COMPARATIVE STUDY ON CAPITAL STRUCTURE ANALYSIS OF
SAPTAKOSHI DEVELOPMENT BANK LIMITED AND MUKTINATH
BIKAS BANK LIMITED
A Thesis Report
Submitted By:
ANIL KUMAR SHAH
Purbanchal University School of Management
PU Regd. No.001-2-3-05810-2019
A Graduate Research Report submitted to
Purbanchal University School of Management
In partial fulfillment of the requirement for the degree of
Master of Business Administration (MBA)
Biratnagar
2022
i
RECOMMENDATION
This is to certify that the thesis submitted by Anil kumar shah entitled “Comparative study on Capital
Structure analysis of Saptakoshi Development Bank Limited and Muktinath Bikash Bank Limited” has
been prepared as a part of the student’s original research. The thesis has been prepared on the prescribed
format approved by the Faculty of Management, Purbanchal University. It is forwarded for
examinationby the concerned department of Purbanchal University School of Management.
Supervisor
Name: Mr. Rajesh Agrawal
Signature:
Date:
Campus Chief
Name: Mr. Prashant Kumar Lal
Signature:
Date:
ii
VIVA-VOCE SHEET
We have conducted the viva-voce examination of the thesis submitted by
ANIL KUMAR SHAH
Entitled
Comparative study on Capital Structure analysis of Saptakoshi
Development Bank
Limited and Muktinath Bikash Bank Limited
We have found the thesis as the student’s original work and have been prepared on the
prescribed format approved by the Faculty of Management, Purbanchal University.
We recommend the thesis to be accepted as a partial fulfillment of the requirement for Master of
Business Administration (MBA).
Viva-Voce committee
Campus Chief:
Member (Thesis Supervisor):
Member (External Expert):
iii
DECLARATION
I hereby declare that this thesis entitled “Comparative study on Capital Structure analysis of
Saptakoshi Development Bank Limited and Muktinath Bikash Bank Limited” submitted in
partial fulfillment of the MBA Degree, the Faculty of Management, Purbanchal University is my
original work carried out under the guidance of Mr. Rajesh Agrawal and has not been submitted
anywhere for the award of any other degree or commercial purpose. In keeping with the ethical
practice in reporting scientific information, due acknowledgements have been made wherever the
findings of others have been cited.
………………………………
Anil kumar Shah
Purbanchal University School of Management
PU Reg. No.: 001-2-3-05810-2019
iv
ACKNOWLEDGEMENT
This thesis entitled “Comparative study on Capital Structure analysis of Saptakoshi
Development Bank Limited and Muktinath Bikash Bank Limited” has been carried out to
meet the period requirements of the fulfillment for the degree of the Master of Business
Administration of Purbanchal University.
First of all, I am pleased to take this opportunity to express my intense gratitude to my thesis
supervisor, Mr. Rajesh Agrawal for his valuable guidance, suggestion and encouragement,
without which it was beyond imagination to bring this thesis in this form.
It is my utmost responsibility to appreciate and acknowledge other people behind the success of
this study. I am very grateful to, Mr. Prashant Kumar Lal Campus Chief, for his valuable
suggestions and guidance. Similarly, I highly appreciate the efforts, supervision, guidance and
inspiration of all the faculties of Purbanchal University School of Management not only in
conducting this research but throughout my MBA.
I must acknowledge the various authors of different studies that I have referred during this study.
Moreover, I would also like to express my thanks to all the respondents who have given valuable
time to male this study a success.
I would like to express my deep gratitude to my family for the economic support, the completion
of this thesis would have been impossible without thesis whole-hearted support and love, Finally,
I would like to thank all my colleagues for their heartily co-operation in each and every way they
could have done. At last thank you so much my friend sujan Babu Basnet for your support.
Anil Kumar Shah
Purbanchal University School of Management.
v
Table of Contents
CONTENTS
RECOMMENDATION…………………………………………………………….
ii
VIVA-VOICE SHEET……………………………………………………………...
iii
DECLARATION……………………………………………………......................
iv
AKNOWLEDGEMENT.……………………………………………………………
v
TABLE OF CONTENTS
LIST OF TABLES
LIST OF FIGURES
LIST OF ABBEREVAITIONS
CHAPTER 1………………………………………………………………………..
12
INTRODUCTION ……………………………………………………………
12
1.1
Background of study…………………………………………………….
12
1.1.1
14
Background of Development Bank in Nepal…………………….
1.2
Profile of Organisation ………………………………………………….
17
1.3
Statement of Problem …………………………………………………...
18
1.4
Objectives of the study ………………………………………………….
19
1.5
Rationale of the study ………………………………………………….
19
1.6
Limitation of the study ………………………………………………...
20
1.7
Organisation of the study ………………………………………………
20
vi
CHAPTER 2 ……………………………………………………………….
22
REVIEW OF THE LITERATURE …………………………………………
22
2.1
Conceptual Review .…..……………………………………………….
22
2.2
Review of the previous study ………………………………………….
23
2.3
Research Gap ………………………………………………………….
31
CHAPTER 3 ……………………………………………………………….
32
METHODOLOGY …………………………………………………………
32
3.1
Research Design ……..……………………………………………….
32
3.2
Sources of Data ………………………………………………………..
33
3.3
Population and Sample ………………………………………………..
33
3.4
Data collection Procedure ……………………………………………..
33
3.5
Data analysis procedure ……………………………………………….
34
3.6
Tools and Techniques …………………………………………………
34
3.6.1
Financial Tools ………………………………………………..
34
3.6.2
Statistical Tools ……………………………………………….
37
CHAPTER 4 ……………………………………………………………….
40
RESULTS …………………………………………..………………………
40
4.1
Results ……..………………………………….……………………….
40
4.1.1
Debt Ratio ……………………………………………………….
43
4.1.2
Debt /Equity Ratio ………………………………………………
46
4.1.3
Equity Multiplier ………………………………………………..
48
4.1.4
Return on Assets ………………………………………………..
50
4.1.5
Interest Coverage Ratio …………………………………………
53
vii
4.2
4.1.6
Core Capital or Tier I Capital Ratio …………………………….
54
4.1.7
Supplementary Capital or Tier II Ratio …………………………
57
4.1.8
Capital Adequacy Ratio or Capital Ratio ……………………….
59
4.1.9
Correlation Coefficient Between Equity Capital & Debt Ratio …
59
Major Findings …………………………………………………………
59
CHAPTER 5 ……………………………………………………………….
61
CONCLUSION …………………………………………………………….
61
5.1
Summary …..………………………………….………………………..
61
5.2
Conclusion ………………………………………………………………
62
5.3
Implications ………………………………………………………………
64
REFERENCES ………………………………………………………………
66
viii
List of Tables
Table 1
Debt to Total Assets ratio of selected Development banks …… 41
Table 2
Debt to equity of selected development banks
………….. 44
Table 3
Equity Multiplier of selected development banks
………….. 46
Table 4
Return on Assets of Selected development banks
………….. 49
Table 5
Interest Coverage ratio of selected Development banks …….
Table 6
Core Capital or Tier I Capital ratio of selected Development
banks
……………………………………………. 53
Table 7
Supplementary Capital or Tier II Capital ratio of Selected
Development banks
…………………………………….. 55
Table 8
Capital Adequacy Ratio or Total Capital ratio of selected
Development banks
…………………………………….. 57
Table 9
Correlation Coefficient Between Equity Capital Ratio and Debt Ratio 59
ix
51
List of Figures
Figure 1
Total Debt to total assets
……………………………… 41
Figure 2
Total Debt to total equity ratio ……………………………… 44
Figure 3
Equity Multiplier
…………………………………….. 47
Figure 4
Return on Assets
…………………………………….. 49
Figure 5
Interest Coverage Ratio …………………………………….
Figure 6
Core Capital or Tier I Capital Ratio
Figure 7
Tier II Capital Ratio
Figure 8
Capital Adequacy or Total Capital Ratio
……………………….. 54
…………………………………..
x
52
………………..
56
58
List of ABBREVIATIONS
NRB
Nepal Rastra Bank
CV
Coefficient of Variation
Min
Minimum
Max
Maximum
i.e
That is
&
And
SKDBL
Saptakoshi Development Bank Limited
MBBL
Mukhinath Bikas Bank Limited
%
Pecentage
MBA
Masters in Business Administration
LTD
Limited
Yrs
Years
TU
Tribhuvan University
PU
Purwanchal University
r
Correlation Coefficient
NBBL
Nepal Bangladesh Bank
NIB
Nepal Investment Bank
HBL
Himalayan Bank
ROA
Return On Assets
DPS
Divident Per Share
EPS
Earning Per Share
CIB
Credit Information Bureau
xi
CHAPTER I
INTRODUCTION
1.1 Background of the Study
Bank is the financial institution which collects deposits and in turns provide loan by creating
credit. A bank is an organization whose primary function are concentrated with accumulation of
ideal money from general public and advancing loan to individuals, trades industries and
business houses for expenditures.
Development bank, which is national or regional financial institution designed to provide
medium- and long-term capital for productive investment, often accompanied by technical
assistance, in poor countries.
Development bank is an institution that provides services such as accepting deposits, providing
business loans and offering basic investment products. Development bank can also refer to a
bank, or a division of a large bank, which more specifically deals with deposit and loan services
provided. The development banks are second type of bank and considered as the heart of the
economic system. Development bank generally provides a number of services to its clients, these
can be split into core banking services such as deposit and loans and other services which are
related to payment system etc.
Capital structure can be described as the arrangement of capital by using different sources of
long term funds which consists of two broad types, equity and debt. The different types of funds
that are raised by a firm include preference shares, equity shares, retained earnings, long-term
loans etc (Ghimere, 2010)
The success and failure of any organization banks mainly depends upon its capital structure. It
determines the profit making power of the bank as well as it helps to reduce its risk to minimum
level. Increase in equity capital decreases the earning power as well as risk to its shareholders.
Similarly, increase in debt capital increase the profit as well as risk to the shareholders.
Therefore, the bank should manage the optimum capital structure so that profit and risk could be
managed well. (Ghimere, 2010)
12
Capital structure is the composition of long term sources of financing. Capital structure refers to
the proportion of different source of financing i.e. equity and debt to the total capitalization. A
business organization should be able to choose such a capital structure that can maximize the
return of shareholders and value of the firm. (Bhattarai, 2015)
Capital structure plays a vital role in accelerating the economic growth of nation, which in turns
in basically determined, among others by saving and investment propensities. But the capacity of
saving in the country is quite low with relatively higher marginal propensity of consumption. As
a result developing countries are badly trapped into the vicious circle of poverty. The basic
problem for the developing countries is raising the level of saving and investment. In order to
collect the enough saving and put them into productive channels, financial institution like banks
is necessary. It will either be diverted abroad or used for unproductive consumption or
speculative activities. (Goyal,2013)
The term capital structure refers to the mix of different types of funds a company uses to finance
its activities. Capital structure varies greatly from one company to another. For example, some
companies are financed mainly by shareholders fund whereas other make much greater use of
borrowings. Thus, capital structure decision affects the value of the firm. The proper balance
between debt and equity is necessary to ensure a tradeoff between risk and return to the
shareholders. The optimum capital structure of the bank should be such that leads to the value
maximization. The optimal capital structure, i.e. the capital structure with reasonable proportion
of debt and equity minimizes the opportunity cost of capital and maximizes the shareholder’s
wealth. (Shrestha,2014)
Every business firm or Bank requires the initial funds for its sound operation. Capital is the
blood of the business. A business firm or enterprises cannot run their business without capital.
Enterprises whether they are government owned or privately owned have to make pertinent
capital structure decision in identifying exactly how much capital is needed to run their operation
smoothly. The fund required are generated usually by two means: equity and debt, equity
provides the ownership of the firm to the shareholders. On the other hand, debt is a fund
borrowed with fixed charges to be paid periodically to the debtor, the term capital structure refers
to the proportion of debt and equity capital or the composition of long term sources of finance,
13
such as preference capital debentures, long term debt and equity capital including services and
surpluses (i.e. retained earnings and excluding short term debts). The term capital structure
refers to the mix of different types of funds a company uses to finance its activities. Capital
structure varies greatly from one company to another. For example, some companies are
financed mainly by shareholders finds whereas others make much greater use of borrowings.
Firstly, we must decide what we mean by a good capital structure. This would be a capital
structure, which results in a low overall cost of capital for the company, that is, a low overall rate
of return that needs to be paid on funds provided. If the cost of capital is low, then the discounted
value of future cash flows generated by the company is high resulting in a high overall company
value. The objective is therefore to find the capital structure that gives the lowest overall cost of
capital and consequently, the highest company value. The capital structure decision affects the
total value of the firm. The proper balance between debt and equity is necessary to ensure a
tradeoff between risk and return to the shareholders. The capital structure of the bank should be
such that leads to the value maximization. The optimal capital structure, i.e. the capital structure
with reasonable proportion of debt and equity minimizes the opportunity cost of capital and
maximizes the shareholders' wealth. (Pandey, 2015)
1.1.1
Background of Development Banks in Nepal
The term “development bank” is commonly applied to investment banks for the financing of
developmental projects which deserve to be promoted on general economic grounds. Their
salient task is usually to provide medium- and long-term funds. Development banks are
established for the promotion & development of a special sector of the economy. The main
objective of development banks is to provide medium & long-term loans for the establishment,
development & modernization of special sectors like agriculture, industrial as well as other basic
infrastructure related projects. Moreover, such banks are also involved in the transactions of
shares & debentures. After the introduction of development bank act 1995, there was a massive
trend of establishing development banks in Nepal.
Many development banks have been set up with active participation of private sector after the
Development Bank Act 1995 came into effect. The main objectives of this act are enhancing
agriculture, industry and commerce by extending credit facility to the public. Prior to this Act,
14
there were only two development banks, namely, Agricultural Development Bank (which has
already been converted into a commercial bank in 2006) and Nepal Industrial Development
Corporation, both are owned by the government. At present, development banks are operating
under Bank and Financial Institutions Act 2006 and acquired the status of "B" class financial
institutions. The NRB issues the necessary directives for the effective regulation of these banks.
According to the Bank and Financial Institutions Act, 2006, minimum paid up capital required
for "B" class national level development bank is Rs.640 million, development bank covering 410 districts, Rs.300 million (excluding Kathmandu valley and carrying out leasing business only)
and Rs.200 million. Similarly, development bank covering 1-3 districts Rs.300 million
(excluding Kathmandu valley and carrying out leasing business only) and Rs.100 million (NRB,
2007).
Financial institutions of 'B', 'C', and 'D' class are allowed to carry out inward remittances,
companies of B and C class can purchase and sell Indian Currency, whereas B class national
level financial institutions can accept foreign currency deposits, buy and sell foreign currency,
provide exchange facilities against passport & open foreign currency accounts. 'B' and 'C' class
financial institutions can act as co-agent of licensed commercial banks to issue debit and credit
card in Nepalese and Indian currencies while 'B' class financial institutions (other than national
level) are allowed to buy foreign currency and sell it to NRB and/or/ to commercial banks.
Development banks and financial institutions can operate automated Teller Machine (ATM)
under specified directives. Policy decision is made for 'D' Class financial institutions carrying
retail banking transactions, remaining within the given conditions, to mobilize public deposit.
Likewise, those national level "C" class finance companies meeting the set criteria can avail safe
deposit vault and locker facilities (Economic Survey, 2009/2010).
A healthy financial system is the one that effectively fosters resource mobilization for capital
accumulation and determines efficient allocation of resources. It is important to remember that
success of any financial system, in its resource mobilization and allocation functions, depends on
its ability to offer the public a variety of assets (money as a medium of exchange, earning assets,
pension funds, etc.) corresponding to the various needs and preferences of economic agents. A
15
clear understanding and recognition of this fact is very important to formulate appropriate
policies to enable the financial system to function properly and efficiently. The test of the
strength of a country's financial sector is its capability to make available the appropriate types of
institutions and financial instruments that can support economic growth. The NRB’s challenge is
to build up a financial system that is supportive of growth, and dynamic enough to change and
fulfill the evolving demands of a real economy (Panta, 2009). Nepalese financial system has
witnessed a rapid growth both in terms of quantitative and qualitative aspects. Growing share of
total credit, total assets and other measures of financial development indicators can prove this
fact.
Financial sector in Nepal has shown better performance relative to other sectors in the economy.
The economic reforms initiated by the Government in 1990s have changed the landscape of
several sectors of the Nepalese economy. As a result, several banks and financial institutions
have been providing financial services in different region of the country. But whatever the
commercial banks are established in the nation, they are highly concentrated in Kathmandu
valley & other major cities of the Nepal. The central development region has located more than
50% branches of commercial bank where as far western development region has only 5.49%.
Moreover, one third of the branches of the commercial banks were located in Kathmandu valley
where as 26.09% in the hilly areas & 40.43% in the terai areas till the mid April, 2010
(Dhungana, 2010).
In terms of zone wise distribution of branches of commercial bank, Bagmati zone is in the
highest rank that occupies 35.77% where as Karnali zone has only1.06%. There is no regional
balance of development in terms of distribution of branches of commercial banks. All the public
banks have their banking network in each of the fourteen zones but private banks do not have
such network & mainly concentrated in the city areas because their main objective is to
maximize profit. Due to a rapid increase in the number of banking and non-banking financial
institutions with different modes of operations, the task of ensuring adequate monitoring and
control by the NRB has been made more challenging (Dhungana, 2010)
16
1.2 Profile of the Organization

