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A STUDY ON PROFIT PLANNING OF COMMERCIAL BANK(With Reference to Standard Chartered Bank Nepal Limited)By: NIRMALA SHARMA Shanker Dev Campus Campus Roll No.: 1114/ Regd. No.: 7-2-53-847- 2 nd Year Exam Roll No.: 390597A Thesis Submitted To: Office of the Dean Faculty of Management Tribhuvan Universit...

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A STUDY ON PROFIT PLANNING OF COMMERCIAL BANK (With Reference to Standard Chartered Bank Nepal Limited)

By: NIRMALA SHARMA Shanker Dev Campus Campus Roll No.: 1114/066 Regd. No.: 7-2-53-847-2004 nd 2 Year Exam Roll No.: 390597

A Thesis Submitted To: Office of the Dean Faculty of Management Tribhuvan University

In partial fulfillment of the requirement for the degree of Master of Business Studies (MBS)

Kathmandu, Nepal April, 2017

RECOMMENDATION This is to certify that the thesis

Submitted by:

NIRMALA SHARMA Entitled:

A STUDY ON PROFIT PLANNING OF COMMERCIAL BANK (With Reference to Standard Chartered Bank Nepal Limited) has been prepared as approved by this Department in the prescribed format of the Faculty of Management. This thesis is forwarded for examination.

…..……..………………......

Professor Amuda Shrestha (Thesis Supervisor)

......…………..……….….……. Prof. Dr. Kamal Deep Dhakal (Head, Research Department)

…..……..………..…..………… Asso. Prof. Krishna Prasad Acharya (Campus Chief)

…..……………………

DhurbaSubedi (Thesis Supervisor)

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VIVA-VOCE SHEET We have conducted the viva –voce of the thesis presented By:

NIRMALA SHARMA Entitled:

A STUDY ON PROFIT PLANNING OF COMMERCIAL BANK (With Reference to Standard Chartered Bank Nepal Limited) And found the thesis to be the original work of the student and written according to the prescribed format. We recommend the thesis to be accepted as partial fulfillment of the requirement for the degree of Master of Business Studies (MBS) Viva-Voce Committee

Head, Research Department

…………………….………

Member (Thesis Supervisor)

…………………….………

Member (Thesis Supervisor)

…………………….………

Member (External Expert)

…………………….………

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DECLARATION

I Hereby declare that this thesis work entitled A STUDY ON PROFIT PLANNING OF COMMERCIAL BANK(With Reference to Standard Chartered Bank Nepal Limited)submitted to Office of the Dean, Faculty of Management, TribhuvanUniversity, is my original work done in the form of partial fulfillment of the requirement for the degree of Masters of Business Studies which is prepared under the supervision of respected supervisorsProfessor AmudaShrestha andDhurbaSubediof Shanker Dev Campus, T.U.

……….…………… Nirmala Sharma Shanker Dev Campus Campus Roll No.: 1114/066 Regd. No.: 7-2-53-847-2004

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ACKNOWLEDGEMENT This entitled thesisA STUDY ON PROFIT PLANNING OF COMMERCIAL BANK(With Reference to Standard Chartered Bank Nepal Limited)has been prepared in partial fulfillment for the Degree of Master of Business Studies (M.B.S.) under the Faculty of Management, Tribhuvan University, in based on research models involving the use of qualitative aspect of profit planning.

I have great satisfaction and pleasure to express my appreciation and sincerity to my thesis supervisorsProfessor AmudaShrestha andDhurbaSubediof Shanker Dev Campus,TU for their excellent and effective guidance and supervision. I will remain thankful for their valuable direction useful suggestion and comments during the course of preparing this thesis without their help this work would not have come in this form.

I highly appreciate to all the staff of Standard Chartered BankNepal Ltd., NRB Library, Shanker Dev Campus Library and TU Central Library for their valuable advices and support in collecting and presenting the necessary data.

