INTRODUCTION

1.1 Origin of Bank

The origin of banking can be traceable from the early time of human history. In the
ancient period especially in Greece and Rome, the practice of storing the precious
metals and coins at safe place and loaning out money for public on interest was
prevalent. In England, banking had its origin from London goldsmith who is in the 7 th
century began to accept deposits from merchants and others for the safe keeping of
the money and others valuable things. According to French writer Revilpot banks and
bank notes were in existence in Baby loan in 600 B.C. But the term bank was used
only after the establishment of bank of vanish in Italy in 1157 A.D.

There are various opinions about the origin of bank. The first opinions is that the term
bank was originated from Italian word Benko which meant bench. The money
exchangers at that time kept heap of money on the bench from which came that word
Banko. In French and there after it started to be called bank by English. The second
opinion is that in 1171 A.D. There was economic crisis in Italy, to save from crises
Italian government took loan from general public at the rate of 5 %. It was difficult
for government to take loan from public that was why in Italian term was called
monte. It was also called Joint stock Fund. Later on in Germany it was called Bank. In
Italian term Banko. French Banke and in English it was called Bank.

The banking system was prevalent in an unorganized way from ancient time;
Crowther thus, has rightly remarked "The present day banker has three ancestor’s.
The merchant, the money lender and the goldsmith. Lending and borrowing are
almost as old as money itself and the village money lender is found even in quite
primitive communities". (As quoted by Vaish. 1998).

1.2 Meaning of Bank

In general, banks mean an institution that accept deposits in different accounts and
provide loans of different types. A bank is an institution which deals with money and
credit. It accepts deposits from the public and makes the fund available to those

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people who needed money, and helps in the remittance of money from one place to
another. In fact a modern bank performs such a variety of function that it is difficult to
given a precise and general definition of it.

A bank is an institution which deals in money. Broadly speaking, banks draw surplus
money form the people who are not using it at the time, and lend to those who are in a
position to use it for productive purpose (Dewett.1987).

A banker is a dealer in debts. The banker's business is to take the debts of other people
to after his own in exchange and there by to create money. A bank collects money
from those who have it to spare or who are saving it out of their incomes, and it lends
this money that require it (Ahuja.1992).

A bank is establishment which makes to individuals such advance of money as may

required and safely made and to which individuals entrust money when not required
by them for use. According to the Indian companies Act, 1949, baking means " The
accepting for the purpose of companies lending or investment of deposit of money
from the public repayable on demand or otherwise, and withdrable by cheque, draft or
otherwise".

A bank is an institution that accepts deposits of money from the public withdrawal by
cheque and used for lending Banks are said to be department stores of financial
services to their customers. The range of these services differs from bank to bank,
depending mainly on the size and type of banks (Gupta 1992). Commercial banks are
mainly established to facilitate the development of trade and commercial sectors of
the country. The first commercial bank in the world was bank of England established
as a central bank of Britain.

We know that alternative word of bank is financial institution and which means
financial market and its players and opening of all types of depository institution and
other non-depository financial institution to the private sectors. There are so many
institutions include in depository institutions, these are as commercial banks,
development banks, finance companies, cooperative banks.

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Non-Financial institution includes life and non life insurance companies, pension
fund, provident and retirement funds, manual funds, unit trust mortgage banks, money
market mutual funds and so on.

1.3 History of Bank in Nepal

The history of banking in a Nepal may be described as a component of the gradual
and orderly evolution in the financial and economic Sphere of the Nepalese life. The
banking business in Nepal began with the establishment of Nepal Bank Limited in
1937. At first the exchange of money was started by the Malla King of Kathmandu
Valley. In 7th century the currency of money was used and exchanged by
Amshuberma and Bishnu Gupta in 723 A.D. Gunakamdev collect the money as loan
from the public and reconducted the Kantipur, city by that money. After some years
Shankhadhar, who was the merchant and civilian of Kantipur, paid all the loan of
public which was taken by the Malla King and started the Nepal Sambat. Since then
the banking system was exercised in Nepal.

Before the established of Nepal Bank Limited, there was one semi banking institution,
Tejarath Adda which was established in Nepal during the prim-minister ship of
Ranodip Singh. But its activities were limited. It only provided loan and did not
accept any kind of deposits. The commercial bank was established in 1937 A.D.
Named as the Nepal Bank Limited which was in corporate as a semi-government
organization with an authorized capital of Rs 10 million of which 51 percent share is
owned by the government and rest by the private share holder. Now 41% share is
owned by government, 5 % share is owned by staff and rest 54 percent share is owned
by public. It started its business with collection of large amount (Rs 35829765)
thousand from public deposits. Later the Nepal Rastra Bank was established as a
central bank in 1955 A.D. Which helped to make banking system more dynamic with
establishment of Nepal Rastra Bank the process of banking development started to
gain movement, using Nepal Rastra Bank (RBB) Act 1955 another commercial bank
was continuously opened in the country. The Rastriya Banijya Bank set up in 1966
[Link] the Rastriya Banijya Bank Act 1965. It is the full government owned bank
and providing the banking facilities to the public. Similarly agricultural development
bank established in 1969 A.D. Lender the Agricultural Development Bank Act 1967.

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The bank inherited the assents and liabilities of the cooperative bank, which was
established in 1963, in 1973 the land reform and saving corporation, it is the
government and Nepal Rastra Bank being the major share holders.

Today Nepal can proudly speak in the remarkable growth and progress in the banking
sector, Nepal had opened its door to foreign commercial bank NABL came into
existence on 17 may 1984 under commercial bank Act 1974 as a joint venture bank. It
has the authorized capitals Rs 30 million, 50 percent share is held by union bank of
middle East Dubai 20 percent by Nepal industrial development corporation, National
insurance corporation and securities marketing center and rest by the general public.
Similarly in February 1986 Nepal Indosuez bank was established as a joint venture of
Indosuez bank France and public share holders with an authorized capital of Rs 120
million. Nepal Grindlays bank then after established in December 1986, this is also
another joint venture between the Grindlays bank of the U.K.

In Nepal there are massive entrances of foreign bank as the country followed
economic liberalization. The Himalayan Bank and Nepal SBI Bank were established
in 1993 as joint venture bank with Pakistan. Bank and Bank of India repetitively.
Nepal Bangladesh bank and Everest bank were established in 1994 as a Joint venture
with Bangladesh bank and Punjab National bank respectively. Bank of Kathmandu as
a joint venture bank with Thailand bank establish in 1995. Similarly other joint
venture bank in Nepal is bank of Cyelon as a joint venture with Srilanka Bank
establish in 1995. These banks have been contributing in the expansion of banking
industry of Nepal. In beginning most of the bank came into existence as a joint
venture bank but at present situation some of the bank has converted into fully stated
owned. Other banks like Lumbini Bank Ltd. Nepal industrial and commercial Bank
Ltd. Kumari Bank Ltd. Laxmi Bank Ltd. Machhapuchhre Bank Ltd and Siddhartha
Bank Ltd are established without Joint venture.

The entry of foreign commercial banks function led to rapid growth of banking
system. The governments liberalization policy led to a dozen of commercial banks
actively playing in the financial market of the couter. Suggestion for the development
of banking in the country on the basic of area approach is being made by the policy
makers recently. The central idea behind this is that depending on their area of
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operation and location commercial banks could be assigned particular areas where
they act as pace setter in providing integrated banking facilities. The establishment of
commercial and industrial bank in Biratnagar, Lumbini, bank in Narayangadh,
Machhapuchhre bank in Pokhara are some of the example in the promotion of
regional banking industry of the country. Similarly the introduction of Nepal
development bank from private sector in exemplary in the history of banking in
Nepal. Many of these banks have shown tremendous progress to the term of deposits,
lending or in customer base within a short periods of time. In addition the government
has also introduced five regional development banks, which have bost up the income
of poor in rural areas.

Responding to the applications for the establishment of six banks namely, Janta bank,
century bank, Mero bank, Sangrila bank, Civil bank Ltd. and state bank of Nepal,
process (in different phase) are underway to issue licenses to banks. Following the
decision of in April 2009, NMB bank with its Head office in Kathmandu
metropolitan, is granted license to operate banking services of class 'A' in May 2009,
similarly DCBL bank Ltd and Kist Merchant banking and finance Ltd are granted
license in May 2009 for conducting "A" class banking services. Mega Bank just
opening in July 2010, with it Head office in Kathmandu metroplitan, for conducting
"A" class banking services.

The request letters received so far about the merger of 5 financial institutions namely
Mahalaxmi finance Ltd. Butwal finance Ltd. Siddhartha finance Ltd, Birgunj Finance
Ltd and Himchuli Development Bank, have been studied. Nepal Rastra Bank
responded to applicants based on its circular of 5 September 2008 that it can be
considered if application for such merger is received subsequent to raising the level of
their capital fund.

During the review period, the number of "B" class banks reached 60 from 58 banks.
Mean while, development credit bank Ltd (DCBL) of "B" class has been upgraded to
"A" class whereas 3 new development banks have been established. Among the new
banks, Jyoti development bank is located in Kathmandu, Purnima development bank
Ltd. at Siddhartha Nagar Municipality and shine development and bank is located at

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Butwal Municipality of Rupandehi district. Process in various phases is underway for
39 new banks planned for establishment.

Since no "C" class financial company was established in the review period their
number is contained to the previous 78 by mid-March 2009. Out of these 53 financial
companies are based in Kathmandu, whereas 25 are located outside valley, Mean
while 8 more financial companies are in the different phases of their establishment
process.

The number of "D" class micro finance companies has reached 13 against earlier 12
with one more micro finance development bank added during the review period. The
new one, Shree Naya Nepal Micro-Finance development Bank is based at Dhulikhel
of Kavre district.

There has been no change in the number of cooperatives with limited banking
services registered under cooperative Act and limited to 16 ( as before ) by mid-
March 2009. The number of non-government organizations working as intermediary
agency, has limited to 45 by mid-March following the cancellation of licenses of
Nepal Gramin Bikash Samaj Kendra Biratnagar, and Chhimek Samaj Sewa Sanstha,
Kathmandu.

1.4 Overview of the Nepal Bank Limited (NBL)

Nepal Bank Limited (NBL) the first commercial bank was established in 1937(1994
kartik 30 Bs) under the NBL Act 1937. The establishment of Nepal Bank Limited is a
great landmark in the history of modern banking in the country. This bank gave
different service to the people and provides the various facilities for and borrowing
money for commercial and Agricultural purpose. It solved to a great extent the
problems of commercial banking in economy. It contributed significantly in creating
banking habit among people, widening remote fisted area and helped the government
and business community in various ways. The bank has also the objective to
accumulate scattered capital and invest them towards best productive and profitable
channels for the promotion of desired sector of the country for the various factors
which are supposed to be four wheels of development vehicles. With the

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establishment of commercial bank Act 2031, the bank has been operating it function
under the Act 2031. According to commercial bank Act 2031 section 2(a) " accepts
cooperative, agriculture, industry or banking with any other particular objectives a
bank which exchanges money, accepts deposit grant loans and operates commercial
transaction is called a commercial bank. "It is the bank with largest number of
branches reaching every part of the rural and urban area of the country.

The bank started with the authorized capital of 10 million and paid up capital of Rs
84.2 million, out of which 51 percent of the shares were government and the
remaining 49 percentage of the public. The head office of the bank is located in
Kathmandu and 5 regional offices are located in Biratnagar, Birgunj, out of which 16
are located at rural region and remaining 79 at the urban region.

1.5 Overview of the Rastriya Banijya Bank (RBB)

Rastriya Banijya Bank (RBB) is fully government owned and the largest commercial
bank in Nepal. RBB was established on 23 January 1966 (2022 Magh 10 Bs) under
the RBB Act. RBB provides various banking services to a wide range of customers
including banks, insurance companies industrial trading houses, airlines hotels and
many other sectors.

Rastriya Banijya Bank has Nepal's most extensive banking network with over 123
branches, through its branch network RBB has been contributing to Nepal's economic
development by providing banking services throughout the country. RBB has many
correspondent arrangements with major international banks all over the world that
facilitate trade finance bank originated personal funds transfers and inter bank funds
transfer via SWIFT. In a bid to promote remittance business, RBB works with
western union and international money express, two lending person to person funds
transfer network.

In addition RBB runs various programmers i.e. banking with the poor, Micro credit
project for women etc. to exchange the living standard of people as per the govt.
directives. As well RBB actively delivers various government programs to people
living in remote parts of the country, these program are intended to rise living

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standards. The central office the bank is in Singhadurbar Palza Kathmandu main
branch office of the bank is located in Bishal Bazar New Road Kathmandu and 5
regional office are located in Biratnagar, Birgunj, Kathmandu, Pokhara and
Nepalgunja and 124 branches are divided under the 5 regional office which 27
branches are located in regional office Biratnagar, 15 branches are located in regional
office Birgunj, 34 branches are located in regional office Kathmandu, 23 braches are
located in regional office Pokhara and 25 branches are located in regional office
Nepalgunja.

Commercial banks are the heart of our financial system. It is the four wheels of the
development of economy. When the Nepal gets the membership of world trade
organization (WTO) and adopts the liberalization. The joint venture commercial
banks opened their branches in the country and used the new technology and provide
service their customers with modern banking system. But full government shares bank
and mid-government shares bank running with traditional values and services. They
can not facing competition with joint venture banks. Now government owned
commercial banks Nepal bank Limited (NBL) and Ratriya Banigya Bank (RBB) has
many challengers. How to provide the good service for their customers not fully
computerize system. But the joint venture banks had used the computer system and
served the modern banking system. So the NBL and RBB have necessary to use full
computerized system, modern banking system and quickly provide the service.

1.6 Concept of Interest Rate

In common language interest is a payment made by a borrower to the lender for the
use of money and is expressed as a rate percent per year. But in economics, interest is
defined different by different economics. According to carver “Interest is the income
which goes to the owner of capital “Marshall defines interest as "The price paid for
the use for the capital in any market". For Wicksell interest is a "a payment made by
the borrower of capital by virtue of its productivity as a rewards for this (the
capitalized, abstains)" Keynes regards interest as a purely monetary phenomenon and
defines it as the “Premium which has to be offered to include people to hold their
wealth in some form other than hoarded money " (Chopra 1997).

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The bank collected the scattered saving as deposits provide certain rated on various
deposit. The collected deposits are again invested as various kind of loan charging
certain interest by the bank. The difference in lending and borrowing interest rate is
called spread rate. Spread rate has been quoted by Nepal Rastra Bank i.e. 4% to 5
percentages. This spread rate is one of the pure profit of the bank.

In other view, the rate of interest is the cost or price of credit. The cot to the borrower
is called required return. It reflects the level of expected returns. The different types of
assets have different rate of interest for its use. However rate of interest change
together according to time. Hence it is enough to say that rate of interest is high or
low instead of saying the interest rate of particular financial assets. For example if the
corporate interest rate is higher usually the interest rate of the state of local bond is
also higher.

1.7. Focus of the Study

There is a reverse relation between lending and deposit in the case of interest rate,
when the interest rate increases deposit will increase and when the interest rate
decrease lending will increase and vice versa. Interest rates send price signals to
borrowers, lenders, savers and investor. For example, higher interest rates generally
bring forth a greater volume of saving and stimulate the lending of funds. Lower rates
of interest on the other hand tend to dampen the flow of saving and reduce lending
activity but increase the demand for loan. Higher rates tend to reduce the volume of
borrowing and capital investment and lower rates stimulate borrowing and investment
spending (Rose 1997, 124).

This study is basically focused on different interest rate of the selected period and to
know their impact on the deposits of Nepal bank limited (NBL) and Rastriya Banijya
bank (RBB). The interest rate provided by the bank is various according to the deposit
and time. As a profit seeking banks, Nepal bank limited and Rastriya Banijya banks
also provide loan of the people and takes the high rate of interest than in deposits for
which it has to pay. The performance of the Nepal Bank Limited and Rastriya Bank
are evaluated along with the briefly analysis of the state of the economy, which
provides the opportunities as well threats to the commercial bank.

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1.8 Statement of the Problem
Most of the banks are adopting new banking system they seen successful to achieve
remarkable market share in Nepalese financial institution which has lead to throat cut
competition among each other. It has threatened the entire banking system including
two commercial bank like Nepal Bank Limited (NBL) and Rastriya Banijya Bank
(RBB). Commercial banks are expected to boost up the development pace of
communities as well as the economy as a whole. Commercial banks are operated
under the values, regulations, guidance and directive of the central bank. Government
initiated many joint venture banks, government banks financial companies, rural
banks and cooperate societies in Nepal.

Mobilizing of deposits towards best productive channels has been always the concern
of the banks. But a proper effective efficient and economic media for canalizing the
resources has not yet been devised. So the bank has to try its best to induce people to
save and deposit saving in the banks and to utilize these deposit to the maximum
possible extent.

During the last 72 years of the existence of Nepal Bank Limited and above the 43
years of the existence of Rastriya Banijya Bank these banks have been increasingly
making efforts to extent activities and providing large amount of funds to trade.
Industries and also rising along term capital form different resources. Bank seem to be
ready to begrant much more loan advance and other facilities against clients
insufficient deposit unsecured loan and investment may cause the liquidation of
banks. If the funds are wrongly invested without thinking any financial risk, business
risk and other related facts, these banks cannot obtain profitable return as well they
should sometimes loose own principle though both banks faced the problem from bad
loans. Besides these banks (Nepal Bank Limited and Rastriya Banijya Bank) are
facing following problems;
a. Fluctuation of interest rate is the main problem observed.
b. Interest rate provided to the deposit also seems decline yearly.
c. The NPA is not satisfying.

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1.9 Research Questions
This study seeks to answer the following questions.
a. What is the trend at Impact of rate of interest on deposits?
b. What is the trend and impact of rate of interest on lending of the banks?
c. What are the reasons behind the fluctuation on deposit and lending of the banks?
d. How do rate of interest and deposit relate each other?

1.10 Objective of the Study

The general objective of the study is to analysis impact of interest rates on deposit
mobilization and it long term effect on the profitability of the banks. The specific
objectives are:
a. To analyze the trend of interest rate on deposit and lending of NBL and RBB.
b. To analyze the trend and causes of fluctuations deposit and lending amount of
NBL and RBB.
c. To analyze the impact of rate of interest on deposit and lending of NBL and
RBB.
1.11 Significance of the Study
The scope of interest rate policy is as broad as its definition. Many genuine research
works have been done and many important theories are formed and even apply in the
economic world. However, Nepal has yet to achieve a bit of what other foreign
student and scholars have achieved. While in a process this is another effort to fulfill
the gap that has been left by other researcher and continue their genuine work.

