CHAPTER-1

INTRODUCTION

1.1 General Background of the study

Nepal is the birth place of Lord Buddha, the country famous of
highest mountain in the world, Everest. The feature of least developed and
most of the part is land located and agriculture based economy nevertheless
the present trend of gauging national economic prosperity is not in the real
scene the agriculture output alone. The country low industrial base and most
preferred tourist destination in South Asia is an underdeveloped. Along with
other things, the declining rate of agriculture productivity has forwarded
new issues for the economic development.
It is a small country with unique physical setting surrounded by India
in South, East & West and by China in North. It is land located country with
800 km, lengths and open border with India. The country is one of the least
developed countries of the world. Approximate 38% of all Nepalese live in
absolute poverty. World Development Report shows that, the per capita
income is $210 which is very low as per the international standard. The
economic development of the country, which is reflected by the annual GDP
growth rate, is not very significant. Nepal's average GDP growth rate in
recent year is around 3 to 5 percent the population growth rate is 2.3% and
he population distribution is 160 people per square km have affected its
economy to a large extent .World Development Report 2007 shows that the
economic growth rate on per capita GNP is 5.3% .The report shows that the
public expenditure on education &health are 2.8% & 1.2% GNP
respectively. Currently 59% of all adult are literature.
The term development does not merely indicate a particular sector of
the economic pattern; it is associated with the materialistic view of growth.
In a broad context, it denoted sustainable and result oriented
development .And the base of sustainable and result oriented development is
optimum utilization of existing resources. It requires collection of funds and
appropriate usage of fund and other resources as well .The concept had lead
to the view of industrial and commercial existence of institution.
In today's modern era, different business organizations are struggling
for the existence and to earn profit. In this context, finance has becomes key
to their success. Today the business is depending not only on market and
production as it was in late 1920-1950's development of financial sector is
another strategic variable to uplift the economy. Financial institution
transfers the resources from surplus units to deficits units. In this way
financial institutions are catalyst in the process of economic growth of a
country. A key factor in the development of an economy is the mobilization
of domestic resources. Financial institution help the process of

1
mobilization's financial sources are required in each and every steps of the
organization's life. So management of funds, administration and optimum
utilization of the funds is a must in smooth running of the institution.
The importance of financial institutions is the economy has late
grown to an enormous extent. The government is required to regulate their
activities, so that the financial policies are implemented as per the
requirements of the country. Policies such as lending to priority sectors.
Education sectors & industrial sectors are certain examples which the
government in developing economies tries to implement with the help of
financial institutions. Furthermore the selective credit controls imposed in
most developing economies. And the proposed regulation of Bank credit
distribution in some industrial countries is examples of the importance
attached to the intermediary function of commercial banks and financial
institution.
Nepalese economy was characterized by the prevalence of dual
currency system because of the border and excess concentration of trade
with India. Indian currency was more common in use then the Nepalese
currency. In that situation, need for the central bank for the development of
banking and finance, promoting trade and industry managing circulation of
national currency. Managing exchange rate stability was realized .In this
back ground, Nepal Rastra Bank was established on April 26, 1956. While
establish of Nepal Rastra Bank (NRB) a number of financial institution were
established. Among these, establishment of Nepal Industrial development
corporation in 1959, Rastriya Banijya Bank in 1966, Agricultural
development Bank in 1968, and Securities Exchange Center in 1977 were
the one of the development of financial market. The governments introduce
the financial liberalization policy in mid-eighties. After that liberalization
many financial institution are established in this time 20 commercial Banks,
38 development Banks 12 rural development Banks,74 finance
companies,17 co-operative institution and 47 non-government organization
are licensed by NRB in July 2007.Bank of Kathmandu Limited. established
in 1995 Kamaladi Kathmandu (Kamal Pokhari).It was established with an
authorized capital of Rs100 million and issued capital is Rs 50 million and
paid up capital is Rs 463580900. It is a well known commercial Bank of
Nepal with maximum share holding by the Nepalese private sectors. 58 %
of share is subscription of public sector and 42 % share held by owners. In
present situation the bank has 4 branches in Katmandu Valley. Besides it
has 22 branches outsides the Kathmandu valley. The Bank has a very
aggressive plan of establishing more branches in different parts of the
country in near future. The banking services and products offered by the
bank includes fixed deposit, saving and current, credit by term loans as well
as working capital, letter of credit, bank guarantee, retail finance
remittances, swift transfer facility, tale banking, automatic Teller machine
cards.
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1.2 Statement of the Problem
A bank financial health is measure on the basis of ratio analysis.
Almost all the private sectors bank is earning profit rather than government
bank. It appears that bank do not have proper system in managing the
market risks. The people have been raising question over the correction or
credit classification and provision of sum banks. Should be doubt come
true? It is very costly to the all customers & national economy. It would be
pursuits advise Nepal Rastra Bank to strictly implement its directives so that
banks avert the fate of public sector banks.
The fundamental problem of this study is to investigate the financial health
of BOK in the framework of ratio analysis. So the study attempts to solve
the following research questions.
I. What is the trend of liquidity position made by the bank?
II. What is the trend of earning performance made by the bank?
III. What is the trend of earning?
IV. Is the financial position of the bank is good?
V. Is there any shortcoming or potentiality of improvements?
VI. What is the earning power and overall profitability of the bank?
VII. How far the bank managing their expenses with respect to income.
VIII. How the bank is managing the capital.
1.3 Objectives of the study
The basic objectives of the study are to analyze the financial
performance of Bank of Kathmandu Ltd., in terms of overall ratio analysis.
The specific objectives of the study are as follows.
I To evaluate the financial performance of the bank in terms of liquidity
profitability and asset management.
II To determine risk and return pattern of the bank.
III To identify the trend of earning of the bank.
IV To analyze cash flow stream of the bank.
V To asses the capital adequacy.
VI To analyze non- performing loan.
1.4 Significance of the study
Research itself has its own importance because it aims to gain
knowledge and to add the new literature to the existing field. This study is
expected to be helpful to shareholders, management policy maker and other
related outsider.
Significance to shareholders
The study will be helpful to shareholders to get important information
about the financial states and performance of each bank. And the
comparison will help them to identify productivity of their funds in each
their bank.
Significant to management

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This study aims to give new information to a management. Managements
review their individual sector wise performance and to make a right decision
to related field.
Significance to policy maker
Generally in Nepal government and Nepal Rastra Bank top level
management is the policy maker.
It helpful suggests to the policy maker to make necessary policies to attract
private sector investment in the productive sector and reforms in policies
relating to performance. Therefore the study will also be helpful to them
while formulating policies regarding NEPSE & banking sector. It will help
them to find out the problems and prospects in near future.
Significance to outsider
Among outsiders, customers, stake holder's investor, traders can
identify to which sector they should go the study will be helpful for them to
find out the relative worth of different sector. The significance of this study
lies mainly in filling a research gap on the study of financial performance
analysis of bank of Kathmandu L.td.
Significance to researcher
The study is important for the researcher to know about this field.
This analysis helps to researcher which was known about this subject mater.
1.5 Limitation of the study
Every research mutually has some limitation so this study is not
exceptional case this study is carried out as an academic requirement for
degree of Master of Business Study (MBS). So this study may not be able to
reveal the reliability and validity in every field. Basically the major
limitations to the study are as under.
i) The study is only linked to financial performance analysis of Bank of
Kathmandu L.td. Therefore all the activities are intended to analyze the
financial performance.
ii) Last five year data are taken to consideration for the study purpose,
which are collected from the secondary sources.
iii) Data published by different authorities' different figure published by
NRB and banks annual report.
iv) Time and finance constraints are also the major limitation of the study.
The report has to submit in a limited time period.
v) Major portion of analysis and interpretation will be done on the basis of
available secondary data and information.
vi) Analysis is based on the tools developed.
vii) The study is to fulfill the requirements of MBS. So the study cannot
cover all the dimensions of the subject matter.
1. 6 Organization of the study
This study is organized into five chapters which are as follows.
Chapter 1 Introduction

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Introduction chapter includes background of the study, focus of the study
statement of the problem, objectives of the study significance of the study,
limitation of the study. Hypothesis is also setup in this chapter.
Chapter 2 Review of Literature
It includes review of literature. Conceptual review and review of
related studies, review from books, Journals.
Chapter 3 Research Methodology
It includes the research design, data collection procedure, tools for
analysis and method of analysis and presentation.
Chapter 4 data presentation and analysis
It is the main body of the research. It includes data presentation,
interpretation and analysis and financial tools to measure financial
performance.
Chapter 5 Summary, Conclusion & Recommendations.

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 CHAPTER 2
REVIEW OF LITERATURE
2.1 Conceptual framework
Review of literature is an essential part of all studies. A research work
is considered incomplete if it does not contain review of related materials in
it. Almost all types of research work involve the use of reference materials.
Research is a continuous process, it never ends. The process and the finding
may change but research will be continuous work. So far analyzing the data
and to find something new. A researcher must review and know if there are
any studies ahead or not. The purpose of reviewing the literature is to
develop some expertise in one area, to see what new contributions he can
make and to receive some ideas for developing a research design. Thus, the
previous studies cannot be ignored because they provide the foundation to
the present study. In other words, there has to be continuity in research. This
continuity in research is ensured by linking the present study with the past
research studies. This chapter is related with the review of past research
works, conceptual framework. The researcher has reviewed books, articles
and annual reports of sampled study.
In this chapter relevant and recent literature which, are related to the
topic financial performance of commercial bank. So this chapter highlights
upon the literatures that are available in the area of financial performance of
commercial banking sectors. Topic from basis academic course books and
different studies published in magazines, thesis of seniors and Journals
related to the study are review. This chapter is divided into two parts:
conceptual framework and review of related studies.
Upadhya and Tiware (1998) stress that the commercial bank is
established with a view to provide short term to necessary for trade and
commerce of the country. Along with, other ordinary banking business such
as collecting the surplus in the form of deposits, acting as an agent of the
client. In the same way Abrol & Gupta (2002) explain that principally
commercial banks accepts deposit and provide loans too primarily to
business firm. On the other hand, the broad concept of commercial bank
holds that the commercial bank is a banking institution other than central
bank. The commercial bank is the only institution other than central bank
permitted to accept demand and time deposits.
2.1.1 Origin of Bank
In the world gold, cash & ornaments other assets are keep on security
system is established in 2000 B.C. In that time Babylon & Bharat Barsa in
merchant bankers are accept deposit, Providing loan & Issue of Hundi. In
these banking activities are generated.
Two aspects are ahead in origin of Banks.

6
Italian word 'bancs'- In ancient time merchant & goldsmith are done
marketing in the Italy bazaar. In that market they are sitting on a bench and
to provide loan and accept deposit of a business person. In Italian Language
they are said to banks. In this way Bench changed into bancs and being to
Bank.
In 1171 Italy suffered economic crisis because of battle in the
Kingdom of Vanish. In that time government funds is empty. But that lack
of funds government received a loan from public by 5% interest charged.
That combined fund known as 'monte'. Germans people are said that fund
name is bank. After that, Italian are also said to ban co and in England says
bank.
2.1.2 Historical Development of commercial Bank
The evolution of commercial banking system has started a long time
before, during in ancient time. There was reference to the activities of
money changers in the temple of Jerusalem in the New Testament. In
ancient Greece the famous temple of Delphi and Olympia served as great
depositors of peoples surplus fund and these were the centers of money
lending transaction Indeed the traces of 'rudimentary banking" were found
in the Chaldean, Egyptian and Phoenician history. The development of
banking in ancient Rome roughly followed the Greek pattern. Banking
suffered avoid after the fall of the Roman Empire after the death of Emperor
Justinian in 565 A.D. And it was not unit the revival of trade and commerce
in the middle ages that the lesions of finance were ages that the lesions of
finance were learnt a new from the begging money leading in the middle
ages was however largely confined to the Jews since the Christian were
forbidden by the canon law to indulge in the sinful act of lending money to
others on interest. However, as the hold of the church loosened with the
development of trade and commerce about the thirteen century. Christians
also took of the lucrative business of money lending, thereby entering into
keen competition with the Jews, who had hitherto monopolized the
business.
The origin of the Banking system is traceable to the ancient
Assyrians, Babylonians and Arthurian, but the forerunners of modern banks
are considered to the Bank of Venice (1171A.D). The Banks of Genoa
(1320 A.D), Bank of Barcelona (1401A.D), and the Bank of Amsterdam
(1609A.D). The Bank of Venice and Bank of Genoa continued to operate
until the end of eighteenth century. When the expansion of commercial
activities in Northern Europe there spring up a number of private Banking
house in Europe and slowly it spread throughout the world. Almost all
countries the logical & historical order of the development of financial
structure has gone through different stages. In Nepal the first stage starts
from rudimentary economy in which the commodity money such as gold
and silver coins generally accepted as a means of payment. Involvement of
landlords, rich merchants, shopkeepers, and other individual money lender
7
have acted as finance to institutional credit in presence of unorganized
money lender. Though establishment of banking industry was very recent,
some crude bank operations were in practice even in the ancient time. The
new era known as Nepali sambat was introduced by shankadhar, a sudra
merchant of kantipur in 879 to 880 A.D, after having paid all the
outstanding debts in the country. This shows the Basic of money lending
parties in ancient Nepal. At the end of eight century, Gunakam dev
borrowed money to rebuild the Kathmandu Valley. In 11 th centaury during
regime there was an evidence of professional money lender and bankers.
Further believed money lending business, particularly for financing foreign
with Tibet become popular during regime of malla's.
At the end of 14th century we further came across the term " Tanka
Dhari", meaning money dealer, which is one of the sixty four caste
classified basis of occupation. In historical order of development of the
market is seen only in the stage. The establishment of the "Tejarath Adda"
during the year 1877A.D was fully subscribed by the government of
Kathmandu valley, which played a vital role in banking system. The tejarath
adda distributed credit facilities to the public especially on the collateral of
gold and silver. Hence the establishment of tejarath adda could be regarded
as pioneer foundation of banking in Nepal.
The history of the modern banking began only after the establishment
of Nepal bank limited in 1973A.D. as a semi-government organization,
without existence of a central bank. It was established under special banking
act 1936 having elementary functions of a commercial bank. It laid the
foundation of modern banking system in Nepal. Because of the non-
existence of a central bank in the country, the commercial bank had to act its
own central bank, and keep enough sources in hand for meeting
emergencies. At that time, Nepalese economy was characterized by the
prevalence of dual currency system. There were great fluctuations in the
open market rate of exchange of the Nepalese rupees against the India
currency which provided a great hindrance to the economic stability as well
as development of the country. Thus, there was an immediate need of
central bank. As a result, Nepal Rastra Bank came into existence as the
central bank on April 26th 1956, under the Nepal Rastra Bank act 1955 with
the objectives of supervising, protecting and directing the functions of
commercial banking activities. It had authorized capital of R.s. 10 million
fully subscribed by the government. It was empowered by act to have direct
control over financial institutions with in the country. It started issuing
currency in 1959A.D. Another commercial bank fully owned by the
government, named as the "Rastriya Banijaya Bank" got established in
1966A.D (NRB 2001). With a view of providing financial assistance for
agriculture, Agriculture Development Bank of Nepal (ADB/N) was
established in the government sector in 1967A.D.

