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A STUDY ON RELATION OF INTEREST RATE WITH DEPOSIT

(With reference to Prabhu Bank Limited)

A Project Report

By

RIYA HIRACHAN
T.U. Regd. No: 7-2-723-121-2019
Herald International College

Submitted To

The Faculty of Management

Tribhuvan University
Kathmandu

In Partial Fulfillment of the Requirements for the Degree of

BACHELOR OF BUSINESS STUDIES (BBS)

Kathmandu, Nepal
October, 2023
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1.1 Background of the Study

Banks disburse loans to those in need, but with a higher interest rate. The main goal of banks
worldwide is to increase their credit in the economic market and maximize profits. Credit refers
to the total amount of funds provided by commercial banks to individuals, organizations, and
governments. Acting as financial intermediaries, banks accept deposits from the public and offer
loans at a specific interest rate to generate profits. To avoid bad debts and maintain profitability,
banks must create a credit portfolio. However, in their pursuit of profit, banks may offer loans at
a low-interest rate, which can negatively impact their ability to cover debts. The banking industry
has evolved, with banks now offering services in towns and villages.

The primary objective of every banking organization across the globe is to maximize its profits
by increasing its credit in the economic market. Credit refers to the aggregate amount of funds
provided by commercial banks to individual organizations and governments. Commercial banks
act as financial intermediaries by accepting deposits from the public and offering loans at a
certain interest rate to maximize their profits. It is imperative for banks to prepare a credit
portfolio to avoid bad debts and maintain profitability (Varshney and Swaroop, 1994:42).
However, in the pursuit of profit maximization, banks often provide loans to the public at a low-
interest rate, which can negatively impact individual financial institutions' ability to cover their
debts. The banking industry has evolved significantly over time, with banks now offering a range
of services in towns and villages.

The term 'bank' comes from the Italian word banco, Latin word bancus, and French word
Banque, all meaning bench. Banks play a crucial role in the economy, accepting deposits,
advancing loans, and providing interest to depositors.

Various writers have been defined the word "bank" in different ways.
According to Scholars, "The bank is defined as factory of money for credit where it does not
purchase goods and sells it rather produces credit inform of deposit and sells it inform of loans."
According to C.R. Crowther, "A bank collects money from those who have it to spare or who are
saving it out of their income and lends this money to those who required it." Thus. in conclusion,
we can say that bank is an organization which deals with the monetary transactions for the
mobilization of idle money or deposits in productive sectors, is essentially essential for the
development of the whole net.
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1.2 Profile of Prabhu Bank Limited

Prabhu Bank Limited (PrBL), formerly known as Kist Bank, was established in 2002 as a
Finance Company and was upgraded to a Class ‘A’ Commercial bank in May 2009. On 15th
September 2014, PrBL was renamed after the merger of four financial institutions, namely Kist
Bank Limited (Class A), Prabhu Bank Limited (Class B), Gaurishankar Development Bank
Limited (Class B), and Zenith Finance Limited (Class C). PrBL is currently the largest private
sector commercial bank in Nepal in terms of branch network. The Bank's shareholding pattern
comprises of the promoters holding 65% of the shares, while 35% is floated for the public. The
promoter's holding is further divided into 13% shares held by four institutional promoters and the
remaining 52% by 448 individual promoters. The Bank's registered office is located in
Babarmahal, Kathmandu, which also serves as the Head Office of the Bank. Despite its relatively
short period of existence, PrBL has undergone various phases of growth trajectory. Its growth
has been particularly remarkable, especially after the merger of Grand Bank Nepal Limited, Kist
Bank Ltd, Prabhu Bikash Bank Ltd, Gaurishankar Development Bank Ltd, and Zenith Finance
Ltd in 2016. This merger enabled PrBL to attain the status of an "A" class financial institution
licensed and regulated by the central bank of Nepal, Nepal Rastra Bank.
The Bank has undergone a significant journey since its inception, having incorporated seven
distinct financial institutions in its formation. With a network of 137 branches and 126 ATMs
throughout the country, it has established itself as the foremost private bank in terms of both
geographical reach and clientele segments, boasting a customer base of 850,000 among the
private sector commercial banks in Nepal. As the preeminent banking and financial services
group in Nepal, the Bank is committed to being present wherever growth occurs, connecting
customers to opportunities, facilitating business success, promoting economic prosperity, and
ultimately empowering individuals to achieve their aspirations. The Bank provides a
comprehensive range of banking and investment services for both personal and corporate
customers, supported by a team of highly motivated, young, and dynamic professionals.

