CHAPTER-ONE

INTRODUCTION

1.1 Background of the Study

Nepal is landlock by India on three sides and China’s Tibet Autonomous Region to the
north. Nepal had experienced a struggle for democracy at times in the 20 th century and
early 21st century. During 1990s and until 2008, the country was in a civil strife. A peace
treaty was signed in 2006 and elections were held in the same year. The significance and
the need of the bank is confined to the urban people. Only to much extent as seen from
the opening of the such commercial bank in the urban areas.

Profit is one of the core objectives of any firm for its long- term reputation and survival.
Profitability is the profit -making ability which is considerable an important factor for perpetual
existence of firms. Measuring firm’s profitability or taking into effect how well a business is
being run is a very difficult task. There are various approaches have been developed. It can be
measuring the process of gain sharing financially or in economic terms, depending on the
prevailing situation and the current scenario.

Liquidity ratio measure the short- term solvency or liquidity of a firm. Liquidity is the ability of
the firm to meet the short -term obligation within short period. Liquidity ratio reflects the short-
term financial strength of a business. They indicate whether the firm is in a position to meet its
short-term obligations timely or not.

The history of the banking is strictly related the history of money. As a security become more
civilized, the needs for the more efficient method for barter were developed organically. Most
origins of the money can be traced back to the building of the large structure such as temples, or
large undertaking by leaders such as wars.

The term “ bank” is derived from the Latin word ‘bancus’, Italian word ‘banca’, French word
‘banque’ which means a ‘banch’ and German word ‘Bank’ which means Joint Stock Company.
The early bankers, the jews in the Lambardy, transacted third business at benches in the market
place. When they were unable to meet their liabilities, the depositors used to break their benches
and the term bankrupted was derived.
As we know that there is a strong bonding between the profitability and the growth. Profitability
is also cause of maximizes the values of stakeholders as well as investors and also show the
performance of any firm in competent environment. Profitability is usually seen as significant
prerequisite for firm survival and long -term achievement; In addition, the variable significantly
affects the performance of the other financial goals of the company. Some other factors that
describe the position of the profitability of the company are its effect on economic development,
technological change, employment and innovation. But as a result of increased competition, price
forces and improved efficiency, companies are facing more difficulties to the required
profitability.

1.1.1 Introduction of bank

Banking can be defined as the business activity of accepting and safeguarding money
owned by other individual and entities and then lending out this money in order to earn
profit. The banking service these days include issuance of debit and credit cards,
providing safe custody of valuable item, lockers, ATM service and online transfer of fund
across the country/ world.

A bank is a financial institution that accept deposit from public and create credit. Lending
activities can be performed either directly or indirectly through capital market. Due to
their importance in financial system and influence on national economies, banks are
highly regulated in most of the countries.

According to Nepal Rastra Bank ACT 2058, ‘Bank is a financial institution which
provide the financial services that may be in the form of accepting deposits, advancing
loans, providing necessary technical advices, dealing over foreign currencies, remitting
funds etc.’’ Bank is a financial institution licensed to receive deposit and make loans.

In the modern term, we cannot say that bank activities are limited to just borrowing and
lending. This is very primitive concept. In the modern concept the bank is an institution
that deals in monetary transactions. Monetary transaction means dealing in money and
credit. It accepts the deposit from different sector in different account and provide loan
of different type in the needed sector.
1.1.2 Introduction of Commercial Banks

Commercial banks are an institution which accept deposits, make business loans, and
offer related services. Commercial bank also allows for a variety of deposit account such
as checking, saving and time deposit. These institutionsare run to make a profit and
owned by group of individuals. In Nepal, Nepal Rastra Bank is a central bank of Nepal.
Nepal Rastra Bank the governing body of banking and financial institution has
categorized the bank and financial institution in four distinct categories ‘A’ Class, ‘B’
class, ‘C’class and ‘D’ class institution.

Commercial banks are those type of bank which are established to provide short term
loan to traders. But at present commercial bank has been providing loan to several sector
like agriculture, industry, trade, tourism etc. It has been providing not only short-term
loan also providing medium-term and long-term loan.

Commercial banks are a part of organized money market. Commercial banks mobilize
saving in urban and rural areas and making them available to large and small industrial
and trading units mainly for working capital requirement. Commercial banks acquire
fund from the group of surplus spending units and makes these funds available todeficit
unit. They have liability as well as assets.