Saptakoshi Development Bank Limited (SKDBL)
Saptakoshi Development Bank Limited is established under Bank and Financial Institution Act
2063, and licensed by Nepal Rastra Bank as a Regional “Kha” level financial institution
(Developoment Bank) with Operating area of Morang. Illam, Panchthar, Jhapa, Sunsari,
Dhankuta and Terhathum Districts.
The Bank has its Head Office at Dhankuta – 7, Dhankuta and its Corporate office is located at
Mainroad Biratnagar-7, Morang. The promoters of Saptakoshi Development Bank include
successful businessman, traders, social workers and professionals having long experience in
banking sectors. Saptakoshi Development Bank is equipped with modern technologies and it is
providing fast and quality service to the valued customers. Due to the immense support, belief
and help, Saptakoshi Development Bank is rapidly extending its services.
Our main objective is to provide reliable, trustworthy, efficient and quality banking services to
the general public, business community and other beneficiaries with healthy competition in the
banking sectors for the development of the nation under the free economy policy of the Nepal
government. The Bank is committed for good corporate governance practices and banking
activities with prudent banking culture. It has been offering various products and services for its
customer with competitive rate in market. It has been able to provide diversified service (Modern
Banking, Limited Banking and Microfinance) backed by the latest technology.
17
Muktinath Bikas Bank Limited (MBBL)

Muktinath Bikas Bank Limited (MBBL) is another renowned name in Nepalese banking sector.
Established on Poush 19, 2063 B.S., Muktinath Bikas Bank Limited has obtained permission
from Nepal Rastra Bank to operate as a “B” class national level financial institution. At present
the Bank has been upgraded as National Level Development Bank from regional level by way
of acquisition to Dhading based development Bank Civic Development Bank Limited.
The central office of the Bank is situated at Kamaladi -28, Kathamandu of Kathamandu District.
It has a special wing for Micro-Credit finance which is a model for micro banking activities
throughout the development banks in Nepal.
The Bank is committed for good corporate governance practices and banking activities with
prudent banking culture. It has been offering various products and services for its customer with
competitive rate in market. It has been able to provide diversified service (Modern Banking,
Limited Banking and Microfinance) backed by the latest technology.
At present MBBL is one of the largest National Level Development Bank with Branch Network
of 113 modern banking branches, 1 extension counters and 93 microfinance desks with
depositor’s base of more than 4 lakhs customers.
1.3Statement of the Problem
Bank plays a significant role in the economic development of the country by extending credit to
the people. Although banking industry in Nepal is making remarkable progress and growth. It's
not without the problems. Optimal capital structure plays vital role in every organization. There
has been question about effects of the capital structure on the growth of the firm and the extent to
which the capital structure policy is followed by the development banks. This thesis addressed
the following research questions;

What are the position of debt and equity capital of SKDBL and MBBL?

