RESEARCH
METHODOLOGY
3.1
Introduction
Research
methodology helps to find out accuracy, validity and
suitability. The justification on the present study cannot be obtained without
help of proper research methodology. For the purpose of achieving the
objectives of the study, the descriptive methodology are be used.
This topic presents the short outline of the methods applied
in the process of analyzing the liquidity management of the selected bank.
Research is a systematic method of finding out the solution to a problem
whereas research methodology refers to the various sequential steps to adopt by
a researcher in studying a problem with certain objective in view.
3.2 Research Design
The topic of the problem has been selected as Liquidity
management of NBL. The sole objective of this study is to make analysis of
liquidity management of NBL with respect to the directives imposed by Nepal
Rastra Bank. In order to reach and accomplish the objectives of the study.
different activities are carried out and different stages are crossed during
the study period. For this purpose. the chapter aims to present and reflect the
method and techniques those are carried out and followed during the study
period. The research methodology adopted for the present study is mentioned in
this chapter which deals with research design. sources of data. data collection,
processing and tabulation, procedures and methodology.
3.3 Population and Sampling
A population is Complete enumeration of each and every unit
to the universe as a whole. It is related to the total Study of the material in
detail. There are 29 A class licensed banks in Nepal but this Study considers
only Nepal Bank Limited as a sample.
Sample is a small separated part showing the quality of the
whole. In sample, only a part of the universe is Considered and conclusions
about the entire universe arc drawn on that basis. Here, for the proposed study,
I have taken Nepal Bank Limited as a sample.
3.4 Data Analysis Procedure
Data analysis is the separation of the Collected information
into parts for study and interpretation. It is concerned with the detailed
examination of the topic for easy reference. For appropriate data analysis. different
tools and techniques will be used to establish the quantities/numerical
relationship between variables. The tools used will be:
·
Financial Tools
·
Statistical Tools
3.5 Nature and Sources of Data
Data is a collection of related raw materials on which
decision is based. There are mainly two sources of data-primary data and
secondary data. This study will be conducted mainly based on secondary data
like financial/annual statements of the bank, bulletins, bank articles and
literature, economic survey reports etc. of the fiscal year with negligent amount
of primary data like personal interview with the concerned authorities and departments,
questionnaire etc. The major sources of secondary data for this study are as follows:
o
Annual reports of the bank.
o
Previous studies and reports.
o
Unpublished official records.
o
Published and unpublished bulletins
and reports of the bank.
o
Reports published by Nepal Stock
Exchange.
o
Reports of Nepal Rastra Bank Samachar
and Banking and Financial Statistics.
Published by Nepal Rastra Bank
g) Journal and other publish and unpublished related
document and reports for Central Library of T.U., American Library, Library of
Shanker Dev Campus, Library of Nepal Rastra Bank and Library of Nepal Commerce
Campus.
3.6 Data Analysis Tools
Presentation and Analysis of the Collection data is the core
part of the research work. The collected raw data are first presented in
systematic manner in tabular form and are then analyzed by applying different financial
and statistical tools to achieve the research objectives. To make the study
more Specific and reliable, following tools are used for analysis:
·
Financial Tools
·
Statistical Tools
3.6.1 Financial Tools
For the sake of analysis, various financial tools are used.
The basic tools used are ratio analysis. Ratio analysis is used to compare
firm’s financial performance and status to that of other firm’s overtime.
1. Ratio Analysis
Ratio Analysis is the calculation and interpretation of
financial ratio to assess the firm’s performance and status. It is the
relationship between two accounting figures expressed mathematically.
Ratio Analyses are the main tool of financial statement
analysis. Ratio means the numerical or quantitative relationship between two
items or variables. It can be expressed as percentage, fraction or stated or
comparison between numbers.
Financial Ration is the mathematical relationship between
two accounting figures. Ratio Analysis is used to compare a firm's financial
performance and status to that other firm of to it overtime.
