CHAPTER I

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

Commercial bank Act of 2031(Nepal)

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

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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.

Origin of Bank in Nepal

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

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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.

1.2 Commercial bank in Nepal

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

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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.

List of Banks and Non-bank Financial Institutions

Class A: Commercial Banks 32
Class B: Development Banks 89
Class C: Finance Companies 77
Class D: Micro Credit Development Banks 22
Saving and Credit Co-operatives 16
Non-Government Organizations (NGOs) 36
(Source: As of Mid-April; 2011 Licensed by NRB)

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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

1.3 Introduction of NMB Bank Ltd.

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

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1.3.1 Ownership structure of the company

 Individual promoters - 48.8%

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

Figure 1.1 Ownership Ratio

ownership

25
48.8 individual

13.6 institutional

foreign
11.2
public

Source: Annual Report of NMB Bank 2067/68

1.3.2 Vision of NMB Bank:

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

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of relationships that deliver enduring value for customers, shareholders, staff and
communities.

1.3.3 Mission statement of NMB Bank Ltd:

“Continue our positioning as the Market Leader by providing a comprehensive,

personalized, professional and innovative service through customer responsive staff”.

Over the years NMB Bank has delivered excellent financial results and wants to
ensure all their customers, stakeholders that they will continue their performance in
the years to come. NMB Bank has made considerable strategic progress in
specializing in Investment Banking activities and at the same time, providing core
banking products and facilities. The same initiative is in continuation today even
after it upgraded itself as a commercial bank. NMB has been successful in
consolidating the position as the leading Merchant Banker in the country.

1.3.4 NMB Bank Awards:

In its 12 years of operation, NMB Bank was honored as “Best Presented Financial
(Accounts) Award 2007” presented by ICAN (Institute of Chartered Accountants).
Though NMB Bank is newly born commercial bank, it has been able to live up to
the expectations of its investors and its clientele. With the continuous support of the
valued customers the Bank has made all round progress in every sphere of its
operation.

1.3.5 NMB Bank Branches:

NMB Bank which is growing commercial bank has 19 branches spreading all over
the country. Which includes:-
Inside Valley
Babarmahal, Chabahil, Durbarmarg, Kumaripati, Lubhu, Newroad Branch, Thaiba,
Thamel

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

1.3.6 Products and services provided by NMB Bank Ltd:

 Loan and Advances:

NMB is fully committed to provide financial solution and to be a partner in

the customer‟s growth and believes in adding long term value for mutually
beneficial association. The Relationship Managers are trained and committed
to understand customer needs and requirements and provide them with
matching solution to their funding requirement. NMB Bank is committed to
extend package of credit facilities and other financial services to the existing
and potential clients for feasible projects and existing operation. The package
could be either in the form of:

 Corporate Lending
 Business Lending
 Retail Lending and
 Micro Financing

NMB Bank also purchases and sells loans to adjust and modify its portfolio to
hedge concentrated risk.

Some of the major lending products are as under:

 Term loan to businesses

 Working capital loan to businesses
 Bank Guarantee
 Hire-purchase loan to finance vehicles, equipment etc.
 Housing Loan to finance purchase of land and/or building and flats
 Personal Loan for various purposes

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 NMB Bank extends Personal Loan in the form of Term Loan for the
following purposes:

 Personal Business Investment

 Setting-up Office
 Education of dependent family members
 Medical treatment of family members
 Social Functions
 Holiday Trip
 Loan against FDR
 Loan against Other Company shares/Marketable securities

Deposits: NMB Bank also provide following products

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

1.4 Statement of Problem

Nepal is the country which is made up of villages and rural areas mostly and where
there is predominance of agriculture sector. It is very difficult to solve the problem of
credit through commercial banks and very nominal population of the country is using
banking facilities.
Presently, our economy is in critical phase due to political uncertainty, 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?