Liquidity measures the liquidity position of the company and form the ability to make it
short term ability. Liquidity ratio is the indicator of short-term solvency or financial
strength of firm. The most common ratio under this group are current ratio and quick
ratio.

Profit is one of the core objectives of any firm for its long-term reputation and survival. It
shows the combined effect from liquidity ratio, asset utilization ratio, and debt
management ratio on operating result.

An organization should earn profit to survive and grow over the long period of time but
not at the cost of employees, customers and society. Obviously, organization will have no
future if it is unable to make reasonable profit from its operation. The profitability ratio is
used as measure to judge an operating efficiency(success or failure) of an organization.
Profitability and liquidity are the primary variable used by the bank to gauge its
performance. Liquidity may of be defined as the assets or securities which can be without
difficulty convertible into cash. Lack of liquidity is frequently one of the first symptoms
that a financial institution is in extreme monetary hassle.

Liquidity plays the role in figuring out the income level of corporation and maintaining
liquidity is the important thing factor whether it is involved in customer convenience and
satisfaction. The liquidity in the commercial bank represents the ability to fund its
obligation by the contractor at the time of maturity, which includes lending and
investment commitments, withdrawals, deposits and accrued liabilities(Ali and Jameel
2019).

Liquidity needs to neither be too low nor too excessive. Instead, it needs to maintain a
reasonable stage. The liquidity role of financial institution is very important to hold the
general public faith upon banks. There is need to invest the excess of liquidity available
at the banks in the various aspect of investment in order to increase the bank profitability
and to get benefit from the time value of available money(Alshatti,2015).

Profitability indicates the capability of the company in earning income on its property.
Profitability is defined as an ability to make profit from all business activities of an
enterprises(Owolabi and Obida 2012)

Banks today are under great pressure to perform to meet the objective of their
stockholders, employees, depositors and borrowing customers. The main objective of
commercial banks is to maximize profit and maintain liquidity position of firm(bank) or
industry.

1.1.3 Introduction of Nepal Bank Limited

Nepal bank limited is the first commercial bank of Nepal. It was established in 1937 by
Juddha Shamsher which marked the beginning of an era of formal banking in Nepal.
When Nepal bank limited was established it was formed under the principle of joint
venture.Joint venture between government and general public] Nepal bank limited
authorized capital was NRP 10 Million and issued capital NPR2.5 Million of which paid
up capital was NPR 842000 with 10 shareholders. The bank has been providing banking
through its branch offices in different geographical location of the country.

As first bank of nation, Nepal bank limited has been playing a significant role in the
development of Nepalese economy. It has developed a sound infrastructure in the
economy of Nepal. Nepal bank limited is highly successful in creating banking habits
among the people and create monetized in non-monetized area of the country.

The contribution made by the bank at that time in creating banking habits among the
people widening monetized area and helping business communities and government have
helped the bank to be glorious its field.

Beside the main function of deposit collection and mobilization, Nepal bank limited has
served nation’s economy in many ways by investing on the share of government and non-
government organization like Rastriya BeemaSansthan, Nepal oil Corporation, Nepal
Industrial Development Corporation, Economic service Center, Nepal Housing
Development and Finance company, Citizen Investment Trust, Nepal Insurance
Company, Agriculture Project Service Center, Credit Security Corporation etc.

On the other side Nepal bank limited has been serving its customer by means of service
like money transfer, collection, purchase, and remittance of bill, cheque and notes,
opening of letter of credit. It also has been providing ATM facilities, mobile banking,
internet banking facilities, 24-hour services to its customer. Nepal bank limited has
contributed largely for mobilizing domestic resources. It has been collecting small saving
from the people and utilizing them in the needy sector of the country favorably to banks
resource mobilization capacity.

1.1.4 Introduction of NMB Bank limited

NMB bank is a commercial bank in Nepal with Headquater in Kathmandu. The bank is
licensed by central bank of Nepal, the Nepal Rastra bank and has 201 branches across the
nation providing retail and commercial banking service. The bank shares are publicly
traded on Nepal stock exchange. The bank has joint venture agreement with Netherlands
Development Finance Company(FMO) a Durch Development Bank which holds
13.69%of the banks share and is the largest shareholder of the bank.
It was founded in May 2008 and is licensed as an ‘A’ class financial institution. It was
created as merger with four financial institution, Bhrikuti Development Bank,
PathibharaBikas Bank, Prudential Finance Company, Clean Energy Development.

