Conceptual Review :
This is the second chapter where study of previous works and study materials, like: books, articles, journals, etc are taken into considerations for literature review in research. Review of literature helps a researcher find past debates, problems and research gaps. It is also helpful in identifying existing problems. Review of literature makes it clear to researcher about what was done before and what is to be done now.
There are various popular theories related to investment but there is one theory that is taken into consideration, i.e. Irving Fisher’s theory of investment. His theory of capital and investment was introduced in his book “Nature of Capital and Income” in 1906 and in another book “Rate of Interest” in 1907. In his theory, Fisher assumed that all capital was circulating capital. In other words, all capital is used up in production process. Also, he argued that investments are made until the present value of expected future revenues, at the margin. He referred to the discount rate as the rate of return over costs or the internal rate of return.
Similarly, for this study, related journals, articles and previous works from various sources have been reviewed.
Definition of Investment and Investment Policy. Simply, investment is an activity to use a particular amount of savings and deposit in an area for earning income. An asset bought with an expectation to earn income or to increase wealth. In finance, investment is to buy financial assets with the plan that the assets will generate profit in future or it will be sold in higher price. So, investment is usage of savings in a systematic manner for regular income.
An investor buys assets from the market. Those assets are: debts and stocks. From investment in debt, the investor gets fixed rate of return, and from investment in stocks he/she earns dividend as income. We can also define investment as the commitment of a given sum of money at the present time in the expectation of receiving larger sum in future.
Similarly, investment policy is a document that acts as a guideline to the investor. It directs the investor in how and where investment should be done.
Principles of Sound Investment Policy
• Safety and security: A commercial bank should consider the safety and security of its funds before investing it anywhere. The bank should see how safe it is to invest in the chosen place. Investment should not be done in a bankrupt place as it will great loss. Investing in a safe ensures that the invested fund will not face loss.
Further, the bank should invest in legal securities. The bank should
accept the securities that have marketability, ascertain ability.
• Liquidity: Liquidity refers to ability of assets be transferred into cash immediately. People deposit money in bank for saving and to use the fund whenever needed. They believe that the bank will pay them required amount whenever needed. Therefore, the bank must be always be ready to pay the customers. They should make balance in liquidity.
• Legality: This is another important principle that states that the banks should buy legal securities and should not be involved in illegal activities. They should follow rules set by NRB to trade securities.
• Policy coherence: It is a better option for an investor to create such investment policy which helps in overall development of country. So the investment policy must be coherent.
• Balance and diversification: Balance in finance is to own different types of investments. Diversification means to spread money around enough to manage risks. Balance and diversification help to manage risks that are inherent in investing. Therefore, the banks or investors must diversify the funds, this helps in recovery if there is loss.
Review of Previous Works
Pokharel, Y (2013) conducted a study on the topic “Nepalese Commercial Banks, Lending and Economic Growth”, in which she has defined financial institution as an important activity in the economy. They perform a wide variety of functions in the financial system.
The objectives in this study were:
• To assess the role of commercial banks in resource mobilization and utilization.
• To examine the pattern of contribution of credit with total sources of fund and number of financial institutions.
• To examine the pattern of contribution of credit flow from the commercial banks upon gross domestic product.
The results were as follows:
• There is a positive relationship between credit with total assets and the number of commercial banks.
• The regression coefficient of independent variable shows that there is significant role of commercial banks in producing GDP in Nepal.
• The share of commercial banks in total assets of whole financial system is increasing every year.
The recommendations made in this study are as follows:
• NRB must think its institutional capabilities with respect to the number of financial institutions regarding the close monitoring and supervision.
• There is a need to revise the existing licensing policy to divert the existence of financial institutions in the needy areas of the country.
• The government should prioritize their fiscal policy towards the development of infrastructures in the rural areas.
Pokharel, L. (2015) conducted a study in the topic “Investment policy of Nabil Bank, Nepal Investment Bank and Standard Chartered Bank Ltd.”,with following objectives:
• To evaluate liquidity, assets management, profitability, risk ratio, growth ratio of the banks under study.
• To examine the relationship between total deposits, investment, loans and advances.
• To assess the interest earned, net profit and net profit to outside assets and total working fund, loan and advances to interest paid and compare them.
The results of this study are:
• Amount of total deposit collected by Nabil Bank was higher than other two banks. Similarly, investment to total deposit ratio and the amount of total investment made by Nabil was higher.
• Loans and advances of Nepal Investment Bank was higher.
• Investment policy of Standard Chartered Bank was more sound from profit point of view.
• The relationship between deposit and loans and advances and deposit investment of all three banks was positive.
The recommendations made were as follows:
• There should be diversification in the investment in the NRB bonds, government non-financial institution, other non-financial institution.
• All banks should follow the liberal lending policy to increase their total loan and advances in order to earn more profit.
• Nabil bank must seek new places or sectors of investment with potentially high return and low risk.
• SCBNL is recommended to diversify its investment on more profitable sector and adopt sound investment policy.
• The banks have to maintain sufficient funds in the form of cash and liquid assets to meet various commitments.
Baidhya (2011) conducted a study in “Comparative study of Nepal SBI and Nabil Bank ltd”, following were the objectives:
• Make a comparative analysis of the investment policy of the banks understudy.
• Evaluate liquidity, profitability and risk position of Nabil’s in comparison to Nepal SBI.
• Examine and evaluate the utilization of available fund of Nabil’s in comparison to Nepal SBI.
• Find out the empirical relationship between deposits, loans and advances, investment, and net profit.
The results of this study are:
• The liquidity position of Nabil is comparatively lower than that of Nepal SBI’s, but it has the highest investment in government securities to current assets ratio.
• Nabil bank has highest ratio in investment to total deposit and government securities to total working fund but lower into shares and debentures to total working fund.