Bank are major part of the economy as their polices and movements are always under
financial scrutiny old banks have obvious advantage over new banks in term of
operational cost and expertise gained though past experiences. How ever, new banks
have obvious advantages provided by the updated and software and technology which
is definitely going to pay back in the long run. These banks got autonomy to maintain
their own interest rate, it has to shoulder huge responsibility as they have to scrutiny
every aspect of effect of increase or decrease in the interest level.
Any genuine study in this can solve problems set definite directions therefore there
has always been encouragement to bring about new ideas and information. The study
undertaken is deeply concentrated on the impact of interest rate on deposit

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mobilization and profitability of the bank therefore it will be helpful to all directly or
indirectly related to economic fields. The study will be will known to respective
problems etc.

1.12 Limitation of the Study

The research is limited to deposits included current saving and fixed deposits and its
interest rate is provided by Nepal Bank limited (NBL) and Rastriya Banijya Bank
(RBB). The major limitation being only impact of limitation being only impact of
interest rate on deposit mobilization is considered deposit there are several factors
which have higher influence. Besides this study is bounded by the following
limitation.

a. The study focus itself only on two commercial banks of Nepal Bank Limited
(NBL) and Rastriya Bnaijya Bank (RBB)
b. Analysis is based on secondary data.
c. In this study saving and fixed deposit only are included.
d. This study covers only the period 2003 to 2009 AD.

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 CHAPTER- II
REVIEW OF LITERATURE
The develop concepts and ideas about the selected topic by reviewing all the relevant
materials regarding the study. In fact, review of literature beings with each for a
suitable topic and continues throughout the duration of the research work. It deals
with a literature survey of the existing volumes of similar related subjects. Review of
literature means reviewing research studies or other relevant propositions in the
related area of the study so that all the past studies their conclusions and deficiencies
may be known and further research can be conducted. It is an integral and mandatory
process in research works. The main reason for a full review of research in past is to
know the outcomes of those investigations in areas where similar concepts and
methodologies had been used successfully.

2.1 Conceptual Framework

This chapter lays the foundation of my research work, it discuss briefly about the
theoretical concepts of interest rate and it relation with other subjects. The banks
sensitivity to changes on interest rates is another source of liquidity problems. When
in interest rates full, some depositors will withdraw their funds in search of higher
returns elsewhere. This trend will decrease the liquidity in the bank significantly. At
the same time many loan customers may flow into banks for loan request or spend up
their drawing on those credit lines that carry lower interest rates. When interest rates
rise many depositors may rush into bank to deposit in their fund. Bank interest rate is
very sensible. It means comparatively little difference in the interest rate on deposit
can significantly increase or decrease the volume of bank deposit, because majority of
bank customers are always looking for higher interest rate. At the same time, when
interest rate rise, many loan customers may postpone new loan request or speed up
their drawing on these credit lines that carry lower interest rates. "An important aspect
of interest rate policy is the setting of an appropriate margin between the lending and
deposit rate. If the margin is too high, banks will make excessive profit and this may
lead to waste of saved resources is low, it will discourage intermediation and
devitalize financial institution" (Schulz,1978).

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The rate of interest is a purely monetary phenomenon, a rewards for parting with
liquidity, which is determined in the money market by the demand and supply of
money. In Keyne's monetary theory he has presented a proposition that the rate of
interest influences the level of economic activity by first influencing the rate of real
investment in the economy. According to him the real investment is in fixed capital or
durable machines. Keynes (1936),
"An important aspect of interest rate policy is the setting of an appropriate margin
between the lending and deposit rate, if the margin is too high banks will make
excessive profits and this lead to waste of saved resources. If is too low it will
discourage intermediate and devitalize financial institutions. At the same time the
demand for credit goes on increasing being affected by the cheap loan rates. Hence it
can be concluded that changes in interest rate structure produces either positive of
negative impact upon the growth of developing economy such as ours. When such
amendments are introduced without thinking seriously, there spread more negative
effects than positive. There are different interest rates in the financial system. Even
securities issued by the borrower often carry a variety of interest rates. Schulz (1989)

Some common types of interest rate are as follows (Jhingan, 2000).

a. Risk Free Rate of Interest

It is a component of all interest rates; pure interest rate is what remains with the lender
after deducting the reward for risk taking from gross interest. The pure or risk free
rate of interest exists only in theory, the closet real world approximation to this pure
rate of return is the market interest rate on government bonds less inflation. It is a rate
of return presenting little or no risk of financial loss to the investor. And it represents
the opportunity cost of investing in government bonds with no risk and earns this
minimum rate of return (Dictionary of Economics 2003).

b. Gross Interest
The payment, which the borrower makes to the lender excluding the principle, is
gross interest.

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c. Rewards for Risk Taking
Interest also includes reward for risk taking. The lender exposes him to risk when he
lends money. The greater the risk element the higher the rate of gross interest.
Unsecured loans are more risky than secured loans and they carry a high premium
rate.

d. Rewards for Inconvenience

Interest also a reward for inconvenience. When a lender loans money he forgoes its
use for the duration of the loan. His money is looked up and can not be used for more
profitable purposes. Even if he needs this amount for his personal use, he will have to
undergo the inconvenience of arranging it from some other source. So on fixing the
rate of interest the lender includes in it the reward for such inconveniences.

Interest rates have diverse roles and functions in the economy. Its roles can be notices
as a reward to capital which is a factor of production a return to saving a cost of
investment as an instrument of monetary policy for credit control, its functions are: It
helps guarantee that current saving will flow into investment to promote economic
growth. It rations the available supply of credit generally providing loan able funds to
those investment projects with the highest expected returns. It brings the supply of
money into balance with the publics demand for money.

2.2 Theories of Interest Rate

Various interest rate theories have been propounded by various economists, which
describe how interest rate is determined in various situations. Some well knows
theories of interest rates are as follows: ( Samuelson P,A, & Nordhus, William 2002
Economics)

2.2.1 The Classical Theory of Interest Rates

One of the oldest theories concerning the determinants of the pure or risk free interest
rate is the classical theory of interest rates, developed during 18th and 19th centuries by
a number of British economists and elaborated by fisher (1930) earlier in this century.
The classical theory argues that the interest is determined by two force: First is supply

15
of savings, derived mainly from households and second the demand for investment
capital, coming mainly from the business sectors ( Rose, 2003).

Saving by Households
Individuals and families carry out most of the saving in modern industrialized
economics. For these households, saving is simply abstinence from consumption
spending. Current saving therefore are equal to the difference between current income
and current consumption expenditure. In making the decision on the timing and
amount of saving to be done, households typically consider several factors: the size of
the size of current and long term income, the desired saving target, and the desired
proportion of income to be set aside in the form of saving (i.e. the propensity to
save).Generally the volume of household saving rise with income. Higher income
families and individuals tend to save more and consume less relative to their total
income than families with lower incomes. Although income levels probably dominate
saving decisions, interest rates also play an important role. Interest rates affect an
individual's choice between current consumption and saving for saving future
consumption. The classical theory of interest assumes that individuals have a definite
time preference for current enjoyment of goods and services over future enjoyment.
(Rose Peterson 2003)

Saving by Business Firm

Not only households, but also business, save and direct a portion of their saving into
the financial markets to purchase securities and make loans. Most business hold
saving balance in the form of retained earnings. Infact, increase in retained earnings
reported by business each year is a key measure of the volume of current business
saving. And these retained earnings supply most of the capital for annual investment
spending by business firms. Saving depends on two key factors: the levels of business
profits and the dividend policies of corporations. These two factors are summarized in
the retention rate, the ratio of retained earnings to net income after taxes. This ratio
indicates the proportion of business profits retained in the business for investment
purposes rather than paid out as dividends to the owners. Experience has shown that
dividend policies of major corporations do not change very often. Many corporations
prefers to keep their dividend payments level constant or increase them slightly each

16
year, regardless of their current earnings. Any shortfalls in earnings needed for
dividend payments are made up though borrowing. (Rose Peterson 2003)
Saving by Government
Government also saves though less frequently than households and business. In fact,
most government receipts and unexpectedly exceeds actual amount of expenditures.
Income flows in the economy out of which government tax revenues arise, and the
pacing of government spending programs are the dominant factors affecting
government saving. It increases the supply of funds.(Rose Peterson (2003) Money and
capital markets.

2.2.2 The Liquidity Preference Theory of Interest

The classical theory of interest has been called a long term explanation of interest
rates because it focuses on public’s thrift habits and productivity of capital factors that
tend to change slowly. During the 1930. British economy Keynes (1936) developed a
short term theory of the rate of interest that he argued was more relevant for policy
makers and for explaining near term changes in interest rates. This theory is knows as
liquidity preference theory of interest. In this theory interest is the interplay of
demand for liquidity and supply of money ( NRB, Economics Report, 2001)

2.2.3 The Fund Theory of Interest Rate

A view that overcomes many of the limitations of earlier theory is the loanable funds
theory of interest rates. This view argues that the risk free rate is determined by the
interplay of two forces the demand for and supply of credit (loan able funds). The
demand for lonable funds consists of credit demands from domestic business
consumers and government and also borrowing in the domestic market by foreigner.
The supply of loan able funds stems from four sources domestic saving boarding
demand for money creation by the banking system and lending in the domestic market
by foreign individuals and institutions (Ibid 2001:)

2.2.4 Rational Expectancy Theory

In recent years, a fourth major theory about the forces determining interest rates has
appeared and now appears to be gaining supporters. This is the rational expectations
theory of interest rates (Ibid, 2001, p.132).

17
It builds on a growing body of research evidence that the money and capital market
are highly efficient institutions on digesting new information affecting interest rates
and security prices. The important assumptions and conclusions of the rational
expectations theory are that the prices of securities and interest rates should reflect all
available information and the market uses all of this information to establish a
probability distribution of expected future prices and interest rates. Changes in rates
and security price are correlated only with unanticipated information; the correlation
between rates of return in successive time periods zero; expectations concerning
future security prices and interest rates are formed efficiently. The rational
expectations view argues that forecasting interest rates requires knowledge of the
publics current set of expectations. It implies that policy makers cannot cause interest
rates to move in any particular direction without knowing what the public already
expects to happen and indeed, cannot change interest rates at all unless government
officials can convince the public that a new set of expectations is warranted (Ibid,
2001).

2.3 Interest Rate and its Revision

The formal government of Nepal Rastra Bank Mr. Kul Shekhar Sharma remarks
theses things about interest rate changes (Sharma 1975).
 A high and positive rate of interest is necessary to attract the resources from
the public in terms of rising prices.
 Cheap interest rates do not benefit proper section of the society for whom it
was intended.
 A reform in the interest rate had become necessary to restore equilibrium
because the commercials banks could not attract the general people by the
existing interest rates.
 Interest rate should be changed from time to time in according with the
condition of demand and supply of capital.
 The interest rates should not be fixed at unrealistic level become its principle
function is to guide investment opportunity which are needed in the economy.

18
2.4 Changes in Interest Rate and its Impact
In Hamburger's view "monetary variables have a significant erect on consumers
purchase of durable goods and the most appropriate measures of these variables are
interest rates (Hamburgers 1967)".

This means to say that the consumption pattern of the individual can be changed by
the interest rate. An individual can be attracted by a good avoid rate of interest and
may divert his attention towards earning interest rather than consuming more durable
goods. This shows the effects of interest upon the psychology of an individual. No
doubt there exist positives relation between saving of the people and the interest rate
of the banks.

2.5 Impact of Inflation on Interest Rate

One of the most serious problems confronting economists around the globe in recent
year is in inflation. The relationship between interest rate and expected inflation is
often referred to as the fisher effect. Inflation is defined as a rise in the average level
of prices for all goods and services. To explore the relationship between interest rate
and inflation it is better to distinguish nominal and real interest rates. The nominal
rate is the published or quoted interest rate on a security or loan. In contrast real
interest rate is the return to the lender or investor measured in terms of its actual
purchasing power. An increase in expected inflation automatically increases nominal
interest rates. But expected real rate of return tends to be relatively stable over time
because it depends on such long term factors as the productivity of capital is likely to
influence only the nominal interest rate at least in the short run. (Rose 2003:165).

2.6 Impact of Deflation on Interest Rate

For the past fifty year and move inflation a rising level of prices of goods and services
has been a key economies and financial problem. However as the twentieth century
began there was growing concern that deflation a fulfilling average level of price
might soon replace inflation as one of the key problem. Indeed Japan for much of the
past decade has experience falling prices to go along with rising unemployment and
nominal interest’s rates lowering close to zero. Deflation can lead to falling interest
rates. We can think so because deflation can damage to production and peoples well

19
being. For one thing deflation tends to force real interest rates higher even as nominal
rate drop downwards to zero. These elevated real interest rates tend to slow
investment spending and decrease the development of new jobs. Real economic
output will decline as factories come to produce less and business profits fall. At the
same time lenders gain a tan expense of borrower because the formers purchasing
power rise and business trying to borrow money have to struggle to raise the capital
they require to grow and out people back to work (Ibid 2001 p 274).

2.7 Concept of Deposit

Deposit is the main sources of funds. By providing the certain rate of interest
commercial banks call for the deposits from the customers. Mainly three types of
deposit are accepted by the bank that is the current deposit saving deposit, and fixed
deposits are used for lending the money to different sector as agriculture, productive
work. Trade, industry. The deposit will lead to increase the working capital of the
bank. So in a developing country like Nepal, deposits have played a significant role
fourth development of the Nepal.

2.7.1 Importance of Deposit

Deposit arises from saving. An individual's income equal consumption plus saving
he/she deposits the saved part of income in the bank and gets interest from it. Banks
in turn lend this money and earn profit by charging high interest rates. And borrowers
from banks, invests this fund in productive sectors yielding more return than the
borrowed interest. This investment leads to create new employment opportunities in
the economy, utilimately due to new employment the purchasing power of the
economy increase and finally GDP and growth of the country occurs. it means that the
deposit has very important role in the economy. There is a direct relationship between
deposit of bank and the investment in the economy. If the volume of deposit is low,
the investment in the economy also lags behind due to lack of resources. The deposit
of bank is the accumulated capital which can directly be invested. There is a great
need of such deposit in the developing countries. Deposit includes the idle money of
the public, bond being the intermediate to accept this sort of money and help to
channeled this in productive sector. So the importance of banks and financial
intermediaries is larger in present context.

20
2.7.2 Deposits and Banks
There is greater relationship between deposit and bank. Without deposit bank does not
swing their wings. It means that deposit is the blood circulation of body of bank. So
first of all banks performance to collect the more money as deposit. Money is
deposited by the people in banks for some motives as.
a. For high interest rate gain.
b. Money for safe keeping
c. Safe and transaction
d. Those people who have no any idea how to utilize the money (as business,
industry) so, they keep money for deposit in the bank.
As mentioned earlier people deposit money for safe keeping. It is intense that they can
hardly control their conscience. So it banks does not exist it is certain that people save
less money. It is necessary that three exist some institutions that mobilize their saving.
So the importance of banks can not longer be exaggerated.
The large number of banks in the country suggests that the people of that country save
more money. Unless people save more money the opening of new branches and the
extensive of banking system will get no meaning. On the other hand the volume of
deposit also depends upon the interest rates of the banks. Positive real interest rates
attract more resources from the public.

2.8 Concept of Lending (Credit)

Another importance function of commercial bank is to provide types of loans of
credit. The word credit means trusting. In credit transaction the lender (or bank) must
have confidence in the borrower that she/he will be able to repay the money. In credit
transaction the creditor turned over to the debtor to repay and equivalent amount
usually money in future plus as added sum called interest. In other words the
commercial bank earns profit by lending the amount in terms of loan or credit and in
return it gets interests. Banks loan are classified as: a) Loan and advances b)
overdraft, c) cash credit d) Discounting of bills and so on. (Monohar 1998.225) But
besides this the other forms of credit are: Bills of exchange cheque Draft, promissory
Note, Letter of credit (LC). Travelers cheque, Treasury Bills (T. Bills ) credit etc.

21
2.8.1 Factors Affecting the Volume of Lending
The volume of credit within a country upon different factors. For this study only the
effect of interest rate is taken into consideration and other factors are not considered
some of the factors affecting the volume of credit are as follows:

a. Credit Lending Rate

If the bank credit rate is very high then, the volume of credit expansion is less and
vice-versa. It means that volume of credit and interest rate of credit has inverse
relation. People invest very little in productive sectors when the interest rate is high in
the market economy.

b. Rate of Return
If the rate of return is high people inclined to invest more. People earn more profit and
they become able to afford higher rate of interest along with timely repayment of loan

c. Investment Opportunity
If the investment opportunity within the country is high, the volume of credit becomes
high. The basic thing for investment stimulation is easy and cheap credit etc.
d. Peace of Financial Development
If there are enough banking facilities to provide loans in easy terms the volume of
credit may be high. It is due to the lack of cheap money lenders that rural people are
deprived of loan. If the banking facilities within the nations are expanded the volume
of credit rises.

e. Basic Infrastructure
Like transportation, marketability, availability of raw materials also pays an important
role in raising the volume of credit in the country

f. Political Condition
Political condition especially political instability, is also one of the major causes of
low volume of credit. In such a case none would like to risk his capital in new
ventures. The present condition of the country is the glaring example of this. In
addition to aforementioned point, other factors like trade condition, currency
conditioned are also the factors affecting the volume of credit.

22
2.9 Review of Related Studies
In the preparation of this thesis there are some research papers articles and thesis
related to this study, which contributes some idea and the help in the presentation of
this study regarding to this thesis, there are very few thesis and research papers
articles submitted to the libraries Tribhuwan University and its wing colleges on the
same topics. But besides this there are some other thesis which is related to this study
to some extents. The review and the extract from them presented in this section.

