A STUDY ON RELATION OF INTEREST RATE WITH DEPOSIT

(With reference to Prabhu Bank Limited)

A Project Report
By:
Riya Hirachan
Symbol no:
T.U. Regd. No: 7-2-723-121-2019
Herald International College

Submitted To:
Office of the Dean
The Faculty of Management
Tribhuvan University
Kathmandu

In Partial Fulfillment of the Requirements for the Degree of

BACHELOR OF BUSINESS STUDIES (BBS)
Kathmandu, Nepal
September,2023

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 TABLE OF CONTENTS
Title 1
Table of Contents 2
CHAPTER 1: INTRODUCTION 3-10
1.1 Background of the Study 3
1.2 Profile of Prabhu Bank Limited 4
1.3 Objective of the Study 4
1.4 Rationale of the Study 5
1.5 Review of Literature 5-7
1.5.1 Conceptual review 5
1.5.1.1 Current deposit 6
1.5.1.2 Saving deposit 6
1.5.1.3 Fixed deposit 7
1.5.2 Review of previous studies 7-8
1.5.2.1 Review of journals and articles 7-8
1.5.3Reserch Gap 8
1.6 Research Methodology 9-10
1.6.1 Research Design 9
1.6.2 Nature and Sources of data 9
1.6.3 Population and sample 10
CHAPTER-2 RESULT AND ANALYSIS 11
2.1 Data Presentation and Analysis 11
CHAPTER-3 SUMMARY ANDS CONCLUSIONS 12-13
3.1 Summary 12
3.2 Conclusions 12-13
BIBLIOGRAPHY 13

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 Chapter – 1
INTRODUCTION

1.1 Background of the Study

Banks disburse loans to those in need, but with a higher interest rate. The main goal of banks
worldwide is to increase their credit in the economic market and maximize profits. Credit refers
to the total amount of funds provided by commercial banks to individuals, organizations, and
governments. Acting as financial intermediaries, banks accept deposits from the public and
offer loans at a specific interest rate to generate profits. To avoid bad debts and maintain
profitability, banks must create a credit portfolio. However, in their pursuit of profit, banks may
offer loans at a low-interest rate, which can negatively impact their ability to cover debts. The
banking industry has evolved, with banks now offering services in towns and villages.
The primary objective of every banking organization across the globe is to maximize its profits
by increasing its credit in the economic market. Credit refers to the aggregate amount of funds
provided by commercial banks to individual organizations and governments. Commercial banks
act as financial intermediaries by accepting deposits from the public and offering loans at a
certain interest rate to maximize their profits. It is imperative for banks to prepare a credit
portfolio to avoid bad debts and maintain profitability (Varshney and Swaroop, 1994:42).
However, in the pursuit of profit maximization, banks often provide loans to the public at a low-
interest rate, which can negatively impact individual financial institutions' ability to cover their
debts. The banking industry has evolved significantly over time, with banks now offering a
range of services in towns and villages.
The term 'bank' comes from the Italian word banco, Latin word bancus, and French word
Banque, all meaning bench. Banks play a crucial role in the economy, accepting deposits,
advancing loans, and providing interest to depositors.
Various writers have been defined the word "bank" in different ways.
According to Scholars, "The bank is defined as factory of money for credit where it does not
purchase goods and sells it rather produces credit inform of deposit and sells it inform of
loans."
According to C.R. Crowther, "A bank collects money from those who have it to spare or who are
saving it out of their income and lends this money to those who required it." Thus. in
conclusion, we can say that bank is an organization which deals with the monetary transactions
for the mobilization of idle money or deposits in productive sectors, is essentially essential for
the development of the whole net.

