CHAPTER I

INTRODUCTION

1.1. Background of the Study

Financial Institutions play significant role in every economical sector. Liberalization and de-regulation process started
in 1991-92; has made a fluctuation in the banking system. The financial sector reforms carried out so far have made
the balance sheets of bank look healthier and helped them move towards achieving global benchmark in terms of
prudential norms and best practice. The competitive environment in the banking sector is likely to result in individual
players working out differentiated strategies based on their strengths and market niches.

Bank is an institution that works for making the monetary transactions sound and effective. Bank collects deposits
from the depositors and lends it to the people who are seeking credit for their own purposes. Bank accumulates the
idle money from the scattered sources and lends it to the various productive sectors in an economy that certainly
yields positive results in an economy, employment opportunities, economic activities and finally developing the whole
economy.

Commercial banks are highly sensitive organizations open to public scrutiny. As such, they must continuously ensure
their profitability, which is essential for their growth and viability as also for infusing public confidence. Thus, banks
have assumed greater responsibilities in mobilizing domestic resources for financing the priorities of the economy.
Resource mobilization is an integral part of banking activity. Bank deposits have certain peculiar features which
combine the cannons of liquidity, profitability and security. Further, the main objective of bank nationalization is
tapping of potential savings and marshalling them for strategic uses for productive purposes. To an investor, deposits
are the most secure and liquid financial assets available, which can accelerate banks lending to various sectors.
Deposit mobilization is the most important function of commercial banks since their successful functioning depends
on the extent of funds mobilized. The government has directed banks from time to time to make all possible efforts to
mobilize new deposits, which can only expedite the pace of lending activities.

There are many commercial banks that invest in various sectors. These banks play important role in economic
development of the country. For investment activity, the commercial banks follow methods, rules, and principles of
investment. They create their own investment policies, which acts as their guidelines. The commercial banks collect
funds from public as deposits and invest them in various sectors to earn income. Investment policy is a plan that
directs investors about how and where to invest. The investment activities involve risks which have to be tackled.

Commercial banks are major financial institution, occupying an important place in the economy of a country because
the deposits collected by them provide much needed capital for the development of industry, trade and commerce
and other sectors, thereby contributing to the economic growth of the nation. However, investment activities are not
without risks. They have to follow sound principles of investment policy, the rules and regulations, directives issued
by the Central Bank. Diana McNaughton in her research paper “Banking institutions in developing markets” states
that investment policy should incorporate several elements such as regulatory environment, the availability of funds,
the selection of risk, and loan portfolio balance and term structure of the liabilities. The loan provided by commercial
bank is guided by several principles such as length of time, their purpose, profitability, safety etc. These fundamental
principles of commercial bank’s investment policy are needed to be considered while making investment decisions.

1.1.1. Overview of Nepal State Bank of India (SBI) Ltd

Nepal SBI was incorporated as a public company in 1993 AD, under the Company Act 1964, as a joint venture of
State Bank of India (SBI). It was licensed as an ‘A’ class commercial bank in 2006 AD. Its authorized capital is Rs.
300 crore and paid-up capital is Rs. 235 crore. Its 55% of total share capital is held by SBI, 15% by Employees
Provident Fund and rest by general public. It has total 62 branches in Nepal, and 18 of them are operating in
Kathmandu.

There are many services provided by Nepal SBI ranging from deposits, lending, trade finance and remittances, etc.
Some other services are:
• Automated Teller Machines.
• Merchant banking.
• Safe deposit lockers.
• Foreign as well as domestic remittance services.
• Insurance and mutual funds, etc.
1.2. Statement of Problem
Establishment and expansion of a number of banks and other financial institutions in Nepal has created keen
competition among themselves. This has created a lot of challenges to them. The problems the commercial banks
are facing in Nepal include the problems of resources mobilization, poor investment climate, heavy regulatory
procedure, uncertain government policy, and NRB’s directives etc. Lack of sound investment policy is another reason
for commercial banks not utilizing its deposits that is making loan and advances or lending for a profitable project.
This condition may even lead the commercial banks to the position of liquidation. Commercial banks invest their
funds in limited areas to achieve highest amount of profit. They are found to be more interested to invest in less risky
and highly liquid sectors i.e. treasury bills, development bonds and other securities. There is hesitation to invest on
long-term projects because commercial banks are much more safety minded. So, they seem to follow conservative
and un-effective investment policy. In Nepal, every commercial bank has invested in the similar sectors. These major
sectors include tourism, garments, and trading as well. But given the current situation of the country it is not up to
them to decide in which sector they want to invest. The main factors for success of any organization are the secured
situation. Once the economic and political situation is stabilized, then only commercial banks can consider rationally
as to where they should invest and grow. Till then it is a question of moving into sectors as and when things develop.
So, security problem is the big problem for every commercial bank to invest their funds in any sectors. Nepalese
commercial banks do not seem to have formulated their investment policy in an organized manner they mainly rely
upon the instructions and guidelines of Nepal Rastra Bank. They do not have clear view towards investment policy.
Furthermore, the implementation of policy is not done in an effective way. Lack of farsightedness in policy formulation
and absence of strong commitment towards its proper implementation has caused many problems to commercial
banks. The issues specially related to investment functions of the commercial banks under study have been
presented briefly as under.

