Chapter: 1

Introduction
1. Background of the Study
Generally, an institution established by law, which deals with money and credit is called
bank. A bank simply carries out the work of exchanging money, providing money, providing loan
accepting deposit and transferring the money. Financial development of a country largely
depends on effective mobilization of its internal resource. Banks and Financial institutions play
pivotal role in the development of the country by performing the task of effective mobilization of
its internal resources. It helps in growth of agriculture, trade, commerce and industry of national
economy. The banking sector is largely responsible for collecting unused public deposit in
various types and deploying these in the society by lending in different sectors of economy.
According to Dahal, B. and Dahal, S. (2002)," Banking has crossed various phases to
come to the modern form. Some sort of banking activities had been carried out since the time
immemorial. Traditional forms of banking were traced during the civilization of Greed, Rome
and Mesopotamia. Merchants, goldsmiths and moneylenders are said to be the ancestors of
modern banking."
According to Paul A.S., "Banking concept was also in existence even in ancient period
when the goldsmith and rich people used to issue receipt to common people against the promise
to safe keeping their valuable items. On the presentation of receipt, the depositors would get
back their gold and valuables after paying a small amount for safekeeping and saving."
The term bank was originated from the French word BANKE. Regarding the origin
and banking institution in the world, the first bank was Bank of Venice of Italy. After that a lot
of other banks were established in the world. Some of them are the bank of Barcelona in 1401
A.D.Bank of Genoa & Bank of England as a joint venture bank in 1407 & 1694 A.D.
respectively. Several national and foreign banks were established in India & other countries
subsequently.
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In Nepalese banking concept, the history of banking is not long. But it is found that
the banking transactions are conducted in ancient time. Some crude bank operations were in
practice even in the ancient time In the Nepalese Chronicle, it was recorded that the new era
known as Nepal Sambat was introduced by Shankhadhar, a sudra merchant of Kantipur in 879
or 880 A.D; after having paid all the outstanding debts in the country. This shows the basis of
money lending practice in ancient Nepal. Towards the end of 8th century, Gunkam Dev had
borrowed money to rebuild the Kathmandu Valley. In 11th century during Malla regime, there
was an evidence of professional moneylenders and bankers. It is further believed that moneylending business, particularly for financing the foreign trade with Tibet, became quite popular
during regime of Mallas. However, in the absence of any regulatory measures, the unscrupulous
moneylenders were known to have charged exorbitant rates of interest and other extra dues on
loans advanced because of this inconvenience

the

Prime Minister Ranodeep (1877-1885) to

establish Tejarath Addaha in Kathmandu which was a government financial institution supplying
credit to the people in against of their valuable ornaments at the rate of 5%. During the time of
Chandra Shamsher (1901-1929), credit facilities of Tejarath were extended to some other parts of
the country by opening its branches. It is believed that the so-called well-to-do persons used to
take loans from private money lenders even at a higher rate of interest than those from the
government institution. To control spurious rates of interest and also to curb unfair practice on
the part of the unscrupulous moneylenders, legislative measures were also taken.
Later, many banks were established in the world and growing necessity of the
commercial banks in the Nepal as well, Nepal Bank Limited, the first commercial bank of Nepal,
came into being in 1937 A.D. replacing the older system of banking. Nepal bank limited was the
first modern bank in Nepal established with the motive to develop the trade and industry in the
country. Nepal Bank Limited had a responsibility of attracting people towards banking sector
from predominant sahu-mahajan's transaction and introducing other banking services as well.
Being a commercial bank, it was natural that Nepal Bank Limited paid more attention to profit
generating business. But it is the duty of the government to look into the neglected sectors.
Therefore Nepal Bank Limited was established with 51% ownership of His Majesty Government
(HMG) (Now Nepal Government) and 49% of the equity participation from private sector. With
the development of banking sector and to help the government, formulate monetary policies, as it
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was remained the only financial institution of the country. Later Nepal Rastra Bank was set up in
1956 A.D. (14th Baisakh 2013 B.S), the central bank of the country with an objective to provide
the policy decision, guidance and control the banking and to monitor this sector. Since then it has
contributed to the growth of financial sector. The growth and development of the country is
possible only when competitive banking services reach each and every corner of the country.
However, as the central bank, Nepal Rastra Bank had its own limitations and as a commercial
bank it was not logical for Nepal Bank Limited to go to unprofitable sectors. So, to catch up with
these problems, the government established Rastriya Banijaya Bank is 2022 B.S. (1965 A.D),
under Banijya Bank Act 1965 A.D. as a fully state owned commercial bank (Dahal, 2002:11).
With the aim to provide quality-banking service, enhance the efficiency and healthy competition,
foreign investment and new technology in banking sector was introduced.
Apart from these advantages in a country like Nepal, banking consciousness is lacking as
well as majorities of the people are economically and financially immobile. So, the country is
facing great problem to get economic prosperity. Sustainable economic growth requires
intermediary channels for efficient allocation of funds. Through intermediary channels such as
financial institutions and financial markets, funds should be efficiently channeled from
depositors and investors to borrowers in need of funding, for example, to expand their business
or buy a house. By mobilizing the scattered idle resources from the savers, intermediary channels
pools up the funds in a sizable volume in order to feed the fund requirement of productive sector
of the economy. The role played by financial institutions and financial markets in this process is
referred to as the function of financial intermediation. Financial institutions as important
financial intermediary channels need to maintain sound business operations. Financial
institutions need to better satisfy various financial demands of customers and enhance
profitability by continually improving the ways in which they manage risks and their business
operations and to remain as the major contributing factors to the growth of the nations economy,
they themselves have to have sustainable existence and growth of themselves for which
profitability is a must.

