CHAPTER – I

INTRODUCTION

1.1 Background of the Study

A financial institution is the lifeblood of economic development of the country.
Financial institution acts as catalyst for economic growth of the country. A
bank is a financial institution, which can play a significant role in the
enhancement of the economic situation of the developing country like Nepal.
Bank plays a vital role to encourage thrift and discourage hoarding by
mobilizing the resources and removing the habit of hoarding. They pursue
economic growth rapidly, developing the banking habit among the people by
collecting the small-scattered resources in one bulk, using them in the further
productive purposes, and rendering other valuable service to the country. Thus,
this gives the individual an opportunity to borrow funds against future income,
which may improve the economic well being of the borrower. Bank deals with
the offer of collected deposits and provides the loan for commercial purpose. In
other words, bank facilities act as right hand for the growth of trade and
industry for national economy of developing country like Nepal. The above
fact shows that a bank plays vital role for the economic development of the
country.

Commercial banks play an important role for economic development of nation.

They have adopted new banking technique, management like, hypothecation,
syndication lending polices, tele-banking credit card, master card from
international banking technique. They render various services to their
customers in order to facilitate their economic and social life. Commercial
banks are operating in Nepal in an act as commercial banks are operating and
performing their work under the direction of Nepal Rastra Bank. Nowadays,
there are many Commercial banks and other financial institutions, but there are
little opportunities to make fair investment. Meanwhile, the banks and financial
institutions are offering very low deposit and credit interest rate. So to survive
1
in the competitive banking market, one should follow the fundamental
principles of sound investment policy with minimum risk and maximum profit.
At present, about a dozen of the Commercial banks are operating in Nepal and
are playing important role in the economic development of the country.

Investment policy is an important ingredient of overall national economic

development because it ensures efficient allocation of fund to achieve the
materials and economic well being of the society as a whole. In this regard,
Commercial bank investment policy push drives to achieve priority of
commercial sectors in the context of Nepal’s economic development. National
development of any country depends upon the economic development of that
country and economic development is supported by financial infrastructure of
that country. Banks constitute an important segment of financial infrastructure
of any country. Banking when properly organized it aids and facilities the
growth of trade and industry and hence of national economy. In the modern
economy, banks are to be considered not as dealers in money but as the
leaders of development.

Banking plays a significant role in the development of nations. Bank is a

financial institution which primary classes in borrowing and lending. Modern
bank prefers varieties of functions. Therefore it is difficult to decide the
function of a modern bank because of their complexity and versatility in
operation. Various authors have defined the word ‘Bank’ in different ways. A
commercial bank is dealer in money and it substitutes for money such as
cheque or bills of exchange, it also provides a variety of financial service.

Commercial banks are major financial institution, which occupy quite

important place in the framework in every economy because they provide
capital for the development of industry. Commercial banks formulate sound
investment policies to make it more effective, which eventually contribute to
the economic growth of country. The bound policies help commercial banks
2
maximizing quality and quantity of investment and hereby achieve the own
objective of profit maximization and social welfare. Formulation of sound
investment policies and co-ordinate and planned efforts pushed forward the
forces of economic growth.

In the study, the word investment conceptualized the investment of income,

savings or other collected fund. The term investment covers a wide range of
activities. It is commonly known fact that an investment is only possible where
there is adequate saving. If all the incomes and savings are consumed to solve
the problem of hand to mouth and to the other basic needs. Then there is no
existence of investment. Therefore, both saving and investment are interrelated.
Investment policy is an important ingredient of overall national economy
development because it ensures efficient allocation of fund to achieve the
materials and economic well being of the society as a whole. In this regards,
commercial bank investment policy push drives to achieve priority of
commercial sectors in the context of Nepal’s economic development.

1.2 Statement of the Problem

In developing countries, the contribution on industrial sector is also very low in
the output and the employment. In Nepal the commercial bank has played a
catalytic role in the economic growth. Its investment range from small-scale
cottage industries to large industries making investment in loans and
government securities one may always wonder which investment is better. It
can be hypothesized that bank portfolio variables like loans, investment, cash
reserve, deposit and borrowing affects the national income and also how the
government policy affects these variables, such as the effect of an interest rate
on the bank portfolio variables is of great concern, therefore when monitoring
money and credit conditions, the central bank has to keep an eye on the bank
portfolio behavior. Nepalese commercial banks have not formulated their
investment policy in an organized manner. They mainly rely upon the
instructions and guidelines of Nepal Rastra Bank. They do not have clear view
3
towards investment policy. Furthermore the implementation of policy is not in
an effective way.

Thus the present study will make a modest attempt to analyze investment
policy of Siddhartha Bank Limited (SBL) and Bank of Kathmandu Limited
(BOK). In this study, SBL investment policy is analyzed comparing it with
BOK. Following are the major problems that have been identified for the
purpose of this study.
a. What portion of the total assets does the investment of the bank
covers?
b. In which sector, government securities, shares and debentures &
interbank lending, does the bank gives more preference while making
investment?
c. What returns have been obtained by SBL and BOK from investment and
what is the investment loss provision?
d. What should the bank do for having optimum investment policy?

1.3 Objectives of the Study

The main objective of this study is to examine investment policy of SBL and
BOK. The specific objectives of the study are as follows:
a. To evaluate the mobilization of fund.
b. To identify the investment in various sectors, i.e. in government
securities, corporate shares and debentures and interbank lending.
c. To examine the return on investment in government securities,
corporate shares and debentures and interbank lending.
d. To evaluate the provision for possible losses to total investment.
e. To present the opinion of bank personnel to improve investment
policy.

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1.4 Significance of the Study
Return on investment first sustains the institution and provides handful
income to the investors. The better the investment policy, the more valuable
the company, the higher return to share holders etc. and vice versa. Since the
different parties, shareholders, general public and government are directly
affected by the investment policy of the financial institutions. The researcher
feels the needs to study this policy effects on following stated parties.
 Management of banks
 Financial institution
 Share holder
 General public (customer, depositors and creditors)
 Related parties

Nepalese commercial banks have not formulated their investment policy in an

organized manner. They mainly depend upon the instructions and guidelines
of NRB. They do not have clear view towards investment policy. Further
more, the implementation of policy is not in an effective way. Thus the
present study will make a modest attempt to analyze investment policy of
SBL and BOK. This study will provide a useful feedback for academic
institution, bank employees, trainees, investors, for financial person, policy
making bodies and other concerned people with bank.

1.5 Limitations of the Study

The followings are the limitation of the study:
a. The study encompasses only the financial investment, and hence real
investment and other financial aspects have been ignored.
b. This study covers only a five year period i.e. from 2004/05 to 2008/09.
c. The accuracy of secondary data totally relies on the published annual
reports of the banks’ annual report, different publication, website and
journals. Similarly, the reliability of primary data absolutely depends
on the opinions of the respondents.
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 d. Only two banks, Siddhartha Bank Limited and Bank of Kathmandu
Limited, are taken for this study.

1.6 Organization of the Study

The study will be divided into five chapters:

Chapter I: Introduction
This chapter deals with subject matters consisting of the background, statement
of the problem, objectives, significance and limitation of the study.

Chapter II: Review of Literature

This chapter deals with review of various literatures of the study field within
the framework, of which this research is conducted. Therefore, it includes
conceptual framework along with the review of major journals, research works
and thesis etc.

Chapter III: Research Methodology

This chapter deals with research methodology and includes the research design,
population and sample, nature and sources data collection and data analysis
tools.

Chapter IV: Data Presentation and Analysis

This chapter consists of an analysis and interpretation of the data, using
financial tools and statistical tools as described in chapter three. Similarly this
chapter also includes the major findings of the study.

Chapter V: Summary, Conclusion and Recommendations

This chapter summarizes and concludes the research work. Lastly, appropriate
recommendations are made at the end of the chapter.

At the end of the study, Bibliography and Appendices are presented.

6
 CHAPTER – II
REVIEW OF LITERATURE

2.1 Conceptual Review

2.1.1 Meaning of Investment
The word ‘investment’ can be defined in many ways according to different
theories and principles. It is a term that can be used in a number of contexts.
However, the different meanings of investment are more alike than dissimilar.
Generally, “investment is the application of money for earning more money.
Investment also means savings or savings made through delayed consumption.”
(Ross; 2002: 78) According to economics, “investment is the utilization of
resources in order to increase income or production output in the future. An
amount deposited into a bank or machinery that is purchased in anticipation of
earning income in the long run is both examples of investments. Although there
is a general broad definition to the term investment, it carries slightly different
meanings to different industrial sectors.” (Duffie; 2001: 51)

According to economists, “investment refers to any physical or tangible asset,

for example, a building or machinery and equipment. On the other hand,
finance professionals define an investment as money utilized for buying
financial assets, for example stocks, bonds, bullion, real properties, and
precious items. According to finance, the practice of investment refers to the
buying of a financial product or any valued item with anticipation that positive
returns will be received in the future. The most important feature of financial
investments is that they carry high market liquidity. The method used for
evaluating the value of a financial investment is known as valuation.” (Musiela
& Rutkwoski; 1998: 65)

“According to business theories, investment is that activity in which a

manufacturer buys a physical asset, for example, stock or production
equipment, in expectation that this will help the business to prosper in the long
7
run. Investment is the commitment of money or capital to purchase financial
instruments or other assets in order to gain profitable returns in the form of
interest, income, or appreciation of the value of the instrument. Investment is
related to saving or deferring consumption.” (Musiela & Rutkwoski; 1998: 665)

“An investment involves the choice by an individual or an organization such as

a pension fund, after some analysis or thought, to place or lend money in a
vehicle, instrument or asset, such as property, commodity, stock, bond,
financial derivatives (e.g. futures or options), or the foreign asset denominated
in foreign currency, that has certain level of risk and provides the possibility of
generating returns over a period of time. When an asset is bought or a given
amount of money is invested in the bank, there is anticipation that some return
will be received from the investment in the future.

Investment is a term frequently used in the fields of economics, business

management and finance. It can mean savings alone, or savings made through
delayed consumption. Investment can be divided into different types according
to various theories and principles. While dealing with the various options of
investment, the defining terms of investment need to be kept in mind.” (Bodie
& Merton; 2002: 202-203)

Investment in Terms of Economics

“According to economic theories, investment is defined as the per-unit
production of goods, which have not been consumed, but will however, be used
for the purpose of future production. Examples of this type of investments are
tangible goods like construction of a factory or bridge and intangible goods like
6 months of on-the-job training. In terms of national production and income,
Gross Domestic Product (GDP) has an essential constituent, known as gross
investment.” (Clewlow & Strickland; 1998: 315)

8
Investment in Terms of Business Management
“According to business management theories, investment refers to tangible
assets like machinery and equipments and buildings and intangible assets like
copyrights or patents and goodwill. The decision for investment is also known
as capital budgeting decision, which is regarded as one of the key decisions.”
(Tuckman; 2002: 15)

Investment in Terms of Finance

“In finance, investment refers to the purchasing of securities or other financial
assets from the capital market. It also means buying money market or real
properties with high market liquidity. Some examples are gold, silver, real
properties, and precious items.

Financial investments are in stocks, bonds, and other types of security

investments. Indirect financial investments can also be done with the help of
mediators or third parties, such as pension funds, mutual funds, commercial
banks, and insurance companies.” (Tuckman; 2002: 17)

2.1.2 Investment Types

“A particular investor normally determines the investment types after having
formulated the investment decision, which is termed as capital budgeting in
financial lexicon. With the proliferation of financial markets there are more
options for investment types.

According to the financial terminology investment means the following:

 Purchasing Securities in Money or Capital Markets
 Buying Monetary or Paper Financial Assets in Money or Capital
Markets
 Investing in Liquid Assets like Gold, Real Estate and Collectibles

9
Investors assume that these forms of investment would furnish them with some
revenue by way of positive cash flow. These assets can also affect the
particular investor positively or negatively depending on the alterations in their
respective values.” (Questa; 1999: 13)

2.1.2.1 Capital Investment

“Capital investment is defined as the expenditure that may be incurred by a
business organization in order to purchase machineries and other fixed assets.
This expenditure is normally beneficial as it lays the foundation for future
investments of similar kind.

Capital spending is normally performed for categories that are expected to last
for more than a single year. The value of the assets being bought with capital
spending is supposed to be important as far as the preparation of the cash flow
statement is concerned.

As per the capital investment plans, the companies spend primarily on buying
new plants or equipments that may be related to their field of work. Nowadays,
the number of investors willing to opt for the medium of capital investment is
on the rise.

The phenomenon of working capital is relevant in the context of capital

investment as well as determining a company's operational status. The efficacy
of operations of a company is normally inversely proportional to the building
up of working capital. Methods like Net Present Value and Internal Rate of
Return are employed when the proposals for venture capital investments are
judged.” (Hull; 2002: 35-36)

2.1.2.2 Financial Market Investment

“When investing in the financial market, traders are provided with the
opportunity to deal in financial securities, commodities and other freely
10
interchangeable goods at affordable rates of transaction. The prices of these are
reflective of effective market speculation.

It has been observed that there has been noticeable evolution and an increase in
the various financial markets. These markets are making the best of efforts to
enhance the factor of liquidity. The different financial markets that are
available at the present time are:
 Real Estate Market
 Bond Market
 Commodities Market
 Stock or Equities Market
 Spot or Cash Market
 Forex Market
 Over-the-counter Market
 Derivatives Market” (Gould; 1968: 50)

There is an existence of general, as well as specialized financial markets in

today's world. General markets are where a diverse group of commodities are
traded, whereas specialized ones are those, which specialize in dealing with
only one kind of commodity or good.

The financial markets of today bring buyers with different interests onto the
same platform. This process enables them to locate prospective customers and
enhances the efficiency of the market operations as a whole.