• The return on total working fund and return on loan and advances of Nabil is higher than that of SBI. But, total interest paid to total working fund of Nabil is lower.
• SBI has good liquidity position and risk ratio.
• Profitabiity ratio of Nabil bank is good.
The recommendations done through this study were:
• Nabil is recommended to invest in shares and debentures of other financial companies.
• Nabil is recommended to increase its interest earning capacity by investing more fund in loans and advances and different types of securities.
• The banks should not take high risks.
• The banks should be able to provide more personalized services and a better environment for its customers.
Bhattarai (2016), in his research paper “Effect of Credit Risk on the Performance of Nepalese Commercial Bank”, has concluded following points:
• There’s significant relationship between bank performance and credit risk indicators.
• Nonperforming loan ratio has negative effect on bank performance where as cost per loan assets has positive effect on bank’s performance.
• Cost per loan assets is considered to be the influencing variable to enhance bank’s performance.
Review of Books and Articles
Someshwar (2015), in her journal “An Investment pattern of scheduled Commercial banks in India”, has stated that the words, the investment and investment problems will revolve around the concept of managing the surplus financial assets in such a way that will lead to wealth maximization and providing significant further source of income to the banks. Thus, investment is the management of surplus resources in such a way that it will provide benefits to the supplier of the funds that is the banks. The objective of this study was to analyze the investment pattern of the scheduled commercial banks.
The results of this study were:
• Banks are more concentrating on advances as compared to investments out of their total deposits.
• There is a downfall in income of banks because return on investments is lesser than interest income.
• Portfolio of investment may be upgraded to earn maximum return on investments.
The recommendations derived from this journal were as follows:
• The scheduled commercial banks should be careful while investing its funds.
• An investment should ensure maximum profit and minimum risk.
• The banks must be motivated to invest in other countries to earn foreign exchange.
• Portfolio of investments should be upgraded to earn maximum profits.
Brennan and McCave (2002), in their book “Straight Talk on Investing”, have said that one of the key characteristics of a successful investor is that they adopt good habits. We can start with the very best investment plan possible and still end up disappointed if our own behavior undermines our plan. And, first absolutely important habit to develop is saving money.
Dewald (2016), in his book review of “Commercial bank loan and Investment Policy” originally written by Donald R. Hodgman (1963), has summarized that since there are no more alternative sources of borrowed funds than sources of demand deposit services, commercial banks tend to be more competitive in lending than in supplying demand deposit services. Furthermore, the prohibition of interest on demand deposits limits price competition to service charges on demand deposits. Banks competing for the same deposit customers tend to set charges by agreement.
Olokoyo (2011), in her journal titled as “Determinants of Commercial Banks’ Lending Behaviour in Nigeria” , has stated that banks grant loans and advances to individuals, business organizations as well as government in order to enable them embark on investment and development activities as a mean of aiding their growth in particular or contributing toward the economic development of a country in general.
The objectives of this study were:
• To provide an insight into best lending practice and behavior.
• To confirm the effectiveness of the common determinants of the commercial banks lending as specified and how it affects the lending of commercial banks in Nigeria.
The results of this study were:
• There is existence of a long run relationship between banks’ lending, volume of deposit, investment portfolio, interest rate, minimum cash requirement ratio, liquidity ratio, foreign exchange and domestic product.
• Though the lending charged by banks is relevant to their lending performance, the effect of high lending rate on banks’ lending is not pronounced.
• The monetary do not impact negatively on banks’ lending behavior.
The recommendations made through this article were:
• Commercial banks should develop credit procedures, policies and analytical capabilities and these efforts should be expanded into full credit management including organization, approval, monitoring and problem management tailored to the needs of each bank.
• Commercial banks should strategize on how to attract and retain more deposit so as to further improve on their lending performance.
• There should be closer consultation and cooperation between commercial and the regulatory authorities so that the effect of regulatory measure on commercial banks will be taken into account at the stage of policy formulation.
• Banks should try as much as possible to strike a balance in their loan pricing decisions.
Thirumalai and Chandar (2014) in their research paper “Investment policy of commercial banks”, have explained that the investment policy of a bank consists of earning high returns on unloaned resources. But it has to keep in view the safety and liquidity of its resources so as to meet the potential demand of its customers. Since the objective of profitability conflicts with those of safety and liquidity, the wise investment policy is to strike a judicious balance among them. Therefore, a bank should lay down its funds in such a manner so as to ensure safety and liquidity of its funds and at the same time maximize its profit.
The only objective of this study was to study the investment practices of commercial banks.
The results of this research paper were:
• Banks are not investing in private companies.
• Commercial banks form the most important part of financial intermediaries.
• Banks form a significant part of infrastructure essential for breaking vicious circle of poverty and promoting economic growth.
The recommendations made through this research paper were:
• Banks should invest at least 10% of its deposits in private companies as well.
• Investment in private companies boosts up operating profit.
• Also, investment in private companies helps in industrial development and increases standard of living.
Research gap is the difference between previous work done and the present research work. There has been lot of research works and studies undertaken to identify and examine investment policies of Nepal SBI. But the purpose of study is quite different from the previous studies in terms of the time period it covers are from 2011/12 to 2015/16.
The purpose of research work is different than that of studies made by the above persons (related to commercial bank). The above researches are based in Indian, Bangladeshi, Ethiopian, etc banking industry. This study will only totally based on SBI of Nepal. The samples that researcher has taken into consideration also serve as a unique sample in Nepalese context. Since, there are lots of studies done for investment policies, but when we see the recent data new research on the exact topic in Nepal cannot be found. Not only in the sample but the measuring tools also act as a unique tool. Therefore, to fulfill this gap, this research is done.
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