8
 In 1980A.D.government introduced "financial sector Reforms" which
facilitated the establishment of different private sector financial institution
in Nepal. Besides Nepal Bank Limited and Rastriya Banijya Bank, other
commercial banks did not come in to existence until 1984A.D. the
commercial banking act 1974 was amend in 1984A.D to increase the
competition between commercial banks. As per the provision made in this
act, private sector (including foreign investment) was given freedom in
opening commercial bank. The entry barriers placed on commercial bank
were eliminated. However, foreign participation in the financial sector is
only allowed with the joint collaboration with domestic partners. The
establishment of joint banks gave a new horizon to the financial sector of
the country.
After the restoration of democracy in 1990 A.D., NRB adopted a
more liberal policy in establishing the commercial banks. As a result a
number of commercial banks increased dramatically viz. Himalayan Bank
Ltd, Nepal SBI Bank Ltd. Everest Bank Ltd, and Bank of Kathmandu Ltd
etc. At present time 20 commercial banks are operating all over the country.
2.2 Research Review
2.2.1 Review of Articles, Journals and Newspapers:
This is an important part of review literature. While preceding the
present study, some articles, newspapers etc. were also reviewed written by
different personnel's, academicians. This part shows the indication of
performance of related financial institutions to the public and concerned
persons. In other words, it tells about how different persons have
experienced those financial institutions in their field. Therefore, it helps to
know about those institutions had add knowledge regarding the present
study. Considering the fact, the searcher had reviewed some articles, papers
which are as follows:-
An article by D.B. Dahal entitled, "Agriculture Development Bank
Today and tomorrow" concluded that ADB/N is only such type of financial
institution reach is working in remote places of the country. But, other
financial institutions have not been able to provide their services in remote
areas and enlarge their services. The bank has been continuously using its
efforts for providing service in rural sectors. It is familiar as bank which is
doing lot efforts by modernizing agriculture sector. It has extended its
services in different fields such as viniculture, Horticulture, sugarcane,
special crops though it has been assisting in crop cultivation. It has been
also playing an important role in production, processing, storage, marketing,
management and so on. The bank has been helping to establish rural agro-
based and cottage industry by providing loan facility, technical suggestions
etc. As a result, the bank contributes to provide employment to many people
indirectly in different sectors. It has also been providing a lot of supports to
modernize agro-tools i.e. tractor, irrigation machine etc. It has also been
engaged to give a lot of supports to the people of terai, hilly region families
9
by providing capital and technical assistance to establish bio-gas plant. It
had also started group-based work from 2032 B.S. to increase the capability
of technical and management skill for poverty alleviation. So, it is the first
bank which has started such a group concept to enhance managerial and
technical capacity by grouping deprived section of the society.
Similarly, in their article entitled, "Review of Macro Economic
Environment for Agriculture Growth" Dr. Shiva Sharma and Mr. R. K.
Sharma concluded that the high and sustainable overall economic growth of
a country is the key factor for creating a congenial environment for
production, employment generation and poverty alleviation. It should be
given emphasis to the agriculture for a country like Nepal where almost 80
percent people are totally lived upon agriculture. Considering the fact, the
Agriculture Dev. Bank was established in 1968 to cater to the credit demand
of farmers. The Nepal Rastra Bank has also been assisting the ADB/N for
the development of agriculture by providing refinance facility. The ADB/N
has also engaged itself to mobilize funds and extend resources to the rural
sector. With a view to facilitate this process, some ADB/N branches are
permitted to conduct banking services in urban and semi-urban centers.
And, a large amount of funds thus collected from these urban and semi-
urban centers is transferred to the rural areas. In addition to it, ADB/N is
also operation Small farmers development project (SFDP) since 1975 to
improve the living standard of small farmers living in rural areas through
different programs, creating, and awareness regarding the improved
techniques and utilizing the resources in the society. The government used
to provide subsidized inputs to the farmers in the past relating to chemical
fertilizer, irrigation, bio-gas, and solar energy, and small hydro-power, food
transport to hills and interest subsidy to micro-farm loan. The rationale of
providing subsidies was to encourage farmers, to use modern agriculture
inputs and thereby increase agriculture production and productivity. But,
due to the liberalization policy, subsidies have been utilized to enhance
market competitiveness. As a result, farmers were notable to get benefit
from subsidy provided by the government. Rural poor farmers are obtaining
from modernizing their farm as they lack liquidity and incentives.
Production has not been accelerated due to the lack of adoption of
appropriate technology. It has affected the Nepalese agriculture vis-à-vis
Indian agriculture. Indian still continues the practice of fixing minimum
support and procurement prices whereas Nepal has withdrawn from its.
[2003] In the same way, an article written by D.P. Shah entitled, "for the
Situation of the country, it has become very difficult to conduct Continuity
of Reform Program" has explained that due to the conflict banking
activities. The staffs working in their related field have been threatened and
sometimes they area being looted by the Maoist. Due to the security
problem, not only SFDP but also big branches area being shifted in the
center. Many new offices haven't opened due to Nepal banda and other
10
incident happened in the country, many sectors are badly affected and
ADB/N can not remain isolated by the situation. To increase the
disbursement and to boost up the production according to the climate,
market feasibility, entrepreneurship etc. is essential. And, it should be given
emphasis to the special type of crops. Though the ADB/N has been
performing through SFDP, staffs are reluctant to stay in the village and
Maoists are trying to remove SFDP from village. Because of these reasons,
donor agencies have been discouraged. [2000]
In his article entitled, "Agriculture Development Bank: Yesterday,
Today and Tomorrow" Arjun Bist has revealed that the ADB has
contributed a lot to maintain the economic status of people by providing
capital and loan to them. For these purpose, it has devoted four decades for
the overall agriculture development of the country. Furthermore, it has been
making preparations to establish itself as a financial institution to make
efficient, competent, and broad and to provide professional service focusing
on banking services to the rural areas all over the country as ADB/N. Along
with this, Asian Development Bank (ADB) has also planned to establish the
bank as financially trustable and efficient in three years. So, the ADB is
providing technical assistance to the bank. The ADB is also processing to
reconstruct the financial and functional structure considering the welfare of
rural people for poverty elimination. The ADB has formed a work-team of
experts to act in six technical areas such plan formulation, loan analysis, risk
management, bank training management, management information system,
test of record and internal record.
The bank has been regarded as the first development bank in the
country providing three separate functions such as- development banking,
commercial banking and small farmer development program. The main
service areas of the bank are as follows.
The bank has started the commercial banking transaction from2041B.S. to
provide long-term loan in agriculture sector initiating the collection of
deposit. Now, there are 47 banking offices all over the country operating
their transaction. [2062]
In his article, "Role of ADB/N in Agriculture Development of Tenth
Year Plan" written by Ghuran Thakur has stated that the main aim of tenth
plan is to reduce poverty from 42 percent to 30percent, increase the literacy
up to 70 percent. Along with this, the plan has expected the annual growth
rate to be 6.2 percent, to provide drinking water facility to 85percent, make
average age to 62 year and provide electricity facility to 55percent of the
population. Furthermore, the plan has prioritized the agriculture sector for
agriculture development, sustainability management of natural resources
and bio-diversity, poverty elimination and for relating research work with
agriculture development. For this purpose, it has been declared to celebrate
the tenth and eleventh plan as "Agriculture Decade".

11
 The ADB/N has been providing institutional loans through individual
institutions to increase the production and productivity of agriculture sector
from its establishment for the purpose of improving the living standard of
rural farmers and entrepreneurs. It has been assisting as main financial
agency in the fields-professionalization of agriculture livestock, fish culture,
tea, and coffee, cardamom business, construction of cold storage houses,
agriculture mechanization and irrigation. Along with these, the bank has
been able to invest more than it was estimated by the agriculture planning
for agriculture development i.e. 75 percent of institutional loan. It has
helped to increase agriculture production and create the additional
employment opportunities for poverty reduction by giving emphasis on
chemical fertilizer, high value commodities, irrigation, production, cottage
and small industry and agriculture mechanization. [2062]
In his article, "Financial Statement Analysis", N.P. Poudel has
explained that balance sheet, profit and loss account and the accompanying
notes are the most useful aspect of the bank. The bank's balance sheet is
composed of financial claims as liabilities in the form of deposits and as
assets in the form of loans. Fixed asset accounts from a small portion of the
total assets. Financial innovations which are generally contingent in nature
are considered as off-balance sheet items. Interest received on
loan/advances and investment and paid on deposit liabilities are the major
components of profit and loss account. The other sources of income are fee,
commission, discount and service charges. According to him, the principle
objectives of analyzing financial statements are to identify:-
Financial adaptability (Liquidity)
Financial performance (Profitability) and,
Financial position of bank (Solvency).
However, the purpose of analysis of the financial statements depends
on the needs of the user. The users of the financial statement of a bank need
relevant, reliable and comparable information which assists then in
evaluating the financial position and performance of the bank and it is also
useful them in making economic decisions. Most of the user of financial
statement are interested in assessing the bank's overall performance i.e.
profitability which is affected by the following factors-
- Operating Efficiency and internal management system.
- Management decisions taken by the top management regarding interest
rate, exchange rate, lending policies etc.
Environmental changes [technology, Govt., Competition, economic
environment] furthermore, he has pointed the other factors to be considered
in analyzing the financial statement of bank i.e, asses the capital adequacy
ratio and liquidity position In the line of the norms set by the bank for
international settlement (BIS), capital adequacy of a bank is assessed on the
basis of risk-weighted assets. It indicates a bank's financial strength and
solvency. Banks facing with capital adequacy problem may increase capital
12
or reduce assets or reallocate the existing assets structure in order to
maintain the desired level of capital base. [2053]
"Commercial Banks Comparative Performance Evaluation" an article
by Dr. M.K. Shrestha stressed on a proper risk management. He believes in
the appropriate classification of loans under performing and non-performing
category. Again, he writes that adequate provisioning is the surest way to
get relief from sinking loan after careful consideration of portfolio risk. A
clear-out criteria is necessary to treat interest suspense account and it is
advisable that all interested unpaid for more than six months need to be the
bank, he has suggested following points-
Any Customer having overdue loan of two years or more in his
account should not be given other loan facilities.
Strong provisioning or reservations are required in restructuring
portfolio relating to overdue loan.
All credits including overdrafts should be given a maturity date and
should be subjected to revision at that date and consequently categorize as
good standard or doubtful loans
Financial credit-worthiness of the borrower must be evaluated
properly before granting the loans.
Furthermore, he clarifies that joint venture banks [J.V.B.] in Nepal
are new and comparatively more efficient in operation and having superior
performance among local banks. Due to there sophisticate technology,
modern banking and skill, JVB are performing better in comparison to local
banks. Their better Performance is also due to the burden local banks which
are facing the burden of government's branching policy in rural areas and
financing public enterprises. Local banks are efficient and expertise in rural
sector. But, having number of deficiencies, they have to face growing
constraints of socioeconomic political system on one hand spectrum that of
issue and challenges JVBs commanding significant banking in other hand
spectrum. Similarly, another article, ''Monetary policy and Deposit
Mobilization in Nepal'' written by Mr. B.B. Bajracharya concluded that the
mobilization of domestic saving is one of the prime objectives of the
monetary policy in Nepal and for this purpose, commercial banks are the
vital active financial intermediary for generating resources in the form of
deposit of the private sector and providing credit to the investors in different
sectors of the economy. [2047]
In the same way, an article on ''problems Encountered by the
Nepalese Financial System'' written by B.R. Dhungana has highlighted the
major weakness of the banking sector, mainly of RBB and NBL, and has
suggested the reform which these banks need to improve their health. He
states that our financial sector is dominated by banking sector and overall
banking sector is still dominated by two-fold government-owned banks The
two banks constitute the largest components of total deposits and loading of
banking system. But, these banks are suffering from various problems
13
which ultimately result towards the unsound financial health of the banking
industry of Nepal. He has pointed some major weaknesses of these banks
which are as follows:-
Concentration of loan to limited borrowers.
Over valuation of goods pledged and land building mortgaged.
Poor supervision and follow-up after credit disburse men.
Absence of systematic recording of credit information of borrowers.
Large number of branches with limited transaction and heavy overheads.
Negligence in recovery of overdue loans.
Insufficient recording and book-keeping.
Insufficient staffs and absence of manpower development and planning.
Lack of knowledge in examining industrial project viability.
Less familiarity with the new instrument and innovations.
Little or no application of modern banking equipments in bank branches.
[2053]
2.2.2 Review of Books
It is another part of review of literature. It is important to review
books written by various scholars and writers in their books related to the
topic. Some of the books reviewed by the researcher are as follows:-
In the book," Modern Banking" R.S. Sayers stresses in the economic
importance of commercial banks and highlights in the function of 'Creation
of money' by bank. According to him, the special interest of economists in
the activities of bank is due to the monetary nature of deposit liabilities of
the bank. There lies in the community's interest in banks because by their
operations, they can affect the monetary situation, in sense of the
availability of the purchasing power. This can most readily be understood
by reference to the ordinary lending business of the bank. When a bank
makes an advance, by allowing a customer to overdraw his account, the
bank in effect, exchanges its own promise to pay immediately against the
customer's promise to pay- off the advance later on. The economic
importance of this exchange is that the bank's promise to pay immediately is
absolutely effective purchasing power, which plays an instrumental role in
increasing the total demand of the goods and services.
In the same way "Elements of Agricultural Finance" written by G.
Kotharia and K. Chandrasekhar an have studied the problems of agricultural
finance and have come to the conclusion that in a country like Nepal where
very few farmers are hardly educated in using the improved from
technology, it is possible that credit may not utilized entirely for the purpose
for which it has been granted.
They have also suggested that farm visit is an important part of
becoming acquainted with the farmers. It helps the banker to know more
fully the difficulty of farmers and will also enable him to analyze the
financial position with greater understanding. These visits also help to

14
develop a friendly relationship and create a sense of confidence in the
farmer. [1975]
The book, named, "Success in Elements of Banking" written by
David Cox stresses in three major functions to be performed by the
commercial banks which are shown as below.
To accept and safeguard deposits of money from customers.
To permit money to be withdraw or transferred from one account to another.
To lend the surplus of deposited money to suitable customers who wish to
borrow.
He believes that the word money is common to all the basic function
of the bank. Money according to him can be defined as anything which is
generally accepted in the settlement of the department and passes freely
from hand to hand.
"Agriculture Development in Nepal" a book written by Y.P. Pant and
S.C. Jain has explained that the major problem of agriculture sector is a
heavy indebtedness due to the domination of village money lenders who
charger very high rate of interest while providing loans, the institutional
financing practice in rural areas of Nepal has been quite inadequate and the
lending procedure is also suffering from many weaknesses in spite of the
fact that agriculture is the main occupation in economic life of Nepal, most
of the agricultural producers are still poor and illiterate.[1979]
In addition to above books, another book written by M.P. Aryal named
'Nepalese Banking System" highlights the following characteristics of the
commercial banks operating in Nepal.
Commercial banks, having limited liability are established under the
company act 2021 with the approval of the NRB.
Commercial banks are established with the objective of profit maximization
and are managed by its shareholders.
Commercial banks, except performing primary function of accepting
deposits and lending, also deal in foreign exchange and trade finance
activities.
Commercial banks in Nepal are established in government semi-
government private and Joint-venture sectors.
NRB recommends, directs and controls the establishment, operation and
dissolutions of all the commercial banks in Nepal.
In his book, "Agricultural Finance in Nepal", K.K. Jha has stated that
consumption of loan, high cost of credit, indebtedness, low saving, low
productivity, excessive dependence on money lenders and the inadequate
provision of institutional credit are the main problems of small farmers.
Furthermore, he writes that there is no doubt to say that the farmers borrow
loan for agriculture purpose but it has been found that a large part of the
borrowed loan is used for family expenditure and only the remaining very
little part of it is used of agricultural purpose to improve the productivity
resources.[1978]
15
 The book, 'Evaluation of Banking Supervision in Nepal Rastra Bank"
Published by M.K. shrestha has studied certain useful journals on domestic
market, banking financial statement analysis and monetary credit situation
of Nepal. There has been substantial growth in the number of JVB in Nepal
since 1990. The basic reason behind this is the government's deliberate
policies of allowing foreign JVB to operate in Nepal. Government's
liberalization policy also encourages the traditionally run domestic
commercial banks to enhance their efficiency and competitiveness through
modernization, mechanization via computerization and prompt computer
services by setting them to the exposure of the JVB.[1998]
Similarly, the book, "Financial management: the Theory and
Practice" written by Dr. M.K Shrestha had concluded that the bank has
sufficient liquidity to meet the claim of depositors (excluding fixed
deposits). The bank has a highly geared capital structure and is more
depending on borrower funds. The bank has been able to meet the interest
on deposits out of its profits. The rate of return on ownership capital is
favorable. He further suggests that operational efficiency should be
enhanced to achieve its higher profit goal for better performance. [1980]
The author in his book "The Economics of Agriculture", Cohen has
identified the need of more capital to the farmers to inner expenditure in
producing goods which should be made available to the farmers like all
other entrepreneurs. [1968]
"Agriculture development in Nepal" written by P.R Mathema has
given much emphasis on need of agricultural credit. He has expressed that
the traditional credits system should be replaced by institutional credits
system for agricultural improvement in the initial stage of development.
[1969]
In his book, "Contemporary Reading in Agriculture Economics",
Prof. J.D Black has stated that there should be an adequate provision of
credits to farmers which is the there should be an adequate provision of
credits to farmers which is the first and foremost requirement to increase the
productivity of agriculture sectors. [1995]
2.2.3 Review of Thesis related to the Study
` Thesis reviews have also been taken as an internal part for this study.
Before this, various researchers regarding the various aspects of commercial
banks, such as financial performance, Investment policy Interest rate
structure, resources mobilization and capital structure have conducted in the
thesis works. Some available previous thesis related to the topic of the study
as they contribute to add more information.
M.K. Shrestha in his thesis entitled" Performance Evaluation of
ADB/N as a source of Agriculture Credit in Nepal" states that the main
problem in agriculture finance but also with other non-monetary factors
such as input, lack of technical knowledge and landlessness. The major
findings of the study were as follows:-
16
i) ADB/N had been devised as an instrument for easy accessibility of credit
for poor farmers. But, in its operation mainly large and medium farmers
have been benefited by its credit. Small and very small farmer have still to
depend on traditional sources.
ii) Thus, majority numbers of farmers have preferred to approach
cooperatives, village moneylenders and friends and relatives for credit. They
have given least preference to ADB/N in comparison to these agencies.
iii) Outstaying ADB/N Credit is mounting because of weaker recovery
situation due to misuse of loan in non-productive use.
iv) Non-borrowers both have complained about high interest rates, stringent
security rules and difficulties in securing loan in time of need.
Another study was conducted by Kishor Hakuduwal entitled,
"Performance analysis of NIDC and ADB ". The main objective of the study
was to evaluate the financial performance of the NIDC and ADB/N.
Besides, the following were the additional objectives of the study:-
i) To analyze the trend of financial performance of NIDC and ADB/N.
ii) To examine, analyze and compare the financial performance of NIDC
and ADB/N.
iii) To identify the financial strength and weakness of NIDC and ADB/N.
iv) To recommend the appropriate suggestion for future improvements.
After analyzing the financial performance in NIDC and ADB/N, the
following conclusions had been written by him:-
a) Current Ratios of both development banks are not satisfactory and it is
less then conventional rule 2:1. ADB/N has more current ratio than NIDC.
ADB/N has more ability to meet its short term obligation than NIDC.
b) NIDC has not collected deposit from people but ADB/N has. The cash
and bank balance to total deposit of ADB/N is in fluctuating trend.
c) Return on investment ratio of NIDC is in negatively declining trend. It is
great challenge to NIDC for improving current trend. But ADB/N has
slightly satisfactory investment on profitable assets and it has been able to
invest its fund in profitable assets than NIDC.
Net profit to total asset ratio shows that ADB/N has been efficient in
utilization of its overall assets and to achieve better position to earn profit
from total asset whereas NIDC has suffered from inefficient utilization of
total assets.
NIDC has more than 3.83 times average debt capital financing than
shareholders equity in its capital structure. But the average debt capital
financing of ADB/N is more than 3.19 times than SHE.
The ratio of total assets of NIDC is higher than ADB/N. it shows that NIDC
had successfully using debt to more profitable assets than ADB/N.
The ADB/N has been to get positive return on SHE but NIDC has negative
trend. It indicates that ADB/N has been able to earn satisfactory from its
owner but NIDC has great challenges to improve it.