2.1.2.3 Stock Investment

“The process of stock investment enables the stock traders or investors to trade
in securities. Investors can operate individually or under the guidance of
investment management companies. The system of stock investment is not
devoid of prices and the process involves a considerable amount of risk and
uncertainty. The ones who are most likely to be affected by the harsh nature of
11
the stock investment are the new investors and those who are not wise in their
decision making process.” (Hull; 2002: 41)

It could be assumed safely that stock market investment is definitely not the
right option if an investor is interested in making quick money. While investing
in the stock market it is usual for the investors and the traders to be confronted
with expenses like the following:
 Commissions
 Fees to be Paid for Brokerage and other Services
 Taxes

2.1.2.4 Share Market Investment

“Shares are purchased and sold on the primary and secondary share markets.
To invest in the share market, investors acquire a call option, which is the right
to buy a share, or a put option, which is the right to sell a share. In general,
investors buy put options if they expect prices to rise, and call options if they
expect prices to fall. For currency rate exchanges, investors may buy a swap
option.

The value of a derivative depends on the value of the underlying asset. The
various classifications of derivatives relevant to share market investment are:
 Swap
 Futures Contract
 Forward Contract
 Option Contract” (Questa; 1999: 23)

Before a share is chosen for investment, a technical analysis of the share is

performed. The price and volume of a share over a period of time are tracked
and then a business plan is constructed. A fundamental analysis involves a
close study of the company associated with the share, and its performance over
time. The fundamental analysis is important for the share market investor.
12
2.1.2.5 Land Investment
“Land as investment is a long-term investment and as the price of land all over
the world has taken an upswing, this form of investment can be termed as a
safe bet. Big development companies, wealthy individuals and well-off farmers
have involved themselves in land investment. However, a system for efficient
development of land must be in place. With the increase in land prices,
investment in land can be very lucrative as capital gains are easily realized.
Besides, land is a tangible asset and the investors can use it in their best
interests.

Land investment forms a major part of real estate investment. The attachments
to lands and buildings are not an essential requirement of land investment and
it is the main point of difference between land investment and real estate
investment. Land can be termed as the most basic form of asset. The land
developer is entrusted with the duty of developing the land. Land appreciates in
value with establishment of buildings and other proper amenities on it.”
(Pattillo; 1998: 530-531)

2.1.2.6 Retirement Investment

“Retirement investment planning ensures financial security in the post
retirement period. The resulting retirement benefits prove to be of great use for
retirees. A considerable amount of money should be invested in retirement
investment plans. Money must not be withdrawn indiscriminately from
retirement accounts. An individual's various retirement investments must be
monitored regularly. Both social security and investment in stocks may
contribute to an individual's retirement.

The first step to success in retirement investing is to develop the habit of saving
early in life. Next, a sound investment strategy is necessary, one which allows
for an amount of risk but also enhances the average annual returns on
investment. Investment in short-term government bonds and government
13
treasury bills are two examples of areas for retirement investment.” (Questa;
1999: 28)

2.1.2.7 Real Estate Investment

“Real estate can broadly be defined as immovable property. Land and things
attached to it in permanence, such as buildings, come under the category of real
estate. Investment in real estate has its fair share of risks. But one advantage of
real estate is that it gives the owner the right to transfer the title to the land.

Real estate investors often own more than one unit of real estate. The investor
uses one unit as his or her residence and accrues rental income from the others.
Investment in real estate also involves value appreciation of property over time,
which leads to capital gains. The whole program of real estate investment is a
long-term process.” (Pattillo; 1998: 535)

2.1.2.8 Gold Investment

“Gold investment is a long-term investment scheme involving low risks.
People willing to invest in gold have a natural advantage because the demand
for gold is much more than its actual supply. The price of gold is generally in a
continual rise. However, investors should not invest all their funds in one kind
of gold investment. The gold industry is huge and has many facets, and a savvy
investor can exploit this. Money can be invested directly in gold mines, for
example, which can be more lucrative than investing in physical gold.” (Lucas;
1967: 81)

Gold investors prefer to buy gold in its cheapest forms such as krugerrands,
sovereigns and bars. Gold bars are the cheapest while gold sovereigns, because
of their smaller size, are worth paying an extra premium for.

14
2.1.2.9 Portfolio Investment
“Portfolio investment refers to the passive holdings of the financial securities
such as foreign stocks, foreign bonds and other foreign financial assets, which
are not under the control of the investors.

Unlike foreign direct investment, the issuers of securities do not control the
portfolio investment. The foreign direct investment involves the investors to
make investment to acquire the lasting interest in the enterprises that are
operational outside the domestic economy. A typical foreign direct investment
relationship allows the parent enterprise and a foreign affiliate to form together
a transnational corporation.

The portfolio investments are primarily connected with the portfolio

diversification process and the examples of portfolio investment are:
 Purchasing of shares in a foreign company
 Purchasing of bonds that is issued by a foreign government
 Acquisition of the assets in a foreign country.” (Cox & Ross; 1976: 148)

“The developing countries use the portfolio investment as a growing tool in the
economy and take some measures to encourage the use of portfolio investment.
While going for liberalization and economic reforms in order to bring about the
substantial and rapid economic growth, the government takes up some policies
and instruments. The portfolio investment is one of the most famous financial
instruments that are taken up by government to enhance the economic growth.
The foreign direct investments are also encouraged by the developing countries
while going for the economic reforms.” (Lucas; 1967: 84)

2.1.2.10 Business Investment

“Business investment can give investors a chance to invest in different kinds of
businesses. Business investment can be a good option for the investors to
manage their own portfolios.
15
A number of business investment opportunities exist. Investors may choose
from different business investment plans depending on the market conditions
and trends. Business investment typically means purchasing an asset in the
form of stocks or bonds with a hope of getting returns and interest in the future.
Companies also release their shares and bonds in the capital market in order to
collect money for some financial purpose. The assets that are purchased may be
physical, intangible, or financial depending on the nature of the asset.” (Jarrow
& Turnbull; 1999: 102-103)

Business finance, on the other hand, refers to the business finance loan, which
is one of the easiest ways to acquire funds for a company. Considering the
cutthroat competition of the business world, having financial support seems to
be crucial. Finance is the most important aspect for an entrepreneur both in
order to start a new business and to expanding an existing business.

2.1.2.11 Equity Investment

“Equity investment refers to the trading of stocks and bonds in the share
market. It is also referred to as the acquisition of equity or ownership
participation in the company.

An equity investment is typically an ownership investment, where the investor

owns an asset of the company. In this kind of investment there is always a risk
of the investor not earning a specific amount of money. Equity investment can
also be termed as payment to a firm in return for partial ownership of that firm.
An equity investor, in some cases, may assume some management control of
the firm and may also share in future profits.” (Eisner & Strotz; 1963: 35-36)

In order to understand equity investment properly, it is necessary to see the

technical and fundamental analysis. The technical analysis of equity investment
is primarily the study of price history of the shares and stock market. A
fundamental analysis of equity investment involves the study of all available
16
information that is relevant to the share market in order to predict the future
trends of the stock market. The annual reports, industry data and study of the
economic and financial environment are also included in the fundamental
information of equity investment.

2.1.3 Best Investment

The best investment options depend on the particular investor. Two people
cannot be the same and so, the definition of this 'best' is bound to vary from
investor to investor. At the same time, the market conditions are also
responsible for making an investment option good or bad. There are several
factors, which are related to the definition of bet investment plan. These are:

a) Safety
“The safety of the investment is the basic factor for investing money. There are
several types of risks, which are included in an investment. The prime risk is of
facing huge loss. On the other hand the slow paced growth of the investment is
also a matter of concern for the investors. So, the best investment should cover
these factors.” (Flavell; 2002: 45)

b) Return
“Return is another matter of concern for the investors. There are several
investment mediums, which promise low but safe return. On the other hand, the
high yielding mediums are related to the high level of risk. Now this depends
solely on the investor to identify the best investment option according to his or
her mental set up.

Everybody wants to save some amount of money from the taxes. Now if the
investments can do this for them, then it is surely going to be a lucrative option
for them. It can also be considered as the best option if it can provide the above
discussed factors with the tax relief.” (Flavell; 2002: 46)

17
c) Investment Planning
“The basic idea behind any form of investment planning is to maximize future
financial returns for future security. In formulating a financial plan, an
individual investor must carefully consider his or her choices before making
any decision.

Investment planning involves considering many possible financial options that

could be used to secure the desired financial future. Often groups of individuals
get together for the purpose of investment planning.

Investment plans require careful scrutiny of the financial market. It is mostly

the responsibility of the particular firm to make the decision on the matter of
management of money, which could be utilized in meeting long term asset
investment plans or for gathering working capital.

An integral part of financial planning is the system a particular investor uses to

decide how much and in what ways to invest. Another important task is to
ascertain the source from where the money could be obtained.

Yet another important aspect of investment planning is analyzing the

development and performance of investments in a particular span of time. This
could help the investor by cutting down on the amount of uncertainty involved
in the process. Investment planning also helps investors in channeling their
funds in the right direction.” (Flavell; 2002: 48-50)

2.1.4 Investment Strategy

“Investment strategy is actually the plan, which is followed by an investor to
make profits and to achieve financial stability. Based on this investment
strategy the investor identifies the areas where the money can be invested
safely. At the same time the returns from that money is also of equal

18
importance. The investment strategy also helps the investor to reduce the risk
factor from the investment portfolio.” (Das; 2002: 61)

Now several investment options are available in the market. There are
thousands of people who are making money from these options. Again, there
are also a large number of investors who are facing losses every day. This
means that if the investment is done in a proper manner, the profit can be made
from every possible medium otherwise the result may be the opposite.

But to make the investment successful, an investor needs to do the homework

properly. He or she needs to follow that market closely in which he or she
wants to invest. There are several sources like the financial market news,
several journals, internet and many more that can provide vital information
about the financial market. This information is very important to form a
strategy. At the same time, the financial planners can also provide assistance to
form an investment strategy, which suits the need of the investor.

“Before planning a strategy for investment, one needs to be sure about the aim
of his or her investment. One needs to decide about the desired returns and
more importantly the amount of risk that he or she can bear. These factors are
going to decide the suitable medium of investment for the investor.

The investment medium may be anything; the investment portfolio of the

investor should be diversified. Investing in one single medium may increase the
amount of risk. In multi-investment, the risks related to one medium are
covered through another one.” (Das; 2002: 64)

“An essential of investment refers to why investment, or the need for

investment, is required. The investment strategy is a plan, which is created to
guide an investor to choose the most appropriate investment portfolio that will
help him achieve his financial goals within a particular period of time. An
19
investment strategy usually involves a set of methods, rules, and regulations,
and is designed according to the exchange or compromise of the investor's risks
and returns.

Investment strategies can be broadly categorized into the following types:

 Active strategies: One of the principal active strategies is market timing
(an investor is able to move into the market when it is on the low and
sell the stocks when the market is on the high), which is applied for
maximizing yields.
 Passive strategies: Frequently implemented for reducing transaction
costs.

One of the most popular strategies is the buy and hold, which is basically a
long term investment plan. The idea behind this is that stock markets yield a
commendable rate of return in spite of stages of fluctuation or downfall.
Indexing is a strictly passive variable of the buy and hold strategy and, in this
case, an investor purchases a limited number of every share existing in the
stock market index, for example the Standard and Poor 500 Index, or more
probably in an index fund, which is a form of a mutual fund.

Additionally, as the market timing strategy is not applicable for small-scale

investors, it is advisable to apply the buy and hold strategy. In case of real
estate investment the retail and small-scale investors apply the buy and hold
strategy, because the holding period is normally equal to the total span of the
mortgage loan.” (Das; 2002: 65-67)

2.1.5 The Fundamentals of Investment Management

The fundamentals of investment management taken by the investment
management companies include the processing of the securities and assets in
such way so as to gain the maximum benefit for the client investors.

20
“The client investor in the investment management may either be an insurance
company, a corporation or a pension fund or even may be private investor
going for collective investment schemes like mutual fund. The investment
managers are sitting at the centre of all investment management taking all the
decisions on behalf of the client's investments. The investment managers
generally take the fundamentals of investment management only. The
investment advisor makes an assessment on the needs and risk profile of each
client.

One of the prime tasks of the investment management firms is to allocate the
asset and the exercise of allocating funds among these assets is of high
importance, while the classes of the assets being stocks, bonds, commodities
and real estate. The asset allocation carries significant effect on the
performance of a fund as the different asset classes show different interaction
effects and market dynamics, while some researches even suggest that the asset
allocation are having the predictive power in fund's success. It is the prime task
of the investment manager to allocate the asset in the most feasible way in
order to ensure the success of the fund.” (Brealey, Razavi & Myers; 2002: 71-
72)

The diversification is another measure that the investment managers take up

seriously after asset allocation. The managers construct a list of planned
holding depending on the theory of portfolio diversification and the list
eventually indicates the amount or percentage that the fund should invest in a
particular bond or stock.

“A number of different styles of fund management are available that an

investment management institution can take up while growth, market neutral,
value, indexed, small capitalization, etc being the examples. Every style of
fund management has its own distinctive adherents and features while in any
particular financial environment it shows distinctive risk characteristics. The
21
performance of the fund is the main acid test for fund management firms and
managers. In order to make the performance measurement accurate, all the
financial institutions measure the performance of each fund and also get it
measured by external performance measurement firms. The aggregate industry
data showing how the funds performed against some given indices over various
time periods is the main index for performance measurement of a fund.”
(Brealey, Razavi & Myers; 2002: 71-73)

2.1.6 Online Investment

With the advent and subsequent growth of computers along with the
development of Internet facilities, online investment has become a much
practiced mode of investment. For a considerable period of time, online
investment has come to replace physical investment practices.

The specialty of online investment is the fact that the quality of the services
provided in this domain is top notch. The pace of transaction, as well as the fact
that the investors might be able to carry on the trade themselves without the
need of any external help has made online investment a lucrative proposition.

“The online investment services allow the investors to invest their money in
mutual funds and many other favorable investment options on a global basis. In
this context, another important aspect is that the investors operating in the
global market also prefer to invest in foreign stocks. The foreign direct
investments that are made in outstation markets have also emerged as one of
the preferred investment solutions for the global investors.