J.M Keynes (1936 p.136) “The general theory of employed interest and money" in
J.M Keynes book brought forwards his view about the rate of interest. Community's
liquidity preferences and quantity of money and rate of interest are negatively
correlated. At low rate of interest the liquidity preferences of community is high and it
is low at high rate of interest.
According to the modern view interest rate determination deepens upon the
investment, the marginal efficiency of capital is the rate of interest and investment is
equal to the desire volume of saving.
Thus, the total investment total saving or I= S keynes said that the three divisions of
liquidity preference are;
i. The transactions motive i.e. the need of cash for the current transaction of
personal and business exchanges.
ii. The precautionary-motive i.e. the desire for security as to the future cash
equivalent of a certain proportion of total resources; and.
iii. The speculative-motive i.e. the object of securing profit from knowing better
than the market what the future will bring forth.

Maxwell (1974), Opines that the interest rate fixing authorities cause adverse effects
on income distribution. The interest rates are beneficial especially for the small
savers. According to him interest rate affects the saving and mobilization. A high
interest rate diverts the resources from unproductive tangible assets into financial
claims. For Nepalese people and Nepalese undeveloped money and capital market
interest rate can be taken as an important weapons in mobilizing the interest
resources, here interest rate plays as a market clearing device. Higher interest rate
pushed people to some money and it allows people to invest into opportunities. Low

23
interest rate attracts the small borrowers. In Nepalese context investor are bound to
take loan from unorganized sectors and have to pay high rate of interest. This high
rate of interest affects on their return on investment. Interest rate risk exists in
conditions in financial markets will later the balance between the supply and the
demand for loanable funds.

"When funds are plentiful, market rate generally tends to decline banks seek loan
move aggressively, and therefore lower their rated induce marginal borrower to come
into the market. When funds are scare banks raise their rates and coming of potential
borrowers may differs the use of credit or seek it else where" (cross 1963).

Samuelson (1989), Mentioned about the impact of changing rate of interest. Interest
rateaffects the interest earning and interest expenses. The spread changes according to
the changes the interest rate. The changes in risk less rate of interest caused the whole
spread some times, up and sometimes down.

2.10 Review of Papers and Articles

When funds are plentiful market rate generally tends to decline banks seek loan more
aggressively and therefore low their rates to include marginal borrower to come in to
the market. When funds are scare banks raise their rates and some potential borrowers
may differ the use of credit or seek it else whereas (Crosse 1963).

Price level trends affect interest rates in two important ways. First the nominal interest
rates the contract or stated, interest rate reflects expiations about future price level
behavior. It prices are rising and expected to raise further the expected rate of
inflations added to the interest rate that would have prevailed in the absence of
inflation to adjust for the decline in purchasing power represent by price increases.

Panta (1983) mentioned that changing interest rates in deposits changes the saving
held by the Nepalese individuals. High interest rate in deposit helped to raise the
saving especially from rural areas. Lower rated loan showed huge increment in sale
and purchase of land, building and vehicles in the recent years. In his book, interest

24
rate policy rate policy of Nepal has expressed the following view points about the rate
interest.

The change in the interest rate will increase time deposit through the rout of balance
payment but the magnitude of effect will depend in particular on the interest elasticity
of money demand function. The real rate of interest has the expressed influence on
money demand or the velocity of money. But the coefficient is too small to be
statically significant on that an increase of 100 percent in real interest will lead to just
seven percent increases in saving. The changes in interest rate in April 1975 by NRB
have generated three effects.
a. Time deposit increased at a relatively higher rate for a year or two and increased
resources base of the commercial banks. The change in a deposit rate is
expected to have diverted the resources from rural to urban area.
b. Won traditional are but more importantly on the slow growth in demand for
investment for the private sector.
c. The profit position of commercial banks deteriorated sharply due to lack of any
comprehensive credit plan to use the accumulated resources in the form of
deposit liabilities.

Kafle (2005), In her article entitled " Nepal Rastra Bank and its polices for monetary
control" opines that liberalization, the effect on deposit seems to be positive in the
letter period as it increased from 17.74 to 21.60 percent of nominal GDP and thus
there was a positive effect on saving mobilization, however in the case of loan and
advances commercial banks were founds to be underlet because the percentage of
loans and advances to nominal GDP was only 10.6 and 11.9 in the two period
respectively.

The existing of large unorganized money market. Lack of sensitivity of economic

agents for monetary changes budgetary operation of the government highly
mismatching for revenue and expenditure, lack of adequate securities markets,
undeveloped money and capital markets. And so on are the main factors creating
problems for the effectively use of monetary policy.

25
2.11 Review of Thesis
Raj Bhandary (1978) conducted a study on "the interest rate structure of commercial
banks in Nepal". The objective of this study was to show the relation of interest rate
with saving and fixed deposits; with loans and advances; and with net interest earning
(i.e. interest received on loan minus interest paid on deposit). The study concluded
that the time deposit are positively and significantly correlated with interest rates.
There is significant correlation between the saving deposit and the rate of interest
fixed deposit is more sensitive to the interest rate revision deposit and the interest rate
particularly from 1977 is most significant. But the relation between the interest rates
and the loan and advances is less significant. Among all the sectors, the private sector
seems most sensitive to interest rate change. Most of the loans too are correlated
positively if absolute cumulative figures are taken. But the growth rate of total loans
and advances expect investment on government securities is negatively correlated
more with the weighted average rate of interest since 1973. The growth of loans to
private sector is also negatively correlated with interest rate since 1971. Negative
means that loons decrease at higher interest rate since 1971. Negative correlation
between loans and interest rate means that loans decrease at higher interest rate and
vice versa.

The net interest earning is developed upon interest coverage. The total interest
received and the total interest paid significantly correlated in the case of both of the
banks i.e. Nepal bank limited and Rastriya Banijya Bank the sample organizations of
the study. He is in view that NRB can well monitor the credit flow and profits of the
commercial banks in Nepal by manipulating the rates of interest. It can be also
manipulate the demand for and supply of money.

Pandey’s (1979), Study on "Money level of prices and interest rate structure A case
study" was conducted with the objective of studying the trend of money supply in
Nepal and there by to find out the factors responsible for it same wise to analysis the
interest rate of NRB. With this study we also have the relationship among money
supply prices and interest rate structure of Nepal.

26
With the above mentioned objectives the study concluded that: the time deposit is
positively and significantly correlated with the interest rate. There is significant
correlation between the saving deposits and the rate of interest and between the fixed
deposits and the rate of interest. Fixed deposit is more sensitive to the interest rate
revisions. The correlation between the growth of fixed deposits and the rate of interest
particularly is most significant. Among all sectors the private sector seems most
sensitive to interest rate revision. The net interest earning depends upon interest
coverage. The total interest received and the total interest paid is significantly
correlated in the case of both the banks i.e. Nepal Bank Limited and Rastriya Banijya
Bank. By manipulating the rates of interest Nepal Rastra Bank can will monitor the
credit flow and profits of the commercial bank in Nepal. It can manipulate demand for
and supply of funds by manipulating interest rates and by contracting or expanding
money supply.

Khatri (1980), Mentioned in this thesis that the overall performance of commercial
banks in satisfactory and Nepal Rastra Bank has to play more active role to enhance
the operation. The liquidity position of commercial bank is satisfaction co-efficient of
correlation of deposit and lending and investment of commercial banks have better
position. The co-efficient of interest rates and deposits of commercial banks do not
have better position. He further found that the trend of deposit loan and advances and
investment to deposits is in decreasing trend. He concluded his thesis mentioning that
the interest rate has played important rate in deposit mobilization of the bank. So, the
structure of interest rate should be changed according to the need of nation.

Neupane (1997), Mentioned in his research work that interest rate various among
nations. It depends upon their economics activities and existing policies. In every
economy we find inverse relationship between investment and interest rate. Higher
the interest rate, lower the investment and vice versa. Direct relationship may be
found between interest rate and saving. With the lower interest rate the deposit also
falls down so while determining the interest rate should always by equality in saving
and investment. Appropriate interest rates scan direct investment in the proper filed.
For resources, interest rate should be positive.
In Nepal interest rate can perform the following functions.
 The interest rates mobilized saving.
27
  The interest rates in an effective rationing device for the allocation of the
scarce resources between alternative investments.
 The interest rate can provide a social discount rate for decision to save and
invest.
Interest rate has the guideline for directing the investment into productive sector. The
cheaper interest rate of the commercial banks diverted the capital into unproductive
and speculative sectors.

Bhandarie's (2005), Study on " A study impact of interest rate structure on

investment portfolio of commercial banks of Nepal" a study was conducted with the
objective to cast a glance at the historical background of interest rate structure of
commercial banks policies, decisions and strategies regarding it and their impacts and
to assess the impact of interest rate structure of commercial banks on their investment
portfolio by analyzing their deposits loans advances, interest spread investment and
bills purchases and discounted.

With these mentioned above objectives the major finding of the study are to be
identified. Deposit rates and lending rates of the commercial banks have been
changing time to time. It is found that the deposit rates and lending rates increased
slightly immediately after the liberalization of interest rate on August 31, 1989. But
therefore these rates started to decline. Lower rates of interest have helped in
increasing the credit flow. Interest rate structure of the commercial banks greatly
influences their profitability which depends on their interest spread, decrease in
lending rates resulted in the increase of credit flow and interest spread which
consequently increased the profits of commercial banks. Deposit rate is the most
important determinant of the deposit collection of the commercial banks. According
to the earlier analysis, it is found that though the mount of the deposit collection of the
commercial banks is increasing the rate of increment is declining with the decline in
the deposit rates. This means depositors are more interest conscious. They increase
their deposit, if higher deposit rates are offered. The study shows that the increasing
dements for credit can be met only by increasing deposit collection.

Dangol's (2006), Study on "The impact of interest rate on financial performance of

commercial banks of Nepal". A case study was conducted and following findings are
28
measured as most of the sample commercial banks contradict the general financial
theory. The average data also is contradictory with the general financial theory. Thus,
the whole banking sector represents an anomaly in the financial theory. The relation
between deposit and interest rate must be positively correlated. But this is not so as
indicated in the study. The analysis shows just the opposite picture. The study revels
that in our economy as whole deposits are increasing despite the decrease in the
general level of interest. The economy of the country is stagnant at the present time.
This has resulted in low consumer and business confidence. As a result of such
psychological phenomenon. Business are reluctant invest in new ventures. The result
such phenomenon is that there are fewer investment opportunities for the banking
sector as well as the general investors. The relation between total amount of loan and
the lending rate is negative and significant in all the cases. This thus is what is
expected in an economy. This is one aspect where the general economic theory is
applicable. The change in the total amounts of loan flow is not however proportionate
with the change in the lending rate, this also caused by the current state of the
economy. The general trend of the operating cost of the commercial banks is growing
this is probably the result of inflation prevailing in the economy. The trend of the
interest rates ate however just opposite. Thus, since the general trends of both the
variables under consideration are opposite the correlation analysis is not able to
clearly decipher the relation between the variables. The study also reveals the
commercial banks are more or less similar in various aspects.

(Dhungana: 2007) in his study” Lending Practices of Finance Companies” concluded

that lending plays key role for the success of every Finance Company. There should
be effective loan policy and efficient implementation to get successful recovery. Loan
policy and interest rate are interrelated, so fixing appropriate interest rate may lead the
Finance Companies towards bright future. He further recommend that there is need to
increase liquidity position of Finance Companies and they should be focused towards
commission based transaction.
Mr. Paudel (2008) in his thesis study on "Impact of Interest rate on Deposit
mobilization of Finance companies at Rupandehi" find out that Economic
liberalization policy of the government has encouraged establishing and growing of
FC's with is short span of time. In a situation when existing financial institution
specially governments commercial banks were unable to mobilizing the deposit and to
29
cary capital market activities, finance companies have contribute a lot. Now there are
79 FC's up to mid January 2008 and all are operating smoothly. Due to the active roll
of Nepal Rastra Bank overhall performance of FC's is almost satisfactory.

2.12 Review of Policy Document

The following Nepal Rastra Banks directions relating to interest rate issued for
commercial banks effective from February 14, 2001.
 The commercial bank should in from Nepal Rastra bank in written from
regularly and compulsorily, and publish in the news media within every three
month and immediately in case change.
 The commercial banks could offer interest rate more than published interest by
50 basic points on the basic of negotiation with customers for the deposit of
two hundred million and 100 basic points for the deposits more than Rs. two
hundred million.
 Over the published lending rates for all types of loans, the bank could make
the adjustment up to 50 basis point on the basis of negotiation with the
customers.
 While publishing any deposits rate or any lending rates expect the provision
on above (b) and (c) the commercial banks was not allowed to mention the
term "could be determined on the basic of negotiations. "If interest rates are
determined against this directive, penalty equivalent to an amount arising such
increased or lowered rate of interest should be imposed (economic report
2000\2001)
The difference between the interest provided and interest changed (spread) should not
be more than 5 percentage. The difference is calculated on the basis of the weighted
interest provided and the weighted interest charged.

2.13 Nepal Rastra Bank's Domination on Interest Rates

Nepal Rastra Banks playing a lending role in the economic and financial sector of the
nation. As a result of interest rate on deregulation, commercial banks are allowed to
determine their own interest rate on deposits and loans. The interest rate structure
continues to be an important area concerned to born Nepal Rastra bank and
commercial bank. The deregulation of interest rates has provided autonomy to

30
commercial banks to determine their own interest rate on deposits and loans but the
disparity should not exceed more than 6 percent. After the establishment of Nepal
Rastra bank, it held the authority of controlling commercial banks from and financial
institutions. Nepal Rastra bank had actively formulating the monetary policies and
fixing the interest rates.

The economic liberalization policy of the government also has encouraged the
established and growth of commercial banks in the country within a short span of
time. In a situation when existing financial institution, especially commercial bank are
unable to supply credit is one of the important instruments of monetary policy.
According to this policy Nepal Rastra Bank control over the commercial banks
statutory reserve of liquid assets. Limitation and spread of interest rates over deposit
and loans, ceiling on the flow of loan a priority sector [Link] past Nepal Rastra Bank
(NRB). Sometimes controlled and sometimes provide facility in the determination of
interest rates of commercial banks.
With a view to attract saving into the banking sector and to make rate structure in
Nepal competitive with of India, the NRB issued their directives to interest rates
effectives August 31st [Link] minimum rate on saving deposit of 4
percentages per annum and on fixed deposit of year or more 6 percentage per annum.
The commercial banks were also directed to increase by 1 percentage point in saving
and by 2 percentage points in one year fixed deposit. (NRB directives, 1996)

For the subsequent development in the national economy, the NRB announced a new
interest rate structure, effective April 14th [Link] new lending rats of commercial
banks ranged from the 7 percentage to 13 percentages as compared to the previous
rates ranging from 7.5 percentages to 12.5 the new lending rates of the financial
institutions in the agriculture sector ranged 3.45 for long term loans as compared to
previous rates ranging from 5 percentages to 10 percentages. The new lending rate of
Nepal industrial development cooperation had fixed the interest rate at 7.5
percentages. The corporation in an average interest rate fixed 8 percentages, 6
percentage and 5.5 percentages for short medium and long term respectively. (NRB
directives, 1971)

31
From the very beginning of the FY 1971\1972, the rate of growth in fixed and saving
deposits started to decline, whereas the demand for credit was rising steadily. One of
the main causes of the fall in deposit growth was the non effective interest rate
structure, turned negative due to spiraling prices, although the interest rate revisions
of July 1974 had given some impacts to deposit growth for a few month the same
could not continue for long. The exploding international price situation due to the and
caused Nepalese price also to move upwards and the inflation rate was recorded at as
high as 18 percentages during 1973\74 and 17 percentage during 1974 \75. This result
is a negative real state of interest on saving discouraging deposit mobilization. To
correct this, a historical upwards revision in interest rate structure was made in April
1975. (NRB directives, 1975)

In this interest rate revision, the rate on saving deposit was raised from 6.5
percentages to 8 percentages on three month fixed deposit from 3.55 to 4 percentages
and on six months fixed deposit from the rate was fixed at 10 percentages. The rate of
1 year deposit was increased from 9.5 percentages to 15 percentages and 2 year
deposits from 9.75 percentages to 16 percentages. With a view to make use of the
expending sector in agricultural industry and export promotion, the NRB downwards
revisions in the interest rate structure effective mid-July 1976. Accordingly, fixed
deposit rates were cut down by 1 percentage fixing 1 year and 2 year deposit rates at
14 percentage and 15 percentages respectively. (NRB directives, 1976)

The interest rate revision aimed at controlling credit and was geared more towards
mobilization of resources to enable commercial banks and financial institution to
advance move credit. In order to provide additional impacts to resources mobilization
and channeling the available resources to productive sectors effective June 15th 1982
increased the deposit rates marginally by 0.5 percentage and lending rates by 1.0
percentage. (NRB directives, 1982)

Effective November 16, 1984, the NRB granted autonomy to the commercial banks in
offering the rate of interest on saving and time deposit to the extend of 1.5 percentage
1 percentage respectively above the minimum level. The NRB directed commercial
banks and agricultural development bank to reduce the interest rate by 2 percentage

32
that the normal credit rate for agricultural and cottage industries in the 18 remote
districts. (NRB directives, 1982)

Effective May 29,1986 commercial banks and financial institutions were set free in
fixing the maximum interest rate on deposits and lending rates above the minimum
interest rate on deposit and maximum lending rates for productive and priority
sectors. The minimum interest rates were 8.5 percentages on saving deposit and 12.5
percentages for one year fixed deposits. (NRB directives, 1986)

The banks were also instructed by the NRB regarding saving accounts operation
authorized to fix ceiling on periodical withdrawals amount of minimum balance to be
maintained by the saving account holders as well as the maximum balance that would
be eligible for carrying interest etc, besides this, the NRB lifted the restriction on
opening saving accounts by individuals only and institutions not motivated by profit
consideration.

Regarding lending rates, the banks and financial institutions were allowed freedom in
fixing the lending rated in all areas for credit to the priority sector. Effective interest
rates of banks and financial institutions from 31 August 1989, were completely
liberalized and granted autonomy in fixing their own deposit and lending rates. The
ratio able for ending the administered interest rate structures, bring about flexibility in
the mobilization of financial saving and make efficient allocation of available
resources. (NRB directives, 1989)

Interest rate liberalization could not fully meet the objectives and the lending rates
increased faster than the deposit rates. Interest rates structure could not treat
uniformity in terms of interest rates. Thus, instead of competition in the market
discrepancies were observed in the interest rate structure after August 22, 1992. The
Nepal Rastra Bank issued the following directives to bank and other financial
institutions. (NRB directives, 1992)
a. Interest rates on deposit of at least up to one year to clearly spelt out.
b. Range of interest rates on the credit of same type or purchase not to be more
than one percent.
c. Fixation of interest rate in flat basis to be stopped.
33
 CHAPTER-III
RESEARCH METHODOLOGY
3.1 Introduction
Research methodology is the process of arriving at the solution of the problem
through planned and systematic dealing with the collection, analysis and
interpretation of fact and figures. When a particular research area has been identified,
research problem defined and the related literature in the area have been reviewed; the
next foremost step toward the objective is to set research methodology.

