CHAPTER I Introduction 1.

1 Background of the study

The word Bank has been derived from the Italian word Banco which means a place for keeping, lending and exchanging money, the bank is a financial institution, which deals with money. It accepts deposits from individuals and organizations and grant loans to them it allows interest on the deposits made and charges interest on the loan granted. Since, it accepts deposits and grant loans, it is regarded as the trader of money. Further, it creates credit and supports for the formation of capital and hence it is regarded as manufacturer of money. The following are some of the main definitions given by different economist: A bank is an organization whose principal operations are concerned with the accumulation of the temporarily idle money of the general public for the purpose of advancing to others for expenditure. -Kent Bank is an institute which collects money from those who have it to spare and who are saving it out of their income and lends this money out to those who requiredCrowther Bank is an organization established for the purpose of exchange money deposit lending money and participation in transactions.

Commercial bank Act of 2031(Nepal) From the above definitions, it is clear that the bank is a financial institution, which accepts deposits from the public in different accounts and grant loans to individuals and corporations against their securities. The difference in interest rate on lending and deposit, interest rate spread, is the major source of income for the bank. Interest on lending is higher than the deposits. It is an agent of its clients, which remits money, collects incomes and pays expenses on behalf of them. It performs the wide variety of functions, which provide utility to the individual, corporation and general public.

History The history of banking is nearly as old as civilization. In the ancient Rome and Greece, the practice of storing precious metals and coins at safe places and loaning out money for public and private purpose on interest was prevalent. In England, banking had its origin with the London goldsmith who in the 17th century began to accept deposits from merchants and other for safe keeping of money and other valuables. As public enterprises, banking made its first appearance in Italy in 1157AD when the Bank of Venice was founded. Linguistic (the science of language) and Etymology (the study of the origin of words) suggest an interesting story about the origin of the word bank. Both the old French word Banque and the Italian word Benca were used centuries ago to mean a bench or money changers table. Banks are among the most important financial institutions whose principle operation are concerned with a accumulation of the temporarily idle money with the general public for the purpose of advancing it to others for expenditure. Thus, the word banking has been used to denote a certain kind of trading in money. A bank is thereafter a corporation that deals in credit i.e. accept deposits from public, withdrawing by cheques and advances loans of various sorts. The modern economic system cannot function without bank. According to the modern concept, banking is a business that not only deals with borrowing, lending and remittance of funds, but it is also important instrument for fostering economic growth. Presently there are various types of banks are established for instance, industrial bank, commercial bank, agricultural bank, joint stock bank, co-operative bank and development bank with different purpose.

Origin of Bank in Nepal The history of banking in Nepal can be traced to 1877 A.D. when Tejarath Adda was established by the government to provide credit facilities to general public. These unorganized institutions although quite underdeveloped could still mobilize funds from wide range of different sources. Although the Tejarath Adda was established, it was to facilitate the growing trades with Tibet and India. Thus a need for the establishment of a modern bank had become essential to promote the trade of the 2

nation. In the year 1923 Treaty of peace and Friendship were concluded between the Government of Britain and Government of Nepal. As per the treaty, Nepal could carry on import trade free of duty via India. In other word, it meant that Nepal was going to diversify its foreign trade and for that the country needed a modern bank. But it wasnt till 1936 A.D. that the Udyog Parishad (industrial Development Board) was set up with the following objectives:-

To promote and protect the trade, commerce, industries and manufacturers of Nepal, and to consider and discuss questions connected with or affecting such trade, commerce, industries and manufacturers, to register and incorporate joint stock companies in conformity with Nepal Companies Act and also to examine and supervise their workings and to assists and advise Government of Nepal in economic and financial matters. Thus, the Udyog Parishad helped in opening new avenues for the advent of banking, industry and commerce in Nepal and thus helped to enhance the economic status of the country. A year after its formation, the Udyog Parishad formulated the company act and the Nepal Bank Act in 1937 A.D. which established the Nepal Bank Ltd with the technical cooperation of the Imperial Bank of India, as the first commercial bank of Nepal. Before 1956 Sardar Mulukikhana Adda (local treasury of the government) issued currency notes and the foreign exchange reserves of Nepal were maintained by Reserve Bank of India. During that period the Indian currency along with Nepalese currency was circulating in the economy. Thus to manage the circulation of national currency and to maintain exchange rate stability, there was an urgent need for the establishment of a Central Bank. In 1956, the Nepal Rastriya Bank Act was formulated and Nepal Rastra bank was established as central bank on April 26, 1956. It took over the functions of Mulukikhana Adda government Treasury and started issuing currency in 1959; and also thus relieved the various Mal Addas (Revenue Offices) of their work. Thus it helped the government to perform treasury functions and stabilize 3

the exchange rate. The NRB focused mainly on eliminating dual currency system prevalent in Nepalese market. The NRB tried to decrease the circulation of the Indian currency, replacing it with the Nepalese currency in various transactions of trade and commerce. The initiation of the Nepalese currency Act, 1958 and the opening of the banks branches in various part of the country were the major steps undertaken by the central bank in this respect. There were other government banking institutions. Rastriya Banijya Bank (National Commercial Bank), a state-owned commercial bank, was established in 1966. In the same year, the Land Reforms Saving Corporation was established to deal with finances related to land reforms. There were two other specialized financial institutions. Nepal Industrial Development Corporation (NIDC), a state-owned development finance organization headquarter in Kathmandu, was established in 1959 with United States assistance to offer financial and technical assistance to private industry. The co-operative Bank, which becomes the Agricultural Development Bank in 1967, was the main source of financing for small agribusiness and cooperative. Almost 75 percent of the bank was state-owned; 21 percent was owned by the Nepal Rastra Bank, and 5 percent by cooperative and private individuals.

1.2

Commercial bank in Nepal

The history of banking dates to the sixteenth century. However in Nepal formal banking system was only introduced only in 1994 Kartik 30th was the establishment of Nepal bank limited (NBL), which was regarded as pioneer institution in modern banking system and served as a role financial institution of the country for nearly two decades prior to establishment of this bank, the banking need of people were fulfilled to certain extent only by organized financial institution the TejarthaAdda. However the service it offered were not sufficient. Actually, the formation of high committee board UdhogParisad was indeed a landmark in opening of new avenue in the field of banking industries and commerce. Accordingly, NBL was established on November 1937 under Nepal bank act as joint venture between government and private and overcoming its limitations. It regulates currency achieving stable exchange rate and mobilized capital for economic development and for simulation of trade 4

industry and banking sector. Nepal Rastra Bank (NRB) comes into existence in April 26th 1956 as a countrys central bank. After this NRB diverted its attention toward development of banking system by formulating relevant policies procedure in this commotion commercial bank act 1963 was formulated, credit control regulation was too formulated. Hence, further shouldering the banking service. The Rastriya Banijya Bank (RBB) was established in 1966 under RBB Act 1964 with fully government owned commercial bank. NRB (2008) stated The function of the banks can be classified into Class A, Class B, and Class C and Class D. Class A includes 32 licensed Commercial Banks that can be government-owned, privately-owned or jointly owned by government and the private sector. They collect deposits from public, invest in loans and overdrafts, sell and purchase bills, open letter of credit for export and import, provide bank guarantee, deals in foreign exchange and invest in stock and bonds. Class B includes 87 Development Banks. They take high risky by providing loans for venture capital. They provide loans to industry, agriculture, import-export, cottage and small industries, cooperatives. Further, Finance Companies fall under C class with 79 companies operating to provide service. They accept fixed and saving deposits with higher rate of interest. They provide loans to industries and individuals and charge higher rate of interest. Class D includes 21 Micro Credit Development Banks. Moreover, 16 saving and credit co-operative (limited banking) and 38 Non-Government Organization (NGOs) are also actively participating in its own way.

List of Banks and Non-bank Financial Institutions Class A: Commercial Banks Class B: Development Banks Class C: Finance Companies Class D: Micro Credit Development Banks Saving and Credit Co-operatives Non-Government Organizations (NGOs) 32 89 77 22 16 36

(Source: As of Mid-April; 2011 Licensed by NRB)

1.2.1

Functions of commercial bank

Banks are financial service firms, producing and selling professional publics funds and performing various roles in the economy. Commercial banks are established to improve peoples economic welfare and facility, to provide loan to agriculture, industry and commerce and to offer banking services to the people and the country. Commercial bank has been playing a great role for the economic development of the country directly or indirectly. In Nepal, the commercial banks perform the following functions: Major functions of commercial banks Accept deposits Giving loan Investment of funds Agency functions Credit Creation General Utility Functions

1.3

Introduction of NMB Bank Ltd.

NMB Bank Ltd (erstwhile Nepal Merchant Banking & Finance Ltd) had been financially institutionalized in the year 1996 A.D. in Durbarmarg, Kathmandu. Currently it has its head office situated in Babarmahal, Kathmandu near the CDO office. It is promoted by members of leading business conglomerates in association with Yong Lian Reality, Malaysia and Employee Provident Fund of Nepal. It is one of the leading Merchant (Investment) Banker at present in Nepal. It also enjoys number one status among the existing finance companies in terms of, profitability, market capitalization, deposits, Risk Assets and Net Worth. Growing from strength to strength, NMB managed to upgrade itself to a commercial bank in 12 years. It is the first finance company in Nepal to become a commercial bank. NMB is a public limited company with NPR 1 billion in paid-up capital including 25% of the shares held by the general public.