17
 The major source of revenue of NIDC and ADB/N is interest income.
The contribution of interest to total income for NIDC has exceeded 70
percent and ADB/N has exceeded 90 percent.
NIDC has dividend income for ABD/n are bank commission,
commitment charge, income from auction and misc. income, The
contribution of other income source of ADB/N is less than 5 percent to total
income.
j) The major head of expenditure is interest expenses. NIDC has made more
expenses on interest than ADB/N.
Other source of expenses of both development banks are staff, office
operation and other expenses, ADB/N has more staff expenses than that of
NIDC but NIDC has more office operation and other expenses than that of
ADB/N.
Regression analysis between cost and revenue of ABD/N shows that
every rupee earns Rs. 1.0654 as revenue. So revenue is greater than the cost
by Re. 0.654. But revenue of NIDC is less than cost by Re. 0.033, it
indicates revenue of ADB/N is strong and NIDC is weak.
The co-relation between cost and revenue of ADB/N is 0.998. It
indicates that the cost and revenue are positively correlated which means
when cost increases, revenue also increase and vice-verse. ABD/N has
"calculated t-value for the test of significant of correlation coefficient" is
more than "tabulated value" it indicates that the cost and revenue are
significantly correlated and means that movement of cost affects revenue
significantly.
The NIFC has negative correlation Coefficient between cost and
revenue that is 0.0697. It indicates that there is opposite relation between
cost and revenue. It means that when cost increase, revenue will be
decreased and vice-verse. The "calculated t-value for the test of significance
of correlation coefficient" of NIDC is less than "tabulated t-value". So, the
cost and revenue are not significantly correlated and means that movement
of cost does not affect revenue significantly.
On the basis of study, he had recommended following suggestions to
be considered for better financial performance of the organization:
Liquidity position of both NIDC and ADB/N is less than theoretical terms.
Lower current ratio represents that the liquidity position of both
development banks isn't good. The current ratios of both banks are not
satisfactory as it is below the standard level i.e. 2:1, so, both banks are
suggested to improve the current ratio.
The cash and bank balance to total deposit ratio of ADB/N is not
satisfactory. So, it is suggested that it should undertake the step to increase
their cash and cash balance to total deposit for ensuring the liquidity
position.
NIDC has negative return on investment. So, it is suggested to invest
in profitable assets to improve current situation.
18
 Return on SHE of NIDC is also negative. So, it is suggested to
improve current situation by efficient operation.
The major head of expenses of ADB/N and NIDC is interest expenses. So
they are suggested to invest the deposit and borrowings in profitable sectors
to pay interest.
The staff expenses of ADB/N are high. So it is suggested to reduce
staff expenses or to utilize available human resources properly to increase
revenue.
The revenue of NIDC is less than cost by 0.033 in this situation, it
can't make profit. Therefore, it is suggested to improve the current situation
by controlling cost.
NIDC has negative correlation coefficient between cost and revenue.
It indicates that when cost increases, revenue will be decreased. So, it is
suggested to reduce cost to get more revenue.
NIDC has been suffering loss from fiscal year 2054/055. So it is
suggested to improve current loss situation by controlling cost and effective
utilization of collection procedure of loan and interest on loan.
Both development banks have suffered government and political
intervention. Most of temporary are appointed on the basis of political
ideology. They do not work efficiently as the goals and objectives of the
bank. So, they do not work efficiently as the goals and objectives of the
bank. So, they are suggested to controlling such type of appointment of
staffs.
Monitoring, evaluating and controlling mechanism of the both banks
are not good. So, they are suggested to manage good leadership and
participative management for effective monitoring, evaluating and
controlling.
Both development banks are suggested to pay attention to reduce their
operating expenses to maximize their operating profit.
Both development banks are suggested to invest in profitable sectors as well
as agricultural and industrial with priority.
In the same way, Mr. D. K. Shrestha in his thesis entitled "Analysis of
financial performance of ADB\N” tried to examine the revenue and
expenditure position, deposit collection and mobilization of ADB\N. He
concluded that the major source of revenue is interest on loan and major
head of expenditure is interest on deposit. The bank has over staffing and it
increases in doubtful debt account problem. The loan procedure requires
that customers have to go through lengthy and complex process to get loan.
So, he recommended to the ADB\N to remove unnecessary legal formalities
for getting opportunities by managing over staffing and take steps to reduce
its interest receivable immediately.

19
 CHAPTER-3
RESEARCH METHODOLOGY

3.1 Introduction
Research Methodology is an important chapter of the study.
Generally, the word's "Research" is made from two word "re" and "search".
The word' refers to do something again and 'search' means to look for
something. Hence, research means to look for something again.
"Research means to research the problems again and again to find out
something more about the problems."78 (kothari 1996)
According to Karlinger, "Research methodology means how the
research objectives will be reached and how the problems encountered in
the research will be tackled."
"Research methodology refers the various steps that are adopted by a
researcher in studying the research problem along with the logic behind it.
Thus, the research methodology is a way to systematically analyze so that
we can solve the research problems."79 (Wolf Howarkk&premR.pant1999)
Research methodology refers the systematic and organized procedures and
process applied to investigate the problem in entire study. It includes
various sequential steps of gathering, recording, analyzing and interpreting
the data that should be considered by a researcher in studying the problems
for specified objective. Therefore, research is conducted not only to solve
the existing problem but also to add or contribute to the general body of
knowledge in a particular area of interest to the researcher.
The present study includes the methodology utilized for research
work to achieve the desired objectives. The prime objective of the study is
to analyze and evaluate the financial strength and weakness of bank of
Kathmandu Ltd. providing suggestive guidelines for improvement.
Methodologies in the research work are used to test the hypothesis, analysis
and interpretation of data acquired from the bank. Tables and figures are
used with a view for systematic data collection and data interpretation. The
statistical tools and financial tools have been used as well. Hence, it
represents basically the descriptive and analytical analysis of the relevant
information and data. This chapter includes research design, Justification for
the selection study unit, nature and sources of data. Methods of data
collection, data analysis tools and limitation of study are as follows
3.1.1 Research Design
Research design refers the overall framework or plan for conducting
the research work. It is a blueprint for the collection, measurement and
analysis of data.

20
 Research design is the plan, structure and strategy of investigation
conceived so as to obtain answers to research questions and to control
variance. In other words, research design is the conceptual framework
created by the researcher within which the researcher will make conclusion
and will obtain the answer to the research questions. It is a plan for the
collection of variables for research purpose. At the same time, research
design can be used as a structure, more specific than plan that explains how
the research objectives will be achieved and how the problems encountered
in the research will be tackled. In reality, research design is the strategy of
conducting research work in an organized approach.80 (Karlinger, F.N1986)
"A research design is the arrangement of conditions for collection and
analysis of data in a manner that aims to combine relevance to the research
purpose with economy in procedure."81(Selltiz Claire & others1962)
Research design is the most important aspect of any research work.
Basically, research design has two purposes. The first purpose is to answer
the research questions or test the research hypothesis. The second purpose
of a research design is to control variance. The research design followed in
this study is descriptive as well as analytical. It will describe the Financial
situation of Bank of kathmandu for the period of five years from 2060-
2064.The present study tries to explore the true financial performance of
sampled institution i.e. Bank of Kathmandu L.T.D.
Generally, research design refers the definite procedures and
techniques that provide way for doing research. It includes nature of data,
specification of the method of the proposed study and detailed plan for
carrying out the study for the analysis of problem.
3.1.2 Research Variables
Research variables of the study are as follows:-
I Capital employed.
II Capacity utilization of profit and loss.
III Total assets.
IV Size of current assets and current liabilities.
V Total debt.
VI Volume of deposit and loan disbursement of customers.
VII Operating expenses.
VIII Interest expenses.
IX Cash flow of short-term and long-term analysis.
X Working and economic environment of the bank.
3.2 Population and Sample
The word population refers to the entire group of people, events or
things that have been chosen for the purpose of study. It can be also said
universe that includes any well-defined class of people, events or objects.

21
 On the other hand, a sample is only a portion or subset of the universe
or population. In other hands, a sample includes some observations selected
from the population. It is a representative of the total population.
The present study is related to the financial performance of BOK Limited
operating in Nepal. At present, there are twenty commercial banks licensed
by Nepal Rastra Bank conducting transactions in the country.
a) Non-random sampling/Non-Profitability sampling
In this type of sampling design, all items or elements in the universe
do not have equal chance of being selected. This sampling technique is
applied when the number of elements in the population is either unknown or
can not be usually identified. In this sampling design, the subjects includes
in the sample are collected from the sampling frame without their
probability of occurrence. The limitation of this sampling technique is that
the decision is followed by personal convenience or judgments of the
researcher. Therefore, there is probability of bias in this technique.
b) Random Sampling/Probability Sampling
If each item or element in the universe has equal chance of being
selection, then, random sampling design is applied. In this sampling
technique, the probability of selecting an item is known. At the same time,
the subjects includes in the sample are selected from the sampling frame
with their known probability of occurrences.

Population and Sample size

Table 3.1
S.n. Name of Bank
Nepal Bank Limited
Rastriya Banijya Bank
NABIL Bank Limited
Nepal Investment Bank Limited
Standard Chartered Bank Nepal Limited
Himalayan Bank Limited
Nepal SBI Bank Limited
Nepal Bangladesh Bank Limited
Everest Bank Limited
Bank of Kathmandu Limited
Nepal credit and commerce Bank Limited
Limbuni Bank Limited
Nepal Industrial &commercial Bank
Limited
Machhapuchhre Bank Limited
Kumari Bank Limited
Laxmi Bank Limited
Siiddhartha Bank Limited
Agriculture Development Bank Limited
22
 Global Bank Limited
Citizen Bank Limited

The sample institution for the study is taken to BOK L.td. The
researcher had used convenience sampling method for the study.
3.3 Sources of Data
There are two types of data. They are:-
Primary Data
Secondary Data
The data which are collected by the researcher himself or herself in
the original form is known as primary data. But, if the data are collected in
the form of published or unpublished sources complied by other parties is
known as secondary data.
The data collected from primary sources may not be adequate or
needed material may not be available. In some cases, information
requirements cannot be satisfied from secondary sources. Therefore, it may
be time consuming and insufficient too. Considering this fact, data are
acquired from secondary sources. Primary data have not been previously
collected or assembled for any other known project and they are in
unorganized form. But, secondary data are acquired from unpublished
source such as reports, records or statistics and published source refers the
studies carried out by governmental and non-governmental agencies in
different titles.
In the course of the study, basically secondary data have been used
i.e. financial statement and annual reports and others official records of
Bank of Kathmandu Ltd. Besides these, some well-known magazines and
other available empirical studies have been reviewed in this study. In
addition to it, the study also incorporates the views, opinions and
clarification received from the officials of the bank wherever necessary.
3.4 Data processing Procedure
The data collected by the researcher may be in raw form. Therefore,
those data are converted / transformed into the form that gives some
meaning and can be understood to fulfill the research objectives. Hence,
data processing procedure indicates the process of changing the assembled
or acquired data so as to get information for further analysis. The
information obtained from secondary data will be presented in an
appropriate tabular form and will be analyzed.
3.4 Data Analysis Tools
The next step after converting the unprocessed data into meaningful
form is to analyze the data by using different statistical and financial tools.
In other words, method of analysis is applied as simple as possible. The
main purpose of the analysis is to obtain answers to research questions to
exhibit the true financial performance of the Bank of Kathmandu. For this
purpose, data obtained from financial account, the records and interviews,
23
balance sheet, profit and loss account and income statement of the bank
have been used. The methods of analysis employed in the present study
consist of following types of analytical methods.
3.5 Ratio Analysis
Ratio analysis is one of the widely-used techniques of financial
analysis. A ratio indicates the relationship between two interrelated
accounting figures of financial statements. It shows the numerical or
arithmetical relationship between the two figures. A ratio is a statistical
yardstick that provides a measure of the relationship between variable and
figures. Ratio analysis is the process of determining and interpreting
numerical relationship based on financial statements. It is one of the key
financial ratios where the financial ratios are used for assessing the financial
performance and position of the company. A ratio helps the analyst to make
quantitative judgment about the firm's position and performance. In other
words, ratio analysis is defined as the systematic use of ratio to interpret the
financial statements so that strength and weakness of firm can be
determined. The financial statements like balance sheet, profit and loss
account and income statement are used to calculate ratio analysis. In
addition to this, ratio analysis also reflects the operating and financial
characteristics of a firm from accounting data and financial statements.
Ratio analysis helps to evaluate or compare the performance of a firm
within itself, with another firm and within the industry by comparing ratios.
The present ratios of a firm cam compare its ratios with other firms at the
same point of time. Another way to evaluate the performance of a firm is to
compare ratios within the industry of which the firm is a member.
Different authors have classified financial ratios under various
categories. The classified major financial ratios are as following:-
I) Liquidity ratio
II) Asset management or efficiency ratio
III) Debt management or Leverage ratio
Profitability ratio
I) Liquidity Ratio
The word "liquidity" refers the ability of a firm to meet current
obligations. And, liquidity ratio measures the ability of a firm to meet its
short-time obligations and reflects the short-term financial strength/solvency
of a firm. In fact, liquidity is a pre-equity for the survival of a firm. The
consequence of inadequate liquidity will result in bad credit rating, loss of
creditor's confidence, or even in law suits resulting in the closure of
company. On the other hand, a very high degree of liquidity is also bad; idle
assets earn nothing. The firm may be unnecessarily tied up in current assets.
Therefore, it is important to measure liquidity position of a firm for long-
term survival and growth of firm. Some of the popular liquidity ratios are as
follows:
i) Current Ratio
24
 It is one of frequently used liquidity ratio. It indicates the extent to
which current assets are sufficient to pay current liabilities. It is calculated
by dividing the current assets by current liabilities. It shows the rupees of
current assets available for each rupee of current liabilities. By formula-
CR = CA
CL
Where, CR= Current ratio
CA= Current assets i.e. cash and bank balance, marketable securities,
inventory, prepaid expenses, bills receivable, debtors, outstanding incomes.
CL= Current liabilities i.e. Creditors, bills payable, bank credit, outstanding
expenses, accrued expenses, income tax liability.
The standard for current ratio is regarded as 2:1. Higher current ratio
indicates that the firm is in liquid and has ability to pay its current obligation
in time as and when they become due as well as the greater safety of funds
of short-term creditors. On other hand, lower current ratio represents that the
liquidity position of the firm is not sound and the firm will face difficulty in
paying its short-term obligations in time. The current ratio represents a
margin of safety i.e. a "cushion" of protection for creditors. However, an
arbitrary standard of 2:1 current ratio should not be blindly followed. It is
because the current ratio is a 'test of quantity' not quality. It does not
measure the quality of assets. Therefore, it should not be taken decision
considering the current ratio only. However, the current ratio is a 'crude and
quick' measure of the firm's liquidity.
ii) Quick Ratio
A modified version of current ratio known as second measure of
firm's liquidity is the acid test or quick ratio. It is often referred to as quick
ratio because it is a measurement of a firm's ability to convert its current
assets quickly into cash in order to meet its current liabilities. So, it is a
measure of quick or acid liquidity. The quick ratio is found out by dividing
the total of the quick assets by total current liabilities. Quick ratio is also
known as "Liquidity Ratio."
By formula, QR =QA

Quick Ratio = Quick Assets

Current Liabilities

= Current Assets – Inventory – prepaid expenses

Current Liabilities
Where, Quick Assets = All current assets except inventory and prepaid
expenses.

A rupee of cash is considered equivalent to a rupee of inventory or

receivable. But, it is not always so, a rupee of cash is more readily available
(i.e. more liquid) to meet current obligations than a rupee of, say, inventory.