The online investment brokers play a crucial role in the context of online
investment as they are the ones who are normally entrusted with the
responsibility of managing the affairs of the online investment market besides
facilitating the transactions between the buyers and the sellers.” (Brealey,
Razavi & Myers; 2002: 83)
22
Over the years, the investment brokers operating online have been developing
ways that help the customers to make deals in the online investment market
with convenience and ease. The facilities that are available from different
websites vary, but the general emphasis of all the websites is on providing top
quality of service to their customers in order to satisfy them.

The online investment tools are also equally important as the online investment
brokers. Over the years, these devices have been playing an important role in
the context of online investments by enabling the clients to make various
investment related calculations and find out the exact amount of return that
would be received by them.

2.1.6.1 Online Investment Services

“With the continuous development of the World Wide Web, online investment
services have assumed a special role in the field of investment and related
activities. The online investment service providers have been critical in making
online investment a better choice than physical investment.

The efficient use of different innovations in the field of communication

technologies has made it possible for the providers to furnish their clients with
viable online investment services that include the opportunity to trade in other
countries, as well.

The mutual companies are the leading providers of online investment services
in a lot of countries including the United States, where insurance firms and
banks function as online investment service providers. These are normally
managed by the members of the organization rather than the shareholders. If
the mutual company happens to be a savings bank or a savings association,
then the members are granted the status of depositors, and if the mutual
company operates as an insurance company, then the members are regarded as
policyholders.” (Fielding; 1999: 408)
23
“The role of online brokers is quite significant as far as online investment is
concerned as they are responsible for looking after the transactions of their
clients in the online investment market. However, it is advisable that the clients
judge the credibility of the broker before signing the agreement with the
broker.

It is extremely important from the point of view of the investors that they sign a
formal contract with the broker. This agreement ensures that the investor has
certain rights by law and can exercise them as specified by the contract. The
online financial planners are also important in that they are responsible for
making a plan that suits the interests of their respective clients and helps them
derive the maximum possible return from their investments.” (Fielding; 1999:
410-411)

The investment clubs consist of groups of people who collect money from their
own members for the purpose of investment. Decisions are normally taken after
careful market analysis by the members. Such investment clubs make
arrangements for meetings in order to popularize the concept of online
investment services.

2.1.7 Return on Investment

“Return on investment or ROI refers to how money can be received from
investments. It is represented as a ratio of money earned or suffered as a loss in
an investment in association to the invested amount of money. The money,
which is earned, is known as profit, interest, net income or gain. The money
lost is known as loss. The return on investment (ROI) is normally expressed as
a percentage.” (Musiela & Rutkwoski; 1998: 101)

The amount of money that is invested is termed as capital, asset or principal.

Return can either be positive or negative, which means return can either mean a
profit or loss. Return on investment can be calculated on previous or present
24
investment and it is also applied for calculating the estimated rate of return of
future investment. Return on investment (ROI) is frequently used on an
annualized or yearly basis.

“Return on investment is implemented for the comparison between the returns,

which are expected to yield on investments, if the comparison cannot be
performed conveniently with the help of monetary values. Return on
investment is also known in a number of names, for example the rate of return
(ROR), rate of profit or simply return. The ROI measures the ability of a
particular company to utilize its assets for the purpose of generation of extra
value for the shareholders. ROI is estimated as Net Profit/Net Worth. The
return on investment can be improved in the following ways:
 By decreasing expenses
 By increasing profits
 By speeding growth” (Hull; 2002: 80)

The different formulas for calculating the ROI are the following:

Return on investment is equal to gain from investment minus cost of

investment divided by cost of investment. In this case, the cost of investment is
deducted from the gain from investment and then it is divided by the cost of
investment. The result is represented as a ratio or percentage.
ROI= Net Income/Book Value of Assets
Or, ROI= Net Income + Interest (1-Tax Rate)/Book Value of Assets

Return on investment or ROI is a highly popular measurement due to its

convenience. The factors on which the ROI depends for its amplification are
the following:
 The term of the project (the bigger, the more the increase)
 The rate of depreciation
 Capitalization policy
25
  The time lag between the disbursement of money and the recovery of
money (the more the time lag, the more the increase)
 The rate of appreciation of investment

2.1.8 Investment Risk

On ground of assurance of the return, there are two kinds of Investments -
Riskless and Risky. Riskless investments are guaranteed, but since the value of
a guarantee is only as good as the guarantor, those backed by the full faith and
confidence of a large stable government are the only ones considered riskless.
Even in that case the risk of devaluation of the currency (inflation) is a form of
risk appropriately called "inflation risk." Therefore no venture can be said to be
by definition risk free - merely very close to it where the guarantor is a stable
government.

2.1.8.1 Types of risk

Depending on the nature of the investment, the type of investment risk will
vary.

a) Capital Risk
“A concern with any investment is that you may lose the money you invest -
your capital. This risk is therefore often referred to as capital risk.” (Demeterfi,
Derman, Kamal & Zou; 1999: 10)

b) Currency Risk
“If the assets you invest in are held in another currency there is a risk that
currency movements alone may affect the value. This is referred to as currency
risk.” (Demeterfi, Derman, Kamal & Zou; 1999: 10)

c) Liquidity Risk
“Many forms of investment may not be readily saleable on the open market
(e.g. commercial property) or the market has a small capacity and may
26
therefore take time to sell. Assets that are easily sold are termed liquid;
therefore this type of risk is termed liquidity risk.” (Demeterfi, Derman, Kamal
& Zou; 1999: 11)

d) Financial Risk
“The risk that there may be a disruption in the internal financial affairs of the
investment, thereby causing a loss of value, is called financial risk. A prime
example of that form of risk was experienced by the investors in Enron, or one
of the dot-com stocks that really never did have a profitable financial footing.
Many of the employees of Enron experienced both liquidity and financial risk
as the price decline in the stock of that company occurred just as there was a
freeze on stock liquidation in their retirement plans.” (Demeterfi, Derman,
Kamal & Zou; 1999: 11)

e) Market Risk
“Perhaps the most familiar but often least understood form of investment risk is
market risk. In a highly liquid market like the collective stock exchanges in the
United States and across the developed world, the price of securities is set by
the forces of supply and demand. If there is a high demand for a given issue of
stock, or a given bond, the price will rise as each purchaser is willing to pay
more for the security than the last one. The reverse of that occurs when the
sellers want to rid themselves of an issue more than the buyers want to buy it.
Each seller is willing to receive less than the last one and the market price, or
valuation, declines.” (Demeterfi, Derman, Kamal & Zou; 1999: 12)

2.2 Review of NRB Directives

Nepal Rastra Bank is the central monitoring body of the financial institutions of
Nepal. For the smooth and effective operations of FI, the bank provides
circulars in regular time interval. The circular related to the investment are as
follows;

27
a) Provision for Investment in Deprived Sector
Commercial banks are compulsorily required to extend their credit and
investment in the deprived sector such as co-operative institutions and the rural
banks that are licensed through NRB. The new provision obligates the
commercial banks to invest 3.0 % of the total loan and advances to the
deprived sector.

b) Provision for Investment in Productive Sector

Nepal, being a developing country needs to develop infrastructure and other
primary productive sectors like agriculture, industry etc. For this, NRB has
directed commercial banks to extend at least 40% of their credit to the
productive sectors like agriculture sector and industrial sectors.

c) Investment in Stocks and Securities

Commercial banks are also required to minimize exposures to risk involved in
investing the deposits of the saver and other financial resources at their disposal
in earning assets. Commercial banks are required to compile and submit their
financial reports keeping in view:
 Nepal Rasta Bank Act
 Commercial Bank Act
 International Accounting System
 Nature and type of their respective transaction
 Directives of the Nepal Rastra Bank
 Monetary and Financial Statistics Manual of IMF

d) Investment Management Regulation

A commercial bank formulating a written policy may decide to invest in shares
and securities of an organized institution. However, such investment is
restricted to 10% of paid up capital of the organization. However, the
cumulative amount of such investment in all the companies in which the bank
has financial interest shall be limited to 20% of the paid up capital of the bank.
28
But the total amount of investment in share and securities of the organized
institution is restricted to 30% of the paid up capital of the bank.

Likewise, Commercial Banks are not allowed to invest in any shares, securities,
and hybrid investment issued by any banks and financial institutions licensed
by NRB. Where such investment exists prior to issuances of this directive, such
investment brought within the restrictive limitation by the FY 2003//04.
However, investments on rural microfinance development banks’ share are free
from such restriction.

2.3 Review of Related Studies

2.3.1 Review of Journals and Articles
Andrés and Rowland (2008), in their article, “Investment Flows into
Emerging Markets”, have stated that investment flows constitute an important
part of the balance of payments, and it is of this reason crucial for policy
makers to understand their behavior and determinants, both to be able to
evaluate the impact of policy decisions on the balance of payments and to be
able to correctly forecast this. Investment flows have, indeed, played an
important role in recent emerging market crises, and large inflows of portfolio
investment, in particular, often turns out to be a curse rather than a blessing,
when such flows come to a sudden stop or even reverse.

Policy makers should play a major role in fostering good fundamentals as a

result of sound, transparent and publicly known policies. Good fundamentals
affect inflows as reflected in our empirical results. In addition, sound
fundamentals can absorb sudden stops at a much lesser cost than unbalanced
economies. Unexpected transitory shocks to the capital account of an
unbalanced economy may translate into a permanent shock with high output
costs. However, good fundamentals take time to consolidate, and their impact
on capital flows might not be instantaneous. Finally, not everything is
asymmetric information and sound fundamentals. As shown, the influence of
29
external factors continues to be, and should continue to be a main determinant
of capital inflows to developing countries as the global economy tends to
greater integration. The above policy orientation does not solve the issue of
volatile and scarce capital flows. However, it should be able to alleviate some
of the threats posed in the current global capital markets with asymmetric
information.

Naudé, Oostendorp and Serumaga-Zake (2009), in their article,

“Determinants of Investment and Exports of South African Manufacturing
Firms: Firm-Level Survey Results”, has utilized data from a firm-level survey
of 61 manufacturing firms in South Africa to identify the determinants of
investment and exports of manufacturing firms in South Africa. The sample
was chosen to include a region of South Africa where manufacturing firms
were particularly subject to adjustment shocks over the past six years. These
were adjustment shocks relating to incorporation of so-called homeland areas
into South Africa, and the greater liberalization of the South African economy.
It was deemed necessary to identify the determinants of investment and exports
in manufacturing as this sector is vital for growth and job creation, and need
higher levels of investment than in the past as well as higher exports to be
internationally competitive.

The implementation of tariff reform and tariff reductions, in accordance with

the country’s GATT obligations, reduced the level of protection from
international competition that many South African firms enjoyed. During the
apartheid era, some manufacturing firms enjoyed “double” protection in that
tax, labor and other incentives were awarded to manufacturing firms that were
located in the so-called homeland areas. In order to analyze how these firms
where adjusting to greater competition, their investment and export behavior,
and the determinants thereof, was investigated. The survey results can be
summarized as follows, with reference to the results from other African
countries. Exporters are more efficient than non-exporters, and that exporting at
30
any scale is only a real possibility for firms if they have achieved a sufficient
level of efficiency. Thus, improving firm efficiency and overcoming labor cost
disadvantages are serious firm level constraints facing South African
manufacturing firms in their adjustment to globalization.

Brown, Florax and McNamara (2010), in their article, “Investment Flows in

U.S. Manufacturing”, contribute to the relatively small literature on the
regional investment. A conceptual model of location determinants is
developed, which considers the importance of agglomeration economies,
market structure, labor availability and productivity, infrastructure, and fiscal
determinants. A cross-regressive model containing spatially lagged explanatory
variables and a spatial Durbin model containing spatially lagged explanatory
variables, including the lagged dependent variable, are estimated.

The study find a positive impact associated with local agglomeration

economies, market size, labor productivity, and transportation infrastructure.
Spatial spillovers are found to be of a competitive nature at the state level,
implying that a factor that attracts more investment to a particular state is
associated with lower investments in neighboring states. Market structure was
found to be the most important factor in investment location, which suggests
that the manufacturing sector as a whole still prefers to locate near demand
centers. One potential policy implication is that policy makers should focus on
economic development policies that attract people if they wish to attract
manufacturing investment. Moreover, the attempts to increase the investment
flows in a particular state may have competitive implications for investment
flows to neighboring states. This may point to the possibility of unintended
consequences on the impact of states’ economic development policies as well
as any federal transfers used to attract investment.

31
2.3.2 Review of Thesis
Basyal (2006), in her thesis, “A comparative Study on Investment Policy of
Nepal Investment Bank Ltd. and Himalayan Bank Ltd.”, has the main objective
to examine and evaluate the investment policy of Nepal Investment Bank and
Himalayan Bank. The other specific objectives of the study are;
a. To compare the investment policy of concern banks and to discuss the
fund mobilization of these two banks.
b. To evaluate the liquidity, assets management efficiency, profitability
and risk position.
c. To determine the growth rate of bank in terms of deposit, loan and
advances, investment and profitability of the banks.

The major findings of the study are;

a. The mean current ratio of both Banks is almost same. However, NIBL
has more consistency than HBL in terms of current ratio. Likewise, the
mean ratio of cash and bank balance to total deposit of NIBL is higher
than that of HBL. It states that the liquidity position of NIBL is better
than that of HBL.
b. The mean ratio of investment on government securities to current asset
of NIBL is lower than that of HBL. It states that HBL uses to invest its
current assets in government securities more than that of NIBL.
c. The mean ratio of total investment to total deposit ratio of NIBL is lower
than that of HBL. It concludes that HBL has better utilization of deposits
to investment than NIBL.
d. The mean ratio of investment on government securities to total working
fund ratio of NIBL is lower than that of HBL. Similarly, the mean ratio
of investment on shares and debenture to total working fund ratio of
NIBL is lower than that of HBL.
e. The total investment of both banks is in increasing trend where it will be
Rs. 11701 millions in NIBL and Rs. 12784 millions in HBL in the fiscal
year 2011/12.
32
 f. There is highly positive relationship between net profit and outside
assets of both NIBL and HBL.

