ANALYSIS ON LIQUIDITY AND PROFITABILITY OF COMMERCIAL

BANKS IN NEPAL

(With reference to Comparative Study on NABIL and Nepal SBI Bank Limited)

Thesis
By
Anita Adhikari
Central Department of Management
Exam Roll No 636/16
Registration No. 7-2-625-91-2011

Submitted in partial fulfillment of the requirement of the degree of

Master of Business Studies (MBS Semester)
In the
Faculty of Management
Tribhuvan University

Kirtipur, Kathmandu
June, 2018
 RECOMMENDATION LETTER

It is certified that thesis entitled “Liquidity and Profitability of Selected Commercial

Banks of Nepal” submitted by Anita Adhikari is an original piece of research work
carried out by the candidate under my supervision. Literary presentation is satisfactory
and thesis is in a form suitable for publication. Work evinces the capacity of the
candidate for critical examination and independent judgment. Candidate has put in at
least 60 days after registration of the proposal. Thesis is forwarded for examination.

………………………………..
Dr. Bal Ram Chapagain
Thesis Supervisor
Central Department of Management
Tribhuvan University, Kirtipur, Kathmandu, Nepal

Date:……………………………
 APPROVAL SHEET

We, the undersigned, have examined the thesis entitled “Liquidity and Profitability of
Selected Commercial Banks of Nepal” presented by Anita Adhikari, a candidate for the
degree of Masters of Business Studies (MBS Semester) and conducted the viva-voce
examination of the candidate. We hereby certify that the thesis is worthy of acceptance.

………………………………
Dr. Bal Ram Chapagain
Thesis Supervisior

……………………………….
Internal Examiner

……………………………….
External Examiner

……………………………….
Prof. Bhawani Shanker Acharya
Chairperson, Research Committee

………………………………
Prof. Dr. Bhoj Raj Aryal
Head of Department
Central Department of Management
Date:…………………………
6

TABLE OF CONTENTS

Title page i

Certification of Authorship ii

Recommendation iii

Approval Sheet iv

Acknowledgement v

Table of Contents vi

List of Table ix

List of Figure x

Abbreviations xi

Abstract xii

CHAPTER – I INTRODUCTION

1.1 Background of the Study 1

1.1.1 Measurement of Liquidity 6

1.1.2 Measurement of Profitability 6

1.2 Statement of the Problem 7

1.3 Purpose of the Study 9

1.4 Significant of the Study 9

1.5 Limitation of the Study 10

1. 6 Chapter Plan 11

CHAPTER-II LITERATURE REVIEW

2.1 Theoretical Review on Liquidity Management 12

2.2 Review of Related Research Study 14

2.2.1 Review Articles in the National Context 23

2.3 Research Gap 26

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CHAPTER- III RESEARCH METHODOLOGY

3.1 Research Design 27

3.2 Sources of Data 27

3.3 Population and Sample 28

3.4 Method of Analysis 28

3.4.1 Financial Tool 28

3.4.2 Statistical Tool 35

CHAPTER- IV RESULTS

4.1 Financial Analysis 38

4.1.1 Liquidity Ratio 38

4.1.1.1 Current Ratio 38

4.1.1.2 Cash and Bank Balance to Total Deposit Ratio 40

4.1.1.3 Cash and Bank Balance to Current Assets Ratio 41

4.1.1.4 Investment and Government Security to Current Assets Ratio43

4.1.1.5 Loan and Advance to Current Assets Ratio 44

4.1.2 Assets Management Ratio 45

4.1.2.1 Loan and Advance to Total Deposit Ratio 46

4.1.2.2 Total Investment to Total Deposit Ratio 47

4.1.2.3Loan and Advance to Total Working Fund Ratio 49

4.1.3 Profitability Ratio 51

4. 1.3.1 Return to Total Working Fund Ratio 51

4.1.3.2 Return on Loan and Advanced Ration 53

4.1.3.3 Total Interest Earned to Total Outside Assets Ration 55

4.1.3.4 Total Interest earned to Total Working Fund Ratio 57

4.1.3.5 Total Interest Paid to Total Working Fund Ratio 58

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4.1.4 Risk Ratio 60

4.1.4.1 Liquidity Ratio 60

4.1.4.2 Credit Risk Ratio 61

4.1.4.3 Capital Risk Ratio 63

4.2 Trend Analysis

4. 2.1 Trend Analysis of Loan and Advanced to Total Deposit Ratio 64

4.2.2 Trend Analysis of Total Investment to Total Deposit Ratio 66

4.2.3 Coefficient of Correlation Analysis 67

4.3 Major Findings of the Study 70

CHAPTER-V CONCLUSION

5.1 Summary 74

5.2 Conclusion 76

5.3 Implication 77

5.4 Recommendation 77

Appendix

References
 CHAPTER I

INTRODUCTION

1.1 Background of the Study

A day-to-day management of a firm’s short-term assets and liabilities plays an

important role in the success of the firm. Firms with glowing long-term prospects and
healthy bottom lines do not remain solvent without good liquidity management.
Hence, despite maximization of shareholder wealth still remaining the ultimate
objective of any firm, preserving the liquidity of a firm is equally an important
objective and as such a firm should balance among the different interest objectives.
Increasing profits at the cost of liquidity can bring serious problems to the firm and a
tradeoff between these two objectives of the firms needs to be struck. If a firm does
not care about profit, it will not survive for a longer period while on the other hand if
it does not care about liquidity, it may face the problem of insolvency or bankruptcy.
For these reasons, therefore, liquidity management should be given proper
consideration and will ultimately affect the profitability of the firm.

A firm can have a large sale level through adopting a generous credit policy and thus
extending the cash cycle though the action may increase the level of profitability.
However, the traditional view of the relationship between a firms liquidity level is
such that, all other factors remaining constant, the longer cash conversion cycle hurts
the profitability of the firm (Deloof, 2003). This therefore requires that the level of
working capital that a firm maintains need to be kept at an optimum point that will
maximize the profits. Liquidity and profitability are crucial elements that organization
keeps in mind while assessing their financial position. These are considered one of the
most important issues in corporate finance and are essential for the survival of any
bank. Short term survival of a bank is dependent on its liquidity while, its long term
growth and survival depends on its profitability. The basic function of commercial
bank is to receive deposits and to lend money. At the same time, it has to maintain
adequate liquidity. If case of negligence, the bank may face risk. At the same time,
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increased liquidity would reduce the profits. So the banks must maintain a balance
between the profitability and liquidity.

Every stakeholder has its interest in the liquidity position of a bank. In this research
we have analyzed how a bank’s liquidity affects its profitability. Profitability is
actually the return which a company earns from its operations. Basic purpose of a
business is to earn profits and so does banks. Banks profit is calculated as the
difference between the interest it charges on the loans it grants to its customers and
the interest which it pays to its account holders. For determining the impact of
liquidity on profitability of the banks, certain ratios are considered that would be
further discussed in the methodology section.

Several studies has been undertaken to inquire the major determinants of a bank’s
profitability and liquidity has always remained one of the major determinants. Several
studies has been undertaken to inquire the major determinants of a bank’s profitability
and liquidity has always remained one of the major determinants. (Bourke, 1989)
found a positive relationship among liquid assets and profitability of about 90 banks
in Europe, North America and Australia for the period of 1972- 1981.In most
economies developed and developing, banks are the most important financial
institutions. The banking sector is an important element in any economy as it plays
the roles of satisfying the needs of investors with new financial instruments that offer
a wider range of opportunities for risk management and transfer of resources,
lowering transactions costs or increasing liquidity by creating financial instruments
such as loans and also works as the operator of the payment system. Other roles
played by the banking sector include the fundamental role in financial intermediation
by mobilizing deposits from members of the public and employing such deposits by
way of loans and investments. The significance of the banking sector underlines the
need for stability in the sector that is vulnerable to financial distortions. Key drivers of
stability for any commercial entity are profitability and liquidity.

Vieira (2010) describe profitability business's ability to generate earnings as

compared to its expenses and other relevant costs incurred during a specific period of
time. Potential investors are interested in dividends and appreciation in market price
 3

of stock, so they pay more attention on the profitability ratios. Managers on the other
hand are interested in measuring the operating performance in terms of profitability.
Hence, a low profit margin would suggest ineffective management and investors
would be hesitant to invest in the company. Niresh (2012) opined that liquidity is of
major importance to both the internal and external analysts’ because of its close
relationship with day to day operations of a business. A weak liquidity position poses
a threat to the solvency as well as profitability of a firm and makes it unsafe and
unsound.

Credit is regarded as the heart of the commercial banks in the sense that; it covers the
main part of the investment; the most of the investment activities based on credit; it is
the main factor of creating profitability. It is the main source of creating profitability:
it determines the profitability. It’s effect the overall economy of the country. In
today’s context, it also affects on national economy to some extent. If the bank
provides credit to retailer, it will make the customer status similarly, it provides to
trade and industry of the Government. Will get tax from then and help to increase the
national economy. It is the security against depositors. It is proved from very
beginning that credit is the shareholders wealth maximization derivative. However,
other factors can also affect profitability and wealth maximization but the most
effective factor is regarded as credit. It is the most challenging job because it is
backbone in commercial banks. Thus, effective management of credit should
seriously be considered.

Credit management refers to fund and working capital management. However, most
people have some miss concepts. They only consider heredity management is a short-
term process. In fact, if it relates to working capital, it may be right. However, if it
relates to fund management, it can be a long-term basis. We may imagine asset
valuation for credit evaluation, i.e. a credit management step, refer to fixed assets
usually. Value of fixed assets will change over its life. In other words, your credit
evaluation will adjust all the time. Credit Management is the process of mitigating the
risk involved in granting the credit. It is a key to successfully utilize our credit by
minimizing our risks and losses. Credit is regarded as the most income generating
assets especially in commercial banks.
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A credit facility is said to be performing if payment of both principal and interest are
up to date in accordance with agreed repayment terms. The non- performing loans
(NPL) represent credits which the banks perceive as possible loss of funds due to loan
default. They are further classified into substandard, doubtful or lost. Bank credit in
lost category hinders bank from achieving their set targets (Kolapo, Ayen, & Oke,
2012).

The wave of financial globalization that started in the 1980s transformed financial
markets and institutions around the world. As a result of this trend of financial
integration, global banks increased their footprint within their domestic markets and
across both emerging and advanced economies. In this process, banks developed
different business models to manage the funds raised from external sources. One of
those business models operates by centrally managing liquidity within the banking
organization. The central office in this type of banking organization allocates
resources across its branches depending on the objectives of the officers of the bank.
Thus, external liquidity raised throughout the bank is moved internally across offices
in different countries or regions within a country (Campello, 2002).

Liquidity means allocation of funds in close relation to their respective sources.

Liquidity is the status and part of the assets which can be used to meet the obligation
in the commercial banks. Liquidity can be viewed in terms of liquidity stored in the
balance sheet and in terms of liquidity available through purchased funds. Liquidity is
the ability of a bank to pay cash to depositors on demand. It is the arrangement and
the allocation of funds in such a way that can be drawn immediately without any loss
of principle. At present, there is no secured investment opportunity for the Nepalese
commercial banks. The banks are facing the problem of vague liquidity in term of
monetary firm.The idle money does not make any return. Therefore, the high liquidity
may cause of low profitability and inefficient performance of the overall Banking
sector. It may cause failure of banking performance in long term (Pandey, 2000).

Liquidity is a financial term that means the amount of capital that is available for
investment. Today most of this capital is credit, not cash. Bank Liquidity simply
means the ability of the bank to maintain sufficient funds to pay for its maturing
 5

obligations. It is the bank’s ability to immediately meet cash, cheques, other

withdrawals obligations and legitimate new loan demand while abiding by existing
reserve requirements. Nwaezeaku (2006) defined liquidity as the degree of
convertibility to cash or these with which any asset can be converted to cash (sold at a
fair market price).

Liquidity management therefore involves the strategic supply or withdrawal from the
market or circulation the amount of liquidity consistent with a desired level of short-
term reserve money without distorting the profit making ability and operations of the
bank. It relies on the daily assessment of the liquidity conditions in the banking
system, so as to determine its liquidity needs and thus the volume of liquidity to allot
or withdraw from the market. The liquidity needs of the banking system are usually
defined by the sum of reserve requirements imposed on banks by a monetary
authority (CBN, 2012).

The liquidity is a vital factor in business operations. For the very survival of business,
the firm should have requisite degree of liquidity. It should be neither excessive nor
inadequate. Excessive liquidity means accumulation of ideal funds. Which may lead
to lower profitability, increase speculation, and unjustified extension, extension of
liberal credit terms, liberal dividend policy etc; whereas inadequate liquidity result in
interruptions of business operations. A proper balance between these two extreme
situations therefore should be maintained for efficient operation of business through
skill full liquidity management. The need of efficient liquidity management corporate
sector has become greater in recent years.

The need for liquidity of current assets could not be over emphasized. The efficient
management of liquidity is integrated part of overall finance management and has a
bearing on the objective of the consolidation of short-terms solvency position to
achieve this. It is necessary to generate sufficient liquid fund. The extent to which
liquidity can be gained will naturally depend upon the magnitude of the sales. The
efficiency of collection department the lowest period of operating cycle etc. a
successful collection programmer is in other words, necessary for maintaining
 6

liquidity by any business enterprises. Those sales don't convert into cash is instantly
remain a time lag between the sales of goods and receipt of cash.

Many people do not realize just how dramatically a single bad mark on your credit
can alter your ability to obtain good interest rates. The impact is even more dramatic
the more negative items appear on your credit file. Someone with bad credit has a
very difficult time obtaining credit of any form, including a job at times. Keeping
your credit file clean is often one of the only ways to ensure that you will be able to
obtain a good job, as well as qualify for the lowest interest possible in order to save
money while still purchasing the things you need in life.

1.1.1 Measurement of Liquidity

Liquidity position of commercial banks is normally monitored and measured by

liquidity ratio (Rychtarik, 2009). The significant items that was diagnosed includes
the liquidity position measures such as total deposit to core funding position, liquid
assets to demand liabilities and gross loans to demand liabilities. This study will
examine a set of commercial banks providing services to the same economy and
operating in the same environment. Moreover this study will be interested in
establishing differences, if any, in relative degrees of liquidity position of these
commercial banks. The ratio of total deposit to total Funding, liquid assets to demand
liabilities and gross loans to total deposit were used as the measurement criteria.