25
The standard for quick ratio is considered to be 1.1 as satisfactory level. It is
very useful to measure the liquidity position of a firm. The standard level
for quick ratio may not represent sound liquidity position or satisfactory
financial condition. It is because a low ratio doesn't necessarily emply bad
liquidity position. Similarly, a company with a high value of quick ratio can
flounder if it has slow-paying, doubtful and stretched out in age receivables
(book debts). Along with this, a company with a low value of quick ratio
may really be prospering and paying its current obligations in time, if it has
been managing its inventories very efficiently with a continuous salability.
II) Asset Management Ratio
Asset management ratio measure the efficiency of a firm in utilizing
its assets. In other words, it shows how effectively the firm is
managing/utilizing its assets. It indicates the relationship between interest
and earned and various assets of a firm. The asset management ratio is also
called "Turnover Ratio" as indicates the speed with assets are being
converted or turned over into sales. A very efficient firm is one that utilizes
its investment asset to generate the largest possible level of interest revenue.
Some of the important types of asset management ratios are as follows:-
a) Inventory Turnover Ratio
The inventory turnover ratio indicates the efficiency of managing the
firm's inventory. It measures how quickly the inventory is sold. This ratio
explains the number of times inventory or stock is replaced during the year.
Here, by formula,

Inventory Turnover Ratio = Sales

Closing/Ending Inventory
This ratio measures the velocity of conversion of stock into interest
revenue. A high stock turnover ratio reflects the efficient management of
inventory because more frequently the stocks are sold; the less amount of
capital is required to finance the inventory.
b) Receivable Turnover Ratio
General measure of the productivity of the receivable investment is
calculated by this ratio. It shows the number of times the firm collects its
account receivable per year. This ratio indicates how quickly another current
asset i.e. receivable or debtors is converted into cash. In other words, this
ratio is a test of the liquidity of the debtors of a firm.
By Formula, Debtors Turnover Ratio = Total Interest Revenue
Debtors (Ending/Closing)

Where, Total Interest Revenue = Total Interest Earned from loan and
advances.
The higher the value of its turnover, the more efficient is the
management of debtors or more liquid the debtors.
c) Days Sales Outstanding
26
 It is also called "Average Collection Period" that is used to appraise
account receivables. It shows the number of days that sales are tied up in
receivables. This ratio is interrelated with receivable turnover ratio. The
formula for computing day's sales outstanding is as below:-

Days Sales Outstanding = Days/Months in a year

Debtors Turnover Ratio

Or, DSO = 360

Debtors Turnover Ratio
A long collecting period reflects an inefficient credit and collection
performance. On other hand, low collection period a restrictive credit and
collection policy. Therefore, the average collection period should be
compared against the firm's credit terms and policy to judge its credit and
collection efficiency. Generally, shorter ratio is considered to be better.
One of the important method of measuring the quality of debtors is 'Aging
Schedule'. The aging schedule breaks down debtors according to the length
of time for which they have been outstanding. The usefulness of the aging
schedule is that it enables the analyst to identify the slow-paying debtors in
respect of whom the firm may have to encounter a serious collection
problem. Aging schedule gives more information than the collection period.
d) Fixed Assets Turnover Ratio
It measures the efficiency with which the firm is utilizing its
investment in fixed assets such as land and building, plant and machinery,
furniture etc. It also indicates the adequacy of sales in relation to the
investment in fixed assets.
The fixed assets turnover ratio is sales divided by net fixed assets i.e.
depreciated value of fixed assets which can be shown as below:-

Fixed Assets Turnover Ratio = Total Interest Income

Fxed Assets (Net)

Where, Net Fixed Assets = Fixed Assets – Depreciation

= Depreciated value of fixed asset.
A higher ratio indicates efficient utilization of fixed asset in
generating sales and better business performance whereas lower ratio
inefficient management and utilization of fixed assets.
e) Total Asset Turnover Ratio
It measures the efficiency of a firm to manage its total assets efficiently to
generate maximum sales through their proper utilization. It indicates the
sales generated per rupee of investment in total assets. The total asset
turnover ratio is calculated dividing sales by total assets of the firm. By
Formula,

27
 Total Assets Turnover Ratio = Total Interest Income
Total Assets

Where, Total Assets = current assets, long-term and fixed assets, intangible
assets.
The amount of total assets can be determined as below:-

Total amount of assets side of balance sheet = 20496005483

Less: Total amount of fictitious assets = 0000
Total assets: = 20496005483
Here, fictitious assets refer the assets like deferred expenditure, debit
balance of profit and loss account etc.
Higher assets turnover ratio indicates the proper utilization of assets of the
firm and vice-versa. One considerable matter is that older assets with a
lower book value may create a misleading impression of higher turnover.
III) Debt Management Ratio
It is also known as "Leverage Ratio", "Solvency Ratio" or "Capital structure
Ratio." The long-term solvency of a firm can be examined by using leverage
or capital structure ratio. There should be an appropriate mix of debt and
owner's equity in financing the firm's assets. The ratios calculate the extent
to which a bank relies on debt. Other things being equal, a high leverage
ratio indicates a riskier bank because the interest payment on debt is fixed
even if the earnings of the bank fluctuate. Debt management has following
implications:-
By raising funds through debt, the owners can maintain control of the firm
with a limited investment.
Creditors look to the equity or owner's supplied funds to provide a margin
of safety.
Return on owner's equity is magnified.
Higher debt ratio indicates the more claim of outsiders on a firm's assets
which arises risk to shareholders. It is because shareholders' claim on assets
declines due to the use of higher proportion of debt. In case of any disability
to pay the debt, debt holder can liquidate the firm.
On the other hand, higher debt helps to increase profit due to the lower cost
of financing as well as tax-shield on interest expenses.Debt management
ratios have been classified as below.

Debt to Equity Ratio

It is an important tool of financial analysis to appraise the financial structure
of a firm. It reflects the relative claims of creditors and shareholders against
the asset of the firm. In other words, it shows the relative contribution of
creditors and owner's of business in its financing. It has important

28
implications from the view point of the creditors, owners and the firm itself.
The debt to equity ratio can be computed in the following way:-

Debt to Equity Ratio = total long term debt

Shareholders Equity
Or D/E ratio = 200000000
20296005483
Where, Ltd = Long-term debentures
SHE = Shareholders Equity or Net Worth
= (Equity + Preference Share Capital + Share Premium + Reserve and
Surplus)
= Total Assets – Total liabilities

This ratio is also called "Debt to Net Worth" ratio. A higher ratio
shows that the claims of creditors are greater than those of owners. The
higher ratio is unfavorable from the firm's point of view. It would lead to
inflexibility in the operation of the firm, firm would have to face a heavy
burden of interest payment and encounter serious difficulties in raising
funds in future. It would be riskier to the creditors.
Total Debt to Total Assets Ratio
It is another measuring tool of capital structure ratio. It measures the
shares of the total assets financed by outside funds. The total debt of the
firm comprises long-term debt plus current liabilities. Similarly, total assets
consist of permanent by dividing total debt by total assets. By Formula,

Total Debt to Total Assets Ratio = Total Debt

Total Assets

Or, TD/TA Ratio = TD

TA

Where, Total Debt = Long-term debt + Current liabilities

Total Asset = permanent capital +current + Liabilities

A low ratio of debt to total asset is desirable from the point of the
creditors as there is sufficient margin of safety available to them. A low
ratio represents security to creditors. On the other hand, a firm with a very
high ratio would expose the creditors and also the shareholders to higher
risk. In conclusion, a firm should have neither a very high ratio nor a very
low ratio.
c) Interest Coverage Ratio or Times – Interest Earned Ratio
It measures the debt-servicing capacity of a firm. It shows how many
times the interest-charge is covered by EBIT or funds that are ordinarily
29
available to pay the interest charges. In other words, it shows the proportion
of interest to the operating profit (EBIT). It is calculated by dividing
operating profit or earning before interest the fixed interest charges on
loans.
Interest Coverage Ratio/Times Interest Earned Ratio
= Net Profit before Interest & Taxes
Interest

= EBIT
I
Generally, higher interest-coverage ratio is favorable. A high ratio
indicates the ability of the firm to handle fixed charge liabilities. On the
other hand, a low ratio is a danger signal. It states that the firm should make
effort to improve the operating efficiency or to retire debt. For example, the
interest coverage ratio of 5 times indicates that the firm can still pay its
interest in case of any decline in profit from one hundred percent to twenty
percent (i.e.1/5).
III) Profitability Ratio
These types of ratios are used as an overall measure of the operating
efficiency of the firm's investment management. In other words, the
profitability of a firm can be measured by its profitability ratios. Unlike
creditors, owners and management or the company it self are also interested
in the financial soundness of a firm. At one hand, shareholders or owners
except reasonable return on their investment and on the other hand,
management desires to operate the company providing adequate return to its
shareholders. Similarly, creditors want to get interest regularly and return of
principal at maturity. Therefore, financial manager should continuously
evaluate the efficiency of its company in terms of profits. The profitability
of the company should also be evaluated in terms of the firm's investment in
assets and in terms of capital contributed by creditors and owners.
Profitability is the net result of a large number of policies and decisions. In
fact, sufficient profit must be earned to sustain the operation of the business,
to be able obtain funds from investor for expansion and to contribute toward
the social overheads for the welfare of the society. A contribute toward the
social overheads for the welfare of the society. A company should earn
profits to survive and grow over a long period of time. Some important
profitability ratios are as follows:-
a) Gross Profit Margin
One of the most commonly used ratio in operational analysis is the
calculation of gross profit as a percentage of sales i.e. interest earned in the
present study. A firm should have a reasonable gross margin to ensure
adequate coverage for operating expenses of the firm and sufficient return to
the owners of the business. It is also known as "Gross Margin". It expresses

30
the relationship between gross profit and sales. The ratio can be computed in
the following way:-
Gross profit Margin = Gross profit × 100
Total Interest Income

Where, Gross profit = (sales- Cost of good sold)

A high ratio of gross profit to sales is a sign of good management as it

implies that the cost of production of the firm is relatively low. On the other
hand, a relatively low gross margin is a danger signal for firm. It needs a
careful and detailed analysis of the factors responsible for it. The causes of
low ratio are as follows:-
High cost of production
Inefficient utilization of current as well as fixed assets,
A low selling price resulting from severe competition, inferior quality of the
product, lack of demand etc.
Over-investment in assets.
For these reasons, the financial manager must be able to detect the
causes of failing gross margin in and initiate action to improve the situation.
b) Net Profit Margin
It measures the overall profitability of the firm by establishing the
relationship between net profit and sales of a firm. The relation between net
profit and sales indicates management's ability to operate the business with
sufficient success not only to recover the cost of production, operating
expenses of business and cost of borrowed funds, but also to leave a margin
of reasonable compensation to the owners for providing their capital risk.
The ratio is an overall measure of the firm's ability to turn each rupee of
sales into net profits. It also indicates the firm's capacity to withstand
adverse economic conditions. It is calculated by dividing net profit after tax
and interest by sales.
Net Profit Margin = Net profit after tax x 100
Total Interest Income
It indicates the margin of compensation left to the owner for providing
their capital after all expenses have been met. A firm with a high net margin
ratio would be in an advantageous position to survive in the situation of
rising cost of production, failing sales prices or declining demand for the
product. In other words, the firm can make better use of favorable condition
such as rising sales price, failing cost of production or increasing demand
for the product.
c) Return on assets
It is another useful measure of the profitability of the assets. This
ratio shows the relationship between net profit and assets. So, this ratio can
also be called "profit to Assets Ratio". It is computed as dividing the net
profit after tax by total assets.
31
 Return on Assets = Net profit after tax
Total assets

Or, ROA = …………%

Where, TA = (FA+ CA)

This ratio judges the effectiveness in using total fund supplied by the
owners and creditors. Higher ratio indicates higher return on the assets used
in the business and effective use of the resources available and vice – versa.
d) Return on Equity:-
It is an important ratio to judge whether a firm has earned a
satisfactory return for its equity holders/owners or not. In other words, a
return on all shareholders equity is calculated to see the profitableness of the
owners' investment. As the shareholders are the residual and real owners of
the company, the performance of its operation is judged on the basis of
return earned on common equity. The return on shareholders' equity is net
profit after tax and after preference dividend divided by the common
shareholders' equity. By formula,
Return on Equity = (Net profit after tax - Preference dividend)
Shareholder's equity

Or, ROE = NPAT-PD

SHE
Where, SHE = shareholder's equity or Net worth
= Common share capital + pref. share capital + share premium
+ Reserve and
Surplus – Accumulated losses,

PD = Dividend paid to preference shareholders.

This ratio indicates how well the firm has used the resources of the
owners. The earning of a satisfactory return is the most desirable objective
of a business. This ratio has great importance to present as well as
prospective shareholders and also of great concern to management.

e) Return on capital Employed

The return on capital employed indicates how well the management
has used the funds supplied by creditors and owners. It shows the
relationship between capitals employed and net profit after tax.

Return on capital employed = Net Profit after Tax

Capital Employed
Or
ROCE = NPAT
CE
32
Where, CE = Capital Employed
= Permanent Capital - Non-current liabilities + Shareholder
equity
= Working capital + Non-current assets
= CA-CL + Net FA
= Equity + Preference share capital + Reserve + R/E +
Profit and Loss a/c (CR) + share premium + other undistributed Profit +
debenture + Bond + Ltd. + P/L appropriation a/c – Investment on
government securities, fictitious assets i.e., preliminary expenses – profit
and Loss a/c (Dr) discount.
The higher the ratio, the more efficient the firm is in using funds and
vice-versa. It shows how efficiently the management has used the available
resources supplied by owners and creditors.
f) Market value Ratio
These ratios relate to firm's stock price to its earning and book value
per share. These ratios gives management and indication of what investor
think of the company's past performance and future prospects.
g) Earning per share
It measures the profit available to the equity holder on a per share
basis i.e. the amount that they can get on every share held. It is computed by
dividing the profit after preference dividend available to the shareholders by
the member of the outstanding shares. By formula-

Earning per share = Net profit after tax – pref. dividend

No. of share outstanding

Or, EPS = NPAT-PD

N

The EPS shows the profitability of the firm on a per share basis; it
doesn't reflect how much is paid as dividend and how much is retained in
the business. But as a profitability index, it is a valuable and widely-used
ratio.
In general, higher the figure is considered as best. While calculating
the EPS, retained earnings shouldn't be considered i.e. only the earnings of
the year should be included.
h) Dividend per share
The net profit after interest, tax and preference dividend belongs to
ordinary shareholders. The EPS represents what the owners are theoretically
entitled to receive from the firm. Apart from the net profits belonging to
them, is retained in the business and the balance is paid to them as dividend.
The dividend paid to the shareholders on a per share basis is the DPS. The
amount of earning distributed and paid as cash dividend is considered for
calculating the dividend per share. It is not necessary that dividend per share
should be equal with earning per share. It is computed by dividing the
33
amount of dividend distributed to shareholders by the number of common
shares outstanding. By formula,

Dividend Per share = Earning Paid to shareholders

No. of common shares outstanding

Or, DPS = Net Profit after Interest, Preference Dividend and Tax
No. of common Shares outstanding

Generally, the higher figure is considered to be better from the view

point of common shareholders. The DPS would be a better indicator than
EPS. It is because a large number of present and potential investors are
more interested in the dividend per share than the earning per share.
i) DU PONT IDENTITY
The Du Pont chart was developed by the "Du Pont Company" of the
USA. This chart shows the combined effect of net profit margin and the
asset turnover. The company developed a famous way of decomposing ROE
into its component parts. As above explained, the two measure of
profitability, ROA and ROE are the reflection of the use of debt financing or
financing leverage. The Du Pont Identity states that ROE is affected by
three things:-
Operating efficiency as measured by profit margin.
Asset-use efficiency as measured by total assets turnover ratio.
Financial leverage as measured by equity multiplier.
Return on Asset (ROA) = Profit Margin x Total Assets Turnover
Ratio……… (i)
Again,
Return on Equity (ROE) = Return on Assets x Equity
Multiplier………. (ii)
j) Users of Ratio Analysis
Ratio analysis has been regarded as an important and widely-used
tool of financial analysis. Different parties are benefited by the use of ratio
analysis as it serves to them from different point of view i.e. liquidity,
profitability, solvency, operating efficiency etc. In addition to it, ratio
analysis helps to determine a particular characteristics of the firm in which
they are interested. The ratio analysis is performed from the following
concerned parties of firm:-
Owners or shareholders
Investors or creditors
Management committee
Employees
Consumers
Government
Limitation
34
 All of these ratios are meaningful only in conjunctions with a bank's
past performance or in comparison with other banks. Also, none of these
measures has a "correct" value. For example, it might seem that a higher
debt to asset ratio is always better. After all, the higher the ratio is the
greater the return on equity of the bank, according to Du Pont Equation.
However, managing a firm to ensure a high debt to asset ratio may lead to
an increased risk of default. Similarly, any bank's liquidity can be improved
by taking out a long term loan right before the end of the fiscal year and
repay it at beginning of the next one. If the funds from the loan are kept in
the form of vault case, then the bank will appear to be very liquid. So, the
ratios should be viewed as part of a whole not just in isolation.
Trend Analysis
Trend analysis is significant tool of horizontal financial analysis. It
indicates the direction of change or movement i.e. whether the movement is
favorable or unfavorable. It enables a firm to make the time dimension into
account. It is one of the useful tools in making a comparative study of the
financial statements of the number of years. It helps to identify the change
in an item or in a group of items over a period of time and to draw
conclusion regarding the changes thereon. Furthermore, it helps to identify
the controllable items of the given period and make forecast for future to an
ongoing concern.
Trend analysis states the favorable or unfavorable situation of a
business by analyzing the different items of given period. As a result, it can
be known that whether the financial position of a firm is improving or
deteriorating over the years. Therefore, trend analysis provides guideline
regarding the operation of a firm in different years.
Cash is regarded as an economic fuel for the successful operation of
any business firm. No business activities can be forwarded in the absence of
cash. Hence, cash is the life-blood of any business firms or institutions.
Cash flow statement is prepared through the statement of cash flow.
A cash flow statement is a statement of firm's ability to generate cash from
various activities such as operating, investing and financing. In addition to
it, it shows the cash inflows and outflows of firm during a period.
Information about cash flow is useful in assessing its liquidity, financing
flexibility, profitability and risk. Cash flow information is widely used by
investors, analysts, creditors, managers and others.
Cash flow statement provides those types of information which are
not covered by income statement and balance sheet. It measures the changes
that have been taken place in the financial position of firm.
The analysis of the events and transactions that affect the cash
position of the firm is known as cash flow analysis. Therefore, decision-
maker must pay attention to these events and transaction that cause position
to change.