Shah (2007), in his thesis “A Study on Investment Portfolio of Commercial

Banks in Nepal”, has the main objective to identify the current situation of
investment portfolio of CBs in Nepal. The other specific objectives are as
follows:
a. To analyze the investment portfolio of Commercial Banks
b. To analyze the risk and return of selected commercial banks on
investment using Portfolio concept.
c. To forecasting and examine the trend of investment and to provide
complementary measures based on analysis.

The major findings of the study are;

a. Proper investment on various securities i.e. balance allocation of funds
on various government securities such as Treasury bills, National saving
bonds, Development bonds etc and fixed income percentage rate that
help to reduce the variability of return. In the analysis of risk and return
comparatively SCBNL have more return from investment on
government securities like same NABIL has better position on
investment on loan and advances.
b. The return on share and debenture of commercial banks shows wide
fluctuation. These fluctuations in returns are caused mainly by the
volatility of the shares prices in market and by the changes in dividends
in some extent. Comparatively to other assets, share and debenture has
higher return on higher risk. Hence, it is cleared from analysis that
investment on share and debenture is highly risky assets.
c. The return is slightly lower than average return from loan and advances
and share and debentures. The portfolio risk on investment is less than
that of risk on loan and advances and risk on share and debenture. It
shows there is vital role of government securities to reduce the risk.
33
 d. The study shows that the portfolio return is decreasing trend every year.
It shows the investment portfolio concept is not using properly by the
selected banks.
e. SCBNL is the bank that mobilizes its total deposits more effectively on
government securities. EBL has concentrated to mobilize its depositor’s
funds in loan and advances. HBL, NSBIBL and NIBL are not so
successful to mobilize its depositor’s funds in government securities.
But NSBIBL is also more successful to mobilize depositor’s funds in
loan and advances as well as share and debentures. And NIBL
effectively mobilize its depositor’s funds in share and debentures.

Satyal (2008), in her thesis, “A study on Portfolio Investment Analysis of

Commercial Banks in Nepal”, has the main objective to analyze the portfolio
investment of commercial banks. The other specific objectives are;
a. To examine the existing situation of portfolio investment management
of Nepalese commercial bank.
b. To analyze risk and return of commercial banks.
c. To analyze the investment and loans and advance portfolio of
commercial banks.
d. To show the present position trend of loan and advance and investment
to total deposit and forecast it.

The major findings of the study are;

a. The industrial mean ratio of investment to total deposit is 21.86%. The
only EBL has a greater ratio above industrial mean ratio i.e. 24.77>21.8.
But other banks have lower investment to total deposit ratio than
industrial mean ratio. It shows that EBL has effective mobilization its
deposit on investment to generate the return.
b. Among four commercial banks HBL has invested its more funds on
government securities (i.e. risk free assets) and lesser fund on share and
debenture (i.e. risky assets). All banks have invested more than 83%
34
 amount in government securities. Only BOKL has invested it’s 0.63%
on non-resident sector. None of the banks have invested any amount on
NRB bond.
c. All of the selected commercial banks are granting very high amount its
loan and advances to private sector. NIBL and HBL have given second
priority to government enterprise and EBL and BOKL give second
priority to foreign bills purchase and discount.
d. BOKL stock has the highest expected return i.e. 8.34% and HBL has
lowest expected return i.e. -8.82%. NIBL has also negative return i.e. -
7.71%. The market expected return is -6.47%. The risk of BOKL is the
highest i.e. 57.14% and HBL has 36.03% respectively. The market risk
is 15.68%.
e. HBL has the highest portfolio return i.e. 4.85%, NBIL stock has lowest
(i.e. negative -1.19%) portfolio return and it has the highest portfolio
risk i.e. 8.46%. It means NIBL invest its amount in risky assets so it
become in loss. EBL and BOKL have a portfolio return of 4.79% and
4.80% respectively and portfolio risk is 0.28% and 5.77% respectively.

Gautam (2009), in her thesis, “Investment Portfolio Analysis of Joint Venture

Banks”, has the main objective to identify the current situation of investment
portfolio of joint venture banks in Nepal. The specific objectives are as
follows;
a. To analyze the risk and return ratios of commercial banks.
b. To evaluate the financial performance of joint venture banks.
c. To study exiting investment policies taken by JVBs in various sectors.
d. To study portfolio structure of JVBs in investment as compared to other
joint venture banks.
e. Preference given by JVBs for investment between loan investment,
investment in real fixed assets, investment in financial assets.

The major findings of the study are;

35
 a. SCBNL and HBL have better position. NBBL and NABIL have a low
position in the industry. But EBL has a very low position in the industry
because of having lowest mean return on shareholder’s fund.
b. SCBNL has the highest mean return and EBL has the lowest return.
Expect EBL, all other four banks i.e. NABIL, SCBNL, HBL and NBBL
have good performance.
c. Among other joint venture banks, SCBNL has the highest return and
EBL has above mean return than industry average. SCBNL and EBL
mobilizes the funds in investment title is higher than the standard ratio.
d. NABIL, SCBNL and HBL are investing low amount of deposits on
loans and advance which is lower than industry average and NBBL and
EBL have invested a high amount of deposits to loans and advances title
which is higher than industry average.
e. NABIL is investing the highest amount of funds on NRB bond as
compared to other JVBs i.e. 3%. NBBL has invested no amount of funds
in this title and EBL has invested the lowest of funds i.e 0.4 % and
SCBNL and HBL have invested above industry average.

Tamrakar (2010), in his thesis, “Investment Analysis of Nepalese Banks”, has

the main objective to analyze the trend of investments in private sectors. The
other specific objectives of the study are;
a. To analyze the trend of repayment in private sectors for 10 years.
b. To measure the effectiveness of the program in terms of the investment
and repayment in rural and urban sector.
c. To evaluate the banking procedures and services in disbursing loan in
this sector.

The major findings of the study are;

a. The target of 12% investment of total outstanding liabilities in priority
sector and 3% out of which has been invested in deprived sector has
been met by RBB.
36
 b. Trend analysis of 10 years shows the increasing trend of investment in
priority sectors which shows that the CBs are giving due consideration
to increase investment in priority sector.
c. Interest charged on the loan disbursed in this sector is fairly less than the
interest charge on loans for other purposes. In addition to this, there is
high overhead cost incurred for supervision, administration and others in
this program.
d. Regression analysis shows positive relation between investment and
repayment. The Chi square test of effectiveness of program is more
effective in rural and semi rural area as compared to the urban areas.
Investment on agriculture is higher than investment on industry and
service sector.
e. The study revealed that the procedure of loan disbursing itself is
complicated for the borrowers to understanding. In fact, if the
supervisors make the scheduled supervision & inspection & the frequent
contact with the borrowers, the chance of misuse of the loan can be
minimized.

2.4 Research Gap

All of the previous studies made are concerned with comparing the total
investment with the total flow of loan and advances, and do not enlightens on
each component of the investment. Tracing this defect, the present study is
conducted to analyze the investment priority given by the banks in each
component of the investment, such as treasury bond, development bonds,
corporate securities and debentures, interbank lending and so on. Further, the
study also analyzes the primary data to understand the views of bank-related
personalities, mainly employees and investors.

37
 CHAPTER – III
RESEARCH METHODOLOGY

3.1 Research Design

Research design is the plan, structure and strategy of investigation conceived so
as to obtain answer to research questions and to control variance. It is
arrangement for collection and analysis of data. To achieve the objective of this
study, descriptive and analytical research design has been used. Some financial
and statistical tools have been applied to examine facts and descriptive
techniques have been adopted to analyze the investment policy of commercial
banks.

3.2 Population and Sample

Currently there are 29 commercial banks operating in Nepal. The study of all
these banks in this study is not impossible. So, two commercial banks, namely
Siddhartha Bank Limited and Bank of Kathmandu Limited, have been selected
randomly as sample of the study.

3.3 Nature and Sources of Data

The study is based on secondary data and primary data. The secondary data
have been extracted from the annual reports of SBL and BOK. Besides annual
reports, the official website of sampled banks, NEPSE, SEBON and NRB have
also been reviewed. While the primary data have been collected through
conduction questionnaire, targeting to the employees of the banks and investors
of shares as the respondents.

3.4 Data Analysis Tools

The collected data have no meaning if such data are not analyzed. To analyze
the data in this research, the researcher has used some statistical and financial
tools which are explained here.

38
3.4.1 Financial Tools
The major financial tools used in this research are as follows;

A) Total Net Investment to Total Assets

Investment is the one of the sources of income of bank. The bank earns interest
income from government securities, bond and other investment, and dividend
& capital gain from corporate shares. The net investment to total assets
measures what portion of the total fund available has been mobilized on
investment excluding provision.

B) Investment in Government Securities to Total Investment

Government securities are the fixed income securities issued by governments.
These securities are among the safest of all investment, as the government is
unlikely to default on interest or on principal repayments. As a result, the
government securities has enticed the bank for investment. The investment in
government securities to total investment measures what portion of the total
investment is occupied by government securities.

C) Investment in Corporate Shares and Debentures to Total Investment

This ratio shows that the banks' investment on shares and debentures of
other companies. It can be calculated by dividing investment on share and
debenture by total investment.

D) Investment in Inter Bank Lending to Total Investment

Banks are required to hold an adequate amount of liquid assets, such as cash, to
manage any potential withdrawals from clients. If a bank cannot meet these
39
liquidity requirements, it will need to borrow money in the interbank market to
cover the shortfall. Some banks, on the other hand, have excess liquid assets
above and beyond the liquidity requirements. These banks will lend money in
the interbank market, receiving interest on the assets. Thus, the interbank
lending to total investment clarifies the role of interbank lending on total
investment.

E) Return on Government Securities

The return on government securities is computed by dividing interest
income on government securities by total investment on government
securities, which can be presented as:

F) Return on Corporate Share and Debentures

The return on Shares and Debentures considers dividend yield, capital gain
yield i.e. change in market price, and the interest on debenture. The dividend
yield is only a partial indication of the return; hence, the return on Share and
Debenture significantly depends on the change in its Share Price.

G) Return on Inter Bank Lending

The bank earns interest on interbank lending. The return on interbank lending
indicates how much interest income it has collected from both local licensed
institutions lending and foreign bank lending. Higher the ratio is considered
favorable.

40
H) Provision on Investment
Investment in corporate shares and debenture is one of the sources of income to
bank. However, the market situation does always remain favorable, and thus
the market price of the invested share can be lower than the par value. To
confront which such situation, the bank keeps the provision on investment.
Thus the provision on investment measures what portion of the investment has
been kept as provision.

3.4.2 Statistical Tools

To achieve the objectives of the study set out in first chapter, the following
statistical tools have been efficiently utilized in fourth chapter to analyze the
data.

A) Mean
The arithmetic mean (or simply the mean) of a list of numbers is the sum of the
list divided by the number of items in the list. The mean is the most commonly-
used type of average and is often referred to simply as the average.

B) Standard Deviation
Standard deviation is a widely used measure of the variability or dispersion,
being algebraically more tractable though practically less robust than the expected
deviation or average absolute deviation. It may be thought of as the average

difference of the scores from the mean of distribution, how far they are away
from the mean. A low standard deviation indicates that the data points tend to
be very close to the mean, whereas high standard deviation indicates that the
data are spread out over a large range of values.

41
C) Coefficient of Variation
The coefficient of variation represents the ratio of the standard deviation to the
mean, and it is a useful statistic for comparing the degree of variation from one
data series to another, even if the means are drastically different from each
other.

D) Correlation Coefficient
Two variables are said to have correlation, when they are so related that the
change in the value of one variable is accompanies by the change in the value
of the other. One of the widely used mathematical methods of calculating the
correlation coefficient between two variables is Karl Pearson’s correlation
coefficient (r), which is defined by;

E) Regression
Regression refers to any approach to modeling the relationship between one or
more variables denoted Y and one or more variables denoted X, such that the
model depends linearly on the unknown parameters to be estimated from the data.
The simple regression line of Y on X is given by;

Where, Y = Dependent Variable

a = Constant
b = Regression Coefficient
X = Independent Variable

F) Probable Error
42
The probable error denoted by P.E. is used to measure the reliability and test of
significance of correlation coefficient. Significance of relationship has been
tested by using the probable error (P.E.) and it is denoted by the following
model:

Where, r = the value of correlation coefficient

n = number of pairs of observations
if r < P.E., it is insignificant, i.e. there is no evidence of correlation
if r > 6 P.E., it is significant.

G) Trend Analysis
Trend analysis is an analysis of financial ratio over time used to determine the
improvement of deterioration of financial situation. Using the least square
method, the projection for two years is done. For the estimation of linear trend
line, following formula has been used.
Y = a + bx

Where,
Y = dependent variable
a = y-intercept
b = slope of the trend line
x = independent variable

43
 CHAPTER – IV
DATA PRESENTATION AND ANALYSIS

4.1 Secondary Data Analysis

Under this section, the data related to the investment of banks in each sector,
i.e. in government securities, corporate shares and debentures, interbank,
lending are analyzed with respect to the total investment and the return on such
investment is evaluated.

4.1.1 Total Net Investment to Total Assets

Investment is the one of the prominent sources of income in bank. The interest
and the dividend income achieved from investment buttresses the net profit of
the bank. However, it seems that the bank has been less enticed in investment
in comparison to granting loan and advances. To measure the preponderance of
the total net investment on the total fund mobilized, the ratio of net investment
to total assets of SBL and BOK have been evaluated.
Table 4.1
Total Net Investment to Total Assets
FY SBL BOK
TNI TA Ratio TNI TA Ratio
2004/05 286.62 3091.10 9.27 2598.25 9857.13 26.36
2005/06 650.98 4756.93 13.68 3374.71 12278.33 27.49
2006/07 865.19 7954.65 10.88 2992.43 14581.39 20.52
2007/08 1150.09 11668.35 9.86 3204.07 17721.92 18.08
2008/09 2176.43 17881.75 12.17 2783.60 20496.00 13.58
Mean 11.17 21.21
S.D. 1.60 5.18
C.V.% 14.29 24.45
(Source: Appendix-I)

44
The table manifests that the total net investment of the bank out of the total
fund mobilization is comparatively lower, which indicates that the bank has
given predilection to the loan and advances while mobilizing the available
fund. Nonetheless, both the banks have put their effort to increase the
investment amount in most of the fiscal years. As a result the net investment of
SBL has increased from Rs. 286.62 millions in the fiscal year 2004/05 to Rs.
2176.43 millions in the fiscal year 2008/09 and the net investment of BOK has
ranged from Rs. 2598.25 millions in the fiscal year 2004/05 to Rs. 3374.71
millions in the fiscal year 2005/06, and in the fiscal year 2008/09 it is Rs.
2783.60 millions. In addition, the total assets of the both the banks have
undoubtedly increased in each fiscal year.