1.5 Objectives of the Study

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

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

1.7 Limitation of the study

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

1.8 Organization of the Study

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

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

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

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

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

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

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 CHAPTER - II
REVIEW OF LITERATURE

2.1 Introduction
Review of literature is a stocktaking of available literature in the field of research. It
supports the researcher to explore the relevant and true facts for the reporting purpose
in the field of research study. Literature here means the related printed material about
the subject matter of the research work. It may be in various forms like book, booklet,
thesis, reports etc in the courses of research, review of existing literature would help to
check the chance of duplication in the present study. One can find what study has been
conducted and what remains to go with. Review of literature is vital while doing
research work as it gives the finding of the previous study. It can be used as a
secondary 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.

2.2 Conceptual Framework

2.2.1 Bank
Banking, transactions carried on by any individual or firm engaged in providing
financial services to consumers, businesses, or government enterprises. In the
broadest sense, banking consists of safeguarding and transfer of funds, lending or
facilitating loans, guaranteeing creditworthiness, and exchange of money. These
services are provided by such institutions as commercial banks, savings banks, trust
companies, finance companies, and merchant banks or other institutions engaged in
investment banking. A narrower and more common definition of banking is the
acceptance, transfer, and most important, creation of deposits. This includes such
depository institutions as commercial banks, savings and loan associations(more
common in the United States), building, societies, and mutual savings banks. All

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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.

2.2.2 Concept of Commercial Bank

Commercial banks are the heart of the financial system. They hold the deposits of
many persons, government establishment and business units. They make fund
available through their lending and investing activities to borrowers, individual
business firms and services from the producers to customers and the financial
activities of the government. They provide a large portion of the medium of
exchange and they are media through monetary policy is affected. These facts show
that the commercial banking system of the nations is important for the
functioning of the economy. Banks are business firm; like Frisbee Manufacturer,
fast food chains and textbook publishers, bankers buy inputs, message them a
bit, burn a little incense, say the magic words, and out pop some output from the
oven. If there lick holds, they sell the finished product for more than it costs to buy the
raw materials in the first place. For bankers, the raw materials are money. Evaluation
of financial performance is a study of overall financial position of any organization. It
is closely related to the decision making. In the modern context, it gives vital support
for the investment decisions, financing decisions and dividend decisions. Financial
performance analysis is undergone with the help of periodically made financial
statements of the firm.

2.2.3 Financial Statements

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

15
and interpretation of financial statements depend on the nature and type of
information available there in” (Pandey, 2006 : 23).
Hence financial statement refers to any formal and original statement that
discloses the financial information related to any business concern during a
period. The income statements and balance sheet usually prepared at the end of each
financial year show the 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.

Good cash management means:

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

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Cash flow management is the process of monitoring, analyzing and adjusting business
cash flows. For business, the most important aspect of cash flow management
avoiding extended cash shortages, caused by having too great a gap between cash
inflow and outflows. We 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.

2.2.5 Functions of cash management

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

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

To design and manage cash flows:

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

To maintain cash and marketable securities in amount close to optimal level:

The firm should try to maintain the appropriate level of cash balances. The cost of
excess cash and the danger of cash deficiency should be matched to maintain tha
optimal level of cash balances.

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

2.2.6 Importance of Cash Management

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

19
management is to reduce cash holdings to the minimum necessary level to conduct
business” (Weston and Copeland, 1981:428).
Business analysts report that poor management is the major reason why most
businesses fail. It would probably be more accurate to say that business failure is due
to poor cash management. For this, financial manager should take a look at the cash
flow process to find out. The starting point for avoiding a crisis is to develop a cash
flow projection. Smart business owners know how to develop both short-term (weekly,
monthly) cash flow projections to help them manage daily ash, and long-term (annual,
3-5 year) cash flow projections to help them develop the necessary capital strategy to
meet their business needs. They also prepare and use historical cash flow statements to
gain an understanding about where all the money went.
Therefore, we need to perform a cash flow analysis on a regular basis, and use cash
flow forecasting so you can take the steps necessary to head off cash flow problems.
Many software accounting programs have built-in reporting features that make cash
flow analysis easy. One of the most useful strategies for business is to shorten is to
cash flow conversion period so that business can borrow money faster.

2.2.7Efficiency of Cash Management

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

Speedy Cash Collection

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

20
available for use. Within this time gap, the delay is cause by the mailing time. The
amount of cheques sent by customer but not yet collected are called deposit float. The
greater the deposit floats, the longer the time taken in converting cheque into usable
funds. There are mainly two techniques, which can be used to save mailing and
processing time which is concentration banking, lock box system.