There are investment policy related problems currently faced by Nepal SBI to which this study is directed to find and
solve etc. Therefore, this study is focused towards investment policy related problems of Nepal SBI.
• What is the relationship of investment with total deposit, loan and advances and total profit?
• What is the proportion of investment of Nepal SBI?
• How much risk Nepal SBI is facing while investing in different assets? Which year higher investment in five years?
1.3. Research Objectives

The main objective of this study is to examine the investment policy of SBI. The major research objectives are:
• To evaluate and analyze the variation in investment structure.
• To analyze risk and return on investment portfolio of Nepal SBI.
• To find out the proportion of investment of Nepal SBI.
• To fulfill the requirement of BBS 4th year course of TU.
1.4. Significance of the Study

The main focus of the study is to highlight the investment policies of commercial banks with the expectation that the
study can bridge the gap between deposits and 18 investments. On the other hand, the study would provide
information to management of the bank that would help them to take collective actions. In the context of Nepal, there
is less availability of research works, journal and articles in investment policy of commercial banks as well as other
financial institutions. As it is well known that the success and prosperity of the bank heavily relies upon the successful
investment of collected resources to the important sectors of the economy. Successful formulation and effective
implementation of investment policy is the prime requisite for the successful performance of commercial banks. There
are various problems in effective investment of commercial banks of Nepal, which affect their performance to the
great extent. CB’s performance does not seem satisfactory in terms of utilizing its resources efficiently in productive
sectors. Hence, the main significance of this study if investment portfolio analysis of Nepalese commercial banks is to
help how to minimize risk on investment and maximize return through portfolio analysis. Similarly, the study of
commercial bank’s investment trend, risk return pattern, portfolio management, credit management and effect on
investment decision on earning will strive to disclose the internal weakness of the banks and furnish the ideas for
improvement. Therefore, the researcher has undertaken this study to analyze the existing investment portfolio of
Nepalese commercial banks and point out their various weaknesses and package of suggestions for its improvement.
Even the study is of great relevance to policy makers regarding some strategy and solutions regarding the deposits to
Nepalese commercial banks. It will help them to make decisions regarding investments and decisions regarding loan
expansions.

Not only the financial institutions and the policy maker will be guided by the report other stakeholders and the
shareholders will also be able to grab the information’s regarding deposits of commercial banks. Stakeholders like
customers will get to know where their money has been mobilized. Even with the help of the report customers will be
able to know the status of the financial institution so that they will able to mobilized their assets or saving effectively.

Government or the regulator (NRB) can also reference for making the strategy and policy with the help of this report.
The result of this research can serve as the basis of reference for future research conducted for the same field of
study.
1.5. Report Structure of the Study

The final paper of the study is organized into five chapters. Review of Literature and Theoretical Survey will be
discussed in chapter two. This section of the report gives a picture of various previously done studies on investment
policy of commercial banks by different writers of different countries. It even explains the research gaps i.e. what is
already known and what is still to be known. It includes the detail analysis of dependent and independent variables.
Research Methods will be discussed in chapter three. This chapter includes various research design and research
plans carried out in the research process. The components of this chapter are population and sample size, sources of
data (primary or secondary), methods of data collection, and instruments of data, reliability and validity of data, their
analysis and the expected outcomes. Result and Findings will be discussed in chapter four. This chapter explains the
actual research results. Available data are analyzed using various statistical and analytical tools including graphs,
tables, charts etc. Lastly, Summary, Conclusion and Recommendation will be discussed in chapter five.

Chapter I: Introduction
This is the very first chapter of research study which consists of Background of study, Brief overview of concerned
bank, Statement of problems, Objectives of study, Rationale and Report Structure of Study. The brief explanation of
all of these chapters have been already done above.

Chapter II: Related Literature Review

This chapter includes study of materials like: books, articles, journals, annual reports of concerned bank, etc. The
study of annual report and profit and loss statement have also been considered for this research work. The titles
included under this chapter are: Conceptual Review, Review of Previous Works and Research Gap.

Chapter III: Research Methods

As research is a systematic study, there are methods and procedures to conduct it. This chapter includes: Types of
research techniques used, Collection and Analysis of Data, Determination of Population and Sample size,
Instrumentation of Data and Limitations of Study.

This study has been conducted as per a design. The datas are mostly collected from secondary source. The statistics
are presented in figures, charts and diagrams. The statistics show results of investigation.

Chapter IV: Results and Findings

A research’s main objective is to find results. The results found after completing research are pointed out and
explained clearly in this chapter. So, this chapter includes: Presentation of data in tables and figures and their
analysis, and Major Findings.

Chapter V: Discussion and Conclusion

This is last chapter of research work where conclusion and recommendations are given to the subject of study. The
conclusion of this research topic is the product of results and findings of the study of investment policy. The
recommendations are suggestions based on the problems in investment policy and solutions are suggested for
further improvement.
In this study, recommendations are related to improving investment policy of Nepal SBI on financial assets. It shows
what more can be done for investment. These recommendations help in taking effective steps after measuring gap in
actual and expected outcomes from investment.