1.3.1 Ownership structure of the company Individual promoters 48.8%

Institutional promoters- 11.2% Foreign investors Public shareholders - 13.6% - 25%

Figure 1.1 Ownership Ratio

ownership

25 48.8 13.6 11.2 individual institutional foreign public

Source: Annual Report of NMB Bank 2067/68 1.3.2 Vision of NMB Bank: Vision of NMB Bank is to become the leading player in the financial sector in the country and to be a better bank. NMB Bank graduated as a commercial bank has successfully gained the position in the market and aims to enhance the network extensively by providing access to financial services to as many people as it is possible. NMB strives to remain close to its customer and understand their needs. Advisory services attached to the packaging of products and services have been the focus of the Company in servicing its clientele. Its strategic plan guides the building

of relationships that deliver enduring value for customers, shareholders, staff and communities. 1.3.3 Mission statement of NMB Bank Ltd: Continue our positioning as the Market Leader by providing a comprehensive, personalized, professional and innovative service through customer responsive staff. Over the years NMB Bank has delivered excellent financial results and wants to ensure all their customers, stakeholders that they will continue their performance in the years to come. NMB Bank has made considerable strategic progress in specializing in Investment Banking activities and at the same time, providing core banking products and facilities. The same initiative is in continuation today even after it upgraded itself as a commercial bank. NMB has been successful in consolidating the position as the leading Merchant Banker in the country. 1.3.4 NMB Bank Awards: In its 12 years of operation, NMB Bank was honored as Best Presented Financial (Accounts) Award 2007 presented by ICAN (Institute of Chartered Accountants). Though NMB Bank is newly born commercial bank, it has been able to live up to the expectations of its investors and its clientele. With the continuous support of the valued customers the Bank has made all round progress in every sphere of its operation. 1.3.5 NMB Bank Branches: NMB Bank which is growing commercial bank has 19 branches spreading all over the country. Which includes:Inside Valley Babarmahal, Chabahil, Durbarmarg, Kumaripati, Lubhu, Newroad Branch, Thaiba, Thamel

Outside Valley Banepa, Biratnagar, Birgunj, Butwal, Dhangadhi, Dharan, Doti, Kirne, Manthali, Nepalgunj, Pokhara

1.3.6 Products and services provided by NMB Bank Ltd: Loan and Advances: NMB is fully committed to provide financial solution and to be a partner in the customers growth and believes in adding long term value for mutually beneficial association. The Relationship Managers are trained and committed to understand customer needs and requirements and provide them with matching solution to their funding requirement. NMB Bank is committed to extend package of credit facilities and other financial services to the existing and potential clients for feasible projects and existing operation. The package could be either in the form of:
Corporate Lending Business Lending Retail Lending and Micro Financing

NMB Bank also purchases and sells loans to adjust and modify its portfolio to hedge concentrated risk. Some of the major lending products are as under:
Term loan to businesses Working capital loan to businesses Bank Guarantee Hire-purchase loan to finance vehicles, equipment etc. Housing Loan to finance purchase of land and/or building and flats Personal Loan for various purposes

NMB Bank extends Personal Loan in the form of Term Loan for the following purposes:
Personal Business Investment Setting-up Office Education of dependent family members Medical treatment of family members Social Functions Holiday Trip Loan against FDR Loan against Other Company shares/Marketable securities

Deposits: NMB Bank also provide following products

Current account Call account Saving account Fixed deposits Structured saving Local Saving Investors saving

1.4

Statement of Problem

Nepal is the country which is made up of villages and rural areas mostly and where there is predominance of agriculture sector. It is very difficult to solve the problem of credit through commercial banks and very nominal population of the country is using banking facilities. Presently, our economy is in critical phase due to political uncertainty, labormanagement conflict, power crises and so on. In such as situation banking system are facing different problems which has created to increase risks in the operation of banking and financial institutions. The problem like liquidity crisis, uncertain directives by NRB, increase in interest rates, fraud, etc.

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The commercial banks are facing a huge burden due to excessive competition from rural banks, finance companies and local co-operatives, which provide loans to the local customers. In addition, the large numbers of commercial banks in the economy is the emerging challenges for commercial banks. Therefore, NRB should take every step very carefully to stabilize the economy and banking sector should take adequate decision to decrease risks. This study raise some issued to be examined which are stated as below: What are the major factors affecting cash management policy? How the Bank is operating its cash management in this competitive market? What is the status of credit administration and credit recovery process of the bank? How is the non-performing cash is affecting is cash management? Is writing off of non-performing assets satisfactory?

1.5

Objectives of the Study

The financial institution play very vital role in the economic development of the nation. The efficient performance of the banks and financial institution give shape to economic indicators of the nation. The main purpose of this study is to examine the way and techniques used by NMB Bank in Cash Management. Study will cover the areas where cash are managed by bank. The major objectives of the study are to examine the management of cash of NMB Bank. Therefore, the basic objective is as follows: To examine the cash management practice followed by the organization To examine how the bank is following the norms of NRB with regard to cash management To analyze the relationship between the deposits collected and loan distributed by the bank To analyze the effective utilization of surplus of cash

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1.6

Significance of the study

Banking sector plays an important role in the economic development of the country. Cash management is a most important and crucial part of business. Business could not run without having enough cash. Proper management in cash is needed for smooth flow of business. The expected significance of this study is as follows: The finding of the study helps to know the ways of cash management of NMB Study will be useful and provide guideline for further researches in similar area It is expected that the study will help the people to get information about cash management strategy in NMB 1.7

Limitation of the study

The study tries to find out the strategy and techniques of cash management of NMB. The researcher will try to cover most of the information regarding the topic, but still there are certain limitations. The limitation of the study is as follows: Report covers a period of four fiscal years data due to the time constraint. The study is based to know the techniques of cash management of NMB bank did not disclose much. Study is based on secondary data. Time constraints are one of the main limitations of the study because it must be submitted within stipulated period of time. It is only for partial fulfillment of MBA

1.8

Organization of the Study

This whole study will be divided into five chapters, each one focusing on a particular area. The units will be listed in the contents.

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Chapter I The first chapter includes general background, statement of the problem, objectives of the study, significance of the study, and limitations of the study and organization of the study.

Chapter II The second chapter includes conceptual framework along with review of published and unpublished reports, booklets, journals, magazines, research work and thesis and useful website relating to liquidity.

Chapter III The third describes the various sequential steps that will be strictly followed in conducting this research. Different financial as well as statistical tools have been used to find out the actual performance of the two banks. The main financial tool adopted to analyze the data is accounting ratio. Other simple statistical analysis such as standard deviation, coefficient of variation, etc. will be calculated where necessary. Moreover, the forecasting of the next five years data will be done with the help of regression.

Chapter IV This chapter deals with the static evidence and facts to clarify the research work. Here, the study presents the collected data for various purpose of analysis to obtain the answer to the research question. Here, the calculations of different accounting rations and their applications will be presented.

Chapter V Finally, the fifth chapter is the conclusion of the research. On the basis of the data analyzed the research will reach in final phase to conclude the analysis of this chapter. This chapter further deals with the major findings, prevailing issues and gaps of the concerned banks. The suggestions to the related banks will also be given which will help the bank to improve the company in many ways.

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CHAPTER - II
REVIEW OF LITERATURE

2.1 Introduction
Review of literature is a stocktaking of available literature in the field of research. It supports the researcher to explore the relevant and true facts for the reporting purpose in the field of research study. Literature here means the related printed material about the subject matter of the research work. It may be in various forms like book, booklet, thesis, reports etc in the courses of research, review of existing literature would help to check the chance of duplication in the present study. One can find what study has been conducted and what remains to go with. Review of literature is vital while doing research work as it gives the finding of the previous study. It can be used as a secondary datas; it gives the valuable information about the subject. This chapter highlights the literature available related to the present study. This chapter has been divided into three main sections. First section encompasses the conceptual framework. The second section presents the review of previous research work (thesis) on the topic. The final section explains he research gap.

2.2

Conceptual Framework

2.2.1 Bank Banking, transactions carried on by any individual or firm engaged in providing financial services to consumers, businesses, or government enterprises. In the

broadest sense, banking consists of safeguarding and transfer of funds, lending or facilitating loans, guaranteeing creditworthiness, and exchange of money. These services are provided by such institutions as commercial banks, savings banks, trust companies, finance companies, and merchant banks or other institutions engaged in investment banking. A narrower and more common definition of banking is the acceptance, transfer, and most important, creation of deposits. This includes such depository institutions as commercial banks, savings and loan associations(more common in the United States), building, societies, and mutual savings banks. All 14

countries subject banking to government regulation and supervision, normally implemented by central banking authorities. For further information on central banks and investment banking, see the relevant articles.

2.2.2 Concept of Commercial Bank Commercial banks are the heart of the financial system. They hold the deposits of many persons, government establishment and business units. They make fund

available through their lending and investing activities to borrowers, individual business firms and services from the producers to customers and the financial activities of the government. They provide a large portion of the medium of exchange and they are media through monetary policy is affected. These facts show that the commercial banking system of the nations is important for the

functioning of the economy. Banks are business firm; like Frisbee Manufacturer, fast food chains and textbook publishers, bankers buy inputs, message them a bit, burn a little incense, say the magic words, and out pop some output from the oven. If there lick holds, they sell the finished product for more than it costs to buy the raw materials in the first place. For bankers, the raw materials are money. Evaluation of financial performance is a study of overall financial position of any organization. It is closely related to the decision making. In the modern context, it gives vital support for the investment decisions, financing decisions and dividend decisions. Financial performance analysis is undergone with the help of periodically made financial statements of the firm.

2.2.3 Financial Statements The Financial Statements are the means of presentation of a firm's financial condition and basically consist of two types of statements - The Balance Sheet & Income Statement. These are prepared to report the overall business activities as well as financial status of the firm for a specified period to its stakeholders. These contain summary of information regarding financial affairs that is organized systematically. The top management is responsible for preparing these statements. The basic objective of financial statements is to assist in decision making. The analysis 15

and interpretation of financial statements depend on the nature and type of information available there in (Pandey, 2006 : 23). Hence financial statement refers to any formal and original statement that discloses the financial information related to any business concern during a period. The income statements and balance sheet usually prepared at the end of each financial year show the firms position.

A) Balance Sheet Balance sheet is one of the basic financial statements of an enterprise. It is also called the fundamental accounting report. As the name suggests, the balance sheet provide information about financial standing or a position of a firm at a particular point of time usually end of the financial year. It can be visualized as a snapshot of the financial status of a company (Khan and Jain, 1993). Balance sheet summarizes the assets, liabilities and owners equity of a business at a moment of time, usually at the end of the financial year. Balance sheet is a financial statement, which contains information regarding different capital

expenditures made on purchase of assets on particular date and information regarding various sources of funds acquired by the business concern to finance these assets and also the different sources of capital and liabilities at that particular point of time.

B) Income Statement Income statement is designed to portray the performance of the business firm for specific period of time i.e. for a year or month or quarter. The business revenues and expenses resulting from the accomplishment of the firms operation are shown in the income statements. It is the Scoreboard of the firms

performance during particular period of time. It shows the summary of revenues, expenses and net income or loss of a firm for a particular period of time. Income statement also serves as a true measure of the firms profitability.

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2.2.4 Cash Management Before knowing about Cash Management is better to know about Cash. Cash is the money, which the firm can disburse immediately without nay restriction. The term cash includes coins currency and cheque held by the firm and balance in its bank accounts. Sometimes near cash items, such as marketable securities is also included in cash. Cash is the important current assets for the operations of the business organization and public organization. Cash is the basic input needed to keep the business running on a countries basis. It is also the ultimate output expected to be realized by selling the service or product manufactured by the firm. The firm should keep sufficient cash neither more nor less. Cash shortages are disrupting the firms manufacturing operations while excessive cash is simply remaining idle, without contributing anything towards the firms profitability. Thus, a major function of the financial manager is to maintain a sound cash position. The term Cash Management is concerned with the management of current assets and current liabilities of the business, which is necessary for day- to-day operation. Cash management is concerned with the decision regarding the short-term funds influencing overall profitability add risk involving in the firm. The management of cash has been regarding as one of the conditioning factors in the decision making issues .it is no doubt, very difficult to point out as to how cash is needed by particular company, but it is very essential to analyze and fine out the solution to make efficient use of funds for minimizing the risk of loss to attain profit objectives.