From the help of ratio analysis, the quantitative judgment
can be done regarding financial performance of a firm. In this study, different
ratio are calculated and analyzed, which are given below:
A. Liquidity Ratios
Liquidity ratios measure the ability of the firm to meet its
current obligation. The failure of a company to meet its obligation, due to
lack of sufficient liquidity, will result bad credit image. loss of creditor’s confidence,
or even in lawsuits resulting in the closure of the company. A very high degree
of liquidity is also bad, as idle assets earn nothing. The firm’s funds will
unnecessarily tie up in current assets. Thus it is the measurement of speed
with which bank’s assets can be converted into cash to meet deposit withdrawal and
other current obligations. There are various ratios under liquidity ratio,
which calculated as follows.
i) Current Ratio
The Current Ratio is a measure of the firm’s short-term
solvency. it indicates the extent to which the claims of short-term creditors
are covered by assets that could expect to be converted into cash in a period
roughly corresponding to maturity of claims. Generally, it shows relationship
between current assets and current liabilities. Current assets include within
the year such as investment in government securities, receivables, overdraft,
loans, include deposits cash, bank balance, money at called and those assets which
can be converted into cash and other short-term loan, bills payable, staff
bonus, dividend payables and miscellaneous current liabilities.
The ratio is calculated by dividing current assets by
current liabilities.
Current Ratio=
As a Conventional rule, a Current ratio of 2:1 or more is considered.
The higher the greater will be the ability of the bank to pay its current obligations
The current ratio represents a margin of safety, (i.e. a Cushion) of protection
for creditors. However, an arbitrary standard of 2-to-1 should not be blindly
allowed because current ratio is a test of quantity, not quality. Firms with
less then 2-to-1 current may be doing well, while firms with 2-to-I or even
higher current ratios may be finding great difficulties in paying their bills.
ii) Cash and Bank Balance to Total Deposit Ratio
It is ability of to meet their daily requirement. Hence,
cash and bank balance includes cash in hand, foreign cash on hand, cheques and
other cash items, balance held in foreign banks. The deposit represents current
deposits, saving deposits, fixed deposits, money at call and short notice and
other deposits. Dividing cash & bank balance calculate the ratio by total
deposits.
It is stated as:
B. Assets Management Ratio of Activity Ratios
Activities ratios are employed to evaluate the efficiency
with which the firm manages and utilizes its assets, The ratio are also called
turn over ratios because they indicate the speed with which assets are being
converted or turnover. Thus ratios are used to measure the banks ability to
utilize. These are following ratios, which falls in this category.
i) Loan and Advances to Total Deposit Ratio
This ratio shows how successfully the bank in utilizing its
total deposits to loan and advance for generating profit. The ratio can be obtained
by dividing loan and advances by total deposits. Higher ratio implies the
better utilization of total deposits.
This can be stated as:
This ratio shows the utilization of firm's deposit to loan
and advance for generating profit and in government securities and bonds,
shares and debentures of other companies and bank . Share is subsidiary
companies & other investments.
Mathematically it is expressed as:
iii) Performing Assets to Non-performing Assets Ratio
Performing assets are the main contributing assets of the
bank. If the level of performing assets is high it results high profitability
of bank where as if the level of non performing assets is high, it reduces its
profitability. This ratio shows the percentage of performing assets to not
performing assets of the bank. Mathematically it can be expressed as follows:
It tells the percentage of non performing assets on total
assets. It is useful to know that whether the bad credit is increasing or not.
If bad credit is found increasing, it should be correctly analyzed. High level
of non performing assets highly affects the profitability of the bank. This
ratio is calculated as follows:
v) Non performing Loan lo Total loan and Advances Ratio
To measure the volume of non-performing loan to total loan
and advances, this ratio has
been used. This ratio shows the percentage of non-recovery loans in total loans and advances. This is calculated as follows:
been used. This ratio shows the percentage of non-recovery loans in total loans and advances. This is calculated as follows:
vi) Provision for Pass Loan to Total Pass Loan Ratio
This ratio measures the percentage of provision for pass
loan to total pass loan. As per the Nepal Rastra Bank directives the provision
for pass loan should be 1% of total pass loan. Excess provision for pass loan
provision could tie up the capital which could other wise used for the
investment purpose. Mathematically it is expressed as:
viii) Provision for Bad Debt (Loss) to total Bad Debt Ratio
It is the percentage of provision for bad debt and total bad
debt. Increasing b ad debt means not the indication of good business. Bad debt should
try to reduce as much as possible. There should be made provision for bad debt
by each bank. As per the directive of Nepal Rastra Bank, the provision for bad
debt should be 100% of the total debt. it is calculated by using the following
formula:
C. Profitability Ratios
Any organization should earn profit lo survive and grow over
a long period of time. Profit is ultimate output of any organization, and it
will have no future if it fails to make sufficient profits. Thus, the financial
manager should continuously evaluate the efficiency of its organization in
terms of profit. Profitability ratios are the best indicator to measure overall
efficiency of operation any organization. As the management of organization, creditors
& owners are also interested in the profitability of firm. Creditors want
to get interested and repayment of principal regularly. Owners want to get a
reasonable return on their investment. This is possible only when the
organization earns enough profit. Profitability ratio implies that higher the
profitability ratio, better the financial performance of the bank.