Research is a systematic and organized effort to investigate a specific problem that

needs a solution (Sekaran1992). This process of investigation involves a series of
well- through –out activities of gathering, recording analyzing and interpreting the
data with the purpose of finding answer to the problem. Thus, the entire process by
which we attempt to solve problems or search the answer to questions is called
research.

The objective of this study is to examine deposit collected and interest rate provides
by Nepal Bank limited (NBL) and Rastriya Banijya Bank (RBB) also tries to find out
the relation between lending, deposit and interest rate. To achieve the objective, the
study requires an appropriate research methodology. In methodology of data
collection method of data processing techniques use in details for estimation and
study design itself.

3.2 Research Design

"A research design in the arrangement of condition for the collection and analysis of
data in a manner that aims to combine relevance to the research purpose with
economy in procedure" (Kothari, 1990).

Thus a research design in a plan for the collection and analysis of data. For research
there exist different types of research design like historical research, descriptive
research, case study, field study, analytical research, true experimental research and
so on. This study mainly concerned with historical research. In this study generally to
show the relationship of interest rate with deposit and lending amount, past historical

34
data are used. The relevant and needed data has been collected form various
publications of commercial banks like Nepal Bank Limited, Rastriya Banijya Bank
and Nepal Rastra Bank.

3.3 Population and Sample

There are 26 commercial banks, 61 development banks 78 finance companies, 13
micro finance institutions 16 NRB licensed co-operatives (limited Banking
transaction), 45 NRB licensed NGOs (Dealing in Micro Finance), in the country.
Among the total population only some selected institution are taken as sample or
random basis similarly due to unavailability of data from all the sector, only
commercial banks are chosen for this study. So, precisely saying all 26 commercial
banks are the population of this study and among them only two commercial banks
are chosen as samples from total population from selecting the samples. These two
banks are chosen deliberately NBL is the first bank of Nepal and is functioning in
private sector, where, RBB is government owned bank. Thus these two banks are
representative for monetary phenomenon of the country. At the same time different
ownership of these two banks can clear rate on deposit and lending. The following are
the population of the banks and their sample chosen there of.
Sample
1. Nepal Bank Limited
2. Rastriya Banijya Bank

3.4 Sources of Data

Data may be obtained from several sources; it is easily to list them in detail. Each
research project has its own data needs and data sources. However, the general
classification of data sources has two dimensions: primary and secondary sources.
Primary data are original data gathered by the researcher for the research project at
hand. Thus, this data are collected for meeting the specific objectives of the study.
Primary data are collected through interviews, questionnaires, observations or
experiments. Secondary sources refer to those for already gathered by others. The
sources of secondary data can be divided into two groups internal and external. The
internal secondary data are found within the company. Sources of such data include
sales information, accounting data and internally generated research reports. External

35
secondary data are colleted from sources outside the company such sources may
include books, periodicals, published reports, data services and computer data banks.

This study is conducted on the basis of secondary data. The data relating to the
deposit, interest rate and other are directly obtained by the concerned banks. These
data are based on the information provided by the officers of concerned department of
Nepal Rastra Bank, Nepal Bank Limited and Rastriya Banijya Bank. During the
personal interview with them. Another source of data can be collected from the
publications of Nepal Rastra Bank which includes publications like annual economic
report quarterly, economic bulletin banking and financial statistics, monthly Report,
Nepal Rastra Bank Samachar, economic review, Mirmire, similarly various data and
information collected from these related banks published and unpublished report,
documents, bank Samachar, websites and economic survey of government of Nepal
from various sources will also be used.

3.5 Methods of Analysis

Collected data are comparatively analyzed in different ways according to its
requirement. For that obtained data have been presented in various tables, graphs,
diagrams ratio, average, and percentage with supporting interpretations.

3.6 Data Analysis Tool

For the purpose of the study all collected primary as well as secondary data are
arranged tabulated under various needs and them after disunities and statistical
analysis have been carried out to enlighten the study.
In this way the tools used in this study can be classified in to two categories:
Financial Tools
Statistical Tools

i. Financial Tools
Total Credit Deposit
Credit to Deposit Ratio =
Total Deposit

36
 Deposit
Ratio=  100
Total Deposit
Growth Amount
Total Deposit Growth=
Total Deposit
Growth Amount = Current Year Amount – Last Year Amount

ii. Statistical Tools

 Percentage
 Pie Chart
 Diagram

 Average Mean X 
x
n
When X = Average Interest Rate

 x = Total Interest Rate

N= Number of Year Interest
 Graphical Trend Analysis

3.6 Limitation of the Methodology

As limitation of methodology is concerned with the study it is based only on Nepal
Bank Limited (NBL), Rastriya Banijya Bank (RBB) and its seven years periods of
analysis and comparative study. The data are based on the manual records of these
banks.

37
 CHAPTER –IV
PRESENTATION AND ANALYSIS
4.1 Introduction
The most important way to show the true position and the performance of
organization is analysis of its past data. This is the one of the major chapter in this
study because it includes detail analysis and interpretation of data from which
concrete result of Nepalese market can be obtained with out this part the study
becomes in complete. In this chapter the relevant data and information necessary for
the study are presented and analyzed keeping the objectives set in mind. This chapter
consist of various calculation made for the analysis of interest rate and it impact on
deposit amount and lending amount for the sample banks to make our study effective
and precise as well as easily understandable, this chapter is categorized in three part
presentation analysis and interpretation section data are presented in terms of graph of
figures, according to need.

4.2 Expansion of Commercial Bank Branches.

The number of commercial bank branches operating in the country increased to 752 in
mid- July 2009 from 555 in Mid July 2008. Among the total bank branches; 50.39
percent bank branches are concentrated in the central region along. By the end of
Mid-July 2009, total 379 branches are being operating in this region. However in the
western, eastern, mid-western and far western region are 19.54 percent (147), 17.95
percent (135), 7.57 percent (57) and 4.52 percent (345) respectively.

38
 Table no. 4.1
Branches of Commercial Bank
S.N. Name of Commercial Bank Branches Mid-
July 2009
1. Nepal Bank Limited 100
2. Rastriya Banijya Bank 123
3. Nabil Bank Ltd. 32
4. Nepal Investment Bank Ltd. 31
5. Standard Chartered Bank Ltd. 13
6. Himalayan Bank Ltd. 23
7. Nepal SBI Bank Ltd. 33
8. Nepal Bangaladesh Bank Ltd. 17
9. Everest Bank Limited 30
10. Bank of Kathmandu Limited 30
11. Nepal Credit & Commercial Bank Ltd. 17
12. Nepal Industrial and Commercial Bank Ltd. 21
13. Lumbini Bank Ltd. 5
14. Machhapuchhre Bank Ltd. 31
15. Kumari Bank Ltd. 15
16. Laxmi Bank Ltd. 19
17. Siddhartha Bank Ltd. 10
18. Agricultural Development Bank Ltd. 86
19. Global Bank Ltd. 16
20. Citizen Bank Ltd. 10
21. Prime Bank Ltd. 8
22. Sunrise Bank Ltd. 21
23. Bank of Asia Ltd. 21
24. Development Credit Bank Ltd. 5
25. NMB Bank Ltd. 9
26. Kist Bank Ltd. 26
27. Mega Bank Ltd. Just Opening this month 1
Grand Total 753
Source: Banking and financial statistic NRB

39
 Table no. 4.2
Indicators of Financial Expansion and Deepening
Mid- April 2007 Mid- April 2008 Mid- April 2009 *
Commercial Bank 546 591 617
Branches
Population per 47120 44499 42832
Branch
Deposit in 325770.0 375590.0 481440.0
Commercial Bank
(in Million) Rs.
Per capita Deposit 12663 14282 18217
(Rs.)
Loan and Advance 324100 387050.0 47127
of Com. Bank (in
Milon Rs.)
Per Capita loan 12598 14717 17833
(Rs.)
Source: Economic survey FY 2008/09 government of Nepal
* Based on the data up to Mid-March 2009

A fair degree of progress is observed while associating the number of commercial

banks and their branches with the total population of the country. The earlier ratio of
44499 persons per branch by mid April 2008 has come down to 42832 persons per
branch by mid-April 2009. In the mean time, per capita deposit of Rs. 14282 in April
2008 has increased notably to Rs. 18217 by April 2009. Likewise, per capita credit
channeled through commercial banks has reached to Rs. 17833 by mid April 2009
against the earlier Rs. 14717. This data shows the steadily rising trend of bank credits.

4.2.1 Deposit Mobilization and Credit Disbursement Situation of

Commercial Banks
During the first eight months of FY 2008/09 the total deposit mobilization of
commercial banks has increased by 14.2 percent (Rs. 59.91 billion) amounting to Rs.
481.44 billion against the growth of 12.3 percent or Rs. 41.14 billion during the same

40
period of the previous fiscal year. In the review period saving deposits has increased
by 14.1 percent and fixed deposit by 20.7 percent against the previous year's
expansion of 12.2 percent and 14.5 percent respectively. The increased periodic
deposit rate owes to the public issue of shares by the citizen Bank and the Bank of
Asia with the collected amount deposited in commercial banks by the authorized
banks and financial institutions.

The rate of credit flows of commercial banks to the private sector has declined during
the review period. In the previous year, credit flow stood at 18.9 percent which grew
only by 15.1 percent this year. Out of the credit circulated to the private sector in the
last fiscal year 17.6 percent (1099 billion) was to the productive sector while it was
37.2 percent (7.35 billion) for construction sub-sector. The credit flow to the private
sector on productive and construction – sub sector has increased by 10.7 percent (Rs.
9 billion) and 16 percent (Rs. 6.17 billion) respectively. There is a decline in metal-
based production, machinery electric apparatus, wholesale and retail business and
services whereas consumption credit has increased.

During the review period, the liquid fund of commercial banks rose by 14.9 percent
against 7.2 percent rise last year. This higher deposit growth is attributed mainly to
the promising inflow of remittances. The deposit with NRB one of the constituent
factors of liquid fund has increased by 6.7 percent against the growth of 7.9 percent in
the previous year. Likewise commercial banks stock in foreign banks has increased by
22 percent to Rs. 50.16 billion against the growth of 5.2 percent last fiscal year.

41
 Table no. 4.3
Interest Rate Structure on Deposit of Commercial Banks as on Mid- July
Particular/ 2003 2004 2005 2006 2007 2008 2009
Year
Deposit rate %
Saving deposit 6.00 5.50 5.50 5.25 5.00 4.50 4.50
Fixed Deposit
1 months 0.00 3.50 3.25 3.50 3.00 3.00 3.00
3 month 5.00 4.75 4.50 4.00 4.25 4.00 3.75
6 month 6.00 5.00 4.75 4.50 4.50 4.25 4.00
1 year 7.00 5.75 5.00 5.00 5.00 5.00 5.00
2 year & above 7.50 6.00 6.50 6.40 5.50 6.00 6.00
Whole Mean 6.3 5.08 4.91 4.77 4.54 4.45 4.37
Fixed deposit 6.37 5.00 4.80 4.68 4.45 4.40 4.35
mean
Source: Nepal Rastra Bank:

Table no. 4.3 shows the deposit interest rate of commercial Banks in 7 different FYs.
For this study 2003 is taken as initial year and 2009 as final years. The data shows the
decreasing tendency of interest rate. The interest on saving deposit in the beginning
year was 6.00% and decreased to 4.50% in 2009. This is 25.00% reduction during the
7 years period. Similarly the interest rate of fixed deposit in the beginning year was
(mean) 6.37 and decreased to 4.35% in 2009. This is 31.71% reduction during the 7
years period also fixed deposit rate was in decreasing trend during the 7 years period
the decline percentage is 14.29% , 25.00, 33.33%, 28.57% and 20.00% respectively
for 1 month, 3 month, 6 month, 1 year and 2 year & above. If the mean is taken of all
(both saving and fixed) then average interest on deposit was 6.3% for 2003, 5.08% for
2004, 4.91% for 2005, 4.77% for 2006, 4.54% for 2007, 4.45% for 2008 and 4.37 for
2009. Similarly, if average of fixed deposits of different period is taken then the result
is almost similar with "whole average", It means the average interest rate for fixed
deposit only was 6.37%, 5.00%, 4.80%, 4.68%, 4.45%, 4.40% and 4.35% respectively
for the year 2003, 2004, 2005, 2006, 2007, 2008 and 2009. All the above described
matters can be shown on figure 4.1 as follows:

42
 Fig. No. 4.1
Interest Rate of Commercial Banks on Saving and Fixed Deposit.

5
Interest Rate

0
2003 2004 2005 2006 2007 2008 2009
Year

Saving deposit Fixed deposit

Table no. 4.4

Relationship Between Interest Rate and Deposit Amount of Commercial Banks
(Rate in percentage/Rs. In million)
Year Saving deposit Saving Fixed deposit Fixed deposit
interest rate deposits interest rate amount
amounts
2003 6.00 97238.90 6.37 63287.60
2004 5.50 114137.20 5.00 65130.90
2005 5.50 129995.00 4.80 67318.20
2006 5.25 151639.40 4.68 76572.80
2007 5.00 174732.50 4.45 87212.60
2008 4.50 211452.00 4.40 104775.50
2009 4.50 259925.40 4.35 141259.40
Sources: Nepal Rastra Bank

43
The table 4.4 shows the amount of saving deposit and its interest rate as well as
amount of fixed deposit and its interest rate for 7 fiscal year 2003 to 2009. The table
indicates that, in one hand deposit rates are declining where as in other hand deposit
amount is increasing in each fiscal year. This suggests that interest rate and deposit
amount may have negative relationship. The interest rate on saving deposit in the
beginning year 2003 was 6.00% and saving deposit amount was 97238.90 million and
decreased is 25.00% and saving deposit amount increased 162686.5 million during
the 7 years period and other hand the interest rate of fixed in the beginning year 2003
was 6.37% decreased to 4.35% in 2009. The interest rate fixed deposit reduction
31.71% and fixed deposit amount reduction during the 7 years 77971.8 million. This
can also be shown in figure 4.2

Fig. no. 4.2

Deposit Amount of Commercial Banks During Different FYs

300000

250000

200000
Deposit Amount

150000

100000

50000

0
2003 2004 2005 2006 2007 2008 2009
Year

Saving deposit Fixed deposit

The above figure saving amount was 97238.90 million for 2003, 114137.20 for 2004,
12995.00 for 2005, 151639.40 for 2006, 174732.50 for 2007, 211452.00 for 2008 and
259925.40 million for 2009. Similarly fixed deposit amount was 63287.60 for 2003,

44
61130.90 for 2004, 67318.20 for 2005 76572.80 for 2006, 87212.60 for 2007,
104775.50 for 2008 and 141259.40 million for 2009.

Table no. 4.5

Deposit Ratio of Commercial Banks During Different F/Y
(Rs. In Million)
Fiscal Year Saving Fixed Current Other Total
deposit Deposit Deposit deposit Deposit
2003 97238.90 63287.60 28862.50 14490.30 203879.30
2004 114137.20 65130.90 33729.90 20813.20 233811.20
2005 129995.00 67318.20 34646.40 20450.20 252409.80
2006 151639.40 76572.80 37386.50 25646.80 291245.50
2007 174732.50 87212.60 45031.20 30520.90 337497.20
2008 211452.00 104772.50 56089.30 53766.50 426080.30
2009 259925.40 141259.40 71651.00 90768.60 563604.40
Source: Nepal Rastra Bank

Deposit
Ratio = 100 s
Total Deposit
(In %)
Fiscal Year Saving ratio Fixed ratio Current Other ratio Total
ratio Deposit
growth
2003 47.69 31.04 14.16 7.11 10.12
2004 48.82 27.85 14.43 8.90 14.68
2005 51.50 26.67 13.73 8.10 7.95
2006 52.06 26.29 12.84 8.81 9.60
2007 51.77 25.84 13.35 9.04 15.88
2008 49.63 24.59 13.16 12.62 26.25
2009 46.12 25.06 12.71 16.11 32.28

From the above table the ration of saving to total deposit is higher than the other
deposit. The highest amount was deposited in saving deposit second highest was fixed

45
deposit amount and the current and others deposit amount was the least compare to
fixed and saving accounts. The deposit ratio of commercial banks in 7 different FYs.
For this study 2003 is taken as initial year and 2009 as final years. The data shows the
ratio of saving to total deposit is higher and increasing tendency of deposit amount
ratio. The deposit ratio on saving deposit amount in the beginning year was 47.69%
for 2003, 48.82% for 2004, 51.50% for 2005, 52.06% for 2006, 51.77% for 2007,
49.63% for 2008 and 46.12% for 2009 and second higher fixed deposit amount ratio
was 31.04% for 2003, 27.85% for 2004, 26.67% for 2005, 26.29% for 2006, 25.84%
for 2007, 24.59% for 2008 and 25.06% for 2009. The saving deposit comprises the
major share in total deposit followed by fixed deposit and current deposit. As of Mid-
July 2009 the proportion of saving fixed and current deposit are 46.12 percent 25.06
percent and 12.71 percent respectively in the last year 2008. The respective share of
saving fixed and current deposit was 49.63 percent, 24.59 percent and 13.16 percent.
This deposit ration is shown in the figure as in figure 4.3
Fig. No. 4.3
Deposit Ratio of Commercial Banks During Different FYs.

