 1. It indicates that there is high degree of positive correlation between cash and bank balance and total deposit. It signifies that cash & bank balance increase total deposit also increases. Now, P.E=
( √ )

or, Hence 6*P.E. = 0.726 < r i.e. r>6*P.E.

Since r is greater than 6 times P.E., there is highly significant relationship between cash and bank balance and total deposit.

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2.4.2 Trend analysis This statistical tool used in this page describes the trend of any variables whether it increases or decreases with passage of time. I have used least square method. yc= a + bx Where, a = b= Here “a” is the “yc” intercept and “b” is the slope of trend line or the amount of change that comes in “yc” for a unit in the value of “x”. The “x” variable represents the time. Table no.11 Trend analysis of cash and bank balances with passage of time. Mid (X) July Cash Bank Balance(Y) 2005 2006 2007 2008 2009 Since, ∑x=0 1357.79 890.01 1945.14 1619.96 1333.53 ∑y=7146.43 -2 -1 0 1 2 ∑x=0 4 1 0 1 4 ∑x2=10 -2715.58 -890.01 0.00 1619.96 2667.06 ∑xy=681.41 1293.004 1361.145 1429.286 1487.427 1565.568 & X=(X-2007) X2 xy yc

Cash & Bank balance with passage of time
2000 Rs in million 1500 1000 500 0 2005/06 2006/07 2007/08 2008/09 2009/10

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Since here the growth rate is positive, so the given figure shows a rising trend.

EVALUATION Table 12 Ratios Average Ratios Cash and Bank Balance to Fixed Deposit Cash and Bank Balance To Saving Deposit Cash and Bank Balance to Current Deposit Cash and Bank Balance to Total Deposit Return on Total Assets Return on Shareholders‟ Funds Return on Loan and Advances Investment to Total Deposit Loan and Advances to Total Deposit 51.34% 126.32% 100.31% 26.76% 0.53% 11.46% 0.88% 9.66% 72.19% Satisfactory Excellent Good Satisfactory Satisfactory Excellent Good Poor Good performance

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CHAPTER – III

SUMARRY, CONCLUSIONS AND RECOMMENDATIONS
3.1 SUMMARY
Nepal State Bank of India (SBI) was registered on 28th April 1993. The letter of intent to the establishment of the bank was received from Nepal Rastra Bank and was registered in the office of the registrar of companies. Nepal State Bank of India was inaugurated in 7th July 1993 by the Prime Minister G.P. Koirala. This bank commenced its operation since 8th July 1993.

There are altogether 23 commercial banks in Nepal. Nepal State Bank of India is the first Joint Venture Bank of Nepal and India. Its corporate office is located as Hattisar Sadak, Kathmandu and main branch at Durbar Marg, kathamandu, Nepal State Bank of India has 14 branches. It has authorized capital of RS 1,000,000,000 and issued capital of RS 650,000,000. It has paid up capital of RS 647,798,000.

The objectives of the Nepal SBI Bank are as follows:  To play an important role in facilitating the growing Nepal- India trade with the support of large network of branches of SBI in India to provide a whole range of international banking services to facilitate Nepal‟s trade and tourism.        To participate in the emerging industrial scenario in Nepal where SBI‟s age –old exposure, experience and expertise would come in handy. To play a meaningful support role in the socio-economic development of Nepal. The services provided by Nepal SBI Bank are as follows: Deposit – Current, Saving, Fixed and Call Deposits. Remittances/ Money Transfer to and from more than 300 branches of SBI in India and worldwide. Anywhere banking among the selected branches. Loans and Advances/ priority and deprived Sector Lending. Consortium Lending 34

   

Trade finance- Letter of credit, Import/ Export. Bank Guarantees/ Bid Bonds. Sales and Encashment of SBI Rupee Traveler‟s Cheques. Housing loans, Car Facilities and Education loans.

3.2 CONCLUSION
It is a common practice in the banking sector of Nepal to use consultant to look into various corporate problems. How many of their recommendations are being successfully implemented is still questionable although huge sum of money and other resources are spent in research and implementation.