Profitability position of the bank can be evaluated in terms of the
relationship between net profit and assets.
The following ratios are taken into account under this
heading.
i) Interest Income to Loan and Advance and Investment Ratio
It tells the income as interest from total credit and advances.
It is useful to know the facts that whether the credit has given good return or
not. We can increases interest income by taking good issuing and recovery credit
policy. High return shows the soundness of credit policy. It is calculated by
using the following formula:
Interest Income to Total Loan and Advances and Investment
Ratio
ii) Interest
Expenses to Total Expenses Ratio
This ratio measures the percentage of interest p aid against
total expenses. The high ratio indicates the low operational expenses and vice
versa. The ratio indicates the costly source of funds. It is calculated by
using following formula.
iii) Interest Expenses to interest Income Ratio
This ratio shows the relationship between interest expenses
and interest income. The percentage of interest expenses that is subject to
interest income is measured by this ratio. Interest expenses mean the cost of
bank where as interest income means incomes that is derived from loan and
investment Mathematically, it is derived by using the following formula.
iv) Return on Total Assets Ratio
The ratio is useful to measure how well management uses all
the assets in the business to generate an operating surplus. Higher the ratio
indicated the higher efficiency in the utilization of total assets and vice-versa.
the ratio is how due to low profit. In other words, ii is low utilization of
bank assets and over use of higher interest bearing amount of debt and
vice-versa.
In this study. net profit/loss assets ratio is examined to
measure the profitability of all the financial resources in bank-assets and is
calculated by applying the following formula:
v) Return on Equity Ratio
It indicates the
generation of net profit after tax for the
Contribution towards net worth (without deducting intangible asset) An Increasing
ratio may indicate better control of production and other costs. It may also be
the result of higher prices due to inflation. A decreasing ratio may indicate
problems with cost Control or production efficiency. It is calculated by using
following formula:
vi) Return on Net Loan and Advances
It indicates the generation of profit by utilizing loan and
advances. Higher the ratio indicates the higher efficiency in the utilization
of loan and advances and vice-versa. Loan and advances generate the major
portion of profit. Hence this ratio measures how efficiently the banks have
employed their loan and advances. This ratio is calculated as follows.
vii) Earning per Shares
Earning per Share is one of the most widely quoted
statistics when there is discussion of a company’s performance or share value.
It is the profit after tax figure that is divided by the number of common
shares to calculate the value of earning per share. This figure tells us what
profit the common shareholders for every share held have earned. A company can
decide whether to increase or reduce the number of shares on issue. This
decision will automatically affect that earning per share. The profits
available to the ordinary shareholders are represented by net profit after
taxes and preferences dividend. Symbolic expression of EPS is given below.
3.6.2 Statistical Tools
Some of the
statistical tools which show the highlight of Nepal Bank Limited are used to
achieve objective of the study. The main statistical tools used in this
research are as follows:
i) Arithmetic Mean
Arithmetic means of given set of observation is their sum
divided by the
observation. It represents the
entire data by a single value. It provides the gist and the bird’s eye view of the huge mass of Unwieldy numerical
data. Out of the various
central tendencies a mean is one of
the useful tools to find out the average of the given data. It is calculated in the following way.
44 TO CONTINUE
ii.) Correlation Co-efficient (r)
Correlation may be defined as the degree of linear
relationship existing between two or more variables. 1hese variables are said
to be correlated when the changes in the value of one results change in another
variable. Correlation is of three types. They are Simple. Partial and multiple
correlations. Here, we study simple correlation. Two variables are said to have
correlation when the value of one variable is accompanied by the change in the
value of the other. it is calculated as follows:
iii.) Probable Error
It is the measure of
testing the reliability of the calculated value of correlation. The probable
error of the coefficient of correlation helps in interpreting its value. with
the help of probable error, it is possible to determine the reliability of the
value of the coefficient in so far as it depends on the conditions of random
sampling. The probable error of the coefficient of correlation is defined.
Where,
r = Correlation coefficient
N = Number of pairs of observations
If the value of r is less than the probable error, there is
no evidence of correlation. i.e. the value of r is not at all significant.
Then, if the value of r is more than six times of the probable error, the coefficient
of correlation is practically certain, i.e. the value of r is Significant.
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