1.1.2 Measurement of Profitability

There is general agreement that bank profitability is a function of internal and external
factors. Koch (1995) observed that the performance differences between banks
indicate differences in management philosophy as well as differences in the market
served. Profitability is a function of internal factors that are principally influenced by
a bank's management decisions and policy objectives such as the level of liquidity,
provisioning policy, capital adequacy, expense management and bank size, and the
external factors related to industrial structural factors such as ownership, market
concentration and stock market development and other macroeconomic factors
(Athansasoglou, Brissimis, & Delis, 2006).To identify the relevant factors influencing
 7

commercial bank profitability in Liberia, this research will be concentrated on bank-

specific factors based on the CAMEL framework and market structural factors;
ownership and market concentration. CAMEL is a widely used framework for
evaluating bank performance. The Central Bank of Liberia also uses the same to
evaluate the performance of commercial banks in Liberia.

Numerous studies have used CAMEL to examine factors affecting bank profitability
with success Elyor (2009), Uzhegova (2010). CAMEL is an acronym Capital
adequacy, Asset quality, Management efficiency, Earnings performance and
Liquidity. Though some alternative bank performance evaluation models have been
proposed, the CAMEL framework is the most widely used model and it is
recommended by Basle Committee on Bank Supervision and IMF (Baral, 2005).

According to Kosmidou (2009) refers Capital adequacy to the sufficiency of the

amount of equity to absorb any shocks that the bank may experience. The capital
structure of banks is highly regulated. The main reason is that capital plays a crucial
role in reducing the number of bank failures and losses to depositors when a bank
fails as highly leveraged firms are likely to take excessive risk in order to maximize
shareholder value at the expense of finance providers (Kamau, 2009).

Credit risk is one of the factors that affect the health of an individual bank. The extent
of the credit risk depends on the quality of assets held by an individual bank. The
quality of assets held by a bank depends on exposure to specific risks, trends in non-
performing loans, and the health and profitability of bank borrowers (Baral, 2005).
Aburime (2008) asserts that the profitability of a bank depends on its ability to
foresee, avoid and monitor risks, possibly to cover losses brought about by risks
arisen. Hence, in making decisions on the allocation of resources to asset deals, a
bank must take into account the level of risk to the assets.

1.2 Statement of the Problem

Liquidity management is the essence of commercial banking; consequently the
formulation and implementation of second lending policies are among the most
important responsibilities of directors and management. Well conceived liquidity
 8

management policies and careful lending practices are essential if a bank is to perform
its credit. Liquidity management effects on the company’s profitability, so it is one of
the crucial decisions for the commercial banks.

Holding more liquid assets diminishes a commercial bank’s profit and hinders the
investment prospect of the bank, which could lead to growth and expansion.
However, if it wishes to maximize profit, the commercial bank will have to reduce the
level of liquid assets it holds on the balance sheet. Holding too much illiquid asset
will expose the commercial bank to liquidity risk and huge interest charges in an even
of fire sales (Casu, et al 2006). Eljelly (2004) opines that firms with high liquidity
have majority portion of their investments in short term assets, which have lower
return than the long term assets. Dernberg (1985) observed that in managing their
portfolios, the commercial banks have two main aims that may conflict; maintenance
of stock of liquid assets in case their cash is under pressure and the wish to earn high
return on their assets in order to maximize profits. Smith (1980) observed that
excessive dependence on liquidity indicates the accumulation of idle funds that don’t
fetch any profits for the firm. On the other hand, insufficient liquidity might damage
the firm’s goodwill, deteriorate firm’s credit standings and that might lead to forced
liquidation of firm’s assets. Wahiu (1999) did a study to establish the determinants of
liquidity of commercial banks in Kenya. The study involved all the commercial banks
operating in Kenya during the period 1989 to1998. He observed that one of the two
most important requirements of liquidity is profitability. In the modern and current
liberalization of banks and financial institution in Nepal many difficulties and
complexities also have been emerging along with increasing demand and supply of
lending (liquidity management). In other word, some time high liquidity condition
affect to the credit and performance of the banks that due to ineffective management
of high liquidity by converting to lending in productive sectors with in time. The
increasing situation of non-performing loan is also badly affecting to the credit and
liquidity management of the banks.

The research questions to be raised for covering the issues of this study are as below:

i. What is the Liquidity position of selected commercial banks of Nepal?

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ii. What is the status profitability and risk position of selected commercial
banks of Nepal?

iii. What is the trend and relation of the total deposit, investment and total loans
of the selected commercial bank of Nepal?

1.3 Purposes of the Study

The specific objective of the study is to examine the liquidity management &
profitability of Nepalese commercial banks along with this the other objectives are as
follows:

i. To identify the liquidity position of the selected Commercial banks.

ii. To identify the status of profitability and risk position of selected

Commercial Banks of Nepal.

iii. To examine the trend and relations of total deposit, investments and total
loans of the selected commercial banks.

1.4 Significance of the Study

This study is very important from the point of view of liquidity management of the
banks. Because of the usefulness of recently updated data concerned with liquidity
and profitability evaluation to take decision on how can we go ahead in future to
control if any risks were emerged at present. The main strategy of every commercial
bank is to achieve the better creditability position, which has directly impacted the
financial performance of an organization. Beside it helps to build positive attitude and
perceptions non customer that helps to make the organizational successes in terms of
better transaction, better turnover and better profitability. The study helps for
following concern parties.

i. This study will help to support for sample banks to forecast about credit and
liquidity.
ii. This study can be based for further research on concern topic.
iii. This study will help to formulated plan and policy for sample banks.
 10

iv. This study will help for investor and creditor to identify the real financial
position that make considered whether expand additional money for further
investment.
v. This study can become the support documents to achieve academic degree.
vi. This study can be useful to concerned stakeholders (customer, suppliers,
businessmen, households, society, agent and government) to get information
about financial position of sample banks

This study is based on specifically in case of joint-venture commercial banks in

Nepal and such study are rarely found in the Nepalese context. Moreover, this
study seems to provide roadmap for the formulation of different policies for the
management regarding liquidity management i.e lending viewing to maximize the
return i.e profitability.

1.5 Limitations of the Study

The study focused to fulfill the partial requirement course of M.B.S. of T.U. It has
some limitations. There have limited resources and it is difficult to explore researcher
to find out new aspect. Reliability of statistical tools used and lack of research
experience are the major limitation. The study is based on following limitations.

i. This research is limited to liquidity management practice of sample banks.

ii. This study is limited on secondary data, which are used to analyze for result
interpretations, so the accuracy of the finding depends on the reliability of
available information.

iii. This study is limited on quantitative analysis which does not consider on
qualitative variable.

iv. It focuses on only two joint venture commercial banks in Nepal covering the
period of five years study. (I.e. 2012/13 to 2016/17).
 11

v. This research conducts limited study upon commercial banks which has left
the other part of financial institution such as development banks, finance
companies, micro finance companies and so on.

vi. Result of this study may differ according to different state of nature.

1.6 Chapter plan

This part includes the structure and chapter plan of the study. The study is organized
in five chapters which are as follows.

Chapter- I: Introduction

This chapter deals with the background of the study, state of the problems, objective,
significance limitations and organization of the study.

Chapter – II: Review of Literature

This chapter focused on the review of literature which includes review of theories. It
also included review of previous studied and research gap.

Chapter –III : Research Methodology

This chapter includes the research design, sources of data, analysis of data, population
and sampling and tools for analysis of data.

Chapter – IV: Results

In this part excel used to analysis and interpretation of the data, the presentation and
analysis of relevant though define course of research methodology with the financial
and statistical analysis related to loan management of banks. Major findings of the
study also included in thesis chapter.

Chapter-V: Conclusion

This chapter includes discussion, conclusion and implication of the study. Reference
and appendices are also attached at the end of the study.
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CHAPTER II

LITERATURE REVIEW

This chapter will includes the review of literature which includes review of books,
journals, bulletins and annual reports published by the banks and other related
authorities, review of related articles and studies and previous thesis as well.

2.1 Theoretical Review on Liquidity Management

The theories and liquidity management are outlined and explained in this section.

2.1.1 Anticipated Income Theory

This theory holds that a bank’s liquidity can be managed through the proper phasing
and structuring of the loan commitments made by a bank to the customers. Here the
liquidity can be planned if the scheduled loan payments by a customer are based on
the future of the borrower. The doctrine of anticipated income, as formalized by
Herbert V. Prochnow in 1949, embodied these ideas and equated intrinsic soundness
of term loans, which were of growing importance, with appropriate repayment
schedules adapted to the anticipated income or cash flow of the borrower. The credit
demands of business were well accommodated under this system of banking policy,
and the use of loan commitments was freely pursued. Changing economic conditions,
however, placed extra demands on the banking system that resulted in a new approach
to balance sheet management, and businesses faced new financial challenges. Under
this emerging state of affairs, bank loan commitment policies would come to play a
more important part in the credit process. This theory has encouraged many
commercial banks to adopt a ladder effects in investment portfolio.

2.1.2 Shiftability Theory

This theory posits that a bank’s liquidity is maintained if it holds assets that could be
shifted or sold to other lenders or investors for cash. This point of view contends that
a bank’s liquidity could be enhanced if it always has assets to sell and provided the
Central Bank and the discount Market stands ready to purchase the asset offered for
 13

discount. Thus this theory recognizes and contends that shiftability, marketability or
transferability of a bank's assets is a basis for ensuring liquidity. This theory further
contends that highly marketable security held by a bank is an excellent source of
liquidity. The Shiftability theory liquidity replaced the commercial loan theory and
was supplemented by the doctrine of anticipated income. Formally developed by
Harold G, Moulton in 1915, the shiftability theory held that banks could most
effectively protect themselves against massive deposit withdrawals by holding, as a
form of liquidity reserve, credit instruments for which there existed a ready secondary
market. Included in this liquidity reserve were commercial paper, prime bankers’
acceptances and, most importantly as it turned out, Treasury bills. Under normal
conditions all these instruments met the tests of marketability and, because of their
short terms to maturity, capital certainty.

A major defect in the Shiftability theory was discovered similar to the one that led to
the abandonment of the commercial loan theory of credit, namely that in times of
general crisis the effectiveness of secondary reserve assets as a source of liquidity
vanishes for lack of a market (Casu et al 2006). The role of the central bank as lender
of last resort gained new prominence, and ultimately liquidity was perceived to rest
outside the banking system. Further- more, the soundness of the banking system came
to be identified more closely with the state of health of the rest of the economy, since
business conditions had a direct influence on the cash flows, and thus the re- payment
capabilities, of bank borrowers. The shiftability theory survived these realizations
under a modified form that included the idea of ultimate liquidity in bank loans
resting with shiftability to the Federal Reserve Banks. Under this institutional scheme,
the liquidity concerns of banks were partially returned to the loan portfolio, where
maintenance of quality assets that could meet the test of intrinsic soundness was
paramount (Allen and Gale, 2004).

2.1.3 Commercial Loan Theory

This theory has been subjected to various criticisms by Dodds (1982) and Nwankwo
(1992). From the various points of view, the major limitation is that the theory is
inconsistent with the demands of economic development especially for developing
 14

countries since it excludes long term loans which are the engine of growth. The theory
also emphasizes the maturity structure of bank assets (loan and investments) and not
necessarily the marketability or the shiftability of the assets.

Adam Smith provided the first systematic exposition of the doctrine in his Wealth of
Nations (1776). Basically, it is a theory of asset management that emphasized
liquidity; the doctrine held that banks should restrict their earning assets to “real” bills
of exchange and short-term, self-liquidating advances for commercial purposes. In
this way, it was argued; individual banking institutions could maintain the liquidity
necessary to meet the requirements of deposit withdrawals on demand. Under a
somewhat modified character this basic doctrine came to be known in the U. S. as the
commercial loan theory of credit. The commercial loan theory of credit became
obsolete both because of its conceptual flaws and its impracticality. A critical
underlying assumption of the theory held that short-term commercial loans were
desirable because they would be repaid with income resulting from the commercial
transaction financed by the loan. It was realized that this assumption would certainly
not hold during a general financial crisis even if bank loan portfolios did conform to
theoretical standards, for in most commercial transactions the purchaser of goods sold
by the original borrower had to depend to a significant extent on bank credit. Without
continued general credit availability, therefore, even short-term loans backing
transactions involving real goods would turn illiquid. Rigid adherence to the orthodox
doctrine was, furthermore, a practical impossibility if banks were to play a role in the
nation’s economic development (Casu, 2006). Moreover, the practice of continually
renewing short- term notes for the purpose of supporting long-term capital projects
proved unacceptable. The failure or inability of banks to tailor loan arrangements to
the specific conditions encountered with longer-term uses in fact contributed to the
demise of the practice.

2.2 Review of Related Research Studies

Fredrick (2012) analyzed the impact of liquidity management on the financial

performance of commercial banks in Kenya. The study has used CAMEL model as a
 15

proxy for liquidity management. The author found that the strong impact of CAMEL
(credit risk components) on the financial performance of commercial banks.

Funso et. al. (2012) examined the effect of credit risk on the performance of
commercial banks in Nigeria over the period of 11 years (2000-2010). Panel model
analysis was used to estimate the determinants of the profit function. The results
showed that the effect of credit risk on bank performance measured by the Return on
Assets of banks is cross-sectional invariant. That is the effect is similar across banks
in Nigeria, though the degree to which individual banks are affected is not captured
by the method of analysis employed in the study. Based on our findings, it is
recommended that banks in Nigeria should enhance their capacity in credit analysis
and loan administration while the regulatory authority should pay more attention to
banks’ compliance to relevant provisions of the Bank and other Financial Institutions
Act (1999) and prudential guidelines

Hoseininassab et al. (2013) examined effects of risk parameters (credit, operational,

liquidity and market risk) on banking system efficiency (studying 15 top banks in
Iran) recognizing the importance of efficiency and risk as two fundamental important
categories in banking industry, seeks to review the effectiveness of two popular
models: parametric (SFA) method with economic basis and nonparametric (MEA)
method with mathematical optimization basis to evaluate bank efficiency and rank
and select an optimal model and also to identify the impact of credit, operational,
market and liquidity risks on banking system efficiency. The 15 banks were selected
as statistical research community over the last six years (2005-2011). Using average
performance provided by the above two methods, banks were ranked with Deap and
Frontier software, and then to examine the presence or absence of significant
correlation between the rankings provided by these two methods, the Pearson
correlation coefficient was used. The results suggest differences in the two methods
with regard to performance evaluation and ranking of banks, and show a relative
superiority of SFA method, compared to MEA method. In addition, to examine the
impact of efficiency on risk, for the four studied risks based on selected indicators,
four models were estimated using econometric methods and the ordinary least squares
 16

(OLS). The results showed that each of the studied risks and their related indicator
and their specific coefficient, significantly affect on efficiency.