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

21
Cash velocity
Efficiency in the use of cash depends upon the cash velocity i.e., level of cash over a
period of time.

Synchronized cash flows

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

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

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

Minimum Cash Balance

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

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

22
Transferring Fund
A transferring fund is a system for moving funds among accounts at different bank.
The main transfer mechanisms are depository transfer cheque (DTC), electronic
depository transfer cheque (EDTC) and wire transfers.

2.2.8 Different Techniques of Cash Management

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

ii) Cash Budget

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

iii) Short term Cash forecasting

There are most two common used methods of short term cash forecasting are as
follows:

23
 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.

iv) Long Term Cash Forecasting

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

2.2.9 Determining the Optimum Cash Balance

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

24
the firm obligations when they become due. Thus the cash balance is maintained for
transaction purpose and additional amounts of cash balance. A tradeoff between risks
and return influences such a decision. If the firm maintains small cash balance, its
liquidity position becomes weak and suffers from a capacity of cash to make payment.
But investing released funds in some profitable opportunities can attain a higher
profitability. If the firm maintains a high level of cash balance it will have a sound
liquidity position but forego the opportunity to earn interests. Thus the firm should
maintain an optimum cash balance to find out the optimum cash balance the
transaction costs and risk of too small a balance should be matched with the
opportunity costs of too large a balance.

2.2.10 Cash Management Models

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

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.

25
The total cash associate with cash management, according to this model has two
elements: (a) Cost of converting marketable securities into cash and (b) the lost
opportunity cost.
The conversion costs are incurred cash times marketable securities are converted into
cash symbolically, total conversion cost per period.
=Tb/C………………………………………. (i)
Where,
T= Total transaction cash needs for the period
b= Cost per conversion assumed to be independent of the size of transaction
C= Value of marketable Securities sold at cash conversion
The opportunity cost is derived from the lost/forfeited interest rate that could have
been earned on the investment of cash balances. The total opportunity cost is the
interest rate times the average cash balance kept by the firm. Symbolically, the average
lost opportunity cost
= I(C/2)………………………………... (ii)
Where,
I= interest rate that could have been earned
C/2= Average cash balance i.e. the beginning cash plus the ending cash balance of the
period divided by 2
The total cost associated with cash management compromising total conversion cost
plus opportunity cost of not investing cash until it is needed in interest-bearing
instruments can be symbolically expressed as
I(C/2+Tb/c)…………………….…… (iii)
To minimize the cost, therefore the model attempts to determine the optimal
conversion amount .i.e. the cash withdrawal that costs the least. Symbolically, the
optimal conversion (c*) amount.
C*= 2bT/i…………………… (iv)
The model in terms of equation (IV) has important implications. First, as the total cash
needs for transaction rises because of expansion/diversification etc., the optimal
withdrawal increases less than proportionately. This is the result of economy of scale
in cash management. Each project does not need its own additional cash balance. It

26
only needs enough added to the general cash balance of the firm to facilitate expanded
operations. Secondly, as the opportunity interest rate increases the optimal cash
investment opportunity and financial managers want to keep as much cash invested in
securities for as long as possible. They can afford to do this as the higher 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)

ii) Miller-Orr Model

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

27
E (N) = the expected number of conversions
T = the number of days in the period
J = the lost opportunity costs
C = total cash management costs.
The Miller-Orr model is in fact an attempt to make the Baumol model more realistic as
regards the patern of cash flows. As against the assumption of uniform and certain
levels of cash balances randomly fluctuate between an upper bound (h) and a lower
bound (o). When the cash balances hit the upper bound (h), the firm has too much cash
and should buy enough marketable securities to bring the cash balances back to the
optimal bound (z). When the cash balances hit zero, the financial manager must return
them to the optimum bound (z) by selling converting securtites in to cash. According
to the Miller-Orr model, as in Baumol Model, the optimal cash balance (z) can be
expressed symbolically as
Z = 3(3b2)/4i+L………………………(ii)
Thus, as in Baumol model, there are economies of scale in cash management and the
two basic costs of conversion and the lost interest that have to be minimized. 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)

iii) Orgler’s Model

According to this model, an optimal cash management strategy can be determined
though the use of a multiple linear programming model. The constrictions of the
model comprise three sections
 Selection of the appropriate planning horizon
 Selection of the appropriate decision variables
 Formulating of the cash management strategy itself