What is the relationship between debt capital and equity capital of SKDBL and MBBL?

What is the position of core capital and supplementary capital of SKDBL and MBBL?
18
1.4 Objectives of the Study
This study has relation between debt to equity and objective of analyzing the capital structure
performance of the development bank. The most important objective of the analysis of the
interception of financial statement are attempted to determine the significance and meaning of
the financial data to know the strength and weakness of the bank. The main objectives of the
study are as follows;

To analyze the position of debt capital and equity capital.

To examine the relationship of the debt capital and equity capital.

To analyze the core capital and supplementary capital of development bank.
1.5 Rationale of the Study
This study is concern with the capital structure management of Saptakoshi Development Bank
Limited (SKDBL) and Muktinath Bikas Bank Limited (MBBL). It is expected that this study
will significantly contribute towards the field of capital structure. The bank capital structure
should be managed in such a way that the fund could be provided efficiently and effectively. The
goal of the study is to examine Capital structure analysis of development banks which are
reflected in the annual financial report. For this the following points are justify the study.

This study helps to specify the entire goal of these development banks especially in the
sector of capital structure.

This study will help to show the financial position of the bank to the investors as well as
concerned management.

This study will help to indicate the strength and weaknesses of these banks especially in
the sector of capital structure.

Optimum capital structure is the key of success of any organization. Due to lack of sound
knowledge of capital structure, many organization failed in our country. So this study
will help to the concerned management to improve their efficiency.

This study will also helpful to depositors, lenders, borrowers, policy maker, shareholders
and customers of the banks under research.
19
1.6Limitation of the Study
Although efforts have been to research the objective of the study. The following limitations
cannot be ignored and the limitations faced while doing these studies are as follows;

The study is concern the analysis of only 6 years data (i.e, 2072/73 to 2077/78).

The study is based on secondary source of data.

Out of 17 development banks only 2 banks are taken into account to do the comparative
study

This study covers only the financial aspects.

Out of the numerous affecting factors only those factors related with capital structure are
considered.
1.7Organization of the Study
The study has been divided into five chapters. The titles of the chapter are as follows:
Chapter one:- Introduction
The first introduction chapter deals with subject matter of the study. This chapter consists of
background of the study, Profile of an organization, Statement of the Problem, objectives of the
study, significant of the study, limitation of the study and organization of the study.
Chapter two: - Review of the literature
It included review of available literature related to area of this study. It is directed towards the
review of conceptual framework and review of major related studies
Chapter three:- Methodology
This chapter consists of research methodology, express the way and use technique while
studying, applied in research process; this includes research design, population and sample,
sources of data, tools and technique, method of data analysis and interpretation.
20
Chapter four: Results
This chapter has covered the presentation and analysis of data with presenting charts, figures and
other statistical tools, mathematical tools and financial tools.
Chapter five:- Conclusion
This chapter is concerned with output of thesis as summary ,conclusion and Implications and
bibliography and appendices are attached at the end.
21
CHAPTER II
REVIEW OF LITERATURE
In this chapter, the review of various articles, research studies, journals and books has been made
to have a clear understanding about the capital structure analysis of development banks in Nepal.
This chapter will help to recall the theories and previous studies made by various researches in
different part of the world. Literature review is basically a stock taking work of available
literature. The purpose of literature review is thus to find out what principles are established and
what research studies have been conducted in the field and what remains to be done.
These topics about the review of literature. It is believed that the review of literature is helpful to
show the needs of the research work and to justify the work. It gives more information and
description of the related theoretical aspects. It tries to clear the conceptual thought and bank
related terms. There might be different ways to present the review but it is presented in following
ways;
1.6.1 Conceptual Review
Conceptual review work provides the fundamental theoretical framework and function to the
study. Various writers have defined the theoretical aspect of Capital Structure in different way
which is taken into consideration.
Capital structure is the mix or proportion of a firm’s permanent long term financing represented
by debt, preferred stock and common stock equity.
The financial manager is concerned with determining the best financial mix or capital structure
where the optimal financing mix would exist in which market price per share could be
maximized. (Pandey, 2012)
Capital structure of the firm is the permanent financing represented by long term debt, preferred
stock and shareholder’s equity. Thus, firm’s capital structure is only part of its financial structure.
(Weston and Brigham, 1978)
Capital structure analysis is the basis for analyzing the usefulness of accumulation from different
sources of capital composition of capital is another factor, which affects the profitability. Loan
22
capital dominant enterprises have less chance for prosperity despite of their huge profits. (Thapa,
2014)
Capital structure is composition of debt and equity that comprises a firm’s financially of its
assets. Both debt and equity are used in large organization. “the choice of the amount of debt and
equity is made after a comparison of certain characteristics of each kinds of security of internal
factor related to the firm’s operations and of external factor that can affect the firm”. (Joshi, 2011)
Sound capital structure is required to operate business smoothly and achieve the business goal.
Capital structure is concerned with analyzing the capital composition of the company. (Weston
and Brigham, 1978)
1.6.2 Review of Previous Study
Bhattarai (2010) conducted a study on the topic “Focus on Capital Structure of selected and
listed public companies”. The study used data from 12 companies which covered different
sectors such as manufacturing, finance, utility service and other allied areas. It was found that
most of these companies have debt capital relatively very higher than areas. It was found that
most of these companies have debt capital relatively higher than equity capital. Consequently,
most of them are operating at losses to the extent that payment of interest on loan has been
serious issue. Most of losses are after charging interest on loan. It has suggested that the
government has to consider the public enterprises in evaluation the relationship between use of
debt and its impact on overall earning of public enterprises. So, government should be sure in
knowing how using debt capital will maximize return. It should develop a suitable capital
structure guideline to make public enterprise aware of its responsibility to repay the debt
schedules. Government has to analyze cost and risk return trade of cost. Finally, he conclude that
policy maker have to be careful in developing the suitable capital structure guidelines in making
public enterprises as well as listed companies to be aware of financial accountability.
Dhakal, (2012) had done a research entitled “An Evaluation of Capital Structure Analysis of
Nepal Bank Limited” point out that the financial strength and weakness of Nepal Bank Limited
based on its capital structure ratios.
23

To analyze the capital structure analysis of Nepal Bank Limited through financial ratios
taking relevant variables.

To identify major weakness and strengths of Nepal Bank Limited.

To find out the past and present challenges undergone by Nepal Bank Limited
Thapa (2013) stated that capital structure is the most significant discipline of company's
operations. The capital structure decision is a vital decision with great implication for the firm's
sustainability. The ability of the organizations to carry out their shareholders' need is closely
related to the capital structure. The determination of a company's capital structure is a difficult
task to achieve.
Baral (2011) found negative relation between profitability and debt ratio and contends that there
is no target debt-equity ratio. In financing, first, management prefers the internal equity financing
and then debt financing and finally external equity financing. Thus, this theory explained the
financing behavior of management.
Neupane (2013) found positive relationship between debt to equity ratio and efficiency as well as
between capital adequacy and efficiency. Further, profitable banks with lower leverage and
higher capital adequacy ratio are found to be more efficient and bank loans seem to be more
highly valued than alternative bank outputs i.e. investments and securities.
The Modigliani and Miller’s Study: Modigliani I and Miller M.H. the cost of capital, corporation
finance and the theory of investment. American economic review, June 1958 page 261-297.
In their first study, MM used the previous works of Allen and Smith in support of their
independence hypothesis. Allen’s study consisted of an anlaysis of the relation between security
yields and financial structure for 43 large electric utilities, which is based on average figure for
the years 1947 and 1948, while smith designed his study of 42 electric utilities.
In the first paper of their work MM tested their proposition I, the cost of capital is irrelevant to
the firm’s capital structure by correlation after tax cost of capital with leverage B/V they found
that the correlation coefficient is statistically insignificant and positive in sign.
24
In the second part of their study, they tested their proposition II the expected yield on common
share is linear function of debt to equity ratio. The second part of their study is consistent with
their views i.e. if the cost of borrowed funds increases, the cost of equity will decline to offset
this increase.
In other respect, the study has posed serious questions on the empirical validity of the pecking
order theory. However, given the simplicity of the empirical model it is impossible to reject the
pecking order theory prediction completely.
Ghimire, (2017). “Capital Structure Analysis of Rastriya Banijya Bank Limited" in his work had
tried to deal with the leverage analysis of Bank in Nepal.
Major objectives on the basis of which study is done are as follows:

To know about the leverage position of the bank.

To measure the rate of return earned by investors.

To know the various earning sector of Banks.