Kumar & Yadav (2013) assessed on liquidity risk management in bank that Liquidity
is a bank’s capacity to fund increase in assets and meet both expected and unexpected
cash and collateral obligations at reasonable cost and without incurring unacceptable
losses. In the context of banking, liquidity, or the ability to fund increases in assets
and meet obligations as they come due, is critical to the ongoing viability of the
banking institution. Since there is a close association between liquidity and solvency
of banks, sound liquidity management reduces the probability of banks becoming
insolvent, thus reducing the possibilities of bankruptcies and bank runs. Ultimately,
prudent liquidity management as part of the overall risk management of the banking
institutions ensures a healthy and stable banking sector. Effective liquidity risk
management helps ensure a bank’s ability to meet its obligations as they fall due and
reduces the probability of an adverse situation developing. They examined the sound
practices for the liquidity risk management in banks. They went along with the
suggestions of the Basel Committee and Reserve Bank of India on management of
liquidity risk. They explained the meaning of liquidity, liquidity risk and liquidity risk
management. It also discussed the process of building up of a liquidity risk
management system.

Kaitibi .B. et al (2018) assessed the impacts of efficient liquidity management on

profitability of commercial bank in Sierra Leone. For this purpose, the rokel
commercial bank was selected as case study. Relevant data were collected from five
years financial statements and annual reports of the bank. The analysis of the data was
quantitatively as well as qualitatively done using ratio analysis and charts. Results
showed that profitability of commercial banks in Sierra Leone is significantly
influenced by the efficiency of credit management. Noor .A. et al (2018) examined
the impact of credit risk management on financial performance of banks. This study
was descriptive and analytical natured based on secondary data sample of four
different commercial bank. The analysis of data was based on simple regression
analysis of percentage of classified loan on ROI, ROE, ROA and so on financial
 17

indicators. The study concluded that there is significant relationship between the
variables during short run.

Ibe O.S. (2013) investigated the impact of liquidity management on the profitability
of banks in Nigeria. The work is necessitated by the need to find solution to liquidity
management problem in Nigerian banking industry. Three banks were randomly
selected to represent the entire banking industry in Nigeria. The proxies for liquidity
management include cash and short term fund, bank balances and treasury bills and
certificates, while profit after tax was the proxy for profitability. Elliot Rothenberg
Stock (ERS) stationary test model was used to test the run association of the variables
under study while regression analysis was used to test the hypothesis. The result of
this study has shown that liquidity management is indeed a crucial problem in the
Nigerian banking industry. The study therefore recommends that banks should engage
competent and qualified personnel in order to ensure that right decisions are adopted
especially with the optimal level of liquidity and still maximize profit.

Abdullah & Jahan (2014) focused on two important issues of main stakeholders of
bank which are liquidity and profitability. The shareholders desire maximum
profitability as a return on their investment, while the depositors opt for a maximum
liquidity as a guarantee for safety and ability to pay their money on demand.
Statistical significance of liquidity on profitability can be a great factor for existing
and potential stakeholders. Therefore, this study had attempted to investigate the
impact of liquidity and profitability of the private commercial banks of CSE-30 in
Bangladesh by focusing on certain ratios over a period of five years. Five private
commercial banks have been selected to undertake the research. Profitability
measures - ROA and ROE are dependent variables and liquidity measures - Loan
Deposit Ratio, Deposit Asset Ratio and Cash Deposit Ratio are selected as
independent variables. The research carried out simple regression analysis to test the
hypotheses. However, the null hypothesis is accepted in this study indicating that
there is no significant relationship between liquidity and profitability.

Smail (2016) referred the mounting importance of liquidity and profitability as a key
concern in today’s competitive business environment to generate funds internally.
 18

This study has examined the impact of the liquidity management on the performance
of the 64 Pakistani non-financial companies constituting Karachi Stock Exchange
(KSE) 100 Index for the period of 2006-2011. To derive the results of the study;
descriptive statistical analysis, correlation analysis and multivariate regression tools of
analysis were applied. According to the results of analyses, it is found that liquidity
variables current ratio and the cash conversion cycle have significant positive impact
on profitability (ROA). Further, results indicate that high current ratio and longer cash
conversion cycle lead firms towards better performance. This study suggested firms to
relax their credit sales policies, and devise inventory & collection turnover system in a
wise manner to be more accessible to a large number of customers.

Begum (2016) investigated the relationship between banks' liquidity and profitability
and the impact of liquidity on bank's profitability. The paper applies the ordinary least
square (OLS) method for the sample period from 1997 to 2014 to examine the impact
of liquidity on banks' profitability. The paper finds that the advance deposit ratio
positively impacts banks' profitability while profitability is defined as return on asset
(ROA). Call money rates, non performing loans (NPLs), and excess liquidity impact
banks' profitability in a negative fashion. The negative relationship between NPLs and
ROA has been a major concern for the policymakers in the banking industry of
Bangladesh since NPLs in the banking sector have increased during the last three
years in the post 2011 period.

Ali et. al (2011)examined the profitability indicators of public and private

commercial banks of Pakistan explored in 2006-2009. The return on assets (ROA)
and return on equity (ROE) are used as profitability measures to determine the affect
of bank-specific and macroeconomic indicators on profitability. The descriptive,
correlation and regression analysis results are derived with the help of SPSS. The
efficient asset management and economic growth establish positive and significant
relation with profitability in both models (measured by ROA & ROE). The high credit
risk and capitalization lead to lower profitability measured by return on assets (ROA).
The operating efficiency tends to exhibit the higher profitability level as measured by
return on equity.
 19

Olweny and Shipho (2011) determined and evaluate the effects of bank-specific
factors; Capital adequacy, Asset quality, liquidity, operational cost efficiency and
income diversification on the profitability of commercial banks in Kenya. The second
objective was to determine and evaluate the effects of market structure factors;
foreign ownership and market concentration, on the profitability of commercial banks
in Kenya. This study adopted an explanatory approach by using panel data research
design to fulfill the above objectives. Annual financial statements of 38 Kenyan
commercial banks from 2002 to 2008 were obtained from the CBK and Banking
Survey 2009. The data was analyzed using multiple linear regressions method. The
analysis showed that all the bank specific factors had a statistically significant impact
on profitability, while none of the market factors had a significant impact. Based on
the findings the study recommends policies that would encourage revenue
diversification, reduce operational costs, minimize credit risk and encourage banks to
minimize their liquidity holdings. Further research on factors influencing the liquidity
of commercials banks in the country could add value to the profitability of banks and
academic literature.

Aboila and Olausi (2014) investigated that the impacts of credit risk management on
the performance of commercial banks in Nigeria. Financial reports of seven
commercial banking firms were used to analyze for seven years (2005–2011). Panel
regression model was employed for the estimation of the model. In the model, return
on equity (ROE) and return on assets (ROA) were used as the performance indicators
while non-performing loans (NPL) and capital adequacy ratio (CAR) as credit risk
management indicators. The study revealed that credit risk management has a
significant impact on the profitability of commercial banks‟ in Nigeria. The results of
the study revealed that there was a significant relationship between credit
management and bank profitability and there was a significant relationship between
bank liquidity and profitability among deposit money banks in Nigeria.

Danjuma (2015) examined out a conceptual review of credit risk management and
customers’ satisfaction in Deposits Money Banks (DMBs) in Nigeria. It examined
concepts of credit and credit risk management based on credit and credit risk, credit
management and risk assessment tools The Credit Appraisal Process was also
 20

examined from the corporate strategy and portfolio strategy perspectives. Conceptual
issues relating to customer satisfaction, consumer behavior and dimensions of
customer satisfaction: emotional, behavioral affective, cognitive and intention to
repurchase were discussed. The study proposes a conceptual framework for
measuring link between credit risk management and customer satisfaction in DMBs.
Also, the framework proposes that perceptions of customers about satisfaction can be
determined based on their gender, age and occupation.

Alshatti (2015) examined the effect of credit risk management on financial

performance of the Jordanian commercial banks during the period 2005-2013 using
capital adequacy ratio, credit interest/credit facilities ratio, provision for facilities loss/
net facilities ratio, leverage ratio and non-performing loans/gross loans ratio as
independent variables. The dependent variables represent the profitability measured
by ROA and ROE. The author concludes that all the credit risk management
indicators used in the study have significant effect on the financial performance of the
Jordanian commercial banks.

Onuko et al. (2015) investigated the effect of credit risk management on loan portfolio
quality of tier one commercial banks in Kenya. The study used loan pricing as the
independent variable while loan portfolio quality as the dependent variable. The
quality of the loan portfolio was measured by use of nonperforming assets (NPA).The
study employed descriptive research design. Five tier one commercial banks in Kenya
were analyzed. Financial reports for the five banks were analyzed between the years
2009-2013. Data was collected through both primary and secondary methods. The
findings indicated loan pricing had significant positive effect on the level of NPA and
it accounted for 57.4% change in level of NPA. It is therefore recommended that
financial institutions charge affordable interest rates that will attract more creditors
hence increasing their revenue from interest earned. Further studies should carried out
on other factors not included in this study such as loan exposure limits.

Ugoani (2015) examined the relationship of poor credit risk management and bank
failures in Nigeria using survey research design. The results from the Chi-square
statistics revealed that weak corporate governance accelerates bank failures and the
 21

credit risk management function is to the greatest extent the most diverse and
complex activity in banking business. The author concludes that poor credit risk
management influences bank failures.

Michael et al. (2015) developed an effective credit risk management that the credit
management starts with the sales and does not stop until the full and final payment
has been received. The central bank annual supervision report 2015 indicated high
incidence of credit risk reflected in the rising levels of non-performing loans by the
commercial banks in the last 10 years. This results in loan losses when ultimately loan
recovery flops and also creation of provision for doubt debts thus affecting overall
profitability. Therefore, this study aims at assessing the effectiveness of credit
appraisal on loan performance in commercial banks in Kenya. It was intended to be of
significance to various parties namely the banks management, customers, investors
and even the government. It was suffered difficulties due confidentially of credit
information but the researcher obtained an introductory letter from the university and
assured responds of confidentiality. Descriptive research design was used. The
population comprised of 86 respondents. Data was collected using a self-administered
questionnaire through drop and pick later method. The questionnaire was both open
and closed ended. Test retest method was used to ensure reliability while piloting was
used to check the validly of the research instrument .data was analyzed using to
frequencies, percentages and means. Correlation was used to compute the degree of
association between variable. The hypotheses were tested using chi square. Data was
thereafter presented using table and pie charts. Credit appraisal was found to be very
important in influencing performance of commercial banks. Findings revealed that
lending placed much reliance on use of past information and thus credit referencing
and credit history were applied more in credit appraisal. It was recommended that
credit appraisal should be carried out by the technical people who are experienced and
competent credit officers. Use of a multi-variety approach to credit risk appraisal was
also recommended.

Shing & Shahid (2016) investigated that how well the banking sector of Oman is
managing their liquidity risk by comparing them with some of the leading
multinational banks. The liquidity ratios are used to compare the liquidity risk of
 22

domestic banks with the multinational banks. Frequently used liquidity ratios were
calculated and compared for the period of three years from 2012 to 2014 using
descriptive and analytical approach. On the basis of liquidity ratios the two domestic
banks of Oman are weak in liquidity management as compared to their international
counterpart .However, Central bank of Oman monitors the liquidity reports of each
bank, policies are reviewed and approved by the risk committee of banks. Moreover,
the Omani local banks also frequently conduct stress testing based on the market
situations and bank conditions as per the standard laid down by the Basel Committee.

Bassey et al. (2016) examined the liquidity management and the performance of
banks in Nigeria within the period 2000-2010. It investigated the relationship between
the variables of bank performance and those of liquidity management using bank
deposit, cash reserve requirement, bank investment, and cash ratio as indicators. Data
were mainly collected from CBN’s statistical bulletin. Data were analyzed using
simple percentages and simple regression model. Findings indicated that a strong
relationship exists between bank deposit and bank reserve requirement, and bank
investment and cash ratio. Thus, these finding which had re-echoed results from
similar studies re-emphasize the fact that successful operations and survival of banks
anchored on efficient and effective liquidity management. Therefore, it was
recommended that banks should not concentrate purely on deposits but rather other
measures be adopted to reduce illiquidity in this sector.

Wambui & Wanjim (2016) determined the effect of credit risk on corporate liquidity
of deposit taking microfinance institutions (DTMs) in Kenya. The population of the
study comprised all the nine DTMs in Kenya. The data for the study was collected
from secondary sources for the period between 2011 and 2013. Regression analysis
was used to determine the strength of the relationship between the variables. The
findings of the study indicated that credit risk has a strong and a statistically
significant effect on corporate liquidity of deposit taking microfinance institutions in
Kenya.

Davronov (2016) studied the existing mechanisms of liquidity management in

practice of commercial banks in Uzbekistan. In addition, it presents description and
 23

grouping of theoretical approaches to the liquidity management in commercial banks.

He also formulated main requirements to the mechanism of liquidity management
process. Moreover, it proposes and demonstrates the results of testing mathematical
model of analysis and forecast of bank cash flows which is based on ARIMA method.
It should be noted that the model, proposed in the article, cannot entirely optimize the
activity of the bank and minimize risks of liquidity management. On the one hand, it
is connected with the fact that the forecast for future cash flows of the bank is made
with the certain probability. Thus if we raise the time series, the reliability of the
results will be decreased.