28
The advantage of linear programming model is that it enables co-ordination of the
optimal cash management strategy with the other operations of the firm such as
production with less restriction on working capital balances. The model basically uses
one-year planning horizon with twelve month periods because of its simplicity. It has
four basic sets of decisions variables which influence cash management of a firm and
which must be incorporated into the linear programming model of the firm. These are
(i) payment schedule, (ii) short term financing, (iii) purchase and sale of marketable
securities and (iv) cash balance it.
The formulation of the model requires that the financial manager first specify an
objective function and then specify a set of constraints. 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).

2.2.11 Cash Conversion Cycle

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

29
Cash conversion cycle = Average stockholding period (in days) + Average receivables
processing period (in days)
Where,
Average stockholding period (in days) = closing stock / average daily purchases.
Average receivables processing period (in days) = account receivables / average daily
credit sales.

Average payable processing period (in days) = accounts payable / average daily credit
purchases.
The duration between the purchase of a 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.

2.2.12 Credit Management

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

30
Credit terms
 Cash discounts
 Cash discount period
 Credit period
Collection Policies
 Correspondence
 Telephone calls
 Personal visits
 Legal action

2.2.13 Cash Flow

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

i) Operating Cash Flow

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

31
business. It is the real lifeblood of business, and because it is generated internally, it is
under our control.

ii) Financing Cash Flow

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

2.2.14 Cash Flow Projection

A cash flow projection is a forecast of the difference between cash coming “in” the
business and cash going “out” from the business. The estimation or projection cash
flow is a powerful cash management tool for a business. If we were to choose one
financial management tool that we use on a routine basis, the cash flow projection and
cash flow analysis would be the one to choose.
By knowing cash position now and n the future, we can:
 Make sure business have enough cash to purchase sufficient inventory for
seasonal cycles;
 Take advantage of discounts and special purchase;
 Properly plan equipment purchases for replacement or expansion;
 Prepare for adequate future financing and determine the types of financing
(short-term credit line, permanent working capital, or long-term debt).
 Impress lenders with ability to plan and repay financing.
Moreover, it just makes good business sense to know where you are and where you are
going with your company. A cash flow projection can help to do this. For a new or
growing business, the cash glow projection can make the difference between success
and failure. For an ongoing business, it can make the difference between growth and
stagnation.
The cash flow projection shows how cash will flow in and out of the business and
enables firms to budget the cash needs of the business over a period of time. The
ability to predict and plan cash outlays means that firms won‟t be forces to resort to

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

2.2.15 Cash Flow Statement (CFS)

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

33
2.3 Review of previous research
Pant, R.P. (2001), Pant has studied on “A study of deposit and its utilization by
Commercial Bank in Nepal.” The main objective of the study is to test whether
lending process is significant and to find out the way to encourage mending by
increasing bank deposit. The finding of the study is; commercial banks in Nepal are
not able to satisfy the financial need of the economy, commercial banks in Nepal are
not playing active role to utilize their resources collected from different sector,
according to the need of the economy. He has recommended the new branches should
be open.

Acharya, N. (2001), “Deposit mobilization of commercial bank in Nepal”. The main

objective is to analyze the impact of interest rate on deposit mobilization as well as
credit ratio increase or decrease as the change in interest rate. Besides this, the
objective is to know the efficient utilization of the accumulated deposits. She has
found that the commercial bank have not been successful in the mobilization of the
deposits collected by the commercial banks. It is because of the fact that the
commercial banks have not able to motivate and facilitate to their cents except at
change in the rate of interest. The problems are to attracting the savings to the
maximum possible extent to channeling these savings into these savings into those
sectors of the economy where there are most needed and to extending banking
facilities in the country to unbanked areas. The changes of interest rates in loan are
also recommended. Commercial banks should extend long term and medium term
credit in addition to short term credit.

