CHAPTER-I

INTRODUCTION

1.1 General Background of the Study

1.1.1

Introduction of the Bank

The word bank is used in the sense of commercial bank. A bank is a

financial institution licensed by a government. Its primary activities
include providing financial services to customers. There is the great
role of bank and banking industry for each business organization. The
success of a business largely depends on selecting the correct bank for
carrying out all the transactions efficiently. So the bank is the vital
segment in the whole economy.
A bank is an institution which accepts deposits from the public and
in turn advances loans by creating credit. It is different from other
financial institutions in that they cannot create credit though they may
be accepting deposits and making advances. An organization, usually a
corporation, chartered by a government, which does most or all of the
following: receives demand deposits and time deposits, honors
instruments drawn on them, and pays interest on them; discounts
notes, makes loans, and invests in securities; collects checks, drafts,
and notes; certifies depositor's checks; and issues drafts and cashier's
checks is regarded as bank. Bank is a financial institution, which is
engaged in monetary transaction. It develops saving habits of people.
It has always been the most importance and acts as a largest financial
intermediary. It collects the scattered money from public providing

interests and services. This collection becomes the capital for the bank
to invest. Commercial banks are one of the major financial
intermediaries whose primary function is the transfer of monetary
resources from the savers to the users. They are almost everywhere
with the widest range of activities and they provide a large amount of
the money supply.
The commercial banking industry, central part of the financial
sector occupies an important place in the framework of every economy
because it provides capital for the development of industry, trade,
business and other resources deficits sector by investing the saving
collection as the deposit.
Therefore, the bank is a financial institution which accepts deposits
from the general public and provides loans to different sectors at
different interest rates. Bank plays the vital role in the economical
condition. It is a backbone of economic development in modern society.
Banking institutions are inevitable for mobilizing resources, for finance
and socio- economic development of a country and which is important
to all parties i.e. general public, business, organization, government
and other small financial institution.

1.1.2 Commercial Banking in Nepal

It is important to overview about the development of banks in
Nepalese context for making this study meaningful. The Tegarath
Adda was the first historical credit institution in Nepal. It is regarded
as the first modern banking institution for the overall development of
the banking practice in Nepal. No financial institutions were
established due to political reasons for a long period of time.

Nepalese first commercial bank, the Nepal Bank Limited was

established in 1937. The government owned 51 percent of the shares
in the bank and controlled its operation to a large extent. The Rastrya
Banijya Bank (National Commercial Bank), a state owned commercial
bank was established in 1966. The Land Reform Savings Corporation
was established in 1966 to deal with finances related to land reforms.
There were other two specialized financial institutions, namely Nepal
Industrial Development Corporation (NIDC) and Cooperative Bank.
NIDC was a state owned development finance organization
established in 1959 with US assistance to offer financial & technical
assistance to Nepalese private industries. Likewise, the Cooperative
Bank, which became the Agricultural Development Bank in 1967, was
the main source for financing in small agro-based business. In the mid
1980s, three foreign commercial banks opened their branch in Nepal.
The banking activities have rapidly increased after the
establishment of the branches of joint venture banks in Nepal. The
Nepal Arab Bank was co-owned by The Emirates Bank International
Limited (Dubai), the Nepalese government and the Nepalese general
public. Likewise, The Nepal Indosuez Bank (currently named as Nepal
Investment Bank) was jointly owned by the French Banque Indosuez,
Rastriya Banijya Bank, Rastriya Beema Sansthan (National Insurance
Corporation), and the Nepalese public. Nepal Grindlays Bank (currently
named as Standard Chartered Bank Nepal) was co-owned by a British
firm called Grindlays Bank, local financial institutions, and the
Nepalese public. In 1994, Nepal SBI Bank was opened with the joint
venture of Nepal and India, Himalayan Bank Limited with the venture
of Habib Bank of Pakistan, and Nepal Bangladesh Bank Limited, Bank

of Kathmandu Limited with joint venture of Thailand were established

during the period.
On the other hand, the rapid growth in the economic activities
forced the local entrepreneurs to form the local banks. Currently the
number of commercial banks is hit by 31. The Civil Bank Ltd is 30 th
bank which has formally operated from 24th November, 2010. And the
Century Commercial Bank is 31st in the ranking due to the operation
date.
The list of commercial banks licensed by Nepal Rastra Bank as A
classed bank is given as follows:
Table 1.1
List of Commercial Banks in Operation
Operatio
S.

