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1.1 Background of the study

Financial institution can be considered as the catalyst to the economic growth of a country. The
development process of a country involves the mobilization and deployment of resources.
Development of trade, commerce and industry are the prime requisite for the attainment of the
economic political and social goals.
Financial institution refers to a business concern which is mainly confined to finance for the
development of the trade, commerce and industry. Trade, commerce and industry are the prime
factors of the economic development. Bank is a financial institution, which primarily deals in
borrowing and lending. Banking is a vital part of national economy and vehicle for the
mobilizations of economy's financial resources and extension of credit to the business and
service enterprises.
Nepal Bank Ltd. is the first modern bank of Nepal. It is taken as the milestone of modern
banking of the country. Nepal bank marks the beginning of a new era in the history of modern
banking in Nepal. This was established in 1937A.D. Nepal Bank has been inaugurated by King
TribhuvanBir Bikram Shah Dev on 30thKartik 1994 B.S. Nepal bank was established as a semi-
government bank with the authorized capital of Rs.10 million and the paid -up capital of Rs. 892
thousand. Until the mid-1940s, only metallic coins were used as a medium of exchange. So the
Nepal Government (His Majesty Government on that time) felt the need of separate institution or
body to issue national currencies and promote the financial organization in the country. Nepal
Bank Ltd. remained the only financial institution of the country until the foundation of Nepal
Rastra Bank is 1956 A.D. Due to the absence of the central bank, Nepal Bank has to play the role
of the central bank and operate the function of the central bank. Hence, the Nepal Rastra Bank
Act 1955 was formulated, which was approved by the Nepal Government accordingly, the Nepal
Rastra Bank was established in 1956 A.D. as the central bank of Nepal. Nepal Rastra Bank
makes various guidelines for the banking sector of the country. A sound banking system is
important for the smooth development of the banking system. It can play a key role in the
economy. It gathers savings from all over the country and provides liquidity for industry and
trade. In 1957 A.D. Industrial Development Bank was established to promote the
industrialization in Nepal, which was later converted into Nepal Industrial Development
Corporation (NIDC) in 1959 A.D.
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1.2 Profile of the organization

Everest Bank Limited (EBL)
Everest Bank Ltd was established in the year 1994 with a view & objective of extending efficient
banking services to various segment of society. Joint venture partner of EBL is Punjab National
Bank (holding 20% equity in the bank) is the largest nationalize bank in India. EBL was one of
the first banks to introduce Any Branch Banking System in Nepal. The bank has been awarded
with “Bank of the Year-2006, Nepal” by the banker, of publication of financial times, London.
For its outstanding performance it has also received “NICCI Excellence Award” by Nepal-India
chamber of commerce in finance sector.
EBL has always been committed to provide a quality service to its valued customers with a
personnel touch. Therefore, EBL is committed to be a bank where “Power to Lead” & its key
mission is to preferred provider of quality financial service in country. Its main aim is to use
latest technology at customer satisfaction & act as a effective catalyst for social economic
development.
Functions of EBL:
Receiving deposit from public is the first function of EBL. It has opened different account for
making the deposit & they have current saving and terms deposit account in local and foreign
currency, fund transfer services, 24 hrs ATM series safe deposits, Home Loan, Education Loan,
Vehicle Loan, Loan against share, Loan against Life Insurance Policy, Foreign Exchange
Services, Consumer Finance Auto Loan, Personnel Loan etc.
1.3 Objectives of the study
The main objective of the study is to examine how Everest Bank limited, manage their liquidity.
The specific objectives of this Study are as follows:
 To analyze the liquidity position of the banks.
 To assess the profitability position of the selected banks.
 To study the relationship between liquidity and profitability and loan and advances and
profitability.
1.4 Rationale of the study
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This study has been mentioned already that the research focuses only on the comparative study
of liquidity and profitability of EBL. This comparative study of liquidity and profitability
analysis gives insight into the relative financial condition and performance of these banks. This
will provide guideline for improving its performance to achieve the banks overall objectives.
Similarly, this study helps the banks to identify its hidden weakness regarding financial
administration. This study has following signification:

a) This study explains the shareholders about the financial performance of the respective banks.

b) The study also compels the management of respective banks for self-assessment of what they
have done in the past and guides them in their future plan and programs.

1.5 Review
This chapter comprises two parts i.e. Conceptual review followed by review of related study.
According to Wolf & Pant “The purpose of the reviewing the literature is to develop some
expertise in One’s area, to see what new contribution can be made and to review some idea for
Developing research design”. (Pant and Wolf; 1996:31-44). In conceptual review, it reviews the
concept concerning the subject matter that are written on related journals, magazines and
concerned books while in review of related studies, it reviews the previous related studies which
are related to previous subject matter of the study and other related heading are also enclosed
with help to study the topic as depth.