Coleman et al. (2017) explained the patterns of internal liquidity management and
their effect on bank lending, using a novel branch-level dataset of Brazilian banks.
The results suggest that internal liquidity management increases during times of
financial stress. Privately owned banks are most affected by a liquidity shock, and
increase the level of internal funding to maintain their branch lending, while their
government-owned competitors react strategically. Private and government banks
increase the funding of branches in concentrated and riskier areas. This funding
translates into more lending, as the sensitivity of lending to internal funding remains
high after the liquidity shock. Altogether, the paper provided branch-level evidence of
the way that banks ration internal liquidity, both in normal times and in times of
stress, and the effect this has on bank lending.

Ejong et al. (2014) examined the impact of credit risk and liquidity risk management
on the profitability of deposit money banks in Nigeria with particular reference to
First bank of Nigeria Plc. Descriptive research design was used for the study where
questionnaires were administered to a sample size of eighty (80) respondents. The
data obtained were presented in tables and analyzed using simple percentages. The
formulated hypotheses were tested using the Pearson product moment correlation.

2.2.1 Review Article in the National Context

Koirala (2010) assessed the record of accomplishment of potential borrowers and

innocent characters termed as the best borrower. The bank, on the other hand is an
 24

institution established have been responsible for the existence of huge volume of NPA
in state-owned commercial banks. In order to improve the situation, there is a need to
evolve a more acceptable working system backed by cooperation and realization by
the banks employees as well as the politicians and stakeholders, who can influence in
banks operation.

Gautam (2012) analyzed financial performance of commercial banks using both

descriptive and diagnostic approach. It was concluded the following points:

i. The structural ratio of commercial banks shows that banks invest on the
average of 75% of their total deposit on the government securities and the
shares.
ii. The analysis of resource position of commercial banks should quit high
percentage of deposit as cash reserve.
iii. Return ratio of all the banks show that most of the time foreign banks have
higher return as well as higher risk than Nepalese banks.
iv. The debt – equity ratios of commercial banks are more than 100% in most of
the time period under studies period. It led to conclude that the commercial
banks are highly leveraged and highly risky. JVBs had higher capital adequacy
ratio but has been dealing every day.
v. In case of the analysis of the management achievement, foreign banks have
comparatively higher total management achievement index.

Shrestha (2012) conducted the role of deposit mobilization and its problems and
prospects in context of Nepal using descriptive and diagnostic approach for the study
of banks and has presented that following problems in the context of Nepal:

i. People do not have knowledge and proper education for institutional manner.
They so do not know financial organizational process, withdraw system,
depositing system etc.
ii. Financial institutions do not want to operate and provide their services in rural
areas.
 25

iii. He has also recommended about how to mobilize the deposit collection by the
financial institutions by rendering their services in rural areas and by adding
various services.
iv. By operating rural banking programs and unit, mobilize the deposit collection
by the financial institutions by rendering their service in rural areas, by adding
various services.
v. Nepal Rastra Bank must organize training programs to develop the skill
human resources.
vi. By spreading a numbers of co-operative societies to develop mini banking
services and improves the habits of public in deposit collection to the rural
areas.

Poudel (2012) examined the impact of credit risk management on the financial
performance of commercial banks in Nepal using the financial report of 31 banks for
eleven years (2001-2011). The methods of data analysis in the study were descriptive,
correlation and multiple regressions. The financial performance indicator used in the
study was return on assets (ROA). The predictors of the banks‟ financial performance
used in the study were: default rate, cost per loan assets and capital adequacy ratio.
The author asserts that all these parameters have an inverse impact on banks‟
financial performance. However, among the risk management indicators, default rate
(NPLR) is the single most influencing predictor of bank financial performance in
Nepal whereas cost per loan assets is not significant predictors of bank performance.
The author concludes that credit risk management is crucial on the bank performance
since it have a significant relationship with bank performance.

Bhattarai (2016) examined the effect of credit risk on performance of Nepalese

commercial banks. The descriptive and causal comparative research designs have
been adopted for the study. The pooled data of 14 commercial banks for the period
2010 to 2015 have been analyzed using regression model. The regression results
revealed that 'non-performing loan ratio' has negative effect on bank performance
whereas 'cost per loan assets' has positive effect on bank performance. In addition to
credit risk indicators, bank size has positive effect on bank performance. Capital
adequacy ratio and cash reserve are not considered as the influencing variables on
 26

bank performance. This study concludes that there is significant relationship between
bank performance and credit risk indicators.

2.3 Research Gap

The many research have been conducted on liquidity management analysis of

commercial banks in foreign country as well in Nepalese context. All the previous
research and studies were focused on different aspect of credit and liquidity by linking
it with the performance of the commercial banks. Also the many research in process
to conduct in micro topic concern with financial instruments but there was no any
research and studies conducted on liquidity and profitability analysis of two joint
venture commercial banks in Nepal. The research gap among the previous studies and
current studies firstly, cover the relevant data and information from the year 2012/13
to 2016/17. Secondly, no research has been undertaken regarding comparative
analysis of liquidity and profitability performance between Nabil Bank Ltd. and Nepal
SBI Bank Limited that itself demonstrates the gap of this research from the previous
one because the researchers have not found any research done on this bank in
collective form.

While the Nepalese banking sector is being more competitive, on the basis of creation
of credit and liquidity management processes to achieve high earning. It is difficult to
identify that which commercial banks have well financial strength and poor
performance. Banks are walking on a tight rope to maintain the balance between
providing more credit and maintaining enough liquidity. The banks that are able to
maintain this balance are the ones that are enjoying huge returns. Hence, this research
was conducted to understand whether the sample banks have been successful on
maintaining this balance. Every year financial performance is changing according to
the environment of the country. Hence this study fulfils the prevailing research gap
about the depth analysis of liquidity and profitability performance evaluations. The
research work will help acquire knowledge regarding tools and techniques used and
extra knowledge for the further researcher who is going to study in the concern topic.
Therefore, this study fulfills the confusion and uncertainty about credit and liquidity
management by analyzing various financial ratios of sample commercial banks in
Nepal.
 27

CHAPTER- III

RESEARCH METHODOLOGY

This chapter refers to the overall research method followed by us in analyzing the
objectives outlined.

This study covers quantitative methodology in greater extent and also uses the
descriptive part based on both technical aspects and logical aspects. This research
tries to perform a well-designed quantitative and qualitative research in a very clear
and direct way using both financial and statistical tools.

3.1 Research Design

The study basically follows the descriptive as well as analytical research design.
Financial and statistical tools have been applied to examine facts and descriptive
techniques have been adapted to evaluate investment performance of CBs. Besides
these, some simple questions have been asked to the concerned personnel in the
course of visiting the bank. This report also contains other primary data. This report is
mainly based on secondary data, which include annual reports published by the
concerned banks and other publications related to the concerned topic.

3.2 Sources of Data

The study is based on secondary data. The data required for the analysis are directly
obtained from the balance sheet and P\L account of concerned banks’ annual reports.
Supplementary data and information are collected from number of institutions and
regulating authorities like NRB, SEBON, NEPSE, Ministry of Finance, and budget
speech of different fiscal years and economic survey.

All the secondary data are complied, processed and tabulated in the time series as per
the need and objectives of the study. Likewise various data and information are
collected from the economic journals, periodicals, bulletins, magazines and other
published & unpublished reports and documents from various sources. Formal and
 28

informal talks with the concerned authorities of the banks are also very helpful to
obtain the additional information of the related problem.

3.3 Population and Sample

There are altogether 28 commercial banks functioning in the country. Out of 28

commercial banks in Nepal there are 6 joint venture natured banks and for the study
only Nabil Bank and Nepal SBI Bank Limited has taken as a sample by In this study,
using convenience sampling method and also be taken 5 years data from the time
period of 2012/13to 2016/17.

Their data relating to investment policy (liquidity management) are studied and
compared.

3.4 Method of Analysis

Various financial, accounting and statistical tools are used to make the analysis more
effective, convenience, reliable and authentic. The analysis of data is done according
to the pattern of data available because of limited time and resources. Simple
analytical statistical tools such as percentage, Karl Person’s coefficient of correlation,
regression, and the method of least square and test of hypothesis are used in this
study. Similarly, some accounting tools such as ratio analysis and trend analysis have
also been used for financial analysis. The various tools applied in this study have been
briefly presented as under:

3.4.1 Financial Tools

Financial tools are used to examine the financial strength and weaknesses of bank in
this study.

Ratio Analysis

Ratio analysis is the relationship between two accounting figures expressed

mathematically. It is computed by dividing one item of relationship with the other.
Management itself can use these parameters to improve the organization’s
performance. The knowledge regarding strengths and weakness is necessary for
 29

exploiting maximum benefits and to repair the weaknesses to meet the challenges.
The financial ratios, which are calculated and analyzed in this study, are as follows:

A) Liquidity Ratios

Liquidity ratios measure the firm’s ability to meet current obligations. It reflects the
short-term financial strength of the business. It is the measurement of speed with
which a bank’s assets can be converted into cash to meet deposit withdrawal and other
current obligations. A bank should ensure that it does not suffer from luck of liquidity
and also it does not have excess liquidity. Both condition of liquidity are not in favor
of the banks. The following ratios are evaluated under liquidity ratios.

i) Current Ratio

The ratio between current assets and current liabilities is known as current ratio. It
shows the relationship between current assets and current liabilities. Current assets are
those assets, which can be converted into cash within short period of time, normally
not exceeding one year. Current liabilities are those obligations, which are payable
within a short period, normally not exceeding one year.

Mathematically it is expressed as,

Current Ratio =

Higher the current ratio better is the liquidity position. The widely accepted standard
of current ratio is 2:1 but accurate standard depends on circumstances in case of
seasonal business ratio.

This ratio measures the bank’s short-term solvency i.e. its ability to meet short-term
obligations. As a measure of creditors versus current assets, it indicates each rupee of
current assets available for each rupee of current liability.

ii) Cash and Bank Balance to Total Deposit Ratio (Cash Reserve Ratio)

Cash and Bank Balances are the most liquid current assets. This ratio measures the
percentage of most liquid fund with the bank to make immediate payment to the
 30

depositor. This ratio is calculated by dividing the cash and bank balance by the
amount of total deposits. Mathematically, it is expressed as,

Cash Reserve Ratio =

Hence, cash and bank balance includes cash on hand, foreign cash on hand, cheques
and other cash items, balance with domestic and abroad banks whereas the total
deposits include current deposits, saving deposits, fixed deposits, money at call and
short-term notice and other deposits.

iii) Cash and Bank Balance to Current Assets Ratio

This ratio measures the proportion of most liquid assets i.e. cash and balance among
the total current assets of the bank. Higher ratio shows the banks’ ability to meet its
demand for cash.

This ratio is calculated by dividing cash and bank balance by current assets.

Mathematically, it is expressed as,

Cash and Bank Balance to Current Assets Ratio =

iv) Investment on Government Securities to Current Assets Ratio

Investment on government securities includes treasury bills and development bonds

etc. This ratio is calculated to find out the percentage of current assets invested in
government securities.

This ratio is calculated by dividing investment made on government securities by

current assets. Mathematically it is expressed as,

Investment on Govt. Securities to Current Assets Ratio =

 31

v) Loan and Advance to Current Assets Ratio

Loan and advances to current assets ratio shows the percentage of loan and advances
in the total current assets, where loan & advances by current assets.

Mathematically it is expressed as,

Loan and Advances to Current Assets Ratio =

B) Assets Management Ratio (Activity Ratios)

Activity ratios are employed to evaluate the efficiency with which the firm manages
and utilizes its assets. Assets management ratio measures how efficiently the bank
manages its resources.

The following ratios are used under asset management ratio.

i) Loan and Advances to total Deposit Ratio

This ratio is calculated to find out that which banks are able to utilize their total
deposits on loans and advances for profit generating purpose. This ratio can be
obtained by dividing loan and advances by total deposits, which can be stated as,

Loan and Advances to Total Deposit Ratios =

ii) Total Investment to Total Deposit Ratio

This ratio implies the utilization of firm’s deposit invested in government securities
and share & debentures of other companies and bank.

This ratio can be calculated by dividing total investment by total deposit. It can be
stated as,

Total Investment to Total Deposit Ratio =

 32

iii) Loan and Advances to Working Fund Ratio

Loan and advances indicates the ability of any bank to canalize its deposits in the
form of loan and advances to earn high return. This ratio is computed by dividing loan
and advances by total working fund, which can be stated as,

Loan and Advances to Working Fund Ratio =

Where, total working fund consists of current assets, net fixed assets, loan for
development banks and other miscellaneous assets.

iv) Investment on Government Securities to Total Working Fund Ratio

This ratio shows that banks’ investment on government securities in comparison to

the total working fund.

This ratio is calculated by dividing investment on government securities by total

working fund, which can be stated as,

Investment on Government Securities to Total Working Fund Ratio

Investment on government securities includes treasury bills and development bonds

etc.

C) Profitability Ratios

Profit is the difference between revenues and expenses over a period of time. A
company should earn profit to survive and grow over a long period of time. Therefore,
the financial manager should continuously evaluate the efficiency of its company in
terms of profits. The profitability ratios are calculated to measure the operating
efficiency of a company. It is the indicator of the financial performance of any
institution. This implies that higher the profitability ratio, better the financial
performance of the bank and vice versa. The following ratios are taken into account
under this heading.
 33

i) Return on Total working Fund Ratio

This ratio measures the overall profitability of all working funds I.e. total assets. A
firm has to earn satisfactory return on assets or working fund for its survival. This
ratio is calculated by diving net profit by total working fund.

This can be expressed as,

Return on Total Working Fund Ratio =

ii) Return on Loan & Advance Ratio

This ratio indicates how efficiently the bank has employed its resources in the form of
loan and advances. This ratio is computed by dividing net profit by loan and
advances.

This ratio can be expressed as,

Return on Loan & Advances Ratio =

iii) Total Interest Earned to total outside Assets Ratio

This ratio measures the interest earning capacity of the bank through the efficient
utilization of outside assets. Higher ratio implies efficient use of outside assets to earn
interest. This ratio is calculated by diving total interest earned by total outside assets.