Joshi, D.(2002), “A study on Commercial banks of Nepal with Reference to Financial

Analysis of Rastriya Banjiya Bank” is the study conducted to direct the financial
position of the bank and recommended the essential suggestion to that bank.

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.

3.1 Research Design

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

36
banks. The design for this research is made by collection of information from different
sources by using various financial and statistical tools.

3.2 Source of Data

There are two sources of data, primary and secondary. But only secondary data has
been used in this search.
Secondary Source:
This refers to data that are already used and gathered by others. Secondary data are
mostly used for this research purpose. So the major sources of secondary data are as
follows:
 Annual general report of NMB Bank Ltd from 2064/65 to 2067/68
 National newspaper, journals, magazine, and reports for Central Library of T. U.,
Library of Shanker Dev Campus.
 Internet and various website

3.3 Population & Sample

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

3.4 Method Of Data Analysis

To make the study more specific and reliable, the researcher uses two types of tool for
analysis,
a) Financial Tools
b) Statistical Tools

3.4.1 Financial Tools

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

37
strategies. For the sake of analysis, various financial tools were used. In order to meet
the purpose of study, following financial tools have been used.

3.4.1.1 Ratio Analysis

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

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

i. Current Ratio
Current ratio= Current Assets
Current liabilities

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)

Cash Reserve Ratio= Cash and Bank Balance

Total Deposits

B. Activity Ratios / Turnover Ratios

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

i) Loans and Advances to Fixed Deposit Ratio

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

39
ii) Loans and Advances to Saving Deposit Ratios

Loan & Advances to saving Deposit Ratio = Loan & advances

Saving deposits

iii) Loan and Advances to Total Deposits Ratio

Loan & Advances to Total Deposit Ratio = loan & advances

Total deposits

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

i) Return on Total Asset

Return on Assets = Net Profit after Tax (NPAT)
Total Assets

ii) Return on Shareholder’s Equity (Net Worth)

40
 Return on Net Worth= Net profit After Tax
Net Worth

iii) Interest Earned to Total Asset Ratio

Interest earned to Total Assets = Interest earned

Total Assets

iv) Return on Total Deposit Ratio

Net Profit to Total Deposit= Net Profit

Total Deposit

3.4.2 Statistical Tools

Several numbers of statistical tools can be employed to examine the financial

data of NMB Bank Ltd. Some of the statistical tools that are used for the purpose of
this study
are presented below;

A. Arithmetic Mean

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

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
∑

B. Standard Deviation (S.D.)

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

∑ ∑
√ ( )

, N= number of observation in series X

√ = Sum of observation in series X
√ = Sum of Squared observation in series X

Standard deviation is the absolute measure of dispersion. The relative measure of

dispersion based on the standard deviation is known as the coefficient of standard
deviation

42
C. Coefficient of Variation ( C.V.)

Coefficient of variation is the relative measure of dispersion, comparable across

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

The coefficient of variation is given by,

Where,
C.V. = Co-efficient of variation
̅ = Arithmetic mean
σ = Standard deviation

3.4.3 Diagrammatic and Graphical Representation

Diagrams and graph are visual aids that give a bird‟s eye view of a given set of
numerical data. They present the data in simple and readily comprehensive form.
Diagrams are primarily used for comparative studies and can‟t be used to study the
relationship between the variable under study. That is done through graphs.

3.5 Data Processing procedure

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

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.

3.4 Period Covered

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

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.

4.1 Deposit Categorization of NMB Bank Ltd.

4.1.1 Interest Bearing Deposit

Table 4.1
Interest Bearing Deposit

(Rs in a
Million)
Year Interest bearing Deposit Growth % Growth

Current year Previous year

2064/65 1636.64 1291.74 344.9 21.07

2065/66 6762.91 1636.64 5126.27 75.79

2066/67 9439.87 6762.91 2676.96 28.35

2067/68 12289.85 9439.87 2849.98 23.18

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

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%.

