1

CHAPTER-I
INTRODUCTION

1.1Background of the Study

The development of any country cannot be imagined without the development of the economy.

The country should be strictly based on the proper and efficient utilization of the resources

available with well-planned management, strategy and up to date revision. Efficient utilization of

available resources appreciates the wealth position of individual as well as nation which can be

possible only at Integrated and speedily condition when competitive banking and financial service

reaches nook and corners of the country i.e. without development of financial sector or banking

sector economic development of country cannot be imagined.

Bank is an organization whose main function is to accept deposit and invest it to different sectors.

Bank collects money from public by providing attractive interest and earns profit by lending it in

business organization, industrial, agricultural sector etc. In order to make profit, banks help to

convert unproductive towards productive sector. Bank plays vital role to develop economic

condition of a country. Only successful banks can be stable in thecountry which is very

challenging task. To be a successful bank, formulation of capital structure and its proper utilization

or implementation is essential. A healthy development of any banks depends heavily upon its

capital structure management. Proper capital structure of any particular bank has a positive impact

on economic development of the country and vice-versa.

The term Capital Structure is used to refer to the mix of long-term sources of capital. Long-term
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debt and equity capital are the long-term source of capital. In other words, capital structure is the

composition of long-term sources of financing. Capital structure is essentially concerned with how

the firm decides to divide its cash flows into two broad components, a fixed component that is

earmarked to meet the obligations toward debt capital and a residual component that belongs to

equity shareholders.

The capital structure is how a firm finances its overall operations and growth by using different

sources of funds. Debt comes in the form of bond issues or long-term notes payable, while equity is

classified as common stock, preferred stock or retained earnings. Short-term debt such as

working capital requirements is also considered to be part of the capital structure.

1.2. Profile of Organization.

Nepal Bangladesh Bank

Nepal Bangladesh Bank Ltd. also known as NB Bank or NBB is a public owned commercial bank.
It was established in June 1994 with an authorized capital of Rs. 240 million and Paid up capital of
Rs. 60 million as a Joint Venture Bank with IFIC Bank Ltd. of Bangladesh. Its Head Office is
situated at Kamaladi-31, Kathmandu. The bank has a network of 43 branches, 7 Branchless
banking and 43 ATM terminals. Nepal Bangladesh Bank Ltd. is a leading ‘A’ class commercial
bank licensed by Nepal Rastra Bank. Nepal Bangladesh Bank was registered with Office of
Company Registrar (50-050/051, Dated January 14, 1994) as a public company limited by shares.
Nepal Bangladesh Bank started its banking operation from 6th June, 1994. Nepal Bangladesh Bank
was established as a joint venture bank with IFIC Bank Ltd., Bangladesh. Shares of the bank are
listed in Nepal Stock Exchange Ltd. since 1995. (www.nbbl.com.np)

1.3. Objectives of study

Each and every research study is conducted with a view of achieving some objectives and this
study is of no exception. The main objective of this study is to analyze total capital of NBB in
each year. The specific objectives of this study have been set out as follows:
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 To analyze the capital structure of Nepal Bangladesh Bank Ltd.

 To find the trend of debt use of Nepal Bangladesh Bank Ltd.
 To examine the debt of total assets of Nepal Bangladesh Bank Ltd.

1.4.FocusoftheStudy

The concept of financial institutions in Nepal was introduced when the first commercial bank,
the Nepal Bank Ltd was established on 30th Kartik 1994 B.S as a semi government organization.
In the fiscal year 2039/040, new banking policy was introduced for the establishment of new
banks by the joint investments of foreign nations. The establishment of joint venture banks gave
a new horizon to the financial sector of the country. Commercials banks are the heart of the
financial system, which plays significant role by collecting scattered surplus funds and deploying
these funds in the productive sectors as an investment. They make funds available through their
lending and investing activities to borrowers, individuals, business firms and government
establishments.

The main focus of the study is to know the liabilities part of Nepal Bangladesh Bank Ltd. as
well to know the composition of debt and equity. How Nepal Bangladesh Bank Ltd. is getting
highly success in the market? The main function of the manager is to determine the proportion
of equity capital and debt capital. So this study is a reference regarding the capital structure of
Nepal Bangladesh Bank Ltd.