Good cash management means: Knowing when, where, and how your cash needs will occur Knowing what the best sources are for meeting additional cash needs and Being prepared to meet these needs when they occur, by keeping good relationship with bankers and others creditors.

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Cash flow management is the process of monitoring, analyzing and adjusting business cash flows. For business, the most important aspect of cash flow management avoiding extended cash shortages, caused by having too great a gap between cash inflow and outflows. We wont be able to stay in business if we cant pay our bills for extended length of time. Therefore, we need to perform a cash flow analysis on a regular basis, and use cash forecasting so you can take the steps necessary to head off cash flow problems. Most software accounting programs have built in reporting features that make cash flow analysis easy. One of the most useful strategies for business is to shorten cash flow conversion period so that business can bring in money faster.

2.2.5

Functions of cash management

There are various functions of cash management. They are as follows:

Cash planning: Cash flows (inflows and outflows) should be planned to project cash surplus or deficit for the period. Cash budget is prepared for this purpose.

To design and manage cash flows: The cash flows (inflows and outflows) should be Properly managed. The inflows of cash should be accelerated and the outflows of cash should be decelerated as possible.

To maintain cash and marketable securities in amount close to optimal level: The firm should try to maintain the appropriate level of cash balances. The cost of excess cash and the danger of cash deficiency should be matched to maintain tha optimal level of cash balances.

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To place the cash and marketable securities in the proper institutions and in the proper forms: The idle cash of precautionary cash balances should be properly invested to earn profits. The firm should take to appropriate decision about the division of such cash balances between bank deposits and marketable securities.

2.2.6

Importance of Cash Management

Cash the most liquid asset, is of vital importance to the daily operations of business firm. Cash is both the beginning and the end o f the working capital cycle-cash, inventories, receivable and cash; its effective management is the key determinant of efficient working capital management. Cash like the blood stream in the human body gives vitality and strength to a business enterprise. The steady and healthy circulation of cash throughout the entire business solvency. According to J.M. Keyns it is cash, which keeps a business going. Hence, every enterprise has to hold necessary cash for its existence. In a business firm ultimately, a transaction results in either an inflow or an outflow of cash. In an efficient managed business, static cash balance situation generally does not exist. Adequate supply of cash is necessary to meet the requirement of the business. Its shortage may stop the business operations and may generate a firm into a state of technical insolvency and even of liquidation. Through idle cash is sterile; its retention is not without casts. Holding of cash balance has an implicit cost in the form of its opportunity costs. The highest the level of idle cash the greater is the cost of holding it in the manner of loss of interest, which could have been earned either by investing it and securities or by reducing the burden of interest charges by paying off the loans taken previously. If the level of cash balance is more than the desired level with the firm, it shows mismanagement of funds. Therefore, for its smooth running and maximum profitability proper and effective cash management in a business is for paramount importance. Efficient and optimal cash flow management is important to all firms. Cash is a non earning asset in the sense that although it is needed to pay for labor and raw materials to buy fixed assets, to pay taxes, to serve debt, to pay dividends and so on. Cash

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management is to reduce cash holdings to the minimum necessary level to conduct business (Weston and Copeland, 1981:428). Business analysts report that poor management is the major reason why most businesses fail. It would probably be more accurate to say that business failure is due to poor cash management. For this, financial manager should take a look at the cash flow process to find out. The starting point for avoiding a crisis is to develop a cash flow projection. Smart business owners know how to develop both short-term (weekly, monthly) cash flow projections to help them manage daily ash, and long-term (annual, 3-5 year) cash flow projections to help them develop the necessary capital strategy to meet their business needs. They also prepare and use historical cash flow statements to gain an understanding about where all the money went. Therefore, we need to perform a cash flow analysis on a regular basis, and use cash flow forecasting so you can take the steps necessary to head off cash flow problems. Many software accounting programs have built-in reporting features that make cash flow analysis easy. One of the most useful strategies for business is to shorten is to cash flow conversion period so that business can borrow money faster.

2.2.7Efficiency of Cash Management Cash performs number of functions as it makes payment possible. It serves to meet emergencies. But if cash is kept idle it contributes directly noting to the earning of the corporation. As such corporation must adopt such a policy that makes optimum cash management possible. The financial manager of the corporation should try to minimize the corporation holding of cash wide still maintaining enough to insure payment of obligation. For improving the efficiency of cash management effective method of collection and disbursement should be adopted. Some methods for efficiency of cash management are briefly described below. (Van Horne, 1974; 426)

Speedy Cash Collection A firm can conserve cash and reduce its requirement for cash balance if it can speed up its cash collection. Reducing the lag for gap between the times a customer pays his bill can accelerate cash collection and the time the cheque is collected and funds become 20

available for use. Within this time gap, the delay is cause by the mailing time. The amount of cheques sent by customer but not yet collected are called deposit float. The greater the deposit floats, the longer the time taken in converting cheque into usable funds. There are mainly two techniques, which can be used to save mailing and processing time which is concentration banking, lock box system.

Concentration Banking Concentration banking is a system of operating through number of collection centers, instead of a single collection centre centralized at the firm head office. In this system the firm will have a large number of bank account operated in the area where the firm its branches. All branches may not have the collection centers. The collections centers will be require collecting cheque from customers and deposit them in their local bank accounts. The collection centre will transfer funds above some predetermined minimum to a control generally at the firms head office, each day. A concentration bank is one where the firm has a major bank account from which the firm makes usually disbursement

Slowing Disbursement Apart from speedy collection of account receivable the operation cash requirement can be reduce by slow disbursement of account payable. It may be recalled that a basic strategy of the cash management is delay payment as long as possible without impairing the credit rating of the firm. In fact, slow disbursement represents a source of funds requiring no interest payments. There are some technique to delay payment is avoidance of early payment centralized disbursement, float and accruable. Quick collection and slow disbursement accomplish the corporation with adequate cash in hand for longer periods. Effective control of disbursement can results in a faster turnover of cash. Whereas the underlying objectives of collection are maximum acceleration, the objectives in disbursements are to slow tem down as much as possible.

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Cash velocity Efficiency in the use of cash depends upon the cash velocity i.e., level of cash over a period of time.

Synchronized cash flows Situation in which inflow coincides with out flows, thereby permitting a firm to hold transaction balance a minimum.

Usage float Cheque written by the firm but not deducted from the bank records until they are actually received by the bank, possible a matter of several days slag between the times, cheque is written until the time bank receives it is known ad float.

Transferring fund There are two principal method-wire transfer and electronic depository transfer cheques. With a wire an electronic depository transfer cheque (DTC) arrangement in the movement of funds an electronic cheque image is processed through an automatic clearing house. The funds become available on business day later. From small transfer, a wire transfer may be too costly.

Minimum Cash Balance Corporations are required to keep minimum cash balance requirement of a bank either for the service in record or in consideration of lending arrangement.

Overdraft System Systems where depositors may write cheques in excess of their balances with their banks automatically extend loans to cover the shortage. Most of the foreign countries use overdraft system.

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Transferring Fund A transferring fund is a system for moving funds among accounts at different bank. The main transfer mechanisms are depository transfer cheque (DTC), electronic depository transfer cheque (EDTC) and wire transfers.

2.2.8

Different Techniques of Cash Management

i) Cash Planning Cash planning can help to anticipate future cash flows and needs of the firm and reduces the possibility of idle cash balance and cash deficiencies. Cash planning is a technique to plan for and control the use of cash. The forecasts may be based on the present operation or anticipated future operation. Cash plan is very crucial in developing the overall operation plans of the firm. Cash planning may be done on daily, weekly or monthly basis. It depends upon the size of the firm and philosophy of manage.

ii) Cash Budget Cash Budget is the most significant device to plan and control cash receipt and payment. A cash budget is a summary statement of the firm expected cash inflows and outflows over a projected time period. This information helps the financing of these needs and exercise control the cash and liquidity of the firm. The time horizon of cash budget may differ in various firms. A firm whose business is affected by seasonal variations may prepare monthly cash budget. Daily or weekly cash budget should be prepared for determining cash requirement. If cash flows show extreme fluctuation, cash budget for longer interval may be prepared of cash flows are relatively stable.

iii) Short term Cash forecasting There are most two common used methods of short term cash forecasting are as follows:

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a. Receipt and disbursement forecast The prime aim of receipt and disbursement forecast is to summarize the flows during a predetermined period. In case of those companies where cash items of income and expenses involves this method is favored to keep a close control over cash. b. Adjusted net income method This method of cash forecasting involves the tracing of working capital flows. Sometime it is also called the source and uses approach. Two objectives if he adjusted net income approaches are to project the companys need for cash at some future date and to show whether the company can generate this money internally or not, how much will give to either borrow or rise in the capital market. In preparing the adjusted net income forecast items such as net income, depreciation, taxes, dividend etc. can easily be determined from the companys annual operating budget.

iv) Long Term Cash Forecasting Long Term Cash Forecasting are prepares to give an idle of the companys financial requirement of disbursement of distant future. Once a company has developed long term cash forecast, it can be used to evaluate the impact of say new product development on the firm financial condition three, five or more years in future. The major uses of the long term cash forecasts are companys future financial needs, especially for it working capital requirement, to evaluate proposed capital projects and it help to improve corporate planning. Long term cash forecasting not only reflects more accurately the impact of any recent acquisitions but also foreshadows financing problems.

2.2.9 Determining the Optimum Cash Balance Financial manager responsibilities are to maintain a sound liquidity position of the firm. So that dues may be settled in time. The firms need cash not only to purchase raw materials and pay wages but also for payment of dividend, interest, taxes and countless other purpose. The text of liquidity is really the availability of cash to meet 24

the firm obligations when they become due. Thus the cash balance is maintained for transaction purpose and additional amounts of cash balance. A tradeoff between risks and return influences such a decision. If the firm maintains small cash balance, its liquidity position becomes weak and suffers from a capacity of cash to make payment. But investing released funds in some profitable opportunities can attain a higher profitability. If the firm maintains a high level of cash balance it will have a sound liquidity position but forego the opportunity to earn interests. Thus the firm should maintain an optimum cash balance to find out the optimum cash balance the transaction costs and risk of too small a balance should be matched with the opportunity costs of too large a balance.

2.2.10 Cash Management Models Optimal balance of cash is determined by the cost-benefit trade-off between interests income, transaction costs if no compensating balance were required. However, with the existence of conversion delays and positive transaction cost, the firm would prefer to hold some cash balance. There are different types of analytical models for cash management. Baumol Model Miller-Orr Model Orglers Model

i)

Baumol Model

Baumols Model, also known as inventory model, is one of the simplest models to determine optimal cash under the condition of certainty. According to this model carrying cost of holding cash is balanced against the fixed costs of transferring marketable securities into cash or cash into marketable securities. The purpose of this model is to determine the minimum cost amount of cash that a financial manager can obtain by converting securities to cash considering the cost of conversion and the counter-balance cost of keeping the cash balance which otherwise could have been invested in marketable securities.