Figure 4.1: Interest Bearing Deposit

5
4.5
4
3.5
Ratio in %

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

4.1.2 Saving Deposit

Table 4.2
Saving Deposit
(Rs. in Millions)
Year Saving Deposit Growth % Growth

Current year Previous year

2064/2065 395.69 444.92 -49.23 -12.44

2065/2066 1544.42 395.69 1148.73 74.37

2066/2067 1421.59 1544.42 -122.83 -8.64

2067/2068 1883.50 1421.59 461.91 24.52

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

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.

Figure 4.2: Saving Deposit

5
4.5
4
Ratio in %

3.5
3
2.5
2
1.5
1
0.5
0
2064/65 2065/66Fiscal Year2066/67 2067/68

4.1.3 Fixed Deposit

Table 4.3
Fixed Deposit

(Rs in a Million)
Year Fixed Deposit Growth % Growth

Current year Previous year

2064/2065 926.51 682.41 244.1 26.34

2065/2066 2079.15 926.51 1152.64 55.43

2066/2067 4020.04 2079.15 1940.89 48.28

2067/2068 6563.09 4020.04 2543.05 38.74

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

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.

Figure 4.3: Fixed Deposit

5
4.5
4
3.5
Ratio in %

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

4.1.4 Call Deposit

Table 4.4

Call Deposit

(Rs In a Million)
Year Call Deposit Growth % Growth

Current year Previous year

2064/2065 314.43 164.40 150.03 47.71

2065/2066 3139.33 314.43 2824.9 89.98

2066/2067 3998.24 3139.33 858.91 21.48

2067/2068 3843.26 3998.24 -154.98 -4.03

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

48
From the above table we can see that the position of the call deposit in the NMB was
good in 2065/66 as it was in increasing rate in last year. Call deposit hugely declined
in 2067/68 by -4.03%, which was not good for the bank.

Figure 4.4: Call Deposit

5
4.5
4
3.5
Ratio in %

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

4.1.5 Non- Interest Bearing Deposit

Table 4.5
Non- Interest Bearing Deposit
(Rs in a Million)
Year Non- Interest Bearing Deposit Growth % Growth

Current year Previous year

2064/2065 24.95 4.64 20.31 81.40

2065/2066 114.99 24.95 90.04 78.30

2066/2067 670.81 114.99 555.82 82.85

2067/2068 576.36 670.81 -94.45 -16.38

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

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.

Figure 4.5: Non-Interest Bearing Deposit

5
4.5
4
3.5
Ratio in %

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

4.1.6 Current Deposit

Table 4.6
Current Deposit
(Rs in a Million)
Year Current Deposit Growth % Growth

Current year Previous year

2064/2065 22.41 0.11 22.3 99.50

2065/2066 101.42 22.41 79.01 77.90

2066/2067 628.77 101.42 527.35 83.87

2067/2068 518.48 628.77 -110.29 -21.27

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

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.

Figure 4.6: Current Deposit

5
4.5
4
3.5
Ratio in %

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

4.1.7 Margin Deposit

Table 4.7
Margin Deposit
(Rs in a Million)
Year Margin Deposit Growth % Growth

Current year Previous year

2064/2065 2.54 4.52 -1.98 -77.95

2065/2066 13.57 2.54 11.03 81.28

2066/2067 42.04 13.57 28.47 67.72

2067/2068 57.88 42.04 15.84 27.36

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

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

4.1.8 Total Deposit

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

Table 4.8
Total Deposit
(Rs in a
Million)
Year Total Deposit Growth % Growth

Current year Previous year

2064/2065 1661.60 1296.38 365.22 21.98

2065/2066 6877.90 1661.60 5216.3 75.84

2066/2067 10110.68 6877.90 3232.78 31.97

2067/2068 12866.22 10110.68 2755.54 21.41

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

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.

Figure 4.8: Total Deposit

5
4.5
4
3.5
Ratio in %

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

4.2 Ratio Analysis

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

4.2.1 Liquidity Ratio

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

53
advances to current assets ratio, fixed deposit to total deposit ratio, saving deposit
to total deposit ratio, and investment in government securities to current assets
ratio attempts to figure out the liquidity position of the two banks under study.

i) Current Ratio
The current ratio one of the most commonly cited financial ratio, measures the 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

Current ratio= Current Assets

Current liabilities

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

Figure 4.9: Current 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

ii) Cash and Bank Balance to Total Deposit Ratio

The ratio shows the proportion of total deposits held at most liquid assets. The ratio
computed by dividing the cash and bank balance by total deposits.