60

50

40
Deposit Ratio

30

20

10

0
2003 2004 2005 2006 2007 2008 2009
Year

Saving ratio Fixed ratio Current ratio Other ratio

46
The table 4.5 show the increased of deposit amount and increased the growth rate of
deposit percent the beginning year. The total deposit amount was 203879.30 and its
growth rate was 10.12 percent for 2003, similarly total deposit amount was 233811.20
and its growth rate was 14.68 percent for 2004, total deposit amount was 252409.80
million growth rate 7.95, amount 291245.50 growth rate 9.60, amount 337497.20
growth rate 15.88 percent amount 426080.30 growth rate 26.25 and amount
563604.40 growth rate 32.28 percent was F/Y 2005, 2006, 2007, 2008 and 2009. The
mid-July 2009 total deposit of commercial banks increased by 32.28 percent compare
to 26.25 percent in the Mid- July [Link] a mid- July 2009 it reached to Rs.
563604.40 million from Rs. 426080.30 in the mid-July 2008. All the above data can
be shown on figure 4.4 as follows.
Fig. No. 4.4
Total Deposit Growth Percentage of Commercial Banks During Different FYs.

9%
27% 13%

7%

8%
22% 14%

2003 2004 2005 2006 2007 2008 2009

47
 Table no. 4.6
Lending Rate on Commercial Bank on Different Sector During Seven F/Ys
Sector/ 2003 2004 2005 2006 2007 2008 2009
Year
Industrial 14.00 13.50 13.50 13.50 13.00 13.00 13.00
Agricultural 14.50 12.50 13.50 13.00 13.00 12.00 12.00
Export Bills 13.00 12.00 12.00 11.50 11.50 11.00 11.00
Commercial 16.00 15.00 14.50 14.50 14.00 13.50 13.00
loan
Overdraft 17.00 15.50 15.00 15.00 14.50 14.00 13.50
Average 14.90 13.70 13.70 13.50 13.20 12.70 12.50
Interest
Rate
Lending 1245 140031. 163718 176820. 231829. 302913 398143
Amount 22.40 40 .80 30 50 .40 .00
Lending 10.03 12.45 16.92 8.00 31.11 30.66 31.44
growth
(%)
Source: Nepal Rastra Bank

The table 4.6 shows the interest rate of commercial Banks on lending on seven fiscal
years granted in different sectors. From table it is clear that the interest rate on lending
of commercial Banks is in falling stage. The average interest rate for F/Y 2003, 2004,
2005, 2006, 2007, 2008 and 2009 are 14.90%, 13.70%, 13.70%, 13.50%, 13.20%,
12.70% and 12.50% respectively. The average interest rate shows that the interest
jump by high percentage gap and later on fill with little [Link] this interest of
productive sector loan. In same manner for lending amount of commercial bank
increased each year. During the last F/Y the lending amount rises by more than 3
times. The lending amount for 2003, 2004, 2005, 2006, 2007, 2008 and 2009 are
124522.40 million, 140031.40 million, 163718.80 million 176820.30 million,
231829.50 million, 302913.40 million and 398149.00 million. Similarly lending
amount growth rate for 2003, 2004, 2005, 2006, 2007, 2008 and 2009 are 10.03%,
12.45%, 16.92%, 8.00%, 31.11, 30.66% and 31.44%. This shows that the lending

48
amount and interest rate have negative relationship. The figure for changing trend of
interest rate and lending amount, lending growth rate is given on figure no 4.5, 4.6
and 4.7.

Fig. No. 4.5

Average Lending Rate of Commercial Banks During Different FYs.

15.5

15

14.5

14
Ledning Rate

13.5

13

12.5

12

11.5

11
2003 2004 2005 2006 2007 2008 2009
Year

Average Interest Rate

Fig. No. 4.6

Lending Amount of Commercial Banks During Different FYs.

450000

400000

350000

300000

250000
Lending
Amount
200000

150000

100000

50000

0
2003 2004 2005 2006 2007 2008 2009
Year

Lending Amount

49
 Fig. No. 4.7
Lending Growth Rate (%) of Commercial Banks During Different FYs.

7%

22% 9%

2003
2004
12%
2005
2006
2007

6% 2008

22% 2009

22%

Table no. 4.7

Credit to Deposit Ratio of Commercial Banks During Different (F/Y)
(Rs. In million)
Year/ Particulars Amount of Total Amount of Total Credit to Deposit
Deposit Lending Ratio (%)
2003 203879.30 124522.40 61.08
2004 233811.20 140031.40 59.89
2005 252409.80 163718.80 64.86
2006 291245.50 176820.30 60.71
2007 337497.20 231829.50 68.69
2008 426080.30 302913.40 71.09
2009 563604.40 398149.00 70.64
Source: Table no. 4.3 and 4.6
Above the table 4.7 shows the ratio of credit to deposit of commercial Banks from
F/Y 2003 to 2009. The ratio of credit to deposit was 61.08% for 2003, 59.89% for
2004, 64.86% for 2005, 60.71% for 2006, 68.69% for 2007, for 71.09% for 2008 and

50
70.64% for 2009. Credit deposit ratio is main indicator of commercial Bank its
international norms is under the 80.00%. So the above table’s data presented to
positive the commercial Banks are normal position about the deposit collection and
lending ratio. We also can see following diagram figure no 4.8.

Fig. No. 4.8

Credit to Deposit Ratio of Commercial Banks During Different FYs.

72

70

68

66
CD Ratio

64

62

60

58

56

54
2003 2004 2005 2006 2007 2008 2009
Year

Credit to Deposit Ration (%)

4.3 Branches of NBL and RBB in Mid- July 2009

The number of Nepal Bank Limited (NBL) and Rastriya Banijya Bank (RBB)
branches operating in the country 100 and 123 in Mid-July 2009. Among the total
bank branches of Nepal Bank Limited 41.00 percent branches are concentrated in the
central region alone. By the end of Mid- July 2009, total 41 branches are being
operating in this region. However in the eastern, western, Mid-western and Far-
western region are 26 percent (26), 17.00 percent (17) 12.00 percent (12) and 4.00
percent (4) respectively. Similarly, among the total bank branches of Rastriya Banijya
Bank (RBB) 37.40 percent branches are concentrated in the central region alone. By
the Mid-July 2009, total 46 branches are being operating in this region. However in
the eastern, western, Mid-western and Far-western region are 23.58 percent (29),

51
19.50 percent (24), 9.76 percent (12) and 9.76 percent (12). The branches of these
banks in the country we can see the following table 4.8.

Table no. 4.8

Branches of NBL and RBB in Mid- July 2009
Development region Zone District NBL Branches RBB Branches
Jhapa 6 3
Ilam 1 2
Panchthar 1 0
Taplejung 1 0
Mechi Total 9 5
Sunsari 4 3
Morang 4 6
Dhankuta 0 1
Terhathum 1 0
Sankhuwasawa 1 2
Bjopor 1 1
Koshi Total 11 13
Saptari 2 1
Udayapur 1 2
Siraha 3 3
Khotang 0 1
Okhaldhunga 0 1
Solukhumbu 0 3
Sagarmatha Total 6 11
Eastern Total 26 29
Sarlahi 1 1
Dhanusa 2 3
Mahottari 0 1
Dolakha 1 1
Ramechhap 0 2
Sindhuli 0 1

52
 Janakpur Total 4 9
Bara 1 2
Rautahat 2 2
Parsa 4 2
Chitwan 3 2
Makawanpur 2 1
Narayani Total 12 9
Kathmandu 13 16
Bhaktapur 2 3
Lalitpur 5 2
Rasuwa 1 0
Dhading 0 3
Sindhupalchok 1 0
Kabhre 2 2
Nuwakot 1 2
Bagmati Total 25 28
Central Total 41 46
Lamjung 1 1
Tanahu 2 1
Gorkha 0 3
Syangja 2 1
Kaski 3 3
Gandaki Total 9 9
Gulmi 0 1
Nawalparasi 0 4
Palpa 1 1
Arghakhanchi 0 1
Rupandehi 2 4
Kapilvastu 1 1
Lumbini Total 4 12
Baglung 1 1
Parwat 1 1

53
 Mustang 1 0
Myagdi 1 1
Dhaulagiri Total 4 3
Western Total 17 24
Rolpa 1 0
Dang 1 2
Rukum 1 0
Salyan 1 0
Pyuthan 1 1
Rapti Total 5 3
Jumla 0 1
Mugu 0 1
Humla 0 1
Kalikot 0 1
Dolpa 1 0
Karnali Total 1 4
Dailekh 0 1
Surkhet 1 1
Jajarkot 1 0
Bardiya 2 1
Banke 2 2
Bheri Total 6 5
Mid-Western Total 12 12
Bajhang 0 1
Doti 0 2
Bajura 0 1
Kailali 2 3
Achham 0 1
Seti Total 2 8
Darchula 0 1
Biatadi 0 1
Dadeldhura 1 1

54
 Kanchanpur 1 1
Mahakali Total 2 4
Far-Western Total 4 12
Total Braches in Country 100 123
Source: Banking and Financial Statistic NRB

4.4 Financial Sector Reform Program

The financial sector reform program (FSRP) is considered an important constituent
factor for the wide-ranging reform of the financial sector as a whole. Following the
financial sector reform strategy paper 2000 AD, the government of Nepal introduced
this program with clear cut guidelines through an announcement made in October of
the same year. NRB is assigned with the responsibility of executing this program.
The main target of this reform program is to help financial sector become healthy
competitive efficient and professional by enabling it for sufficient contributions in the
country's economic growth. The World Bank department for international
development (DFID) of UK government and loans and grants from government of
Nepal are assisting the programe. The main activities under the programe include.
- Re-engineering of Nepal Rastra Bank (NRB)
- Restructuring of Nepal Bank Ltd. (NBL) and Rastriya Banijya Bank
(RBB) in addition to capacity enhancement of the financial sector as a
whole.

4.5 Structural Reform of Nepal Bank Limited and Rastriya Banijya

Bank
Nepal Rastra Bank (NRB) has taken over the control of Nepal Bank Limited
(NBL).Until Mid-March 2002 in accordance with the section 86 (c) of NRB Act
2002. A three member team from NRB succeeded the management since the expiry of
the contract with the consultant of the Bank of Scotland (Ireland) on 21 July 2007.
The team of experts has been appointed at the recommendation of the CEO to work
under his direct supervision. Meanwhile NRB has taken the initiative to request the
World Bank for further grant assistance for the remuneration of the newly recruited
management team.

55
The re-structuring of Rastriya Banijya Bank (RRB) is being carried out by a
management committee composed of the Chief Executive Office (CEO) and Chief
Information Technology Officer (CITO). In order to continue the restructuring of the
Bank, the contract of the present management team has been extended (with World
Bank's consent) until 15 January 2010.
Both of the banks undergoing reform programs have been generating net profit since
FY 2003/04. They have not only formulated and implemented internationally
accepted practices to maintain sustainability but also have reduced the negative
capital fund. Needless to mention both of these banks still need more reforms to
advance and make progress.
Table No. 4.9
Status of Nepal Bank Limited and Rastriya Banijya Bank
Description Mid- July 2002/03 Mid- July 2007/08 Mid- January 2009
Nepal Bank Ltd.
Net Profit (in (252.0) 529.0 450.0
million Rs.)
Capital Fund (in (98.3) (57.2) (55.6)
Million Rs.) ( )
Negative
Non- Performing 60.47 13.49 8.98
Loan (%)
No. of Staff 5250 2885 2852
Rastriya Banijya Bank
Net Profit (in (48.5) 1770.0 110
million Rs.)
Capital Fund (in (22390.0) (155.0) (14490.0)
Million Rs.) ( )
Negative
Non- Performing 60.15 27.65 18.72
Loan (%)
No. of Staff 5402 3002 2939
Source: Economic survey FY 2008/09 Gov. of Nepal

56
There has been some progress in Nepal Bank Limited (NBL) and Rastriya Banijya
Bank (RBB) after the introduction of the Restructuring Program. NBL which was
continuously at loss of billion of rupees since 1999 has constantly reduced such losses
limiting at Rs. 250 million by FY 2002/03. The net loss during Fiscal Year of
2003/04, 2004/05, 2005/06, 2006/07 and 2007,08 has made net profit worth Rs. 710
million, 1.73 billion, 1.21 billion, 230 million and 530 million respectively. Similarly,
the bank has made a net profit of Rs. 450 million by January 2009.
The net loss of Rastriya Banijya Bank (RBB) which was Rs. 7.07 billion in FY
2001/02 and Rs. 4.84 billion in 2002/03 was turned into net profits of Rs. 1.04 billion
in FY 2003/04 Rs, 1.32 billion in FY 2004/05, Rs. 1.62 billion in FY 2005/06 Rs.
1.68 billion in FY 2006/07 and Rs. 1.77 billion in FY 2007/08. Meanwhile the
targeted profit of Rs. 940 million by January 2009 has reached to Rs. 1.11 billion
showing a promise.

Table No. 4.10

Negative Net Worth
(In billion Rs.)
Mid-July Nepal Bank Limited Rastriya Banijya Bank
2003/04 9.80 22.39
2004/05 8.90 21.00
2005/06 7.16 20.00
2006/07 6.30 18.59
2007/08 6.25 17.21
2008/09 5.72 15.50
Mid-Jan 2009 5.56 14.49
Source: Economic survey FY 2008/09 Gov. of Nepal

There seems a gradual progress in taking both banks NBL and RBB away form their
negative net worth status in the past. After undergoing restructuring program, the
negative net worth of NBL, Rs. 9.80 billion in June 2004, gradually decreased to Rs.
8.90 billion in 2005, Rs. 7.16 billion in 2006 Rs. 6.30 billion in 2007, Rs. 6.25 billion
in 2008 and Rs. 5.72 billion by January 2009, similarly RBB's capital fund which was
negative by Rs. 22.39 billion in 2004, has marginally improved to Rs. 21billion in

57
2005, Rs. 20 billion in 2006, Rs. 18.59 billion in 2007, Rs. 17.21 billion in 2008 and
Rs. 15.50 by June 2008 that shows the reversing trend of negative net worth.
Likewise, the target to limit the negative net worth at Rs. 14.57 billion during the first
6 month of FY 2009 has marginally crossed having Rs. 14.49 billion negative net
worth by January 2009. Never the less, rapid and substantial progress in this direction
is imperative.
Fig. No. 4.9
Negative Net Worth of NBL and RBB

25

20
Percentage

15

10

0
2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 Mid-Jan
2009
Year

Nepal Bank Limited Rastriya Banijya Bank

Table No. 4.11

Overdue Loan in Total Loan and Advance
Mid-July Nepal Bank Limited Rastriya Banijya Bank
2003/04 60.47 60.15
2004/05 53.74 57.64
2005/06 49.64 50.70
2006/07 18.18 37.00
2007/08 13.50 27.60
2008/09 12.38 21.65
Mid-Jan 2009 8.98 18.72
Source: Economic survey FY 2008/09 Gov. of Nepal

58
Out of the total credit of NBL, Non-performing Assets (NPA) till Mid-July 2004
stood at 60.47 percent which gradually decreased in the subsequent years. The NPA
between by mid-July of 2004, 2005, 2006, 2007 and 2008 gradually came down to
53.64 percent, 49.64 percent, 18.18 percent, 13.49 percent and 12.38 percent
respectively. Eventually, it has come down to 8.9 percent by mid-January 2009. The
sliding down of NPA since 2005/06 onwards is due to writing off of bad loans, which
has again showed the trend of reviving back. The recovery of the written-off loan is a
challenge in itself for the banks. Similarly, RBB'S non-performing asset as such has
not decreased in quantitative term as desired, its level, however, is decreasing. The
non performing loan of RBB by June 2003/04 was 60.15 percent of the total credit
which has been limited to 57.64 percent in 2004/05, 50.70 percent in 2005/06, 37
percent in 2006/07, 27.60 percent in 2007/08 and 21.65 percent in 2008/09. During
the first 6 months of the current fiscal year, out of the total credit of RBB the ratio of
non-performing asset has remained at 18.72 percent.

Fig. No. 4.10

Overdue Loan of NBL and RBB

70

60

50
Percentage

40

30

20

10

0
2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 Mid-Jan
2009
Year

Nepal Bank Limited Rastriya Banijya Bank

59
The obligatory auditing of both banks that were overdue for the last several years
were resumed in case of NBL since 1999/2000 covering up to the period of 2007/08.
In addition to updating of the audit, financial statements on activities are regularly
being published on quarterly basis. The external audit of RBB, that remained pending
for some years, has been resumed after the new management took over. By far the
external audit of FY 2007/08 has been completed while the preliminary audit report
for FY 2008/09 has been submitted to NRB. Meanwhile, all the details concerned
with the recent external audit are updated and internal audit has been completed as
well.

Both NBL and RBB have developed and put into practice their Management plan,
HRD plan and Skill Enhancement plan for necessary human resource and right-sizing
of institutions. Staff Needs Assessment has been completed and both banks have
submitted their respective capital plan and successor plan to NRB.

The volunteer Retirement scheme as an attempt of right sizing in NBL has been
successful to reduce the total number of staff of 6300 in June 2001 to 2885 by January
2009. Similarly, HR information system, HRD plan etc. are exercised for developing
human resource and rightsizing it. HR Need Assessment has been completed and
performance based Rewarding system is implemented. To right size the employees
call for volunteer retirement scheme has implemented for the 5th time. The RBB has
also succeeded in reducing the size of its staff slowly. The 5583 employees in 2002
were brought down to 3417 by June 2005; 3301 by next June 2006, 3127 in June 2007
and 3002 by June 2008 and 2939 by January 2009.

The management team of NBL has formulated and adopted various plans policies and
directives for making banking system more robust and competent, especially by
improving the credit management, credit policy and directives Assets and Liability
Management (ALM) Guidelines designed and applier and Asset Liability Committee
(ALCO) formed especially for better credit management. Besides strategic policies
like New Audit Manual, Internal Audit Manual and classification of Accounts heads,
HR plan Skill Enhancement Plan, portfolio status and plan, Budget plan, strategic
plan etc. are designed and applied NBL has prepared and implemented a number of
Manuals and Guidelines such as-the credit write off Regulations Antimony
60
Laundering policy, Investment and Treasury Operation Manual, Review of Internal
Audit Manual, Trade Finance Manual as well as credit policy and Directives in
addition to the application of credit write off.

To provide prompt efficient and well-managed banking services, computerization of

44 branches of NBL is completed and additional 38 branches are identified where
computerized system are going to be applied. NBL has recently introduced. Any
Branch Banking System (ABBS) in 27 of its branches. The total deposit and credit of
the bank have undergone computerized system with 79 and 89 percent respectively.
As in the case of RBB computerized system for efficient, prompt and manageable
services, information Technology policy has been formed and accordingly, Pumory
plus (Banking software) is in operation among the 40 branches of RBB. Pumory plus
is also applied in two departments under the Head office while in other 37 branches
outside Kathmandu Rastriya Banijya Bank System (RBBS) is in operation. Integrated
banking Information System (IBIS) are already in full implementation. About 86 and
96 percent of deposit and credit of RBB has undergone computerized system by
January 2009. Under restructuring of NBL and RBB processes to appoint a new Chief
Executive Officer through open competition has already been started.