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The total cash associate with cash management, according to this model has two elements: (a) Cost of converting marketable securities into cash and (b) the lost opportunity cost. The conversion costs are incurred cash times marketable securities are converted into cash symbolically, total conversion cost per period. =Tb/C. (i) Where, T= Total transaction cash needs for the period b= Cost per conversion assumed to be independent of the size of transaction C= Value of marketable Securities sold at cash conversion The opportunity cost is derived from the lost/forfeited interest rate that could have been earned on the investment of cash balances. The total opportunity cost is the interest rate times the average cash balance kept by the firm. Symbolically, the average lost opportunity cost = I(C/2)... (ii) Where, I= interest rate that could have been earned C/2= Average cash balance i.e. the beginning cash plus the ending cash balance of the period divided by 2 The total cost associated with cash management compromising total conversion cost plus opportunity cost of not investing cash until it is needed in interest-bearing instruments can be symbolically expressed as I(C/2+Tb/c). (iii) To minimize the cost, therefore the model attempts to determine the optimal conversion amount .i.e. the cash withdrawal that costs the least. Symbolically, the optimal conversion (c*) amount. C*= 2bT/i (iv) The model in terms of equation (IV) has important implications. First, as the total cash needs for transaction rises because of expansion/diversification etc., the optimal withdrawal increases less than proportionately. This is the result of economy of scale in cash management. Each project does not need its own additional cash balance. It 26

only needs enough added to the general cash balance of the firm to facilitate expanded operations. Secondly, as the opportunity interest rate increases the optimal cash investment opportunity and financial managers want to keep as much cash invested in securities for as long as possible. They can afford to do this as the higher interests rates because at those higher rates any shortfall costs caused by a lower withdrawal are offset. In sum, the model of cash management is very simplistic. Further, its assumption of certainty and regularity of withdrawal of cash do not realistically reflect the actual situation of any firm. In addition, the model is concerned only with transaction balances and not with precautionary balances. In addition, the assumed fixed nature of the cash withdrawals is also not realistic. Nevertheless, the model does clearly and concisely demonstrates the economies of scale and the counteracting nature of the conversion and opportunity costs, which are undoubtedly major considerations in any financial managers cash management strategy (Boumol, 1952-545-556). Total Cost=Holding Cost + Transaction Cost = (Average Cash Balance X Opportunity Cost) + (Cost Per Transaction X No. of Transaction) Or, Total Cost= b (T/C*) +I(c*/2)

ii) Miller-Orr Model When cash balance fluctuates unpredictably, we use control theory to determine optimal behavior regarding cash holdings. Stochastic model / Miller-Orr Model, which specifies two controls limited i.e. upper and lower limit. The objective of cash management according to Miller-Orr is to determine the optimum cash balance level, which minimizes the cost of each management. Symbolically, C = bE (N) / t+jE (M)(i) Where b= the fixed cost per conversion E (M) = the expected average daily cash balances 27

E (N) = the expected number of conversions T = the number of days in the period J = the lost opportunity costs C = total cash management costs. The Miller-Orr model is in fact an attempt to make the Baumol model more realistic as regards the patern of cash flows. As against the assumption of uniform and certain levels of cash balances randomly fluctuate between an upper bound (h) and a lower bound (o). When the cash balances hit the upper bound (h), the firm has too much cash and should buy enough marketable securities to bring the cash balances back to the optimal bound (z). When the cash balances hit zero, the financial manager must return them to the optimum bound (z) by selling converting securtites in to cash. According to the Miller-Orr model, as in Baumol Model, the optimal cash balance (z) can be expressed symbolically as Z = 3(3b2)/4i+L(ii) Thus, as in Baumol model, there are economies of scale in cash management and the two basic costs of conversion and the lost interest that have to be minimized. MillerOrr model also specifies the optimum upper boundary (h) as three times the optimal cash balance level such that Upper limit (h)= 3Z-2L.(iii) Average Cash Balance = (h+Z)/3 Further, the financial manager could consider the use of less liquid potentially more profitable securities as investments for the cash balances in excess of cash (Miller and Orr, 1966; 413-435) iii) Orglers Model According to this model, an optimal cash management strategy can be determined though the use of a multiple linear programming model. The constrictions of the model comprise three sections Selection of the appropriate planning horizon Selection of the appropriate decision variables Formulating of the cash management strategy itself 28

The advantage of linear programming model is that it enables co-ordination of the optimal cash management strategy with the other operations of the firm such as production with less restriction on working capital balances. The model basically uses one-year planning horizon with twelve month periods because of its simplicity. It has four basic sets of decisions variables which influence cash management of a firm and which must be incorporated into the linear programming model of the firm. These are (i) payment schedule, (ii) short term financing, (iii) purchase and sale of marketable securities and (iv) cash balance it. The formulation of the model requires that the financial manager first specify an objective function and then specify a set of constraints. Orglers objective function is to minimize the horizon value of the net revenues from the cash budget over the entire planning period using the assumption that all revenue generated is immediately reinvested and that any cost is immediately financed. The objective function recognizes each operation of the firm that generates cash inflow or cash outflows as adding or subtracting profit opportunities for the firm is cash management operations. In the objective function decision variables which cause inflows such as payments on receivables have positive co-efficient while decision variables which generate cash inflows, such as interest on short-term borrowings have negative co-efficient. The purchase of marketable securities would for example produce revenue and they have a positive co-efficient while the sale of those securities would incurred conversion costs and have a negative co-efficient. A very important feature of this model is that it allows the financial managers to generate cash management with production and other aspects of the firm (Orgler: 1970:305).

2.2.11 Cash Conversion Cycle

Cash Conversion Cycle, also known as asset conversion cycle, net operating cycle or just cash cycle, is a ratio used in the financial analysis of a business. The higher the number, the longer a firms money is tied up in operations of the business and unavailable for other activities such as investing. The cash conversion cycle is the number of days between purchasing raw materials and receiving the cash from the sale of the goods made from that raw material. 29

Cash conversion cycle = Average stockholding period (in days) + Average receivables processing period (in days) Where, Average stockholding period (in days) = closing stock / average daily purchases. Average receivables processing period (in days) = account receivables / average daily credit sales.

Average payable processing period (in days) = accounts payable / average daily credit purchases. The duration between the purchase of a firms inventory and the collection of accounts receivable for the sale of that inventory, also known as cash cycle. Cash Conversion Cycle = Inventory Processing Period + Days to Collect Receivables.

2.2.12 Credit Management Credit policy can have significant influences on sales. In theory, the firm should lower its quality standard for accounts accepted as long as the profitability of sales generated exceeds the added costs of receivable is determined by the volume of credit sales and the average period between sales and collection. Firms objective of credit management is not only to collect receivable promptly, but also to give an outlook to the benefit cost trade off involve in various aspects of accounts receivable management. The important criteria to maintain benefit cost trade off the firms receivable management are to set up credit policies. A firms policy provides guidelines for determining whether to expand credit to a customer and how much credit should be given to the customer. Collection policies decision includes three dimensions. Credit Standards 30 Sales revenue Investment in account receivable Bad debt expenses

Credit terms Cash discounts Cash discount period Credit period

Collection Policies Correspondence Telephone calls Personal visits Legal action

2.2.13 Cash Flow Cash flow simply refers to the flow of cash into and out of a business over a period of time. Watching the cash inflows and outflows is one of the major management tasks of an owner. The outflow of cash is measured by those cheques of transaction that will write every month to pay salaries, suppliers, and creditors. The inflows are the cash, which receive from customers, lenders and investors. Positive cash flow means the cash coming in to the business is more than the cash going out of the business; the company has a positive cash flow. A positive cash flow is very good and the only worry here is what to do with the excess cash. Negative cash flow means the cash going out of the business is more than the cash coming in to the business; the company has a negative cash flow. A negative cash flow can be caused by a number of reasons. For example: too much or obsolete inventory or poor collections of accounts receivable can be the cause of short of cash. If the company cant borrow additional cash at this point, the company may be in serious trouble. A cash flow statement is typically divided into three components. These are stated follows:

i) Operating Cash Flow Operating cash flow, often referred to as working capital, is the cash flow generated from internal operations. It is the cash generated from sales of the product or service of

31

business. It is the real lifeblood of business, and because it is generated internally, it is under our control.

ii) Financing Cash Flow Financing cash flow is the cash that flows to and from external sources; such as lenders, investors and shareholders. A new loan, the repayment of a loan, the issuance of stock and the payment of dividend are some of the activities that would be included in this section of the cash flow statement.

2.2.14 Cash Flow Projection A cash flow projection is a forecast of the difference between cash coming in the business and cash going out from the business. The estimation or projection cash flow is a powerful cash management tool for a business. If we were to choose one financial management tool that we use on a routine basis, the cash flow projection and cash flow analysis would be the one to choose. By knowing cash position now and n the future, we can: Make sure business have enough cash to purchase sufficient inventory for seasonal cycles; Take advantage of discounts and special purchase; Properly plan equipment purchases for replacement or expansion; Prepare for adequate future financing and determine the types of financing (short-term credit line, permanent working capital, or long-term debt). Impress lenders with ability to plan and repay financing.