2. Theoretical Framework of the Study

Profitability is a derivation of the term profit, which explains the ability to make the
profit. Profit is the difference between revenue generated and expenses occurred over the period
of time but the term profit has several different interpretations. It is a basic test of the
performance of any business concern. It is the ultimate output of the company, without profit a
firm could not attract the outside capital or we can say it is essential for the survival of the
company. Moreover, the owners and creditors would become concerned about the companys
future and attempt to recover their funds. Owner, creditors and management pay close attention
for boosting profit due to the great importance placed on earning the market place. Profitability is
a technical term, used to compare performances analysis of different trading systems or different
investments within one system. This is computed for each system or investments being compared
over the same period long enough to include significant "ups" and "downs". So analysis of the
profitability of the business is very essential which can be used to measure the overall efficiency
of the business. Profitability of the business can be analyzed through the financial analysis
which refers to the assessment of the viability and stability of the business. Profitability of a
company is usually reflected by income statement. A properly conducted profitability analysis
provides invaluable evidence concerning the earnings potential of a company and the
effectiveness of management. While analyzing profitability different profitability ratios are
calculated. Profitability ratios provide a definitive evaluation of the overall effectiveness of
management based on the returns generated on sales and investment. The most widely used
profitability measurements are profit margin on sales, return-on-investment ratios, and earnings
per share.

3. Focus of the Study

Every country needs to give emphasis on upliftment of economic conditions. The In this
regards the commercial banks in Nepal play a vital role in banking sector and financial services
industry. The financial situation of Nepalese banking sector was in a very poor condition as the
government-owned Nepal Bank Ltd and Rastriya Banijya Bank in operation for several decades.
Growing competition in the financial sector, recent increase in transaction of security and capital
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markets as well as the taxation laid on higher deposits in banks are the factors affecting bank's
profitability. In this study, the attempts has been made to get knowledge about the analysis of
profitability, operational efficiency of the management, efficient use of total assets by the
management by identifying the strengths and weakness of the two respective banks. For the
purpose of this study, evaluation of the bank is made with respect to profitability ratios.

4. Statement of the Problem

As being a commercial institution, a commercial bank must make profit out of its
operation for its survival and fulfillment of its responsibilities. The major activities of the
commercial banks include mobilization of resources, which involves cost, and profitable
deployment of the resources, generating income. The excess return income over expenses is the
main source of profit to the bank. In case the bank fails to generate sufficient returns on the
resources deployed, it makes a drain on the company's resources and country's resources as well.
Commercial Banks play vital role in economic growth of the country.
Till the early 1980s, the financial sector was not opened up for private sector. Only two
commercial banks - Rastriya Banijya Bank and Nepal Bank Limited, that are government
controlled, are functioning in Nepal. The economic reforms initiated by the Government more
than one and half decade ago have changed the landscape of several sectors of the Nepalese
economy. The Nepalese banking industry is no exception. As a result of this policy, large number
of banks and financial institutions mushroomed across the country. Both the government owned
and privately incorporated banks co-exist in Nepalese economy. However, the performance of
the privately incorporated banks is doing better than those with the government control. Because
of the tailor-made product and services provided by the private institutions, they have been able
to perform significantly well in the market. The last five years was also the period of financial
sector reform and restructuring. Various programs related to strengthening of the NRB, the
restructuring of the Nepal Bank Limited (NBL) and Rastriya Banijya Bank (RBB) and enhancing
the capacity of the whole financial sector were implemented during this period. Under the
financial sector reform program, human resource development and institutional restructuring of
this bank were also carried out to make the regulation and supervision system effective. In
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addition, the policy of gradually phasing out the non-core activities of the bank has been
adopted. In the period of reform and restructuring, these two banks (NBL and RBBL) have
gradually improved its performance, recovered drastically from the NPL as well as started
increasing the level of net profit steadily. In this context, the comparative profitability analysis of
NBL and RBBL will provide an insight to the banks performance with respect to profitability.
The following problems are stated in this study.
1. Does the profitability and operating efficiency of Nepal Bank Ltd. in comparison to
Rastriya Banijya Bank Ltd is good ?Does the growth trend of profitability of the Nepal
Bank Ltd and Rastriya Banijya Bank Ltd over the study period is good?
2. Does the restructuring of the Nepal Bank Limited (NBL) and Rastriya Banijya Bank Ltd
(RBBL) enhancing the capacity directed by NRB?
3. Are the NBL and RBBL increasing the profit sufficiently?