Evaluate and compare the soundness of leverage and operation efficiency along several
joint venture banks.
Pokharel (2014) observed that when there was high concentration of corporate ownership
structure and dominance of a family business groups in corporate affairs then there were some
positive symptoms in bank performance but there existed constraints in exercising good
corporate governance. To ensure a good corporate governance in Nepal requires a joint effort of
the investors(promoters) who need to more transparent, responsible and socially accountable; the
shareholders who must actively participate in their corporate affairs to help prevent any
fraudulent and insider practices and ; the regulatory authority that should effectively enforces
rules and regulations in order to protect the rights of all stakeholders and create favorable
environment to enhance good corporate governance culture.
The study on bank, ownership structure and firm value in context of Japan was conducted by
Stephon (2010). The main purpose of this study is to find the relation between the ownership
structure and firm value in Japanese banks. The study revealed that at low levels of ownership by
25
main banks, firm’s value fall as bank equity ownership rises. At higher levels of bank ownership,
this relationship is mitigated and, in some specifications, even reversed. It is argued that this
relation reflects both costs and benefits of equity holdings by banks. In Japan, unlike the US,
firm value rises monotonically with increased managerial ownership. Equity ownership by
corporate block holders is also positively related to firm value in Japan.
Gitman (2010) concluded that higher the debt ratio the more leveraged the company and the
greater its financial risk since the payment of interest and repayment of debts are not “optional”
in the same way as dividends. In other words a company with high leverage is more vulnerable
to downturns in the business cycle because the company must continue to service its debt
regardless of how bad sales are.
Karki (2004) analyze comparative study on financial performance with the objective to compare
and analyze the liquidity, profitability, operating efficiency, capital structure, leverage and
overall performance of Nabil and Standard Chartered Bank. The major finding of the study was
that liquidity ratio was relatively fluctuating over the period, return on equity was found
satisfactory and there is positive relationship between deposit and loan advances. The
profitability of Standard Chartered Bank was good in comparison to Nabil Bank.
Adhikari (2012) conducted a study on a comparison of financial performance of commercial
banks in the context of Nepal. The objective of this study was to compare the financial
performance of different ownership structured commercial banks in Nepal based on their
financial characteristics and identify the determinants of performance exposed by the financial
ratios, which were based on CAMEL model. Eighteen commercial banks for the period 2005 to
2010 were financially analyzed. In addition, econometric model by formulating two regression
models were used to estimate the impact of capital adequacy ratio, non performing loan ratio,
interest expenses to total loan, net interest margin ratio and credit to deposit ration the financial
profitability namely return on assets and return on equity of these banks. The results show that
public sector banks are significantly less efficient than their counterpart are; however domestic
private banks are equally efficient to foreign ownership banks. Furthermore, the estimation result
26
reveals that return on assets were significantly influenced by capital adequacy ratio, interest
expenses to total loan and net interest margin, while capital adequacy ratio had considerable
effect on return on equity.
Dang (2005) examined the performance of two influential but contradicting theories of capital
structure, known as the trade-off and pecking order theory. In general, our finding suggests that
the trade-off theory holds well under both a partial adjustment and an error correction framework.
In specifications that nest both theories, the former theory outperforms the latter theory. The
introduction of the cash flow deficit variable has added little amount of additional explanatory
power to the trade-off framework. Furthermore, the estimated coefficient on that variable is not
fund to be statistically equal to unity as it would be if the strict interpretation of the pecking order
theory were to hold. The results consistently show that the adjustment process prevails with the
speed of adjustment coefficient significant and relatively high. There has been also some
compelling evidence in favor of the relationships between gearing and the conventional
determining factors except profitability, as predicted by trade-off framework. Non-debt tax
shields and growth opportunities are reported to be inversely related to debt to the ratio, while
collateral value of assets and size are found to have positive effects upon gearing. In other
respect, the study has posed serious questions on the empirical validity of the pecking order
theory. However, given the simplicity of the empirical model it is impossible to reject the
pecking order theory prediction completely.
Ms. Anjana Shah (2012) made the study with a purpose to access the debt serving capacity of the
mentioned manufacturing companies examining the relation between return on equity and total
debt. Return on equity and debt ratio, earning after tax and total debt and interest and earnings
before interest and tax.
Both financial tools such as ratio analysis as well as statistical tools such as correlation
coefficient and regression analysis have been used as the methodology. The study revealed that
Nepal Lever Limited is fully based and has not been using long term debt. The Bottlers Nepal
limited is free of long term debt because of improved cash flows and effective management. The
Sriram Spinning Mills has 66.33% of assets financed with debt and hence there is less flexibility
to the owners. The degree of Finance leverage analysis of Jyoti Spinning Mills shows the failure
27
of the company to gain expected profits. The Arun Vanaspati Udhyog has a fluctuationg debt
equity ratio. Its long term debt is decreasing and only creditors make a small share of finance.
The study has used financial tools such as ratio analysis, EBIT-EPS analysis, overall
capitalization rate, equity capitalization rate, total value calculation etc and statistical tools such
as Karl Pearson’s correlation and probable error.
The study is concluded that all the joint venture banks are using high percentage of total debt in
raising the assets and all the banks are able to pay the interest. The study suggested that the bank
must control total deposit and investment. That bank needs to reduce its expenses and control
fluctuations in the earning per share to improve its market price per share.
“A study on capital structure and its impact on value of affirm.” an article by Sudhir Poudel
(2011) concentrated to examine the interrelationship between the objective of achieving an
optimal capital structure and to provide conceptual framework for the determination of the
optimal structure.
For this, a hypothetical firm is constructed and different assumptions are laid down to analyze
the effect of capital structure . Various statistical and financial tools like ratio analysis are used to
extract reasonable figure for the hypothetical firm. It is observed that the minimum weighted
average cost of capital, maximum value of the firm and price per share are attended at debt ratio
of 30%. Further more, if there is flexibility to select capital structure in any proportion, optimal
capital structure range from 30% to 40%. An optima capital structure would fulfill the interest on
equity shareholder and financing requirement of a company as well as other concerned groups.
Paul Marsh (Marsh P. “The Choice between Debt and Equity”. The journal of finance. Vol 271
March 1982)
In the article, “the choice between debt and equity” following issued are expressed;

Whether companies are having the targeted debt ratio

Whether they have similar targets from the composition of their debt.
28

Whether debt ratio or the choice of the finance instrument are influenced by other
factors.

How accurately can we predict whether the company will issue equity or debt?

While planning their issues company should consider future as well as current debt
ratio.
Sharma (2004). "A comparative case study between Nepal Bangladesh Bank and Himalayan
Bank Ltd." An Unpublished Masters Degree Thesis, Submitted to T.U.
The main objectives were as follows:

To determine the comparative position of capital structure of these two banks and
provides suggestive framework issue relating to capital structure management.

To examine the cost of capital especially cost of debt.

To find out the investment of the raised capital.
The major findings were as follows:

Debt capital of the banks and interest burden as well is too high.

High operating cost and low return on equity.

More concentration and investment of NBBL only in the area of loan and advance.

Less utilization of value of the firm of NBBL.
To solve these problems, following suggestions are made:

The bank's capital structure should be restructured by increasing equity capital and
decreasing debt capital.

The debt capital should be issued in low interest rate to reduce the interest burden of the
banks.

Investment should also be made in the sector of commission base so that investment risk
could be minimized.

Operating expenses should decrease to increase the profit.
29
Nepal (2015) believes the asset liquidity net effect on company total value will be resulted from
a trade-off between the reduction and increase in debt and equity value. If the operating
flexibility value which is provided by asset liquidity in comparison with the reduction in debt
level or the value is lower, it will be optimum for the company to issue unsecured debt. The
model shows the bond contract, pledging assets as security deposit can decrease company total
value by bringing about over investent in unavailing asset. This model also demonstrates that the
policy of maximizing value includes mortgaging part of the company’s assets and that the
optimum amount of the mortgage will depend on attributes of company and its industry.
Rijal (2015) study the capital structure of Necon Air Limited, examine the financial position,
highlight their growth and policies and review various previous studies relation to the study. The
study used primary as well as secondary data for the analysis. The methodology used includes
financial tools such as Ratio Analysis and statistical tools such as correlation coefficient and
probable error. The study has found that Necon Air Limited has debt equity ratio higher than
required. This higher debt capital is a serious implication form the firm's point of view. In this
condition, the capital structure will lead to inflexibility in the operation of the firm as creditors
would exercise pressure and interfere with management. Necon Air has raised debt from
different commercial banks and has to pay heavy portion of profit as interest, so the payment of
the interest will be hazardous when profit is declining. So it is suggested that Necon Air Ltd
should decrease its debt capital as far as possible. It has added that the ration of 2:1 is the best
ratio for optimal capital structure.
A study conducted by Thapa (2017) entitled "A Comparative Study of Financial Performance
Analysis of HBL and NIB" in 2010, with the general objective of examining and evaluating the
financial performance of HBL and NIB concludes the findings such as,

The liquidity position of NIB is better than that of HBL,

The analysis of leverage ratio shows that HBL has higher ability in utilizing debts than
NIB in terms of total debt to total equity, total assets and total capital ratio,