One of the primary objectives of the bank is to provide a range of beneficial products and
services to the general public, ensuring their future prosperity. The bank has achieved a
significant level of success in executing this objective in a short period of time, resulting in the
establishment of a substantial base of loyal customers. The bank's core strengths include
personalized service, prompt transactions, extensive networks, mobile banking, and real-time
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account credit. The bank offers a variety of deposit schemes, loans and advances, foreign
exchange facilities, trade financing, inward/outward remittances, market-making for government
securities, and non-fund-based services such as issuing guarantees and letters of credit. While
adequate financing is crucial for the establishment and operation of any business, it alone does
not guarantee success. Success is dependent on other factors such as quality consultation and
counseling. Therefore, the bank has prioritized the development of human resources capable of
understanding customer needs and meeting their requirements. The bank places its customers at
the center of all its operations, believing that a bank's success is only possible when its customers
are successful.

1.3 Objectives of the Study

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

We can study the objectives in following ways:

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

1.4 Rationale of the Study

The primary operations of commercial banks are centered on deposit-taking and lending. In this
regard, Prabhu Bank Limited assumes a pivotal role in executing these functions. The present
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study aims to evaluate the bank's efficacy in these procedures. This study no doubt will have
importance to various groups but in particular is directed to certain groups of people/
organizations, which are:

 It helps to know the policies of financial institutions regarding rate of interest.

 This study effort to help analyze the interest rate structure of commercial banks in Nepal.
 It helps to develop some ideas about the interest rate to the economy.
 It is useful resources for teachers, students, researchers in abstracting some useful
information about interest rate and deposits.
 This study will provide information to those who are planning to invest in Prabhu Bank
Limited
 The study will help general public to know about the overall financial position of PrBL. So.
this study helps to identify its hidden strength and weakness of bank as well as regarding
financial condition of bank.
Likely after the completion, this report will be kept in the library, which plays significant role of
reference to students making the similar study in future.

1.5 Review of Literature

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

A deposit refers to a sum of money that is entrusted to a bank, discount house, or other financial
institution. It represents an individual's assets that are placed with the institution for safekeeping,
with the expectation of receiving interest in return. From the perspective of the bank, deposits are
considered liabilities. The Commercial Bank Act 2031(1974) defines deposits as the amount of
money deposited in a current, savings, or fixed account with a bank or financial institution.
Deposits typically consist of funds that are placed into various types of accounts, including
savings accounts, checking accounts, and money market accounts. It is important to note that
there are various types of deposits available to individuals. But for this study, major three types
of deposits are taken, they are:

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

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

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

1.5.2 Review of previous studies

1.5.2.1 Review of journals and articles

Dhungana (2011) conducted a study on the impact of commercial banks on the economic
growth of Nepal from 1990 to 2010 AD. The study utilized secondary data and employed
statistical analysis to examine the relationship between bank deposits and economic growth. The
findings of the study indicated that a higher level of deposit in financial institutions, particularly
commercial banks, was positively associated with an increase in GDP and economic growth.

The study also highlighted the dual role of the banking sector in mobilizing and allocating
limited resources to meet the needs of the people and promote economic development. The study
further revealed that individuals preferred to deposit their funds in saving accounts due to the
attractive features of this account. Additionally, the total deposit of various financial institutions
increased annually, with commercial banks having the highest level of depository amount due to
their reputation as a secure and sound financial institution.

Maharajan S (2008) research aims to investigate the relationship between the total deposit
amount and the total credit granted by commercial banks in Nepal. The study utilizes secondary
data and focuses on four banks, namely Himalayan Bank Ltd. (HBL), Siddhartha Bank Ltd.
(SBL), Nabil Bank Ltd. (NBL), and Standard Chartered Bank Nepal Ltd. (SCBNL), as a sample
for comparative analysis during the period of 2059/60 to 2063/64 BS. The research employs
financial and statistical tools, such as ratio analysis, mean, standard deviation, coefficient of
variation, and correlation analysis. The findings indicate that SBL has been relatively successful
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in investing in the productive sector and mobilizing its collected deposits to provide loans and
advances for profit generation. On the other hand, SCBNL appears to be more successful in
earning profits on loans and advances compared to the other three banks. The study recommends
that commercial banks should collect more deposits through a variety of deposit schemes and
facilities, such as cumulative deposit schemes, prize bond schemes, recurring deposit schemes
(life insurance), monthly interest schemes, house building schemes, direct finance housing
schemes, education loan schemes, and others.

Shrestha (2014), In her thesis entitled "Deposit Mobilization of Selected Commercial Banks of
Nepal," conducted an analysis of the trend of deposit mobilization among commercial banks in
Nepal. The study focused on four commercial banks, namely Standard Chartered Bank Nepal
Ltd (SCBNL), Nepal Investment Bank Ltd. (NIBL), Himalayan Bank Ltd (HBL), and Nabil
Bank Ltd. (NABIL), during the period from 2065 to 2069 BS. Secondary data were utilized for
the study, and various financial and statistical tools such as ratio analysis, standard deviation,
average mean, correlation coefficient, regression analysis, and trend analysis were employed to
analyze the data.

