LIQUIDITY ANALYSIS OF COMMERCIAL BANK

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LIQUIDITY ANALYSIS OF COMMERCIAL
BANK

LIQUIDITY ANALYSIS OF COMERCIAL

BANK

(With Reference to NBL & SBL)

 

INTRODUCTION

 

1.1   Background of the Study

Bank is the main financial institution, which plays an important role in the economic development of the nation. It is the backbone as well as the foundation for the development of the country. Its principal operations are concerned with the accumulation on the temporary idle money of the public for advancing others for expenditures. In other words, Bank is an institution that deals in money and its substitutes and provides other financial services. Banks accept deposit and make loans and derive a profit from the difference in the interest rates paid and charged, respectively. Depositors may be either individual or institutions. These deposits may be current, saving or fixed and the tenure depends upon the mutual agreements between the bank may be either an individual or institutions. The tenure of the loan may very as per the demand, criteria and the usefulness of the loan. Some banks also have the power to create money.

 

The principal types of banking in the modern industrial world are commercial banking and central banking. A commercial banker is a dealer in money and in substitutes for money, such as checks or bills of exchange. The banker also provides a variety of other financial services, The basis of the banking business is borrowing from individuals, firms, and occasionally i.e. receiving "deposits" from them, with these resources and also with the bank's own capital, the banker makes loans or extends credit and also invests in securities. The banker makes profit by borrowing at one rate of interest and lending at a higher rate and by charging commissions for services rendered. Commercial banks are the major financial institutions that occupy quite an important place in the framework in the economy development sectors as well as in saving and investment sectors. Commercial banks are suppliers of finance for trade and industry and play a vital role in the economic and financial life of the country. They also provide an opportunity in the development of individual industries, trade and business organization by investing Liquidity management refers to the planning and control necessary to ensure that the organization maintains enough liquid assets either as an obligation to the customers of the organization so as to meet some obligations incidental to survival of the business or as a measure to adhere to the monetary policies of the central bank. For a commercial bank to plan for or manage its liquidity position, it first manages its money position by complying with the legal requirement. Actually, management of money position is essential if a bank must avoid excesses or deficiencies of required primary reserves. Where there is a decline in market price of securities or where additional funds needed to correct the bank reserve position are for a very short time, it will be definitely expensive to sell securities than to borrow from another bank. Moreover, it may be more desirable to borrow for bank's liquidity needs than to call back outstanding loans or to cancel or place embargo on new loans. a situation that will reduce the existing and potential customers of a bank. Commercial banks are expected to maintain certain levels of reserves. These reserves are statutory requirements stipulated by the central bank specifying the cash reserves equal to certain fraction of the banks' deposits of loans and advances which bank must maintain.


 

 

1.1.1        Profile of the Sample Banks

As there has been number of commercial banks established, the research has been taken into consideration of NBL and SBL. Therefore, short glimpse of these commercial banks are given as:

 

Nepal Bank Ltd (NBL)                                                                

Nepal Bank was established in 1994 B.S. Due to the less competition in the Nepalese Banking sector, Nepal Bank has been able to maintain a lead in the primary banking activities- Loans and Deposits. Legacy of Nepal Bank lives on in an institution that's known throughout Nepal of its innovative approaches to merchandising and customer service. Products such as Premium Savings Account, NBL Proprietary Card and Millionaire Deposit Scheme besides Savings and collected deposits. By investing the saving and collected deposits in the productive sectors, they help in the formation of capital. Besides they also render numerous services to its customers in a view of providing facilities to theirs economic and social life in the community.

A financial institution is the life blood of economic development of the country. Financial institution acts as catalyst in the process of economic growth of the country. A bank I s a financial institution, which can play a significant role in the upliftment of the economic situation of the developing country like Nepal Bank plays a vital role to encourage thrift and discourage hoarding by mobilizing the resources and removing the habit of hoarding. They pursue economic growth rapidly, developing the banking habit among the people by collecting the small scattered resources in one bulk, using them in the further productive purposes, and rendering other valuable services to the country. Thus, this gives the individual an opportunity to borrow funds against future income, which may improve the economic well being of the borrower, Bank deals with the offer of collected deposits and provides the loan for commercial purpose.