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1.2 Profile of Prabhu Bank Limited
Prabhu Bank Limited (PrBL) was established in 2002 as a Finance Company under the name Kist
Bank. In May 2009, it was elevated to the status of a Class A Commercial bank. On 15th
September 2014, PrBL underwent a merger with four financial institutions, resulting in its
current name.
The financial institution in question is a commercial bank of the highest caliber, designated as
an 'A' class establishment and authorized by the Nepal Rastra Bank. It boasts a widespread
network of branches throughout the country, with its central administrative hub situated in
Kathmandu, from where it offers a comprehensive range of commercial banking services. The
bank's shares are publicly traded as an 'A' category company in the Nepal Stock Exchange.
The Bank has successfully traversed several years since its inception and has incorporated seven
distinct financial institutions in its establishment. As the preeminent banking and financial
services conglomerate in Nepal, the Bank endeavors to be present in areas of expansion, linking
clients to prospects, empowering enterprises to flourish, and economies to prosper, ultimately
aiding individuals in fulfilling their aspirations and achieving their goals. The Bank provides a
comprehensive suite of banking and investment services for both individual and corporate
customers, supported by a team of highly motivated, youthful, and dynamic professionals.
Prabhu Bank has a network of 208 Branches, 46 Extension Counters and 155 ATMs all over
Nepal.

1.3 Objectives of the Study

Research without a goal is useless. This study aims to understand the meaning of interest rates
and deposits at Prabhu Bank Limited (PrBL). It also aims to improve knowledge about the
banking industry in Nepal. This report helps gain practical experience and use knowledge in a
specific area. The main goal of the report is to explain what was learned.
We can study the objectives in following ways:

 To conduct an analysis of the fixed, savings, and total deposits of PrBL over the course of
the previous five years.
 To examine the correlation between the interest rate on deposits and the quantity of
funds deposited.
 To identify trend of rate of interest.
 To identify the relationship between deposit collection and lending of the commercial
banks.

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  To analyze the standing of the priority sector in the bank's lending activities.

1.4 Rationale of the Study

The primary operations of commercial banks are centered on deposit-taking and lending. In this
regard, Prabhu Bank Limited assumes a pivotal role in executing these functions. The present
study aims to evaluate the bank's efficacy in these procedures. This study no doubt will have
importance to various groups but in particular is directed to certain groups of people/
organizations, which are:
• It helps to know the policies of financial institutions regarding rate of interest.
• This study effort to help analyze the interest rate structure of commercial banks in Nepal.
• It helps to develop some ideas about the interest rate to the economy.
• It is useful resources for teachers, students, researchers in abstracting some useful
information about interest rate and deposits.
• This study will provide information to those who are planning to invest in Prabhu Bank
Limited
• The study will help general public to know about the overall financial position of PrBL. So. this
study helps to identify its hidden strength and weakness of bank as well as regarding financial
condition of bank.
Likely after the completion, this report will be kept in the library, which plays significant role of
reference to students making the similar study in future.

1.5 Review of Literature

The process of reviewing literature entails the examination of research studies or other
pertinent propositions in the related area of study. This is done in order to gain knowledge of
past and previous studies, their conclusions, and any deficiencies that may exist. This process is
an integral and mandatory component of research works, and is a crucial part of all
dissertations. Essentially, it involves fact-finding based on a sound theoretical framework,
oriented towards the discovery of relationships guided by experience, resonance, and empirical
investigation. This chapter serves to broaden the information base and inputs to the study, and
deals with the theoretical aspect of the topic on investment policy in a more detailed and
descriptive manner. It provides the foundation for developing a comprehensive theoretical
framework and knowledge of the status relevant to the field of research, in order to explore the
relevant and true facts for the purpose of reporting. This chapter is arranged in the following
order:

1.5.1 Conceptual review

A deposit refers to a sum of money that is entrusted to a bank, discount house, or other
financial institution. It represents an individual's assets that are placed with the institution for
safekeeping, with the expectation of receiving interest in return. From the perspective of the
bank, deposits are considered liabilities. The Commercial Bank Act 2031(1974) defines deposits

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as the amount of money deposited in a current, savings, or fixed account with a bank or
financial institution. Deposits typically consist of funds that are placed into various types of
accounts, including savings accounts, checking accounts, and money market accounts. It is
important to note that there are various types of deposits available to individuals. But for this
study, major three types of deposits are taken, they are:

1.5.1.1 Current deposit

A current deposit account is a type of running account where funds are continuously deposited
and withdrawn. These accounts are also referred to as demand deposits or demand liabilities,
as the bank is obligated to pay out funds upon demand. Typically, current deposit accounts are
opened by business entities, public institutions, corporate bodies, and other organizations that
engage in frequent banking transactions. While primarily intended for business use, individuals
may also operate current deposit accounts. The nature of these accounts allows for unlimited
deposits and withdrawals at any time. However, funds deposited into current deposit accounts
cannot be invested in productive sectors and remain as stock in the bank. As such, banks do not
provide interest on these deposits. Merchants and traders tend to benefit more from current
deposit accounts than individuals. Banks must honor checks drawn against these accounts as
long as there are sufficient funds available. Firms with high daily transaction volumes typically
operate current deposit accounts.