Moreover, it just makes good business sense to know where you are and where you are going with your company. A cash flow projection can help to do this. For a new or growing business, the cash glow projection can make the difference between success and failure. For an ongoing business, it can make the difference between growth and stagnation. The cash flow projection shows how cash will flow in and out of the business and enables firms to budget the cash needs of the business over a period of time. The ability to predict and plan cash outlays means that firms wont be forces to resort to 32

unexpected borrowing to meet your cash needs. The lack of liquidity can be a killereven for profitable business. Lack of profits wont kill a business nearly as quickly as the lack of cash to pay your trade creditors. Remember, non-cash expenses such as depreciation can make your profit look negative, while your cash flow is positive. And you could also be showing a profit but have negative cash flow. Thats why it is essential that we understand how to use a cash flow statement, and use it on regular basis. Preparing a cash flow projection is a something like preparing budget and balancing checkbook at the same time. Unlike the income statement, a cash flow statement deals only with actual cash transactions. Depreciation, a non cash transaction, does not appear on a cash flow statement. Loan payments (both principal and interest) will appear on your cash flow statement since they require the outlay of cash. Cash is generated primarily by sales. In most of the business not all sales are cash sales. Even if firms have a retail business and a large percentage of sales are cash it is likely that firm offer credit (charge accounts, term payments, lay-a-way, and trade credit) to customers. Thus, we need to have a means of estimating when those credit sales will turn into cash-in-hand. Cash flow projection should be prepared for shortterm (weekly, monthly), and long-term (annual, 3-5 years) planning purposes. They are used for deficient purposes and thus are generally prepared differently

2.2.15 Cash Flow Statement (CFS) The Cash Flow Statement attempts to analyze the transactions of the firm in terms of cash i.e. the transactions generating cash and using cash. The focus in the cash flow statement is on cash rather than on working capital. So, the CFS provides a summary of sources of cash and uses of cash in the firm. The sources of cash may be the cash profits earned but the firm, issue of capital for cash, issue of other securities for cash, borrowings, sale of assets or investments etc. the uses of cash may be purchase of assets, investment, and redemption of debenture or preference share, repayment of loan, payment of tax, dividend distribution etc. The excess of sources cash over the uses of cash would be the increase in cash during the year and vice-a-versa. Thus, the CFS summarizes the cash inflows and outflows. (Rustagi, 2001:155) 33

2.3 Review of previous research

Pant, R.P. (2001), Pant has studied on A study of deposit and its utilization by Commercial Bank in Nepal. The main objective of the study is to test whether lending process is significant and to find out the way to encourage mending by increasing bank deposit. The finding of the study is; commercial banks in Nepal are not able to satisfy the financial need of the economy, commercial banks in Nepal are not playing active role to utilize their resources collected from different sector, according to the need of the economy. He has recommended the new branches should be open. Acharya, N. (2001), Deposit mobilization of commercial bank in Nepal. The main objective is to analyze the impact of interest rate on deposit mobilization as well as credit ratio increase or decrease as the change in interest rate. Besides this, the objective is to know the efficient utilization of the accumulated deposits. She has found that the commercial bank have not been successful in the mobilization of the deposits collected by the commercial banks. It is because of the fact that the commercial banks have not able to motivate and facilitate to their cents except at change in the rate of interest. The problems are to attracting the savings to the maximum possible extent to channeling these savings into these savings into those sectors of the economy where there are most needed and to extending banking facilities in the country to unbanked areas. The changes of interest rates in loan are also recommended. Commercial banks should extend long term and medium term credit in addition to short term credit. Joshi, D.(2002), A study on Commercial banks of Nepal with Reference to Financial Analysis of Rastriya Banjiya Bank is the study conducted to direct the financial position of the bank and recommended the essential suggestion to that bank.

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Adhakari (2008), in his thesis paper, "A Study of Commercial Banks Deposit and Its Utilization" got to notice that the percentage of the total credit supplied by commercial banks within five years period (2000-2007) is more or less same while in the collection of deposits. The percentage has increased too much. Thus, the increasing gap between collection and utilization shows economic requirement and to contribute the economic upliftment of the country, commercial bank should affair sector wise and planned policy, he suggested.

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CHAPTER III RESEARCH METHODOLOGY

Research is effort of search new fact, knowledge and principle in scientific ways. To generate knowledge, investigation or enquiry in the phenomenon of the explored or unexplored area necessitated the research work. The research requires different methodologies, tools, techniques, etc. This chapter attempts to explain the methodology of the research undertaken. This chapter contains research design, source of data, population and examples, method of data collection.

3.1 Research Design

"Research design is the plan, structure and strategy of investigation conceived so as to obtain answer to research question and control variance. The plan mean now researcher investigator collect the data structure in term controlling the data in term of money and time." The plan mean now researcher investigators collect the data structure in term controlling the data in term of money and time. We can say that the research design is specific action of methods and procedures for acquiring the information needed. It is the plan, structure and strategy of investigation conceived so as to obtain answer to research questions and to control; variances. It is the overall operational pattern of framework of the projects that stipulates what information is to be collected from which sources by what purpose. A good design will ensure that the information obtained is relevant to the research question and that it was collected by objective and economically procedure. The main objective of research design is to make analysis of financial performance of commercial banks with reference to NMB Bank Ltd. The research analyzes the financial performance of commercial banks in Nepal and provides valuable recommendation. In other words, this research is aimed at studying profit through analyzing financial ratio of NMB Bank Limited. This will follow analytical and descriptive research design. It also analyzes the composition of trend of total deposit, total assets, investment and profitability condition of commercial

36

banks. The design for this research is made by collection of information from different sources by using various financial and statistical tools.

3.2 Source of Data

There are two sources of data, primary and secondary. But only secondary data has been used in this search. Secondary Source: This refers to data that are already used and gathered by others. Secondary data are mostly used for this research purpose. So the major sources of secondary data are as follows:

Annual general report of NMB Bank Ltd from 2064/65 to 2067/68 National newspaper, journals, magazine, and reports for Central Library of T. U., Library of Shanker Dev Campus. Internet and various website

3.3 Population & Sample

All a commercial banks currently operation in Nepal is the population. On the basis of the researcher's judgment, the study will cover only 1 sample out of all the banks, viz. NMB.

3.4 Method Of Data Analysis

To make the study more specific and reliable, the researcher uses two types of tool for analysis,

a) b)

Financial Tools Statistical Tools

3.4.1 Financial Tools Financial tools ar those which are used for the analysis and interpretation of financial data. These tools can be used to get the prescribe knowledge of business which in turn are fruitful in exploring the strength and weakness of the financial policies and 37

strategies. For the sake of analysis, various financial tools were used. In order to meet the purpose of study, following financial tools have been used.

3.4.1.1 Ratio Analysis Ratio analysis is a widely used tool of financial analysis. A large number of ratios can be generated from the components of profit and loss account and balance sheet. It is a powerful tool of financial analysis. It helps to summarize the large quantities of financial data and to make quantitative judgments about the firms financial performance. They are sound reasons for selecting different kinds of ratios for different types of situations. For this study, ratios are categorized into the following major headings:

A. Liquidity Ratios Liquidity refers to the ability of a firm to meet its short- term or current obligations. So liquidity ratios are used to measure the ability of a firm to meet its short-term obligations and from them the present cash solvency as well as ability to remain solvent in the event of adversities of the same can be examined (Van Horne, 1999:693). Inadequate liquidity can lead to unexpected cash short falls that must be covered at inordinate costs, thus reducing profitability. In the worst case, inadequate liquidity can lead to the liquidity insolvency of the institution. On the other hand, excessive liquidity can lead to low asset yields and contribute to poor earnings performance. (Scott, 1992:140). To find -out the ability of bank to meet their short-term obligations, which are likely to mature in the short period, these ratios The types of liquidity used in this study are as follows:

i. Current Ratio Current ratio=

Current Assets Current liabilities

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ii) Cash and Bank Balance to Current Asset Ratio

Cash & Bank Balance to Current Assets Ratio = Cash & Bank Balance Current Assets

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

Cash Reserve Ratio= Cash and Bank Balance Total Deposits

B. Activity Ratios / Turnover Ratios The fund of creditors and owners are invested in various assets to generate income and profit. Better the management of assets, the larger the amount of income. Activity ratio measures the degree of effectiveness in use of resources of fund by an entrepreneur. It is also known as turnover ratio because they indicate the number of times the assets are being converted or turnover into income. In other words turnover ratios also known as utilization ratio or activity ratios are employed to evaluate he efficiency with which the firm manages and utilizes its assets. They measure how effectively the firm uses investment and economic resources at its command. High ratio depicts the managerial efficiency in utilizing the resources. They show the sound profitability position of the bank. Low ratio is the result of insufficient utilization of resources. However, too high ratio is also not good enough as it may be due to the sufficient liquidity. Depending upon special nature of assets and sales of the banks, following ratios are tested.

i) Loans and Advances to Fixed Deposit Ratio

Loan & Advances to Fixed Deposit = Loan and Advances Fixed Deposits

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ii) Loans and Advances to Saving Deposit Ratios

Loan & Advances to saving Deposit Ratio = Loan & advances Saving deposits

iii) Loan and Advances to Total Deposits Ratio

Loan & Advances to Total Deposit Ratio = loan & advances Total deposits

C. Profitability Ratio A company should earn profits to survive and grow over a long period of time. It is a fact that sufficient profit must be earned to sustain the operation of the business; to be able to obtain funds from investors for expansion and growth; and to contribute towards the social overheads for the welfare of the society. The profitability ratios are calculated to measure the operating efficiency of the company. Management of the company, creditors and owners are interested in the profitability of the firm. Creditors want to get interest and repayment of principal regularly. Owners want to get a reasonable return from their investment. Profitability ratios are calculated to measure the operating efficiency of the company. Various profitability ratios are calculated to measure operating efficiency of the business enterprises. Though profitability ratios the lender and investors want to decide whether to invest in particular business or not. To meet the objective of the study, following ratios are calculated in this group.

i) Return on Total Asset Return on Assets = Net Profit after Tax (NPAT) Total Assets ii) Return on Shareholders Equity (Net Worth) 40

Return on Net Worth= Net profit After Tax Net Worth

iii) Interest Earned to Total Asset Ratio

Interest earned to Total Assets = Interest earned Total Assets

iv) Return on Total Deposit Ratio

Net Profit to Total Deposit= Net Profit Total Deposit

3.4.2 Statistical Tools Several numbers of statistical tools can be employed to examine the financial data of NMB Bank Ltd. Some of the statistical tools that are used for the purpose of this study are presented below;

A. Arithmetic Mean An average is a single value selected from a group of values to represent them in same way, which is suppose to stand for whole group of which it is a part, as typical of all the values in the group (Waugh A.E). Arithmetic Mean is statistical constants which enables us to comprehend in a single effort of the whole." (Bowley, 2000:357). Out of various measures of the central tendency, arithmetic mean is one of the useful tools applicable here. It represents the entire data by a single value. It provides the gist and gives the bird's eye view of the huge mass of unwieldy numerical data. It is easy to calculate and understand and based on all observation.

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Arithmetic mean of a given set of observation is their sum divided by the number of observation. In general if X1, X2, X3---------------Xn are the given observations, then arithmetic mean usually denoted by X is given

B. Standard Deviation (S.D.) Average like other mean, mode and medium gives us the idea of concentration of the items around the central part of distribution. But average do not gives clear picture about the distribution because two distributions with same average may differ in the scatter ness of the items from the central value. To remove this drawback, dispersion is used. Dispersion is defined as the measure of variation of the item from the central value. Among various measure of dispersion, standard deviation is widely used. Standard deviation is absolute measure of dispersion, which is defined as the positive square root of the mean of the square of deviation taken from the arithmetic means, if X1, X2, X3-------Xn are the given observation, then standard deviation denoted by is given by;

( )

, N= number of observation in series X = Sum of observation in series X = Sum of Squared observation in series X Standard deviation is the absolute measure of dispersion. The relative measure of dispersion based on the standard deviation is known as the coefficient of standard deviation

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C. Coefficient of Variation ( C.V.) Coefficient of variation is the relative measure of dispersion, comparable across distribution, which is defined as the ratio, of the standard deviation the mean express in percent (Rechard& Rubin, 1994, pg 114). It is used in such problem where we want to compare the variation which is greater and is said to be more variable or conversely less consistent, less uniform, less stable or less homogeneous. On the other hand, the series for which co-efficient of variation is less and is said to be loss variable or more consistent, more uniform and more stable or more homogenous.