 

Bank is considered as the backbone in the development of the national economy. It is financial institution, which act as a transaction of money by accepting various types of deposit, disbursing loans and rendering other financial services. So, among the various function to provide loan to the investors is the major function, through the loan, there will be increase in the environment of the investment and the bank has the major role in creating such an environment (Singh, 2007, 26).

Liquidity is much more important than we may realize, because both excess as well as insufficient liquidity is injurious to the banks' profitability. In order to pay current obligations liquidity management is very important for every business organization, Liquidity management is of crucial importance in financial management decision, the optimal of liquidity management is could be achieve by company that manage the trade-off between profitability and liquidity management

Although many commercial banks are established, most of them are not seen so serious regarding dividend decision; each company has its own policy. There are not any certain rules and regulations.

In these circumstances, this study seeks to find out the solution of the following problems.

·         Whether commercial banks are able to maintain adequate liquidity or not?

·         Do commercial banks examine the liquidity and profitability?

·         Are commercial banks are following NRB guideline with respect to liquidity?

·         What are the liquidity trends of commercial banks?

Services such as ATMs and Tele-banking were first introduced by NBL. Other financial institutions in the country have been following our lead by introducing similar products and services. Therefore, we stand for the innovations that we bring about in this country to help our Customers besides modernizing the banking sector. With the highest deposit base and loan portfolio amongst private sector banks and extending guarantees to correspondent banks covering exposure of other local banks under the bank's credit standing with foreign correspondent banks, the bank believe to lead the banking sector of Nepal

Siddhartha Bank Limited

Siddhartha Bank Limited (SBL), established in 2002 and promoted by prominent personalities of Nepal, today stands as one of the consistently growing banks in Nepal. While the promoters come from a wide range of sectors they possess immense business acumen and share their valuable experiences towards the betterment of the Bank.

Within a short span of time, Siddhartha Bank has been able come up with a wide range of products and services that best suits its clientele. Siddhartha Bank has been posting growth in its portfolio size and profitability consistently since the beginning of its operations. The management of the Bank has been thoroughly professional.

Siddhartha Bank has been able to gain significant trust of the customers and all other stakeholders to become one of the most promising commercial banks in the country in less than 10 years of its operation. The Bank is fully committed towards customer satisfaction. The range and scope of modern banking products and services the Bank has been providing is an example to its commitment towards customer satisfaction. It is this commitment that has helped the Bank resister quantum growth every year. And the Bank is confident and hopeful that it will be able to retain this trust and move even further towards its mission of becoming one of the leading banks of the industry.

Various calculated results are then tabulated under different heading which are later on compared with each other to interpret the result.

 

1.1   Statement of the Problem 

Liquidity and profitability is the most sensible and critical aspect of banks. The managers should be foresighted and able to predict future demand and supply of liquidity and profitability. The bank must always stand ready to meet immediate cash demands made by the depositors and borrower that can be substantial at any tie. Bank manager should know the trends of liquidity demand on the basis of past experience (Thapa & Rawal, 2016, 2017).Bank must give high priority to meet demands for liquidity. Many depositors were crowded into bank to withdraw their deposit. In this situation, most banks in the Kathmandu valley suffered a lot from the scarcity of liquidity. Thus one of the most important tasks of a liquidity manager is to keep close contact with the bank's largest depositors and holders of large unused credit line. It is essential to predict if and when withdrawals of fund with be made. So, close contact and prediction of future liquidity demand provide the bank to make sure that adequate funds are available in time. The following questions were arisen:

·         Is bank in the right level of liquidity?

·         Is bank investing in good and profitable sectors?

·         Has bank been able to earn profits?

·         What are the credit efficiency of NBL and SBL?

·         What is the impact of growth in deposit on liquidity and lending practice?

·         What is the position of non performing credit in NBL and SBL?

·         How far NBL and SBL are able to use its resources in credit and advances?

1.1.1        Objective of Study

2        To analysis whether or not commercial banks are able to maintain adequate liquid assets (like cash reserve, balance with NRB, investment in government securities. etc)

3        To study liquidity and its' profitability position of NBL and SBL.

4        To analyze the growth of total deposit, total investment, loan and advances and net profit of sample banks.

5        To examine the trend of total deposit, loan and advances, and net profit.

 

1.3   Research Question or Hypothesis

Generally the study gives emphasis liquidity and profitability position commercial banks in Nepal. While preparing this thesis researcher gain knowledge through their own experience enabling them to deal with problems relating to studies. The study also intends to let reader know about required information by themselves.