The profitability position of NIB is better than that of HBL in terms of ROA,

The EPS and DPS of HBL are better than NIB,
30
On the basis of analysis and evaluation of various financial and statistical tools, he recommended
that both the banks should maintain standard current ratio. Moreover, he also suggested that both
the banks should improve their capacity by improving effective organization structure and
controlling capital structure and so on.
1.6.3 Research gap
There are various studies accepted on capital structure management of various state owned
development banks of Nepal. Most of the study indicates that a sound principle of capital
structure and its management haven’t been followed by the enterprises in Nepal. The basic
objective in all of the studies shows analysis of components parts of capital structure ratios, its
interrelationship, debt serving capacity, relation between return on equity-debt, earning before
tax and interest. However, their study reveals that they have not been using long term debt
effectively. The net worth of the bank was used in unproductive assets, shows low debt equity
ratio. Even then, different studies have been carried out regarding the subject matter of gap
structure previously by different researchers. But, the research gap among the previous studies
and this current study lies firstly in fiscal years under which the current study has undertaken.
Secondly, the sample banks are new from the previous studies. The current study however is a
comparative study of capital structure of two development banks. The researcher may feel
comfort if the gap created by the previous studies can be filled up. Besides the analysis of capital
structure ratios this study has made an attempt to analyze the effect of capital structure on the
value of the development banks. Further, this study will help research student to carry further
studies as well as, it will helpful to the interested groups in the selected development banks to
analyze their position at present and search for the prospective investors.
31
CHAPTER III
METHODOLOGY
Research methodology sets out overall plan associated with the study. It provides a basic
framework on which the study is based upon. This research methodology chapter includes
research design, population and sample, nature and sources of data, data collection procedures,
data analysis tools. Before analysis and interpretation of the data, it is necessary that research
methodology be described first. In absence of research methodology, it is likely that conclusions
drawn may be misunderstood. This chapter therefore explains the methodology employed in this
study. This chapter is designed to throw light on the methodology used to undertake this study,
which aims at analyzing the capital structure analysis of Saptakoshi Development Bank Limited
and Muktinath Bikas Bank Limited and also drawing some patient conclusion from this. For this
purpose, the following research methodology has been adopted which includes research design,
population and sample, nature and sources of data, data collection procedures, data analysis tools
are used.
3.1 Research Design
A research design is the arrangement of condition and analysis of data that aims to combine
relevance to the research purpose. Research design is the plan, structure and strategy of
investigations conceived so as to obtain answers to research question to control variances. The
study is based on descriptive and analytical research design.
Descriptive research design is a type of research design that aims to obtain information to
systematically describe a phenomenon, situation, or population. Analytical research is a specific
type of research that involves critical thinking skills and the evaluation of facts and information
relative to the research being conducted. A variety of people including students, doctors and
psychologists use analytical research during studies to find the most relevant information. This
study uses descriptive, in order to examine the capital structure analysis of development bank in
Nepal from the fiscal year 2072/73 to 2076/77. Descriptive research design helps to describe
characteristic of variables and involves in the evaluation of facts and information. The
32
descriptive study defines a subject by constructing a profile of people, group or events through
tabulation and the collection of data on the frequencies on studied variables.
3.2 Sources of Data
Mainly, the study is conducted on the basis of the secondary data. The data required for the
analysis are directly obtained from the balance sheet and the profit and loss account of the
concerned bank’s annual reports. Supplementary data and information are collected from the
number of institution and regulating authorities like NRB, economic survey and national
planning commission etc. All the secondary data are compiled, processed and tabulated in the
time series as per the need and objectives.
3.3 Population and Sample
The limitation of time and unavailability of the relevant data has forced resercher to make
research on the Saptakoshi Development Bank Limited and Muktinath Bikas Bank Limited even
though there are 17 development banks established in Nepal which is selected from the
population.
3.4 Data Collection Procedure
Different tools and techniques were adopted while collecting and processing data for the study.
The data needed for conducting this study includes all the secondary sources. The degree of
reliability and validity of the data used for the study depends on the degree of accuracy of the
data maintained by the sample banks in their respective reports or accounts. In order to make the
study more reliable and authentic the different tools and techniques are used throughout the study.
Various related publications of NRB were collected from the concerned websites, published and
unpublished sources. Similarly reports of Credit Information Bureau(CIB) have been collected.
3.5 Data analysis procedure
33
The data collected from different sources are recorded systematically as necessary. Only useful
and related data are grouped as per need of the research work. Data are presented in appropriate
forms of tables, graphs and figures for analysis of appropriate mathematical, financial as well as
statistical tools are used.
3.6 Tools and Techiniques
For the effective analysis of the available data to gain the objective of the study various tools
including financial tools would contribute to study on the topic. The tools which contribute in
this research are categorized on the basis of their nature.. The following ratio are analyzed:
A) Financial Tools
a) Debt to total asset ratio
This ratio measures the extent to which borrowed funds have been used to finance the company's
assets. It is related to calculate total debt to the total assets of the firm. The total debt included
long term debt and current liabilities. The total assets consist of permanent assets and other assets.
It is calculated as:
The lower total debt to total assets ratio indicates that the creditors claim in the total assets of the
company is lower than the owner's claim and vice versa.
b) Debt to equity ratio
The debt equity ratio measures the long term components of capital structure. Long term debt
and shareholder's equity are used in financing assets of the companies. So, it reflects the relative
claims of creditors and shareholders against the assets of the firm. Debt to equity ratio indicated
the relative proportions of debt and equity. The relationship between outsiders claim and owners'
34
capital can be shown by debt equity ratio. It is calculated as:
This ratio is also known as debt to net worth ratio. A high debt equity ratio indicates that the
claims of the creditors are greater than that of the shareholders or owners of the company.
c) Equity Multiplier
The equity multiplier is a financial leverage ratio that measures the amount of a firm’s assets that
are financed by its shareholders by comparing total assets with total shareholder’s equity. In
other words, the equity multiplier shows the percentage of assets that are financed or owned by
the shareholders.
d) Interest coverage ratio
This ratio indicates the ability of the company to meet its annual interest costs or it measures the
debt servicing capacity of the firm. It is determined by using following formula:
Hence, higher interest coverage ratio indicates the company's strong capacity to meet interest
obligations. A firm always prefers interest coverage ratio because low interest coverage ratio is a
danger signal. Lower interest coverage ratio means the firm is using excessive debt and does not
have an ability to offer assured payment of interest to the creditors.
35
e) Return on Assets
Return on total assets ratio measures the profitability of bank that explains a firm to earn
satisfactory return on all financial resources invested in the bank’s assets. This ratio explains net
income for each units of assets. It also shows the profit earned per birr of assets and indicates
how effectively the bank’s assets are managed to generate revenue, although it might be biased
due to off-balance sheet activities.
Higher ratio indicates efficiency in utilizing its overall resources and vice-versa. From the point
of view of judging operational efficiency, rate of return on total assets is more useful measure.
The return on total assets is calculated using the following formula:
f)
Core Capital Ratio
The Core Capital ratio is the ratio of financial institution core equity capital to its total risk
weighted assets. In Nepal, development bank should maintain capital fund at least 11% of the
risk weighted assets in which 6% of the risk weighted assets must be Tier-I capital. Risk
weighted assets are the total of all asset held by the bank weighted by credit risk according to a
formula determined by the regulator.
Core Capital or Tier-I Capital ratio =
g) Supplementary Capital Ratio
Supplementary capital is also known as Tier-II capital of banks. Tier-II capital includes
undisclosed funds that do not appear on a bank’s financial statements, revaluation reserves,
hybrid instruments, subordinated term debt also known as junior debt securities and general loanloss, or uncollected reserves. Tier-II capital is supplementary capital because it is less reliable
than Tier-I capital. Supplementary capital ratio is the formula utilized to describe the capital
being held versus what’s known as total risk weighted assets. Risk weighted assets are the assets
held by the financial institutions that are weighted by its credit risk.
36
Supplementary Capital or Tier- II Capital ratio =
h) Capital adequacy ratio
Capital adequacy is a reflection of the inner strength of a bank. The main activity of the bank is
to collect funds and channel them back in the form of loans. If a bank enough capital or meet the
requirements, it can operate to create profit. Higher the CAR better is the performance of a bank.
The capital adequacy ratio is calculated by using the following formula.
Capital adequacy or Total Capital ratio =
B) Statistical Tools
To meet the objectives of the study statistical tools are equally important. It helps us to analyze
the relationship between two or more variables. In this research, the following statistical tools are
used.

Mean
The most popular and widely used measure of representing the entire data by one value is called
the mean. The value is obtained by adding together all the items and dividing this total by the no
of items.
Where,
∑X = Sum of all values of the variables.
37

Standard deviation
Standard deviation is a statistical measure of the variability of a distribution of return around its
mean. It is the square root of the variance and measure the unsystematic risk. A Small standard
deviation means a high degree of uniformity of the observation. Standard deviation is an absolute
measure of dispersion. The standard deviation is the square root of mean squared deviation from
the arithmetic mean.
S.D=

Coefficient of Variation
The relatives measures of dispersion based on standard deviation is called coefficient of standard
deviation. It measures the risk per unit of return. It provides more meaningful basis for
comparison when the expected returns on two alternatives are same the higher the coefficient of
variation, the higher the risk and vice-versa. It is calculated as follows;
Standard Deviation
Mean
*100
Coefficient of Variation (C.V.) =