It is expressed as,

Total Interest Earned to Total outside Assets Ratio =

iv)Total Interest Earned to Total Working Fund Ratio

This ratio is calculated to find out the percentage of earned to total assets (working
fund). Higher ratio implies better performance of the bank in terms of interest earning
on its total working fund. This ratio is calculated by diving total interest earned by
total working fund.
 34

It can be expressed as,

Total Interest Earned to Total Working Fund Ratio =

Where, total interest earned includes, interest on loan, advances and overdraft,
government securities, investment debentures and other inter-bank loans.

v) Total Interest Paid to Total Working Fund Ratio

This ratio is calculated to find out the percentage of paid on liabilities with respect to
total working fund. This ratio is calculated by dividing total interest paid by total
working fund which is expressed as,

Total Interest Paid to Total Working Fund Ratio =

Where, total interest paid includes total expenses on deposits, loan and advances,
borrowings and other deposits.

D) Risk Ratios

Risk taking is the prime business of banks’ investment management. It increases

effectiveness and profitability of the bank. These ratios indicate the amount of risk
associated with the various banking operations, which ultimately influences the
banks’ investment policy.

The following ratios are taken into account under this heading.

i) Liquidity Risk ratio

This ratio measures the level of risk associated with the liquid assets i.e. cash, bank
balance etc. that are kept in the bank for the purpose of satisfying the depositors’
demand for cash. Higher the ratio, lower is the liquidity risk.

Mathematically it is presented as,

Liquidity Risk Ratio =

 35

ii) Credit Risk Ratio

This ratio measures the possibility that loan will not be repaid or the investment will
deteriorate in quality or result in loss to the bank. By definition, it is expressed as the
percentage of non-performing loan to total loan & advances.

Mathematically it is presented as,

Credit Risk Ratio =

3.4.2 Statistical Tools

Some important statistical tools are used to achieve the objective of this study. In this
study, statistical tools such as trend analysis of important variables, co-efficient of
correlation between different variables as well as test of hypothesis have been used
which are as follows:

a) Trend Analysis

This topic analyzes the trend of loan and advances to total deposit ratio and trend of
total investment to total deposit ratio of NABIL & SBI bank from 2012\2013 to
2016\2017 and makes the forecast for the next five years. Under this topic following
sub- topic have been presented.

i) Trend analysis of loan and advances to total deposit ratio.

ii) Trend analysis of total investment to total deposit ratio.

b) Co-efficient of Correlation Analysis

This analysis identifies and interprets the relationship between the two or more
variables. In the case of highly correlated variables, the effect on one variable may
have effect on other correlated variable under this topic. Karl Pearson’s co-efficient of
correlation has been used to find out the relationship between the following variables.

i.) Co-efficient of correlation between deposit and loan and advances.

 36

ii.) Co-efficient of correlation between deposit and total investment.

iii.) Co-efficient of correlation between total outside assets and net profits.

These tools analyze the relationship between these variables and help the banks to
make appropriate policy regarding deposit collection, fund utilization (loan &
advances and investment) and maximization of profit.

This tools is used for measuring the intensity or the magnitude of linear relationship
between two variable X and Y is usually denoted by ‘r’ can be obtained as:

Where,

N = no. of observation in series X and Y

= Sum of observation in series X

= Sum of observation in series Y

= Sum of square observation in series X

= Sum of square observation in series Y

= Sum of the product of observation in series X and Y

The result of coefficient of correlation is always between -1 to +1, where r= +1 means

there is a positive relationship between two variables and where r=-1, means there is a
negative relationship between two variables.

II. Coefficient of Determination (r2)

It explains the variation percent derived in dependent variable due to the any one
specified variable; it denotes the fact that the independent variable is good predictor
of the behavior of the dependent variable. It is square of correlation coefficient.
 37

III. Probable Error of Correlation

The probable error of the co-coefficient of correlation helps in interpreting its value; it
is obtained the following formula.

It is used in interpretation whether calculated value of ‘r’ is significant or not.

1. If r < P.E., it is insignificant. So, perhaps there is no evidence of correlation.

2. If r > P.E., it is significant.
3. In other cases nothing can be concluded.
 38

CHAPTER – IV

RESULTS

In this chapter an attempt has been made to analyze and evaluate major financial
items, which have an impact on investment management and fund mobilization of
NABIL and SBI bank. A number of financial ratios that are crucial in evaluating the
fund mobilization system of commercial banks have been calculated and analyzed in
this chapter. After this, the investment policy of the banks has been explored.

4.1 Financial Analysis

We have tried to analyze and evaluate those major financial items, which are mainly
related to the investment management and fund mobilization of NABIL and SBI
bank. The ratios are designed and calculated to highlight the relationship between
financial items and figures. It is a kind of mathematical procedure to derive
relationship between two or more variables. The important financial ratios, which are
to be calculated for this study, are as follows:

4.1.1 Liquidity Ratio

This ratio measures the ability of the firm to meet its current obligations. A
commercial bank must maintain its satisfactory liquidity position to meet the credit
need of the community, to meet demands for deposits, withdraws, pay maturity
obligation in time and convert non-cash assets into cash to satisfy immediate needs
without loss to bank and consequent impact in long run profit. In fact, it analyzes
liquidity needs, which is helpful for the preparation of cash budget and fund flow
statement.

The following ratios are evaluated and interpreted under liquidity ratio:

4.1.1.1 Current Ratio

Current ratio indicates the ability of a bank to meet its current obligation. This is the
broad measure of liquidity position of the financial institutions. The widely accepted
standard of current ratio is 2:1 but accurate standard depends on circumstances in case
 39

of banking and seasonal business ratio such as 1:1 etc. Mathematically it has been
represented as:

Current Ratio=

Where, current assets consist of cash and bank balance, money at call or short-term
notice, loan advance investment in government securities, other interest receivable
and miscellaneous current assets whereas, current liabilities consist of deposits, loan
and advances, bills payable, tax provision, staff bonus, dividend payable and
miscellaneous current liabilities.

Table 4.1 Current Ratio (times)

S.N Fiscal Year NABIL SBI

1 2012/2013 0.76 1.02
2 2013/2014 0.81 1.05
3 2014/2015 0.92 1.06
4 2015/2016 0.94 1.07
5 2016/2017 0.96 1.09
Total 4.39 5.29
Mean 0.878 1.058
S.D. 0.079 0.02315
C.V. 0.0895 0.022

Current Ratio
35
Current ratio Times

30
25
20
NABIL
15
SBI
10
5
0
2012/13 2013/14 2014/15 2015/16 2016/17

Fig 4.1
 40

The table 4.1 shows that the current ratio of these commercial banks. Total mean
standard deviation and coefficient of variation have also been calculated. Although
the current ratio of Nabil has been fluctuating it is always around one or less than one.
Current ratio of SBI, on the other has always remained at 1:1. In fact, the ratio of both
the banks seems to be appropriate. But, the lower ratio of Nabil indicates that it may
often not be in a proper liquidity position. SBI’s liquidity position is better than that of
Nabil Bank.

The coefficient of variation between the current ratio of Nabil is 8.95% that is greater
than that SBI i.e.2.2%. It shows that current ratio of Nabil is fewer consistencies than
that of SBI bank.

4.1.1.2 Cash and Bank Balance to Total Deposit Ratio (CRR Ratio)

Cash and bank balance are the most liquid assets. This ratio measures the ability of
the bank to meet the unanticipated cash and all types of deposits.

Cash and Bank Balance to Total Deposit Ratio =

Cash and bank balance includes cash on hand, foreign cash on hand, cheques and
other cash items, balance with domestic and abroad banks whereas the total deposits
include current deposits, saving deposits, fixed deposits, money at call and short-term
notice and other deposits.

Table 4.2 Cash and Bank Balance to Total Deposit Ratio (%)

S.N Fiscal Year NABIL SBI

1 2012/2013 5.13 29.42
2 2013/2014 6.78 29.07
3 2014/2015 8.51 20.44
4 2015/2016 6.87 12.01
5 2016/2017 5.38 10.43
Total 32.67 101.37
Mean 6.534 20.274
S.D. 1.215 8.078
C.V. 0.186 0.398
 41

The table 4.2 shows the total mean, standard deviation and co-efficient of variation of
cash and bank balance to total deposit ratio of these two commercial banks. It is clear
from the above table that CRR of the banks quite fluctuating, although SBI’s CRRis
quite high as compared to that of Nabil’s. It indicates that Nabil bank is maintaining
appropriate CRR ratio if SBI bank can maintain a consistent CRR, the remaining fund
can be used for further investment.

Mean and standard deviation of Nabil bank is less that of SBI bank. C.V. ratio of
Nabil and SBI bank are 0.186 and 0.398 respectively. From this, we can conclude that
Nabil has better maintained its liquidity than SBI bank.

4.1.1.3 Cash and Bank Balance to Current Asset Ratio

This ratio shows the banks’ liquidity capacity on the basis of cash and bank balance
that is the most liquid asset. So, this ratio visualizes higher liquidity position than
current ratio.

Cash and Bank Balance to Current Asset Ratio =

Where, cash and bank balance represent total of local currency, foreign currencies,
cherubs in hand and various bank balances in local as well as foreign banks whereas
the current assets consist of cash and bank balance, money at call, short-term notice,
loan and advance, investment in government securities and other interest receivable
and other miscellaneous current assets.

Table 4.3 Cash and Bank Balance to Current Assets Ratio

S.N Fiscal Year NABIL SBI

1 2012/2013 6.18 27.14

2 2013/2014 7.90 23.87
3 2014/2015 8.25 18.01
4 2015/2016 7.81 15.36
 42

5 2016/2017 6.17 9.41

Total 36.31 93.79
Mean 7.262 18.758
S.D. 0.899 6.259
C.V. 0.124 0.334

Cash & Bank Balance to Current Assets Ratio

60
50
40
Ratio %

30 SBI
20 NABIL
10
0
2012/13 2013/14 2014/15 2015/16 2016/17

Fig.4.2

Table no.4.3 shows the total mean, standard deviation and C. V. of cash and bank
balance to current assets ratio of commercial banks. This ratio of these two banks is
better as they show the ability to manage the deposit withdrawals by the customers.

The above table shows that the cash and bank balance to current assets ratio of Nabil
bank is at fluctuating trend. It has ranged from 6.18 (in FY 2012\13) to 8.25 (in FY
2014\15). But, SBI bank has decreasing trend in FY 2012\13 i.e. 27.14 to FY 2016/17
i.e. 9.41 From the above analysis we can conclude that liquidity position (only cash
and bank balance) of Nabil bank is lesser than that of SBI bank. But, Nabil bank has
higher consistency than SBI bank. The table also reveals that Nabil has utilized its
funds more efficiently.

Similarly, the figurative representation concludes that there is highly volatility in the
ratio of SBI Bank in comparison to that of Nabil Bank.
 43

4.1.1.4 Investment on Government Securities to current Assets Ratio

The government securities are not so much liquid as cash and bank balance. But they
can easily be sold in the market or they can be converted in to cash. Investment on
government securities includes treasury bills and development bonds etc.

Table 4.4 Investment on Government Securities to Current Assets Ratio

S.N Fiscal Year NABIL SBI

1 2012/2013 20.76 5.09

2 2013/2014 30.95 7.41

3 2014/2015 25.88 16.06
4 2015/2016 25.78 22.43
5 2016/17 24.87 25.49
Total 128.24 76.48
Mean 25.648 15.296
S.D. 3.246 8.022
C.V. 0.127 0.524

Fig 4.3 Investment on Government Securities to Current Assets Ratio

60
50
40
Ratio %

30 SBI
20 NABIL
10
0
2012/13 2013/14 2014/15 2015/16 2016/17

Table 4.4 shows the table mean, standard deviation and coefficient of variation of
investment on government securities to current assets ratio of commercial banks.
Figure in the above table shows that investment on government securities to current
assets ratio of Nabil bank has increasing trend in the first two years i.e. 20.76 to 30.95
(FY 2012/13 to 2013/14) but then after, it follows decreasing trend i.e. 25.88 (FY
2014/15) to 24.87 (FY 2016/17). SBI bank has increasing trend, i.e. 5.09 to 25.49 in
 44

the FY 2012/13 to 2016/2017 respectively. The mean ratio of investment on

government securities to current assets of Nabil bank is higher than that of SBI bank
i.e. 25.648>15.296. On the other hand, coefficient of variation of Nabil bank is lesser
than that of SBI bank i.e. 0.127<0.524.

It can be concluded that Nabil has invested its current assets in government securities
more than SBI bank and its investment is also quite stable than that of SBI bank
through the figurative representation also.

4.1.1.5 Loan and Advances to Current Assets Ratio

To make an appropriate profit, a commercial bank should not keep its all collected
fund as cash and bank balance but they should be invested as loan and advances to the
customers. In the present study, loan and advances represent local and foreign bills
discounted & purchased loans, cash credit and overdraft in local currency as well as
inconvertible foreign currency.

We have,

Loan and Advances to Current Assets Ratio =

Table 4.5 Loan and Advances to Current Assets Ratio (%)

S.N Fiscal Year NABIL SBI

1 2012/2013 63.25 58.45
2 2013/2014 55.87 63.34
3 2014/2015 55.93 60.35
4 2015/2016 57.50 61.64
5 2016/2017 59.57 62.46
Total 291.94 306.24
Mean 58.388 61.248
S.D. 7.563 2.927
C.V. 0.1295 0.048
 45

Loan & Advance to Current Assets Ratio

60
50
40
Ratio %

30 NABIL

20 SBI

10
0
2012/13 2013/14 2014/15 2015/16 2016/17

Fig 4.4

Table no 4.5 shows the total mean, standard-deviation and coefficient of variation of
loan and advances to current assets ratio of these two commercial banks. Through this
table loan and advances to current assets ratios of the sample CBS are analyzed. In
the case of Nabil bank, loans and advances to current assets ratio are in fluctuating
trand i.e. highest in the FY 2012/13 (63.25%) and lowest in the FY2013/14 (55.87%).
Similarly, the ratios of SBI bank are also in fluctuating trend i.e. highest in the FY
2016/17 (62.46%) and lowest in the FY 2012/13(58.45%). Mean value of this ratio of
Nabil bank is less than that of SBI bank i.e. 58.388<61.248. But, coefficient of
variation of Nabil bank is slightly greater than that of SBI bank i.e. 0.1295>0.048.
This analysis shows that Nabil bank provides less loan and advances is less
consistence than that of SBI bank.