1.5.1.2 Saving deposit

As per the Commercial Bank Act 2031(1974), a saving account refers to an account where funds
are deposited in a bank for the purpose of saving. The saving deposit possesses the
characteristics of both current and fixed period deposits. It is primarily intended for non-trading
customers who have the potential to save and do not have a high volume of transactions
entering the account. The minimum compensating balance required while opening the account
varies according to the bank's regulations.
Developing countries often face a shortage of capital for developmental activities across all
sectors. It is not feasible for the government alone to handle and develop all sectors
simultaneously, and people cannot undertake large businesses due to their low per capita
income and high propensity to consume. Consequently, their savings and capital formation are
low, which is insufficient for carrying out developmental works. To achieve a higher rate of
growth and per capita income, economic development must be accelerated.
"Economic development may be defined in a very broad sense as a process of rising income per
head through the accumulation of capital" (Johnson. 1965:11). However, in developing
countries, capital accumulation can occur through two ways: external and internal sources.
External sources include foreign aid, loans, and grants, while internal sources rely on financial
institutions operating within the country. In Nepal, commercial banks are the primary financial
institutions that can play a crucial role in resource mobilization for economic development.
To achieve economic development, trade, industry, agriculture, and commerce must be
developed.

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1.5.1.3 Fixed deposit
Under the provisions of the Commercial Bank Act 2031(1974), a "Fixed Deposit" refers to an
account where a certain amount of money is deposited in a bank for a specific period of time.
Customers who open such accounts deposit their funds for a predetermined duration. Typically,
individuals or institutions seeking higher interest rates opt for this type of account. Fixed
deposits offer a higher interest rate compared to savings deposits. Withdrawals from fixed
deposits are highly restricted, as the deposit must remain with the bank until the maturity date.
This type of deposit is also known as a "Time Deposit" due to its primary feature of being time-
bound. The interest rate on a Fixed Deposit varies according to the duration of the deposit, and
the bank cannot alter the interest rate before the maturity period. However, at the time of
renewal, the bank may change the interest rate and other terms and conditions. The interest
paid to depositors and charged to customers for loans is a crucial factor for both deposit and
loan accounts. The difference between the interest rates of deposits and loans is the primary
source of earnings for the bank. Loans are provided to individuals or businesses by the bank to
meet their various expenses. The bank provides loans from the deposits collected, and the
interest charged on the loan depends on the nature of the loan, such as short-term, medium-
term, or long-term. According to Prof. Knight, "Profit is not a reward for bearing risk, but it is a
reward for bearing uncertainty." Banks provide loans to different people and businesses, and it
is uncertain whether all the loans will be recovered or not. If the loans are recovered, the bank
charges a certain percentage of interest, which becomes the bank's profit. In the event that
expenditures surpass income, a loss ensues. This may occur within a bank as a result of
irrecoverable loans, elevated administrative expenses, and the like. It is imperative that the
bank take measures to manage and mitigate such losses.

1.5.2 Review of previous studies

1.5.2.1 Review of journals and articles
Dhungana (2011) conducted a study on the impact of commercial banks on the economic
growth of Nepal from 1990 to 2010 AD. The study utilized secondary data and employed
statistical analysis to examine the relationship between bank deposits and economic growth.
The findings of the study indicated that a higher level of deposit in financial institutions,
particularly commercial banks, was positively associated with an increase in GDP and economic
growth.
The study also highlighted the dual role of the banking sector in mobilizing and allocating
limited resources to meet the needs of the people and promote economic development. The
study further revealed that individuals preferred to deposit their funds in saving accounts due
to the attractive features of this account. Additionally, the total deposit of various financial
institutions increased annually, with commercial banks having the highest level of depository
amount due to their reputation as a secure and sound financial institution.