The significance of the study is mentioned below:-

2        This study helps to get acquainted with some aspect of liquidity by performing various financial analyses.

3        This study is beneficial to come to conclusion about the liquidity and profitability position of commercial Banks.

4        This study helps to find out the position of commercial bank in the banking field of Nepal

4.3      Significance of Study

Generally the study gives emphasis liquidity and profitability position commercial banks in Nepal. While preparing this thesis researcher gain knowledge through their own experience enabling them to deal with problems relating to studies. The study also intends to let reader know about required information by themselves.

The significance of the study is mentioned below:-

·         This study helps to get acquainted with some aspect of liquidity by performing various financial analyses.

·         This study is beneficial to come to conclusion about the liquidity and profitability position of commercial Banks.

·         This study helps to find out the position of commercial bank in the banking field of Nepal

 

1.5 Limitations of the Study

Never the less, the analysis performed and conclusion drawn regarding the liquidity and profitability position of commercial Bank; there is considerable place for arguing about its accuracy and reliability. There are limitations which weaken the conclusion e.g. inadequate data, time and other variable.

·         Thought there are around 28 commercial banks, the study covers only 2 commercial banks: Himalayan Bank International Limited and Siddhartha bank limited.

·         The research is based to secondary data only.

·         The study period cover five fiscal years beginning from 2013/14 to 2017/18.

·         Being a student time and resource consentient.

·         Limited variable has been selected.

·         The truth of the project depends upon the available data from the bank.

·         There are many factors that affect liquidity of bank, International liquidity and valuation of firm however only related factor are taken into consideration in this study.


·          

 

2.1 ORGANIZATIONS OF THE STUDY

The study is classified into five different chapters which are briefly discussed as follows:

 

Chapter I: Introduction

The first chapter dealt with introduction of the study. It includes background of the study. focus of the study, statement of the problems, objectives, significance, and limitations of the study and organizations of the study.

 

Chapter II: Review of Literature

The second chapter dealt with the review of literature which included review of related books, journals, articles and previous unpublished master level thesis etc.

 

Chapter III: Research Methodology

This chapter explained the research methodology used in the study. It included research design, population and sampling, types and sources of data, data collection procedure, method of analysis and analytical tools used.

 

Chapter IV: Data presentation and Analysis

Data presentation and analysis contained in the fourth chapter dealt with presentation of the data collected through various sources and analysis of data as well as major findings of the study.

 

Chapter V: Summary, Conclusions and Recommendations

This is the last chapter of the study covered the summary of study and the main conclusion drawn from the study and some recommendations as well as suggestions on the basis of the study. Last but not least, an intensive Bibliography, Annex and are in corporate at the end of the study.

  

 

RESEARCH METHODOLOGY

The research methodology is systematic way of solving research problem. Research methodology refers to the overall research process, which a researcher conducts during their study. Research can be conducted on the basis of primary and secondary data. Here in the study all the data and observed data are analyzed with using appropriate financial tools. To evaluate, analyze and interpret on every subject and discipline a detailed research plan is required. Without gathering detailed data and without applying different analytical tool it is impossible to confess anything about the related subject.

 

3.1 Research Design

The research design serves as a framework for the study, guiding the collection and analysis of the data, the research instruments to be utilized, and the sampling plan to be followed (Wolf & Pant, 2014). Specially speaking, research design describes the general plan for collecting, analyzing and evaluating data after indentifying:

·         What the researcher wants to know?

·         What has to be dealt with in order to obtain the required information?

The study is the blend of analytical type of research. Historical data are used to identify and analyze the liquidity and profitability of sample banks. Since only two banks have been selected for the study, thesis study is a comparative study between these two banks in liquidity and profitability analysis. To achieve the objective of study descriptive and analytical research designs has been used.

 

3.2 Population and Sample

Population or universe refers to the industries of the same-nature of its service & product. It is the collection or the aggregate of objects or the set of results of an operation. On the other hand sample means the representative parts of population selected from it with the objectives of investigating its properties. Thus, a sample is just a portion of the population selected with a view to draw conclusions about the population under study.