The table reveals that the total net investment to total assets of SBL has
fluctuated during the entire periods, which means that the total net investment
of the bank could not meet the same pace of growth that the total assets has
followed. Consequently, the ratio of total net investment to total assets of SBL
is 9.27% in the fiscal year 2004/05, which has increased to 13.68% in the fiscal
year 2005/06, then it has decreased to 10.88% in the fiscal year 2006/07 and
9.86% in the fiscal year 2007/08, and finally it has increased to 12.17% in the
fiscal year 2008/09. In average, the bank has mobilized 11.17% of the total
funds in the investment such as government securities, foreign securities inter -
bank lending, and corporate shares and debentures. Also the fluctuation on the
ratio is 14.29%, indicating lower variation.

Unlike in SBL, the ratio of net investment to total assets of BOK has followed
decreasing trend, indicating lower growth rate in investment than in total
assets. The ratio is 26.36% in the fiscal year 2004/05, and by the end of the
fiscal year 2008/09, it has gradually decreased to 13.58%. This decreasing
phenomenon has signaled that the bank has been fascinated in other sectors in
the quest of augmenting profit, and thus investment in government securities,
corporate shares and debentures, foreign and local licensed institutions etc.
45
have been given low preference. In average, 21.21% of the total funds have
been mobilized in investment and the variation in the ratio is 24.45%.

On the basis of the average ratios, it can be considered that BOK has mobilized
the total funds in investment in greater extent than SBL has done. But if the
past trend continues, the ratio in SBL will be inevitably greater than the ratio in
BOK in the forthcoming fiscal years.
Figure 4.1
Total Net Investment to Total Assets

4.1.2 Investment in Government Securities to Total Investment

The commercial banks of Nepal seem to be highly enticed by the government
securities while making investment, and thus the investment of the banks is
highly dominated by the government securities, which involves treasury bill
and development bonds. The investment in government securities to total
investment delineates to what extent the investment of the bank is dominated
by government securities.

46
 Table 4.2
Investment in Government Securities to Total Investment
FY SBL BOK
TB DB GS TI Ratio TB DB GS TI Ratio
2004/05 272.50 3.77 276.27 286.62 96.39 1559.51 587.11 2146.62 2598.61 82.61
2005/06 394.59 3.77 398.36 650.98 61.19 2072.38 585.99 2658.37 3378.13 78.69
2006/07 621.97 3.77 625.74 865.19 72.32 1387.39 944.65 2332.04 2995.19 77.86
2007/08 846.31 3.77 850.08 1150.09 73.91 1281.18 832.04 2113.22 3206.83 65.90
2008/09 1483.72 3.77 1693.57 2176.43 77.81 907.25 837.72 1744.97 2786.35 62.63
Mean 76.33 73.54
S.D. 11.45 7.81
C.V.% 15.00 10.62
(Source: Appendix-I)
Both the banks have ignored savings bonds of the government securities and
focused on treasury bills and development bonds. Further, there is no addition
in development bonds by SBL, as a result the investment amount in
development bonds has been limited to Rs. 3.77 millions in each fiscal year. In
contrast, BOK has made addition to development bonds for the first three fiscal
years, i.e. from Rs. 587.11 millions in the fiscal year 2004/05 to Rs. 944.65
millions in the fiscal year 2006/07, and then the bank has made deductions in
the remaining two fiscal years, i.e. Rs. 832.04 millions in the fiscal year
2007/08 and Rs. 837.72 millions in the fiscal year 2008/09.

In contrast, the investment of SBL in treasury bills has increased in each fiscal
year, and thus it has increased from Rs. 272.50 millions in the fiscal year
2004/05 to Rs. 1483.72 millions in the fiscal year 2008/09. However, the
investment of BOK in treasury bills has increased in the fiscal year 2005/06,
i.e. to Rs. 2072.38 millions in the fiscal year 2005/06 from Rs. 1559.51
millions in the fiscal year 2004/05, and then decreased in the remaining years,
and finally the treasury bill has been decreased to Rs. 907.25 millions.

In overall, SBL has increased the total investment in government securities in

each fiscal year, as a result the government securities of the bank has increased
47
almost by six times within the five year periods, i.e. from Rs. 276.27 millions
in the fiscal year 2004/05 to Rs. 1693.27 millions in the fiscal year 2008/09.
However, the total investment in government securities of BOK has fluctuated
during the five consecutive fiscal years, and thus it has ranged from Rs.
2598.61 millions in the fiscal year 2004/05 to Rs. 3378.13 millions in the fiscal
year 2005/06.

Moreover, the investment in government securities to total investment of SBL

has fluctuated during the periods, and thus it has ranged from 96.39% in the
fiscal year 2004/05 to 61.19% in the fiscal year 2005/06, while in the fiscal
year 2008/09 the ratio is 77.81%. In average, the government securities have
covered 76.33% of the total investment and the variation in such coverage is
15.00%. Similarly, the investment in government securities to total investment
of BOK has decreased in each fiscal year, and thus it has diminished from
82.61% in the fiscal year 2004/05 to 62.63% in the fiscal year 2008/09. In
average, the government securities have occupied 73.54% of the total
investment with 10.62% variation.

Finally, it has been ascertained that the banks are more enticed toward the
treasury bill than the development bond. Although the coverage of government
securities in total investment is less in the recent periods, the government
securities still have greater preponderance in total investment than other form
of investment. On the basis of average ratio, it can be avowed that SBL has
focused more on government securities than BOK.

48
 Figure 4.2
Investment in Government Securities to Total Investment

4.1.3 Investment in Corporate Shares and Debentures to Total Investment

Corporate shares and debentures is another field where the bank is interested to
make investment. The investment in corporate shares and debenture to total
investment depicts the weight of corporate share and debentures.
Table 4.3
Investment in Corporate Shares and Debentures to Total Investment
FY SBL BOK
Shr. Deb. CSD TI Ratio Shr. Deb. CSD TI Ratio
2004/05 0.35 0.00 0.35 286.62 0.12 23.16 69.86 93.02 2598.61 3.58
2005/06 0.35 0.00 0.35 650.98 0.05 23.16 73.71 96.87 3378.13 2.87
2006/07 15.35 0.00 15.35 865.19 1.77 25.56 64.61 90.17 2995.19 3.01
2007/08 16.23 0.00 16.23 1150.09 1.41 28.32 85.73 114.05 3206.83 3.56
2008/09 16.23 0.00 16.23 2176.43 0.75 29.21 94.54 123.75 2786.35 4.44
Mean 0.82 3.49
S.D. 0.68 0.55
C.V.% 83.28 15.87
(Source: Appendix-I & II)
SBL has shown no interest in corporate debenture and bond for investment, and
thus it has focused only in corporate shares; limited to the share of Credit
Information Corporation Limited and Siddhartha Insurance Limited. Whereas
49
BOK has invested in both debenture; debenture of State Bank of India, and
corporate shares; share of Central Region Rural Development Bank, Rural
Microfinance Development Centre, Chimmek Bikash Bank, Credit Information
Bureau, Himalayan Distillery Limited and Nepal Clearing House Limited.

Moreover, the corporate investment of SBL has increased for the first four
years, i.e. from Rs. 0.35 millions in the fiscal year 2004/05 to Rs. 16.23
millions in the fiscal year 2007/08, and then it has remained stable in the fiscal
year 2008/09. Consequently, the corporate share and debenture investment to
total investment of the bank has fluctuated during the observed periods and
thus it has ranged from 0.05% in the fiscal year 2005/06 to 1.77 times in the
fiscal year 2006/07. In average, the corporate investment of SBL has
represented miniature share of total investment, i.e. just 0.82%, which has
varied enormously by 83.28%.

Similarly, the corporate share investment of BOK has increased in the last four
fiscal years, i.e. from Rs. 23.16 millions in the fiscal year 2005/06 to Rs. 29.21
millions in the fiscal year 2008/09. And the corporate debenture investment of
BOK has increased in most of the fiscal years, from Rs. 69.86 millions in the
fiscal year 2004/05 to Rs. 95.54 millions in the fiscal year 2008/09. As a result
the total corporate share and debenture investment of the bank has ranged from
Rs. 90.17 millions in the fiscal year 2006/07 to Rs. 123.75 millions in the fiscal
year 2008/09. Eventually, the representation of corporate investment of BOK in
total investment has fluctuated during the observed periods and thus the ratio
has ranged from 2.87% in the fiscal year 2005/06 to 4.44% in the fiscal year
2008/09. In average, the representation of corporate investment in total
investment of the bank is 3.49% with the variation of 15.87%.

Comparing the banks, it can be inferred that SBL has given less preference to
corporate share and debenture investment than BOK, as a result the

50
preponderance of corporate share and debenture on total investment in SBL is
lower than that in BOK.
Figure 4.3
Investment in Corporate Shares and Debentures to Total Investment

4.1.4 Investment in Inter Bank Lending to Total Investment

Interbank lending involves lending to both local licensed institutions and
foreign banks for a short period of time, which in turn returns interest, and thus
is the other sector of bank for investment. The ratio of investment in interbank
lending to total investment measures the relationship between them.
Table 4.4
Investment in Inter Bank Lending to Total Investment
FY SBL BOK
Local Foreign IBL TI Ratio Local Foreign IBL TI Ratio
2004/05 10.00 0.00 10.00 286.62 3.49 0.00 358.97 358.97 2598.61 13.81
2005/06 140.00 112.26 252.26 650.98 38.75 0.00 622.89 622.89 3378.13 18.44
2006/07 195.00 29.09 224.09 865.19 25.90 0.00 572.98 572.98 2995.19 19.13
2007/08 50.00 233.78 283.78 1150.09 24.67 0.00 979.54 979.54 3206.83 30.55
2008/09 50.00 416.25 466.25 2176.43 21.42 9.19 908.44 917.63 2786.35 32.93
Mean 22.85 22.97
S.D. 11.33 7.43
C.V.% 49.61 32.33
(Source: Appendix-I)

51
The table depicts that SBL has practiced interbank lending with both the local
licensed institutions and foreign banks. However, in some fiscal years the
amount of interbank lending to local institutions is greater and in some fiscal
years the amount of interbank lending to foreign banks is higher. Generally, the
local interbank lending has ranged from Rs. 10 millions in the fiscal year
2004/05 to Rs. 195.00 millions in the fiscal year 2006/07, and the foreign
interbank lending has ranged from Rs. 29.09 millions to Rs. 466.25 millions in
the last four fiscal years. In overall, the total interbank lending of SBL has
increased in each fiscal year, except in the fiscal year 2006/07, and thus it has
ranged from Rs. 10 millions in the fiscal year 2004/05 to 466.25 millions in the
fiscal year 2008/09. Moreover, the total interbank lending to total investment
has decreased in the last four fiscal years, and thus the ratio is highest, 38.75%,
in the fiscal year 2005/06 and lowest, 3.49%, in the fiscal year 2004/05. In
average, the total interbank lending has represented 22.85% of the total
investment with 49.61% variation.

Likewise, BOK has ignored interbank lending to local licensed institutions for
the first four fiscal years, and the transaction is only Rs. 9.19 millions in the
fiscal year 2008/09. However, the bank has shown interest in foreign interbank
lending and thus, except in the fiscal year 2006/07 and 2008/09, it has
increased in other remaining years. As a result, the foreign interbank lending of
BOK has ranged from Rs. 358.97 millions in the fiscal year 2004/05 to Rs.
979.54 millions in the fiscal year 2007/08. Since the local interbank lending for
the first four fiscal years is nil, the total interbank lending in these periods is
same as the foreign interbank lending and at the end of the fiscal year 2008/09
the total interbank lending is Rs. 917.63 millions. Nonetheless the interbank
lending to total investment of BOK has increased in each fiscal year, and thus
the ratio has increased from 13.81% in the fiscal year 2004/05 to 32.93% in the
fiscal year 2008/09, with the variation of 32.33%.

52
Finally, it can be stated that the preponderance of interbank lending on total
investment does not vary greatly in average in the observed banks. Further it
can be stated that each bank has preferred to government securities first, then to
interbank lending and finally to corporate investment.
Figure 4.4
Investment in Inter Bank Lending to Total Investment

4.1.5 Return on Government Securities

The bank receives interest income on both the treasury bill and development
bonds. The return on government securities measures what percentage return is
received from government securities .
Table 4.5
Return on Government Securities
FY SBL BOK
Int.TB Int. DB IGS GS ROGS Int.TB Int. DB IGS GS ROGS
2004/05 3.60 0.25 3.85 276.27 1.39 70.88 17.12 88.00 2146.62 4.10
2005/06 14.57 0.25 14.82 398.36 3.72 82.24 32.08 114.32 2658.37 4.30
2006/07 13.52 0.25 13.77 625.74 2.20 65.44 43.14 108.59 2332.04 4.66
2007/08 22.24 0.25 22.49 850.08 2.65 41.04 43.92 84.96 2113.22 4.02
2008/09 66.52 1.04 67.56 1693.57 3.99 73.98 42.75 116.73 1744.97 6.69
Mean 2.79 4.75
S.D. 0.96 0.99
C.V.% 34.46 20.89
(Source: Appendix-III)

53
SBL has earned constant interest income, i.e. Rs. 0.25 millions, for the first
four years from development bonds and then Rs. 1.04 millions in the fiscal year
2008/09. However, the interest earning on treasury bond has increased in most
of the fiscal years, and thus it is maximum, Rs. 66.52 millions, in the fiscal year
2008/09 and minimum, Rs. 3.60 millions, in the fiscal year 2004/05. In total,
the interest earning on government securities of the bank is Rs. 3.85 millions,
Rs. 14.82 millions, Rs. 22.49 millions, Rs. 67.56 millions in the fiscal year
2004/05, 2005/06, 2006/07, 2007/08 and 2008/09 respectively. Such interest
earning has represented 1.39%, 3.72%, 2.20%, 2.65% and 3.99% return on
government securities in the same fiscal year. In average, the return on
government securities is 2.79% with the variation of 34.46%.