Name of Bank

No.
1.

Head
Office

Nepal Bank Limited

Kathmandu

n Date

Paid Up
Capital

(in

(A.D.)

millions)

1937-11-

330.40

15
2.

Rastrya Banijya

Kathmandu

Bank
3.

Nabil Bank Ltd

1966-01-

1172.30

23
Kathmandu

1984-07-

14491.00

16
4.

Nepal Investment
Bank Ltd

Kathmandu

1986-02-

2407.10

27
5.

Standard Chartered
Bank Nepal Ltd

Kathmandu

1987-01-

1398.50

30
6.

Himalayan Bank Ltd

Kathmandu

1993-01-

1600.00

18
7.

Nepal SBI Bank Ltd

Kathmandu

1993-07-

874.50

07
8.

Nepal Bangladesh
Bank Ltd

Kathmandu

1994-06-

1860.30

05
9.

Everest Bank Ltd

Kathmandu

1994-10-

8305.00

18
10.

Bank of Kathmandu

Kathmandu

Ltd
11.

1995-03-

11822.00

12

Nepal Credit &

Commerce Bank Ltd

Rupandehi

1996-10-

1399.60

14

12.

Lumbini Bank Ltd

Chitwan

1998-07-

1288.00

17
13.

Nepal Industrial and

Commercial Bank
Ltd

14.

Machhapuchhre

Morang

Kumari bank Ltd

1391.80

21
Kaski

Bank Ltd
15.

1998-07-

2000-10-

1700.00

03
Kathmandu

2001-04-

1304.90

03
16.

Laxmi Bank Ltd

Parsa

2002-04-

1533.70

03
17.

Siddhartha Bank Ltd

Kathmandu

2002-12-

1230.00

24
18.

Agriculture
Development Bank
Ltd

19.

Kathmandu

1968-01-

10777.50

02

Global Bank Ltd

Parsa

2007-01-

1325.10

02
20.

Citizens Bank
International Ltd

Kathmandu

2007-06-

1159.10

21
21.

Prime Commercial
Bank Ltd

Kathmandu

2007-09-

1163.80

24
22.

Bank of Asia Nepal

Kathmandu

Ltd
23.

2007-10-

1053.20

12

Sunrise Bank Ltd

Kathmandu

2007-10-

1419.40

12
24.

Development Credit
Bank

Ltd

Kathmandu

2008-05-

1655.30

25
25.

NMB Bank Ltd

Kathmandu

2008-06-

1430.00

05
26.

KIST Bank Ltd

Kathmandu

2003-02-

2000.00

21
27.

Janta Bank Limited

Kathmandu

2010-04-

1408.35

Ltd
28.

Mega Bank Limited

06
Kathmandu

2010-09-

2330.00

17
29.

Commerz & Trust

Bank Ltd

Kathmandu

2010-09-

1400.00

20
30.

Civil Bank Ltd

Kathmandu

2010-11-

1200.00

24
31.

Century Commercial
Bank Ltd

Kathmandu

2011-01-

2000.00

23
(Source: Nepal Rastra Bank)

1.1.3 Role of Commercial Bank in Nepal

Today the people of Nepal can avail of almost all types of
commercial banking services available in the developed countries.
Similarly, they have options of both brick (branch banking) and click
(internet banking, telebanking, ATM, POSs, mobile banking etc)
banking channels. The major product offered by the Nepalese
commercial banks include various types of deposits, loans, letter of
credits, letter of guarantee, remittance, trust services, merchant
banking, retirement fund management, investment banking and
foreign exchange. In other words, Nepalese commercial banks are
treated as financial departmental stores selling all types of financial
services. The banking system of Nepal has undergone through
significant change since liberalization. The free market operation in the
area of interest rate, foreign exchange rate, and diversified banking

products, which are latest development in the banking sector. Though

the banking system in Nepal is not multifaceted when compared to
that of developed countries, it has definitely grown to become more
complex in recent years. Further, electronic and internet banking
services offered by the commercial banks indicate adaptation of
advanced technologies.
Commercial banks play an important role in the financial system
and the economy. As a key component of the financial system, banks
allocate funds from savers to borrowers in an efficient manner. They
provide specialized financial services, which reduce the cost of
obtaining information about both savings and borrowing opportunities.
These financial services help to make the overall economy more
efficient.
In Nepalese context, commercial banks play important role in
economic development of the country. In the addition of providing
advanced banking services, they are introducing foreign investment.
They are playing as medium for bringing the healthy competition
among all financial institutions. Therefore, the role played by such
banks has helped to modernize the traditional banking services in
Nepal.