35
 Cash flow statement is prepared by taking the opening balance of
cash adding all the inflows of cash and deducting all the inflow of cash from
total. While calculating operating profits for cash flow statement,
adjustments for prepaid and outstanding expenses and income are made to
convert the data from accrual basis to cash basis.
The starting of cash flow statement was begun in United States from
1988. Later on, British Companies also made necessary to publish cash flow
information in the beginning of 1992. Afterwards, many other countries
such as New Zealand, Australia and South Africa also started to prepare
statement. In 1992, the International Accounting Standard Committee issued
an accounting standard on cash flow statement. Nepal Company Act 2053
B.S. also made mandatory to present cash flows statement along with
balance sheet and income statement. So, every enterprise should prepare a
cash flow statement as an integral part of its financial statements for each
period for which financial statements are prepared.
It also helps to prepare cash budget for the specific period and make
plans and policies for taking decisions.

Cash flow from different activities can be presented as below:-

Operating Activities Investing Activities: Financing Activities:-

Cash Sales Collection on loan. Issue of share, long term
Collection from Customers Sales of debt or equity debt instruments.
Receipt of interest & dividend Instruments (Investment).
Other operating receipts Sales of productive assets.

Cash Inflows

Pool of Cash

Cash Out flows

Operating Activities: Investing Activities: Financing Activities:-

Payment to suppliers Cash purchase of productive Payment of dividends.
Payment to employees. assets. Repayment of loan
Interest payment. Purchase of debt or equity. amount
Redemption of debenture.
Payment of income tax Instruments( Investment)
Purchase of treasury
Other operating cash stock bills
payments

36
 CHAPTER: 4
DATA PRESENTATION AND ANALYSIS
Data presentation and analysis is another important chapter of the
present study. Almost all research study includes this chapter. The analysis
of data consists of organizing, tabulating, performing statistical analysis and
drawing inferences. The main purpose of analyzing the data is to change it
from an unprocessed form to an understandable presentation. In other
words, data analysis and presentation refers arranging the raw data collected
by the researcher in different ways such as in tables, graphs, charts etc. In
order to get some senses to the reader regarding the study. The presentation
of data is the basic organization and classification of data for analysis.
Organization and processing of data require knowledge of some technical
methods. Classification refers to dividing of the data in to different
categories, classes, group or heads. After the classification of data, those
data are analyzed and interpreted to draw conclusion by examining them
systematically.
This chapter related with the analysis of the financial performance of
Bank of Kathmandu Ltd, with the help of different and statistical tools.
4.1) Introduction of Bank of Kathmandu LTD
Bank of Kathmandu is private commercial bank established under
company act of Nepal. The Bank was incorporated in 1995 AD (2050 B.S)
and was listed in the NEPSE in 1998 (2054/04/02 BS). It is authorized
capital is R.s 1000000000.00, Issued and paid -up capital is Rs 8444000000.
Both the par value per share of Rs100 and paid - up value per share is Rs
1750. It is a first private commercial Bank with totally Nepalese share
holders. The central office is at Kamladi Kathmandu and has 22 branches all
over the country. The main theme of the bank is "We make your life easier"
Branching Network of BOK:-
Headoffice: Kamal Pokhari (Kamladi) 4414541 info@ bok.com.np
Branches: Thamel 4430640 thamel@ bok.com.np
New road 4231556
Gongabu 4385712
Jawalakhal 5537866
Biratnagar 536904
Hetauda 521331
Pokhara 539150
Butwal 541692
Nepalgunj 523185
Dhangadi 523386
Birgunj 534026
Amlekhgunj 570033
Janakpur 527372

37
Itahari 586710
Kohalpur 5541343
Surkhet 523664
Ghorahi 561951
Tulsipur 522691
Jumla 520298
Balaju
Attriya
Dadeldhura
Mahendranagar
Internally BOK money transfer is related to internet platform. By
internet service is providing to 250 places where customer transfer funds
one place to other safely. BOK provides ATM services to the customers and
to operate Visa debit card and providing internet banking services. BOK
distributes shares 42% held owners and 58% held public offering.

BOK used internal control system which helps to well operation of

institution and guided by employee. BOK highlights to keep the corporate
culture in modern time.
4.2) Analysis of liquidity position
Generally, liquidity refers the ability of a firm to meet short-term
obligations. In other words, liquidity represents the solvency power of the
firm to meet short-term obligations. It also reflects the financial strength or
solvency of a firm. Generally, a high liquidity ratio shows the efficiency of
firm to pay debt immediately. Some liquidity ratios that explain the liquidity
position are as follows.
4.2.1)Current Ratio:-
It is most widely and frequently useful ratio. This ratio is used to
calculate the short-term solvency because of its merits of showing whether
the claims made by short-term creditors can be covered with short-term
creditors, with short-term assets that are expected to be converted into cash
with in a year. In other words, it shows the relationship between current
assets and current liabilities to measure the current liabilities. The standard
38
for current ratio is 2:1 which indicates two rupees of current assets should
be available for each rupee of current liabilities. However, the current ratio
is not a conclusive index of the liquidity of the firm, as a conventional rule.
A current ratio of 2:1 or more is considered satisfactory which may differ as
per the nature of the business. The current ratio of Bank of Kathmandu Ltd
has taken been presented in the table no.4.1 which is as below.
Current Ratio = Current Asset or, = CA
Current Liabilities CL

Table 4.1
Financial year Current Asset Current Liabilities Ratio
( Rs in million) (Rs in million) (CA/CL)
2061 6704.99 9161.79 0.73
2062 8003.45 10685.42 0.75
2063 10784.18 12658.12 0.85
2064 13760.24 16079.85 0.85
2065 16759.08 18454.42 0.91

Source: Annual report of B O K L.td

Table 4.1 shows the current ratio, position of current asset and current
liabilities of the Bank of Katmandu Limited to meet its short time
obligations. The current ratio of the bank has been calculated form the five
financial years. Generally, the current ratio of 2:1 id considered ideal for a
concern. The current ratio of the bank from the financial year 2061 to 2065
has been seemed below the 2:1. It can be said that there is insolvency raised
in the bank. The bank should not meet its short-term obligation. In the year
2061 to 2062, the ratio has been seen 0.73:1 and 0.75:1. The current ratio of
bank from 2063 to 206 is 0.85, and 2065 is 0.91:1 has been above table.
According to financing aspect of bank respect with the current ratio, the
bank position is going to unhealthy. In this situation bank should not pay
short-term liabilities.
4.2.2 Cash and bank Balance to Deposit Ratio
It is another ratio to measure the liquidity position of the Bank. It
refers the ability of the bank to meet their current margin calls and saving
deposits. The higher the ratio reflects the greater capability vice versa.
However, too high ratio is not beneficial as capital is tied up in the
unproductive sector i.e., cash and bank balance. This ratio can be computed
by using the following formula.

Cash and Bank Balance to deposit ratio = cash and bank balance deposit
Deposit (excluding fixed deposit)
Where,
Cash and Bank Balance = Cash in hand + Bank Balance
39
 Deposit = Saving deposit and daily deposit
This ratio measures the percentage of most liquid fund with the bank
to make immediate payment to the depositors.

The condition of cash & Bank Balance to deposit ratio can be shown
in table no 4.2, which is below:-

Table 4.2
Cash & Bank Balance to Deposit Ratio
Financial Cash & Bank Saving Deposit Ratio
Year Balance (Rs in (Rs in million) (%)
million)
2061 579.34 8975.78 0.06
2062 533.32 10485.36 0.051
2063 1102.54 12388.93 0.089
2064 1142.80 15833.74 0.072
2065 1889.17 18083.98 0.105
Source: Annual report of BOK
The above table reflects the position of cash & bank balance to
deposit of the bank. It has been seen that the ratio of the bank from the
financial year 2061/62 to 2065/66 is 6, 5.1, 8.9, 7.20 & 10.50 respectively.
The table indicates that the ratio had been decreased from 6 to 5.1 from
financial year 20610/2062. In other words, the ratio has increased in the
year 2062 to 2063. On other hand, the ratio also increased from the financial
year 2063/2064. The ratio decreases in the year 2064. And end of financial
year 2065 the ratio is increased.

Figure 4.1
40
 Cash & Bank Balance to Deposit
Amount

Year
In the basis of above analysis, it can be summarized that there would
be the possibility of refunding deposits to overcome the problem that arise
in future as the cash and bank balance to deposit ratio has been decreased
from the financial year 2061 to 2062 and also increased respect to the 2062
to 2063, it also decreased in the year 2064 and increased in 2065. But it can
be raise that overall liquidity position is better to some expert. It is
suggested that is to invest in more production sector like government
securities, bond, Treasury bill for further advancement in its profitability
position.
4.3) Analysis of profitability
Every business organization is established to achieve profit. The bank
also can not be segregated from it. As the bank is a banking institution, it
has determined to earn profit to some extent from the banking transaction by
providing qualitative service to customers. Profit is essential for survival
and growth of any organization. An organization should earn sufficient
profit to sustain the operation smoothly and continuously. The profitability
ratios are calculated to measure the operating efficiency of the organization.
Therefore, financial manager should continuously evaluate the efficiency of
the institution in terms of profits irrespective of social consequences. Every
investor invests their money for the return. Besides management of the
organization, creditors, and owners are also interested in the profitability of
the institution or business organization. For these reasons, the institution
should try to earn sufficient surplus irrespective of social motive for its
41
expansion, growth and long term profitability in the present competitive
business environment.
The profitability is another measure to evaluate the financial
performance of an organization. The ratio measures the organization
effectiveness in terms of managing funds to generate profit. Hence, the man
agement of the organization is interested in the profitability. It is regarded as
the most crucial element for the survival and growth of the organization.
Some of the commonly used profitability ratios are below.
4.3.1 Operating profit Margin to Interest earned ratio: -
It is one of the important profitability ratios which was measures the
efficiency and operation of the organization. Operating profit is calculated
by deducting the amount of operating expenses from total income. And
operating expenses is a sum of interest expenses, management expenses,
employee expenses, deprecation, exchange fluctuation loss and other related
expenses to the operation of the bank. Likewise, total income includes
interest income, commission & discount income, exchange fluctuation
income, loans and advance, dividend from investment and other related
income. Therefore, operating profit margin is not the actual realized profit
of the bank as it comprises only operating expenses but not the non-
operating expenses. The ratio of operating profit margin to interest earned is
calculated by dividing the operating profit by the interest earned. It can be
shown as below.

Operating profit margin to interest earned ratio = Operating profit

Interest earned
Where,
Opt. profit = (Total Income – operating expenses)
Interest earned = Interest earned from loans and advances
Total Income= Interest earned from loans and advances (Dividend from
investment on share) + commission & Discount, + other
miscellaneous receipt
Operating expenses = Interest expenses + Depreciation + Management
expenses + other operating expenses + Employee expenses
Generally, a high operating profit margin is a sign of good
management as it reflects that the relatively lower operating expenses have
been incurred during the period and vice versa. The financial manager
should try to detect the cause of lower margin ratio and initiate action to
improve the situation.
The portion of operating profit to interest earned can be presented as
in table no 4.3 which is below.

Table 4.3
Operating profit margin to interest earned ratio
42
 Financial Operating Interest Ratio %
Year Profit (Rs) earned (Rs)
2061 226942675 607035662 37.38
2062 321573073 718121378 44.77
2063 387017669 819003947 47.25
2064 563441461 1034157874 54.48
2065 700912442 1347755382 52.00

Source: Annual report of Bok

The operating profit margin to interest earned has been shown in the
above table no 4.3 for five different financial year, from 2061 is 37.38
percent where as it has been increased to 44.77 percent in the year 2062. In
has been also increase in further year 2062, 44.77 percent, 47.25 percent in
year 2063is 47.25, 54.48% in year 2064&52%in year 2065. The course of
increase in ratio is the increase in operating expenses of the bank. While
increase the operating expenses it also increased the interest income. The
average ratio is 43.46 % it is suggested that the management should
concentrate toward increasing the profitability by reducing the operating
expenses. This trend has been shown in figure 4.2 as below

Figure 4.2
Operating profit margin to interest earned ratio
43
Amount

Year
4.3.2 Return on Assets (ROA)
It is another significant profitability ratio to measure the profitability
of all financial resources invested and utilized by the organization. It
showed the relationship between net profit and total assets to determine the
overall operating efficiency of an organization. It is important for all the
organization, because maximum profitability is the first objective. ROA is
primarily an indicator of managerial efficiency it indicates how capacity the
management of the bank has been converting the institutions assets in to net
earnings (Raze, 1999)
A firm has to earn satisfactory return on assets for its survival.
Generally, the return on assets ratio should be 1 percent and higher is
desired to the banking industry (World Bank 1996).
Higher ratio indicates satisfactory position, utilization of fund
invested and vice versa. The ratio can be calculated by dividing the net
profit after tax by the total assets. The ratio has been shown by the following
formula.
Return on Assets = Net profit after tax
Total Assets
Or, ROA = NPAT
TA
NPAT = Net profit – Tax
TA = Current Assets + Net fixed assets.

44
 The position of net profit after tax and total assets of the bank can be
shown as below in the table 4.4

Table 4.4
Return on Assets Ratio

Financial Net profit after Total Assets Ratio

year tax(Rs in million) (R in million) %
2061 139.53 9888.53 1.41
2062 202.44 12278.33 1.64
2063 262.39 14570.10 1.79
2064 361.50 17721.93 2.03
2065 461.73 20496.01 2.25
Source: Annual report of BOK
In the above table 4.4 returns on assets ratio of the bank has been
shown. It has been shown that the bank has positive ratio of all financial
year. The bank has been able to earn profit continuously by increasing trend.
In above table net profit has been increasing yearly 2061 to 2065 and also
increasing total assets 2061 to 2065. In the year 2061 to 2065 the ratio has
been seen 1.41, 1.64, 1.79, 2.03, and 2.25 respectively.
Higher ratio reflects the efficiency of the organization which was
utilized assets resources & vice versa. The management of the institution
should consider about the utilization of resources.
4.3.3 Return on Equity (ROE)
Return on equity is measures of the rate of return flowing to the banks
shareholders. It approximates the net benefit that the stockholders have
received from investing their capital in the bank. The return on equity is the
most important return measure of banks because it influenced by how will
the banks have performed on all other return categories and indicates
whether a bank can complete for private sources of capital in the economy.
Computed as the ratio of net income to the equity, it reflects the income
earned from its internal sources. The return on equity measures the book
return to the owners of the firm. It is "bottom link ratio" in that sense
(Weston & Copeland 1991). It measures the company's return towards how
well the bank used the resources of owners. It is one of the important ratio
to judge whether the bank has earned a satisfactory return for its equity
shareholders or not the higher ratio represents the sound management and
efficient mobilization of the owners equity and vice versa. Generally the
return on equity on equity ratio is 15 percent and higher is desired for
banking industry (World Bank, 1996). The return on shareholders equity
calculated following formula.

ROE = Net profit after tax – preference dividend

Shareholders equity
45
ROE = NPAT- PD
SHE

NPAT = Net profit – Tax

ROE = share holders equity = paid up capital+ reserve & funds + share
premium other reserve + retained earning – accumulated losses
The rate of return on net worth has been presented in the following
table.