In most of the fiscal years, the interest earning of BOK in treasury bond is
higher than the interest earning in development bonds, since the bank has
invested higher amount in treasury bond than in development bonds. The
interest earning on treasury bond has ranged from Rs. 41.04 millions in the
fiscal year 2007/08 to Rs. 82.24 millions in the fiscal year 2005/06 and the
interest earning in development bond has ranged from Rs. 17.12 millions in the
fiscal year 2104/05 to Rs. 43.92 millions in the fiscal year 2008/09. In total the
interest earning on government securities of the bank is lowest, Rs. 84.96
millions, in the fiscal year 2007/08, and highest, Rs. 116.73 millions, in the
fiscal year 2008/09. Such interest earning has shown 4.10%, 4.30%, 4.66%,
4.02% and 6.69% return on investment in government securities in the fiscal
year 2004/05, 2005/06, 2006/07, 2007/08 and 2008/09 respectively. In average,
the return on government securities is 4.79% with 20.89% variation.

Though the ratio of government securities to total investment of SBL is greater

than that of BOK, the return on government securities is higher in BOK in
comparison to that in SBL. This might be due to policy of SBL in unchanging
the amount on development bonds and in increasing the treasury bonds, while

54
in contrast BOK has adopted the policy of increasing the amount of
development bonds.
Figure 4.5
Return on Government Securities

4.1.6 Return on Corporate Shares and Debentures

Corporate shares yield return in the form of dividend and capital gain, while
debentures yield return in the form of interest. To measure the earning of the
banks in the corporate share and debentures investment, the return on corporate
shares and debentures has been evaluated.

55
 Table 4.6
Return on Corporate Shares and Debentures
FY Corporate Shares Debentures Income Inv. on Return
Div. Price Change Inc. on CS Interest on CSD CSD (ROCSD)
SBL
2004/05 0 0 0 0 0 0.35 0.00
2005/06 0 0 0 0 0 0.35 0.00
2006/07 0 0 0 0 0 15.35 0.00
2007/08 0 22.95 22.95 0 22.95 16.23 141.40
2008/09 0 -9.00 -9.00 0 -9.00 16.23 -55.45
Mean 17.19
S.D. 65.72
C.V.% 382.28
BOK
2004/05 0.05 0.00 0.05 0.25 0.30 93.02 0.32
2005/06 0.22 -0.80 -0.58 3.78 3.20 96.87 3.30
2006/07 0.49 6.59 7.08 3.20 10.28 90.17 11.40
2007/08 0.15 6.84 6.99 3.41 10.40 114.05 9.12
2008/09 0.34 3.99 4.33 5.12 9.45 123.75 7.64
Mean 6.36
S.D. 4.01
C.V.% 63.10
(Source: Appendix-III)
The investment of SBL in corporate shares (no corporate debenture investment)
is quite melancholy, as the bank has neither enjoyed capital gain nor received
dividend in the first three fiscal years. However, in the fiscal year 2007/08, the
bank has enjoyed a capital gain of Rs. 22.95 millions on the share investment in
Siddhartha Insurance Limited, and in the fiscal year 2008/09 the bank incurred
a capital loss of Rs. 9.00 millions on the share investment of same insurance.
The share investment in Credit Information Corporation limited seems fruitless
within these periods. In addition, the return on corporate share and debenture of
SBL is 141.40% in the fiscal year 2007/08, -55.45% in the fiscal year 2008/09
and nil in other remaining fiscal years. Thus, it can be said that the return on
corporate shares and debentures of the bank is irregular. Nonetheless, the bank
has received 17.19% of the corporate shares and debentures as return, which
has varied by 382.28%, showing extremely inconsistent.

56
In contrast to SBL, BOK has received interest income on debenture investment
in State Bank of India in each fiscal year. The interest income on debenture
thus has ranged from Rs. 0.25 millions in the fiscal year 2004/05 to Rs. 5.12
millions in the fiscal year 2008/09. Also the bank has received dividend on
corporate share investment in each fiscal year, and thus the dividend income
has ranged from Rs. 0.05 millions in the fiscal year 2004/05 to Rs. 0.49
millions in the fiscal year 2006/07. In addition to these, the bank has enjoyed
capital gain in last three fiscal years, i.e. Rs. 6.59, Rs. 6.84 and Rs. 3.99 in the
fiscal year 2006/07, 2007/08 and 2008/09, and bared capital loss in the fiscal
year 2005/06 amounting to Rs. 0.80 millions. Though the bank has invested in
corporate shares of six local licensed institutions within these observed periods,
the bank has bared capital gain or loss only in Chimmek Bikash Bank Limited
and Himalayan Distillery Limited. Summing the dividend, capital gain and
interest, it has been revealed that the income on corporate shares and
debentures has increased for the first four fiscal years, i.e. from Rs. 0.30
millions in the fiscal year 2004/05 to Rs. 10.40 millions in the fiscal year
2007/08, and slightly decreased to Rs. 9.45 millions in the fiscal year 2008/09.
Moreover the return on corporate shares and debentures of the bank has
fluctuated during the periods and thus it has ranged from 0.32% in the fiscal
year 2004/05 to 11.40% in the fiscal year 2006/07, while in the fiscal year
2008/09, it is just 7.64%. In average, the bank has received a return of 6.36%
from total investment in corporate shares and debentures with 63.10%
variation.

Comparing the banks it can be said that although the average return of SBL is
greater than that of BOK, the return of SBL is almost uncertain and irregular,
while that of BOK is regular and BOK has received all three income; dividend,
capital gain and interest on debenture.

57
 Figure 4.6
Return on Corporate Shares and Debentures

4.1.7 Return on Inter Bank Lending

The purpose of interbank lending is to gain interest income. The interest
income earned by the bank in both domestic and foreign lending has been
summed up and presented in the table to evaluate the return on interbank
lending.
Table 4.7
Return on Inter Bank Lending
FY SBL BOK
Int. IBL ROIBL Int. IBL ROIBL
2004/05 0.00 10.00 0.00 0.00 358.97 0.00
2005/06 0.00 252.26 0.00 0.48 622.89 0.08
2006/07 54.23 224.09 24.20 0.58 572.98 0.10
2007/08 37.49 283.78 13.21 2.23 979.54 0.23
2008/09 45.33 466.25 9.72 7.42 917.63 0.81
Mean 9.43 0.24
S.D. 9.06 0.29
C.V.% 96.11 120.28
(Source: Appendix-III)

58
The table depicts that although both banks have invested in interbank lending,
the interest income in such lending is irregular. SBL has not received any sort
of interest in interbank lending in the first two fiscal years, and then onward the
interest on interbank lending is Rs. 54.23 millions, Rs. 37.49 millions and Rs.
45.23 millions in the fiscal year 2006/07, 2007/08 and 2008/09 respectively.
Consequently the return on interbank lending is 24.20% in the fiscal year
2006/07, 13.21% in the fiscal year 2007/08 and 9.72% in the fiscal year
2008/09. In average the bank has generated 9.43% return on interbank lending
with the variation of 96.11%.

Similarly, BOK has earned interest income of Rs. 0.48 millions, Rs. 0.58
millions, Rs. 2.23 millions and Rs. 7.42 millions from interbank lending,
especially from foreign bank lending, in the fiscal year 2005/06, 2006/07,
2007/08 and 2008/09 respectively. As a result, the return on interbank lending
of BOK is in increasing trend, and thus it is 0.08, 0.10%, 0.23% and 0.81% in
the fiscal year 2005/06, 2006/07, 2007/08 and 2008/09 respectively. In average,
the bank has earned 0.24% of the total interbank lending as interest income
with the variation of 120.28%.

Comparing the banks, it can be assumed that the investment on interbank

lending of SBL is superior to that of BOK, since the amount of interbank
lending of SBL is lower than that of BOK, the return is higher in SBL. Further,
it would be better if BOK considers equally also on local licensed institutions
for interbank lending.

59
 Figure 4.7
Return on Inter Bank Lending

4.1.8 Provision on Investment

As per the provision of the NRB, the bank has to keep provision of investment
when the market price of the invested corporate shares becomes lower than the
par value. Thus, the provision on investment in relation to the total investment
of the observed banks is evaluated under this heading.
Table 4.8
Provision on Investment
FY SBL BOK
Prov. TI Ratio Prov. TI Ratio
2004/05 0.00 286.62 0.00 0.00 2598.61 0.00
2005/06 0.00 650.98 0.00 0.48 3378.13 0.01
2006/07 0.00 865.19 0.00 0.58 2995.19 0.02
2007/08 0.00 1150.09 0.00 2.23 3206.83 0.07
2008/09 0.00 2176.43 0.00 7.42 2786.35 0.27
Mean 0.00 0.07
S.D. 0.00 0.10
C.V.% 0.00 134.04
(Source: Appendix-I & II)

60
The table delineates that there is no market risk on the corporate shares and
debentures investment of SBL, since the market price of the invested corporate
shares is not specified and thus no provisioning has been made. While in BOK,
the provisioning for investment is Rs. 0.48 millions in the fiscal year 2005/06,
Rs. 0.58 millions in the fiscal year 2006/07, Rs. 2.23 millions in the fiscal year
2007/08 and Rs. 7.42 millions in the fiscal year 2008/09. Such provisioning has
represented 0.01%, 0.02%, 0.07% and 0.27% of the total investment. Thus, it
can be assumed that the corporate share and debenture investment of BOK has
much market risk than that of SBL.
Figure 4.8
Provision on Investment

4.1.9 Statistical Analysis

Under this section, the effect of the investment of the banks in different
categories on the net profit, and the estimated value of total net investment and
net profit for the forthcoming four fiscal years have been evaluated. For this,
mainly the correlation coefficient, probable error, and regression analysis and
trend analysis have been conducted.

61
4.1.9.1 Relationship between Investment on Government Securities and
Net Profit
To measure the impact of investment on government securities on net profit,
the correlation coefficient has been evaluated and for the regression analysis,
the net profit has been assumed as the dependent variable on investment on
government securities.
Table 4.9
Relationship between Investment on Government Securities and Net Profit
Bank r P.E. 6 P.E. Regression Remarks
SBL 0.9845 0.0093 0.0556 NP = 32.66 + 0.11 Significant
IOGS
BOK -0.7032 0.1525 0.9149 NP = 879.14 - 0.27 Insignificant
IOGS
(Source: Appendix IV)
The table signifies that there exists positive relationship between investment on
government securities and net profit in SBL and negative relationship between
these two variables in BOK. In other words, the net profit of SBL increases and
that of BOK decreases with the increase in investment in government securities
of the respective banks. The ‘r’ value calculated between these two variables is
0.9845 and -0.7032 in SBL and BOK respectively. Further the regression
analysis indicates that the net profit of SBL increases by Rs. 0.11 millions with
Rs. 1 million increase in government securities, if the variable 32.66 remains
constant, and the net profit of BOK decreases by Rs. 0.27 millions with Rs. 1
million increase in government securities, if the variable 879.14 remains
uniform. However, the relationship between these two variables is statistically
significant only in SBL, as the absolute value of ‘r’ (0.9845) is greater than the
6 P.E. (0.0556). Thus, the increment in government securities certainly
increases the net profit of SBL and may not cause net profit to decrease in
BOK.

62
4.1.9.2 Relationship between Investment on Corporate Shares &
Debentures and Net Profit
The correlation coefficient, probable error and the regression analysis between
the investment on corporate share and debentures and net profit are presented
in the table below.
Table 4.10
Relationship between Investment on Corporate Shares & Debentures and
Net Profit
Bank r P.E. 6 P.E. Regression Remarks
SBL 0.7487 0.1326 0.7954 NP = 64.30 + 5.57 Insignificant
IOCSD
BOK 0.9038 0.0552 0.3314 NP = -535.34 + 7.93 Significant
IOCSD
(Source: Appendix IV)
As expected, the relationship between investment on corporate shares &
debentures and net profit of both the banks is positive, indicating that the net
profit increases/decreases with the increase/decrease in investment on corporate
shares and debentures. The calculated ‘r’ value between these two variables is
0.7487 in SBL and 0.9038 in BOK. Further, the regression analysis signals that
Rs. 1 increase in investment in corporate shares and debentures leads to Rs.
5.57 increase in net profit of SBL and Rs. 7.93 increase in net profit of BOK, if
the corresponding a-coefficient remains constant. However, the relationship
between these two variables could be statistically justified in BOK only, as the
‘r’ value of SBL is lower than the 6 P.E. and the ‘r’ value of BOK is higher
than the 6 P.E. Thus, the investment in corporate shares and debentures has
greater impact in net profit in BOK than in SBL.

4.1.9.3 Relationship between Investment on Interbank Lending and Net

Profit
Assuming net profit as the dependent variable on investment on interbank
lending, the effect of investment in interbank lending on net profit has been
evaluated with the aid of correlation and regression analysis.
63
 Table 4.11
Relationship between Investment on Interbank Lending and Net Profit
Bank r P.E. 6 P.E. Regression Remarks
SBL 0.8294 0.0941 0.5648 NP = 38.29 + 0.32 Significant
IOIBL
BOK 0.9033 0.0555 0.3331 NP = -25.63 + 0.45 Significant
IOIBL
(Source: Appendix IV)
The table manifests that investment in interbank lending has positive
relationship with net profit of the corresponding banks, which means that the
interbank lending augments the net profit of the bank. In addition, the
calculated ‘r’ value between these two variables is 0.8294 in SBL and 0.9033
in BOK. Also the regression analysis clarifies that per rupee increment in
interbank lending leads to Rs. 0.32 increment in net profit of SBL, and Rs. 0.45
increment in net profit of BOK. Thus, the effect of interbank lending is higher
in BOK than in SBL. The relationship between these two variables is also
buttressed by the high value of ‘r’ than the corresponding 6 P.E. in both the
banks; in SBL the ‘r’ value (0.8294) is greater than the 6 P.E. (0.5648) and in
BOK the ‘r’ value (0.9033) is greater than the 6 P.E. (0.3331).