I would also like to express my thankfulness to my friends, my family members as well as all known people who supported as well as inspired me directly or indirectly to complete this thesis. Nirmala Sharma

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TABLE OF CONTENTS Page No. Recommendation

i

Viva Voce Sheet

ii

Declaration

iii

Acknowledgement

iv

Table of Contents

v

List of Tables

vi

List of Figures

vii

Abbreviations

viii

CHAPTER – I: INTRODUCTION

1-9

1.1 Background of the Study

1

1.2 Brief Profile of Standard Chartered Bank Nepal Limited (SCBNL)

4

1.3 Statement of the Problems

6

1.4 Objectives of the Study

7

1.5 Significance of the Study

7

1.6 Limitations of the Study

8

1.7 Organization of the Study

8

CHAPTER – II: REVIEW OF LITERATURE 2.1 Conceptual Framework

10-38 10

2.1.1 Concept of Profit Planning

10

2.1.2 Concept of Profit

11

2.1.3 Concept of planning

12

2.1.4 Types of Planning

13

2.1.5 Role of Forecasting in Planning

16

2.1.6 Planning Verses Forecasting

16

2.1.7 Purposes of Profit Planning

17

2.1.8 Long Range and Short Range Profit Plan

17

2.1.9 Budgeting and Budget

18

2.1.10 Budgeting: As a Device of Profit Plan

19

2.1.11 Essentials of an Effective Budgeting

19

2.1.12 Fundamental of PPC

20

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2.1.13 Profit Planning and Control Process

20

2.1.14 Basic Assumptions and Limitations of Profit Plan

23

2.1.15 Development of Profit Plan

23

2.1.16 Resources Mobilization Plan or Budget

24

2.1.17 Resources Deployment Plan or Budget

25

2.1.18 Planning for Non-Funded Business Activities

25

2.1.19 Implementation of the Profit Plan

27

2.1.20 Performance Reports

27

2.1.21 Concept of commercials banks

29

2.1.22 Evolution of Commercial Bank

29

2.1.23 Role of Commercial Banks in the Development of Economy

31

2.2 Review of Related Studies

31

2.2.1 Review of Journals and Articles

31

2.2.2 Review of Thesis

34

2.3 Research Gap

38

CHAPTER – III: RESEARCH METHODOLOGY

39-46

3.1 Research Design

39

3.2 Population and Sample

40

3.3 Data Collection Procedures and Sources of Data

40

3.4 Research Variables

40

3.5 Data Analysis Tools

40

3.5.1 Financial Tools

40

3.5.2 Accounting Tools

42

3.5.3 Statistical Tools

43

CHAPTER- IV DATA PRESENTATION AND ANALYSIS

47-82

4.1 Analysis of Source of Income of Sample Bank

47

4.1.1 Income from Interest

47

4.1.2 Income from Commission and Discount

49

4.1.3 Other Operating Income

50

4.1.4 Exchange Fluctuation Gain/Loss

52

4.2 Analysis of Sources of Expenses of Sample Bank

53

4.2.1 Interest Expenses

53

4.2.2 Staff/Employee Expenses Shanker Dev Campus Library 7

55

4.2.3 Operating Expenses

56

4.3 Cost Volume Profit Analysis

60

4.3.1 Cost Volume Ratio Analysis

60

4.3.2 Contribution Margin Analysis

61

4.3.3 Contribution Margin Ratio Analysis

62

4.4 Break Even Point (BEP)

63

4.5 Margin of Safety (MOS)

65

4.6 Profitability Analysis of SCBNL

67

4.6.1 Net Profit Margin Ratio (NPMR)

67

4.6.2 Return on Total Assets Ratio

69

4.6.3 Return on Equity

70

4.6.4 Operating Efficiency Ratio

71

4.7 Correlation Analysis 4.7.1 Correlation between Total Cost and Profit

73 73

4.7.2 Correlation between Income and Profit

74

4.8 Trend Analysis

75

4.8.1 Trend Analysis of Income

75

4.8.2 Trend Analysis of Net Profit

76

4.8.3 Trend Analysis of Total Cost

77

4.9 Major findings of the study

79

CHAPTER – V SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

83-86

5.1 Summary

83

5.2 Conclusions

84

5.3 Recommendations

85

Bibliography Appendices

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LIST OF TABLES Table No.