Table no 4.5
Return on Net worth
(Rs in million)
Financial year Net profit after tax Net worth Ratio
2061 139.53 720.74 19.35
2062 202.44 839.74 24.10
2063 262.39 993.27 26.41
2064 361.50 1342.14 26.93
2065 461.73 1704.42 27.09

SOURCE- Annual report of BOK

In above table shows the return on net worth of bank for different
financial years. In the year 2061 it has been seen that the ratio 19.58 %.
After that it has slowly decreased in year 2061 is 19.35 percent. After that
this ratio is slightly increasing, that is 24.10 percent in year 2062, 26.41
percent in year 2063, 26.93 percent in year 2064 and 27.09 percent in
year2065. This table shows that all ratios are positive for every year. In the
year 2061 the ratio has dropped to 19.35 percent from 19.58 percent the
bank has not increase the profit. But the bank has been capable to improved
the situation and earn more return in further year i.e. 2062, to 2065. It can
reflect that the management has become efficient to mobilize the owner's
equity.
This ratio helps to maximize shareholders wealth and affects the
market value of the shares. The term net worth can be referred to the market
value of the share. This ratio is helpful to assess the financial management
of the organization.
4.3.4 Return on capital Employed:-
This ratio is the important to measure the profitability of an
organization. It provides a test of profitability related to the sources of long
term funds provides by the creditors and owners of the firm. This ratio
indicates how well the management has used the funds to achieve operating
efficiency the higher the ratio. The more efficient the firm in using funds or
capital employed. The capital employed includes share capital, reserve
funds, long term debt. Alternatively it is equivalent to net working capital
46
plus fixed assets. Similarly, it is equal to non- current liabilities (long term
liabilities) plus owner's equity. Return on capital employed can be computed
with the help of following formula.
Return on capital employed = Net profit after tax
Capital employed
ROE = NPAT
CE
CE = Share capital + Reserve fund + long term debt
= Net working capital + Net fixed assets
= (CA- CL + Net FA)
The ratio of return capital employed can be presented as below in table 4.6

Table 4.6
Return on capital employed
(Rs in millions)
Financial year Net profit after tax Capital employed Ratio
2061 139.53 720.74 19.35
2062 202.44 1039.73 19.47
2063 262.39 1203.27 21.80
2064 361.50 1542.07 23.44
2065 461.73 1741.59 26.51

Source: Annual report of BOK

The return on capital employed for the financial year 2061 has been
shown 19.35%. The ratio increased from 19.35 to 19.47 in year 2062. The
ratio slightly increased in the year 2063 i.e. 21.80 percent. After that the
ratio increased in year 2064 to 2065, which was shown in above table. In the
year 2064 the ratio increased 23.44 percent from 21.80 percent and also
26.51percent in year 2065.
It indicates that the firm has been successful to use the capital
employed in year 2065. In addition, it showed the efficiency of the
management to mobilize. The capital employed properly in year 2061 and
2065.
Hence, it is suggested that to consider about the mobilization of
capital employed properly for the beneficial of the organization. Higher the
capital employed ratio is preferable.
4.3.5 Net profit Margin Ratio: -
The ratio measures the overall productivity of the organization by
establishing relationship between net profit and sales. The word 'sales'
indicates 'interest earned' here for analysis purpose. This ratio exhibits the
management's efficiency to operate the business successfully and firms
capacity to withstand adverse economic condition. This ratio is an indicates
of management ability to operate the business with sufficient success not
only to recover the operating expenses of the firm and cost of borrowed
47
funds but also to leave a margin of reasonable compensation to the owners
for providing their capital at risk. The ratio can be computed by dividing net
profit after tax by interest earned.

Net profit margin = Net profit after tax

Interest earned
Where, interest earned = Interest earned from loan & advances
This ratio is the overall measure of the firm's ability to turn each
rupee of sales into net profit. If the net profit margin is in adequate. The firm
will fail to achieve satisfactory return on owner's equity. Generally, a high
margin ratio indicates the effective and efficient operating of the
organization and advantages position. The net profit margin ratio of the
organization has been shown as below:

Table 4.7
Net profit margin ratio
(Rs in millions)
Financial year Net profit after tax Interest earned ratio
2061 139.53 607.10 22.98
2062 202.44 718.12 28.19
2063 262.39 819.00 32.03
2064 361.50 1034.16 34.95
2065 461.73 1347.76 34.25

Source - Annual report of BOK

Table 4.7 shown the net profit after tax and interest earned by the
bank in five different financial years. In year 2061 net profit margin ratio is
22.98%, in the year 2062 net profit margin ratio is 28.19. The profit margin
ratio is slightly increasing trend 2061 to 2064 but in year 2065 is decreased
at 34.25%. The higher profit margin ratio showed in year 2064. Therefore it
is suggested to any organization must be keep higher ratio which indicates
higher overall efficiency of the business and better utilization of total
resources. BOK has better mobilization of total resources. It is shown that
BOK has improving the net profit margin in rested of by gone year. It is
clear that bank has earned more profit by utilization of fund.

Figure 4.3
Trend of net profit margin ratio

48
Ratio

Figure 1 Year
4.4)Asset Management Ratio
Asset management ratio measures the efficiency of a firm in
managing and utilizing its assets to generate sales revenue i.e. interest
earned. The ratio shows the relationship between various assets i.e. current
and fixed and sales of a firm. This ratio is also known as the "investment
turnover ratio". The higher the turnover ratio, the more efficient the firm
is in the management and utilization of the assets and vice versa.
Furthermore, the better management of assets turnover is the better
indication of its financial performance. Hence a very efficient firm is one,
that utilization its investment assets to generate the largest level of revenue.
Some turnover ratio are calculated to assets the efficiency of the institution
in utilizing available resources. These turnover ratios are as follows.
4.4.1)Fixed asset turn over ratio
It is one of the important turnover ratios. This ratio measures the
efficiency of a firm in utilizing its fixed assets to generate the total interest
earned. It also indicates the adequate of sales i.e. interest earned in relation
to the investment in fixed assets. In other words, this ratio shows the
relationship between fixed assets and interest earned. Generally, a higher
ratio indicates the efficient utilization of fixed assets and vice versa. The
ratio is computed by dividing the interest earned by the net fixed assets.

Fixed assets turnover ratio = Interest earned

Fixed asset
Fixed assets = Net value of fixed assets
Fixed assets – Depreciation

The fixed asset turnover ratio of BOK can be shown as bellow in table no.
4.8
49
 Table no. 4.8
Fixed asset turnover ratio
(Rs in millions)
Financial year Interest earned (Rs) Fixed assets (Rs) Ratio (times)
2061 607.10 95.23 6.37
2062 718.12 110.75 6.48
2063 819.00 320.85 2.55
2064 1034.16 387.27 2.67
2065 1347.76 417.04 3.23
Source: Annual report of BOK L.td
Table 4.8 shows that the fixed asset turnover ratio of the bank in five
different years. The table shows that the ratio has been decreasing in first
four years. The ratio is 6.37 times in year 2061. The ratio is increasing of
6.48 times in year 2062. It has been decreased in year 2063 of 2.55 times
and increased in 2064 & year 2061 is 2.67&3.23 times. It states the
management is not efficient managing and utilizing fixed assets to generate
revenue. It is concluded that the organization do not successful in using
fixed assets.
4.3.2) Total assets turnover ratio
It is a significant turnover ratio which shows the efficiency of a firm
is generating revenue from the available resources to the firm. In other
words, this ratio measures the turnover or utilization of all assets of firm in
generating revenue. The ratio is calculated by dividing the interest earned by
the total assets of a firm.

Total asset turnover ratio = Interest earned

Total asset
Total assets = Total amount of balance sheet
The higher ratio indicates the effective utilization of fixed assets and
vice versa similar to fixed assets turnover ratio. The condition of total assets
and interest earned shows as below in the table.

Table 4.9
Total asset turnover ratio
(Rs in millions)
Financial year Interest earned Total assets (Rs) Ratio (Rs)
2061 607.10 9888.53 0.061
2062 718.12 12278.33 0.058
2063 819.00 14570.10 0.056
2064 1034.16 17721.93 0.058
2065 1347.76 20496.01 0.065
Source: Annual report of BOK

50
 The total assets and interest earned has been shown in above table. It
has been seen that the ratio of different year has fluctuated the ratio 0.061
times in the year 2061and 0.058 times in year 2062. On other hand the ratio
has decreased in year 2063 respected with the year 2061 in 0.061 times. It
also decreases in the year 2063 i.e. 0.056 times. The ratio slightly increased
0.058 & 0.065 times in year 2064 & 2065, with respected to the year 2063.
It is indicated that the firm does not able to utilize total assets. It reflects
inefficiency of the organization.
4.4.3) Net interest Margin
The net interest margin measures how large a spread between interest
revenue and interest cost management has been able to achieve by cost
control over the banks earning assets and the pursuit of the cheapest source
of funding (peter, 1999). Net interest margin is calculated net interest
income dividing by earning assets under earning assets loans and advances,
bills purchased and discounted and investment included. In the composition
of earning assets the loans and advances usually have higher yield which are
more than the securities and its return. The net interest earned from than the
loans and investment shows the percentage a bank earns as interest for each
unit of investment made in loans and securities. It identifies and evaluates
the core earning capacity of the bank. A negative or declining ratio is an
important indicator of treasury management problem that require attention.
Generally the net interest margin ratio should be 3 to 4 percent and higher is
better in banking industry (World Bank 1996). Net interest margin ratio has
been presented below the table:-

Table 4.10
Net interest Margin
(Rs in millions)
Financial Net Interest Income Earning assets Ratio (%)
year (Rs) (Rs)
2061 365.46 8510.83 4.29
2062 409.96 10633.79 3.85
2063 479.82 12391.76 3.87
2064 616.61 15666.71 3.93
2065 784.65 17550.15 4.47
Source: Annual report of BOK

In the past five years, the net interest margin ratio of BOK has been
distributed as a maximum ratio of 4.47 percent in year 2065 and minimum
ratio 3.85 percent in year 2062. At first the ratio of bank increased from
2062 to 2065. After that this ratio increased in the year 2063 i.e. 3.87
percent. In the year 2063 the ratio slightly increased to comparison of year
2063 i.e. 3.87percent. At the end of year 2065 the ratio rested in 4.47

51
percent on the basic of above analysis the net interest margin ratio are
fluctuate in different year. On the basic of mean ratio of bank lies on 3 to 4
percent it indicates that bank maintain interest margin ratio.
4.4.4 Earning Per Share (EPS)
Earning per share provides a direct a measure of the returns following
to the banks owners, its stockholders measured relative to the numbers of
shares to the public (peter 1999). The earning per share of an organization
gives the strength of the share in the market. The profitability is the firm
from the point of view of the ordinary shareholders to the EPS. It measures
the profit available to the equity holders in a per share basic i.e. the amount
that they can get on every share hold. The higher the EPS is suitable for the
bank. The earning per share of BOK is tabulated as below.

Table 4.11
Earning per Share
(Rs in millions)
Year Net Profit (Rs) No. of Share EPS (Rs)
2061 139.53 4635809 30.10
2062 202.44 4635809 43.67
2063 262.39 6031413 43.50
2064 361.50 6031413 59.94

2065 461.73 8444311 54.68

Source: Annual report of BOK

Above the table, reveals that, the EPS of the bank has fluctuated over
the year of study period. The EPS of the bank has in year 2061 is Rs 30.10
and in year 2062 is Rs 43.67. In the year 2063 the EPS of bank is Rs 43.50.
EPS of BOK is going to increasing trend in the year 2061 to 2062. After
2062 the bank has increased no of share in year 2063 which decline the EPS
in year 2063. The EPS of BOK in year 2064 has Rs 59.94 which is the
maximum all over study period. The EPS of 2065 is Rs 54.68, it is
decreased than 2064 by the increasing of No. of share. The average EPS is
Rs 46.378

Figure 4.4
Trend of earning per share
52
 20244062

26238698
4635809

6031413
43.67

43.50
2062

2063

59.94
2064 361496879
Rs

EPS
6031413
Year

4.5) Risk & Return Analysis

Risk and return is the important aspects of financial management.
Generally risk refers the change or variability in the return, the greater the
variability in the return. The higher the risk comprises in the investment.
The return is the sum of regular income and capital gain from investment
that the investor expects over his investments. Therefore risk and return are
a considerable aspect which influences the individual's decision regarding
investment on particular stock and assets. It is very complex to determine
what extent stock or asset is risky. It depends upon the individual's attitude
toward risk. As per the predetermined objectives, risk and return pattern of
the organization has been studied. The return on equity (ROE) is calculated
by dividing net profit after tax by paid up fund. Every investment involves
uncertainties that make future investment risky. The uncertainties can be
reduced to some extent if the investment environment can be predicted
before investment. The risk and return pattern of the institution is presented
in the table given below.

Table 4.12
Risk return pattern
2
Year NPAT Capital ROE
fund
2061 139529721 463580900 0.3009 (0.1628) 0.02650
2062 202440627 463580900 0.4366 (0.0271) 0.00073
2063 262386980 603141300 0.4350 (0.0287) 0.00082
2064 361496879 603141300 0.5993 0.1356 0.001838
2065 461734911 844431100 0.5468 0.0831 0.006905
N=5 Total 2.3186 0.03678
Source: Annual report of BOK

ROE = NPAT
Capital fund
53
Returen ( =
= 2.3186/5
= 0.4637
= 46.37%
Risk

=
= 0.116025
= 11.60%
Coefficient of variation (C.V.) =

=
= 28.34%

Table 4.12 shows that the return on equity of the institution has been
fluctuating during five year period. It has seen that that return on equity is
30.10 percent in the year 2061. So on, the return on equity is 43.66 percent
& 43.50 percent in the year 2062 and 2063. After that the return on equity is
slightly decreased in the year 2063 i.e. 43.50. In the year 2064 the ROE is
59.93 percent and in year 2065 is rested in 54.68 study period. The slightly
decreasing trend in year 2063 shows that the management has unable to
utilize capital fund on generating more return on equity. The expected return
on institution is 40.93 percent.
The standard deviation and coefficient of variation are the measures
to assets the risk on investment. The standard deviations measure the risk of
two variables of firm but coefficient of variation measures the relative risk
return pattern of investment. In other words coefficient of variation shows
the risk per unit return and provides a more meaningful base. The above
table also reflects the risk of the institution. It is seen that the average return
on each share is 40.93 percent where as the risk is calculated to be 11.60
percent. Along with these, the institution has to bear 28.34 percent to earn
100 percent return whish is shown by coefficient of variation.
4.6) Cash flow pattern of BOK

Cash Flow Statement of BOK. Ltd.

Particular 2061 2062 2063 2064 2065
1 cash flow from operating –78837414 3544767832 1196283528 131216696 443842418
cash receipt 733732511 839758005 957415138 1213828527 1689754289
1.1 Interest income 589725336 682260740 771065694 976838292 1306619495
1.2 Commission & discount income 72351675 70776158 97431129 129415582 196942020
1.3 Foreign exchange income 67188214 688887323 72774174 83738239 136036316
1.4 Recovery of written of loan – – 411150 6000 6934365
1.5 non operating income – – –3269907 662690 (2027469)

54
1.6 Other income 4467286 16967545 19002897 23167724 45249562
Cash payment 455169919 570866447 664951336 829126260 1143218634
2.1 Interest expenses 241639164 308155647 339181011 417543432 537538772
2.2 Employee expenses 53822309 59119564 69740384 90601920 146494578
2.3 office overhead expenses 99190178 117591235 138429941 170480908 184113467
2.4 Exchange loss – – – – _
2.5 Income tax payment 6000000 86000000 117600000 150500000 197475219
2.6 Non operating expenses 518267 – – _
2.7 other expenses – – 77596598
Cash flow Before W/C Activities 278562593 268891558 292463802 384702267 546535655
- -
Changes in current Assets -485193627 -920919694 (2359794479)
1772590684 2795185864
1. changes in money at call -56552875 -265173522 334768750 186598792 (170671664)
-
2. changes in other short term investment -274495094 838219860 -203913475 61914604
2489443941
- - -
3. changes in other advances -265881028 (2197998161)
1346503107 2140245038 3063309924
4. changes in other assists. 111735352 88029886 46336734 285438743 (53039258)
5. changes in bank balance – – – – _
changes in current liabilities 127793621 – – 2541700293 2257101242
1. changes in Deposit 1201103174 1858466958 1824739421 3444810505 2250242467
2. changes in certificate of deposit – 1509578372 1903568055 – _
3. changes in short term borrowing. -912150000 -630000000 _
4. changes in other liabilities -161159553 547180000 176819999 -273110212 6858775
-
5. changes in A/C payable. -198291414 – _
2556648633
Cash from investment activities 159465198 -16680494 327492345
1. changes in Long term investment. 153651311 -506944334 -617614646 –7720377 358554548
2. Changes in fixed assists. -11605935 -527514615 -455941759 –66427757 (72449532)
3. interest income from long-term
17370326 -15514256 -210101197 57319582 41051267
investment
4. Dividend income 49496 35860637 490058 148058 336062
5. others – 223900 – _
Cash from financing -127916898 – – – (29689870)
1. outstanding loan – 130284939 486130 – (12000343)
2. changes in bond & debenture – 200000000 – 80
3. changes in share capital – – 139560400 – (17689607)
4. changes in other liabilities -133916898 -69715061 -139074270 – _
5. changes in subside/refinance from
6000000 – – – _
NRB.
Income/Exp from changes in exchange
4926654 -10068172 8051839 10026800
rate.
1. current years cash flow -42362459 -11823391 587206851 124563002 741644893
2. opening cash flow 782882941 740520482 728697090 1315903941 1440466943
3. closing balance. 740520482 728697091 1315903941 1440466943 2182111836