4.1.9.4 Trend Analysis of Total Net Investment

To estimate the value of total net investment in the forthcoming four fiscal
years, the trend analysis has been conducted, assuming total net investment as
the dependent variable on year.
Table 4.12
Trend Analysis of Total Net Investment
Fiscal Year SBL BOK
2009/10 2309.48 3050.63
2010/11 2737.35 3070.64
2011/12 3165.23 3090.64
2012/13 3593.10 3110.65
Regression Y = -257.76 + 427.87 X 2930.59 + 20.01 X
(Source: Appendix V)
64
Presuming that the investment of the banks depends upon the time period, it
has been ascertained that the investment of the both the banks has positive
relationship with the time period. In other word, the bank continues to increase
the investment in forthcoming years. As a result, the investment of SBL
increases by Rs. 427.87 million per year and that of BOK increases by Rs.
20.01 million per year in the future. This indicates that the pace of growth in
investment of SBL will be greater than that of BOK. In addition, the estimated
value of investment by the end of the fiscal year 2012/13 will be Rs. 3593.10
millions and that of BOK will be Rs. 3110.65 million.
Figure 4.9
Trend Analysis of Total Net Investment

4.1.9.5 Trend Analysis of Net Profit

Let the dependent Variable, Net Profit be denoted by Y and the independent
variable, Year be denoted by X. Then, the regression equation of Net Profit on
Year, along with the estimate value of net profit for the forthcoming four fiscal
years is presented in the below table.

65
 Table 4.13
Trend Analysis of Net Profit
Fiscal Year SBL BOK
2009/10 230.34 526.56
2010/11 267.66 606.90
2011/12 304.97 687.25
2012/13 342.29 767.59
Regression Y = 6.43 + 37.32 X 44.48 + 80.35 X
(Source: Appendix V)
The table reveals that the net profit of the bank will continually increase in the
forthcoming year as well. The net profit of the SBL will be Rs. 342.29 million
and that of BOK will be Rs. 767.59 million by the end of the fiscal year
2012/13. Also, the regression analysis between net profit and time period
shows that the increment of net profit per year will be greater in BOK than in
SBL. The net profit of SBL increases by Rs. 37.32 million, if the variable 6.43
remains constant, and the net profit of BOK increases by Rs. 80.35 million, if
the variable 44.48 remains stable.
Figure 4.10
Trend Analysis of Net Profit

66
4.2 Primary Data Analysis
To understand the opinions of the investors and employees apropos of
investment policy, and the requirement for enhancement of investment, the
primary data analysis has been conducted. For analyzing the primary data, a
questionnaire containing 8 questions has been prepared and requested to the 15
employees of BOK and SBL, and 15 investors at the NEPSE floor for
expressing their views.

4.2.1 Appropriateness of Investment Policy

To scrutinize whether the existing investment policy adopted by the banks is
appropriate to meet the goal of the bank, the respondents are asked to express
their opinions. The collected opinions are tabulated in the table below.
Table 4.14
Appropriateness of Investment Policy
Response Employee Investors Total
No. % No. % No. %
Yes 8 53 4 27 12 40
No 6 40 11 73 17 57
Don’t Know 1 7 0 0 1 3
Total 15 100 15 100 30 100
(Source: Opinion Survey, 2010)
The table reveals that 53% (8 out of 15) of the employees, 27% (4 out of 15) of
the investors and 40% (12 out of 30) of the total respondents are in the view
that the investment policy adopted by SBL and BOK is appropriate. In contrast
to this opinion, 40% (6 out of 15) of the employees, 73% (11 out of 15) of the
investors, and 57% (17 out of 30) of the total respondents have stated that the
current investment policy adopted by the banks in not appropriate and needs to
be amended. However, 7% of the employees, which represents 3% of the total
respondents, have stated that they have no idea on this issue. Palpably, on the
basis of the overall majority, and the majority of each category, it can be

67
derived that the investment policy of the banks necessitates restructuring for
enhancement.
Figure 4.11
Appropriateness of Investment Policy

4.2.2 Priority in Making Investment

The secondary data has revealed that the banks have given predilection to
government securities for investment. To examine on which area of investment,
the bank should show much interest, the respondents are asked to present their
opinions.
Table 4.15
Priority in Making Investment
Response Employee Investors Total
No. % No. % No. %
Equity Securities 4 27 6 40 10 33
Short-term Debt Securities 3 20 3 20 6 20
Long-term Debt Securities 2 13 1 7 3 10
Derivative Securities 1 7 2 13 3 10
Real Assets 3 20 3 20 6 20
Other Investment Alternatives 2 13 0 0 2 7
Total 15 100 15 100 30 100
(Source: Opinion Survey, 2010)

68
It has been ascertained that the 27% of the employees, 40% of the investors,
and in total 33% of the total respondents are in the view that the bank should
give most priority to equity securities, which incorporates common stock and
preferred stock, while making investment. Similarly, 20% of the employees,
20% of the investors, and 20% of the total respondents have stated that the
bank should give more priority to short-term debt securities, which
encompasses T-Bill, Commercial paper, Banker’s Acceptance etc, in making
investment. Likewise, 13% of the employees, 7% of the investors, and 10% of
the total respondents have the bank should give predilection to long-term debt
securities, which includes T-Notes, T-Bonds, Savings Bonds etc. Moreover,
7% of the employees, 13% of the investors and 10% of the total respondents
have opined that the bank should prefer to derivative securities, which involves
options, commodity, rights, warrants, futures and so on.

In addition, 20% of the employees, 20% of the investors, and 20% of the total
respondents have opined that the bank should give main priority to investment
in real assets, which includes precious metal, real estate, collectibles etc.
Finally, 13% of the employees, which represents 7% of the total respondents,
have stated that the bank should give preference to other investment
alternatives, which involves pension funds, mutual funds etc. Consequently, on
the basis of the overall majority, it can be stated that the bank should give more
priority to equity investment for enjoying more profit.
Figure 4.12
Priority in Making Investment

69
4.2.3 Sensitivity of Investment Process
Investment process of the bank augments the profit and reduces the risk, if
applied effectively. To investigate on which factor the investment process
should be more sensitive, the respondents are asked on this issue. The
responses obtained through questionnaire on this issue are presented in the
below table.
Table 4.16
Sensitivity of Investment Process
Response Employee Investors Total
No. % No. % No. %
Setting Investment Policy 4 27 6 40 10 33
Performing Security Analysis 6 40 3 20 9 30
Constructing a Portfolio 1 7 1 7 2 7
Revising the Portfolio 2 13 3 20 5 17
Evaluating Portfolio Performance 2 13 2 13 4 13
Total 15 100 15 100 30 100
(Source: Opinion Survey, 2010)
The investment process should be more sensitive while setting investment
policy, as per the view of 27% of the employees, 40% of the investors, and
33% of the total respondents. Similarly, 40% of the employees, 20% of the
investors, and 30% of the total respondents have stated that the investment
process should be more sensitive toward conducting the analysis of security.
Likewise, 7% of the employees, 7% of the investors, and 7% of the total
respondents have said that the investment process should reflect constructing
an effective portfolio.

While 13% of the employees, 20% of the investors, and 17% of the total
respondents have stated that the investment process should be more sensitive in
restructuring the portfolio. Finally, 13% of the employees, 13% of the
investors, and 13% of the total respondents have affirmed the sensitiveness of
investment process in evaluating the portfolio performance. Considering the
70
overall majority, it can be assumed that the investment process should be more
sensitive toward creating the investment policy.
Figure 4.13
Sensitivity of Investment Process

4.2.4 Crucial Element in Equity Share Investment

To analyze the crucial element that fascinates the bank for investment is
ubiquitous. Thus, to examine on which element do the most banks focuses
while taking decision for investment, the respondents are asked on this matter.
Table 4.17
Crucial Element in Equity Share Investment
Response Employee Investors Total
No. % No. % No. %
Dividend Pattern 3 20 3 20 6 20
Earnings Per Share 2 13 1 7 3 10
Right Offerings 3 20 2 13 5 17
Capital Gain/Loss 7 47 9 60 16 53
Total 15 100 15 100 30 100
(Source: Opinion Survey, 2010)
The table explores that as per the opinion of 20% of the employees, 20% of the
investors and 20% of the total respondents, the bank considers the dividend
payment policy of the licensed institutions as the most crucial element while

71
making investment in equity shares. Further, 13% of the employees, 7% of the
investors, and 10% of the total respondents are in the view that the bank
considers earnings per share of the licensed institutions as the major element
for investment.

Similarly, 20% of the employees, 13% of the investors, and 17% of the total
respondents have opined that the right offerings practices of the licensed
institutions is the most crucial element for bank while making investment in
equity shares. Likewise, 47% of the employees, 60% of the investors, and 53%
of the total respondents have stated that the capital gain/loss that is going to be
achieved in the future is the main crucial element that the bank considers while
making investment in equity shares. Thus, on the basis of the majority of each
category, and the overall majority, it can be said undoubtedly that that capital
gain/loss is the most crucial element for investment.
Figure 4.14
Crucial Element in Equity Share Investment

4.2.5 Suitability of Investment Directive of NRB

NRB is the regulating and monitoring body of Nepalese financial institutions.
Thus the role of NRB is crux for smooth operation of banking. Hence, to
examine whether the investment directive issued by NRB is appropriate with

72
the existing market situation, the respondents are requested to express their
views.
Table 4.18
Suitability of Investment Directive of NRB
Response Employee Investors Total
No. % No. % No. %
Yes 8 53 5 33 13 44
No 6 40 10 67 16 53
Don’t Know 1 7 0 0 1 3
Total 15 100 15 100 30 100
(Source: Opinion Survey, 2010)
The table delineates that the majority of the employees, 53%, are in the opinion
that the investment directive of NRB befits the necessity of current market
situation. However, 67% of the investors contradicts on this issue, and says that
the investment directive of NRB is not suitable in the present market. Similarly,
40% of the employees have stated that investment directive of NRB is not
suitable, and 33% of the investors have stated that it suits the market
requirement. Moreover, 7% of the employees have stated that they have no idea
on this issue. In overall, 44% of the total respondents have avowed that the
investment directive is suitable and 53% of the respondents have resisted that it
is not suitable, and 3% of the respondents have remained neutral. Considering
the overall majority, it would be worthwhile if NRB scrutinizes its investment
policy and then directs better investment strategy.

73
 Figure 4.15
Suitability of Investment Directive of NRB

4.2.6 Necessity of Strengthening for Optimum Investment Policy

For having optimum investment policy, the banks need to be strong enough in
each of its activity. To inspect on which area the bank needs to strengthen
most, the respondents are asked on this issue. The collected responses are
presented in the table below.
Table 4.19
Necessity of Strengthening for Optimum Investment Policy
Response Employee Investors Total
No. % No. % No. %
Decision Making Authority 3 20 7 47 10 33
Productivity of Employee 2 13 0 0 2 7
Capital 4 27 2 13 6 20
Risk Assessment Mechanism 6 40 6 40 12 40
Total 15 100 15 100 30 100
(Source: Opinion Survey, 2010)
The table shows that 20% of the employees and 47% of the investors have
opined that the decision making authority for investment necessitates to be
restructured or be more capable for producing optimum investment policy.
Similarly, 13% of the employees and 0% of the investors enforced on

74
strengthening the productivity of the bank’s employees for having optimum
investment policy. Likewise, 27% of the employees and 13% of the investors
have emphasized to strengthen the bank capital for having sound investment
policy. Moreover, 40% of the employees and 40% of the investors have opined
to strengthen the risk assessment mechanism of the bank for optimum
investment policy.

Summing the responses of each category, it has been ascertained that 33% of
the total respondents have pointed out decision making authority, 7% have
pointed out productivity of employees, 20% have stated on capital and 40%
have opined risk assessment mechanism needs to be strengthened for having
sound optimum investment policy. Thus, considering the overall majority, it
can be concluded that the bank needs to strengthen the risk assessment
mechanism most for creating sound investment policy.
Figure 4.16
Necessity of Strengthening for Optimum Investment Policy

4.2.7 Main Reason for Low Proportion of Investment

The secondary data analysis has verified that the proportion of investment on
total fund mobilization is low, especially in comparison to the loan and
advances. To trace out the main reason on the bank’s less interest on
investment, the question has been prepared and presented to the respondents.

75
 Table 4.20
Main Reason for Low Proportion of Investment
Response Employee Investors Total
No. % No. % No. %
Because of Legal Barriers 1 7 0 0 1 3
Because of High Risk 4 27 5 33 9 30
Because of Low Profitability 5 33 7 47 12 40
Because of Maturity Period of 3 20 2 13 5 17
Bond
Because of Ineffectiveness of 2 13 1 7 3 10
SEBON
Total 15 100 15 100 30 100
(Source: Opinion Survey, 2010)
The majority of both the employees, 33%, and the investors, 47%, are in the
view that because of low profitability sector, the investment is low as compared
to loan and advance disbursement. While 7% of the employees have blamed
that the legal requirements obstructs the bank in increasing the investment
amount. Further 27% of the employees and 33% of the investors have opined
that since the investment carries high risk, the investment amount is lower than
the loan and advances. In addition, 20% of the employees and 13% of the
investors have stated that the maturity period of bond, a major investment
sector, is long, as a result the bank shows less interest in investment than in
granting loan and advances. Likewise, 13% of the employees and 7% of the
investors have opined that the ineffectiveness of SEBON in smooth operation
of securities trading is one most crucial reason behind the low interest of bank
in investment.