Page No.

4.1: Sector-wise Income from Interest

48

4.2: Sector-wise Income from Discount and Commission

49

4.3: Other Operating Income

51

4.4: Exchange Fluctuation Gain/Loss

52

4.5: Interest Expenses

54

4.6: Staff/Employee Expenses

55

4.7: Administrative Expenses

56

4.8: Income Statement of SCBNL

58

4.9: Cost Volume Ratio

60

4.10: Contribution Margin

61

4.11: Contribution Margin Ratio Analysis

62

4.12: BEP Income

64

4.13: BEP Ratio

65

4.14: Margin of Safety

66

4.15: Net Profit Margin Ratio

68

4.16: Return on Total Assets Ratio

69

4.17: Return on Equity Ratio

70

4.18: Operating Efficiency Ratio

72

4.19: Relationship between Total Cost & Net Profit

73

4.20: Relationship between Income & Net Profit

74

4.21: Trend Value of Income

75

4.22: Trend Value of Net Profit

77

4.23: Trend Value of Total Cost

78

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LIST OF FIGURES Figure No.

Page No.

4.1: Total Interest Income

48

4.2:Total Commission and Discount

50

4.3: Other Operating Income

51

4.4: Exchange Fluctuation Gain/Loss

53

4.5: Interest Expenses

54

4.6: Staff Expenses

56

4.7: Administrative Expenses

57

4.8: Operating Profit and Net Profit

59

4.9: Fixed Cost and Variable Cost

59

4.10: Cost Volume Ratio

61

4.11: Contribution Margin

62

4.12: Contribution Margin Ratio Analysis

63

4.13: BEP Income

64

4.14: BEP Ratio

65

4.15: Margin of Safety

66

4.16: Net Profit Margin Ratio

68

4.17: Return on Total Assets

70

4.18: Return on Equity

71

4.19: Operating Efficiency Ratio

72

4.20: Trend Line of Income

76

4.21: Trend Line of Net Profit

77

4.22: Trend Line of Total Cost

78

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ABBREVIATIONS %

Percentage

&

And

A. D

Anno Domini

A/C

Account

B. S.

Bikram Sambat

BEP

Break Even Point

C. V.

Coefficient of Variation

CM

Contribution Margin

F/Y

Fiscal Year

FC

Fixed Cost

GDP

Gross Domestic Product

ICA

Independent Cost Analysis

MBS

Master of Business Studies

MOS

Margin of Safety

NP

Net Profit

NPMR

Net Profit Margin ratio

P/V

Profit Volume

PPC

Profit Planning and Control

ROE

Return on Equity

ROA

Return on Total Assets

SCBNL

Standard Chartered Bank Nepal Limited

S.D

Standard Deviation

SDC

Shanker Dev Campus

VC

Variable Cost

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CHAPTER-I INTRODUCTION 1.1 Background of the Study Among the several modern day institution, banks are perhaps the most important and widely known. There are many viewpoints regarding the origin of the word Bank. Generally, it is said that the word bank is derived from the latin word ‘Bancus’ or the French word ‘Banque’ and Italian word ‘Banco’ which all mean a bench. Previously, Italian goldsmith use to perform the monetary task sitting on the bench. Whatever may be its origin it has become the part and parcel of everyday activity of the present times. In a single language, Bank is an institution, which accepts the deposits from the public and in turns advances loans to persons or corporations in need of them.