In the above, cash inflow and outflow of BOK Ltd, for five financial
years has been shown. Generally working capital is the excess amount of
current assets over current liabilities. Decreasing in working capital in
service organization is considered good because current assets provide less
return than long-term fixed assets. Therefore, it would be better to have long
term asset for regular generation of income. In the year 2061 cash receipt
which shows the positive cash flow from operating activities. Similarly, the
organization has utilized the fund to purchase in long term investment and
outstanding loan has appeared in financing activities. The cash and bank
55
balance of the year shows the liquidity position of the institution but more
amounts indicates the idle position. The cash and bank balance shows some
extent but much isn't appropriate for long term. And it has been increasing
every year which shows the inefficiency in utilization of fund. In addition to
it, the deposit amount has increased by Rs 1570933854 which is the main
source of cash inflow. The institution has also made investment for long
term amounting Rs 661260769
In the year 2061 the working capital has also decreased and it is
indicated by negative cash flow from operating activities. The cash from
operating activities shown in the year 2061 is negative i.e. Rs (78837414).
The negative cash from operating activities indicates the decrease in
working capital.
The deposit amount has increased by Rs 1201103174. Similarly, the
amount of loan and advances has reached to Rs 265881028 from Rs
1205261326 and changes on short term investment by Rs 274495094. In
this year the institution has invest in fixed asset Rs 11605935. And income
received from changes in exchange rate is Rs 4926654.
The positive cash from operating activities indicates the increase in
working capital, i.e. increase in current assets in the year 2062. The amount
of long term investment and fixed asset purchased by Rs 527514615, and Rs
15514256 respectively and the institution has utilized the fund in investing
activities is Rs 50694434. In financing activities the institution generated
fund by issuing bond and debentures Rs 200000000. And total cash from
financing activities of the institution is Rs 130284939, and the firm has also
increased income from exchange rate is Rs 10068172.
In the year 2063 there is a positive cash flow from operating activities
which denotes the increase in working capital of the institution, in the
operating expenses cash payment has Rs 664951336 respectively. The
investing activity of the institution shows the increase in long term
investment and fixed asset by Rs 455941759 and Rs 21011197 respectively.
If also show that interest on long term investment and income from dividend
by Rs 47938252 and Rs 490058 respectively. The total cash flow from
investing activities of the institution is Rs 617614646. The firm's financial
activities shows increase the Share capital by Rs 139560400 and also
increase in other liabilities by Rs 139074270. And total cash from financing
activities show the Rs 486130. BOK has earned from exchange rate by Rs
8051839 in the year 2064 the institution has a positive cash flow from
operating activities, and working capital also increased. In this year increase
the deposits and loan and advances by Rs 3444810505 and 630000000
respectively. Total cash from operating activities is Rs 131216696. The
institution invested fund in long term investment by Rs 7720377 and to
invest in fixed asset by Rs 66427757. And interest received from long term
investment is Rs 57319582 and dividend income is Rs 148058. Total cash
from investing activities of institution has Rs 16680494. The firm has no
56
any changes in financing activities in the year 2064. Income from exchange
rate has bee seen in the year 2064 by Rs 10026800. In overall institutions
cash flow has increasing trend in the study period.
4.7) Non-Performing loan to total loan and advances ratio
Loans and advances usually represent the single largest asset of most
banks. That’s why monitoring the quality of the banks loan portfolio is of
the utmost important aspects. When the borrowers fail to pay the interest or
even principal with in the time period the performing loan begins to start in
non-performing loan. As per the total loan classification is performing &
non-performing. But total loan includes pass loan, restructured loan, and
substandard, doubtful loss. And Nonperforming loan includes substandard,
and loan loss. Here the ratio of NPL to total loan and advances shows the
percentage of NPL in total. The lower the ratio is the best management and
utilization of loan and advances. The greater ratio represents the higher the
credit risk to the bank is exposed. If NRB has directed the commercial
banks to classify its loan and advances into the category of pass
substandard, restricted loan, doubtful and loss. Non-performing loan
reflected the quality of assets that a bank is holding. This ratio, measures the
proportion of nonperforming loans on the total volume of loans and
advances. Higher ratio reflects the bad performance of the bank in
mobilizing loans and advances and bad recovery rate and vice-versa. As
increasing trend in the ratio of nonperforming loans to total loans signals a
deterioration in the quality of credit portfolios and consequently, in financial
institutions cash flows, net income, and solvency. This ratio is computed by
dividing the nonperforming loans by total loans and advances. If Banks did
not manage the NPL, bank will be collapse in short time.
Table 4.14 represents the observed nonperforming loan ratio of BOK
Ltd during the study period.

Table 4.14
Nonperforming loan to total loan ratio
(Rs in millions)
Year Nonperforming loan Total loan Rs NPL Ratio
2061 3085.06 5912.58 5.21
2062 2036.24 7259.08 2.80
2063 2432.96 9399.33 2.58
2064 2368.99 12462.64 1.90
2065 2464.72 14647.30 1.68
Source: Annual report of BOK

Table 4.14 shows that the ratio of nonperforming loan to total loan
and advances ratio is decreasing trend in the study period. This decreasing
57
 NPL Ratio
trend of NPL indicates that BOK Ltd has best management and utilization
of loan and advances.
Figure 4.6

Year
In above figure of NPL shows that, the ratio of NPL has decreasing
trend allover the financial year, it indicates that BOK Ltd has well managed
the loan and advances. The Institution has decreases the credit risk. It means
that, providing loan of BOK has very secured and earns more return.4.8)
4.8) Some other financial Indicators
4.8.1) Loan and advances to total deposit ratio
Loan and advances to total deposit ratio measures the capacity of
utilizing deposits in the form of extending loans and advances. This ratio
shows the percentage of deposit mobilized for providing loans and
advances. Loan and advances refers the total loans and advances supplied to
the outsiders i.e. customers and employees. Total deposit includes the
amount collected from its deposits i.e. saving, fixed and daily. Generally
higher ratio indicates the efficient mobilization of funds provided by the
depositors and vice versa. The ratio is calculated by dividing loans and
advances by the total deposits. It can be calculated by using following
formula.
Loan and advances to total deposit ratio = Loan and advance
Total deposit
Total deposit = Saving deposit + fixed deposit + daily deposit
In other words the ratio shows the proportion of total deposit flowed
loan and advances. The position of loan and advances to total deposit ratio
can be presented as below in the table.

Table 4.15
Loan and advances to total deposit ratio
(Rs in millions)
Year Loan and Total Deposit Ratio
58
 advance(Rs) (Rs)
2061 5912.58 8975.78 66.11
2062 7259.08 10485.36 69.23
2063 9399.33 12388.93 75.86
2064 12462.64 15833.93 78.70
2065 14647.30 18083.98 80.99

Source: Annual report of BOK

Table 4.15 shows the ratio of loan and advances to total deposit ratio
of the BOK for five years. It is seen that the ratio 66.11 percent in year 2061
and 69.23 percent in year 2062. The ratio increased in year 2061to 2065 and
with respect to the year 2061 which is 69.23 percent. It is also increasing
trend in the year 2063 i.e. 75.86 percent. The ratio of 2065 is 80.99
percent. The average ratio of BOK is 74.178 percent. The BOK has been
able to utilize its deposits at maximum level in year 2061. The course of
fluctuation can be regarded as the internal conflict, strike, and lack of
security.
4.8.2) Interest income to total income Ratio
This financial indicator assess to the financial position of an
institution. This ratio examines the proportionate contribution of Interest
income in generating total income. In other words, this ratio shows the
portion of interest income in total income. The main source of income for
the institution is interest earned from loan and advances as if is banking
organization that provides loan and advances as well as aspects deposits.
The other source of income for the institution is income from government
securities, commission and discount. Exchange fluctuation income, non-
operating income and other income. The ratio can be calculated by interest
income divided by total income.

Interest income to total income Ratio = Interest income

Total income
Interest income = Income from loan and advances
Total income = Income from government securities + commission +
exchange fluctuation income + Non- operating income + other income
The higher ratio indicates the efficiency of the institution to supply
and manage loan. It also reflects the goodwill of the institution. The ratio is
presented in the following table.

Table no.4.16
Interest income to total income Ratio
(Rs in millions)
Year Interest income(Rs) Total income(Rs) Ratio %
59
 2061 607.10 755.56 80.56
2062 718.12 894.58 80.27
2063 819.00 1051.00 77.92
2064 1034.16 1297.75 79.68
2065 1347.76 1704.42 79.04
Source: Annual report of BOK

In the above table the ratio of interest income to total income has
been shown for five financial years. It is seen that the contribution of
interest income to total income from year 2061 to 2062 is 80.56 percent and
80.27 percent respectively. It means that the institution has been earned
more income than 2062 income. In other words, interest income is greater
than 2062. Furthermore BOK has earned more interest income to
comparison with total income. The ratio of 2062 to 2065 is 80.27, 77.92,
79.68 and 79.04 respectively. The institution has higher ratio of allover the
study period. Interest income is main source of Bank. But BOK has a
greater interest income. It means that the institution has providing loan in
security base.
4.8.3 Interest Expenses to Interest Income ratio
The ratio measures the portion of interest expenses in the interest
income. BOK is the Banking institutions, it accepts deposits from customers
(i.e. depositors) and in turn it pays interest to them. So interest expenses
refer the interest paid on deposit collected by the bank. In addition to it
provides loan to demand groups (i.e. customers) from the amount deposited
by the saver group. The income earned from providing loans helps to meet
the operating expenses and also asset for the smooth operation and long run
existence of the institution. The ratio is computed by dividing the interest
expenses by the interest income.

Interest expenses to total income ratio = Interest Expenses

Interest Income
Interest expenses = Interest paid on deposit
Interest income = Income from loan providing

The ratio explains that what portion of interest income has been expended in
the interest expenses. The ratio can be shown as below the table.

Table 4.17
Interest Expenses to Interest earning Ratio.
(Rs in millions)

60
Year Interest expenses(Rs) Interest Ratio (%)
Income(Rs)
2061 241.64 607.10 39.80
2062 308.16 718.12 42.91
2063 339.18 819.00 41.41
2064 417.54 1034.16 40.37
2065 563.11 1347.76 41.78
Source: Annual report of BOK
Table 4.17 shows the ratio of interest expenses and interest income. It
has been seen that the ratio has fluctuation. The ratio increased the financial
year 2062 than 2061 but after that slightly decreased in the year 2063
&2064 i.e. 41.41 & 40.37 percent. Again the ratio increased in the year
2065 i.e. 41.78 percent. The increasing ratio indicates the increase in interest
expenses to deposit and the decreasing ratio refers the reduction in deposit
collection.
4.8.4 Employee expenses to total income ratio
Employees are regarded as the essential element of an organization.
The existence and operation of an organization depends upon employees. In
addition to it, the success or failure of an organization also relies upon the
employees. Employees refer the human resources employed in the
organization. Therefore, the organization should appoint efficient,
competent, honest and energetic employees to sustain in the competitive
environment and to earn maximum profit providing services to its
stakeholders. Employee expenses include salary and allowances, provident
fund, bonus medical expenses, gratuity, overtime salary, Dashian expenses
etc. Hence it can be said that employees can not be segregated from an
organization. Employee expenses to total income ratio indicates the portion
of employee expenses spent out of total income. The ratio can be calculated
as below.

Employee expenses to total income ratio = Employee expenses

Total Income
Employee expenses = Salary and allowance, provident fund, Dashian
expenses, Bonus, Overtime salary, medical expenses, gratuity etc.
Total Income = Interest income, commission and discount, exchange
fluctuating income, other operating income and non operating income.
The lower ratio is suitable for an organization. The ratio can be
dropped by adopting computer network system which reduced the number
of employees in the organization. The ratio has been presented in the
following table.

Table 4.18
Employee expenses To total income ratio.
(Rs in millions)
61
Year Employee expenses(Rs) Total Income(Rs) Ratio (%)

2061 53.82 755.56 7.11

2062 59.12 894.58 6.67
2063 69.74 1051.00 6.86
2064 90.60 1297.75 7.07
2065 146.49 1704.42 8.6

Table 4.18 shows the ratio of employee expenses to total income

ratio has been shown for five years. It is seen that the ratio is fluctuating
trend. The percentage of employee expenses to total income is ratio in 2061
and 2062 is 7.11 and 6.67 percent. The ratio also decreased in the year 2062
i.e. 6.67 percent. The ratio slightly increased during the year 2063 i.e. 6.8
&2064 is 7.07 percent. In the year 2065 the ratio rested in 8.6 percent. It
states that the ratio fluctuate because of the BOK Ltd established new
branches in different places.
4.8.5 Offices expenses to total income ratio
The portion of total income spent on the office expenses is measured
by this ratio. Office expenses refer the expenses made for regular operation
of the organization. It helps to generate revenue / total income. Office
expenses includes all types of office related expenses such as house rent,
repair and maintenance, electricity and water, office equipment,
advertisement and promotion, postage and telephone, auditing and legal
expenses, transportation expenses, insurance expenses, supervision expenses
etc. The ratio of office expenses to total income ratio calculated as below.

Office expenses to total income ratio = office expenses

Total Income
Office expenses = House rent, repair and maintenance, electricity and water,
office equipment etc.
The ratio can be presented as below in the table.

Table 4.19
Office expenses to total income Ratio
(Rs in millions)
Year office expenses(Rs) Total Income(Rs) Ratio(%)

2061 99.19 755.56 13.11

2062 117.59 894.58 13.27
2063 138.43 1051.00 13.62
2064 170.48 1297.75 13.30
2065 233.67 1704.42 13.71
62
 Source: Annual report of BOK
Table 4.19 shows that the ratio of office expenses to total income has
been fluctuating during these five years. In the financial year 2061 to 2063,
the ratio is 13.11, 13.27 and 13.62 percent.
The ratio decreases in the year 2064 to 13.30 percent and in the year
2065 slightly increased to 13.71 percent. The decreasing ratio reflects the
increase in office expenses and vice – versa. Therefore, the bank should try
to minimize the expenses. Because of the establishing of new branches to
creation the increasing and decreasing ratio has been seen.
4.9 Testing Hypothesis
Hypothesis is another part of data analysis. While preceding the
study, some hypothesis had been formulated. It is also essential to test the
hypothesis. A well established hypothesis provides the guidelines in
investigation. Generally, hypothesis is defined as a logically conjectured
statement relationship between two or more variables which need to be
testes/ investigated. A hypothesis is a provisional formulation or possible
solutions of tentative expiate or suggested answers to the problems facing
by the scientists. A tested hypothesis helps to obtain some reliable
information on what kind of relationship exist among the variable and
finding solution to the problem.
Hypothesis is regarded as a milestone in organizing the collected data
in systematic way. The refined hypothesis is more sufficient in research and
the degree of significance depends on the level of abstraction underlying the
hypothesis. Hence, hypothesis leads to economy of time and as well as
significant conclusion for the advancement of knowledge. There are two
types of hypothesis that have been tested in the course of study. They are as
follows.
4.10) Trend analysis
`rend analysis indicates the direction of change. It helps to know the
direction of movement i.e. whether the movement is favorable or
unfavorable. Trend analysis helps to understand the change in an item or
group of item of the financial statements over a given period. It enables firm
to take the time dimension in to account. The trend percentage shows the
relationship of each item in statements with its proceeding year's
percentage. Under this study a base year is selected and percentage is
calculated for Investment and net profit of BOK taking the figure of base
year as 100. Therefore, trend percentage is shown in the table in form of
Index number. The table no 4, Indicates the trend percentage from the year
2061 to 2065 which is as below.

63
 Table no 4.22
Trend percentage of investment and Net profit
(Rs in millions)
Year Investment Net profit Tend (%)
(Rs)
61 3088.31 139.53 122.13
62 4164.14 202.44 120.57
63 3465.08 262.39 113.21
64 3574.42 361.50 109.88
65 3319.89 461.73 107.19
Trend Percentage

Figure 4.7

Year

Figure 4.8 shows the trend of investment and net profit of BOK Ltd
for five financial years. The trend percentage of investment is fluctuating
trend from 2061 to 2065. In other hand, the trend percentage of BOK year
2061 is 122.13 and it has decreased to 120.57 percent in year 2062. The
trend also decreased in year 2063 to 113.21 percent. It means that the bank
decreased the investment. In the year 2064 &2065 Banks decreases the
investment i.e. 109.88 & 107.19 percent. The investment policy also
decreased in the year 2065 with respect to the year 2061, 2062 2063 &
2064.
In other hand, the trend of net profit in the base year 2060 is 100
percent. Again the trend of net profit 2061 to 2065 has been increasing. The
net profit is not affected by the Investment. It means that higher the
investment to achieve higher the profit. Profit trend is positively related with
comparison of investment.

