CHAPTER-I

INTRODUCTION

1.1 Background of the study

Finance is the blood of trade, commerce and industry. Now-a-days banking sector acts
as the backbone of the modern business. Development of any country mainly
depends upon the banking system.

The term ‘Bank’ is derived from the French word Banco which means a Bench or
Money exchanging table. In olden days, European money lenders or money changers
used to display coin of different countries in big heaps (quantity) on benches or tables
for the purpose lending or exchanging.

A bank is a financial institution which deals with deposits and advances and other
related services. It receives money from those who want to save in the form of deposits
and lends money to those who need it.

A bank is a financial intermediary that performs one or more of the following

functions: safeguards and transfers funds, lends or facilitates lending, guarantees
credit worthiness and exchange money. These services are provided by such
institutions as commercial banks, central banks, savings banks, trust companies,
finance companies like insurer and investment bankers.

History of Banking
Functions performed by banks in present context have been carried out by individuals,
merchants, families or state official at least 4000 years ago. Clay tablets dated from
about 2000 BC indicates that the Babylonians deposited personal valuables for a
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service charge of one 60 of their worth. Interest charges on loans ran as high as
one third.

In medieval times, the knights Templates, a military and religious order not only

stored values and granted loans but also arranged for the transfer of funds from one
country to another. The great banking families of the Renaissance such as the
Medicis in Florence (Italy) were involved in lending money and financing
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international trade. The first modern banks were established in the 17 century,
notably the Risks bank in Sweden (1656) and the Bank of England (1694).

Banking in Nepal
Banks and banking activities have always played a prominent role in the economic
prosperity of the country. The pace of the economic development of the country
flourished as banks and its activities gradually developed. Ever since democracy
was restored in 2007 BS the government as well as citizen felt the necessity of
establishing banks in the country. Likewise, Nepal Rastra Bank (NRB) was established
in 1955 AD. It was established as an apex regulatory body for the banks to be operated
in Nepal.

The history of banking has started after the establishment of Nepal Bank Limited
(NBL) by special act in 1973 AD. The bank was established with an authorized capital
of NRS 10 million.

NRB worked hard to minimize the use of Indian currency in Nepal and to teach the use
of money instead of Barter exchange. It was overwhelmingly successful by opening
branches outside the valley. It helped a lot in raising awareness of banking. In a
decade it has its offices in 7 places which afterwards turned into branches of
commercial banks.

As the monetary transaction got more and more complex, NRB finally suggested the
movement to establish another commercial bank. As a result, Rastriya Banijya Bank
(RBB) came in to existence in 1966 AD.

After the re-establishment of democracy in 2007 BS, the government holds the liberal
policy for the economic prosperity of a nation. As a result, various commercial banks
established in a joint venture with other countries.
S.N Name of Bank Joint Venture With Established
1. Nabil Bank Ltd. Arab Emirates 1984 AD
2. Nepal Grindlays Bank Standard Chartered Bank 1986 AD
3. Nepal Indosuez Bank Bank Indosuez Group 1987 AD
4. Himalayan Bank Ltd. Habib Bank Ltd , Pakistan 1993 AD
5. Nepal SBI Bank State Bank of India 1993 AD
6. Nepal Bangladesh Bank IFIC Bank , Bangladesh 1994 AD
7. Everest Bank Ltd. Punjab National Bank , India 1994 AD

Likewise, there have been 32 commercial banks established so far till this date. Apart
from this many financial institutions and co-operatives societies have also started
contributing in the economy.

1.2 Introduction to the Nepal Investment Mega Bank Limited

Nepal Investment Bank Limited (NIBL) previously Nepal Indosuez Bank Ltd, was
established in 1986 as a joint venture between Nepalese and French partners. The
French partners holding 50% of the capital was credit Agricole Indosuez, a subsidiary
one of the largest banking group in the world. The name of the bank has been changed
to Nepal Investment Bank Limited upon the approval of bank’s annual general
meeting Nepal Rastra Bank and Company Registrar’s office with the following
shareholding structure.

 A group of companies holding 50% of the capital.

 Rastriya Banijaya Bank holding 15% of the capital.
 Rastriya Beema Sansthan holding 15% of the capital.
 The remaining 20% being held by general public.

Over the past 7 years, this bank has grown to become one of the biggest commercial
bank in Nepal. This bank has helped to fulfill growing requirements of credit and
collects deposits for the development projects and support in the business. NIBL has
the highest deposit amongst the private sectors banks throughout the Nepal.
NIBL has been very aggressive in innovating and offering new products and services
in the financial market. NIBL started Visa Electron Debit Card for the first time in
Nepal after acquiring Principal Membership of Visa International in 2003. Since
then, NIBL has been pioneering other existing banks and financial institutions in
the card business. NIBL has the largest ATM network in Nepal with the addition of
nine more ATMs to the Bank's network.