NMB bank has been recognized as Bank of Year in Nepal for three consecutive year
2017, 2018 and 2020 by the bankers, a service of financial Times for its leading role in
the country’s financial sector by using new digital technologies. In September 2019 NMB
bank has acquired OM Development Bank.

NMB bank is the first commercial bank of Nepal that has been able to upgrade from a
finance company to full-fledged commercial bank. Nepal Merchant Banking and Finance
Ltd, the erstwhile name of the institution was amongst the leading financial institution in
its category till may 2008 when the transformation progress for the upgradation was
complete and change its name to NMB Bank Limited.

NMB is the brain child of leading Nepali entrepreneurs with dream of framing the
ultimate in Merchant banking and financial service. Harnessing from its strength on
merchant banking the bank has decided to broaden its scope of service by building
senergy of its current operation. This unprecedented event has been possible by way of
strong commitment and confidence of all stakeholders through customers, promoters,
shareholders, regulators and employees.

1.1.5 Introduction of Nabil bank limited

Nabil bank limited previously known as Nepal Arab bank limited as a commercial bank
in Nepal founded in 1984. The bank has branches across the nation and its head office is
in Kathmandu. It is the first bank in Nepal incepted by multinational(primarily foreign) as
NEPAL ARAB BANK LTD on 12 July 1984. The bank was incorporated with the
objective of providing modern, international standard financial services to businesses. It
is nation’s private sector bank, commencing its business in Nepal.

Nabil bank limited has official name Arab Bank Ltd, till 31 st December 2001. Nabil bank
is the pioneer in introducing many innovative products and marketable concept in
banking sector in Nepal. Success of Nabil bank ismilestone in the banking history of
Nepal.
NABIL bank limited provides a full commercial banking service through its outlets
spread across the nation and reputed correspondent bank across globe. Moreover, Nabill
has good name in market of its highly personalized service to the customer.

NABIL bank has got the highest number of branches among any joint venture bank in
Nepal. It is only bank authorized to operate inside the international airport both at the
arrival and departure lounges. Along with this civil aviation authority has designated only
NABIL to collect embarkation fee of departing passengers.

1.1.6 Introduction of Kumari bank limited

Kumari bank limited, came into existence as the 15 th commercial bank of Nepal by
starting its banking operation from Chaitra 21, 2057(April 03, 2001) with the objective of
providing competitive and modern banking services in the Nepalese financial market.
The bank now has a robust paid-up capital of NPR 9.55 Billion of which 51% is
contributed from its promoters and remaining from the public.

The bank has been providing the wide range of modern banking services through its 141
point of representation located in various urban, semi-urban and rural part of the country,
compromising of 87 outside valley branches, 29 inside valley branches, 5 extension
counter and 20 branchless banking units.

The bank has pioneered in introducing modern banking services like internet banking,
mobile banking and concept of mobile wallet in the country with rapid implementation of
core banking software,FINACLE(VERSION10) in the shortest record time of 4.5 month,
the bank is confident that it will be able to provide a robust, ultra-modern banking
platform for all customer throughout the country.

The bank has been offering both domestic and international visa debit card credit card,
accessible in all VISA Linked ATMS across Nepal and India providing additional
services to the customers through its 110 ATM throughout the country and several Point
of Sale(POS) terminals. Along with this the bank has been offering the latest mobile
banking, internet banking and viber banking services.
1.2 Statement of the Problem

Liquidity and profitability have become one of the most important part of the banks and
financial institutions. Liquidity ratio helps to provide the quick measure of liquidity
position or ability of the firm to meet its short-term obligation. A company’s liquidity is
an indication of how readily it can obtain cash needed to pay its bill and other short-term
obligation. Companies need sufficient liquidity through cash on hand or easily converted
securities to meet their obligation.

Profitability is the basic aim of establishing business and bank are not expectation for
their performance. An organization should earn profit to survive and grow over the long
period of time but not at the cost of employees, customers and society. As the
profitability is an important factor for the smooth running of any business in today’s
competitive setting and it has significant impact on the performance of the institution.