64
 CHAPTER 5
SUMMARY, CONCLUSION AND
RECOMMENDATIONS
65
 This chapter is the last part of the present study entitled, "Analysis of
financial performance of BOK Ltd.". It includes various aspects which helps
understand about the organization in essence. In other words, summary is
the brief description of the activities completed and it is the main text of the
report. Summary gives an overall view of the entire study. On the other
hand, conclusion is the inference based on the analysis of data. Conclusion
gives the answers to the research questions or the objectives set for the
purpose of the study. In short, conclusion is the essence of the research
work. Recommendation refers the suggestions based on the research work
which includes facts and analysis contained in the main text. Generally,
recommendation can be said as the final product of the research work.
Therefore, on the basis of the previous analysis of this study, this part
"Summary, Conclusion and Recommendation" express the main findings
and recommendation for improving the financial performance of the
sampled institution of BOK Ltd. This chapter is divided into the following
three sub-chapters:-
5.1. Summary
5.2. Conclusion
5.3 Recommendations
5.1. Summary
Nepal is one of the land- locked countries in the world situated bet
India at southern, Western and eastern part and China at northern part.
Nepal is mainly based upon agriculture. The basic necessities of the
population are fulfilled by selling the agro-products in the market. Most
countries of the world are stepping toward development but Nepal is rather
going backward. Development also depends upon the initiation, sacrifice,
and devotion etc, of the population of the country. But population has been
increasing rapidly. Almost 31 percent of populations are still under the
poverty. The cause of low development in south Asia can be lack of
entrepreneurship, lack of proper mobilization of resources, geographical
complexity, rural exodus etc. Therefore, there should be financial
institutions, commercial banks, cooperative organizations, insurance
companies, other NGO etc. to achieve the rate of economic growth in the
country. Considering the fact, "Financial Company Act 2042" was
formulated and the first financial institution was opened after seven years
named "Nepal Residential Development Finance Company Ltd". Similarly,
another institution was established in 2049 from private sector named
"Nepal Finance and Saving Company Limited". These financial institutions
have helped to collect and mobilize the scattered saving of the society in
industrial and trade sector.
The word "Bank" has been derived from the Italian word "Banco". In
Italian language, "Banco" refers the bench. Any group used to be engaged in
the transaction of money at public place. Later on, this word came into use
as "Bank" in English. Commercial banks are the first bank in the banking
66
history of Nepal." Nepal Bank Limited" established in B.S 1994 is the first
bank of Nepal. Similarly, another bank, "Rastriya Banijya Bank" was
opened in 2022 B.S." Nepal Arab Bank" is the first joint-venture bank
established in 2041 B.S. There are 20 commercial banks, 38 development
banks including micro-credit development, 12 finance companies, 74 saving
and credit co-operatives, 17 and 47 NGOs operating in Nepal.
For the purpose of analyzing the financial performance of sampled
institution i.e. Bank of Kathmandu Ltd, necessary data and other related
variables have been collected from secondary source and they are presented
in tabular form. Later on all the data analyzed by applying financial and
statistical tools. Similarly, available literature concerning the financial
performance analysis is reviewed and appropriate research methodology is
also described. The study has highlighted on the liquidity position,
Profitability, asset management, risk and return pattern and cash flow
pattern, capital adequacy, Non-performing loss of the institution and some
hypothesis have been formulated as well. Consequently, some other
financial indicators are also utilized to analyze clearly. To obtain the
objectives of the study, different financial variables and statistical tools like
mean, standard deviation, coefficient of variation and student's "t" test have
been used for the meaningful interpretation of the data to find out the true
financial picture of the institution.
Major findings of the study are shown as below:-
Liquidity Position:
To assess the financial performance of the BOK Ltd, liquidity ratios
have been calculated during the study period from 2061 B.S to 2065 B.S.
"Current ratios" of the institution during the study are o.79 times,0.82
times,0.88 times,0.83 times & 0.91 times respectively from 2061 to 2065.
The standard for current ratio is 2:1 but ratios are lower than standard during
the study period.
"Cash and bank balance to deposit ratio excluding fixed deposits" are
12.21, 9.37, 14.07, 11.87 & 10.5 percent respectively during the study
period. The ratio is fluctuating with respect to the past year. It shows the
ability of the institution to meet their current margin calls and saving
deposits.
Profitability Position:
The researcher has computed following profitability ratios to examine
the profitability condition:-
"Operating profit margin to interest earned ratio" has been calculated to
measure the efficiency and operation of the institution. The ratios are 44.77,
47.25, 54.48 & 52 percent respectively during the study first four year
period but decreased in last year i.e. ratios are increasing every year. In the
year 2061 the ratio is 44.77percent which is very low but it is 54.48 percent
in the year 2064 which is considered more satisfactory the average ratio is
43.04 percent.
67
"Return on assets (i.e. total assets) is also increasing every year during the
study. It was 1.64, 1.79, 2.03, 2.25 percent in the year 2063, 2064 and 2065
respectively. The ratio depends upon the organization's business nature and
fixed assets which are major part of the assets. It indicates the efficiency of
the institution to utilize resources.
"Return on Net worth Ratio" indicates how well the institution has used
the resources of the owners to earn profit. The ratio is 19.53 percent
2062/63. The ratio is 24.10, 26.41 and 26.93 percent in the year 2063/2064
and 2065 respectively. Furthermore, it has decreased to 19.53 percent in the
year 2062 and again, increasing trend. Increasing return on networth means,
increasing shareholders wealth and vice-versa.
"Return on capital Employed Ratio" explains how well the mgmt. has
used the funds. The ratio during the study period from 2061 to 2065 is
19.35, 19.47, 21.80, 23.44 and 26.51percent respectively. It indicates that
the ratio is increasing during study period.
"Net Profit Margin Ratio" measures the overall the profitability of the
institution. This ratio is also fluctuating during the study period. The ratio is
high in the year 2064 and low in the year 2061. The ratio during the study
period 2061 to 2065 is 22.98, 28.19, 32.03, 34.95and 34.25 percent
respectively.
The highest ratio is in the year 2064 i.e. 34.95 percent but the lowest
is in the year 2061 i.e. 22.98 percent. Higher ratio exhibits the maximum
utilization of deposits in that year as loan disbursement.
"Trend Analysis" helps to know the direction of movement/Change in an
item or group of item of the financial statements over a given time period. It
shows that whether the movement is favorable or unfavorable. Trend
percentage of Net interest margin ratio of the institution in the study period
2061 to 2065 has been seen, 4.29, 3.85, 3.87, 3.93 percent respectively. The
minimum ratio 3.45 percent in the year 2062 and maximum is 4.29 percent
in the year 2061. Earning per share (EPS) of the Bank has been in the study
period 2061 to 2065 is 30.10, 43.67, 43.50 59.94 and 54.68 rupees
respectively. The EPS of the institution is increasing in the study period.
Investment is 100,104,135,119 and 127 percent respectively from the year
2061 to 2065. But, trend percentages of Net profit are 100,109,158,204 and
281 percent respectively for 2061 to 2065 years. Trend percentage of
Investment as well as trend percentages of Net Profit is increasing every
year. It reflects the efficiency of the institution in Investment and profit.
"Risk and Return" are the two important aspects of the financial
management Return refer the regular income and capital gain that the
investor expects over his investment. Risk indicates the variability in the
return from investment. The return on each share is 40.93 percent whereas
risk is 11.60 percent. Furthermore, coefficient of variation states that each
shareholder has bear 28.34 percent risk in order to earn 100 percentages
returns.
68
"Cash Flow Analysis" Bank of Kathmandu has also been shown in the
study. It is seen that the cash and bank balance has increased every year due
to the increase in deposit amount which is the main source of cash
generation. Similarly, the amount of loan and advances has also increased
every year due to increase in deposit amount. Furthermore, the institution
has increasing and decreasing investment in the year 2061-2065. The
amount of share capital has increased in year 2063.
"Capital Adequacy Ratio" measures the strength of the capital structure of
the institution. Capital Adequacy ratios for the study period 2061 to 2065
are 11.22, 14.52, 12.62 and 11.93 percent respectively. It reflects that the
ratio is fluctuating trend during the period. But it does not going to below
the NRB standard. Non-performing loan to total loan and advances ratio
shows the quality of assets that a bank is holding. Higher ratio reflects the
bad performance of the bank in mobilizing loan and advances and lower
ratio reflect the good performance that the bank has well managed the loan
and advances. This ratio measures the proportion of non-performing loans
on the total volume of loan and advances. The ratio 2061 to 2065 is 5.21,
2.80, 2.58, and 1.90. The ratio has decreasing trend which means that the
bank has manage good performance.
"Loan and advances to total deposit Ratio" had been seen in the year
2061-2065 is 66.11, 69.23, 75.86, 78.70and 80.99 percent respectively. This
percentage is fluctuating during the year.
"Non - performing loan to total loan and advances Ratio" refers the
assets taken by the institution because of not paying the loan by the loaners.
The ratio is 5.28 and 2.80 percent for the year 2061, and 2062 respectively.
Again, the ratio is 2.58, 1.90 and 1.68 percent in the year 2063, 2064 and
2065 respectively. The ratio is appropriate for the institution as it saves from
losses.
"Interest Income to Total Income Ratio" Shows the proportionate
contribution of interest income in generating total income. As it is banking
sector organization, prime source of income is interest earned from loan and
advances. Interest income and total income both are shown in increasing
trend.
"Interest Expenses to Interest income Ratio" is also analyzed for the
purpose of the study. Interest expenses are paid on deposits collected by the
institution and interest income collected by providing loan. The ratios
during the study period are 39.80, 42.91, 41.41 40.37 and 41.78 percent
respectively from 2061-2065. It indicates that the ratio is in decreasing trend
till the year 2063 & 2064. Then, it again increases in 2065 but decreases in
2063 and also decreases in the year 2064.

"Employee Expenses to Total Income Ratio" are calculated to be 7.11,

6.67, 6.86 7.07 and 8.6 percent respectively from 2061 to 2065. It explains
that the institution has been fluctuating, its employee expenses.
69
"Office Expenses to Total Income Ratio" refers the expenses made for the
successful and smooth operation of the institution. The ratios are 13.11,
13.27, 13.62, 13.30and 13.71 percent respectively during the study period. It
is a sign of efficient operation because Bank has been increased the
Branches in different places.
"Testing of Hypothesis" is essential for the purpose of the study.
Hypothesis shows the relationship between two or more variables and
provides solutions to the problem. While testing the hypothesis between
interests earned and interest paid, the calculated value of "t" for interest
earned and interest paid is greater than the tabulated value. So, alternative
hypothesis is accepted. Similarly, as calculated value of "t" for liquidity and
profitability is also greater than the tabulated value, than alternative
hypothesis is accepted.
5.2 Conclusion
As Nepal is one of the developing countries in the world, the
establishment of banks and financial institutions is essential for the
economic development of the country. The scattered money of the society is
utilized in productive sector by the banks and institutions. In addition to it,
proper utilization of available funds is equally necessary to achieve the
objectives of the organization. In Nepal, different types of banks, financial
institution, insurance companies, co-operative organizations, foreign
exchange market etc. have been providing their services to the people.
Nepal is stepping toward development. Therefore, to achieve the rapid rate
of economic growth, the banks and institutions should be extended in the
country.
The conclusions of the present study can be written as below:-
The current ratio of the institution during the study period 2061 to 2065 is
lower than the standard. Similarly, cash and bank balance to deposit ratio
shows strength position in 2065 but weak position in 2062. But cash and
bank balance has been seen increasing trend for every year.
Profitability ratios measure the effectiveness of the institution to generate
profit. Profitability ratios are increasing every year except "Opt. Profit
margin to Interest Earned Ratio". Therefore, from the analysis of the
profitability ratios, it can be said that the management is sufficient to
generate sufficient profit. Operating profit ratio is also shown increasing in
the study period.
Asset Management Ratios measure the effectiveness of a firm in utilizing
available assets to generate revenue. Fixed asset turnover ratio is in
increasing and decreasing trend during the study period. Similarly, total
assets turnover ratio is decreasing in the years 2063 with comparison to past
year but it is the maximum in the years 2061. In addition to it, loan and
advances to total deposit ratio is also in increasing trend for the study period
but it is higher in the year 2063. Hence, it can be said that work performance
of overall asset management is better in the study period.
70
 Trend percentages of investment are also increasing during till the
year 2063 after that it is decrease in the year 2064 and increase in the year
2065. Which is shows that the management has been able to well invest in
the study period. Likewise, trend percentage of Net profit is also in
increasing trend till the year 2061-2065. It reflects that the management is
able to earn more profit during the study period.
From the risk – return analysis, it is seen that the return on each share
is 46.37 percent whereas its risk is 11.60 percent and return is higher than
risk. Furthermore, it is concluded that each shareholder has to bear 28.34
percent to earn 100 percent return. Again, cash flow analysis states that
maximum amount has been kept as an idle. So, there is not proper utilization
of available funds.
Other important financial indicators have been computed for the
purpose of the study. "Capital Adequacy Ratio" is increasing trend during
the study period with comparison to NRB standard. This Ratio is maintained
properly by bank. The highest ratio of the "Interest Income to Total Income
ratio" is 79.04 percentages. The "Interest Expenses to Total Income Ratio"
is also fluctuating during the study period. But, "Employee Expenses to
Total Income Ratio" and "Office Expenses to Total Income Ratio" are
fluctuating. Furthermore, alternative hypothesis is accepted while testing the
hypothesis between interests earned and interest paid as well as the
hypothesis between liquidity and profitability. Loan and advances to total
deposit ratio of BOK has fluctuating in the study period. But BOK has been
able to utilize its deposit very well.
Non-Performing loan to total loan and advances ratio has been seen
decreasing trend during the year 2061 to 2065. It can be said that the bank
has between utilization of loan and advances.
5.3 Recommendations
A clear financial picture of Bank of Kathmandu can be viewed from
the above presentation. On the basis of the summary and conclusion, some
suggestions can be recommended for better performance and to increase the
efficiency of the institution. They are written as below:-
The Bank must be considerations.
To maintain the liquidity position, the institution should not manage its
current assets and current liabilities. The position should meet the standard
level i.e. it should neither be high nor low. But the institution has bad
position on the liquidity.
The cash and bank balance of the institution is increasing every year.
So, there is need to utilize the balance in productive sector so that it could
earn profit for further expansion. It would be better to invest in government
securities, bond, and treasury bills for secured return.
The amount of deposit is increasing every year. Therefore, it is
necessary to open new branches in other areas to provide more services to
move people and to mobilize the deposit collected from customers.
71
 Profitability ratios of the institution are increasing trend during the
study period. Hence, it should reduce its operating expenses, utilize the
available resources property and mobilize the owner's equity effectively in
productive sectors to improve the profitability position and for the existence
and growth. But overall profitability ratio is fluctuating in the study period,
and the bank has a good position.
The institution has been able to utilize its assets continuously during
the study period. Furthermore, it should concentrate to use available assets
in generating revenue. Similarly, it should make more efforts to mobilize
collected deposits by extending loan and advances so that it can earn return
for the institution.

72
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Website
www.nrb.org.np
www.bok.com.np

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 Appendix - 1
Comparative Profit & Loss A/c

Particular 2061 2062 2063 2064 2065

Interest Income 607095662 718121378 819003947 1034157874 1347755382
Interest Expenses 241639164 308155647 339181011 417543432 563113007
Net Interest Income 365456498 409965730 479822936 616614442 784642375

Total operating Income 514390327 576664929 677082975 862962787 1114820075

Enployee Expenses 53822309 59119564 69740384 90601920 146494578
Office expenses 99190178 117591235 138429941 170480908 233667863
Non operating expenses 518267 -
Provision for risk 133916898 -
Operating profit before 226942675 399954129 468912650 601879959 734657634
provision for possible losses
Provision for possible loss - 78381056 81894981 38438498 33745192
Operating Profit 226942675 321573073 387017669 563441461 700912442
Non operating Income/Loss 49496 1090139 (2779849) 810748 (2027469)
Provision written Back - 103871477 37103885 61832950 21577091
Profit from Regular Operation 226992171 426534689 421341705 626085159 720462064
Profit/Loss from extra ordinary - (95205482) 411'1150 (45396284) 6934365
Items
Net profit after considering all 22692171 331329207 421752856 580688875 727396429
activities
Provision for staff Bonus 22699217 30120837 38341169 52789898 66126948
Provision for Income tax 64763233 98767743 121024706 166402098 199534570
Current years - 93235553 115424706 162535369 200304605
Previous years - 5532190 560000 3866729 (770035)
Net Profit 139529721 202440627 262386980 361496879 461734911
Source – Annual report of BOK

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 Appendix- 2
Comparative Balance sheet of BOK
Capital & 2061 2062 2063 2064 2065
Liabilities
Share 463580900 463580900 603141300 603141300 844397900
Capital
Reserve 257156916 376156916 390133544 738932488 897192263
Fund
Debenture - 200,000,000 200,000,000 200,000,000 200000000
& Bonds
Borrowing 6000000 553180,000 - -
Deposits 8942748598 10485359239 12388927294 15833737799 18083980266
Bills 19873927 11671657 - 51576245 51124559
Payable
Proposed 81476650 98711520 135575231 32804204 77333212
&
Dividend
payable
Income tax
– – – – _
liabilities
Other 19873927 89723005 107840825 161733151 241977283
Liabilities
Loan 6000000 - 7300,00,000 100000000 100000000
Payable
Total 9888533138 12278329302 14581394916 17721925187 20496005483
Liabilities
Assets
Cash 161469654 184019718 219042572 536747143 565065889
Balance
606049072 1324108431
Balance 579050828 349295702 883495841
with Nepal
Rastra
Bank
Balance 292937606
with - 195381672 213365528 297670728
financial
Institution
328873857 594047379 259278628 72679836 243351500
Money at
call and
short notice
Investment 2598253410 3374711966 2992433866 3204067718 2783598566
s

Loan 591257472 7259082579 7259082579 12462637541 14647296987

advances &
Bills

77
purchase
Fixed 95230942 110745198 110745198 387274153 417040587
Assets
Non _
Banking - 7356136 3625715 452978
Assets
222606007
Other 181672301 203688954 289978754 154346018
Assets
Total 9888533138 12278329302 14581394916 17721925187 20496005483
Assets
Source – Annual report of BOK

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79