5. Objective of the Study

The specific objectives of the study are:

To evaluate the profitability and operating efficiency of Nepal Bank Ltd. in comparison
to Rastriya Banijya Bank.

To analyze the growth trend of profitability of the bank during study period.

To provide the information to investor, creditors, stakeholders.

To provide suggestion and recommendations for the improvements of the overall

profitability of the banks.

6. Significance of the Study

The profitability analysis is an effective managerial evaluation of performance. It studies

the effect on the shareholders' return and risk. Consequently, the effect on market value of the
share can be verified with profitability analysis. A proper profit planning considerably
contributes to improve the overall financial performance and leads the organization toward
success. In this study, an attempt has made for drawing the overall picture of the selected
commercial banks of Nepal. Data of five fiscal years are presented systematically and analyzed.
This study will be helpful to the management of the selected commercial banks of Nepal to
make effective profit planning strategy for future. This also will be valuable for researcher,
students who want to investigate into the profitability of the selected commercial banks of Nepal.
It will also be important to the bank, investors and stakeholders concerned.

The study will compel the management of Nepal Bank Ltd. and Rastriya Banijya Bank
Ltd. for self assessment of what they have done in the past and provides guidance for
their future plans and program.

The study enlightens the shareholders, depositors, creditors, NRB, Tax office etc. about
the financial performance of the bank

The financial agencies including stock exchanges and stock traders interested in the
performance of the bank as well as the customer, depositor and debtors can identify the
better bank to deal with in terms of profitability, safety and liquidity.

Policy makers, the government and NRB at the macro level will be benefited regarding
the formulation of further policies to facilitate economic development of the country.

7. Limitations of the Study

In the context of Nepal, problem of reliable data is the major for research study. There is
considerable place for arguing about its accuracy and reliability. Every study has limitations due
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to different factors of institutions, time-period taken, reliability of statistical data, tools and
variances and this study is also not free from certain limitations:

The study was concerned with Nepal Bank Ltd. and Rastriya Banijya Bank Ltd.

The study was only to analyze profitability aspect. It ignored other aspects like assets
management, risk management and other activities like investment policy of bank.

The whole study was based on the data of six fiscal years period from the F.Y. 2065/66 to
2069/70 and conclusions were confined on the above period.

This study was based on the financial statements like balance sheet, profit and loss
account and cash flow statement which provided the quantitative information only.

The study is based on secondary data.

8. Organization of the Study

The study on profitability analysis of Nepal Bank Ltd and Rastriya Banijya Bank has
been divided into five Chapters viz . Introduction, Review of Literature, Research Methodology,
Presentation and Analysis of Data and Summary, Conclusions and Recommendations.
Chapter-I Introduction
The introduction chapter deals with the general background and the subject matter of the study. It
consists of introduction of research study, which explains the focus of the study, statement of the
problem, objectives of the study, significance of the study, limitations of the study, research
methodology and review of literature.
Chapter II-Review of Literature
Review of literature is an integral and mandatory process in any research work. It means
reviewing research studies or other relevant propositions in the related area of the study so that
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all the past studies, their conclusions and deficiencies may be known and further research can be
conducted. This chapter includes the brief presentation of the origin and concept of the bank,
concept of commercial bank, evolution of the banking sector in Nepal along with detail profile
about the sample banks under study. This also covers the review of the theoretical background
being implemented as for the management on NPA. The main reason for the full review of
research in the past is to know the outcomes of those investigations in areas where similar
concept and methodologies had been used successfully, and to avoid investigating problems. In
this process effort has been made to examine and review some of the related books, articles
published in different economic journals, bulletins, dissertation papers, magazines, newspapers
and websites.

Chapter III-Research Methodology

A systematic methodology is required to pick an actual result of any study. Research
methodology refers to the various sequential steps to adopt by a researcher in studying a problem
with certain objectives in views. This chapter deals with the methodology that adopted in
analysis of the data for the study. The population and sample, sources and data collection
techniques, data analysis tools, the hypothesis to be tested and various limitations which are
associated with the study have been discussed in this chapter. It helps us to find out accuracy,
validity and suitability. The justification on the present study cannot be obtained without help of
proper research methodology.
Chapter IV- Presentation and Analysis of Data
The second chapter, the data required for the study has been presented, analyzed and interpreted
by using various tools and techniques of financial management and statistics to present the result
relating to the study.
Chapter V- Summary, Conclusion and Recommendations

The third chapter is the final chapter of the study, which consists of the summary of the two
earlier chapters. This chapter tries to draw out a conclusion of the study and attempts to offer
various suggestions and recommendations for the improvement of the future performance of the
banks under review.

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