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

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.

Figure 4.10: Cash and Bank Balance to Total

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

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

4.2.2 Efficiency/ Activity/ Turnover Ratios:

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

i) Loan and Advances to Fixed Deposit Ratio

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

58
 Table: 4.12
Loan and Advances to Fixed Deposit Ratio
(Rs. In Millions)
Year 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

Figure 4.12: Loan and Advances to Fixed

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

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:

Loan & Advances to saving Deposit Ratio = Loan & advances

Saving deposits

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

iii. Loan and Advances to Total Deposit Ratio

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

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.

Figure 4.14: Loan and Advances to Total

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

4.2.3 Profitability Ratio:

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

62
a commercial bank is unlimited and it will have no future if it fails to make sufficient
profits. Therefore the financial manager continuously evaluates the efficiency of the
bank in terms of profits. The profitability ratios in this study are calculated to measure
the operating efficiency and performance of 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

ii) Return on net worth/ shareholder’s equity

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

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

Net Worth

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%.

Figure 4.16: Return on Net Worth

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;

Interest earned to Total Assets= Interest Earned

Total Assets

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.

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 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

iv) Return on Total Deposit Ratio

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

Table: 4.18
Return on Total Deposit Ratio
(Rs. In Millions)
Year 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

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

Figure 4.18: Return on Total Deposit ratio

5
4.5
4
3.5
Ratio in %

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

4.3 Major Findings

 The interest bearing deposit of the NMB has mixed growth rate from the year
2064/2065 to2067/2068. In 2065/66 bank succeed to get high interest bearing deposit
of 75.79% whereas in 2064/2065 banks interest bearing deposit decreased by 21.07%.

 The saving deposit of NMB Bank was in Fluctuating trend in fiscal year

 Fixed deposit was in fluctuating trend. However bank succeeds to make double deposit
than before year in 2065/2066 FY year. In the next two years fixed deposit of the bank
is decreased rate but has been successful in increasing the deposits.

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 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%.

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 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

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 CHAPTER – V

SUMMARY CONCLUSION AND RECOMMENDATION

A summary of the study is presented in this chapter outlining the study‟s

introduction, Purpose, objectives, and methodology. The findings of the study are
also presented in a Summarized for m and recommendations are made where possible.

5.1 Summary

Financial information required for financial planning, analysis and decision-making.

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

The financial statements serve as a means to the various stakeholders of the

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

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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:

Credit Supervision and Monitoring Mechanism

Liquidity is the ability to turn investment into cash quickly at a value close to the face
value of investment. The degree liquidity maintained varies from institution to
institution. While it is necessary for all organizations, including banks, to have a
comfortable liquidity position, absence of liquidity can prove to be hazardous as it can
lead to tying up of assets. Current ratio of 1:2 is the standard norm. However, this can
vary from industry to industry. Negligence in controlling the performance of these
assets can bring about failure in the bank‟s performance as a whole. Credit
supervision and monitoring mechanism must be put in operation to maintain the
quality of credit.

Reduce the cost of Deposits

As For financial Institution if they have placed to invest them in long-term assets,
fixed deposit is better than saving deposits.

Focused on other income generation activities

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

Investment Policy

Loans and advances are profit-earning assets of a commercial bank, which include
loans cash credit, overdrafts; bill discounted and bill purchase. A bank is able to earn
more if it is able to increase its investment in loan and advances. However, it is
necessary to strictly maintain the quality of credit. After presenting and analyzing the
data it is suggested that a proper balance be maintained between loan and advance and
current assets. So as to help increase returns as much as possible and still maintain the
required liquidity.

Portfolio Diversification

Financial institution should diversify their portfolio and invests in different sectors.
Because of current political situation they are not interest investment. Countries
economy will boost with these investment. Financial institution plays an important
role in economic growth of the country so I will recommend having a little eye on
investment.

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