1.5 Review of Literature

1.5.1 ConceptualReview

1.5.2 Review of previous Work

The capital structure concept has an important place in the theory of financial management. The
term capital structure, also known as financial structure of financial plan or leverage. The financial
decision of a firm is one of the tools for achieving firm’s objectives of shareholders wealth
maximization. The term capital structure refers to the proportion of debt and equity capital. Thus, the
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financial decision of a firm relates to choice of proportion of debt and equity to finance the
investment requirement a proper balance between risk and return to the shareholders. Capital structure
with reasonable proportion of debt and equity capital is called optimal capital structure. However, it
can be expected that if the capital structure decision affected the total value of the firm, a firm should
select such a financing mix that maximizes the shareholders wealth. The optimal capital structure and
its implication are more noticeable Capital structure refers to the way a corporation finances its
assets through some combination of equity, debt or hybrid securities. A Firm’s capital structure is
then the composition or ‘Structure’ of it’s liabilities. “Capital structure is the combination of long
term debt and equity. It is a part of financial structure i.e. preferred stock, common stock, long
term debt & current liabilities. If current liabilities are removed from it we get capital structure”
(Mathur, 1979).

A distinction is usually made between financial structure & capital structure. Financial structure
refers to all sources (both short term & long term) that are used to finance entire assets of a firm
where as capital structure is taken as the capitalization part of firms total financing which includes
only the long term source such as long term debt & equity. Thus, the capital structure can be
determined by considering relevant factors & is a part of financial structure.

The composition of capital structure can be presented as shown below.

CapitalStructure

DebtCapital EquityCapital

1.5.2. Review of previous work

Following journal related to the book value per share are reviewed for the preparation of report:

Sharma (2013) has conducted a study on "Capital Structure Management of Manufacturing

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Companies." The Selected Companies are Jyoti spinning Mill, Nepal Lube Oil & Nepal Lever
Ltd. The basic objective was to analyze return on equity and assets. It was found in the study
that JSML had a huge amount of debt and there is a need to reduce the debt capital and JSML
has no long term debt so they should reduce tax by taking long term debt. It is suggested that
JSML and NLOL should increase the equity portion for financing it’s assets to be in safe mode
against liquidation. The study observed that among same type of manufacturing companies,
there is a vast difference in the degree of operating leverage (DOL) and capital structure.
Therefore, the companies should concentrate on restructuring their capital. They should try to
increase their sales volume to reduce their operating cost. The assets, equity and debts
condition is very poor in JSML. NLL is highly dependent on short-term debt, it should try
to adopt long term source of debt.The sample size of the study is small and limited to
manufacturing sector. Furthermore, the study did not cover the issue of determinants of capital
structure and the tools used for analysis is limited to ratio analysis and degree of operating
leverage (DOL).

Singh (2013) conducted a study on "Capital Structure Decision and the Impact on Risk and
Return in Hulas Steel Industry." General objective of the study was to test the relationship
between capital structure and the value of the firm by analyzing the effect of financial leverage
on the return and risk. The researcher has found that the higher proportion of short term debt
and lower current ratio in the company. In addition with short term liquidity position, the return
on total assets and return on shareholder’s equity is not significant. However, the company is
trying to improve the return on total assets & return on equity in the subsequent years. Finally,
he has concluded that the short term financial management of the company is inefficient.
Similarly, the long term financial arrangement of the company seems optimum but the resources
utilization capacity of the term is not effective which is clearly reflected in insignificant return
on total assets. He has suggested to the company to improve the operating efficiency by
applying various techniques of operating resource.

Giri (2014) conducted a study on “Capital structure management of listed joint venture
commercial blames” in which he has analyzed the capital structure of standard chartered bank
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and Nepal Bangladesh Bank. The study shows that the private sector banks have been
successful in increasing their deposit and credit portfolio remarkably over the past few

1.5.3. ResearchGap

After study the above thesis, I found that the researcher highly focused only the relationship
between deposit and investment as well as return in ratio to capital employed but in study of
capital structure there must be analyzed total liabilities not only deposit. Deposit is the part of
total liabilities. And the above researches are done six years ago. That’s why in the present
scenario it is not sufficient and Nepal Bangladesh Bank Limited is the leading bank in the
Nepalese economy that’s why its capital structure must be different than other manufacturing
industries, trading industries & other banks.