4.1.2 Asset Management Ratios (Activity Ratio)

Asset management ratio measures the efficiency of the bank to manage its asset in
profitable and satisfactory sector. This indicates the ability of the bank to utilize their
available resources. Following ratios are discussed under this topic.
 46

4.1.2.1 Loan and advances to Total Deposit Ratio

It shows the relationship between loans and advances to total deposit. This ratio
measures the extent to which the banks are successful to mobilize their total deposit
on loan and advances.

We have,

Loan and Advances to Total Deposit Ratio =

Where, loan and advances include loans, advances, cash credit, local and foreign bill
purchased and discount. Total deposit include saving, fixed current call at short
deposit and others.

Table 4.6 Loan and advances to Total Deposit Ratio (%)

S.N Fiscal Year NABIL SBI

1 2012/2013 57 78
2 2013/2014 53 63
3 2014/2015 48 77
4 2015/2016 58 69
5 2016/17 58 71
Total 274 358
Mean 54.80 71.60
S.D. 3.90 505
C.V. 0.071 0.077

Table no 4.6 shows the total mean, S.D. and C.V. of loan and advances to total
deposit ratio of these two commercial banks. Contents of the table show the
percentage of loan and advances to total deposit ratio position Nabil and SBI bank.
The above table exhibits that the ratio of Nabil bank has decreasing trend in FY
2012/13 i.e. 53% and FY 2013/14 i.e. 48% but it has increasing trend in FY 2014/15
i.e. 58% and it is stable in 2016/2017 i.e. 58%. SBI bank has fluctuating trend i.e.
highest in the FY 2012/2013 i.e. 78% and lowest in FY 2013/2014 i.e. 63%.
 47

The mean value of Nabil bank is lower than that of SBI bank. Mean ratio of Nabil and
SBI bank are 54.8and 71.60 respectively. Coefficient of variation of Nabil is lower
than that of SBI bank i.e. 0.071<0.077.

From table 4.6 it shows that SBI has strong position regarding the mobilization of
total deposit on loan and advances and acquiring high profit in comparison. But only
higher ratio is no better from the point of view of liquidity as the loan and advances
are not as liquid as cash and bank balance. On the other hand, Nabil has less C.V. than
that of SBI bank, which indicates that loan and advances of Nabil is stable and
consistent than that of SBI bank.

Loan & Advance to Total Deposit Ratio

NABIL SBI

52.88
48.64
44.85
41.33 39.48
30.67
26.5
18.51
10.75
5.65

2012/13 2013/14 2014/15 2015/16 2016/17

Figure 4.5

Figure 4.5 demonstrate that Nabil bank has its consistency in loan and advance in
comparison to that of SBI bank. Which indicates that Nabil Bank is Strong in loan &
advance management than SBI bank.

4.1.2.2 Total Investment to Total Deposit Ratio

A commercial bank mobilizes its deposit by investing its fund in different securities
issued by government and other financial or non-financial companies. This ratio
measures the extent to which the banks are able to mobilize their deposit on
investment in various securities.
 48

We have,

Total Investment to Total Deposit Ratio =

Where, total investment includes investment on government securities, investment on

debenture and bonds, shares in subsidiary companies, shares in other companies and
other investments.

Table 4.7 Total Investment to Total Deposit Ratio (%)

S.N Fiscal Year NABIL SBI

1 2012/2013 48.64 5.65
2 2013/2014 52.88 10.75
3 2014/2015 44.85 18.51
4 2015/2016 41.33 26.50
5 2016/17 39.48 30.67
Total 227.18 92.08
Mean 45.436 18.416
S.D. 4.865 9.352
C.V. 0.107 0.508

Table no.4.7 shows the total mean, S.D., and C.V. of total investment to total deposit
ratio of Nabil and SBI bank. The above table reveals that Nabil has increasing in FY
2012/13 i.e. 48.64 and in FY 2013/14 i.e. 52.88 but it has followed decreasing trend in
FY 2014/15 i.e. 44.85 and 2016/17 i.e. 39.48 respectively. But SBI bank has
increasing trend; it has ranged from 5.65in FY 2012/13 to 30.67 in FY 2016/17

The mean value of Nabil is higher than that of SBI bank i.e. 45.436>18.416. But, C.V.
of Nabil is less than that of SBI bank i.e. 0.1071<0.508.

From the above analysis, it is clear that Nabil is more successful to utilize its deposit
than SBI bank and also it has higher consistency to investment in securities than the
other. SBI bank has least invested in securities and also has less consistency to invest
in securities. Moreover the explanation has been depicted by Figure 4.6
 49

Investment to Total Deposit Ratio

60

50

40

30

20

10

0
2012/13 2013/14 2014/15 2015/16 2016/17

NABIL SBI

Figure 4.6

Figure 4.6 Shows that Nabil bank seems more successful and strong in deposit
utilization and its management to generate higher profit.

4.1.2.3 Loan and Advances to Total Working Fund Ratio

A commercial bank must be very careful in mobilizing its total assets as loan and
advances in appropriate lavel to generate profit. This ratio reflects the extent to which
the commercial banks are success in mobilizing their assets on loan and advances for
the purpose of income generating. A high ratio indicates better mobilization of funds
as loan and advances and vice-versa.

We have,

Loan and Advances to Total Working Fund Ratio =

Where, total working fund Consists current assets, net fixed assets, loan for
development banks and other miscellaneous assets.
 50

Table 4.8 Loan and Advance to Total Working Fund Ratio (%)

S.N Fiscal Year NABIL SBI

1 2012/2013 45.32 69.70
2 2013/2014 42.19 57.50
3 2014/2015 46.83 61.23
4 2015/2016 48.91 59.06
5 2016/17 50.38 60.94
Total 233.63 308.43
Mean 46.726 61.686
S.D. 2.853 4.229
C.V. 0.061 0.069

Table no.4.8 shows the total mean, S.D. and C.V. of loan and advances to total
working fund ratio of Nabil and SBI bank. The above table shows that the loan and
advances to total working fund ratio of Nabil has decreasing trend in FY 2012/13 i.e.
45.32 and FY 2013/14 i.e. 42.19. But, it has increasing trend in FY 2014/15 i.e. 46.83
and FY 2016/17 i.e.50.38. SBI bank has fluctuating trend, highest in the FY2012/13
i.e. 69.70 and lowest ratio in the FY 2013/14 i.e. 57.50.

Mean value of Nabil is lower than that of SBI bank i.e. 46.726<61.686 and C.V. of
Nabil is also lower than that of SBI bank i.e. 0.061<0.069. From the above analysis,
we can conclude that SBI bank has done better utilization of funds as loan and
advances for the purpose of generation. Nabil has higher consistency than that of SBI
bank.
 51

Loan & Advance to Total Working Fund Ratio

80
70
60
50
40
30
20
10
0
2012/13 2013/14 2014/15 2015/16 2016/17

NABIL SBI

Figure 4.7

4.1.3 Profitability Ratios

Profitability ratios are very help ful to measure the overall efficiency of operation of
financial institutions. Here, profitability ratios are calculated and evaluated in terms of
the relationship between net profit and assets. Higher ratio shows the higher
efficiency of the bank.

The following profitability ratios are taken into account under this heading.

4.1.3.1 Return on Total Working Fund Ratio

This ratio measures the profit earning capacity of the bank by utilizing its available
resources i.e. total asset. Return will be higher if the banks’ working fund is well
managed and if efficiency is utilized. Maximizing taxes within the legal options
available will also improve the return.

We have,

Return on total Working Fund Ratio =

 52

Table 4.9 Return on Total Working Fund Ratio (%)

S.N Fiscal Year NABIL SBI

1 2012/2013 1.59 0.17
2 2013/2014 1.54 0.58
3 2014/2015 2.51 0.64
4 2015/2016 2.72 0.72
5 2016/17 3.15 0.96
Total 11.51 3.07
Mean 2.302 0.614
S.D. 0.405 0.257
C.V. 0.176 0.418

Table no.4.9 shows the total mean, S.D. and C.V. of return on total working fund ratio
of Nabil bank and SBI bank. In the above table, return on total working fund ratio of
Nabil has decreasing trend in FY 2012/13 and 2013/14 i.e. 1.59 and 1.54 respectively.
Then after, it has increasing trend. The ratio of SBI bank has increasing trend from
2012/2013 (0.17) to FY 2016/17 (0.96).

Mean ratio of Nabil is higher than that of SBI bank i.e. 2.302>0.614.Whereas, C.V. of
Nabil is lower than that of SBI bank i.e.0.176<0.418.

From the mean ratio analysis it is fund that Nabil bank is successful to maintain the
higher ratio in return on total working fund. The C.V. of Nabil is lower than that of
SBI bank, which indicates that return on total working fund ratio of Nabil is stable
and consistence. It also reveals that investment policy of Nabil bank is efficient and
effortable.
 53

Return on Total Working Fund

NABIL SBI

69.7
61.23 59.06 60.94
57.5
48.91 50.38
45.32 46.83
42.19

2012/13 2013/14 2014/15 2015/16 2016/17

Figure 4.8

As per the figure researcher can conclude that Nabil return on working fund lower
than that of SBI bank, which indicates that return on total working fund ratio of Nabil
is stable and consistence. It also reveals that investment policy of Nabil bank is
efficient and effort able as per the line developed.

4.1.3.2 Return on Loan and Advances Ratio

It measures the earning capacity of a commercial bank on its deposits mobilized on

loan and advances. Higher the ratio greater will be the return and vice-versa.

Return on Loan and Advances Ratio =

Where, loan and advances includes loan cash credit, overdraft bills purchased and
discounted.
 54

Table 4.10 Return on Loan and Advances Ratio (%)

S.N Fiscal Year NABIL SBI

1 2012/2013 3.50 0.30
2 2013/2014 3.65 0.95
3 2014/2015 5.37 1.09
4 2015/2016 5.56 1.18
5 2016/17 5.96 1.63
Total 24.04 5.15
Mean 4.808 1.03
S.D. 1.026 0.430
C.V. 0.213 0.418

Table no. 4.10 shows the total mean, S.D, and C. V. of return on loan and advances
ratio of Nabil and SBI bank.

In the above table, return on loan and advances ratio of Nabil bank has increasing
trend from the FY 2012/13 to 2016/17. i.e. 3.50 to 5.96. The ratio of SBI bank has
also increasing trend. In the FY 2012/13 to 2016/17 ratio has increased as 0.30 to
1.63.

Mean ratio of Nabil is greater than that of SBI bank i.e. 4.808>1.3 whereas, C.V. of
Nabil is less than that of SBI bank i. e.0.213<0.418.

From the above analysis, it is fond that Nabil bank has maintained higher ratio than
SBIbank, which indicates that it is successful to earn high return on its loan and
advances. It also indicates that investment policy of Nabil bank is more effective than
other banks. Moreover, Nabil has consistency investment policy return than other
banks.
 55

Return on Loan and Advance

80

60

40

20

0
2012/13 2013/14 2014/15 2015/16 2016/17

NABIL SBI

Fig 4.9

Figure 4.9 indicates that investment policy of Nabil bank is more effective than other
banks. Moreover, Nabil has consistency investment policy return than other banks.

4.1.3.3 Total Interest Earned to Total outside Assets Ratio

It reflects the extent to which the bank is successful to earn interest as major income
on all the outside assets. Higher ratio indicates the higher earning power of total
outside assets.

We have,

Total Interest Earned to Total outside Assets Ratio =

Where, total outside assets includes loan and advances, investment on government
securities, share and debentures and all other types of investment.

Table 4.11 Total Interest Earned to Total outside Assets Ratio (%)

S.N Fiscal Year NABIL SBI

1 2012/2013 7.90 9.74
2 2013/2014 7.16 8.16
3 2014/2015 7.38 8.28
4 2015/2016 7.14 7.00
 56

5 2016/17 7.09 6.89

Total 36.67 40.07
Mean 7.334 8.014
S.D. 1.299 1.036
C.V. 0.177 0.129

Table no.4.11 shows the total mean, S.D. and C.V. of total interest earned to total
outside assets ratio of Nabil and SBI bank,The above shows that the ratio total interest
earned to total outside assets ratio of Nabil bank has decreasing trend in FY 2012/13
to 2016/17 i.e. 7.90 to 7.09 and SBI bank are fluctuating trend. SBI bank has highest
ratio in the FY 2012/13 i.e.9.74.and SBI bank’s lowest ratio in the FY 2016/17
i.e.6.89.

Mean ratio of Nabil is lower than that of SBI bank i.e. 7.334<8.014.But, C.V. of Nabil
is greater than that of SBI bank i.e. 0.177>0.129.

Above analysis shows that SBI bank has better position with respect to the income
earned from the total outside asset in comparison to Nabil bank.

Interest Earned to Total outside Assets

80
60
40
20
0
2012/13 2013/14 2014/15 2015/16 2016/17

NABIL SBI

Fig. 4.10

On the basis of figure 4.10 it can be concluded that SBI bank has better position with
respect to the income earned from the total outside assets in comparison to that of
Nabil bank.
 57

4.1.3.4 Total Interest Earned to Total Working Fund Ratio

It reflects the extent to which the bands are successful in mobilizing their total assets
to generate high income as interest. This ratio actually reveals the earning capacity of
a commercial bank by mobilizing its working fund. A high radio is the indicator of
high earning power of the bank on its total working fund and vice-versa.