In context of Nepal, 28 commercial banks are in operation in data. Among these 8 commercial banks, two commercial banks have been taken as sample from the whole population i.e. twenty eight banks. The sample banks are as follows:-

Nepal Bank Limited (NBL)

Siddhartha Bank Limited (SBL)

 

 

3.3 Sources of Data

After defining the research design, how the work comes to define the sources of relevant data for the research study. Generally, Secondary data are sources of this study.

 

3.4 Data Processing Procedure

Data collected from questionnaire were classified and tabulated in the required form. Simple arithmetic percentage tools were used for analysis. Table and charts were also demonstrated as per the requirement.

 

3.5 Tools of the Study

Analysis and presentation of the data is the core of each and every research work. This study requires some financial and statistical tools to accomplish the objective of the study. The financial and statistical tools are most reliable. In this study various financial. Statistical and accounting tools have been used. These tools make the analysis more effective, convenience, reliable and authentic.

 

The various results obtained with the help of Financial, Accounting and statistical tools are tabulated under different headings. Then they are compared with each other to interpret the results. Two kinds of tools have been used to achieve the certain goals.

·         Financial Tools

·         Statistical Tools

 

On the other hand secondary data are those data that are collected by someone else or used already & made available to other in the form of published statistics such as annual reports, periodicals, newspapers, magazines etc. once a primary data is used; it loses its originality & becomes secondary. This study is mainly depends on the use of secondary data that consists of annual reports of the concerned bank. However besides the annual reports various other sources of data have also been used for the purpose of the study plan documents, newspaper, magazine, economic journals, NRB reports etc.

3.5.1 Financial Tools

Financial tools are used to examine the strength and weakness of the study. Financial tools like interest rate spread and ratios have been used. Ratio is the mathematically relationship between two accounting figures. Ratio analysis has been used to compare a firm's financial performance and status to that of other firm's or to it overtime. The qualitative judgment regarding financial performance of firm can be done with the help

Liquidity Ratio:

Liquidity is measure by the speed with which a bank's assets can be converted into a cash to meet deposit withdrawals and other current obligation. These ratios provide insight into the present cash solvency in the event of adverse financial condition. This ratio is used to measure the company's short-term obligation with short term resources available at a given point of time.

The following ratios are evaluated liquidity ratios:

Current Ratio

It is computed dividing current assets by current liability

Profitability Ratio:

Profitability ratio measures the efficiency of a business enterprise. The profit measure the management ability regarding how well they have utilized their funds to generate surplus for this following ratio has been analyzed.

 

Return on total assets ratio

It is computed by dividing net profit after tax by total assets


Interest Earned to Total Assets Ratio

It is calculated by dividing interest income by total assets of the bank


3.5.2 Statistical Tools

Arithmetical Mean (X)

Arithmetical Mean is a given set of observation in their sum divided by the variation of observation that is calculated as below:

Standard Deviation ()

Karl Pearson first introduced the concept of standard deviation in 1983. Standard deviation is the positive square root of the arithmetic average of the square of all deviation measured from the arithmetic average o the series. The standard deviation measures the absolute dispersion of a distribution. The greater the amount of dispersion the greater will be the magnitude of the values from their mean.

 

 

Deviation means a high degree of uniformity of the observation as well as homogeneity of a serves. Standard deviation is denoted by a Greek letter 'o' (sigma) and is calculated as follows.

Coefficient of Correlation (r)

The correlation analysis is the technique used to measure the closeness of the relationship between the variables. It helps in determining the degree of relationship between two or more variables. It describes not only the magnitude of correlation but also its direction. The coefficient of correlation is a number which indicates to what extent two variables are related with each other and to what extent variations is one leads to the variation in the other. Correlation may be positive or negative which lies between 1. Simple correlation between interest rate on deposit and deposit amount interest rate on lending and credit or lending amount and is computed in this thesis. The correlation between interest rate on deposit and deposit amount is positive. Interest rate on lending and leading amount is negative when inflation increases, interest rate also increases in same direction and vice versa. For our study following reference is used.