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Maharajan S (2008) research aims to investigate the relationship between the total deposit
amount and the total credit granted by commercial banks in Nepal. The study utilizes secondary
data and focuses on four banks, namely Himalayan Bank Ltd. (HBL), Siddhartha Bank Ltd. (SBL),
Nabil Bank Ltd. (NBL), and Standard Chartered Bank Nepal Ltd. (SCBNL), as a sample for
comparative analysis during the period of 2059/60 to 2063/64 BS. The research employs
financial and statistical tools, such as ratio analysis, mean, standard deviation, coefficient of
variation, and correlation analysis. The findings indicate that SBL has been relatively successful
in investing in the productive sector and mobilizing its collected deposits to provide loans and
advances for profit generation. On the other hand, SCBNL appears to be more successful in
earning profits on loans and advances compared to the other three banks. The study
recommends that commercial banks should collect more deposits through a variety of deposit
schemes and facilities, such as cumulative deposit schemes, prize bond schemes, recurring
deposit schemes (life insurance), monthly interest schemes, house building schemes, direct
finance housing schemes, education loan schemes, and others.
In her thesis entitled "Deposit Mobilization of Selected Commercial Banks of Nepal," Shrestha
(2014) conducted an analysis of the trend of deposit mobilization among commercial banks in
Nepal. The study focused on four commercial banks, namely Standard Chartered Bank Nepal
Ltd (SCBNL), Nepal Investment Bank Ltd. (NIBL), Himalayan Bank Ltd (HBL), and Nabil Bank Ltd.
(NABIL), during the period from 2065 to 2069 BS. Secondary data were utilized for the study,
and various financial and statistical tools such as ratio analysis, standard deviation, average
mean, correlation coefficient, regression analysis, and trend analysis were employed to analyze
the data.
The findings of the study revealed that all the sample banks were in a better position in terms
of liquidity and profitability. NIBL maintained a good liquidity position, while NABIL had a poor
liquidity position among the sample banks. SCBNL achieved a good return on loan and advances
and had the lowest credit risk ratio among the sample banks. The deposit and loan and
advances of commercial banks showed an increasing trend. However, the growth rate of loan
and advances was in a decreasing trend, and the growth ratio of deposit was in a fluctuating
trend during the observation period.

1.5.3 Research Gap

The term "research gap" refers to the disparity between existing research and the present
study. A multitude of studies have been conducted on the performance of deposit and lending
in both developed and developing countries. Various factors have been identified as influencing
bank deposit and lending practices, and numerous studies have been conducted to measure
these determinants. Banks play a critical role in a country's economic development by
mobilizing deposits and providing capital, thereby stimulating economic growth. In Nepal, the
banking sector is a crucial contributor to the country's development and is one of the highest

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profit-generating sectors. The identification of determinants that significantly impact deposit
mobilization is essential for commercial banks to assess their current status and make
necessary changes. Previous research studies have primarily focused on the financial
performance and fund mobilization of commercial banks, the role of commercial banks, or
comparative studies of commercial banks. While there are numerous studies on deposit
mobilization of specific commercial banks or comparative studies, this research focuses on the
deposit mobilization of fifteen commercial banks in Nepal. The study covers the period from
2015/2016 to 2019/2020 A.D. and will be beneficial to interested parties, scholars, teachers,
civil society, businessmen, and the government from both academic and policy perspectives.

1.6 Research Methodology

The research methodology pertains to the methods and processes utilized in a study. It
provides a detailed explanation of the research design, which encompasses the sampling
techniques, sources and types of data, and data collection and analysis methods. The tools and
techniques employed to achieve the research objectives are also expounded upon in detail.

1.6.1 Research Design

In this particular study, both descriptive and causal comparative research designs were utilized
to address the fundamental issues at hand. The descriptive research design was employed to
gather pertinent information on bank-specific variables related to deposit mobilization in
Nepalese commercial banks. On the other hand, the causal comparative research design was
utilized to analyze the cause-and-effect relationship of these bank-specific variables on deposit
mobilization. To understand the directions, magnitudes, and forms of the observed
relationship, correlation analysis was employed under the causal comparative research design.

1.6.2 Nature and Sources of data

Data is collected by using secondary sources and the secondary data are of annual nature. Cross
sectional data are used in this study where 15 commercial banks out of 27 in Nepal were
included over the period of 2015/16-2019/20 covering the period of 5 years. The variables used
in the study are categorized into bank specific variables (deposit and lending). The data of bank
specific variables are collected from official website of concern commercial banks. This research
is completely based on secondary data so this research does not require any of survey for
collection of primary data. Data are collected from different sources as per need and
requirement.