In a nutshell, the above outcomes have not only revealed the satisfactory performance of the bank but the sign of future prosperity and development can be expected as well. The problem identification and suggestions mentioned in this report of ours, we feel, may not be new. In reality, the manager in the bank may be aware of some of the problems identified and if asked, they can also give probable solutions. There are certain specific findings, which are given below: a) The ratio of cash and bank balance fixed deposit of Nepal SBI Bank is satisfactory. This reflects the strong liquidity position of this bank. b) The ratio of cash and bank balance to saving deposit of Nepal SBI Bank is good as compared to the standard ratio. This means SBI Bank has a strong liquidity position. c) The ratio of cash and bank balance to current deposit of Nepal SBI Bank is satisfactory as compared to the standard ratio. This reflects the good liquidity position of this bank as compared to other commercial banks in Nepal. d) The ratio of cash and bank balance to total deposit of Nepal SBI Bank is finding poor ratio. It means that the liquidity position of the bank take greater risk. e) The ratio of return on total assets of Nepal SBI Bank has low return as compared to other commercial banks. It means that the Nepal SBI Bank has not got

satisfactory level of profitability in relation to the assets of the bank. The trend of the increasing rate of return is poor. f) The ratio of return on loan and advances of Nepal SBI Bank is at satisfactory level. In the first year the return on loan and advanced high. Then, after the return 35

is in the decreasing trend. This shows that actual performance of the bank is satisfactory. g) The ratio of return on shareholders‟ funds of Nepal SBI Bank is a satisfactory level. It indicates that the Nepal SBI Bank has satisfactory profitability position in relation to the shareholders; funds of the bank. h) The ratio of investment to total deposit of Nepal SBI Bank is poor. It indicates that Nepal SBI Bank is not satisfactory in utilizing its resources in investment. The objective of the bank is optimum utilization of the capital funds. But it cannot achieve the optimum goal of the bank. i) The ratio of loan and advances to total deposits of Nepal SBI Bank is at good position. This reflects that the bank is utilizing its resources on loan and advances to an optimum level. The main objective of the bank is optimum utilization of its resources.

3.3 RECOMMENDATIONS
From the analysis done, it can be concluded that the bank was well managed in the previous years. However, by learning from inefficiencies and weakness, that the bank has managed to gain a position in the banking sector of the Nepal. Even though the bank is providing a handsome return today, some recommended might be helpful for the further enhancement of profitability of the bank. So, the bank may be suggested which can be pointed as: a) Since, the liquidity ratios of the bank are fluctuating and not satisfactory so the bank is suggested to keep the reasonable amount of liquidity. The bank should be maintained their short-term solvency problem. b) Profitability position of Nepal SBI Bank is comparatively better than the other ratios. So I recommend the bank to use its resources for generating more profit margins. If the resources are held idle, the bank may face high costs and causes the low profit margin. c) The investment to total deposit ratio of this bank is poor which shows that the bank is utilizing its resources at a low level. So, I recommend the bank to increase its investment in productive areas.

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d) Nepal SBI Bank should extend its contacts with different institutions to increase its business transactions e) Reports of Nepal SBI Bank that it is not involved in social activities. Therefore, I suggest that Nepal SBI Bank should involve itself or contribute for such programs to maintain favorable public image.

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Bibliographies
Bhandari, D.R. (2003), “Banking and Insurance” Kathmandu: Ayush Publication. Dahal,B&Dahal S, “A Hand Booking to Banking”.

Encyclopedia, The world book, America: Grolier Incororated, Vol.3, 1984 Garg,K.N, 1997, “Money, Banking, Trade and Finance”2nd edition, Allahbad: Kitab Mahal.

Ghos,A. Financial Intermediaries and Monetary policy in developing Country, 1964. Khodaka S.J & Singh H.B “Banking & Insurance”: Asia Publication.

Koch, M.L Money, Banking Management the Dryden ress, New York Lawrence J.Gilman, Principle of Management Finance, 9th Edition 2001, Andrson welsey longman(singapore). Rose, Peter S., (2002), “Commercial Bank Management” 5th edition, McGraw Hill/Irwin, p4

Subedi Raj Bhisma, Devkota Prasad Surya, Neupane Dipendra Kumar, 2062 “Banking and Insurance” BBS Singh Bir Hriday, 2062 “Banking and Insurance” BBS 3rd year, First edition.Asia Publications Vaidya Shakespeare, “Banking Management”, 1999 A.D. Report Annual 14th

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.

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