Correlation Coefficient
Correlation coefficient measures the relationship between two and more than two variables,
when they are so related that the change in the value of one variable is accompanied by the
change in the value of the other. Or it indicates the direction of relationship among variables.
A method of measuring correlation is called Pearson's coefficient of correlation. It is denoted by
'r'. The correlation coefficient can be calculated by using following formula:
38
Where,
N= number of observations
X and Y are variables.
The decision criteria:
When,
r = 0, there is no relationship between the variables.
r = 1, the variables have perfectly positive correlated.
r = -1, the variables have perfectly negative correlated.
39
CHAPTER IV
RESULTS
This is the most important chapter of the study. In this chapter data collected is analyzed and
presented mathematically by using financial and statistical tools. It has already been said that the
main objective of the study is to evaluate the capital structure analysis of SKDBL and MBBL.
Therefore, to analyze the financial performance in respect to capital structure, various
presentation and analysis presented in this chapter are according to analytical research design
mentioned in third chapter using various financial and statistical tools.
Again, it has been already stated that capital structure refers the combination of preference share,
equity share capital including reserve and surplus as well as long-term debt. Thus this chapter
emphasizes the position of capital structure of SKDBL and MBBL.
4.1 Results
4.1.1 Debt Ratio
Debt ratio expresses the relationship between creditors fund and total assets. It is also the
leverage ratio which is also called the debt to total assets ratio. High ratio shows the bank’s
success in exploiting debt to be more profitable as well as it also includes its riskier capital
structure and vice-versa. Debt includes all loans and total assets include all types of assets of the
firm. It measures the percentage of total funds provided by creditors.
This ratio can be calculated by simply dividing total debt by the total assets of the firm.
40
Table 1
Debt to Total Assets ratio or Debt ratio of selected Development banks
Fiscal year
SKDBL(%)
MBBL
2072/73
86.77
89.61
2073/74
82.32
87.96
2074/75
73.54
89.57
2075/76
75.33
91.44
2076/77
79.90
91.23
2077/78
82.51
93.24
Mean
80.06
90.50
Standard deviation
4.92
1.84
C.V.
0.061
0.020
Note: Appendix –1
Figure 1: Total debt to total assets from table 1
41
From the table 1 and figure 1 shows that the Debt to assets ratio of SKDBL and MBBL in fiscal
year 2072/73 to 2076/77.The debt ratio of SKDBL has fluctuating trend. The debt to assets ratio
of SKDBL are 86.77%, 82.32%,73.54%, 75.33% and 79.90% respectively for respective 5 years.
The mean ratio is 79.57% and S.D. is 15.84% with a C.V. of 0.2%.In above, it shows that in
fiscal year 2072/73 is 86.77% which indicates that SKDBL has financed 86.77% by debt and
remaining 13.23% of SKDBL assets by investors or equity financing. Similarly, in fiscal year
2073/74 also SKDBL 82.32% by debt financing and remaining 17.68% by investors or equity
financing. In fiscal year 2074/75 also SKDBL financed by 73.54% by debt and remaining
26.46% financed by investors or equity financing. In fiscal year 2075/76 also SKDBL financed
by 75.33% by debt and remaining 24.67% financed by investors or equity financing. In fiscal
year 2076/77 also SKDBL financed by 79.90% by debt and remaining 20.01% financed by
investors or equity financing.
Similarly, the debt of ratio of MBBL has fluctuating trend. The ratios are 89.61%, 87.96%,
89.57%, 91.44% and 91.23% respectively for consecutive 5 years. The mean ratio is 89.96% and
S.D. is 1.42% with a C.V. of 1.58%.In above, it shows that in fiscal year 2072/73is 89.61%
which indicates that MBBL has financed 89.61% by debt and remaining 10.39% of MBBL assets
by investors or equity financing. Similarly, in fiscal year 2073/74 also MBBL 87.96% by debt
financing and remaining 12.04% by investors or equity financing. In fiscal year 2074/75 also
MBBL financed by 89.57% by debt and remaining 10.43% financed by investors or equity
financing. In fiscal year 2075/76 also MBBL financed by 91.44% by debt and remaining 8.56%
financed by investors or equity financing. In fiscal year 2076/77 also MBBL financed by 91.23%
by debt and remaining 8.77% financed by investors or equity financing.
Therefore, we can say that in terms of total debt to total assets revels that the selected banks are
highly leveraged on five years’ time horizon. It means the assets of selected banks have been
financed more funds collected from the creditors and the consistency of Debt Ratio of MBBL is
higher than SKDBL due to low C.V.
The debt to assets ratio of both banks are fluctuating trend every year. Its mean both banks with
high debt – to- assets ratio may be at risk, especially if interest rates increasing. Creditors prefer
low debt-to- assets ratio because the lower the ratio, the more equity financing there is which
42
serves as a cushion against creditors losses if the bank goes bankrupts. As a result creditors get
concerned if the bank carries a large percentage of debt which may even call some of the debt the
company owes them perfectly utilized the assets. In above it shows that the higher both banks
debt-to-total assets ratio, the more it is said to be leveraged. Highly leveraged bank carry more
risk of missing debt payments should their revenue decline, and it is harder to raise new debt to
get through a downturn.
4.1.2 Debt- Equity Ratio
Debt equity ratio is used to show the relationship between borrowed funds and owners' capital. It
reflects the relative claims of creditors and shareholders against the assets of the firm. It is an
important tool for the financial analysis to appraise the financial structure of a firm. The ratio
reflects the relative contribution of owners and creditors capital of business in its financing. In
other word, this ratio exhibits the relative proportions of capital contributed by owners and
creditors. Debt equity ratio can be calculated in the basis of shareholders' equity and total debt.
Shareholders' equity includes reserve and accumulated profit, preference share and equity share
capital. Where total debt includes long-term and short-term loan. Here debt equity ratio is
computed by simply dividing total debt of the firm by shareholders' equity. The high D/E ratio
shows the large share of financing in the capital by the creditors then the owners or it reflects that
the creditors claim is higher against the assets of firm and vice versa. It is calculated as by using
the following formula;
43
Table 2
Debt to equity ratio of selected development banks
Fiscal year
SKDBL
MBBL
2072/73
6.56
8.62
2073/74
4.65
7.30
2074/75
2.95
8.58
2075/76
3.05
10.68
2076/77
3.97
10.40
2077/78
4.71
13.80
Mean
4.315
9.896
Standard deviation
1.33
2.28
C.V.
0.3090
0.2313
Note: Appendix –2
.Figure2: Total debt to total equity ratio from table 2
44
Form the table 2 and figure 2 shows that the debt to equity ratio of SKDBL and MBBL in fiscal
year 2072/73 to 2076/77.The debt to equity ratio of SKDBL has fluctuating trend. The debt to
equity ratio of SKDBL is 8.62 times, 7.30 times, 8.58times, 10.68times and 10.40 times
respectively for respective 5 years. The highest ratio is 10.68times in the year 2075/76 and the
lowest ratio is 7.30times in the year 2073/74.The mean ratio is 4.2360timesand S.D. is 0.1584
times with a C.V. of 0.0374.
Similarly, the debt equity ratio of MBBL has fluctuating trend. The ratios are 6.55times,
4.65times, 2.95times, 3.05times and 3.97times respectively for consecutive 5 years. The highest
ratio is 6.55times in the year 2072/73 and the lowest ratio is 2.95times in the year 2074/75.The
mean ratio is 9.1160 times and S.D. is 1.4077 times with a C.V. of 0.1544.
The debt-to equity ratio indicates the proportion of equity and debt a bank is using to finance its
assets and it signals the extent to which shareholder’s equity can fulfill obligations to creditors,
in the event a business of bank declines. In above it shows that debt to total equity ratio for all
the fiscal year 2072/73 to 2076/77 is greater than 1. It indicates that both banks debt to total
equity ratio greater than 1 implies that the majority of the assets are funded through debt in
financing their operations than equity. It means that both banks are getting more its financing by
borrowing money in both fiscal year 2072/73 to 2076/77, which subjects the both banks to
potential risk if debt levels are too high. The bank whose debt to total equity ratio is below 1.0
would be seen as relatively safe and it is counts as a “good” debt-to-equity (D/E) ratio because it
depends on the nature of the business and its bank industry. For the banking industry, having
much higher D/E ratios than others. Note that a D/E ratio that is too low may actually be a
negative signal, indicating that the firm is not taking advantage of debt financing to expand and
grow. But by this analysis it shows that the both banks are taking the advantage of debt financing
to expand and grow in all the fiscal year because in all the fiscal year its debt equity ratio is more
than 1.0.
45
4.1.3 Equity Multiplier
The equity multiplier is a financial leverage ratio that measures the amount of a firm’s assets that
are financed by its shareholders by comparing total assets with total shareholder’s equity. In
other words, the equity multiplier shows the percentage of assets that are financed or owned by
the shareholders.
Table 3
Equity Multiplier of selected development banks
Fiscal year
SKDBL
MBBL
2072/73
7.56
9.62
2073/74
5.65
8.30
2074/75
3.95
9.58
2075/76
4.05
11.68
2076/77
4.97
11.40
2077/78
5.71
14.80
Mean
5.315
10.8966
Standard deviation
1.3334
2.2895
C.V.
0.2508
0.2101
Note: Appendix –3
46
Figure3: Equity Multiplier from table 3
From the table 3 and figure 3 shows that the equity multiplier of SKDBL and MBBL in fiscal
year 2072/73 to 2076/77.The equity multiplier of SKDBL has fluctuating trend. The equity
multiplier of
SKDBL are 9.62 times, 8.30 times, 9.58times, 11.68times and 11.40 times
respectively for respective 5 years. In fiscal year 2072/73 the equity multiplier is 9.62 times it
means that SKDBL investment in total assets is 9.62 times the investment by equity shareholders.
In fiscal year 2073/74 the equity multiplier of SKDBL is 8.30 which indicates that SKDBL
investment in total assets is 8.30 times the investment by equity shareholders in fiscal year
2074/75 and so on. The highest ratio is 11.68 times in the year 2075/76 and the lowest ratio is
8.30 times in the year 2073/74.The mean ratio is 5.2360times and S.D. is 1.4751 times with a
C.V. of 28.17%.
Similarly, Equity multiplier of MBBL has fluctuating trend. The ratios are 7.55times, 5.65times,
3.95times, 4.05 times and 4.97times respectively for consecutive 5 years. In fiscal year 2072/73
the equity multiplier of MBBL is 7.55 times which indicates that MBBL investment in total
assets is 7.55 times the investment by equity shareholders in fiscal year 2072/73.In fiscal year
2073/74 the equity multiplier of MBBL is 5.65 which indicates that MBBL investment in total
assets is 5.65 times the investment by equity shareholders in fiscal year 2073/74 and soon. The
47
highest ratio is 7.55times in the year 2072/73 and the lowest ratio is 4.05times in the year
2075/76.The mean ratio is 10.1160 times and S.D. is 1.4077 times with a C.V. of 0.1392. And
the consistency of equity multiplier of MBBL is higher than SKDBL due to low C.V.
Equity multiplier is a key financial metric that measure the level of debt financing in a bank. The
lower equity multiplier shows that bank is unable to obtain debt from lenders or the management
is avoiding the use of debt to purchase assets and high equity multiplier indicates that a