1.1.4 Introduction of Sample Organization

It is important to overview about the profile of concerned banks to
make this research study more meaningful.

1.1.4.1

Everest Bank Limited (EBL)

 Inception
EBL was registered on 17th November, 1992 and come into
operation on 18th October, 1994. It had an initial paid up capital of
Rs.3 crores.

Joint Venture Partner

Punjab National Bank (PNB) has joined hand with EBL as joint
venture since 1997. PNB provides top management support under
the technical service agreement. PNB is one of the largest
nationalized banks with 114 years of banking history in India.

Shareholding Pattern
The ownership of Everest Bank Limited is composed of:
S.N Subscription
o.

Holdings

1.

Local Promoters

50%

2.

Punjab National Bank (PNB)

20%

3.

General Public

30%

Total

100%

Figure 1.1
Shareholders Holding Pattern in EBL

30%
50%
20%

Local Promoters
Punjab National Bank (PNB)
General Public

Services & Branch Network

The services and facilities provided to customers are
cumulative deposit scheme, EBL NRN deposit; Partiva fixed deposit,
supreme deposit, retail loan, corporate loan, inward & outward
remittance, e-banking, innovative banking, and utility bill payment etc.
It has altogether 42 branches all over the Nepal. It has 42 ATM centers
throughout the Nepal and 16 outside the Kathmandu valley.

1.1.4.2

Nepal Investment Bank Limited (NIBL)

Inception

Nepal Investment Bank Ltd. (NIBL), previously Nepal Indosuez Bank

Ltd., was established in 1986 as a joint venture between Nepalese and
French partners. The French partner (holding 50% of the capital of
NIBL) was Credit Agricole Indosuez, a subsidiary of one the largest
banking group in the world. After acquiring the shares of Credit

Agricole Indosuez by Nepalese bankers, professionals, industrialists

and businessmen on April 2002, the bank has been changed as Nepal
Investment Bank Ltd.
Shareholding Pattern
The ownership of Nepal Investment Bank Limited is composed
of:
S.N
o.

Subscription

Holdings

1.

A Group of Companies

50%

2.

Rastrya Banijya Bank (RBB)

15%

3.

Rastrya Beema Sansthan

15%

4.

General Public

20%

Total

100%

Figure 1.2
Shareholders Holding Pattern in NIBL

20%
50%

15%
15%

A Group of Companies
Rastrya Banijya Bank (RBB)
Rastrya Beema Sansthan
General Public

 Services & Branch Network

Nepal Investment Bank Limited has offered deposit accounts such
as normal saving account, social deposit account, Parivar Bachat
Khata, trade finance, corporate finance, remittance services, ebanking, utility payment system etc. It has 41 branches with 67 ATM
outlets.

1.2

Focus of the Study

The commercial banks are one of the major financial intermediaries

whose primary function is the transfer of monetary resources from the

savers to the users. They are, almost everywhere, the largest of all the
financial intermediaries. They have the widest range of activities and
they provide a large amount of the money supply.
The financial analysis refers to an assessment of the viability,
stability and profitability of a business. It is also referred to as financial
statement analysis or accounting analysis. All financial statements are
essentially historical documents. They tell what has happened during a
particular period of time. However, most users of financial statements
are concerned about what happen in the future. The stockholders are
concerned with future earnings and dividends. Creditors are concerned
with the companys future ability to repay its debts. The managers are
concerned with the companys ability to finance future expansion. The
financial analysis involves careful selection of data from financial
statements for the primary purpose of forecasting the financial health
of the company. In the addition to this, it is also used to evaluate the
companys investment potential and creditworthiness.

This research study focuses on the comparative financial analysis of

two commercial banks; Everest Bank Limited and Nepal Investment
Bank Limited. These two commercial banks are compared as per their
financial statements by taking 5 year data from 2006 to 2010.