At present, NIBL has in total, seven Visa Associate Member Banks and 260 ATM outlets
connected to Switch. We have also enabled recharge card options for telecom and Wi-
Fi subscribers of Broadlink Ltd. to carry out top-ups through their ATMs, they are
the only Bank to have enabled this feature. It has also enabled ATM-based money
transfers for cardholders having multiple accounts with NIBL. Currently, it is
implementing their Switch based electronic payment gateway which will enable card to
card money transfer to any client within their Switch network. They are also updating
their systems to be EMV compliant and to issue Smart Cards. They are currently
undergoing PCI-DSS certification as well. They now have 35 Member Banks and 58
ATMs in their Proprietary Card Network called National Payment Network which
began in 2009. They now have over 400,000 cardholders in their Bank and have issued
300,000 on behalf of their National Network.

NIBL has also launched NIBL Mobile (SMS) banking which incorporates Fund Transfer,
Bill Payments, and Nepal Telecom Prepaid PIN Purchase and inquiry services as major
features. We have also made available NIBL Mobile (SMS) Banking application for
Android Platform Smart Phones (2.1 and above) and Java Enabled Phones (touch
and non-touch). NIBL has also recently launched Domestic e-Banking Remittance
which avails customers the facility to instantly transfer money to their
relatives/friends online.

Financial highlights of NIBL:

 No. 1 private sector bank in paid-up capital with NPR 3.01 billion.
 Highest assets base among private sector banks of NPR 58.35 billion.
 Topmost lender in Nepal with total loans and advances of NPR 41.88 billion.
 Highest deposits of NPR 50.13 billion.
  Net profit of NPR 1.17 billion.
 Interest income of loans and advances at 13.12 percent.
 Return on shareholders’ fund at 24.10 percent.
 25% cash dividend, 25% bonus shares.
 Highest paid up capital among the financial institutions in Nepal at NPR 3.01
billion. The highest capital base (including debentures) with NPR 5.15 billion.
 Largest amongst taxpayers in Nepal.

1.3 Statements of Problems

The organized summary of detailed information about financial position and
performance of a concern is known as financial statement. It is prepared at the end of
accounting year for periodic review of the activities of organization and results
achieved by it. It includes Profit and Loss account or income statement and
Balance Sheet. The former shows the results of operation for a particular period while
the latter indicates the financial position of the concern at the end of that period.
Hence, financial statements are the condensed form of accounts.

The financial statements of an organization are analyzed to dig up meaningful

information about its survival, stability, profitability, solvency and growth prospect.
They can be analyzed by using a number of techniques such as comparative
statements, common size statements, index analysis, ratio analysis etc. Ratio
analysis is the most popularly and widely used technique of financial
statements analysis.

A ratio is defined as the indicated quotient of two mathematical expressions.

Accordingly, accounting ratios mean a relationship between two numerical variables
obtained from financial statements. They are used as an important tool for analyzing the
financial performance of the organization over the year. Since an absolute accounting
figure on its own does not provide much meaning by itself, it has to be analyzed in
relation to other figures so that significant information about the organization’s
financial performance can be derived. Ratio Analysis is a technique of analysis and
interpretation of financial statements through mathematical expression.
It determines and presents the quantitative relationship between to accounting
figures. The accounting ratios can be expressed in proportion, percentage, rate,
times or coefficient.

1.4 Objectives of the study

Since, the data given in financial statements are meaningless and unable to
communicate anything from analytical viewpoint unless the heaps of figures contained
in them are properly analyzed. The main purpose of the study is to analyze the absolute
figures contained in Profit & Loss A/C and Balance Sheet of NIBL Ltd. to obtain a better
understanding of the position of its undertaking. The following are the important
objectives of the study:
 To evaluate the liquidity and solvency position of the concern.
 To judge the organization’s efficiency in terms of its operation and
management.
 To ascertain earning capacity of the concern as well as prediction
relating to its future earnings.
To determine the liquidity ratio, profitability ratio and leverage ratio of the
organization.

1.5 Significance of the study:

Business results and situations can be understood properly only when relevant figures
are considered together. A ratio is simply a number that shows the relationships
between two financial figures. The study is important from the point of view of
investors, depositors and management for analysis and interpretation of the concern’s
financial health. It is also useful for judging the firm’s operating efficiency, identifying
strength and weakness of its financial standing and comparing its performance with
other vying firms. Ratio analysis is helpful in financial forecasting and planning. The
ratio calculation of past years works as a guideline for future. It presents the financial
data in purposeful and conclusive manner to facilitate rational decision making of any
financial activity. The fieldwork report is expected to serve the following purposes of
the different users:
 i. Management: Management can draw significant conclusion and determine the
new policies and procedures.
ii. Owners: It lets them be acquainted with profitability and financial
position of the organization. Reliable information assures them safety of their
investment.
iii. Creditor: It helps them to know whether the firm will be financially able to pay
their debt or not, in time.
iv. Bankers/ Lenders: The report can help them to determine whether their
principal and interest will be paid when due.
v. Employees: It is purposive for them to ascertain how much
emoluments and bonus are possible from the profits of the organization.
vi. Researcher students: The report supplies secondary data for their
research efforts.