We have,

Total Interest Earned to Total Working Fund Ration =

Table 4.12 Total Interest Earned to Total Working Fund Ratio (%)

S.N Fiscal Year NABIL SBI

1 2012/2013 6.90 7.21
2 2013/2014 6.35 5.69
3 2014/2015 6.15 8.65
4 2015/2016 5.98 6.85
5 2016/17 5.00 5.00
Total 30.38 33.4
Mean 6.076 6.68
S.D. 0.621 1.264
C.V. 0.1022 0.1892

Interest Earned to Working Fund Ratio

80

60
Ratio %

40 SBI
NABIL
20

0
2012/13 2013/14 2014/15 2015/16 2016/17

Fig.4.11
 58

Table no 4.12 shows the total mean, S. D., and C.V. of total interest earned to total
working fund ratio of Nabil and SBI bank.

The above table shows that the ratio of total interest earned to total working fund ratio
of Nabil bank has decreasing trend i.e.6.90 in FY 2012/13 to 5.00 in FY 2016/17. SBI
bank has fluctuating trend, it has highest ratio in the FY 2013/14 i.e. 8.65 and lowest
in the FY 2016/17i.e. 5.00. Mean ratio of Nabil bank is lower than that SBI bank i.e.
6.076<6.68. C.V. of Nabil is also lower than that of SBI bank i.e. 0.1022<0.1892.

From the above analysis, we can conclude that the ratio of total interest earned to total
working fund ratio of Nabil bank is satisfactory in comparision to SBI bank. It means
the ratio of Nabil bank is stable and consistence than that of SBI bank.

4.1.3.5 Total Interest Paid to Total Working Fund Ratio

This ratio measures the percentage of total interest paid against the total working
fund. A high ratio indicates the higher interest expenses on total working fund and
vice-versa.

We have,

Total interest paid to total working fund ratio =

Where, total interest paid includes total expenses on deposit liabilities, loan and
advances (borrowings) and other deposits.

Table 4.13 Total Interest Paid to Total Working Fund Ratio (%)

S.N Fiscal Year NABIL SBI

1 2012/2013 3.15 3.73
2 2013/2014 2.62 5.11
3 2014/2015 2.20 4.62
4 2015/2016 1.96 3.03
5 2016/17 1.64 2.96
Total 11.57 19.18
 59

Mean 2.31 3.836

S.D. 0.526 0.9178
C.V. 0.228 0.213

Total Interest Paid to Total Working Fund Ratio

80

60
Ratto %

40 SBI
NABIL
20

0
2012/13 2013/14 2014/15 2015/16 2016/17

Fig:4.12

Table 4.13 shows the table mean, S.D. and C.V of total interest paid to total working
fund ratio of Nabil and SBI bank. The above table shows that the total interest paid to
total working fund ratio of Nabil bank has decreasing trend in FY 2012/13 to FY
2016/17. SBI bank has fluctuating trend. It has highest ratio in FY 2012/13 i.e. 5.11
and lowest in the FY 2016/17 i.e. 2.96.

When these ratio are observed, it is found that Nabil bank has the lowest ratio in
comparison with that of SBI bank. The mean ratio of Nabil and SBI bank are 2.31 and
3.836 respectively. It means that Nabil has paid lower interest than SBI bank. But
C.V. of Nabil is higher than that of SBI bank i.e. 0.228>.0213, which indicates that
the total interest paid to total working fund ratio of Nabil is less consistence than SBI
bank. We can say that Nabil bank is paying less interest against its working fund.

Similarly, the figure depicts that Nabil Bank has paid lower interest amount to that of
SBI bank as per the line developed by Figure.
 60

4.1.4 Risk Ratio

The possibility of risk makes banks’ investment a challenging task. Bank has to take
risk to get return on investment. It increases effectiveness and profitability of the
bank. If a bank expects high return on its investment, it has to accept the risk and
manage it efficiently.

Through following ratios, effort has been made to measures the level of risk.

4.1.4.1 Liquidity risk ratio

The liquidity ratio measures the level of risk associated with the liquid assets i.e. cash,
bank balance, etc that are kept in the bank for the purpose of satisfying the depositor’s
demand for cash. Higher the ratio, lower the liquidity risks.

We have,

Liquidity risk ratio =

Table 4.14 Liquidity Risk Ratio (%)

S.N Fiscal Year NABIL SBI

1 2012/2013 8.52 29.42
2 2013/2014 5.13 29.07
3 2014/2015 6.78 20.44
4 2015/2016 8.51 12.01
5 2016/2017 6.87 10.96
Total 35.81 101.90
Mean 7.162 20.38
S.D. 1.267 7.950
C.V. 0.77 0.390

In the table 4.14, liquidity ratios of these commercial banks are in fluctuating trend.
Nabil bank has maintained a highest ratio of 8.52 in the FY 2012/2013. Similarly, SBI
 61

bank has maintained a highest ratio of 29.42 in the FY 2012/2013. They have
maintained a lowest ratio of 5.13 and 10.96 in the FY 2013/2014 and 2016/2017
respectively.

The mean ratio of Nabil is lower than that of SBI bank i.e. 7.162>20.38 which,
indicates that SBI banks’ liquidity risk lower than that of Nabil bank. But C.V. of
Nabil is lower than that of SBI bank i.e. 0.77<0.390 which, indicates that Nabil’s
liquidity position is consistence than that of SBI bank.

Liquidity Risk Ratio

70

60

50
Ratio %

40
Series1
30
Series2
20

10

0
2012/13 2013/14 2014/15 2015/16 2016/17

Fig:4.13

4.1.4.2. Credit Risk Ratio

Credit risk ratio measures the possibility that the loan will not be repaid or that
investment will deteriorate in quality or go into default with consequent loss to the
bank, actually, credit risk ratio shows the proportion of non-performing assets in total
loan an advances of the bank.

We have,

Credit Risk Ratio =

 62

Table 4.15 Credit Risk Ratio (%)

S.N Fiscal Year NABIL SBI

1 2012/2013 45.32 57.50
2 2013/2014 42.19 61.23
3 2014/2015 46.83 59.06
4 2015/2016 48.91 60.94
5 2016/2017 50.15 61.27
Total 233.4 300
Mean 46.68 60
S.D. 2.795 4.493
C.V. 0.059 0.075

The above table shows that the credit risk ratio of these two commercial banks are
fluctuating in every FY. Nabil bank has maintained highest ratio in the FY 2016/2017
i.e. 50.15 and lowest ratio in the FY 2013/2014 i.e. 42.19. Similarly, SBI bank has
maintained highest ratio in the FY 2016/2017 i.e. 61.27 and lowest in the FY
2012/2013 i.e. 57.50.

Mean ratio of Nabil is lower than that of SBI bank i.e. 46.68<60. And also, C.V. of
Nabil is lower than that of SBI bank i.e. 0.059<0.075. It indicates that SBI bank has
more credit risk than Nabil bank. Similarly, Nabil’s risk ratio is more consistence than
that of SBI bank.

Credit Risk Ratio

70
60
50
Ratio %

40 NABIL
30
20 SBI
10
0
2012/13 2013/14 2014/15 2015/16 2016/17

Fig:4.14
 63

4.1.4.3 Capital Risk Ratio

Capital risk ratio measures banks’ ability to attract deposits and interbank funds. It
also determines the level of profit, a bank can earn of a bank chooses to take high
capital risk. The capital risk is directly related to return on equity.

We have,

Capital Risk Ratio =

Table 4.16 Capital Risk Ratio (%)

S.N Fiscal Year NABIL SBI

1 2012/2013 12.77 5.60
2 2013/2014 15.41 13.03
3 2014/2015 16.94 12.75
4 2015/2016 18.09 12.18
5 2016/2017 19.31 10.21
Total 88.52 53.77
Mean 16.504 10.754
S.D. 2.268 9.879
C.V. 0.137 0.918

Table no. 4.16 shows the total mean, S.D., and C.V. of capital risk ratio of Nabil and
SBI bank. In the above table, capital risk ratio Nabil has increasing trend up 12.77 to
19.31 in FY 2012/2013 to 2016/2017. The ratios of SBI bank are in fluctuating trend
it is highest in the FY 2013/2014 i.e. 13.03 and lowest in the FY 2012/2013 i.e. 5.60.

The mean ratio of Nabil bank is higher than that of SBI bank i.e. 16.504>10.754. In
the same way, C.V. of Nabil is lower than that of SBI bank i.e. 0.137<0.918. It can be
consistence than SBI bank.
 64

4.2 Trend Analysis

Under this topic, trend analysis of loan and advances to total deposit ratio as well as
trend analysis of total investment to total deposit ratios of Nabil and SBI bank are
calculated and forecasted for next five years. The forecast is based on the following
assumptions.

a. The bank will run in the present position.

b. The economy will remain at the present stage.

c. The forecast will remain in the present stage.

d. The forecast will be true only if the limitation of least square method is carried out.

e. Nepal Rastra Bank will not change its guidelines to commercial banks.

f. Other things will remain constant.

4.2.1 Trend Analysis of Loan and Advances to Total Deposit Ratio of Nabil and
SBI Bank

In this study, the research has tried to calculate the trend value of loan and advances
to total deposit ratio of Nabil and SBI bank for five years from 2007/2008 to 2011-12
and forecast for next five years from 2011/12 to 2016/17. The following table no. 4.14
shows the trend value of deposit for ten years for the Nabil and SBI bank.
 65

Table 4.17 Trend Analysis of Loan and Advance to Total Deposit Ratio of Banks
Bank (%)

S.N Fiscal Year NABIL SBI

1 2007/08 54.10 72.40
2 2008/09 54.80 71.60
3 2009/10 55.50 70.80
4 2010/11 56.20 70.00
5 2011/12 56.90 69.20
6 2012/13 57.60 68.40
7 2013/14 58.30 67.60
8 2014/15 59.00 66.80
9 2015/16 59.70 66.00
10 2016/17 60.00 65.89

The calculated and projected trend values of loan and advances to total deposit ratio
of Nabil and SBI are fitted in the following trend line.

Figure 4.15 Trend Analysis of Loan and Advances to Total Deposit Ratio of Sample Banks

Trend Analysis of Loan and Advance to total Deposit (%)

80
percentage

60
40
20
0 NABIL
2007/08

2008/09

2009/10

2010/11

SBI
2011/12

2012/13

2013/14

2014/15

2015/16

2016/17

1 2 3 4 5 6 7 8 9 10

Fig:4.15
 66

From the table 4.17 and graph, we can observe that ratios of loan and advances to
total deposit of Nabil bank are in increasing trend but those of SBI bank are in
decreasing trend. If our assumptions are applied the ratio of loan and advances to total
deposit of Nabil will be 59.70% in the 2015/16 which is lower than that of SBI bank.
Similarly, the ratio of SBI bank will be 66.00% investment policy the FY 2015/16.

From the above trend analysis, it is quite obvious that Nabil’s deposit utilization
position in relation to loan and advances to total deposit ratio is lower than the other
bank but it has increasing trend. Its increasing trend ratio is higher than that of SBI
bank. These indicate that Nabil may use relatively large portion of its deposit in
providing loan. It is also found that Nabil may have better position in the future in the
field of providing loan and advances.

4.2.2 Trend Analysis of Total Investment to Total Deposit Ratio of Nabil and SBI
bank

The researcher has tried to calculate the trend values of total investment to total
deposit ratio of Nabil and SBI bank for five years 2007/2008 to 20011/2012 and
forecast for next five years from 2011/12 to 2016/17. The following table 4.15 shows
the trend value of total investment to total deposit ratio of Nabil and SBI bank.

Table 4.18 Trend Analysis of Loan and Advance to Total Deposit Ratio of Banks
(%)

S.N Fiscal Year NABIL SBI

1 2007/08 33.569 7.476
2 2008/09 39.498 13.172
3 2009/10 45.427 18.868
4 2010/11 51.356 24.564
5 2011/12 57.285 30.26
6 2012/13 63.214 35.956
7 2013/14 69.143 41.625
8 2014/15 75.072 47.348
9 2015/16 81.001 53.044
10 2016/17 86.124 58.834
 67

The calculated and projected trend values of total investment to total deposit ratio of
Nabil and SBI bank are fitted in the following trend line

Trend values of total investment to total deposit

NABIL SBI

58.834
53.044
47.348
41.625
35.956
30.26
24.564 75.072 81.001 86.124
18.868 63.214 69.143
13.172 51.356 57.285
7.476 39.498 45.427
33.569

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17
1 2 3 4 5 6 7 8 9 10

Fig:4.16

The table 4.18 and graph shows the ratio of total investment to total deposit ratio of
Nabil and SBI bank. These ratios are in increasing trend for both the banks. If our
assumption is applied, the ratio will be 86.124% and 58.834% for Nabil and SBI,
respectively in the FY 2016/17.

From the above analysis, it can be concluded that Nabil’s increasing trend ratio is
5.929, which is greater than that of SBI bank. It means Nabil may use relatively large
portion of deposit for investment in different sectors.

From the above trend chart, it is found that Nabil has favorable condition than SBI
bank for utilizing the total deposit towards investment.

4.2.3 Co-efficient of Correlation analysis

Under this, Karl Pearson’s co-efficient of correlation is used to find out the
relationship between deposit and loan and advances, deposit and total investment,
outside asset and net profit.
 68

Co-efficient of Correlation between deposit and loan and advances

Co-efficient of correlation between deposit and loan and advances measures the
degree of relationship between these two variables. The purpose of correlation
analysis between deposit and loan and advances is to find out whether the deposit is
significantly used as long and advances or not. In this analysis, deposit is considered
as independent variables, (x) and loan and advances as dependent variables (y)

Table 4.19 Co-efficient of Correlation between deposit and loan and advances

Evaluation Criteria NABIL SBI

R 0.45 0.88
r2 0.20 0.78
P.E.r 0.11 0.03
6 P.E.r 0.65 0.18

Source Appendix

Table 4.19 depicts the value of r, r², P. E. r and E. r between deposit and loan and
advances of Nabil and SBI bank for the period of 2012/2013 to 2016/2017 are
tabulated.

From the above table, it is found that the co-efficient of correlation (r) between
deposit and loan & advances of Nabil and SBI bank are 0.45 and 0.88 respectively. It
shows the highly positive relationship between these two variables. However, co-
efficient of determination i.e. r² of Nabil bank is 0.20, which means that the 20% of
dependent variable i.e. loan and advances has been explained by the independent
variable i.e. deposit.