significant portion of bank asset is financed by debt. It is better to have a low equity multiplier,
because a company uses less debt to finance its assets.
4.1.4 Return on Assets
Return on total assets ratio measures the profitability of bank that explains a firm to earn
satisfactory return on all financial resources invested in the bank’s assets. This ratio explains net
income for each units of assets. It also shows the profit earned per birr of assets and indicates
how effectively the bank’s assets are managed to generate revenue, although it might be biased
due to off-balance sheet activities.
Higher ratio indicates efficiency in utilizing its overall resources and vice-versa. From the point
of view of judging operational efficiency, rate of return on total assets is more useful measure.
The return on total assets is calculated using the following formula:
48
Table 4
Return on Assets of selected development banks
Fiscal year
SKDBL
MBBL
2072/73
1.60
2.79
2073/74
2.76
2.49
2074/75
2.86
1.80
2075/76
2.55
1.65
2076/77
1.07
1.07
2077/78
1.07
1.15
Mean
1.985
1.825
Standard deviation
0.8376
0.6971
C.V.
0.4219
0.3820
Note: Appendix –4
Figure 4: Return on Assets from table 4
49
From the table 4 and figure 4 shows that the return on assets of SKDBL and MBBL in fiscal year
2072/73 to 2076/77. The return on assets of SKDBL has fluctuating trend. The return on assets
of SKDBL are 1.11%, 1.72%, 1.81%, 1.77% and 0.64% respectively for respective 5 years. The
highest ROA is 1.81% in the year 2074/75 and the lowest ROA is 0.64 in the year 2076/77.The
mean ROA is 1.41% and S.D. is 0.5169 with a C.V. of 0.3666.
Similarly, the return on assets of MBBL has fluctuating trend. ROA of MBBL is 2.79%, 2.49%,
1.8%, 1.65% and 1.07% respectively for consecutive 5 years. The highest ROA is 2.79% times
in the year 2072/73 and the lowest ROA is 1.07% in the year 2076/77.The mean ROA is 1.96%
and S.D. is 0.6862 with a C.V of 0.3501. And the consistency of ROA of MBBL is higher than
SKDBL due to low C.V.
Highest the return on assets is better for any bank. The above table and figure shows ROA is in
fluctuating trend of both bank and ROA is very low. So, both banks are not able to run in better
position in fiscal year 2072/73 to 2076/77.
4.1.5 Interest Coverage Ratio
The interest coverage ratio is useful tool to measure long term debt serving capacity of the firm.
It is also called interest earned ratio. Interest is fixed charges of the companies, which is charged
in long term and short term loans. Generally, interest coverage ratio measured the debt serving
capacity of a firm and it is concerned with long term loans. It shows how many times the interest
charges are covered by EBIT out of which they will be paid. This ratio uses the concept of net
profit before tax because interest is tax deductible or tax is calculated after paying interest on
loan. This ratio examines the interest paying capacity of the firm by how many times the interest
charges are covered by EBIT.
Interest coverage ratio is calculated dividing EBIT by interest. So, it is necessary to analyze
EBIT and interest. This ratio is useful to measure long term debt serving capacity of the firm.
The high ratio shows that the firm may imply unused debt capacity and the firm has greater
capacity to handle fixed charges liabilities of creditors. Whereas, low ratio is a signal that the
50
firm is using excessive debt and does not have the ability to offer assured payment of interest to
the creditors.
Interest Coverage Ratio (ICR) =
Table 5
Interest Coverage ratio of selected Development banks
Fiscal year
SKDBL
MBBL
2072/73
42.91
109.2
2073/74
78.42
85.63
2074/75
72.49
48.61
2075/76
55.75
37.78
2076/77
18.49
23.28
2077/78
38.17
34.53
Mean
51.03
56.50
Standard deviation
22.46
33.54
C.V.
0.4401
0.5935
Note: Appendix –5
51
Figure 5: Interest Coverage Ratio from table 5
From the table 5 and figure 5 shows that the interest coverage ratio of SKDBL and MBBL in
fiscal year 2072/73 to 2076/77.The interest coverage ratio of SKDBL has decreasing trend. The
interest coverage ratio of SKDBL are 42.91 times, 78.42 times, 72.49 times, 55.75 times and
18.49 times respectively for respective 5 years. The highest ratio is 78.42 times in the year
2073/74 and the lowest ratio is 18.49 times in the year 2076/77.The mean ratio is 0.5361times
and S.D. is 0.2411times with a C.V. of 0.4496.
Similarly, the interest coverage ratio of MBBL has fluctuating trend. The ratios are 109.2 times,
85.63 times, 48.61times, 37.78 times and 23.28 times respectively for consecutive 5 years. The
highest ratio is 109.9 times in the year 2072/73 and the lowest ratio is 23.28times in the year
2076/77.The mean ratio is 0.6090 times and S.D. is 0.3552 times with a C.V. of 0.5832. And the
consistency of Interest Coverage Ratio of MBBL is higher than SKDBLL due to low C.V.
Highest ratio shows that the firm can pay the interest easily. So the decreasing ratio in each f/y is
not satisfactory. A lower interest coverage ratio for the fiscal year 2072/73 to 2076/77 may be
unattractive to investors because it may mean both banks are not poised for growth. A high
interest coverage ratio indicates that a bank can pay for its interest expense several time over,
52
while a low interest coverage ratio is a strong indicator that a bank may default on its loan
payments.
4.1.6 Core Capital or Tier I Capital Ratio
The Core Capital ratio is the ratio of financial institution core equity capital to its total risk
weighted assets. In Nepal, development bank should maintain capital fund at least 11% of the
risk weighted assets in which 6% of the risk weighted assets must be Tier-I capital. Risk
weighted assets are the total of all asset held by the bank weighted by credit risk according to a
formula determined by the regulator.
Core Capital or Tier-I Capital ratio =
Table 6
Core Capital or Tier I Capital ratio of selected Development banks
Fiscal year
SKDBL
MBBL
2072/73
16.14
11.40
2073/74
23.75
13.77
2074/75
34.04
13.21
2075/76
29.09
12.29
2076/77
30.49
11.97
2077/78
23.44
9.94
Mean
26.15
12.09
Standard deviation
6.3726
1.3586
C.V.
0.2436
0.1123
Note: Appendix –6
53
Figure 6: Core Capital or Tier-I Capital ratio from table 6
From the table 6 and figure 6 that the core capital ratio of SKDBL in fiscal year 2072/73 to
2076/77. The core capital ratio of SKDBL is 16.14%, 23.75%, 34.04%, 29.09% and 30.49%
respectively. The mean ratio is 26.70% and standard deviation is 6.96% with CV of 0.2609. The
core capital of SKDBL is in fluctuating trend and also reflects the earning and reserve are also
fluctuating. But the SKDBL seems very strong to maintain core capital.
Similarly, the core capital ratio of MBBL is 11.40%, 13.77%, 13.21%, 12.29% and 11.97%
respectively. The mean ratio of MBBL is 12.5280 and Standard Deviation is 0.9550 with a CV
of 0.0762. The core capital of MBBL is also in fluctuating trends and also it reflects that earnings
and reserve are highly fluctuating. It seems that both bank have maintain the core capital as per
directed by NRB i.e above 6%.
4.1.7 Supplementary Capital or Tier II Capital Ratio
Supplementary capital is also known as Tier-II capital of banks. Tier-II capital includes
undisclosed funds that do not appear on a bank’s financial statements, revaluation reserves,
hybrid instruments, subordinated term debt also known as junior debt securities and general loan54
loss, or uncollected reserves. Tier-II capital is supplementary capital because it is less reliable
than Tier-I capital. Supplementary capital ratio is the formula utilized to describe the capital
being held versus what’s known as total risk weighted assets. Risk weighted assets are the assets
held by the financial institutions that are weighted by its credit risk.
Supplementary Capital or Tier- II Capital ratio =
Table 7
Supplementary Capital or Tier II Capital ratio of selected Development banks
Fiscal year
SKDBL
MBBL
2072/73
0.80
0.88
2073/74
0.81
0.94
2074/75
0.80
0.99
2075/76
0.72
1.55
2076/77
1.71
1.26
2077/78
1.68
1.25
Mean
1.08
1.145
Standard deviation
0.4724
0.2547
C.V.
0.4347
0.2225
Note: Appendix –7
55
Figure 7: Supplementary Capital or Tier-II Capital ratio from table 7
From the table 7 and figure 7 shows that the Tier-II capital ratio of SKDBL in fiscal year
2073/74 to 2076/77. The Tier- II capital ratio of SKDBL is 0.80%, 0.81%, 0.80%, 0.72% and
1.71% respectively. The mean ratio is 0.9680 and SD 0.4164 with CV of 0.4301. There is
fluctuating nature in keeping supplementary capital by the SKDBL. So, they do not have any
uniform maintenance of their supplementary capital. This shows the SKDBL is not efficient to
manage the supplementary capital uniformly.
Similarly, Tier-II capital ratio of MBBL for the fiscal year 2072/73 to 2076/77 are 0.88%, 0.94%,
0.99%, 1.55% and 1.26% respectively. The mean ratio is 1.1240 and SD 0.2790 with CV 0.2482.
There is increasing nature in keeping supplementary capital by the MBBL. So, they do not have
any uniform maintenance of their supplementary capital. This shows the MBBL is not efficient
to manage the supplementary capital uniformly.
All the sampled banks have maintained the Tier-II capital ratio as directed by NRB, i.e less than
6% but not uniformly. In other words, all the banks have less than 6% Tier-II capital ratio. The
Tier-II capital ratio of all the development banks is less than the prescribed and is more or less
same. The above analysis SKDBL is riskier than the sample bank because it per unit risk i.e CV
of SKDBL is higher than the MBBL.
56
4.1.8 Capital Adequacy ratio or Total Capital Ratio
Capital adequacy is a reflection of the inner strength of a bank. The main activity of the bank is
to collect funds and channel them back in the form of loans. If a bank enough capital or meet the
requirements, it can operate to create profit. Higher the CAR better is the performance of a bank.
The capital adequacy ratio is calculated by following formula.
Capital adequacy or Total Capital ratio =
Table 8
Capital Adequacy Ratio or Total Capital ratio of selected Development banks
Fiscal year
SKDBL
MBBL
2072/73
16.94
12.28
2073/74
24.56
14.71
2074/75
34.83
14.20
2075/76
29.80
13.44
2076/77
32.21
13.23
2077/78
31.11
11.19
Mean
28.241
13.175
Standard deviation
6.4975
1.2822
C.V.
0.2300
0.0973
Note: Appendix –8
57
Figure 8: Capital Adequacy or Total Capital ratio from table 8
From the table 8 and figure 8 shows that the total capital ratio of SKDBL in fiscal year 2072/73
to 2076/77. The total capital ratio of SKDBL during the fiscal year is 16.94%, 24.56%, 34.83%,
29.80% and 32.21% respectively. The mean ratio is 27.66% and S.D is 7.09% with CV 25.63%.
Total capital of SKDBL is in increasing trend which reflects that earnings and reserve are also
increasing. It seems that SKDBL is in strong position to maintain total capital.
Similarly, the total capital ratio of MBBL during the fiscal year 2072/73 to 2076/77 are 12.28%,
14.71%, 14.20%, 13.44% and 13.23% respectively. The mean ratio is 13.57% and SD is 9.34%
with CV 6.89%. Total capital of MBBL is in fluctuating trend and this reflects that earning and
reserve are also fluctuating. But the MBBL seems very strong to maintain the total capital.
58
4.1.9. Correlation Coefficient Between Equity Capital Ratio and Debt Ratio
Bank
Correlation Coefficient
Relationship
SKDBL
-0.0172
Negative Correlation
MBBL
-1
Perfect Negative Correlation
Note: Appendix 9 & 10
The correlation coefficient of SKDBL is -0.0172 which is negatively correlated and MBBL is -1
which indicates that it is perfect negative correlated.
4.2 Major Findings
This topic focuses on the discussion about the major findings of the study, which are derived
from the capital structure analysis of SKDBL and MBBL with five years data from 2072/73 to
2076/77. The major findings from the above analysis are:

In terms of total debt to total assets reveals that the selected banks are highly leveraged
on five-year time horizon. It means the assets of selected banks have been financed more
funds collected from creditors. MBBL has the highest average ratio of 89.96 percent in
comparison to the lowest of 79.57 percent of SKDBL.

SKDBL has debt-equity ratio of 4.2360 times on an average. It means debt capital
financing is more than 4.2360 times higher than shareholders’ equity. MBBL has an
average of 9.10 times debt-equity ratio. It means debt capital financing is more than 9.10
times higher than shareholders’ equity. MBBL is able to maintain its debt-equity ratio
more consistent than SKDBL.

Equity multiplier is a key financial metric that measure the level of debt financing in a
bank. The lower equity multiplier shows that bank is unable to obtain debt from lenders
or the management is avoiding the use of debt to purchase assets and high equity
multiplier indicates that a significant portion of bank asset is financed by debt. The equity
multiplier of MBBL has highest average 10.1160 and lowest average of SKDBL is
5.2360.
59

MMBL able to maintain the highest interest coverage ratio than SKDBL. Its average
interest coverage ratio during five-years period is 0.6090 times. Similarly, the average
interest coverage ratio of SKDBL is 0.5361 times which is the lowest among the selected
banks.

MBBL has the highest average ROA among the selected banks i.e. 1.96 percent. It means
SKDBL has better utilizes its assets to generate profit than MBBL.

All the sample banks have maintained the core capital ratio as directed by NRB i.e. 6%.
In other words, all the banks have higher than 6% core capital ratio. The core capital ratio
of all the banks is slightly more than the prescribed and is more or less same. The above
analysis MBBL is riskier than other banks because its per unit risk i.e. CV is higher than
other banks.

All the sample banks have maintained the Tier-II capital ratio as directed by NRB i.e. less
than 6% but not uniformly. In other words, all the banks have less than 6 percent Tier- II
capital ratio. The Tier-II capital ratio of all the banks is less than the prescribed and is
more or less same. The above analysis shows that SKDBL is riskier than other sample
banks because it’s per unit risk i.e. CV is higher than other banks.

All the sampled banks have maintained the Capital adequacy ratio (CAR) as directed by
NRB. i.e. above 11%. In other words, all the banks have higher than 11% CAR. The
CAR of all the banks is slightly more than prescribed and is more or less same. The
capital adequacy ratio of the bank is in decreasing trend. It is obvious, as transaction of
the bank increases, the risk weighted assets also increases in the same manner. But these
creates bank difficulty to maintain capital fund as required by the NRB as capital do not
increase often and the performance of the bank is the major role to play to comply with
the NRB requirements. As such, it is evident that all sample banks have been performing
well enough to comply with the NRB requirement without failure at any point of time.
60
CHAPTER V
CONCLUSION
This is the concluding chapter of the study. This chapter is divided into three sections: Summary,
Conclusions and implications. In this chapter, the study is summarized in brief. In the last section
of this chapter some implication is given, which are useful to stakeholders and to concerned
companies as well. They can use these implications to take some corrective actions to draw
decisions.
5.1Summary
In this study, to analyze about capital structure, two commercial banks have been chosen. These
banks are Saptakoshi Development Bank Limited. and Muktinath Bikas Bank Ltd. These banks
are listed in NEPSE. To make the study more reliable, the whole study has been divided into
five chapters. The summaries of each chapter are presented following:
First chapter: First chapter starts with historical background of the study. In this chapter an
introduction to banking industry in Nepal, introduction of the banks which are selected for the
study and description of the capital structure is presented briefly. This study endeavors to
evaluate capital structure of commercial banks with reference to Saptakoshi Development Bank
Limited. and Muktinath Bikas Bank Ltd. The main questions presented as the 'focus of the study"
are what are the condition of capital structure analysis of the development banks of Nepal?
Whether or not they are using an appropriate financial mix? If not, what may be the suggested to
improve or to make appropriate capital structure? Does capital structure help to maximize the
value of the firm in the context of Nepalese firms? The statement of the problems deals with the
effect of the capital structure on the growth of the firm, the extent to which the capital structure
policy is followed by the development banks, and the main problems faced by the development
banks in developing and implementing the capital structure.
The main objectives of the study presented are to evaluate the role of capital structure on the
growth of the development banks in Nepal, to analyze the effectiveness and efficiency of capital
structure of the commercial banks in Nepal and to analyze the relationship of capital structure
61
with variables such as ROE and ROA.
Finally, "rationale of the study" and "limitations of the study" are also presented in the first
chapter.
Second chapter: In this chapter various books, research studies and articles concerned with the
capital structure have been reviewed and presented as the review of literature to make the
concept of capital structure more clear. Review of different management journals, articles as well
as related Nepalese studies have been presented as well.
Third chapter: In this chapter the steps to adopt realistic study needed for the researchers have
been presented. The methodology, researcher can use to get appropriate guidelines and
knowledge about the various sequential steps to adopt a systematic analysis has been explained
in this chapter. Most of the data used in this study are secondary in nature that is annual reports
provided by concerned companies. Five-years data are taken as sample years and are analyzed by
using financial and statistical tools. Methods, which the study is going to use, are exhibited in
this chapter.
Fourth chapter: the data mentioned in the third chapter are results and discussion in this chapter
using methods mentioned in the chapter third above such as financial and statistical tools. Detail
calculations presented in this chapter are shown as appendix, which is presented after fifth
chapter.
Fifth chapter: In this chapter summary of the study are presented in brief to understand the whole
get about of the study instantly after which conclusion of the study with implications are
presented.
5.2 Conclusion
The conclusion of this thesis of capital structure analysis of Saptakoshi Development Bank
Limited and Muktinath Bikas Bank Limited is as:
Debt ratio and debt-equity ratio of the selected banks are higher. It shows that the banks have
greater amount of debt in comparison to equity. Total debt to total assets revels that the selected
62
banks are highly leveraged on five years’ time horizon. It means the assets of selected banks
have been financed more funds collected from the creditors.
Interest coverage ratios of the selected banks are in fluctuating trend. It shows that the banks
have relatively high risk of being unable to pay interest in case of any decrease in operating
income. A high interest coverage ratio indicates that a bank can pay for its interest expense
several time over, while a low interest coverage ratio is a strong indicator that a bank may default
on its loan payments.
ROA of the selected banks is in fluctuating trend. It shows the poor profitability position of the
bank in terms of total assets. Higher ratio indicates efficiency in utilizing its overall resources
and vice-versa. From the point of view of judging operational efficiency, rate of return on total
assets is more useful measure.
The core capital of SKDBL is in fluctuating trend and also reflects the earning and reserve are
also fluctuating. But the SKDBL seems very strong to maintain core capital. The core capital of
MBBL is also in fluctuating trends and also it reflects that earnings and reserve are highly
fluctuating. It seems that both bank have maintain the core capital as per directed by NRB.
There is fluctuating nature in keeping supplementary capital by the SKDBL. So, they do not
have any uniform maintenance of their supplementary capital. This shows the SKDBL is not
efficient to manage the supplementary capital uniformly. The Tier-II capital ratio of all the
development banks is less than the prescribed and is more or less same. The above analysis
SKDBL is riskier than the sample bank because it per unit risk i.e CV of SKDBL is higher than
the MBBL.
63
5.3Implications
The sound capital structure enhances the profitability and growth of any company and it also
indicates sound financing position of the company. So all the banks should have the theoretical
knowledge regarding the capital structure. But they have not given significant attention to the
capital structure matter. Capital structure is a serious matter because it affects EPS, value of the
firm, cost of capital etc. So it is recommended that these banks should follow the theoretical
aspects of the capital structure management or give a bit more attention in this matter and try to
manage their activity accordingly. Besides these the following recommendations have been made:
1. The debt ratios of all the selected banks are very high ,which indicates that the bank has
greater risk. So they should raise their share capital and decrease their debt capital which
reduces the payment of heavy interest on debt.
2. Debt equity ratio of all the selected banks indicates greater contribution by creditors than
by shareholders in a bank’s financing. It is also not good for the banks because the
creditors put unnecessary pressure and intervene into bank’s management. So that they
should reduce their debt financing and raise share capital.
3. Interest coverage ratios of all the selected banks are slightly lower. It means the banks
have relatively high risk of being unable to pay interest in case of any decrease in
operating income. Further, the banks cannot obtain additional debt in more easy terms.
4. ROA of the selected banks are also not too satisfactory. This lower return may have been
resulted either from lower operating income or high interest expenses or both. So they
have to increase profit and decrease interest expenses and they have to manage and utilize
their assets properly.
5. The capital structures of the banks are found to be volatile over the study period. So the
banks should try to use stable capital structure as far as possible.
6. It is recommended that the capital structure decision of development banks should be
based on different factors like the agency cost, cost of capital, value of the firm etc.
Optimal capital structure minimizes agency cost and cost of capital and maximizes value
of the firm.
7. It will be better for all the two banks to open branches in other cities as well in order to
find profitable opportunities.
64
8. Government and central bank should also formulate plans and policies and launch various
programs for the improvement of capital structure of development banks.
9. Development banks should increase loan in productive sector, deprived sector and rural
sector as well so that it will help for the economic development of the nation and to meet
social responsibilities as well.
10. All the banks should give continuity in providing both conceptual and practical training
and development to the staffs to enhance their knowledge, skill and competency level.
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