Generally, the bank refers to those organized institution which are established under the provision of current laws, rules and regulations to perform work related to the currency. Practical Nepali Dictionary (2061) defines it as the institute which accepts deposits and grants loans and the person can withdraw deposited amount at any time. Nepali Encyclopedia takes as bank to those commercial, government or non government institute which accept deposit, provides interest on it, pays when demanded provides loan, Tejarath work etc. In the banking history of Nepal, Nepal Bank Limited is the first bank of Nepal which was established in 1994 B.S. After that, Nepal Rastra Bank, RastraBanijya Bank, Agriculture Development Bank and Nepal Industrial Development Bank

were

established. Financial

institutions

are

any

organization/institution which is engaged in any type of financial activities. It is classified as banking as banking financial institution and non-banking financial institution. Some of the financial institutions which are practiced in Nepal are finance companies, Employees Provident Fund, Insurance companies and other

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financial institution such as:- commercial bank, development bank, corporative finance companies, postal saving plan, unit trust, investment companies etc.

According to Commercial Bank Act 2031 “Commercial banks are those banks, which are established under this act to perform commercial function, exchanging currency accepting the deposit and granting loan except those which are established for specific purpose like co-operative, agricultural, industrial or other.”

Planning is the first essence of a management and all other functions are performed with the framework of planning. Planning means deciding in advanced what is to be done in future. Planning starts from forecasting and predetermination of future events. Without planning, it is not possible to fulfill the organization goal or objective and can’t increase profit. The budget is the primary planning operation document committed to performance. In this sense budget is also called a profit planning. Planning is the process of developing enterprise objectives and selecting a future course of action to accomplish them. The term comprehensive profit planning and control it defined as a systematic and formalized approach for performing significant phase of the management planning and control function (Welsch, et al., 2001: 45).

The speedy development of any country in this modern era is depends upon to some extent with financial activities of the country. Financial activities play a role of catalyst in the process of economic development of the country. In Nepal financial sectors (banks, finance companies etc.) plays a vital role

in

the economic development of the country. The current state of

Nepalese economy is characterized by unutilized natural sources, miserable agriculture, deficit trade, mass poverty, illiteracy and so forth. Agriculture is the main occupation of almost village people but no scientific methods of agriculture have yet been implemented. It is one of the richest countries in

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the world in terms of natural resources. The natural resources available here have remained unutilized due to reasons.

Investments in productive sectors increase the economic activities. The unutilized financial resources should be diverted towards productive sector in order to increase the economic activities. To develop the Nepalese economy, the financial institutions should be established. The participations of the private

sectors

development.

play ever Hence,

more

various

important

role

for

the

economic

banks, insurance companies, financial

companies etc. have been established in the private sector and government sector as well to develop the economy to develop the economy of the country, their providing their active participation for the economic development.

But however

even

with the

rapid development and

expansion of financial institutions, the country has not been able to achieve the desired income yet which is due to the poor capital market condition of our country and due to the early stage of economic growth.

Every company or institution is established based on the definite goals and objectives. According to the objectives, the company performs is tasks. Mainly two types of institutions such as profit oriented and service-oriented instructions are established, but most of them are profit oriented because profit is the KBL of the business which not only keeps it alive but also assures the future and makes it sound. Profit planning is an important tool of the firm to achieve the objectives. Profit do not just happen, profits are managed (Lynch and Williamson, 1989: 125). So, to manage the profit, the management should follow various processes of profit planning because the management process and profit planning and control are interrelated to each other. Profit maximization is the basic objectives of a firm and to make it reliable service should render to its customers. Profit is a device to measure efficiency of a firm.

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• The development and application of broad and long range objectives of the enterprise. • The specification of enterprise goals. • A long range profit plan developed in broad terms. • A short range profit plan detailed by assigned responsibilities (divisions, product, project etc.). • A systematic periodic performance reports detailed by assigned responsibilities. As like in the other profit oriented organizations, a commercial bank has also to make reasonable profit for its survival. Most of the commercial bank...