Co-efficient of determination i.e.r² of SBI bank is 0.78, which means that the 78% of
dependent variable i.e. loan and advances has been explained by the independent
variable i.e. deposit. Moreover, while considering the probable error, in case of Nabil
bank r²<6P.E.r i.e. 0.20<0.65 and in case of SBI bank r²>6P.E.r i.e. 0.78>0.18.
 69

From the above analysis, it can be concluded that the value of ‘r’ is significant. There
is significant relationship between deposit and loan and advances of Nabil and SBI
bank. It also reveals that these two banks are successful in mobilizing their deposit as
loan and advances. SBI bank has higher value of ‘r’ indicating that it has better
position in mobilizing deposit as loan and advances in comparison to Nabil bank.

Table 4.20 Co-efficient of Correlation between deposit and Total Investment

Evaluation Criteria NABIL SBI

R (0.15) 0.50
r2 0.02 0.25
P.E.r 0.13 0.10
6 P.E.r 0.79 0.61

Source: Appendix

The above table 4.20 shows the value of r, r², P. E. r and E. r between outside assets
and net profit of Nabil and SBI bank for the period of 2012/2013 to 2016/2017.

From the table 4.20, it is found that the co-efficient of correlation (r) between outside
assets and net profit of Nabil and SBI bank are (0.15) and 0.50 respectively. It shows
that there is negative relationship between the variable of Nabil bank. But, there is
positive relationship between the variables of SBI bank. However, co-efficient of
determination i.e. r² of Nabil bank is 0.02, which means that the 2% of dependent
variable i.e. net profit has been explained by the independent variable i.e. outside
assets. Co-efficient of determination i.e. r² of SBI bank is 0.25, which means that the
25% of dependent variable i.e. net profit has been explained by the independent
variable i.e. outside. Moreover, while considering the probable error, in case of Nabil
bank r²>6P.E.r i.e. 0.02>0.79 and in case of SBI bank r²<6P.E.r i.e. 0.2<0.61.

Here we can observe that Nabil bank is not capable to earn net profit by mobilizing
its outside assets. In case of SBI bank, there is positive correlation between outside
asset and net profit. The relationship is significant and the value of ‘r²’ shows high
percent in the dependent variable, which has been explained by the independent
 70

variable. Above analysis indicates that SBI bank has significant correlation between
mobilization of funds and returns.

4.3 Major Findings of the Study

The main findings of the study are derived with the help of analysis of financial data
of Nabil and SBI bank.

1. Liquidity Ratio

The liquidity position of Nabil and SBI bank reveals that:

 The mean ratio of cash and bank balance to total deposit of Nabil bank is less
than that of SBI bank. It states that liquidity position of SBI bank is better
than that of Nabil bank.

 The mean ratio of cash and bank balance to current assets ratio of Nabil is less
than that of SBI bank. But, Nabil bank has higher consistency than SBI bank,
which indicates that Nabil has utilized its funds more efficiently.

 From the analysis of current ratio, it is found that Nabil bank has maintained
lower current ratio than that of SBI bank, which indicates that liquidity
position of SBI is better than that of Nabil bank.

 The mean ratio of loan and advances to current assets of Nabil bank are lower
than that of SBI bank but its ratios are more consistence that of SBI bank. It
reveals that Nabil provides less loan and advances in comparison to the SBI
bank.

The above result shows that the liquidity position of Nabil is comparatively lower
than SBI bank. It has lower cash and bank balance to total deposit, cash and bank
balance to current assets ratio and loan and advances to current assets but it has
average consistency. IT has maintained highest ratio on investment on government
securities to current assets.
 71

2. Asset Management Ratio

The asset management of Nabil and SBI bank shows that:

 The mean ratio of total investment to total deposit of Nabil is higher than that
of SBI bank, which indicates that Nabil is successful in utilizing its deposit in
a better way.

 The mean ratio of loan and advances to working fund ratio of Nabil is lower
than that of SBI bank, which indicates that it is utilizing its fund lower than the
SBI bank.

 The mean ratio of loan and advances to total deposit of Nabil is lower than
that of SBI bank. But Nabil has less CV than the SBI bank, which indicated
that loan and advances of Nabil bank are stable and consistent.

 In case of investment on government securities to total working fund ratio,

Nabil has higher mean ratio than the SBI bank. It indicates that the investment
policy of Nabil is better to utilize its working fund in comparison to the other
bank.

From the above analysis, we can conclude that Nabil bank has highest investment in
government securities and lower into shares and debentures. And, Nabil bank has
stable and consistent ratios than the other bank.

3. Profitability and Risk Position

The analysis of profitability ratio of Nabil and SBI bank shows that:

 The mean ratio of return on loan and advances of Nabil is higher than that of
SBI bank. There is consistency in return of Nabil than that of SBI bank.

 The mean ratio of total interest earned to total outside assets of Nabil is lower
than SBI bank. It indicates that Nabil has lower position in income earned
form total outside assets than SBI bank.
 72

 The mean ratio of return on total working fund ratio of Nabil is higher than
that of SBI bank and it is more consistent. Nabil bank is successful to
maintain higher ratio investment return on total working fund.

 The mean ratio of total interest paid to total working fund of Nabil is lower
than SBI bank which means that Nabil has paid low interest than the SBI
bank.

4. Risk Ratio

The risk ratios of Nabil and SBI bank reveal that:

 Nabil has maintained higher mean ratio of capital risk than SBI bank. The
ratio of Nabil bank is more consistent than SBI bank.

 The mean ratio of liquidity risk of Nabil is lower than that of SBI bank.

 The mean ratio of credit risk of Nabil is lower than that of SBI bank. This ratio
of Nabil bank is less variable than that of SBI bank.

From the above findings, we can conclude that Nabil has average risk ratio. The bank
should maintain risk against credit fund to earn high profit.

5. Trend of Total Loan and Non-Performing loan

The trend analysis and projection for next five years of Nabil and SBI bank reveals
that:

 The trend analysis of loan and advances to total deposit ratio of Nabil bank has
increasing trend but that of SBI bank has decreasing trend. Nabil's increasing
trend ratio 0.70 and SBI bank has decreasing trend ratio by (0.80). The
increasing trend ratio of Nabil bank shows the better future of Nabil bank.

 The trend analysis of total investment to total deposit ratio of these two banks
have increasing trend. Nabil's increasing trend ratio is 5.929 and that of SBI
 73

bank is 5.696. The increasing trend ratio of Nabil bank shows its better future
condition for utilizing the total deposit towards investment.

From the above findings, it can be concluded that, Nabil may use relatively large
portion of their deposit to investment in the potential sectors of the country. If it is
able to do so, Nabil may have better position in the banking sector.

6. Coefficient of correlation analysis

Coefficient of correlation analysis between different variables of Nabil and SBI bank
shows that:

 Coefficients of correlation between deposit and loan and advances of these

two banks have positive relationship between the variables. Nabil has the
lower value of coefficient of correlation between deposit and loan and
advances than the SBI bank. This indicates that SBI bank's position is better
than Nabil bank in mobilizing the deposit as loan and advances.

 Coefficient of correlation between deposit and total investment of Nabil is

higher than that of SBI bank. It shows the positive relationship between the
variables.

From the above findings, we can observe that there is significant relationship between
deposit and total investment and deposit and loan and advances but negative
relationship between outside assets and net profit of Nabil bank. All the variables of
SBI bank have positive relationship with each other.
 74

CHAPTER V

CONCLUSIONS

In this chapter we present the summary and conclusions flown from the analysis in the
preceding chapter. Then, based on the finding and our conclusion we recommend
certain measures for further improvement. With the help of some important financial
as well as statistical tools, the researcher has tried to make a comparative analysis of
several of the investment of the concerned commercial banks.

After completing the basic analysis required for the study, the researcher has tried to
point out some problems and errors and also has some suggestions for further
improvement. This study may be helpful for the management of concerned bank to
initiate the action and achieve the desired result.

5.1 Summary

The economic development of a country depends upon the development of the

commerce and industry. There is no doubt that banking promotes the development of
commerce because banking sector itself is the part of commerce. The process of
economic development depends upon various factors. However, economists are now
convinced that capital formation and its proper utilization plays a paramount role for
rapid economic development. The economic growth was quite sluggish during the
first three and a half decade during the Maoist insurgency and later on, the growth rate
has been quite dismal. At present, overall economic growth rate is still declining year
by year. Reasons behind such decline are insecure economic condition, decrease in
the tourist arrival decreasing production and export of carpet, garment and Pashmina
industry and political situation of the country.

The evolution of the organized financial system in Nepal has recent history than in
any other countries of the world. In Nepalese context, the history of banking is hardly
seven decade. However, after the announcement of liberal and free market economy
based policy, Nepalese banks and financial sectors started having greater network and
access to national markets. Commercial banks play a vital role, which deals with other
 75

people’s money, and stimulate saving by mobilizing idle resources to those sectors
where the objectives opportunities as available. Modern banks provide various
services to their customers in view of facilitating their economic and social life. The
objective of the commercial banks is always to earn more profit by investing or
granting loan & advances to the profitable, secured and marketable sectors. But they
should be careful while performing the credit creation function; the banks should
never invest its funds in those securities, which are of fluctuating nature. And,
commercial banks must follow the rules and regulations as well as different directions
issued by central bank and ministry of finance while mobilizing the funds. For the
purpose of the present study two commercial banks namely Nabil and SBI, were
taken. In this study, the word investment covers analysis wide range of activities i.e.
the investment of income, saving or any other collected fund. If there is no savings,
there is no existence of investment. Saving and investment are inter-related.
Investment policy is a facet of the overall spectrum of policies that guides banks’
investment operations and it ensures efficient allocation of funds to achieve the
economic development of the nation. A sound and viable investment policy attracts
both borrowers and lenders, which helps to increase the volume and quality of
deposit, loan and investment. Therefore, the investment policy should be carefully
planned and analyzed. Some sources of funds for the investment of bank are capital,
general reserves, accumulated profit, deposits and internal & external borrowings.
Similarly, some important banking terms, which are frequently used investment this
study are loan and advances, investment on government securities, shares and
debentures, deposits, etc.

For the analysis and interpretation of the data of this study, different financial &
statistical tools are used. In the financial tools liquidity ratios, asset management
ratios, profitability ratios, risk ratios and growth ratios have been used. The statistical
tools such as mean, standard deviation, co-efficient of variation, mainly; the
secondary data are used for the analysis in this study. The data are obtained annual
report of concerned banks; likewise, the financial statement of five years i.e.
2013/2014 to 2016/2017 was selected for the purpose of evaluation.
 76

5.2 Conclusion

The above-mentioned major findings led this study to the following conclusions:

 The liquidity position of Nabil is comparatively lower than SBI bank but it has
the highest investment in government securities to current assets ratio.

 Nabil bank has highest ratio in investment to total deposit and government
securities to total working fund but lower into shares and debentures to total
working fund.

 Analyzing the profitability of these two banks, we found that return on total
working fund and return on loan and advances of Nabil is higher than that of
SBI bank. But, total interest paid to total working fund of Nabil is lower than
that of SBI bank.

 From the viewpoint of the risk ratio, liquidity risk and credit risk of Nabil is
lower than that of SBI bank whereas it is higher in case of capital risk.

 Through the help of the trend analysis we come to know that, loan and
advances to total deposit and total investment to total deposit ratios of Nabil
bank are greater than that of SBI bank. It suggests that the position of Nabil
bank may be higher than SBI bank.

 SBI bank has good liquidity position and risk ratio.

Through the analysis and findings, we can summarize that investment policy of Nabil
bank is better in every sector and profitability ratio is good. Similarly, this trend
analysis of loan & advances and total investment to total deposits show that the
position of Nabil will be better in the future. However, liquidity position and growth
rate is not satisfactory and it has average risk ratio. In the case of SBI it has its good
liquidity position as well as minimum risk in comparison to that of Nabil bank
reference to capital risk ratio.
 77

5.3 Implications

This study has several implications pointing to interesting avenue for the future
research, this study is based on modern scenario of the banking and financial
institutions. In current competitive financial markets the commercial banks their own
strategies regarding liquidity management and raising the profitability.

1) The study may be literature and base research for further study in future.
2) The Chief Executive Officer (CEOs) of sample commercial banks may use the
organized data of the study variables and the results to identify the liquidity
position, management and the profitability.
3) On the basis of this study the bankers may formulate several strategic plan and
policies to generate the profitability.
4) The study may be useful for investors and creditors to take investment
decisions.
5) The study may be implacable for customers, deposit holders and households
they consider about banking services that which banks gives more concern to
liquidity management.
6) It is an academic document for the research candidate that may be basic
evidence to get further study and getting job.
7) The bankers may use tools and techniques used in this study for the financial
analysis.
8) The study depicts that sample banks are trying to manage liquidity effectively
viewing to minimizing risks to generate maximum profit.

5.4 Recommendations

On the basis of analysis and finding of the study, following suggestion and
recommendation can be advanced to overcome weakness, inefficiency and
satisfactory improvement policy of Nabil & SBI Bank.

i. The cash and bank balance to total deposit measures the availability of bank’s
highly liquid or immediate funds to meet its unanticipated calls on all types of
deposits. The cash and bank balance of SBI with respect to deposit is better
 78

against the readiness to serve its customer’s deposit than Nabil. It implies that
better liquidity position of SBI. In contrast, a high ratio of non-earning cash
and bank balance may unfit, which indicates the bank’s unavailability to invest
its fund in income generation areas. Thus SBI is suggested to invest in more
productive sectors like short-term marketable securities, treasury bills etc.
insuring enough liquidity which will help the bank to improve its profitability.
ii. It is found that Nabil’s loan and advances to total deposit ratio is
comparatively the highest than SBI bank. SBI’s ratios seem much lower than
that of Nabil. So it is recommended that SBI should follow liberal policy,
invest more and more percentage of total deposit in loan and advances and
maintain more stability on the credit policy.
iii. The banks under study are also recommended to strictly follow the NRB
directives regarding the loan classification. Since it is found that the banks
under study has not been able to maintain certain standards as set by the NRB.
iv. There is highly positive correlation between the total deposit and loan and
advances of Nabil and SBI bank Limited. So it is recommended for all the
banks to increase their total deposit to make more loan and advances for the
generating profit maximization.
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