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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 required-
Crowther
“Bank is an organization established for the purpose of exchange money deposit
lending money and participation in transactions.”
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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 changer‟s 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.
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
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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 wasn‟t
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
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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
bank‟s 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.
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industry and banking sector. Nepal Rastra Bank (NRB) comes into existence in April
26th 1956 as a country‟s 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, co-
operatives. 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.
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1.2.1 Functions of commercial bank
Banks are financial service firms, producing and selling professional public‟s funds
and performing various roles in the economy. Commercial banks are established to
improve people‟s 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
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1.3.1 Ownership structure of the company
ownership
25
48.8 individual
13.6 institutional
foreign
11.2
public
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
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of relationships that deliver enduring value for customers, shareholders, staff and
communities.
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.
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.
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
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Outside Valley
Banepa, Biratnagar, Birgunj, Butwal, Dhangadhi, Dharan, Doti, Kirne, Manthali,
Nepalgunj, Pokhara
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.
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NMB Bank extends Personal Loan in the form of Term Loan for the
following purposes:
Current account
Call account
Saving account
Fixed deposits
Structured saving
Local Saving
Investors saving
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, labor-
management 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?
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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
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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 data‟s; 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.
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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.
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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 firm‟s 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 owner‟s 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 firm‟s
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 firm‟s 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 firm‟s manufacturing
operations while excessive cash is simply remaining idle, without contributing
anything towards the firm‟s 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.
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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 won‟t be able to stay in business if we can‟t 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.
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.
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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.
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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.
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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 firm‟s 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.
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.
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.
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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 company‟s 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 company‟s
annual operating budget.
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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.
i) Baumol Model
Baumol‟s 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
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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 interest‟s
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 manager‟s 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)
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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. Miller-
Orr 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)
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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. Orgler‟s 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 re-
invested 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).
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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 firm‟s 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.
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Credit terms
Cash discounts
Cash discount period
Credit period
Collection Policies
Correspondence
Telephone calls
Personal visits
Legal action
31
business. It is the real lifeblood of business, and because it is generated internally, it is
under our control.
32
unexpected borrowing to meet your cash needs. The lack of liquidity can be a killer-
even for profitable business. Lack of profits won‟t 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. That‟s 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 firm‟s 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 short-
term (weekly, monthly), and long-term (annual, 3-5 years) planning purposes. They
are used for deficient purposes and thus are generally prepared differently
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.
34
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.
35
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.
36
banks. The design for this research is made by collection of information from different
sources by using various financial and statistical tools.
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.
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
38
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)
39
ii) Loans and Advances to Saving Deposit Ratios
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.
40
Return on Net Worth= Net profit After Tax
Net Worth
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.
41
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
∑
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;
∑ ∑
√ ( )
42
C. Coefficient of Variation ( C.V.)
Where,
C.V. = Co-efficient of variation
̅ = Arithmetic mean
σ = Standard deviation
43
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.
44
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.
Table 4.1
Interest Bearing Deposit
(Rs in a
Million)
Year Interest bearing Deposit Growth % Growth
45
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%.
3
2.5
2
1.5
1
0.5
0
2064/65 2065/66 2066/67 2067/68
Fiscal Year
Table 4.2
Saving Deposit
(Rs. in Millions)
Year Saving Deposit Growth % Growth
46
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.
3.5
3
2.5
2
1.5
1
0.5
0
2064/65 2065/66Fiscal Year2066/67 2067/68
Table 4.3
Fixed Deposit
(Rs in a Million)
Year Fixed Deposit Growth % Growth
47
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.
3
2.5
2
1.5
1
0.5
0
2064/65 2065/66 2066/67 2067/68
Fiscal Year
Table 4.4
Call Deposit
(Rs In a Million)
Year Call Deposit Growth % Growth
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.
3
2.5
2
1.5
1
0.5
0
2064/65 2065/66 2066/67 2067/68
Fiscal Year
Table 4.5
Non- Interest Bearing Deposit
(Rs in a Million)
Year Non- Interest Bearing Deposit Growth % Growth
49
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.
3
2.5
2
1.5
1
0.5
0
2064/65 2065/66 2066/67 2067/68
Fiscal Year
Table 4.6
Current Deposit
(Rs in a Million)
Year Current Deposit Growth % Growth
50
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.
3
2.5
2
1.5
1
0.5
0
2064/65 2065/66 2066/67 2067/68
Fiscal Year
Table 4.7
Margin Deposit
(Rs in a Million)
Year Margin Deposit Growth % Growth
51
Figure 4.7: Margin 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
Total Deposit= Total Interest Bearing Deposit + Total Non-Interest Bearing Deposit
Table 4.8
Total Deposit
(Rs in a
Million)
Year Total Deposit Growth % Growth
52
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.