Table No. 4.12

NPA as Percent of Total Gross Loan of Commercial Banks
Mid-July Nepal Bank Limited Rastriya Bajijya Bank Industry Average
2003 60.47 60.15 28.80
2004 53.74 57.64 22.80
2005 49.64 50.7 18.94
2006 18.18 34.83 14.22
2007 13.49 27.65 9.65
2008 8.95 21.65 6.08
Source: Economic survey FY 2008/09 Gov. of Nepal

The level of NPA's which are the outstanding loan and advances of the banks and
financial institution classified under categories other than 'pass or good' loan. While it
is suggested that there was significant levels of NPA in the end part of second phase

61
B, it was only in 2003 that it was identified that NBL and RBB each had move than
sixty percent NPA level that had pulled total NPA level of domestic commercial
banks at 28.8 percent. It has decreased significantly from the above mentioned level
of 6.08 percent in mid-July 2008, although there is still scope to reduce this amount to
the international level of below 5 percent.

The NPA level of commercial banks as a whole is due to progress made by NBL and
RBB; there is significant level of shares of write-off of bad loans in these two banks.
The share of NBL and RBB, both banks had about 60 percent NPA in 2003 and both
showed similar progress till 2005. However after 2005, NBL managed to lower NPA
level from 49.64 percent in 2005 to 18.18 percent in 2006 whereas RBB was just able
to lower from 50 to 37 percent. The existing 14 percent and 27 percent NPA OF NBL
and RBB is still the source of problem since these two banks combined together
occupy about 25 percent of total deposit and 15 percent of total credit facilities of
commercial banks and their branches cover all 75 districts of the country.

Review of the restructuring process of both banks shows that there has been an
increase in net profit since FY2003/04,the negative net worth of both banks gradually
reduced, various plans, policies and directive of international standard has been
designed and implemented to ensure stability of banks, likewise, internationally
accepted management practice and rightsizing models are introduced. Hence the
progress made so far seems positive. Despite this repayment of non- performing loans
is not satisfactory.

4.6 Analysis of Lending and Interest Rate

In this section, detail study is made about deposit amount lending amount and interest
rate of simple banks. For this study only saving and fixed deposits are considered
because current deposit doesn't earn any interest. Lending is second are of the analysis
where mainly the relationship between lending interest rate and its effect upon lending
amount is measured. Generally, when there is higher interest rate (esp. lending or
credit rate) in the economy, people normally borrow lesser amount than the period
when lending interest rate in low. According to theory, when there is low lending rate,
then there should be higher amount of borrowing. Higher amount of borrowing

62
indicates higher investment in the country or higher transaction in trade. This is
necessary for the growth of the economy.

4.7 Interest Rate and its Impact of Deposit on RBB

Prior to entering into the main topics it is preferable to take a glance on the interest
rate structure on different types of deposits. This is essential because the interest rates
are generally different in magnitude for both sample banks. These differences are due
to the numerous factors like maturity period, policy of banks, and goodwill of
organization and so on. In real world government owned bank and banks with high
reputation and goodwill have lower deposit rates. Similarly finance companies, co-
operative and development bank quotes high interest rate on deposits than commercial
banks do.
Table No. 4.13
Interest Rate Structure on Deposit of RBB as on Mid- July.
Particular/ 2003 2004 2005 2006 2007 2008 2009
Year
1. Deposit Rate%
Saving 6.50% 6.00% 5.00% 4.75% 2.25% 2.00% 2.00%
Deposit
Fixed Deposit
7 days 0 0 0 0 0 0 0
14 days 0 0 0 0 0 0 0
1 months 0 0 0 0 0 0 0
3 months 5.00 4.50 4.00 3.75 3.00 2.25 2.25
6 month 5.50 5.50 4.75 4.25 3.50 2.50 2.50
1 year 7.00 7.00 6.00 5.75 3.75 3.50 3.00
Above 2 year 7.50 7.25 6.25 6.00 0 0 0
Whole mean 6.30 6.05 5.20 4.90 3.12 2.56 2.44
Fixed Deposit 6.25 6.06 5.25 4.94 3.42 2.75 2.58
Mean
Sources: Banking and Financial statistic NRB
Table no. 4.13 shows the deposit interest rate of RBB in 7 different FY. For the study
2003 in taken as initial year and 2009 as final years. The table portraits the interest

63
rate that were prevailed in the Nepalese financial markets during last past 7 FYs. The
date shows the decreasing tendency of interest rate. The interest on saving deposit in
the beginning year was 6.50% and decreased to 2.00% in 2009. This is 69.23%
reduction during the 7 years period. In same manner, the bank used to quote the
interest rate of fixed deposit in different short term period like 7 days, 14 days, 1
month, 2 month, 3 month and so on. For the graph purpose, in this study the average
of 7 days to 3 month is taken to make the figure clearer. For other period also the
fixed deposit rate was in decreasing trend. During the 7 years period the decline
percentage is 54.55%, 57.14% and 20.00% respectively fro 6 month, 1 year and 2
years period. The decreasing tendency is high for longer period interest rate. If the
mean is taken of all (both fixed and saving) then average interest rate on deposit was
6.30% for 2003, 6.05% for 2004, 5.20% for 2005, 4.90% for 2006, 3.12% for 2007,
2.56 for 2008 and 2.44% for 2009. Similarly, if average of fixed deposits of different
period is taken, then the result is almost similar with "whole average". It means the
average interest rate for fixed deposit only was 6.25%, 6.06%, 5.25%, 4.94%, 3.42%,
2.75% and 2.58% respectively for the year 2003, 2004, 2005, 2006, 2007, 2008 and
2009. The average figure also shows the decreasing tendency in interest rate except in
the year 2004. At the period, the interest rate was slightly higher than year 2003 but
ultimately felled to the 6.06% in 2004. All the above described matters can be shown
on following table and figure.
Table No. 4.14
Relationship Between Interest Rate and Deposit Amount of RBB
Rate in percentage/ Rs. In million
Year Saving deposit Saving deposit Fixed deposit Fixed deposit
interest rate amounts interest rate amount
2003 6.50 20861.5 6.25 13579.2
2004 6.00 23288.9 6.06 11572.8
2005 5.00 26848.2 5.25 9001.5
2006 4.75 29494.9 4.94 8103.8
2007 2.25 32909.4 3.42 6997.5
2008 2.00 40213.0 2.75 4479.8
2009 2.00 46102.8 2.58 3207.8
Source: Banking and Financial statistics NRB

64
The table 4.14 shows the total amount of fixed deposit and saving deposits and the
interest rates offered on such deposits by RBB on seven fiscal years starting from FY
2003 to FY [Link] table portrays that the both interest rate has been decreased by
greater magnitude. Deposit amount has been increased by more than 2.21 times
during the study period. It means they move in opposite direction i.e. decrease in
interest rate increases the amount of deposit and vice versa. Therefore they should
have negative relationship. The relationship can also be shown in graph as shown in
figures 4.11 and 4.12
Fig. No. 4.11
Deposit Amount of RBB During 7 Year

50000
45000
40000
35000
30000
Amount Rs. 25000
20000
15000
10000
5000
0
2003 2004 2005 2006 2007 2008 2009
Year

Saving deposit amounts Fixed deposit amount

65
 Fig. No. 4.12
Interest Rate of RBB on Saving and Fixed Deposit

5
Percentage

0
2003 2004 2005 2006 2007 2008 2009
Year

Saving deposit interest rate Fixed deposit interest rate

According to table no. 4.14 the interest rate on saving deposit has been decreased
form 6.50% to 2.00% during 7 FYs. The declining tendency is little. In same period
the deposit amount was Rs.20861.5 millions but this amount increases to Rs. 46102.8
millions. It means interest rates fell by 69.23%, where as deposit amount rises by
120.99% within the period of seven years.

Similarly, for fixed deposit the table 4.14 shows that total amount of fixed deposit and
interest rate on fixed deposit offered by RBB on seven consequent FY started from
2003 to FY 2009. The table reveals that average fixed interest rate has been decreased
drastically during the seven FYs. At the FY 2003 the average interest rate was 6.25%
on fixed deposit but later on every year this interest rate started to decrease by 1% per
annum and at 2009. On effect of this decline, the amount of fixed deposit declined,
the amount of fixed deposit also started to decrease in some respect. The table shows
that up to the FY 2003, there is no effect on fixed deposit amount by the declination
of interest rate but after the FY 2003; decrease in interest rate also decreases the fixed
deposit amount. In this regards, the substitution effect holds true in the case of fixed
deposit.
66
 Table No. 4.15
Deposit Growth rate of RBB During Different FY
Fiscal Saving Fixed Current Other Total Deposit
year Deposit Deposit Deposit Deposit Deposit Growth %
2003 20861.5 13579.2 4687.9 180.0 39308.6 1.0
2004 23288.9 11572.8 5227.5 224.4 40313.6 2.56
2005 26848.2 9001.5 6419.8 1219.7 43489.2 7.88
2006 29494.9 8103.8 7891.2 210.8 45700.7 5.09
2007 32909.4 6997.5 10084.7 201.0 50192.6 9.83
2008 40213.0 4479.8 12853.0 445.0 57990.8 15.54
2009 46102.8 3207.8 17642.1 1023.6 67976.3 17.22
Sources: Nepal Rastra Bank

The table on 4.15 shows the amount of saving deposit, fixed deposit, current deposit,
other deposit and total deposit amount of RBB on different fiscal year. Similarly it
table presented total deposit growth percents on different FY. The table shows the
increased of deposit amount and increased the growth rate of deposit. The beginning
year the total deposit amount and was 39308.6 million and growth rate was 1.0
percent fro 2003. Similarly the total deposit amount growth rate was 40313.6 million,
growth rate 2.56 percent, amount 43489.20 million, growth rate 7.88% amount
45700.7 million growth rate 5.09%, amount 50192.6 million, growth rate 9.83%
amount 57990.8 million, growth rate 15.54% and amount 67976.3 million, growth
rate 17.22% in FY 2004, 2005, 2006, 2007, 2008 and [Link] mid July 2009 total
deposit of RBB increased by 17.22 percent compare to 1.00% in the Mid-July 2003.
As a Mid-July 2009 it reached to Rs.67976.3 million from Rs. 39308.6 in the Mid-
July 2003. All the above data can be shown on figure 4.13 as follows.

67
 Fig. No. 4.13
Total Deposit Growth Rate of RBB During Different FYs

2% 4%
29% 13%

9%

17%
26%

2003 2004 2005 2006 2007 2008 2009

Table No. 4.16

Deposit Ratio of RBB During Different FY (in %)
Fiscal Year Saving Ratio Fixed Ratio Current Ratio Other Ratio
2003 53.07 34.55 11.92 0.46
2004 57.77 28.71 12.97 0.55
2005 61.74 20.70 14.76 2.80
2006 64.54 17.73 17.27 0.46
2007 65.57 13.94 20.09 0.40
2008 69.34 7.73 22.16 0.77
2009 67.82 4.72 25.95 1.51
Average ratio 62.84 18.30 17.87 0.99
Source: Table no. 4.15

The table no. 4.16 reveals the deposit ratio of RBB in different years. The deposit
amount ratio increasing year by year. The ratio of saving to total deposit is higher than
other deposit. The higher amount was deposited in saving deposit. Second highest was
fixed deposit amount other deposit amount was the least compare to saving and fixed
accounts. The deposit ratio of RBB in 7 different FYs. For this study is taken 2003 as
initial year and 2009 as final years. The data shows the ratio of saving to total deposit

68
is higher and increasing tendency of deposit amount ratio. The deposit ratio on saving
deposit amount percents was 53.07%, 57.77%, 61.74%, 64.54%, 65.57%, 69.34% and
67.82% in FY 2004, 2005, 2006, 2007, 2008 and 2009. The saving deposit
comparises the major share in total deposit followed by fixed deposit and current
deposit. As of Mid- July 2009 the proportion of saving fixed and current deposit are
67.82%, 4.72 and 25.95%. The respective share of saving, fixed and current deposit
were 69.34%, 7.73% and 22.16% respectively in Mid July 2003 the share of saving
deposit fixed deposit and current deposit was 53.07 percent, 34.55 percent and 11.92
percent. This deposit ratio is shown in the figure as in figure 4.14
Fig. No.4. 14
Deposit Ratio of RBB During Different FYs

80

70

60

50
Ratio

40

30

20

10

0
2003 2004 2005 2006 2007 2008 2009
Year

Saving Ratio Fixed Ratio Current Ratio Other Ratio

69
 Fig. No.4.15
Average Deposit Ratio of RBB

1%
18%

18%
63%

Saving Ratio Fixed Ratio Current Ratio Other Ratio

The above table no. 4.16 revels that the total deposits position in different trend. It
shows the deposit ratio of RBB in 7 different FY. From 2003 to 2009 in comparison
of saving deposit ratio, fixed deposit ratio, current deposit ratio and other deposit ratio
by mean value. The higher amount was deposited in saving deposit it was 62.84%
second highest was fixed deposit it was 18.30%. Third position deposit was current it
was 17.87% and lowest was other deposit it was only 0.99% is shown in the figure as
in above figure no 4.15

4.8 Interest Rate and its Effect of Lending on RBB

The sector where RBB grand its credit during last seven FYs and there corresponding
interest rate, average interest rate are presented in the table 4.17 below.

70
 Table No. 4. 17
Lending Rate of RBB on Different Sectors During Seven FYs
Sector 2003 2004 2005 2006 2007 2008 2009
Year
Overdraft 16.50 13.50 11.75 11.25 12.20 11.00 11.00
Export 15.00 12.00 11.50 10.00 9.50 8.00 8.00
Credit
Import 12.00 13.00 12.00 10.00 10.00 00 7.50
L.C.
Govt. 11.00 14.00 10.50 10.00 7.00 7.00 6.50
Bond
BG/CG 0 10.50 10.00 9.25 9.25 7.00 6.50
Other 15.00 10.50 0 0 0 0 0
Guarantee
Industrial 15.50 15.00 14.50 11.75 12.00 0 0
Loan
Commerci 16.50 15.50 15.00 0 0 0 0
al Loan
Priority 14.00 14.00 13.00 12.00 12.00 11.50 11.00
sector
Loan
Working 14.00 14.50 13.75 12.50 11.00 0 0
Capital
Hire 16.00 14.00 13.50 12.00 12.00 9.00 10.00
Purchase
Others 16.50 15.50 15.00 12.00 12.00 11.50 11.00
Average 14.73 13.50 12.78 11.08 10.70 9.29 8.94
Interest
Rate
Lending 28258.9 26781.7 28919.8 27164.9 25422.3 27494.6 31607.9
Amount 0 0 0 0 0 0 0
Source: Banking and Financial Statistic NRB

71
Lending activity of commercial banks can be diversified into different sectors. But
according to the publication of Nepal Rastra Bank- Banking and Financial Statistics.
The loan of commercial banks is classified in different sub-sectors like overdraft,
export credit; import L.C., Commercial Loan and so on. Besides this there are other
section (area) when bank provides loan and these areas are placed in the topic of
"others". For this study lending area are categorized as classified by NRB.

According to table 4.17 it shows that interest rate on lending on different area are in
declining stage. The table shows that the maximum interest rate is 16.50% in FY 2003
and minimum rate is 6.50% on FY 2009. This shows that the interest rate was decline
drastically during the seven FYs previous. Generally the productive sector loan rate
(like Commercial loan, industrial loan, priority sector loan, working capital rate and
so on) decline less in magnitude than non productive sector loan like overdraft, loan
against government bond, BG/CG rate and so on. For example during the last seven
FYs declination of BG/CG rate was by 4.00%. In same manner the declining
magnitudes were 5.50%, 5.50 and 6.00% for overdraft, other and hire purchase. The
declining percentage for productive sector were 1.50%, 3.00%, .300% and 3.50% in
commercial loan working capital, priority sector loan and industrial loan rate
respectively. According to theory, in order to induce the investment in the country or
expansion of trade the investment in the country or expansion of trade, the productive
sector loan should be available at cheaper rate. But the table shows that these sectors
loan were somewhat costlier than other non-productive loan. If the average of each
fiscal year is taken, then it shows average lending interest rate was 14.73% (2003),
13.50% (2004), 12.78% (2005), 11.08% (2006), 10.70% (2007), 9.29% (2008) and
8.94% (2009), which shows the average rate is decreasing trend. The decreasing
tendency was not smooth. It means the rate declined each year with different rate. In
preceding year the declination was quite fast where as the declining tendency was
little in latter year. This concludes that interest rate on lending is also in decreasing
tendency for past few years. With harmony to interest rate the lending amount of RBB
is also seen to be in decreasing some year but with some fluctuation. This can also be
present in figure 4.16 and 4.17

72
 Fig. No.4.16
Average Lending Rate of RBB During Different FYs

16

14

12
Lending Rate

10

4
2

0
2003 2004 2005 2006 2007 2008 2009
Year

Average Interest Rate

Fig. No.4.17
Lending Amount of RBB During Different FYs

35000

30000

25000
Amount Rs.

20000

15000

10000

5000

0
2003 2004 2005 2006 2007 2008 2009
Year

Lending Amount

73
 Table No. 4.18
Credit to Deposit Ratio of RBB During Different FY
Year Amount of total Amount of total Credit to deposit
deposit lending ratio
2003 39308.6 28258.9 71.89
2004 40313.6 26781.7 66.43
2005 43489.2 28919.8 66.50
2006 45700.7 27164.9 59.44
2007 50192.6 25422.3 50.65
2008 57990.8 27494.6 47.41
2009 67976.3 31607.9 46.50
Source: Table no. 4.14 and 4.17

From table 4.18, it is clear that the credit to deposit ratio of RBB also in decreasing
trend. During the first period out of seven FYs, the declining ratio of credit to deposit
is fast, but after 2007 the declining speed is slow. The credit to deposit ratio of RBB
during last seven was 71.89%, 66.43%, 66.50%, 59.44%, 50.65%, 47.41% and
46.50% in FY 2003, 2004, 2005, 2006, 2007, 2008 and 2009. In Mid –July 2009 the
credit to deposit ratio of RBB remained to 46.50 percent it was 71.89 percent in Mid-
July 2003. We also can see following figure no. 4.18 . this downwards slopping curve
deficts the falling rate of interest on per unit of Rs.