In overall, 3% of the respondents have accused legal obstacles, 30% of the

respondents have shown high risk, 40% of the respondents have stated low
profitability, 17% of the respondents have pointed out maturity period of bond
and 10% of the respondents have blamed SEBON for its ineffectiveness.
Considering the majority of each category and the overall majority, it can be
76
inferred that the investment of bank returns low profit, as a result the banks are
more enticed in granting loan and advances than making investment.
Figure 4.17
Main Reason for Low Proportion of Investment

4.2.8 Suggestion for Optimum Investment Policy

At the end of the questionnaire, the respondents are asked to provide
suggestions that will enhance the banks’ investment policy. The
recommendations obtained from them in having optimum investment policy
are presented in the below table.
Table 4.21
Suggestion for Optimum Investment Policy
Response Employee Investors Total
No. % No. % No. %
Diversify the Investment 3 20 7 47 10 33
Make Meticulous Assessment of 4 26 1 7 5 17
Associated Risk
Evaluate Profitability and Capital 6 40 2 13 8 27
Gain
Increase Investment Weight 1 7 3 20 4 13
Quest Alternate Investment 1 7 2 13 3 10
Opportunity
Total 15 100 15 100 30 100
(Source: Opinion Survey, 2010)
77
The majority of the employees have suggested the bank to meticulously
evaluate the profitability and capital gain from the investment for having
optimum investment policy. About 40% of the total employees have opined
this view. In contrast, only 13% of the investors have suggested this point.
Likewise, the majority of the investors, 47%, and 20% of the employees have
strongly suggested the bank to diversify the investment, which means not to be
saturated to government securities, for having optimum investment policy.
Similarly, 26% of the employees and 7% of the investors have emphasized on
making meticulous assessment of associated risk with investment for having
sound investment policy. Moreover, 7% of the employees and 20% of the
investors have stated that the investment proportion on total fund mobilization
is low and thus the bank should increase the weight of the investment for
having optimum investment policy. Finally, 7% of the employees and 13% of
the investor have urged that the bank should quest alternate investment
opportunity for buttressing the investment policy.

In overall, 33% of the total respondents have suggested diversification of the

investment, 17% have opined conducting careful examination of associated risk
with investment, 27% have suggested evaluating profitability and capital gain
on investment, 13% have stated enforced on the increment in investment
weight, and 10% have suggested questing alternate investment opportunity.
Thus it would be better if the bank considers all these valuable suggestions,
mainly on the diversification of investment, for having optimum investment
policy.

78
 Figure 4.18
Suggestion for Optimum Investment Policy

4.3 Major Findings of the Study

On the basis of the analyses made on the previous sections, the following major
findings have been drawn;

Findings from Secondary Data Analysis

 Both the banks have given low preference to investment, which
indicates that the bank relies mainly on loan and advances for generating
income. The average total net investment to total assets is just 11.17% in
SBL and 21.21% in BOK.
 The investment of both the banks is highly dominated by the investment
in government securities. The investment in government securities to
total investment is 76.33% in SBL and 73.54% in BOK in average.
Among the various government securities, the treasury bill occupies
major portion.
 SBL has not invested in corporate debenture, while BOK has invested in
both corporate shares and corporate debenture. Nonetheless the
investment in corporate shares and debentures is comparatively very low
to government securities. In average, the investment in corporate shares
and debentures to total investment of SBL is 0.82% and BOK is 3.49%.

79
  Next to government securities, the bank has shown interest in interbank
lending. However, BOK has neglected local interbank lending in most
of the years. The interbank lending to total investment of SBL is 22.85%
and that of BOK is 22.97% in average.
 The investment in government securities has yielded 2.79% interest
income in SBL and 4.75% interest income in BOK. Similarly, the return
on corporate shares and debentures of SBL is just meager. The bank has
experienced the capital gain only from the fiscal year 2007/08. In
contrast to it, BOK has received dividend and interest income on
debenture in each fiscal year, and capital gain/loss in most of the years.
Besides these, the average return on investment in corporate shares and
debentures of SBL is higher than that of BOK. The average return on
corporate shares and debentures of SBL is 17.19% and that of BOK is
6.36%.
 Since there is no difference in market price and par value on the share
investment of SBL, the bank has not maintained any provision for
investment. However, BOK has maintained 0.07% of the total
investment as the provision for probable loss on investment.
 The statistical analysis reveals that government securities and interbank
lending has significant effect and corporate share and debenture has
insignificant effect on net profit of SBL. Similarly, the government
securities has insignificant effect, and corporate shares and debentures
and interbank lending have significant effect on net profit of BOK.
 The estimated value of total net investment for the fiscal year 2012/13
will be Rs. 3593.10 million in SBL and Rs. 3110.65 million in BOK.
Likewise, the trend value of net profit in same year will be Rs. 342.29
million in SBL and Rs. 767.59 million in BOK.

Findings from Primary Data Analysis

 The majority of the respondents, 57%, have opined that the banks are
practicing inappropriate investment policy. Further, 33% of the
80
 respondents have stated that the bank should give more priority to equity
securities while making investment.
 33% of the respondents have said that the investment process should be
more sensitive toward setting the investment policy. And 53% of the
respondents have claimed that the bank analyzes capital gain/loss on
equity shares most while making decision to invest.
 In addition, 53% of the respondents have informed that the NRB
directives related to the investment does not match with the current
market situation and thus is unsuitable. Similarly, 40% of the
respondents have stated that the bank should strengthen its risk assessing
mechanism for having optimum investment policy.
 Likewise, 40% of the respondents have stated that the bank shows less
interest in investment due to the low profitability it carries in
comparison to the other ways of earning income. Finally, 33% of the
respondents have suggested the bank to diversify the investment, i.e. not
to be saturated on government securities only, in order to have optimum
investment policy.

81
 CHAPTER – V

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary

Investment policy plays a key role on the development of countries utmost

investment. The political insanity, government rules, tax policy treaty with
neighbor country, social and economic condition of the country affect
investment policy of bank. To keep up the stability with the foreign policy
results the improvement of investment policy.

Designing good investment policy helps to the improvement of investment

policy in the country. As political influence, intervention economic scenario
and social, economic scenario of the country is dramatically problem for the
detection of designing investment policy of bank.

Government policy affects the investment policy of the company, bank and
institution. Government intervention in investment policy is custom tariff
initiated by the government policy, VAT refund policy and tax holding policy
including duty taxes i.e. export and import directly influences investment
policy.

Analysis of investment to avoid the risk, risk related investment influence the
financial and economic condition of investment. Technical and marketing
analyses too reflect the risk measurement. As the investor, the adequate

82
knowledge of investment policy is required. Major problem for applying the
investment policies are integrator of the consumer, changing policy of the
country, industrial policy and neighbor country’s policy.

To examine the investment policy practiced in the commercial banks in Nepal,

two banks namely, Siddhartha Bank Limited and Bank of Kathmandu Limited,
have been chosen as sample. The main objective of the study is to examine
the investment policy of the selected banks. The study uses the both financial
tools and statistical tools to achieve the objective. Further, the study uses
both the secondary and primary data.

5.2 Conclusion

Analyzing the data, it can be considered that the mobilization in investment

occupies crucial ramifications of total assets in banking sector, though such
mobilization is lower than the mobilization in granting loan and advances.
Categorically, BOK has remained more dependent than SBL in mobilization of
total fund in investment. More deeply, it can be assumed that the banking
industry is more allured toward the Treasury bill than toward the
development bond. Although the coverage of government securities in total
investment is less in the recent periods, the government securities still have
greater preponderance in total investment than other form of investment.
Among the observed banks, it can be ideally surmised that SBL has focused
more on government securities than BOK. Besides these, it can be genuinely
speculated that SBL has given less preference to corporate share and
debenture investment than BOK, as a result the preponderance of corporate
share and debenture on total investment in SBL is lower than that in BOK.

83
Generally, it can be said that each bank has preferred to government
securities first, then to interbank lending and finally to corporate investment.

In addition, it can be inferred that the investment of BOK in government

securities is more lucrative than that of SBL. This might be due to policy of SBL
in unchanging the amount on development bonds and in increasing the
treasury bonds, while in contrast BOK has adopted the policy of increasing the
amount of development bonds. Further, although the average return on
corporate shares and debentures of SBL is greater than that of BOK, the return
of SBL is almost uncertain and irregular, while that of BOK is regular and BOK
has received all three income; dividend, capital gain and interest on
debenture. However, the investment on interbank lending of SBL is money-
spinning to that of BOK. Statistically, it can be derived that the increment in
government securities certainly increases the net profit of SBL. And the
investment in corporate shares and debentures has greater impact in net
profit in BOK than in SBL. In addition, the investment in interbank lending has
positive relationship with net profit of the corresponding banks, which means
that the interbank lending augments the net profit of the bank.

From primary data analysis, it can be stated that the investment policy
adopted by the observed banks is not ideal, and thus demands amendment.
The banks have given equity securities more preference to other sectors like
debt securities, derivative securities, real assets and others. Among the
others, the setting of investment policy is more sensitive rather than analyzing
security deposited and others. Further, capital gain/loss is the major concern
for the banks while making investment, rather than the dividend and right
offerings. Most of the personnel of the banks are in the view that the directive

84
of NRB regarding investment is not pragmatic and needs. To strengthen the
investment policy, the bank needs to review the risk assessment mechanism
and should change if necessary. It has been ascertained that the lower
profitability in investment has caused the banks to be more attractive toward
loan and advances in generating profit. Finally, it can be concluded that the
diversification of investment would be better for having optimum investment
policy.

5.3 Recommendations

On the basis of the analysis, the following recommendations have been

provided for the enhancement of banking investment;

 The mobilization of fund in investment is lower than that in loan and

advances. It would be worthwhile if SBL and BOK recognize the
investment that is lucrative and mobilize the fund in portfolio basis.
 Both the banks have given high priority to the government securities
while making investments, however, the return on corporate securities
and debentures is greater than that of government securities. It would
be worthwhile if both the banks divert more investment amount to
corporate shares and debentures.
 The return on interbank lending of BOK is quite low, it would be better
if BOK invest only in lucrative lending. Further, BOK needs to trace
out the method for reducing risk in corporate shares and debentures
and thereby decrease the provision needed for such risk.
 Each bank should identify the much risky assets of portfolio and thus
try to reduce the investment amount on that sector and increase the
investment amount in other secured assets.
 NRB should set directive that would be suitable for the banks and
would be pragmatic for the banks to adopt.

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 As the return on investment is not always clear, so the banks need to
prepare the strategy so as to face the ongoing challenges in investment.
A balanced investment strategy is generally required in the process of
investment, which possesses long time period and some risk tolerance.
 An investment strategy in mutual funds is probably the best bet for a
profitable investment. Mutual fund is a pool of money supplied by
different investors and in turn used by the mutual fund company to
invest in various assets such as stocks and bonds. However, a detailed
research has to be conducted by the bank for choosing the mutual fund
companies and only those should be considered which have a
professional investment manager.

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 APPENDIX - III
Return on Investment

Siddhartha Bank Limited

A) SBL Interest on Investment
Fiscal Year
S.N. Details 2004/05 2005/06 2006/07 2007/08 2008/09
1 Government Securities 3857739 14821239 13773138 22490947 67565822
a Treasury Bills 3602926 14565728 13518326 22236833 66521968
b Development Bonds 254813 255511 254812 254114 1043854
c National Saving Certificates 0 0 0 0 0
2 Foreign Securities 0 0 0 0 0
3 Nepal Rastra Bank Bond 0 0 0 0 0
4 Debenture and Bonds 0 0 0 0 0
a Financial Institutions 0 0 0 0 0
b Other Organizations 0 0 0 0 0
5 Interest on Inter Bank Lending 0 0 54234287 37491852 45330587
Total Interest on Investment 3857739 14821239 68007425 59982799 112896409

B) Dividend on Share Price

S.N. Details 2004/05 2005/06 2006/07 2007/08 2008/09
1 Dividend Received 0 0 0 0 0

C) Price Increase in Share Price

S.N. Details 2004/05 2005/06 2006/07 2007/08 2008/09
1 Siddhartha Insurance
Previous Yr. Mkt. Value 15000000 37950000
Current Yr. Mkt. Value 37950000 28950000
Total Price Increase/Decrease 22950000 -9000000

Bank of Kathmandu Limited

A) BOK Interest on Investment
Fiscal Year
S.N. Details 2004/05 2005/06 2006/07 2007/08 2008/09
1 Government Securities 88001700 114319709 108590200 84961377 116737049
a Treasury Bills 70880559 82236827 65444876 41042649 73985081
b Development Bonds 17121141 32082882 43145324 43918728 42751968
c National Saving Certificates 0 0 0 0 0
2 Foreign Securities 249185 3777755 3195681 3005085 3803408
a State Bank of India 249185 3777755 3195681 3005085 3803408

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 3 Nepal Rastra Bank Bond 0 0 0 0 0
4 Debenture and Bonds 0 0 0 404083 1319994
a Financial Institutions 0 0 0 0 0
b Other Organizations 0 0 0 404083 1319994
5 Interest on Inter Bank Lending 0 482664 578040 2233323 7417344
Total Interest on Investment 88250885 118580128 112363921 90603868 129277795

B) Dividend on Share Price

S.N. Details 2004/05 2005/06 2006/07 2007/08 2008/09
1 Dividend Received 49496 223900 490058 148058 336062

C) Price Increase in Share Price

S.N. Details 2004/05 2005/06 2006/07 2007/08 2008/09
1 Chimmek Bikash
Previous Yr. Mkt. Value 1200000 3600000 8712000 16218000
Current Yr. Mkt. Value 1200000 8712000 16218000 20073600
Price Increase/Decrease 0 5112000 7506000 3855600
2 Himalayan Distillery
Previous Yr. Mkt. Value 13414000 13414000 12609160 14084700 13414000
Current Yr. Mkt. Value 13414000 12609160 14084700 13414000 13548140
Price Increase/Decrease 0 -804840 1475540 -670700 134140
Total Price Increase (1+2) -804840 6587540 6835300 3989740

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Websites:

www.bok.com.np/

www.nrb.org.np/

www.siddharthabank.com/

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