1.6. Methods
The research methodology refers to the various sequential steps to be adopted by a researcher in
studying a problem with certain objectives in view. The purpose of this chapter is to discuss the
method of research followed in this study.

1.6.1. Research Design

The research methodology refers to the various sequential steps to be adopted by a researcher
in studying a problem with certain objectives in view (Kothari, 1994). The purpose of this
chapter is to discuss the method of research followed in this study. The approach followed is to
regress the cost of capital to the leverage and other explanatory variables. In other word
research methodology describes the method and process applied in the entire aspect of the
study. A focus is given to research questions, the model used, definitions of variables, samples
selection and size, source of data.
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1.6.2. PopulationandSample

There are all together 32 commercial banks functioning in Nepal which is the size of the
population. Out of them, one leading commercial bank i.e. Nepal Bangladesh Bank Limited
has been selected for the study purpose.

1.6.3. Types of Data

This study is mainly based on secondary data provided by Nepal Bangladesh Bank Ltd. Data
and information have been extracted from the annual reports of the bank collected from the
concerned bank and downloaded from official websites. The supplementary data and
information have been acquired from various sources like newspaper, magazines, brochures,
booklets, periodicals and bulletins, published and unpublished reports, related documents and
journals available in Central library of Tribhuvan University, and other organization like
Nepal Stock Exchange and Nepal Rastra Bank.

1.6.4. DataProcessingProcedure

Methods of analysis are applied as simple as possible. The obtained data are presented in
various tables, diagrams and charts with supporting interpretations. Among various tools of
data analysis, financial tools and statistical tools are used for research under study.

1.6.4.1. FinancialTools

Financial Tools are used for expressing them utual relation of different accounts consisting in
the financial statement. To make the data of financial statemen tmore clear, it is to be
expressed in referring to other figures. With the help of various financial tools ,it can be made
short, simple and understandable .Following are some important financial tools used for
research work of Capital Structure of Nepal Bangladesh Bank Limited. They are as:
1. Shareholder’sEquity Ratio
2. DebttoEquity(D/E)Ratio
3. ReturnonTotalAssets(ROA)Analysis
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4. Return on Capital Employed(ROCE)

5. Return on Equity(ROE)

1.6.4.2. Statistical Tools

In this method of data analysis we have used only Standard Deviation and, Coefficient of
Variation for data analysis. It has a wide application in statistics.

1.7. Limitations

This study is conducted in fulfillment of the requirement for the BBS 4th year. So it has some
limitations .They are as follows:

 All the Findings and Recommendations, which are stated are applicable only for the current
period.
 The study is limited to to the extent to the data given by the institutions.
 Based on limited information is not possible to arrive at a proper conclusion
 The Interpretation of the study is not complete as primary record, It is based on Annual
Report.
 Accuracy of the Study depends on the accuracy of information and records provided by the
institutions.
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CHAPTER–II
RESULTS AND ANALYSIS

2.1 Presentation of Data

In order to fulfill the objectives of this study, presentation, analysis & interpretation of relevant
data of Nepal Bangladesh Bank Ltd. has been made in this chapter. To obtain best result, the data
have been analyzed according to the research methodology as mentioned in third chapter. The
purpose of this chapter is to introduce the mechanics of data analysis and interpretation. With the
help of this analysis, efforts have been made to highlight the comparative financial strength of the
Nepal Bangladesh Bank Ltd. For analysis, different types of analytical methods & tools such as
financial ratio as well as statistical analysis are used.

2.1.1Debt Ratio
The ratio of total debt to total assets measures the percentage of the firm’s assets financed by
creditors. The lower the ratio the greater the protection afforded by creditors in the event of
liquidation. The industry average of debt ratio is 30%.