The correlation coefficient can be calculated as:

 = Two variables, correlation between them are calculated.

n = total number of observations

Coefficient of Determination (R2)

Coefficient of determination (r212) = (r12)2



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SUMMARY, CONCLUSION AND RECOMMENDATIONS

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SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1Summary
A Commercial Bank means the bank which deals with exchanging currency, accepting deposit, giving loans doing other various commercial transactions. Therefore, the major function of Commercial Bank is to accept deposits and provide loans.
There is not so long history of Commercial Bank in Nepal. Nepal Bank Limited established in 1994 B.S. was the first Commercial Bank of the Nepal. But now there are twenty five Commercial Banks all over the country and they have been expanding their services by establishing branches in every corner of the country.
The assets of Commercial Bank indicate the manner in which the funds entrusted to the bank are employed. The successful working of the bank depends on ability of the management to distribute the fund among the various kinds of investment known as assets outstanding loan advance of the hank. These assets constitute primary source of income to the bank. As being a business unit a bank aims at making huge profit since loan and advances are more profitable than any other assets of the bank, it is willing to lend as much as its fund as possible. But the bank has to be careful about the repayment of loan and interest giving loan. If the bank is too timid, it may fail to obtain the adequate return on the fund, which is confined to it for use. Similarly, if the bank is too liberal, it may easily impair its profits by bad debts. Therefore, bank should not forget the reality that most of the bank failures in the world are due to shrinkage in the value of the loan and advances.
Despite of being loan and advances, more profitable than other assets, it creates risk of non repayment for the bank. Such risk is known as credit risk or default risk. Therefore like other assets, the loan and advances are classified into performing and non performing assets on the basis of overdue aging schedule. If the dues in the form of principal and the interest are not paid, by borrower within a  maturity period, that amount of principal and interest is called non performing loan or assets. Performing assets have multiple benefits to the company as well as to the society while non performing assets erode even existing capital of the bank. So, the proper management of credit in commercial has been key for the success.
Credit administration involves the creation and management of credit and advances. Portfolio rnanagemen helps to minimize or manage the credit risks by spreading over the risk to various portfolios. Bank earns interest on credits and advances, which is one of the major sources of income for bank.
5.2 Conclusions
NBL has sufficient liquidity. It shows that bank has not got investment sectors to utilize their liquid money. Now, in Nepal, many banks and other financial institutions are functioning to collect deposits and invest money somewhere in invest able sectors. Therefore, monetarization have been increased since liberalization policy taken by the government. Heavy remittance has also help to increase the amount of deposits in bank. On the other hand, due to political crisis, economic sectors have been fully damaged. Most of the projects have been withdrawn due to security problem. Therefore, bank has maximum liquidity due to lack of safety investment Sectors.
·        Due to economic crisis in the country, credit takers are not getting good return from their investment sectors. On that situation, credit customers do not return money of the bank in the stipulated time period, therefore, the non-performing credit of the bank increases. As the non-performing credit increases, bank should increase its provision for credit loss.
·        Credit related financial indicators demonstrate the quite poor situation in Nepal Bank Limited. Therefore, Financial Sector Reform Program is below the level and still much needs to be done, It can also be concluded that there has been almost similar procedures and policies while granting the loan, not much change from its conventional methods.
5.3 Recommendations
The present study can b e a valuable piece of research works in liquidity management. It explored the existing Situation and identified the various components for further improvement in liquidity management. Secondary sources of information are used for fulfilling the objectives. Based in the findings of the study, the researcher recommended highlighting the guidelines to put forward for further improvement.
Corporate structure of bank plays key role in the effective loan management. Being loan a risky asset. efforts should be made to have proper control in every steps of loan management. The banks should establish separate department for credit appraisal, documentation, disbursement, inspection and recovery of loan which have possibility of finding mistakes of one department by the others so that the effectiveness can be achieved.
·        Loan must he given if the banker is satisfied that the borrower ca repay money from the cash flow generated from operating activities. However, the banks want to ensure that their loan is repaired even in case of failure of business. To prevent banks from such happenings. the bank take collateral is disposed for the recovery of loan. Therefore, the bank should take proper valuation of collateral so that the bank at least will be able to recover its principle and interest amount in case of failure of the borrower to repay the loan.