1.3

Statement of the Problems

In carrying out the business, every commercial bank has to

encounter several risks like liquidity, interest rate, prepayment, credit,

reinvestment and event risk etc. Among them, liquidity risk is
associated with the bank's ability to meet its financial commitment and
obligations, interest rate risk is associated with both lending and
funding activities, prepayment risk is associated with early payment of
loans, credit risk is associated with default due to client's failure to
repay loan installment, reinvestment risk is associated with
reinvestment of prepayment and event risk is associated with
happening of an unforeseen event that may cause financial loss to the
banks. So if the funds are wrongly invested without thinking such risks,
the bank cannot obtain profitable return as well as it should sometimes
lose its principle. This study will try to find out the financial strengths
and weaknesses of commercial banks.

Are they maintaining sufficient liquidity position?

How efficiently the commercial banks are using assets to generate income?
What is the capacity of banks to meet long term obligations?
What is the profitability position of the banks?
Do these two commercial banks successful to utilize their available fund?

1.4 Objectives of the Study

For any kind of research work or study, first of all the objectives should
be determined. It shows the way to achieve desired goals. Likewise, the
main objective of this research work is to examine, interpret and
analyze the financial performance of two commercial banks; Everest
Bank Ltd and Nepal Investment Bank Ltd. The main objectives related
to this study are presented below:
To study and examine the liquidity position of the sample commercial banks.
To evaluate the profitability of sample commercial banks.
To forecast the financial health of the banks by using different trend analysis.
To recommend some measures for improvement of financial performance of
EBL and NIBL on the basis of findings of the study.

1.5 Significance of the Study

The financial analysis is a significant business study because a
companys financial statements provide useful information. Financial
analysis can be undertaken by management or owners of the firm, or
by external people viz. creditors, investors and others for their own
perspectives. It is also beneficial for the government while formulating
policies and rules regarding commercial bank. From this research
report, shareholders and companies would get information related to
the financial health of the bank and they may know how banks are
mobilizing their fund and resources. And it is fruitful to make
investment on shares of various commercial banks.
The study of financial statements would provide information to the management of
the bank that would be helpful to take corrective action in the banking activities.
This study will serve to be a guide to the management of banks, financial
institutions, related parties, shareholders, general public (customer, depositors and

creditors).
This paper will address the possible risks associated with the normal
course of business of commercial banks and suggest the best possible
way to minimize the risks.

1.6

Limitations of the Study

For the completion of the study, some facts are to be considered as

limitation of this research work:

1. This study is based on secondary data and accuracy depends upon the data
collected and provided by the organization.
2. The whole study is based on the data of 5 years period (i.e. from F.Y. 2006 to
2010).
3. This study has been only of two commercial banks as sample i.e. Everest Bank Ltd
and Nepal Investment Bank Ltd. Due to the small size, it may not fully represent
Nepal as a whole.
4. Non availability of the various references of sources acts as constraints for the
study.

1.7

Chapter Scheme
This study has been conducted with different stages and
procedures as it needed. This is organized in different chapters in
order to make this study more meaningful which are as follows:
i.

Introduction
This is an introductory chapter. It includes background of the study,
development of banks, commercial banking scenario, role of commercial
banks, profile of concerned banks, objectives, signification, and limitations of

ii.

the study.
Review of Literature

The review of literature is reviewing of research studies or other pertinent

propositions in the study so that all the past studies may be known and further
research can be conducted. It includes the review of previous research on the
iii.

same field done for meaningful conclusion.

Research Methodology
This part deals with introduction, research design, sources of data, nature
of data, and population & sample.

iv.

Analysis and Presentation of Data

This part deals with the presentation and analysis of data with financial
and statistical analysis. This is the major part of the obtained data and is

v.

presented in the tabular bar and other forms.

Summary, Conclusion & Recommendations
This part provides summary, conclusion and recommendations for
improving the performance of concerned banks. In addition to this, the
extensive bibliography and appendices are also presented at the end of this
study.

CHAPTER -II

REVIEW OF LITERATURE

Introduction
The term literature review is very important for researcher in the
area of concerned problem. It distributes the knowledge and
information for the researchers to discover the uncovered things by
other researchers. It is a body of text that aims to review the critical
points of current knowledge including substantive findings as well as
theoretical and methodological contribution to a particular topic.
The main reason for a full review of research in the past is to know
the outcomes of those investigators in areas where similar concepts
and methodologies had been used successfully. It is done to find out
what research studies have been conducted in ones chosen field of
study