Table No.1Debt Ratio of Nepal Bangladesh Bank Limited

Year Total Debt Total Assets

Debt Ratio
775,368,432 11,732,516,418 6.61%
2012/13
2013/14 1,079,364,640 15,959,284,687 6.76%

2014/15 1,961,381,060 21,432,574,300 9.15%

2015/16 1,020,443,592 27,149,342,884 3.76%

2016/17 990,574,715 36,916,848,654 2.68%

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The above table shows the total debt portion of Nepal Bangladesh Bank on its assets financing. It
has used minimum 2.68% in F.Y 2016 and maximum of 9.15% of total assets during F.Y 2014. On
an average, Nepal Bangladesh Bank uses 5.79% of total assets financing needed by raising debt
from creditors. This indicates that the bank is financing its assets from its own source. This
supports the concept that lower the debt ratio is good for both creditors and organization. Nepal
Bangladesh Bank’s debt ratio is found in satisfactory level as well as safe level. Nepal Bangladesh
Bank uses less debt financing only may be due to unconfident of management to earn the
consistent income due to fluctuating and unsecured economic condition.

2.1.2 Interest Coverage Ratio

The ratio of earnings before interest and taxes (EBIT) to interest charges is called Interest
Coverage Ratio. This ratio measures the ability of the firm whether it could meet its annual interest
payments or not. This ratio is also known as time interest earned (TIE) ratio which measures the
debt servicing capacity of a firm. Higher TIE ratio shows the financial soundness of the firm.
Generally higher the TIE ratio is preferred because higher the ratio indicates higher capacity to
bear the high volume of interest charge and vice versa.

Table No. 2Calculation of Times Interest Earned Ratio of Nepal Bangladesh Bank

YEAR EBIT INTEREST TIE RATIO

2012/13 277,828,439 4,604,057 60.34x

2013/14 377,200,894 18,004,726 20.95x

2014/15 487,972,659 18,000,000 27.11x

2015/16 718,833,853 23,634,098 30.42x

2016/17 972,950,326 25,397,027 38.31x

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The TIE ratio of nepal bangladesh bank fallen down to 20.95x in F.Y 2013 from 60.34x of F.Y
2012. It showed an increasing trend over the year. The average TIE ratio is found 35.43x. Higher
the TIE ratios better the healthiness of the organization to cover its fixed charge interest on debt
employed by the bank. So, the overall position of the Nepal Bangladesh Bank on covering its
interest charge related to its loan and debt is good. Table shows that except in the initial year 2012,
the TIE ratio is below the average. From this angle, the financial position is not satisfactory.

The TIE Ratio is the highest among the three selected joint venture commercial banks for the
study. Even though its average TIE ratio is 35.43 times F.Y 2013, 2014 and 2015 is below the
average whereas in F.Y 2012 and 2016 only it is more than average. It may be attributed to the
decrease in income due to internal war period in the country and the increase in use of debt. During
study period, Nepal has been through critical situation due to internal war at which almost of all
the sectors of Nepal has been through the trough period of the business cycle. In such unfavorable
condition also the banks maintained its reputation and profit.

2.1.3 Basic Earning Power Ratio

The general concept of BEP ratio is the ability of the firms’ assets to generate operating income. It
shows how much income generated by its total assets financed. It is the ratio of EBIT to Total
Assets. The increasing ratio is favorable for a company which shows that the gross profit is
increasing.
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Figure. 1 Calculation of Basic Earning Power Ratio of Nepal Bangladesh Bank

40,000,000,000

35,000,000,000

30,000,000,000

25,000,000,000

20,000,000,000 EBIT
Total Assets
15,000,000,000

10,000,000,000

5,000,000,000

0
2012/13 2013/14 2014/15 2015/16 2016/17

The BEP for the Nepal Bangladesh Bank is 1.43% in F.Y 2012/13, increased to 1.49 in F.Y 13/14
then decreased to 1.38% in F.Y 13/14 thereafter increased to 1.66% and 1.73% on two consecutive
years. The average BEP ratio for Nepal Bangladesh Bank is 1.54% of its total assets. It means the
gross income of the Nepal Bangladesh Bank is only 1.54% of total assets which is very much low.
So the BEP of the Nepal Bangladesh Bank is not satisfactory because the management team is not
able to maximum utilize the total assets and generate the higher level of income. The return is the
negligible in comparison to its investment in total assets.