·        Lack of proper financial analysis of the borrower by the banks, is one of the major cause behind increasing NPA of Nepalese commercial banks. Therefore, proper financial analysis should be performed before giving loan to the borrower.
·        Competition is increasing day by day in banking industry. Again complete foreign bank can he established after 2010 B.S. So the bank should adopt efficient and modem management concept to make their activities quick and moving there by fulfilling the growing demand of current financial services.
·        Nepal Rastra Bank should regulate all the deposit accepting financial institution under the supervision and regulatory activity so that general people can feel the security of their deposits.
·        The customers are seeking different innovative products with quality. So, banks should modify their products. The banks should come out with new products in retail banking. Hence to retain the Customers’ banks have to come out with competitive products satisfying the desire of the customer at the click of a button.
·        Bank may go for detail market research, which will help them in knowing what their competitors are offering to their clients. This ii11 enable them to have an edge over their competitors and increase their liquidity management pie by offering better products and services.
·        Credit related financial indicators in Nepal Bank Limited seem irrelevant in comparison with the specified standard of Nepal Rastra Bank. Therefore more focus should be given to improve the liquidity management of Nepal Bank Limited such as credit granting procedures. updating the credit files, value of collateral and maintaining the loan loss provisions adequately.
·        New commercial banks are arising day by day with modern banking systems. Lending procedures have been made surprisingly short. And customers can get the loan within a maximum of a week days. So Nepal bank should also compete with them in lending procedures and other banking systems.
·        Cash and bank balance of Nepal Bank Limited is high. Bank’s efficiency should be increased to satisfy the depositors at low level of cash and bank balance. Unused cash and bank balance do not provide return to the bank. Therefore, some percentage of the cash and bank balance should be invested somewhere in profitable sectors.
·        Bank should regularly follow the credit customer to confirm that whether the customers have utilized their credit for same purpose or not, committed at the time of taking credit from the bank.
·        Bank should strictly band the policy of nepotism and favoritism. On the basis of capability and efficiency. recruitment, placement and promotion should be executed.
·        Bank should carefully examine the principle of safety as well as sources of repayment, capital structure and credit worthiness of a borrower before providing loans. In other word, credit and risk must be evaluated by considering well-known five C’s of credit viz. character, capacity, capital, collateral and condition so that the bank is able to mobilize and utilize the resources.
·        The economic Liberalization policy adopted by Government of Nepal has created environment of cutthroat competition even in the banking sector. In this context, Nepal Bank Limited bank is suggested to formulate and implement some sound and effective financial and non-financial strategies to minimize their operational expense to meet required level of profitability.
·        Nepal Rastra Bank should tighten the supervision and inspection activity towards the commercial banks and financial institution so that the accounting manipulation can be  avoided. It is because; there are huge decreases in the net profit in Nepal Bank Limited for the lack of quality credit.
·        The loss incurred by Nepal Bank Limited has decreased significantly after the implementation of financial sector reform programmed but at the same time the volume of non- performing assets is increasing. This indicates that liquidity management is not sufficient. So the Nepal Bank Limited management should generate the. real profit through credit disbursement.
·        Nepal Bank Limited has one more advantage of getting income from government transaction which other private and joint ventures bank do not have. It receives huge amount of commission from the government in return of doing government transaction. So, bank is suggested to handle government transaction properly so that no other banks except Nepal Bank Limited and Rastriya Banijya Bank get this chance continually in future.
·        Due to poor credit administration, the credit recovery process is slow as well as legal process in the recovery of credit is lengthy and ineffective. Clear-cut objective and policy of the liquidity management is lacking so that non-performing credit is going upward. To get better result in the coming future, bank should reduce the volume of non-performing credit.
·        The banks should adopt efficient and modern management concept to make their activities quick and moving there by fulfilling the growing demand of current financial services.
·        Total deposit is not correlated with the loan and advances. This is very serious matter and the main reason is the case of over liquidity that the bank has maintained so far. Thus, the bank should mobilize the deposit and try to bring the correlation between total deposit and loan and advance in an appropriate level.
·        To meet customer's requirement the bank should focus on value added tasks like making front line decisions, making actions plans, improving process reviewing progress, analyzing successes and failures, providing feedback to suppliers, reducing costs etc.



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