Fig. No.4.18
Credit to Deposit Ratio of RBB During Different FYs

80

70

60

50
CD Ratio

40

30

20

10

0
2003 2004 2005 2006 2007 2008 2009
Year

Credit to deposit ratio

74
4.9 Interest Rate and its Impact of Deposit on NBL
The general structure of deposit interest rate of Nepal Bank Limited (NBL) is shown
below on table no. 4.19 the table shows the interest rate of NBL during the last seven
FYs. The trend of interest rate shows that it is decreasing trend. It is similar with that
of RBB. The interest rate on saving deposit of NBL shows that it was 5.50% during
the period of 2003 and decreases by 1% on average every year up 2004. But after the
2004 AD there was some stagnancy in interest rate because it was fell by only 0.5%
up to 2006, i.e. interest rate decreased to 4.75%. But at 2007 there was sharp fall on
interest rate of 2006 (4.75%) fall to 2.5% when it passes one year (2007) fall to 2.00%
in 2008 and it constant from 2008 to 2009. Similarly interest rate on fixed deposit also
fell during the seven fiscal years by almost half. The interest rate fell by large spread
in first few years but on later years, the falling spread was little as compared to the
previous years.
Table No. 4.19
Interest Rate Structure on Deposit of NBL on Mid-July
Year 2003 2004 2005 2006 2007 2008 2009
Deposit Rate
Saving 5.50% 5.50% 5.00% 4.75% 2.5% 2.00% 2.00%
deposit
Fixed Deposit
7 days 2.00 2.00 2.00 2.00 - - -
14 days 2.50 2.50 - - - - -
1 month 3.50 3.50 3.50 3.25 2.50 2.00 2.00
2 month - - - 3.50 2.75 - -
3 month 4.00 4.00 4.00 3.75 3.00 2.25 2.25
6 month 5.00 5.00 4.50 4.25 3.50 2.50 2.50
1 year 6.75 6.75 6.00 5.75 4.00 3.50 3.00
Above 2 7.00 7.00 6.25 6.00 - - -
years
Whole 4.54 4.54 4.46 4.16 3.05 2.45 2.35
mean
Fixed 4.39 4.39 4.38 4.07 3.15 2.56 2.44
deposit
mean
Source: Banking and financial statistics NRB

75
It is also clear that the falling gap for long term fixed deposit is large where as for
short term deposit the falling gap is little. In other words, both long term and short
term interest rate's falling rate is similar in later year but in previous year the falling
rate is fast for long term fixed deposit where as falling rate was slow for short term
fixed deposit. These tendencies can also be shown in table 4.20 as follows.

Table No. 4.20

Relationship Between Interest Rate and Deposit Amount of NBL
Rate in percentage / Rs. in million
Year Saving deposit Saving deposit Fixed deposit Fixed deposit
interest rate amounts interest rate amount
2003 5.50% 21534.5 4.39% 8396.9
2004 5.50% 22063.0 4.39% 7481.0
2005 5.00% 22671.8 4.38% 6269.2
2006 4.75% 23547.9 4.07% 5790.9
2007 2.50% 26425.4 3.15% 5393.2
2008 2.00% 28545.1 2.56% 4757.9
2009 2.00% 31079.7 2.44% 3579.4
Source: Banking and financial statistics NRB

In table no. 4.20 saving amount and deposit rate are arranged in systematic order. The
outlook of the table shows that the interest has been falling since 2004 on both saving
and fixed deposits. But the amount of saving deposit has not been in decreasing trend.
It is increasing every year. This indicates that the condition for NBL is opposite to the
substitution theory. But the picture for fixed deposit is somewhat different. Up to
2003 the deposit amount had been increased with little amount. But after 2003 this
deposit amount has been in decreasing trend. It indicates that with decrease in interest
rate, fixed deposit amount also decreases. But the declining speed of interest rate is
quite higher than that of declining speed of deposit amount. This suggests that they
have positive relationship but to determine the magnitude of relation. Saving deposit
interest rate was decreasing trend in the beginning year 2003 it 5.50%, 5.50% for
2004, 5.00% for 2005, 4.75% for 2006, 2.50% for 2007, 2.00% for 2008 and 2.00%
for last year 2009. Similarly the saving deposit amount was increasing trend it was

76
21534.5 million for 2003, 22063.0 million for 2004, 22671.8 million for 2005,
23547.9 million for 2006, 26425.4 million for 2007, 28545.1 million for 2008 and
31079.7 million for 2009. But fixed deposit interest rate was decreasing trend and it
deposit amount also decreasing trend fixed deposit interest rate was 4.39% and
deposit amount was 8396.90 million for 2003, 4.39% (7481.0 million) for 2004,
4.38% (6269.2 million) for 2005, 4.07% (5790.9 million) for 2006, 3.15% (5393.20
million) for 2007, 2.56% (4757.9 million for 2008 and 2.44% (Rs.3579.4 million) for
2009. The data on the table 4.20 are present on the following figure no. 4.19, 4.20 as
follows.

Fig. No. 4.19

Interest Rate of NBL on Saving and Fixed Deposit

6.00%

5.00%

4.00%
Interest Rate

3.00%

2.00%

1.00%

0.00%
2003 2004 2005 2006 2007 2008 2009
Year

Saving deposit interest rate Fixed deposit interest rate

77
 Fig. No.4.20
Deposit Amount of NBL During Different FYs

35000

30000

25000
Amount Rs.

20000

15000

10000

5000

0
2003 2004 2005 2006 2007 2008 2009
Year

Saving deposit amounts Fixed deposit amount

Table No. 4. 21
Deposit Growth Rate of NBL During Different FYs
Fiscal Saving Fixed Current Other Total Deposit
year deposit deposit deposit deposit deposit growth %
amount amount amount amount amount
2003 21534.5 8396.9 4689.5 116.5 34737.4 1.99
2004 22063.0 7481.0 6100.0 644.5 36288.5 4.47
2005 22671.8 6269.2 5514.4 288.8 34744.2 4.26
2006 23547.9 5790.9 5730.5 375.6 35444.9 2.02
2007 26425.4 5393.2 6561.5 335.1 38715.2 9.23
2008 28545.1 4757.9 7599.1 549.6 41451.7 7.07
2009 31079.7 3579.4 9072.0 615.0 44346.1 6.98
Source: Banking and financial statistics NRB

Above the table no. 4.21 show the increased the deposit amount growth rate. The total
deposit growth rate of NBL in different fiscal years from 2003 to 2009. The data
shows the growth rate of deposit amount is increasing tendency, it was 1.99 percent
for beginning year 2003, 4.47% for 2004, in 2005 it was decreased 4.26% after FYs

78
2006 its trend up to increasing 2.02% for 2006 9.23% for 2007, 7.07% for 2008 and
6.98% for 2009. In mid-July 2009 the total deposit growth rate of NBL remained to
6.98% it was 1.99% in Mid-July 2003. This growth trend we can see following figure
no. 4.21
Fig. No.4.21
Total Deposit Growth Rate of NBL During Different FYs

6%
19% 12%

12%

20%
6%

25%

2003 2004 2005 2006 2007 2008 2009

Table No. 4.22

Deposit ratio of NBL during different FY
Fiscal year Saving ratio Fixed ratio Current ratio Other ratio
2003 61.99 24.17 13.50 0.34
2004 60.80 20.62 16.81 1.77
2005 65.25 18.05 15.87 0.83
2006 66.44 16.34 16.17 1.05
2007 68.25 13.93 16.95 0.87
2008 68.86 11.48 18.33 1.33
2009 70.08 8.07 20.45 1.40
Average ratio 65.95 16.10 16.87 1.08
Sources: Table no. 4.21

79
From the above table no. 4.22 shows the deposits ratio under seven years study
period. The ratio of saving to total deposit is higher than the other deposit. The
highest amount was deposited in saving deposit. Its deposit ratio is increasing trend.
The deposit ratio of saving was 61.99%, 60.80%, 65.25%, 66.44%, 68.25%, 68.86%
and 70.08% in fiscal year 2003, 2004, 2005, 2006, 2007, 2008 and 2009. Similarly
second highest deposit is current deposit its deposit ratio also increasing trend it was
13.50%, 16.81%, 15.87%, 16.17%, 16.95%, 18.33% and 20.45% in FY 2003, 2004,
2005, 2006, 2007, 2008 and 2009. But third highest deposit amount is fixed deposit
it's deposit ratio is decreasing trend it was 24.17%, 20.62%, 18.05%, 16.34%, 13.93%,
11.48% and 8.07% in FY 2003, 2004, 2005, 2006, 2007, 2008 and 2009. Other
deposit ratio is least compare to saving fixed and current accounts. The saving deposit
comprises the major share in total deposit. As of Mid-July 2009 the proportion of
saving, fixed and current deposit are 70.08%, 8.07% , 20.45%, 61.99%, 24.17% and
13.50% saving, fixed current deposit were in Mid-July 2003. This deposit ratio is
shown in the figure as in figure no. 4.22

Fig. No.4.22
Deposit Ratio of NBL During Different FYs

80

70

60

50
ratio

40

30

20

10

0
2003 2004 2005 2006 2007 2008 2009
Year

Saving ratio Fixed ratio Current ratio Other ratio

80
Above table [Link] that the total deposits position. It show the deposit ratio of
NBL in different FY and it's average deposit ratio of saving deposit, fixed deposit,
current deposit and other deposit also presented. The higher amount of deposited in
saving deposit it is 65.95% second higher is current deposit it is 16.87% nearest of
second higher is fixed deposit it is 16.10% and lowest is other deposit it is 1.40% it is
shown in the following figure no 4.23

[Link].4.23
Average Deposit Ratio of NBL

1%
17%

16%
66%

Saving ratio Fixed ratio Current ratio Other ratio

4.10 Interest Rate and its Effects of Lending on NBL

The sector where NBL grant its credit during last seven FYs and their corresponding
interest rate, average interest rate and lending amount are presented in the table 4.13
below.

81
 Table No. 4 . 23
Lending Rate of NBL on Different Sectors During Seven FYs
Sector 2003 2004 2005 2006 2007 2008 2009
Year
Overdraft 15.00 15.00 14.00 10..0 10.00 10.00 10.00
Export 11.00 11.00 11.00 8.50 8.50 8.00 8.00
credit
Import 11.00 11.00 11.00 8.50 - - -
L.C.
Govt. 8.00 8.00 7.00 7.00 7.00 6.50 6.50
Bond
BG/CG 10.00 10.00 10.00 8.75 8.75 7.00 6.50
Industrial 14.00 14.00 13.00 13.00 - - -
loan
Commerci 14.50 14.50 13.50 13.50 - - -
al loan
Priority 14.00 14.00 13.50 10.50 10.50 10.00 10.00
sector loan
Poorer 10.50 10.50 10.00 8.00 8.00 7.50 7.50
sector loan
Working 14.00 14.00 13.00 10.00 10.00 10.00 10.00
capital
Hire 14.00 14.00 14.00 11.00 11.00 9.00 9.00
purchase
Others 16.00 16.00 14.00 11.00 12.00 11.00 10.00
Average 12.67 12.67 12.00 9.98 9.53 8.78 8.61
interest
rate
Lending 19266.1 19141.7 18530.6 12791.1 13750.6 15770.7 19482.2
amount 0 0 0 0 0 0 0
Source: Banking and financial statistics, interest rate NRB

82
According to the table 4.23 it is clear that all the lending interest rate fell by 1.00% to
6.00% within the seven FYs. During the FY 2004 the average interest rate declined
quite rapidly, with greater magnitude but in middle of the FY in remained stagnant.
Again after middle year the momentum of speed rises up. During the period especially
hire purchase rate, against government bond rate, BG/CG rate. Import LC rate and
overdraft lending rate fell drastically. The fell by 5.00%, 1.50%, 3.50% 2.5%, 5.00%.
Where as other sector lending rate of NBL also fell but their magnitude was less. It
means that commercial sector loan rate, industrial loan rate were not decreased by
large percentage. So it can be said that only non-productive sector loan rates were
reduce drastically during the seven FYs as compare to productive sector loan. The
case is similar with the RBB. With rhythm to lending interest rate, the study of
lending amount shows that it is also in decreasing trend. The trend shows that it is
fluctuating. In other words, up to the FY 2006, the lending amount was in decreasing
tendency but after 2006 the lending amount to be increasing. The average lending rate
of each FY and their corresponding lending rate can be exhibited in the figure 4.24
and 4.25 as follows.

Fig. No. 4.24

Average Lending Rate of NBL During Different FYs

14

12

10
Interest Rate

0
2003 2004 2005 2006 2007 2008 2009
Year

Average interest rate

83
 Fig. No.4.25
Lending Amount of NBL NBL During Different FYs

25000

20000
Amount Rs.

15000

10000

5000

0
2003 2004 2005 2006 2007 2008 2009
Year

Lending amount

Table No. 4 .24

Credit to Deposit Ratio of NBL During Different FY
Year Amount of total Amount of total Credit to deposit
deposit lending ratio
2003 34737.4 19266.1 55.46
2004 36288.5 19141.7 52.75
2005 34744.2 18530.6 53.33
2006 35444.9 12791.1 36.09
2007 38715.2 13750.6 35.52
2008 41451.7 15770.7 38.05
2009 44346.1 19482.2 43.93
Source: Table no. 4.21 and 4.23

The table no. 4.24 shows the credit to deposit ratio of NBL during on seven FY. The
table presented the ratio of credit to deposit is decreasing trend it was for FY 2003,
2004, 2005, 2006, 2007, 2008 and 2009 are 55.46%, 52.75% 53.33%, 36.09%,

84
35.52%, 38.05% and 43.93%. From the table it is clear that the total deposit amount
of NBL is increasing trend and total lending amount of NBL is decreasing trend. So
the credit to deposit ratio is also decreasing trend for seven fiscal years. In Mid-July
2009 it was 43.93% and it was 55.46% in Mid-July 2003. It is shown in the figure as
in figure 4.26
Fig. No. 4.26
Credit to Deposit Ratio of NBL During Different FYs

60

50

40
CD Ratio

30

20

10

0
2003 2004 2005 2006 2007 2008 2009
Year

Credit to deposit ratio

4.11 Major Finding of the Study

1. The Nepal Bank Limited (NBL) and Rastriya Banijya Bank (RBB), both
banks deposit interest rate seems decreasing year by year.
2. As the interest rate has been decrease by greater magnitude the saving deposit
interest rate of NBL from 5.50% to 2.00% and RBB from 6.50% to 2.00%.
Similarly fixed deposit interest rate of NBL from 4.39% to 2.44% and RBB
from 6.25% to 2.58% during the study period.
3. The deposit amount of saving of these banks have increasing trend. But the
fixed deposit amount has been decreasing trend.
4. The NBL saving deposit amount has been increased by more than 1.44 times
from Rs.21534.5 to 31079.7 million and RBB saving deposit amount has been
increased by more than 2.21 times from Rs.20861.5 to 46102.8 million.

85
 Similarly, the fixed deposit amount of NBL decreased from Rs.8396.9 to
3579.4 million and RBB from Rs.13579.2 to 3207.8 million in the study
period.
5. This indicates that the saving interest rate and deposit amount condition for
these banks is opposite .But the fixed deposit interest rate and deposit amount
have positive relationship.
6. Both banks the ratio of saving to total deposit is higher than the other deposit
NBL of its ratio is 65.95% and RBB of its ratio is 62.84% in Mid- July 2009.
7. Growth ratio of total deposit of these banks reveals that NBL and RBB having
huge deposit showed 6.98% and 17.22% growth rate in total deposit. NBL and
RBB total deposit reached respectively Rs.44346.1 and 67976.3 million in
Mid- July 2009.
8. The interest rate on lending on different area of these banks is in declining
stage.
9. The average interest rate on lending of NBL and RBB both banks are in falling
stage NBL is from 12.67% to 8.61%. Similarly RBB is from 14.73% to 8.94%
in the seven FYs period.
10. The lending amount of these banks are also seen to be in decreasing some year
with some fluctuation. Lending amount of NBL and RBB increased during the
last year. NBL was for starting year Rs.19266.10 million it reached
Rs.19482.20 million in last year its rise by Rs.216.10 million. Similarly RBB
lending amount was Rs.28258.90 million in starting year its reached 31607.90
million in last year, its rise by Rs.3349.0 million in Mid- July 2009. This
shows that the lending amount and interest rate have negative relationship.
11. The credit to deposit ratio of these banks are in declining stage. In Mid- July
2009, the credit to deposit ration of the NBL and RBB remained to 43.93%
and 46.50% it was 55.46 and 71.89% in Mid-July 2003.
12. Out of the total credit of NBL and RBB non- performing assets (NPA) till
Mid-July 2004 stood at 60.47% and 60.15% which gradually decreased in the
subsequent years. It was come down to 8.98% and 18.72% by mid-January
2009.
13. Review of the restructuring process of both banks shows that there has been an
increase in net profit in Mid- January 2009 the net profit of NBL and RBB
remained 450.0 and 110.0 it was (252.00) and (48.5) in Mid –July 2003.
86
14. From our above calculation we found that deposit interest rate plays a
significant role in deposit collection as well as lending interest rate plays a
significant role in loan disbursements and its long term effect on the
profitability of the banks.

87
 CHAPTER-V
SUMMARY, CONCLUSION AND RECOMMENDATION

5.1 Summary
Nepal Bank Limited (NBL), the first commercial bank established in country, before
72 years and Rastriya Banijya Bank (RBB), the fully government owned commercial
bank established before 43 years. They have helped a lot to develop the banking habit
of the general people within the country. Both banks since establishment have been
functioning only with the main objective of making profit but also giving main
priority to the well being of the nation. Thus there is no doubt that both banks have
contributed a lot to the betterment of the country's economy. In the past overall
performance of these banks, were quite remarkable. They were successful and helped
the government to develop the economic infrastructure of the country. Recently they
felt that in spite of success in collecting scattered saving in the form of deposits, they
have not yet been able to utilize the most productively thus the proper utilization of
the mobilized resources has been become a current and prevalent issue for the banks.
Therefore, this study was undertaken with the objective of analyzing and evaluating
the lending, deposit collected and its interest rate of NBL and RBB in order to trace
out gaps and drawbacks in its performance. A period of seven years starting form FY
2003 to 2009 had been selected for the study.