2.1.4 :Debt Equity Ratio

Fiscalyear Total Debt Total Equity Debt EquityRatio

2012/13 1,594,033,557 10,438,618,663 15.27

2013/14 31,598,300 6,039,333,849 0.52

2014/15 176,000,000 4,892,223,335 3.6

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2015/16 - 4,110,238,338 -

2016/17 - 3,573,416,034 -
(Source:-Annual Report of Nepal Bangladesh Bank Limited)

The ratio Is more significant to determine whether fixed deposit financing is adequate to strength
profitability of bank .It shows the relationship between borrowed fund and owner's capital.The
higher debt equity ratio shows a large share of financing by the creditors relatively to the
owner.The Debt equity Ratios are 15.27% in F.Y.2016/17, 0.52% in F.Y. 2015/16 & 3.6% in F.Y.
2014/13 respectively. There is no borrowings in the F.Y. 2013/12 & 2011/12 due to which we
cannot compute the Debt Equity ratio in the corresponding year.

2.1.5 Return on Shareholders’ Equity

One of the main sources of capital is equity which is raised from issue of common shares to public.
People use their savings on share with a expectation of return from their investment in equity. So
every time equity holders want to know about return on shareholders’ equity of the firm. Higher
the ROSE is preferred by the equity holders. The calculated ROSE of selected sample banks are
presented below:

Table No. 4 ROSE Calculation for Nepal Bangladesh Bank Limited

Year Net income Share Holder Equity Return on share holder equity

2012/13 168,214,611 998,000,000 16.86%

2013/14 237,290,936 1,198,000,000 19.81%

2014/15 296,409,281 1,514,600,000 19.57%

2015/16 451,218,613 2,112,600,000 21.36%

2016/17 638,732,757 2,620,000,000 24.38%

(Source: Annual Report)

The table gives the glimpse of last five years ROSE provided by the Nepal Bangladesh Bank to its equity
holders. The equity holders of Nepal Bangladesh Bank are paid 16.86% in F.Y 2012/13, rose to 19.81% in
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F.Y 2013/14. The ROSE of F.Y 2014/15 is 19.57% which increased in to 21.36% and 24.38% in F.Y
2015/16 and 2016/17 respectively. The average ROSE of Nepal Bangladesh Bank is 20.39% over the study
period. The ROSE for the last 5 years showed an increasing trend, which is the symptom of good
performance by the bank.

2.2 Finding

The data presentation and analysis using different financial and statistical tools find out the
followings:

a) Nepal Bangladesh Bank is found with the debt and equity mix in capital structure and some
are found to be used preference share also in financing its capital structure. The banks are
around 30% of total capital structure is using debt for its capital financing.
b) The Operating Income or EBIT is increasing for the of Nepal Bangladesh bank . The banks
is well operating its business.
c) The Earning per share is found to be increased but it discovered that only the increased in
EBIT does not mean to increase the EPS. The increase in EBIT deducts interest in debt
capital it has employed so EPS may be zero if large portion of debt is used and operating
income is low.
d) The calculation of debt ratio found that around 5% of total assets it has financed are
employed from debt. The majority of the total assets are financed by equity source.
The interest coverage ratio of bank is found satisfactory. The banks are able to meet its
interest expenses on debt employed on its capital structure. Nepal Bangladesh bank 35.43
times,
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CHAPTER III

SUMMARY AND CONCLUSION

3.1 Summary

Capital, in the most basic terms, is money. All businesses must have capital in order to purchase
assets and maintain their operations. Capital is a scarce sources and much more essential to
maintain smooth operation of any firm. The available capital and financial sources should be
utilized so efficiently that could generate maximum return. Capital structure or capitalization of the
firm is the permanent financing represented by long term debt, preferred stock and shareholders’
equityTo find out the present capital structure management of Nepal Bangladesh banks of Nepal
are optimal or not.To Analyze and evaluate the effect of deposit and loan on the EBIT of the joint
venture commercial banks of Nepal.