1.6 Literatures Review

Different journal articles, literature, books, annual reports, professional magazines,
brochures etc. were studied throughout the fieldwork to know what is already known
on the topic and to discover the shortcomings of the previous studies so that due
consideration can be given on them. In 2065, Miss Manisha Thapa , a student of Shree
Projjwal Collegiate Academy had made an analysis about accounting ratios of NIBL
Ltd. Her study shows that the firm is in quite good condition and profit. According to
her analysis, it still needs to improve in various sectors and search for new areas of
investment in order to raise profitability and mobilize deposit efficiently. She states
that the organization has excess liquid assets and it needs to maintain satisfactory
liquidity ratio.

Ratio Analysis is a popular technique of financial statement analysis which is the

process of determining and presenting the mutual relationship between two accounting
figures. According to Kennedy and McMullan “The relationship of one term to
another expressed in simple mathematical form is known as ratio.” Ratio analysis
revolves around the calculation of ratios, comparing them with the ratios of same firm
relating to past and interpretation as well as evaluation of ratios. It makes possible
to analyze business activities systematically. This fieldwork report analyses the
following ratio of NIBL Ltd:

A. Liquidity Ratio:
It reflects the firm’s ability to pay its short terms debts or claims within a period less
than one year. They assess the capacity of the concern to repay its short term
liabilities. The position of the concern can be measured mainly by using two liquidity
ratios such as:
 Current Ratio/ Short term Solvency Ratio/ Working Capital
 Quick Ratio/ Acid test Ratio/ Liquid Ratio

B. Leverage Ratio:
It is long term solvency ratio or capital structure ratio. It weighs up the
ability of a firm to meet the payments associated with its long term debts. It measures
the effectiveness of the long term financial position. It stands for relationship between
internal and external sources of funds of a firm. The major types of leverage ratios are:
 Debt Equity Ratio
 Debt to Total Asset Ratio
 Interest Coverage Ratio/ Time Interest Earned Ratio

C. Profitability Ratio:
It shows the overall efficiency of the concern to in terms of its sales, investments,
and earnings and dividends. An undertaking without profit is unthinkable. The
profitability ratio is related to profit. The following are the major types of
profitability ratios.
 Net Profit Ratio
 Return on Assets
 Return on Shareholder’s Equity
 Interest on Total Assets
1.7 Research Methodology
Fieldwork is a data-based systematic study of a specific situation in an organization.
Data is the essence of all fieldwork. Data is a raw information, facts or statistics
used for reference or analysis. Data can be generated from primary sources, secondary
sources or both.

A. Primary Sources
Primary data refers to data collected for the first time for a specific purpose. It can be
collected through interviews, observations or experimentation. The data needed for
this fieldwork report was collected from face- to- face interview with the manager of the
organization Mr. Hemanta Karki and official Mr. Ram Bahadur Poudel. The
respondents were asked questions through questionnaire.

B. Secondary Sources
Secondary data refers to data already available. It was collected earlier for another
purpose and exists in published form. The necessary data is also gathered from the
organization’s financial statements Income statement, Balance Sheet and the annual
report submitted in Annual General Meeting (AGM). It is also collected from
published magazines, books, articles and literature about the organization.

The collected data and information are edited, classified, tabulated and presented in
different types of charts to serve the needs of the study.

1.8 Limitation of the fieldwork

The fieldwork report may suffer from the following pitfalls:
 This fieldwork report is prepared in partial fulfillment of the requirement for
the degree of Bachelor of Business Studies of Tribhuvan University. It is just a
case study of the NIBL Ltd.
 The fieldwork report is based only on the financial statements of fiscal
year 2067/68 and 2068/69.
 It considers only liquidity ratio, leverage ratio and profitability ratio of the
concern based on financial statements.
  The relevant information and data obtained from the concern for the study
are presumed to be accurate.
 The study depends heavily on secondary data and is not free from its
limitations.
 It may suffer from the inherent weaknesses of the financial
statements of the organization.
 The deadline for the submission of report restricted the depth study.

1.9 Organization of the study

A well managed and orderly arranged scheme of the study is essential to facilitate the
overall study, which is known as organization of the study. This fieldwork
report encompasses three different parts as stated below:

Part One
It is the preliminary section of the report. It consists of acknowledgement which
expresses thanks to different individuals for their pivotal role to prepare this report in
this existing form. It also includes lists of abbreviation used as well as lists of tables
and figures.

Part Two
It contains three chapters. It is the main text of the report. It provides a bird’s eye
view of the report. The first chapter deals with introduction, background of the
fieldwork, statement of the problems, objectives of the fieldwork, literatures
review, methodology of the fieldwork, significance of the study and limitations of the
fieldwork.

The second chapter is the largest section of the report. It involves analysis and
presentation of data by using appropriate techniques. The third chapter comprises
summary, conclusion and recommendation.
Part Three
This part incorporates bibliography and appendices. Bibliography presents an
alphabetical list of books, articles, and other source materials to which references have
been made. Appendices contain the materials used in the report but related indirectly
and not explained in details.