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1.6.3 Population and sample
Though there were 27 commercial banks in Nepal till March 2021, all of them did not provided
scope for the study. In order to represent the banking sector the basis of sample selection is
that banks established in different eras like public bank of government, commercial bank
established in 1980‟s, banks established in collaboration with foreign banks, bank established
between mid-1990‟s and banks established in 2000‟s have been selected for the study. Fifteen
commercial banks have been taken. Therefore, out of 27 commercial banks, 15 are taken as
sample for the study for the period of 2015/16-2019/20.

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 Chapter-2
RESULT AND ANALYSIS

2.1 Data Presentation and Analysis

This section presents and analyzes the filtered data, which is a major chapter of this study. It
includes a detailed analysis and interpretation of data to obtain concrete results of the
Nepalese market. The relevant data and information necessary for the study are presented and
analyzed in this chapter, keeping the objectives in mind. Various calculations are made for the
analysis of interest rates and their effects on deposit amount, lending amount, and inflation
rate of the Prabhu bank.
The analysis is based entirely on secondary data available. The presentation section presents
data in tables, graphs, and charts as needed. Although there is no distinct line of demarcation
for each section, the writing is arranged in the aforementioned way. It is also noted that almost
all data used for analysis are of secondary type. The data for this study are presented, and
statistical and financial tools are used to analyze the collected data. This chapter deals with
various aspects of deposit management, such as financial ratios, the impact of deposit liquidity,
priority lending, correlation, and trend analysis.

Analysis of Result
Financial analysis is done by applying various financial tools in order to clear picture on the
variability of the project.

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 CHAPTER-3
SUMMARY AND CONCLUSIONS
3.1 Summary
Deposit mobilization refers to the process by which financial institutions collect
cash or funds from the public through various account types, including current,
savings, fixed, recurring, and specialized schemes. Capital formation is a crucial
component of national development, as it is essential for economic growth and
prosperity. Financial institutions play a critical role in the formation of capital,
with commercial banks serving as key players in the mobilization of idle and
scattered funds from the general public. Through deposit mobilization,
commercial banks collect savings from individuals and invest them in various
sectors of the national economy, thereby contributing to the development of the
country. Additionally, commercial banks provide loans to individuals, further
supporting economic growth. In Nepal, commercial banks collect deposits in the
form of current, savings, and fixed deposits, mobilizing these funds in different
sectors while also providing loans to individuals.

3.2 Conclusions
The mobilization of deposits collected by commercial banks is of utmost
importance for the development of a nation. The efficiency with which deposits
are mobilized directly impacts the strength of a nation's economy.
A study has determined that two significant factors influencing the level of
deposits are the liquidity level of banks and the interest rate offered on deposits.
Commercial bank deposits serve as the foundation for credit creation. These
banks accept deposits from the public through the establishment of primary
deposit accounts. However, banks do not retain the entire amount of money in
these accounts, and withdrawals are not made simultaneously.

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The study has concluded that several key factors contribute to deposit growth,
including the skills, awareness, capabilities, and commitment of employees,
cooperation from top management, government regulations, service quality, and
customer awareness. Deposit mobilization refers to the collection of cash or funds
by a financial institution from the public through various types of accounts, such
as current, savings, fixed, recurring, and specialized schemes. Mobilizing deposits
is an essential factor in expanding the sources available to banks, enabling them
to effectively serve their customers. Furthermore, the mobilization of deposits
plays a crucial role in providing satisfactory services to various sectors of the
economy. The success of the banking sector heavily relies on the effective
mobilization of deposits .
BIBLIOGRAPHY
Dhungana , B. R. (2011). Impact of bank’s deposit in economic growth of Nepal.
Journal of Finance and Management Review, 2(1): 186-195.
Maharajan, S. (2008). Deposit mobilization of commercial banks in Nepal. An
Unpublished Masters Level Thesis, submitted to Shanker Dev Campus, Tribhuvan
University, Kathmandu.
Shrestha, P. (2014). Liquidity and credit management practices of commercial
banks in Nepal. An Unpublished Masters Level Thesis, submitted to Shanker Dev
Campus, Tribhuvan University, Kathmandu.

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