Economic liberalization policy of the government has encouraged to establish and

growth of commercial banks in the country within short period of time. In situation
when the existing financial institutions, especially governments commercial were
unable to supply credit in time and carry capital market activities whereas commercial
banks have contributed a lot. Financial institutions are spread and functioning in the
different parts of the country. Financial intermediaries transfer saving to the nearby
investor which helps to utilization of funds among various productive sectors. This
helps to the economic development and the rise of living standard of the people.
Deposit is the main source of commercial banks for lending to needy people. Higher
the deposit higher the bank has the ability to lending. The basic policy for the
financial institution is to charge the higher interest in lending and lower interest for
deposit funds. As a result, various of these type of organization are lure for investment

88
in order to gain maximum profit from the deposit and lending. Usually interest rates
have greater impact on the lending and collection of the deposit. The higher interest
rates attract more deposits and lower interest rate on loan and vice versa. However, in
Nepal due to existence of some uncommon practices interest rates do not seem to
have such impacts on deposits and credit. Both deposit and lending rates are
continuously decreasing over the years decreasing the interest spread. Though it is
quite obvious for increasing demand for loan but deposit too are increasing. This has
proved that the customers in Nepal do not care much about when one is depositing but
lower lending rate attract more customers to take loan. So, the relationship between
deposit, lending and interests are directly or inversely proportional to each other.

The sample banks NBL and RBB both banks deposit interest rate has been decreasing
trend. The saving deposit interest rate of NBL from 5.5% to 2.00% and RBB from
6.50% to 2.0%. Similarly fixed deposit interest rate of NBL from 4.39% to 2.44%
and RBB from 6.25% to 2.58%. The deposit amount of saving of these banks have
increasing treand. But the fixed deposit amount has been decreasing trend. The NBL
saving deposit amount from Rs. 21534.5 to 31079.7 million and RBB saving deposit
amount from Rs. 20861.5 to 46102.8 million. Similarly, fixed deposit amount of NBL
decreased from Rs. 8396.9 to 3579.4 and RBB from Rs. 13579.2 to 3207.8 million in
the study period. This is indicate that the saving interest rate and deposit amount
condition for these banks is opposite to the substitution theory. But the fixed interest
rate and deposit amount have positive relationship.
The average interest rate on lending of these banks are in falling stage NBL from
12.67% to 8.61% and RBB from 14.73% to 8.94%. The lending amount of these
banks are also seem to be in decreasing some year with some fluctuation. But lending
amount of these banks have increased in last year from starting year. NBL lending
amount from Rs. 19266.10 to 19482.20 million and RBB from Rs. 28258.90 to
31607.90 million in the study period. This shows that the lending interest rate and
amount have negative relationship.

5.2 Conclusion
Interest rate has been the dominating factor for collection and mobilization of deposits
and it is still continuous to be the important one for much longer time. People prefer

89
to deposit when the deposit interest rate is high and like to take loan when lending rate
is low but what rate is high and low is determined by the market force and position of
the bank in the market. Big banks in the present market situation are giving lower
interest rate on deposit and expect higher interest in return. On the country to the
small and new banks are offering comparatively higher interest rates on deposits and
disburses loan at interest rate similar to well established bank. The total deposit
collected seems unsatisfactory and the deposits should be encouraged to deposit in the
NBL and RBB banks. The depositors being attracted to other banks as some joint
venture banks, some new commercial banks and finance companies nowadays
provide facilities to depositors. The interest rate seems decreasing year by year. It is
fact because these banks have not able to motive and facilities to their client's except
to change in rate of interest. Banks could not mobilize and utilize the accumulated
deposit in productive sector. So it decreases its interest rate.

There is positive relation between interest rate and fixed deposit. Although, when the
interest decreases deposit has gone down. But the relation between interest rate and
saving deposit is high. Inspite of low interest rates in the deposit collection is high.
But the fact is something different, when liberalization was induced in Nepal as a
means of development of the country, many joint venture bank, financial institutions
were established, saving was now safe with banks than in home from securities point
of view. Irrespective of rate of interest; deposit collection seemed to increase so
lending amount also increase. Being an oldest and government owned commercial
banks in Nepal people are appreciating and trusting these banks more than any banks.

To conclude, followings are some of the important impact of changing interest rate t
that are emerged from the study.
 Changing interest rate structure can create a competitive environment among
commercial banks.
 The wider spread interest rate helps the commercial bank to manage the higher
liquidity position and good profitability.
 A high interest in deposit and low in lending is important to attract customers
to the bank but the other facilities offered by the banks also plays an important
role for the success of the banks.

90
  An appropriate and realistic interest rate on lending can help in optimum
utilization of available resources.

Interest rate does play a vital role in Nepalese market, however there are other factors
governing influence in deposit of commercial banks. So the interest rate plays a
significant role in economic development. Any banks willing to increases the business
should always present its interest rate structure in such a way that the impact of it
should be positive of all. Currently banks in the market are able to structure its interest
accordingly which is the reason of increasing profits year after year.

5.3 Recommendation
NBL was the first organized banking institution being joint venture of government
and private individuals and RBB was the fully government owned commercial bank
both established with different objectives. One of the major objectives is to run the
branches in the rural communities, to improve their living standard by providing
banking securities in order to promote the economic situation of the problem and
financial problem. Although NBL has 100 [Link] RBB could successfully
operate 123 branches in different areas. In order to be the instrument of development,
bank is required making better profit and better profit is possible only through better
performance.
Then following are the suggestions to NBL and RBB for better performance.
1. Nowadays other commercial banks, joint venture banks and financial
companies are giving various facilities to the customer providing new schemes
and attractive interest rates. Hence both banks try to bring such schemes to
attract new customers in this competitive business world.
2. Proper marketing strategy should be conducted so that new customer could be
attracted as well we the bank can face a head with other competitor banks.
3. Most of the bank lack of modern technologies like computerized banking
service, ATM service ABBS service and other banking facilities. Nowadays
any joint venture and finance companies adopt these technologies lack of this
technology the work of the bank is being tedious in the modern world of
computer. Hence both banks must also try to modernize itself.
4. Financial statements should be published regularly.

91
5. To get success in competitive banking environment; depositors money must be
utilize as loan and advances. Negligence in administering this asset could be
the main cause of liquidity crises in the bank and one of the main reasons of a
bank failure. To overcome this situation securities against which loan is going
to provide should be valued fairly and properly.
6. The loan and advances department and the loan recovery department should
also be target oriented, that is after advancing loan, there should be regular
supervision and follow up for the proper utilization.
7. Banks should also include the rate of inflation while determining rate of
interest of deposit.
8. In order to developed the economy, banks have to collect more volume of the
capital, so, banks are suggested to quote higher deposit interest rate. This
situation may lead to the reduction of the profit opportunity but it will enhance
the economic condition of the country.
9. There is a higher spread between lending interest rate and deposit interest rate
at present. So, higher spread increase the profit figure of the banks, but it
reduces the deposit collection and investment in the country. Therefore banks
should be conscious for the unusual spread of interest and suggestion is made
to narrow down the difference between these two interest rates.
10. Banks are suggested to invest new but productive areas and they should
introduce competitive customer oriented schemes. It will help in solving
liquidity problems.

92
 APPENDIX – I

Interest Rate Structure on Deposit of Commercial Banks as on Mid- July

Particular/ 2003 2004 2005 2006 2007 2008 2009

Year

Deposit rate %

Saving deposit 6.00 5.50 5.50 5.25 5.00 4.50 4.50

Fixed Deposit

1 months 0.00 3.50 3.25 3.50 3.00 3.00 3.00

3 month 5.00 4.75 4.50 4.00 4.25 4.00 3.75

6 month 6.00 5.00 4.75 4.50 4.50 4.25 4.00

1 year 7.00 5.75 5.00 5.00 5.00 5.00 5.00

2 year & above 7.50 6.00 6.50 6.40 5.50 6.00 6.00

Mean X =
X
N

93
 APPENDIX – II

Lending Rate on Commercial Bank on Different Sector During Seven F/Ys

Sector/ 2003 2004 2005 2006 2007 2008 2009

Year

Industrial 14.00 13.50 13.50 13.50 13.00 13.00 13.00

Agricultural 14.50 12.50 13.50 13.00 13.00 12.00 12.00

Export Bills 13.00 12.00 12.00 11.50 11.50 11.00 11.00

Commercial 16.00 15.00 14.50 14.50 14.00 13.50 13.00

loan

Overdraft 17.00 15.50 15.00 15.00 14.50 14.00 13.50

Mean X =
X
N

94
 APPENDIX – III

Interest Rate Structure on Deposit of RBB as on Mid- July.

Particular/ 2003 2004 2005 2006 2007 2008 2009

Year

1. Deposit Rate%

Saving 6.50% 6.00% 5.00% 4.75% 2.25% 2.00% 2.00%

Deposit

Fixed Deposit

7 days 0 0 0 0 0 0 0

14 days 0 0 0 0 0 0 0

1 months 0 0 0 0 0 0 0

3 months 5.00 4.50 4.00 3.75 3.00 2.25 2.25

6 month 5.50 5.50 4.75 4.25 3.50 2.50 2.50

1 year 7.00 7.00 6.00 5.75 3.75 3.50 3.00

Above 2 year 7.50 7.25 6.25 6.00 0 0 0

Mean X =
X
N

95
 APPENDIX IV
Lending Rate of RBB on Different Sectors During Seven FYs

Sector 2003 2004 2005 2006 2007 2008 2009

Year

Overdraft 16.50 13.50 11.75 11.25 12.20 11.00 11.00

Export 15.00 12.00 11.50 10.00 9.50 8.00 8.00

Credit

Import L.C. 12.00 13.00 12.00 10.00 10.00 00 7.50

Govt. Bond 11.00 14.00 10.50 10.00 7.00 7.00 6.50

BG/CG 0 10.50 10.00 9.25 9.25 7.00 6.50

Other 15.00 10.50 0 0 0 0 0

Guarantee

Industrial 15.50 15.00 14.50 11.75 12.00 0 0

Loan

Commercial 16.50 15.50 15.00 0 0 0 0

Loan

Priority 14.00 14.00 13.00 12.00 12.00 11.50 11.00

sector Loan

Working 14.00 14.50 13.75 12.50 11.00 0 0

Capital

Hire 16.00 14.00 13.50 12.00 12.00 9.00 10.00

Purchase

Others 16.50 15.50 15.00 12.00 12.00 11.50 11.00

Mean X =
X
N

96
 APPENDIX V

Interest Rate Structure on Deposit of NBL on Mid-July

Year 2003 2004 2005 2006 2007 2008 2009

Deposit Rate

Saving 5.50% 5.50% 5.00% 4.75% 2.5% 2.00% 2.00%

deposit

Fixed Deposit

7 days 2.00 2.00 2.00 2.00 - - -

14 days 2.50 2.50 - - - - -

1 month 3.50 3.50 3.50 3.25 2.50 2.00 2.00

2 month - - - 3.50 2.75 - -

3 month 4.00 4.00 4.00 3.75 3.00 2.25 2.25

6 month 5.00 5.00 4.50 4.25 3.50 2.50 2.50

1 year 6.75 6.75 6.00 5.75 4.00 3.50 3.00

Above 2 7.00 7.00 6.25 6.00 - - -

years

Mean X =
X
N

97
 APPENDIX- VI
Lending Rate of NBL on Different Sectors During Seven FYs

Sector 2003 2004 2005 2006 2007 2008 2009

Year

Overdraft 15.00 15.00 14.00 10..0 10.00 10.00 10.00

Export 11.00 11.00 11.00 8.50 8.50 8.00 8.00

credit

Import L.C. 11.00 11.00 11.00 8.50 - - -

Govt. Bond 8.00 8.00 7.00 7.00 7.00 6.50 6.50

BG/CG 10.00 10.00 10.00 8.75 8.75 7.00 6.50

Industrial 14.00 14.00 13.00 13.00 - - -

loan

Commercial 14.50 14.50 13.50 13.50 - - -

loan

Priority 14.00 14.00 13.50 10.50 10.50 10.00 10.00

sector loan

Poorer 10.50 10.50 10.00 8.00 8.00 7.50 7.50

sector loan

Working 14.00 14.00 13.00 10.00 10.00 10.00 10.00

capital

Hire 14.00 14.00 14.00 11.00 11.00 9.00 9.00

purchase

Others 16.00 16.00 14.00 11.00 12.00 11.00 10.00

Mean X =
X
N

98
 Curriculum Vitae
PERSONAL DETAILS
Name : Laxman Upadhyaya
Date of Birth : 2036/07/24
Father's Name : Mr. Bal Krishna Upadhyaya (Poudyal)
Permanent Address : Kharjyang VDC-3, Maindanda, Gulmi
Temporary : Butwal-8, Rupandehi,
Ph. No. : 9847046613
Gender : Male
Marital Status : Married
Nationality : Nepali
Language : Nepali, English & Hindi
Religion : Hindu
Academic Qualifications:
Level University/ Board Year Major Subject
MBS T.U. (Lumbini Banijya Campus) Thesis Account
Submitted
BBS T.U. (Tribhuvan Multiple Campus, Palpa) 2062 Account & Finance
[Link] T.U. (Tribhuvan Multiple Campus, Palpa) 2058 Math & Account
S.L.C. HMG (Adarsh M.V. Digam Kot, Gulmi) 2054 History & Geography

Training
 One month General Banking Training.
 4 days Basic Accountancy Training.
Skill
 Typing both Nepal and English.
 Computer Proficiency: MS- Word, Excel, Power Point and Tally.

References:
Dr. Ishwor Gautam (Campus Chief of Lumbini Banijya Campus, Ph. No.
9857025020)
Mr. Tara Prasad Upadhyaya (Lecturer of L.B.C. , Ph. No. 9857028361)

99
 BIBLIOGRAPHY

BOOKS
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Ltd.
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publication, Baghbazar, Kathmandu.
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publishing company.
Deweet,K.K.(1987). Modern Economic Theory. New Delhi: S. Chand and Company
Ltd.
Gupta, [Link] Economics: Institutions, Theory and Policy. New Delhi:
[Link] and Company Ltd.
Hanson, Jones A. (1985). Interest Rate Policies in Selected Developing Countries.
NY: MC Graw-Hill.
Keynes, J.M. (1936). The General Theory of Employment, Interest and Money. NY:
Macmillan and Co.
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Willy Eastern Ltd.
Maxwell, J. Fry (1974). Resource Mobilization and Financial Development in Nepal.
Kathmandu: CEDA Publication.
Paul, R.R. (2003). Monetory Economics. New Delhi: Kalyani Publishers.
Rose,Peter S.(2003) Money and Capital Markets. Chicago: Financial Institution and
Instruments in a Global Marketplace, Irwin.
Samuelson, P.A. & Nordhus, William D. (2002). Economics. Sixteen edition, New
Delhi: Tata Mc Graw-Hill publishing company Ltd.
Shrestha, M.K. and Bhandari, D.B. (2004). Financial Markets and Institutions,
Kathmandu: Asmita Books Publishers and Distributors.

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DISSERTATIONS

Bhandari, D.R. (2005). The Impact of Interest Rate Structure on Investment portfolio
of Commercial Banks in Nepal. An unpublished MBA Thesis, T.U.
Dangol, N. (2006). The Impact of Interest Rate Structure on Investment portfolio of
commercial banks in Nepal. An unpublished MBA Thesis, T.U.
K. C. Kishor. (1980). Interest Rate Structure and its Relation with Deposit Inflation
and Credit in Nepal. Unpublished MBS Thesis, submitted to Faculty of
Management T.U.
Manandhar, Badri Narayan. (1969). Lending policy of Commercial Banks in Nepal.
Unpublished Master's Thesis, submitted to central Department of
Management, T.U.
Neupane, Guru P. (1997). Money Supply Interest Rates and Financial Development in
Nepal. An Unpublished Thesis, submitted to T. U. Kathmandu.
Pandey’s D.R.(1979), Money Supply, Level of Prices and Interest Rate Structure.
Unpublished Master’s Thesis T.U. Kathmandu
Rajbhandari, N. B. (1978).The Interest Rate Structure of Commercial Banks in Nepal.
An Unpublished M.A. Thesis T.U. Kathmandu.
Shrestha, S.K.(2054).Interest Rate and its Impact upon Resource Mobilization and
Utilization. An unpublished M. A. Thesis T.U. Kathmandu.
Shrestha, Shova. (1982). A Study on Deposit Mobilization and Utilization of
Commercial Banks with special Reference to Nepal Bank Ltd. Unpublished MBS
Thesis T. U. Kathmandu.

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JOURNALS REPORTS AND ARTICLES
AEA, (1974). Journal of Economic Literature, Sep. 79. Vol. XVII. Tennessee:
American Economic Association.
Gov. of Nepal. (2009). Economic survey. Fiscal year 2008/[Link] of Nepal
Ministry of Finance. July 2009 Kathmandu.
Kafle, Shiva Devi (2002). Nepal Rastra Bank and Its Policies for Monetary
Control,Nepal Rastra Bank Samachar. April 2002, Kathmandu: NRB
K.C, Devlal. (1998). Interest Rate Policies. Nepal Rastra Bank Samachar. April 1997
Kathmandu NRB.
NRB, (1996). Forty years of Nepal Rastra Bank Kathmandu. NRB.
NRB, (2003). Report of fiscal year 2002/03, Kathmandu.
NRB, (2004). Quarterly economic bulletin, Volume XXXVIII, Mid-April, Mid-July,
Kathmandu.
NRB, (2005). Economic review, Number 17, Kathmandu.
NRB, (2007). Monetary policy 2007/08. Kathmandu. NRB Central office.
NRB, (2008). Quarterly Economic Bulletin. Mid-July 2008 Volume XXXXII No.4
Kathmandu.
NRB, (2009). Economic Review. No.21 Kathmandu.
Panta,Raghav Dev (1983). Interest Rate Policy Nepal.
Pandey, Chandani (2004). Regulatory Provision of the banks and Financial
Institutions and its Impact on Economic Banking Promotion. NRB Dec, 2004.

Website
[Link]
[Link]
[Link]

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