The findings of the study revealed that all the sample banks were in a better position in terms of
liquidity and profitability. NIBL maintained a good liquidity position, while NABIL had a poor
liquidity position among the sample banks. SCBNL achieved a good return on loan and advances
and had the lowest credit risk ratio among the sample banks. The deposit and loan and advances
of commercial banks showed an increasing trend. However, the growth rate of loan and advances
was in a decreasing trend, and the growth ratio of deposit was in a fluctuating trend during the
observation period.

1.5.3 Research Gap

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

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

1.6 Research Methodology

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

1.6.1 Research Design

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

1.6.2 Population and Sample

Though there were 20 commercial banks in Nepal till March 2021, all of them did not provided
scope for the study. In order to represent the banking sector, the basis of sample selection is that
banks established in different eras like public bank of government, commercial bank established
in 1980‟s, banks established in collaboration with foreign banks, bank established between mid-
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1990‟s and banks established in 2000‟s have been selected for the study. Fifteen commercial
banks have been taken. Therefore, out of 20 commercial banks, one is taken as sample for the
study for the period of 2018/19-2021/22.

1.6.3 Sources of data

Data is collected by using secondary sources and the secondary data are of annual nature. Cross
sectional data are used in this study where one commercial bank out of 20 in Nepal were
included over the period of 2018/19-2022/23 covering the period of 5 years. The variables used
in the study are categorized into bank specific variables (deposit and lending). The data of bank
specific variables are collected from official website of concern commercial banks. This research
is completely based on secondary data so this research does not require any of survey for
collection of primary data. Data are collected from different sources as per need and requirement.

1.6.4 Data Analysis

The core of this research work lies in the presentation and sophisticated analysis of the collected
raw data. The data will be meticulously organized into systematic tabular formats, setting the
stage for a comprehensive analysis. To achieve the research objectives effectively, a range of
financial and statistical tools will be thoughtfully applied. The findings of this study will be
further elucidated through graphical charts and tables to facilitate interpretation. Besides these,
some graph charts and tables will be presented to analyses and interpret the findings of the study.
The tools applied are:

 Financial Tools

Various financial tools can be employed for the analysis. In this study, the main focus will be on
Ratio Analysis. Ratio analysis is the most important tools of the financial analysis, which help to
ascertain the financial conditions of the organizations. Financial Ratio Analysis tools are used to
determine the performance of the banks. Following category of key ratios are used to analysis the
relevant components in terms of Working capital:

 Capital Adequacy Ratio

 Non-performing Loan Ratio
 Loan Loss Ratio
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 Earning per Employee

 Return on Equity (ROE)
 Return on Assets (ROA)
 Earnings Per Share (EPS)
 Total Liquid Fund to Total Deposits Ratio

 Statistical Tools

The collected data will be systematically grouped in table and charts according to their nature, so
that it would be easily calculated. As this research proposal related to the “Quantitative
Research” and also, we predicting relationship between variables, the major statistical tools will
be used for analyzing the data are as follows:

 Arithmetic mean
 Standard Deviation
 Coefficient of Variation
 Bar diagram
 Line graph

1.7 Limitations of the Research

Where there is research on certain things, it comes with some limitations as well. Not all the
research includes 100% of the materials, people, organization, scenarios and so on. For this
research as well, there are few limitations which are mentioned below:
 Certain banks may refuse to reveal extensive information regarding finances, and information
gathered from different databases could not all be uniform in nature.
 The main concentration of this research is on relation of interest rate with deposit.
 Economic circumstances, policies, and banking methods might shift periodically, thus
influencing the study's findings.
 Bank working capital management research might neglect to account for larger
macroeconomic variables like the pace of inflation, volatility in exchange rates, or total
sustainability of the economy.
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 Secondary data available on the internet are not fully dependable.

1.8 Chapter Scheme

This study will be categorized into three different sections i.e., Chapter I (Introduction), Chapter
II (Results and Analysis), Chapter III (Summary and Conclusion) so that the project will be more
structured and standardized.
Chapter I (Introduction)
The first chapter will be all about the background of the research, an overview of the
organizations that we are researching on, objectives of the study, rationales, literature review,
research methodologies and lastly the limitations of the research.

Chapter II (Results and Analysis)

The second chapter will include all the data presentations, its analysis and major findings. This
section is all about the data we have collected from various secondary sources and its brief
analysis and findings related to relation of interest rate with deposit.

Chapter III (Summary and Conclusion)

This chapter includes a brief summary of the report, and conclusion based on the findings of the
report. Besides these chapters, Bibliography and Appendix will be included in this research paper.
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BIBLIOGRAPHY

Dhungana, B. R. (2011). Impact of bank’s deposit in economic growth of Nepal. Journal of

Finance and Management Review, 2(1): 186-195.

Maharajan, S. (2008). Deposit mobilization of commercial banks in Nepal. An Unpublished

Masters Level Thesis, submitted to Shanker Dev Campus, Tribhuvan University,

Kathmandu.

Shrestha, P. (2014). Liquidity and credit management practices of commercial banks in Nepal.

An Unpublished Masters Level Thesis, submitted to Shanker Dev Campus, Tribhuvan

University, Kathmandu.