Before the study and during the study, the researcher has been through several books, journals,
websites, articles, dissertations related to the thesis problem in order to have detailed knowledge
on research topic and the findings of previous researches. National and international journals and
articles published are also reviewed in the same section. Finally the most useful review of past
thesis and dissertations completed by the students of Tribhuvan University in different academic
years in partial fulfillment of MBS degree related to capital structure are studied and reviewed.The
thesis used analytical plus descriptive research design using financial tools ratio analysis, statistical
tools: trend analysis etc. The research is based on completely secondary data available in the
websites of sample banks.
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3.2 Conclusion

Finally the outcome of the thesis conclusion is presented as below based on the study made by
researcher and results obtained in the data presentation and analysis part of the thesis. Based on the
findings, major findings and the researcher’s analysis the conclusions of the study are:

The profitability measures the success of the business. The profitability ratios are the financial
tools. The different calculated profitability of Nepal Bangladesh bank Ltd. Earnings per share
(EPS) of Banks/Companies are calculated to see the strength of the share in the market. It
measures the profitability of the banks on per equity share basis. EPS of Nepal Bangladesh
Bank is continuously increasing As the name also suggests commercial banks focuses their
functions on profit earning. None commercial banks of Nepal are operated to serve public
occurring loss. Even though NRB has given directions for combined effort on economic
development, banks have not shown keen interest on that matter. Keeping this situation in mind
researcher has tried to find the relationship between the capital and profit condition of the Nepal
Bangladesh Bank. the profit of Nepal Bangladesh Bank increased every year to its former year
and shows that the profit trend towards increasing trend. It is supported by the average ROSE
calculated for EBL 20.39%, Every year they have been paying good return on the shareholders’
investment so their capital profit ratio is positive.
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BIBILIOGRAPHY

Books:

Agrawal, Govind Ram (2005). Dynamics of Business Environment in Nepal.

Kathmandu: MK Publishers & Distributors.

Alexander, B. (1963). The effect of Capital Structure on the Cost of Capital. New York:
prentice Hall, Inc.

Bajracharya, B.C. (2055). Business Statistics & Mathematics.

Kathmandu: MK publishers & Distributors.

Brealy, Richard & Steward Myers (2002). Principles of Corporate Finance. New Delhi:
TATA McGraw Hill Publishing co. ltd.

Everest Bank Limited (2062/2063 – 2066/2067). Annual Reports.

Kathmandu EBL.
Gautam, Rishi Raj and Kiran, Thapa (2008). Capital Structure
Management. Kathmandu: Asmita Books publishers & Distributors

(p) Ltd.
Gitman, I.J. (1988). Principles of Managerial Finance. New York: Harper and Raw
publishers Inc.

Hampton, Jhon. J. (1989). Financial Decision Making, Concept, Problem and Causes.
New Delhi: prentice Hall of India Pvt. Ltd.

Khan, M.Y. & Jain, P.K .(1997). Financial Management and Problem, (5th Edition).
New Delhi: TATA McGraw Hill Publishing company.
 18

Kothari, C.R. (1994). Quantitative Techniques. New Delhi: Vikas Publishing House Pvt.
Ltd.

APPENDICS

Calculation of Debt Ratio

Year Total Debt Total Assets Total Debt

Debt Ratio = x100
Total Assets
775,368,432 11,732,516,418 6.61%
2012/13
2013/14 1,079,364,640 15,959,284,687 6.76%

2014/15 1,961,381,060 21,432,574,300 9.15%

2015/16 1,020,443,592 27,149,342,884 3.76%

2016/17 990,574,715 36,916,848,654 2.68%

Calculation of Times Interest Earned Ratio

Year EBIT Interest
EBIT
TIE Ratio =
Interest

2012/13 277,828,439 4,604,057 60.34x

2013/14 377,200,894 18,004,726 20.95x

2014/15 487,972,659 18,000,000 27.11x

2015/16 718,833,853 23,634,098 30.42x

2016/17 972,950,326 25,397,027 38.31x

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Calculation Of Return On shareholder Equity

ROSE =
Net Income Shareholders' Equity Net Income
Year Shareholde rs' Equity

2012/13 168,214,611 998,000,000 16.86%

2013/14 237,290,936 1,198,000,000 19.81%

2014/15 296,409,281 1,514,600,000 19.57%

2015/16 451,218,613 2,112,600,000 21.36%

2016/17 638,732,757 2,620,000,000 24.38%

Average ROSE of Nepal Bangladesh Bank 20.39%