3
2.5
2
1.5
1
0.5
0
2064/65 2065/66 2066/67 2067/68
Fiscal Year
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 firm‟s
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
Table: 4.9
Current Ratio
(Rs. in Millions)
Year Current Assets Current Liabilities Ratio(Times)
2064/65 7552.26 7714.41 0.97
2065/66 13775.28 14264.61 0.96
2066/67 10255.32 11415.04 0.89
2067/68 13056.69 13736.73 0.95
Mean 0.942
SD 0.035
CV 0.037
Source: Annual Report of NMB 2064/65-2067/68
54
The above table shows that the current assets, current liabilities and current ratio of
NMB bank Limited. In the FY 2064/65, the bank‟s 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
3
2.5
2
1.5
1
0.5
0
2064/65 2065/66 2066/67 2067/68
Fiscal Year
Cash and Bank balance to Total Deposit Ratio= Cash & Bank balance
Total deposits
55
Table: 4.10
Cash and Bank Balance to Total Deposit Ratio
(Rs. In Millions)
Year Cash and Bank Balance Total Deposit Ratio (%)
2064/65 5550.41 1661.60 3.34
2065/66 7480.34 6877.90 1.08
2066/67 1729.83 10110.68 0.17
2067/68 1493.88 12866.22 0.11
Mean 1.17
SD 1.51
CV 13.72
Source: Annual Report of NMB 2064/65-2067/68
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 bank‟s
doesn‟t 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.
3
2.5
2
1.5
1
0.5
0
2064/65 2065/66 2066/67 2067/68
Fiscal Year
56
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 Ratio
2064/2065 2.59
2065/2066 1.18
2066/2067 0.20
2067/2068 0.129
Mean 1.024
S.D 1.1484
C.V 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.
57
Figure 4.11: Cash and Bank Balance to Current
Assets Ratio
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
58
Table: 4.12
Loan and Advances to Fixed Deposit Ratio
(Rs. In Millions)
Year Loan and advances Fixed Deposit Ratio(Times)
2064/65 1939.96 926.51 2.09
2065/66 5194.21 2079.15 2.49
2066/67 7808.11 4020.04 1.94
2067/68 11208.57 6563.09 1.70
Mean 2.05
SD 0.33
CV 0.16
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
3
2.5
2
1.5
1
0.5
0
2064/65 2065/66 2066/67 2067/68
Fiscal Year
59
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 time‟s short term interest bearing deposits are utilized for income generating
purpose. It is calculated as:
Table: 4.13
Loan and Advances to Saving Deposit Ratio
(Rs.in Millions)
Year Loan and advances Saving Deposit Ratio(Times)
2064/65 1939.96 395.69 4.90
2065/66 5194.21 1544.42 3.36
2066/67 7808.11 1421.59 5.49
2067/68 11208.57 1883.50 5.95
Mean 4.92
SD 1.12
CV 0.22
Source: Annual Report of NMB 2064/65-2067/68
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%.
60
Figure 4.13: Loan and Advances to Saving
Deposit Ratio
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
61
The ratio helps to analyze whether the outsider‟s 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.
3
2.5
2
1.5
1
0.5
0
2064/65 2065/66 2066/67 2067/68
Fiscal Year
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 NMB bank Ltd. Following are the
measure profitability ratios are calculated:
i) Return on Assets
The ratio is useful in measuring the profitability of all financial resources invested
the firm‟s 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 Net Profit After tax Total Assets Ratio (%)
2064/65 72.82 8927.89 0.81
2065/66 62.95 15856.66 0.39
2066/67 159.87 13226.57 1.20
2067/68 221.50 15948.19 1.38
Mean 0.945
SD 0.439
CV 0.464
Source: Annual Report of NMB 2064/65-2067/68
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
3.5
Ratio in %
3
2.5
2
1.5
1
0.5
0
2064/65 2065/66 2066/67 2067/68
Fiscal Year
64
Table: 4.16
Return on Net worth (Shareholder’s Equity)
(Rs. In Millions)
Year Net Profit After tax Net worth Ratio (%)
2064/65 72.82 1213.48 6.00
2065/66 62.95 1592.05 3.95
2066/67 159.87 1811.52 8.82
2067/68 221.50 2211.46 10.01
Mean 7.19
SD 2.74
CV 38.10
Source: Annual Report of NMB 2064/065-2067/68
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%.
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
65
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;
Table: 4.17
Interest Earned to Total Assets Ratio
(Rs. In
Millions)
Year Interest Earned Total Assets Ratio (%)
2064/65 251.40 8927.89 2.81
2065/66 402.58 15856.66 2.53
2066/67 866.18 13226.57 6.54
2067/68 1492.38 15948.19 9.35
Mean 5.30
SD 3.25
CV 61.32
Source: Annual Report of NMB 2064/65-2067/68
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.
66
Figure 4.17: Interest Earned to Total assets
ratio
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
Table: 4.18
Return on Total Deposit Ratio
(Rs. In Millions)
Year Net Profit After tax Total Deposit Ratio (%)
2064/65 72.82 1661.60 4.38
2065/66 62.95 6877.90 0.91
2066/67 159.87 10110.68 1.58
2067/68 221.50 12866.22 1.72
Mean 2.14
SD 1.52
CV 71.02
Source: Annual Report of NMB 2064/65-2067/68
67
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.
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
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 non-
interest 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 bank‟s doesn‟t 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 leading to average of 7.19% and standard
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
70
CHAPTER – V
5.1 Summary
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 bank‟s doesn‟t 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:
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 bank‟s performance as a whole. Credit
supervision and monitoring mechanism must be put in operation to maintain the
quality of credit.
As For financial Institution if they have placed to invest them in long-term assets,
fixed deposit is better than saving deposits.
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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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