The coefficient of variation is given by, Where, C.V. = Co-efficient of variation = Arithmetic mean = Standard deviation 3.4.3 Diagrammatic and Graphical Representation Diagrams and graph are visual aids that give a birds eye view of a given set of numerical data. They present the data in simple and readily comprehensive form. Diagrams are primarily used for comparative studies and cant be used to study the relationship between the variable under study. That is done through graphs.

3.5 Data Processing procedure

The data analysis tools are applied as simple as possible. Data obtained from various sources cannot directly be used in their original form. They need to further verify and simplify the data for the purpose of analysis. Data, information, figures and facts obtained need to be checked, rechecked, edited and tabulated for computation. According to the nature of data, they have been inserted in meaningful tables, which have been shown I appendices. Homogeneous data have been sorted in one table and

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similarly various tables have been prepared in understandable manner, odd data are excluded from the table. Data have been analyzed and interpreted using financial and statistical tools. The detail calculations that cannot be shown in the body part of the report are presented in appendices at the end of the report.

3.4 Period Covered

This study covers a period of four year from FY 2064/65 to FY 2067/68 of NMB Bank Ltd. this analysis is done on the basis of data covering four years.

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CHAPTER - IV
DATA PRESENTATION AND ANALYSIS
In this chapter, all the efforts have been made to analyze and present the collected data from the various sources. This chapter is the main part of the study because in this chapter collected data are presented and analyzed with the help of various financial and statistical tools, tables, graphs etc meaningfully and clearly. This chapter is performed to show the clear picture of the lending performances of the commercial banks.

4.1 Deposit Categorization of NMB Bank Ltd.

4.1.1 Interest Bearing Deposit

Table 4.1 Interest Bearing Deposit

(Rs in a Million) Year Interest bearing Deposit Current year 2064/65 2065/66 2066/67 2067/68 1636.64 6762.91 9439.87 12289.85 Previous year 1291.74 1636.64 6762.91 9439.87 344.9 5126.27 2676.96 2849.98 21.07 75.79 28.35 23.18 Growth % Growth

Sources: Annual Report of NMB 2064/65-2067/68

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In the above table, we can see that the interest bearing deposit of the NMB has mixed growth rate from the year 2064/2065 to 2067/2068. In 2065/66 bank succeed to get high interest bearing deposit of 75.79% 1 whereas in 2064/2065 banks interest bearing deposit decreased by 21.07%.

Figure 4.1: Interest Bearing Deposit

5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 2064/65 2065/66 2066/67 2067/68 Fiscal Year

4.1.2 Saving Deposit Table 4.2 Saving Deposit (Rs. in Millions) Year Saving Deposit Current year 2064/2065 2065/2066 2066/2067 2067/2068 395.69 1544.42 1421.59 1883.50 Previous year 444.92 395.69 1544.42 1421.59 -49.23 1148.73 -122.83 461.91 -12.44 74.37 -8.64 24.52 Growth % Growth

Sources: Annual Report of NMB 2064/65-2067/68

Ratio in %

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In the above table, we can see that the saving deposit of NMB Bank was in Fluctuating trend in fiscal year. The saving deposit is also one of the interests bearing deposit of the bank. Rate of growth of deposit was in decreasing rate which is not a good sign for the bank.

Figure 4.2: Saving Deposit

5 4.5 4 Ratio in % 3.5 3 2.5 2 1.5 1 0.5 0 2064/65 2065/66 Fiscal Year2066/67 2067/68

4.1.3 Fixed Deposit Table 4.3 Fixed Deposit

(Rs in a Million) Year Fixed Deposit Current year 2064/2065 2065/2066 2066/2067 2067/2068 926.51 2079.15 4020.04 6563.09 Previous year 682.41 926.51 2079.15 4020.04 244.1 1152.64 1940.89 2543.05 26.34 55.43 48.28 38.74 Growth % Growth

Sources: Annual Report of NMB 2064/65-2067/68

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The above table shows that the fixed deposit was in Fluctuating trend. However bank succeeds to make double deposit than before year in 2065/2066 FY year. In the next two years fixed deposit of the bank is decreased rate but has been successful in increasing the deposits.

Figure 4.3: Fixed Deposit

5 4.5 4 3.5 Ratio in % 3 2.5 2 1 0.5 0 2064/65 2065/66 2066/67 2067/68 Fiscal Year 1.5

4.1.4 Call Deposit Table 4.4 Call Deposit (Rs In a Million) Year Call Deposit Current year 2064/2065 2065/2066 2066/2067 2067/2068 314.43 3139.33 3998.24 3843.26 Previous year 164.40 314.43 3139.33 3998.24 150.03 2824.9 858.91 -154.98 47.71 89.98 21.48 -4.03 Growth % Growth

Sources: Annual Report of NMB 2064/65-2067/68 48

From the above table we can see that the position of the call deposit in the NMB was good in 2065/66 as it was in increasing rate in last year. Call deposit hugely declined in 2067/68 by -4.03%, which was not good for the bank.

Figure 4.4: Call Deposit

5 4.5 4 3.5 Ratio in % 3 2.5 2 1.5 1 0.5 0 2064/65 2065/66 2066/67 2067/68 Fiscal Year

4.1.5 Non- Interest Bearing Deposit Table 4.5 Non- Interest Bearing Deposit (Rs in a Million) Year Non- Interest Bearing Deposit Current year 2064/2065 2065/2066 2066/2067 2067/2068 24.95 114.99 670.81 576.36 Previous year 4.64 24.95 114.99 670.81 20.31 90.04 555.82 -94.45 81.40 78.30 82.85 -16.38 Growth % Growth

Sources: Annual Report of NMB 2064/65-2067/68

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In the above table, we can say that the non-interest bearing deposit was in fluctuating rate. The non-interest bearing deposit consists of current and margin deposit which is uncertain in the bank, so the non-interest bearing deposit of the bank are fluctuating.

Figure 4.5: Non-Interest Bearing Deposit

5 4.5 4 3.5 Ratio in % 3 2.5 2 1.5 1 0.5 0 2064/65 2065/66 Fiscal Year 2066/67 2067/68

4.1.6 Current Deposit Table 4.6 Current Deposit (Rs in a Million) Year Current Deposit Current year 2064/2065 2065/2066 2066/2067 2067/2068 22.41 101.42 628.77 518.48 Previous year 0.11 22.41 101.42 628.77 22.3 79.01 527.35 -110.29 99.50 77.90 83.87 -21.27 Growth % Growth

Sources: Annual Report of NMB 2064/65-2067/68

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In the above table, we can say that the current deposit was decreased in the fluctuating rate as it is the non-interest bearing deposit. In the year 2067/2068 it has low growth of -21.27% and in the year 2064/2065 bank succeeds to make 99.50% of growth.

Figure 4.6: Current Deposit

5 4.5 4 3.5 Ratio in % 3 2.5 2 1.5 1 0.5 0 2064/65 2065/66 Fiscal Year 2066/67 2067/68

4.1.7 Margin Deposit Table 4.7 Margin Deposit (Rs in a Million) Year Margin Deposit Current year 2064/2065 2065/2066 2066/2067 2067/2068 2.54 13.57 42.04 57.88 Previous year 4.52 2.54 13.57 42.04 -1.98 11.03 28.47 15.84 -77.95 81.28 67.72 27.36 Growth % Growth

Sources: Annual Report of NMB 2064/65-2067/68

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Figure 4.7: Margin Deposit

5 4.5 4 Ratio in % 3.5 3 2.5 2 1.5 1 0.5 0 2064/65 2065/66 Fiscal Year 2066/67 2067/68

4.1.8 Total Deposit Total Deposit= Total Interest Bearing Deposit + Total Non-Interest Bearing Deposit

Table 4.8 Total Deposit (Rs in a Million) Year Total Deposit Current year 2064/2065 2065/2066 2066/2067 2067/2068 1661.60 6877.90 10110.68 12866.22 Previous year 1296.38 1661.60 6877.90 10110.68 365.22 5216.3 3232.78 2755.54 21.98 75.84 31.97 21.41 Growth % Growth

Sources: Annual Report of NMB 2064/65-2067/68

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In the above table, we can see that the total deposit is composition of interest bearing and non-interest bearing deposit. From the table we can see that the total deposit was increased and decreased yearly in the fluctuating rate.

Figure 4.8: Total Deposit

5 4.5 4 3.5 Ratio in % 3 2.5 2 1.5 1 0.5 0 2064/65 2065/66 Fiscal Year 2066/67 2067/68

4.2 Ratio Analysis Ratio analysis analyzes and interprets the following aspects of NMB Bank: Liquidity position Activity/Turnover Position Profitability position

4.2.1 Liquidity Ratio A satisfactory liquidity positions is one of the distinguishing characteristics of a sound bank. As a critical factor of evaluation, liquidity is the ability of a bank to satisfy the credit needs of the community, to meet demands for deposit, withdrawals, pay maturing obligations on time, and to convert non-cash assets into 'cash' to satisfy immediate needs without loss to bank and consequent impact in the long-term profitability. Liquidity ratios such as cash and bank balance to current assets ratio, loans and 53

advances to current assets ratio, fixed deposit to total deposit ratio, saving deposit to total deposit ratio, and investment in government securities to current assets ratio attempts to figure out the liquidity position of the two banks under study.

i) Current Ratio The current ratio one of the most commonly cited financial ratio, measures the firms ability to meet its short term obligations. Current liabilities includes the sum of borrowings, current and call deposit liability, Bills payables, proposed dividend and other liabilities. Current assets include the cash balance, balance with NRB, money at call and short notice, loans, advances and bills purchase and other assets. It is expressed as follows

Current ratio= Current Assets Current liabilities

Table: 4.9 Current Ratio

(Rs. in Millions) Year 2064/65 2065/66 2066/67 2067/68 Current Assets 7552.26 13775.28 10255.32 13056.69 Mean SD CV Source: Annual Report of NMB 2064/65-2067/68 Current Liabilities 7714.41 14264.61 11415.04 13736.73 Ratio(Times) 0.97 0.96 0.89 0.95 0.942 0.035 0.037

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The above table shows that the current assets, current liabilities and current ratio of NMB bank Limited. In the FY 2064/65, the banks current ratio stands at 0.97. Similarly the current ratio stands at 0.96, 0.89, & 0.95 in the later years i.e. in 2065/66, 2066/67, & 2067/68 respectively. The ratio seems decreasing in FY 2065/66 and 2066/67 again increases in following year. Though the ratio is fluctuating and is below the standard i.e. 2:1, it seems that bank is still able to meet its short term obligation. The table shows the average of current ratio for the period to be 0.942. The standard deviation of 0.035

Figure 4.9: Current Ratio

5 4.5 4 Ratio in % 3.5 3 2.5 2 1.5 1 0.5 0 2064/65 2065/66 Fiscal Year 2066/67 2067/68

ii) Cash and Bank Balance to Total Deposit Ratio The ratio shows the proportion of total deposits held at most liquid assets. The ratio computed by dividing the cash and bank balance by total deposits.