Theoretical review
Liquidity refers to how quickly and cheaply an asset can be converted into cash. Money (in the
form of cash) is the most liquid asset. Assets that generally can only be sold after a long
exhaustive search for a buyer are known as illiquid. “Managing liquidity involves estimating
liquidity needs and providing for them in the most cost-effective way possible. Banks can obtain
liquidity from both sides of the balance sheet as well as from off-balance-sheet activities. A
manager who attempts to control liquidity solely by adjustments on the asset side is sometimes
ignoring less costly sources of liquidity. Conversely, focusing solely on the liability side or
depending too heavily on purchased wholesale funds can leave the bank vulnerable to market
conditions and influences beyond its control. Effective liquidity managers consider the array of
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available sources when establishing and implementing their liquidity plan.” (Khubchandani;
2002: 61).

"Liquidity means a matter of maintaining what the bank has promised to pay the depositors -
cash. In order to fulfill the promise, primary reserves are the first drawn on to satisfy depositors.
In the banking system primary reserves are known as legal reserve and working reserves. The
term is economic rather than accounting concept. Legal reserves are the requirement of monetary
authority. Bank management, student of banking studies and monetary authority are referring the
other names for primary reserve to designate certain ideas and concept regarding banks' assets.
Primary reserves include non-earning assets such as cash in vault, the deposits carried out by
banks with correspondent banks and central bank, and cash items. The cash items represent
cheques held or in process of collection by the banks. The objective of primary reserves in
banking system is maintaining liquidity and solvency"(Sinkey; 1983:135).
The amount of liquidity that a commercial bank or the commercial banking system should
maintain is one of the basic problems of the bank management. If too much liquidity is
maintained, it means that the bank and the banking system are foregoing income. Too, little,
however, may be fatal not only to an individual bank but to the commercial banking system as a
whole, the financial structure of the country, and the economy of the nation. Too little liquidity
and the demands of the depositors in the form of 'runs' on the banks are like oil and water, they
do not mix well"(Reed ;2002:115).
Review of Related Studies
Shrestha (2007) in his article “The Efficiency of Liquidity Monitoring and Forecasting
Framework the Nepal Rastra Bank in the Context of Liquidity Management in the Nepalese
Banking and Financial System” has stated liquidity management as the part of risk management
framework of financial services industry. He found taking high liquidity risk as well as high
credit risk are two main factors that cause banks to fail. Although high liquidity risk alone is not
likely to cause banks failures, a liquidity crisis usually signals a need for change. He concluded
proper liquidity management ensures that banks and financial institutions' financial commitments
and obligations are met. Maintaining adequate liquidity also helps in avoiding forced sale of
assets. The need for bank liquidity stems from seasonal, cyclical trend and short-term irregular
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movements in deposits and loans. The different sources available to meet these liquidity needs
were identified and grouped into asset and liability liquidity sources.
1.6 Methodology
Those tools that are used to conduct research are called research methods. In other words, the
way to solve research problem systematically is called research methodology. Research
methodology is the process of arriving the solution of problem through planned and systematic
dealing with collection analysis and interpretation of facts and figures. Research methodology is
a collective term for the structured process of conducting research. There are many different
methodologies used in various types of research and the term is usually considered to include
research design, data gathering and data analysis. Research methodologies can be quantitative
(for example, measuring the number of times someone does something under certain conditions)
or qualitative (for example, asking people how they feel about a certain situation). Ideally,
comprehensive research should try to incorporate both qualitative and quantitative
methodologies but this is not always possible, usually due to time and financial constraints. A
good design should ensure the research is valid, i.e. It clearly tests the hypothesis and not
extraneous variables, and that the research is reliable, i.e. It yields consistent results every time.
Research designs are concerned with turning the research question into a testing project. The best
design depends on research questions. Every design has its positive and negative sides. The
research design has been considered as a "blueprint" for research, dealing with problems: what
questions to study, what data are relevant, what data to collect, and how to analyze the results.
To achieve the objective of this study, analytical and descriptive research designs have been
used.

1.7 Limitation of the study

 The study is based on secondary data, so it may contain reporting errors.

 The study covers the past and present state of the commercial bank in Nepal and will
not make any projection in future.
 This study covers the data of only one bank i.e. EBL, out of commercial banks in
Nepal.
 Only limited tools for data analysis was used.
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