Cash and Bank balance to Total Deposit Ratio= Cash & Bank balance Total deposits

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Table: 4.10 Cash and Bank Balance to Total Deposit Ratio (Rs. In Millions) Year 2064/65 2065/66 2066/67 2067/68 Cash and Bank Balance 5550.41 7480.34 1729.83 1493.88 Mean SD CV Source: Annual Report of NMB 2064/65-2067/68 Total Deposit 1661.60 6877.90 10110.68 12866.22 Ratio (%) 3.34 1.08 0.17 0.11 1.17 1.51 13.72

The cash and bank balance to total deposit ratio reveals that the ability of banks to cover its short term deposits. The ratio decreases in the second year and decreases rapidly in next two year i.e. FY 2066/67 and FY 2067/68 which implies the banks doesnt have sufficient cash but has maintain balances with increase in total deposit. The average of the ratio and standard deviation are 1.17 and 1.51 respectively.

Figure 4.10: Cash and Bank Balance to Total Deposit Ratio

5 4.5 4 Ratio in % 3.5 3 2.5 2 1.5 1 0.5 0 2064/65 2065/66 Fiscal Year 2066/67 2067/68

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iii) Cash & Bank Balance to Current Assets Ratio The Cash & Bank Balance to Current Assets Ratio measures the portion of cash & bank balances maintained against its current assets. In order to analyze and interpret the cash and bank balance to current assets position of the sampled bank, researcher obtained the required data from the bank. And the results of the analysis have been presented in the table no. 4.11

Table 4.11 Cash & Bank Balance to Current Assets Ratio (Rs. in Millions) Year 2064/2065 2065/2066 2066/2067 2067/2068 Mean S.D C.V Ratio 2.59 1.18 0.20 0.129 1.024 1.1484 112.14

Source: Annual Report of NMB 2064/65-2067/68

The above table shows that the Cash and bank balance to current assets ratio and the percentage shows that how much of current assets of the bank represent cash and bank balance. In the initial two years the ratio decreases from 2.59% to 1.18%, and again decreases in next two year i.e. 0.20& 0.129 which reflects no improvement during the period.

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Figure 4.11: Cash and Bank Balance to Current Assets Ratio

5 4.5 4 Ratio in % 3.5 3 2.5 2 1.5 1 0.5 0 2064/65 2065/66 Fiscal Year 2066/67 2067/68

4.2.2 Efficiency/ Activity/ Turnover Ratios: It is known as turnover or efficiency ratio or assets management ratio. It measures how efficiently the firm employs the assets. Turnover means; how much number of times the assets flow through a firm's operations and into sales (Kulkarni, 1994). This ratio measures the degree of effectiveness in use of resources or funds by a firm. Greater rate of turnover or conversion indicates more efficiency of a firm in managing and utilizing its assets, being other things equal. Various ratios are examined under this heading.

i) Loan and Advances to Fixed Deposit Ratio Loan and advances clearly state that it is the assets of the bank and fixed deposit is the liability. Fixed deposit are interest bearing long term obligation where as loans and advance are the major sources in generating income for commercial banks. This helps to show the ratio of Loan & advances to fixed deposit. We can also conclude that what part of the loan and advances is initiated against fixed deposit. Loan & Advances to Fixed Deposit = Loan and Advances Fixed Deposits 58

Table: 4.12 Loan and Advances to Fixed Deposit Ratio (Rs. In Millions) Year 2064/65 2065/66 2066/67 2067/68 Loan and advances 1939.96 5194.21 7808.11 11208.57 Mean SD CV Source: Annual Report of NMB 2064/65-2067/68 The above table shows the loans and advances to fixed deposit of the bank for four fiscal years. It reveals the proportion of loans mobilized in terms of its fixed deposits. The ratio seems to be in decreasing and increasing trend during the study from FY 2064/65 to 2067/68. The average of the ratio accounts at 2.05 times. The ratio of the period has been revealed by its standard deviation i.e. 0.33 Fixed Deposit 926.51 2079.15 4020.04 6563.09 Ratio(Times) 2.09 2.49 1.94 1.70 2.05 0.33 0.16

Figure 4.12: Loan and Advances to Fixed Deposit Ratio

5 4.5 4 Ratio in % 3.5 3 2.5 2 1.5 1 0.5 0 2064/65 2065/66 2066/67 2067/68 Fiscal Year

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ii) Loan and Advances to Saving Deposit Ratio Saving deposits are interest bearing obligation for short term purpose where as loan and advances are long term investment for generating income. So the ratio indicates how money times short term interest bearing deposits are utilized for income generating purpose. It is calculated as:

Loan & Advances to saving Deposit Ratio = Loan & advances Saving deposits

Table: 4.13 Loan and Advances to Saving Deposit Ratio (Rs.in Millions) Year 2064/65 2065/66 2066/67 2067/68 Loan and advances 1939.96 5194.21 7808.11 11208.57 Mean SD CV Source: Annual Report of NMB 2064/65-2067/68 Saving Deposit 395.69 1544.42 1421.59 1883.50 Ratio(Times) 4.90 3.36 5.49 5.95 4.92 1.12 0.22

The above table shows the loans and advances to saving deposit of the bank for four fiscal years. It reveals the proportion of loans mobilized in terms of its saving deposits. The ratio seems in increasing trend during the entire study period standing at 4.90, 3.36, 5.49,& 5.95 times. The average of the ratio accounts at 4.92 times. The increment in the ratio of the period has been revealed by its standard deviation i.e. 1.12%.

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Figure 4.13: Loan and Advances to Saving Deposit Ratio

5 4.5 4 Ratio in % 3.5 3 2.5 2 1.5 1 0.5 0 2064/65 2065/66 2066/67 2067/68 Fiscal Year

iii. Loan and Advances to Total Deposit Ratio This ratio is calculated to find out the banks are successful utilizing the outsiders fund .i.e. total deposits for profit generating purpose in the form of extending loan and advances. Higher ratio shows higher efficiency to the utilization of outsiders fund. It is calculated as follows: Loan & Advances to Total Deposit Ratio = loan & advances x 100% Total deposits Table: 4.14 Loan and Advances to Total Deposit Ratio (Rs.inMillions) Year 2064/65 2065/66 2066/67 2068/69 Loan and advances 1939.96 5194.21 7808.11 11208.57 Mean SD CV Source: Annual Report of NMB 2064/65-2067/68 61 Total Deposit 1661.60 6877.90 10110.68 12866.22 Ratio(%) 1.16 0.75 0.77 0.87 0.88 0.18 0.20

The ratio helps to analyze whether the outsiders fund have been properly utilized. The above table reveals that the ratio of the bank is in declining trend in first three years. This implies the ratio of funds mobilization has been decreased despite of increase in total deposit of the bank. In the last year i.e. FY 2068/69, the ratio has increased to 0.87 which indicates the deposit mobilized in the form of loan and advances are higher in comparison to total deposit. This is also due to less increment in banks total deposit in the year. The table shows that average of 0.88 of total deposit has been disbursed as loan and advances and standard deviation is 0.18.

Figure 4.14: Loan and Advances to Total Deposit Ratio

5 4.5 4 Ratio in % 3.5 3 2.5 2 1.5 1 0.5 0 2064/65 2065/66 2066/67 2067/68 Fiscal Year

4.2.3 Profitability Ratio: Profit is the difference between total revenue and total expenses over a period of time. It is an important factor that determines the firms expansion and diversification. A required level of profit is necessary for the firms growth and survives in the competitive environment. Profitability ratios have been employed to measure the operating efficiency of the sample banks. There are many measures of profitability. Each relates the return of the firm to its sales, assets, and equity or share value. As a group, these measures allow the analyst to evaluate firms earning with respect to given level of sales, a certain level of assets, the owners investment or share value. Profit of 62

a commercial bank is unlimited and it will have no future if it fails to make sufficient profits. Therefore the financial manager continuously evaluates the efficiency of the bank in terms of profits. The profitability ratios in this study are calculated to measure the operating efficiency and performance of measure profitability ratios are calculated: NMB bank Ltd. Following are the

i)

Return on Assets

The ratio is useful in measuring the profitability of all financial resources invested the firms assets. It is also called net profit or loss to total assets or working fund ratio and denoted by ROA. It is calculated as: Return on Assets= Net profit after tax (NPAT) Total Assets

Table: 4.15 Return on Assets (ROA) (Rs. In Millions) Year 2064/65 2065/66 2066/67 2067/68 Net Profit After tax 72.82 62.95 159.87 221.50 Mean SD CV Source: Annual Report of NMB 2064/65-2067/68 Total Assets 8927.89 15856.66 13226.57 15948.19 Ratio (%) 0.81 0.39 1.20 1.38 0.945 0.439 0.464

The above table shows that the net profit to total assets ratio has ranged between 0.81% in the year 2064/65 and 1.38% in the year 2067/68. The ratio of the bank is somehow increasing throughout the period except in the FY 2065/66. This reveals that the ratio is in satisfactory level. The average or the period is 0.94% and standard deviation for the period is calculated at 0.43%. 63

Figure 4.15: Return on Assets

5 4.5 4 Ratio in % 3.5 3 2.5 2 1.5 1 0.5 0 2064/65 2065/66 2066/67 2067/68 Fiscal Year

ii) Return on net worth/ shareholders equity The ratio is tasted to see the profitability of owners investment. It reflects the extent to which the objective of business is accomplished. So, all commercial banks have its main objectives to earn the maximum profit, so that they can run smoothly and get the name and fame the ratio is of great interest to present as prospective shareholders and also of great significance to management, which has the responsibility maximizing the owners welfare. So, higher is desirable. Net worth refers the owners claim on banks. It is also called net profit to shareholders equity ratio on shareholder equity simply denoted by ROE. It is calculated as:

Return on net worth= Net profit after tax(NPAT) Net Worth

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Table: 4.16 Return on Net worth (Shareholders Equity) (Rs. In Millions) Year 2064/65 2065/66 2066/67 2067/68 Net Profit After tax 72.82 62.95 159.87 221.50 Mean SD CV Source: Annual Report of NMB 2064/065-2067/68 Net worth 1213.48 1592.05 1811.52 2211.46 Ratio (%) 6.00 3.95 8.82 10.01 7.19 2.74 38.10

Here net worth refers to the shareholders equity. The above table shows that return on equity of the bank has Fluctuating ratios 6.00% in first year to 3.95% in the second year. In the FY 2066/67, FY 2067/68 the ratio has Increased to 8.82%, 10.01% respectively and in last year leading to average of 7.19% and standard deviation of 2.74%.

Figure 4.16: Return on Net Worth

5 4.5 4 Ratio in % 3.5 3 2.5 2 1.5 1 0.5 0 2064/65 2065/66 2066/67 2067/68 Fiscal Year

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iii) Interest earned to Total Assets Ratio Interest earning is the major sources of a commercial bank. This ratio is calculated to find out percentage of the interest earned in comparison to total assets. The ratio can be calculated by suing the following formula;

Interest earned to Total Assets= Interest Earned Total Assets

Table: 4.17 Interest Earned to Total Assets Ratio (Rs. In Millions) Year 2064/65 2065/66 2066/67 2067/68 Interest Earned 251.40 402.58 866.18 1492.38 Mean SD CV Source: Annual Report of NMB 2064/65-2067/68 Total Assets 8927.89 15856.66 13226.57 15948.19 Ratio (%) 2.81 2.53 6.54 9.35 5.30 3.25 61.32

The above table shows the interest earned to total assets of the bank varies from maximum of 19.35% in year 2067/68 to the minimum of 2.53% in year 2065/66 during the study period of four years. The analysis indicates that the ratio is in increasing trend which implies the rise in the interest income of the bank along with total assets portfolio.

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5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0

Figure 4.17: Interest Earned to Total assets ratio

Ratio in %

2064/65

2065/66

2066/67

2067/68

Fiscal Year

iv) Return on Total Deposit Ratio The collected deposits are mobilized in investment and loans to get profit. This ratio indicates the percentage of profit earned by using the total deposit. It is calculated by dividing the amount of net profit by the amount of total deposits which is presented below: Net profit to Total Deposit = Net Profit after Tax Total Deposit

Table: 4.18 Return on Total Deposit Ratio (Rs. In Millions) Year 2064/65 2065/66 2066/67 2067/68 Net Profit After tax 72.82 62.95 159.87 221.50 Mean SD CV Source: Annual Report of NMB 2064/65-2067/68 67 Total Deposit 1661.60 6877.90 10110.68 12866.22 Ratio (%) 4.38 0.91 1.58 1.72 2.14 1.52 71.02

The above table shows the percentage of net earnings over the total deposit held by the banks in the respective year of the study. The net profit of total deposit ratio of the bank slightly decreases during the second year i.e. FY 2065/66 but later on it slightly increases and reaches to 1.72 by the end but in decreasing trend. The analysis shows that the bank is able to generate profit out of total deposits posting upward growth.

Figure 4.18: Return on Total Deposit ratio

5 4.5 4 Ratio in % 3.5 3 2.5 2 1.5 1 0.5 0 2064/65 2065/66 2066/67 2067/68 Fiscal Year

4.3 Major Findings The interest bearing deposit of the NMB has mixed growth rate from the year 2064/2065 to2067/2068. In 2065/66 bank succeed to get high interest bearing deposit of 75.79% whereas in 2064/2065 banks interest bearing deposit decreased by 21.07%. The saving deposit of NMB Bank was in Fluctuating trend in fiscal year Fixed deposit was in fluctuating trend. However bank succeeds to make double deposit than before year in 2065/2066 FY year. In the next two years fixed deposit of the bank is decreased rate but has been successful in increasing the deposits. 68

 Call deposit in the NMB was good in 2065/66 as it was in increasing rate in last year. Non-interest bearing deposit was in fluctuating rate. The non-interest bearing deposit consists of current and margin deposit which is uncertain in the bank, so the noninterest bearing deposit of the bank is fluctuating. Current deposit was decreased in the fluctuating rate as it is the non-interest bearing deposit. In the year 2067/2068 it has low growth of -21.27% and in the year 2064/2065 bank succeeds to make 99.50% of growth.

The Current ratio is fluctuating and is below the standard i.e. 2:1, it seems that bank is still able to meet its short term obligation. The Cash & Bank ratio decreases in the second year and decreases rapidly in next two year i.e. FY 2066/67 and FY 2067/68 which implies the banks doesnt have sufficient cash but has maintain balances with increase in total deposit. The Cash & Bank to Current Assets ratio decreases In the initial two years from 2.59% to 1.18%, and again decreases in next two year i.e. 0.20& 0.129 which reflects no improvement during the period. The Loans & Advance to Fixed deposit ratio seems to be in decreasing and increasing trend during the study from FY 2064/65 to 2067/68. The average of the ratio accounts at 2.05 times. The ratio of the period has been revealed by its standard deviation i.e. 0.33. The Loans & Advances to saving Deposit ratio seems in increasing trend during the entire study period standing at 4.90, 3.36, 5.49,& 5.95 times. The average of the ratio accounts at 4.92 times. The increment in the ratio of the period has been revealed by its standard deviation i.e. 1.12%. 69

 The net profit to total assets ratio has ranged between 0.81% in the year 2064/65 and 1.38% in the year 2067/68. The ratio of the bank is somehow increasing throughout the period except in the FY 2065/66. This reveals that the ratio is in satisfactory level. The return on equity of the bank has Fluctuating ratios 6.00% in first year to 3.95% in the second year. In the FY 2066/67, FY 2067/68 the ratio has Increased to 8.82%, 10.01% respectively and in last year deviation of 2.74%. The net profit of total deposit ratio of the bank slightly decreases during the second year i.e. FY 2065/66 but later on it slightly increases and reaches to 1.72 by the end but in decreasing trend leading to average of 7.19% and standard

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CHAPTER V SUMMARY CONCLUSION AND RECOMMENDATION

A summary of the study is presented in this chapter outlining the studys findings of the study are

introduction, Purpose, objectives, and methodology. The

also presented in a Summarized for m and recommendations are made where possible.

5.1 Summary
Financial information required for financial planning, analysis and decision-making. The Financial statement, Balance Sheet and profit & Loss a/c are the basic instrument of an Accounting system to communicate financial information to users. Balance Sheet shows the financial condition of the state of affair s of the firm at a particular point of time while the profit & Loss a/c shows the profitability of the firm by giving details about revenues and expenses for accounting period.

The financial statements serve as a means to the various stakeholders of the firm to analyze the organization s financial strengths, weakness, and

performance. There are various ways to conduct a financial performance study. One of them is the financial ratio analysis. A financial ratio is a relationship between two financial variables. It helps to ascertain the financial condition of a firm. Ratio analysis is a process of identifying the financial strengths and weaknesses of the fir m. This may be accomplished either through a trend analysis of the firm s ratios over a period of time or through a comparison of the fir m s ratios with its nearest competitors and with the industry average. Banks play a vital role in the economy of most of the countries in the world. They are the Backbone of a country s financial system. Although banking is relatively new concept in Nepal compared to its centuries old traditional cultural existence, this sector has Witnessed a phenomenal growth in the last two decades. With the entry of joint- venture banks, 71

customers have been receiving specialized and efficient services. Competitive interest rates, customer- focused services, extra benefits are what customers look in order the choose the institution they want to bank with. This has certainly led to cutthroat competition among the various national banks operating in Nepal. While nature of service and rate of interest attract customers to a great extent, the nature and state of the bank s financial performance also play a vital role. In order to fulfill the partial requirement for the Degree of Masters in Business

Administration, a study titled "Cash management of Bank in Nepal (NMB Bank. Ltd.)" was undertaken. The study seeks to assess the financial performance of the banks with the help of ratio analysis as well as other relevant analysis for the

period starting from 2064/65 to 2067/67. As the study is analytical-cum-descriptive in nature, research is based on the historical data of the banks available in the annual reports of the banks. The annual reports were collected from the respective banks as well as the internet , books, periodicals, journals; articles on the related subject were extensively reviewed in the library quotations from various authors on the related topic have been placed throughout the chapters. Reviews of the previously undertaken research studies have also been made in order to highlight the difference and significance of this study. Financial as well as statistical tools have been used to determine the financial Performance of the bank. While ratio analysis is used to assess the liquidity, profitability position of the banks for which statistical tools such as; mean, standard deviation, coefficient of variation, have been used to determine the extent of variability and similarity between the ratios of the banks. The findings of the study have been presented in tables and graphs. Analysis and interpretation of the findings are also presented for each of the ratios.

5.2 Conclusion
During the study period, NMB was found to be the moving toward successful achievement but due to tough competition with the other commercial banks in Nepal it

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was unable to retain its customers within itself. We can see that the deposits are increasing yearly by yearly but the rate of the growth is not that much satisfaction. The conclusion of the study have been summarized and presented below. The liquidity position of NMB is fluctuating. It has the lower current ratio, cash & bank balance to current assets ratio. The cash and bank to total deposit ratio shows that in some year it is in decreasing state which implies the banks doesnt have sufficient cash but has maintain balances with increase in total deposit . NMB has a decreasing loan advance to total deposit ratio, for the 3 continuous years. This implies the ratio of funds mobilization has been decreased despite of increase in total deposit of the bank.

5.3 Recommendations
As the bank is operating throughout the country with its variety of financial services, the growth and development of the bank is also ascertained. It has got the faith of the customers which is its biggest wealth. But it takes no time to make the name fame down if the services quality goes down. Therefore the continuity of these services is quite indispensable. Based on the analysis and findings of the study, following recommendation can be advanced: Credit Supervision and Monitoring Mechanism Liquidity is the ability to turn investment into cash quickly at a value close to the face value of investment. The degree liquidity maintained varies from institution to institution. While it is necessary for all organizations, including banks, to have a comfortable liquidity position, absence of liquidity can prove to be hazardous as it can lead to tying up of assets. Current ratio of 1:2 is the standard norm. However, this can vary from industry to industry. Negligence in controlling the performance of these assets can bring about failure in the banks performance as a whole. Credit supervision and monitoring mechanism must be put in operation to maintain the quality of credit. Reduce the cost of Deposits As For financial Institution if they have placed to invest them in long-term assets, fixed deposit is better than saving deposits. Focused on other income generation activities

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When we see the ratio, NMB has used its deposit on loan advance to the extend to 0.88% and this shows it has not focused on the other income generating activities.

Investment Policy Loans and advances are profit-earning assets of a commercial bank, which include loans cash credit, overdrafts; bill discounted and bill purchase. A bank is able to earn more if it is able to increase its investment in loan and advances. However, it is necessary to strictly maintain the quality of credit. After presenting and analyzing the data it is suggested that a proper balance be maintained between loan and advance and current assets. So as to help increase returns as much as possible and still maintain the required liquidity. Portfolio Diversification Financial institution should diversify their portfolio and invests in different sectors. Because of current political situation they are not interest investment. Countries economy will boost with these investment. Financial institution plays an important role in economic growth of the country so I will recommend having a little eye on investment.

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