In short, there is no generally accepted outcome to determine the liquidity and

profitability position of the different bank and financial institution. Hence, in this study
we studied some firms(Bank) liquidity and profitability position which help us to know
about the current ratio, quick ratio, gross profit margin, net profit margin, Return on
Assets(ROA), Return on Equity(ROE),Earning per Share(EPS), Time interest Earned
Ratio(TIER).

Banks plays a significant role in the economic development of the country by extending
credit to the people. Although the banking industry in Nepal is making remarkable
progress and growth. The growing competition among these financial institutions recent
increase in the transaction of security and capital market as well as taxation lay on higher
deposit in the bank is affecting the bank deposit collection.

The present study will try to analyze and examine overall performance of the national
level commercial bank in Nepal. This study specially deals with following problem:

a. What will be current liquidity position of commercial bank in Nepal?

b. What will be the position of bank in terms of profitability?

c. What type of ratio will be used by commercial bank to measure its liquidity and
profitability?

d. What will be the impact of liquidity and profitability in commercial bank?

e. Is there any relationship between liquidity and profitability in commercial bank of

Nepal?

1.3Objective of the study

The purpose of this study is to know about the liquidity and profitability position of
commercial bank of Nepal. It helps to examine, analyze, and interpret the liquidity and
profitability position of selected commercial bank. But the specific objective of the study
are as follows:

a. To know about the current liquidity position of commercial bank in Nepal.

b. To analyze the profitability of selected bank.

c. To identify the ratio used by commercial bank in terms of liquidity and profitability.

d. To examine the impact of liquidity and profitability in commercial bank.

e. To identify the relationship between liquidity and profitability in banking sector of

Nepal.

1.4 Research Hypothesis

The research hypothesis is hereby stated to give more emphasis to purpose of the study.
This study includes:

H0: There is no significant relationship between liquidity and profitability of commercial

bank (Null Hypothesis)

H1: There is significant relationship between liquidity and profitability of a commercial

bank (Alternative Hypothesis)
1.5 Significance of the study

Most of the bank and financial institution have their own liquidity and profitability. Some
banks have their liquidity position above their standard and some have below the
standard. All the bank and financial institution aim is to earns profit through the survival
and growth over the long period of time. The significance of the study lies mainly in
filing a research gap on the study of liquidity and profitability analysis. Some of the
significance of the study are:

a. This study will focus on maintaining the liquidity position of commercial bank.

b. This study will conduct to gain more knowledge and information about liquidity and
profitability.

c. This study will focus on formulating the policies and strategies to maintain their
activities effectively.

d. This study will focus on both the short-term and long-term obligation of the
firm(bank).

e. This study is important for banks, board of directors of respective banks researchers,
scholars, investors, students, government as well as other many parties.

1.6Limitation of the study

There is no any study that is free from its limitation. My study is limited under the
liquidity and profitability of commercial bank of Nepal. Some of the limitation of the
study are as follows:

a. This study is based on secondary data only. Accuracy depends upon the data collected
and provided by the bank.

b. This study is made through the survey among four commercial banks of Nepal.

c. This study focuses only on liquidity and profitability of commercial bank not on the
development and microfinance companies.

d. The whole study is based on the data of recent five year.

e. Time and resources are major constraint.

1.7Organization of the study

This study has been organized into five sequential chapters along with its references and
appendices.

Chapter I: Introduction

This chapter include the background information of the subject matter of research
undertaking to provide a general idea of its history. It provides brief description of
background of the study, statement of the problem, objective of the study, research
hypothesis, significance of the study, limitation of the study and organization of the
study.

Chapter II: Literature Review

The process of studying different books, journals, newspaper, published or unpublished

bibliographies is called review of the literature. This chapter comprises the review of the
relevant previous writing and studies to find the existing gaps. It includes the conceptual
framework regarding the bank and performance analysis of financial institution and
review of related studies.

Chapter III: Research Methodology

This chapter describes about the methodology used in the study. This include the
population, sample, sampling procedure, sources of data, data collection technique, data
analysis tools and technique used for data analysis. It also comprises the research design
employed along with the various financial and statistical tools used in the study.

Chapter IV: Results and Discussion

This chapter is the main part of the study. It presents the data and information collected
from primary as well as secondary sources. It comprises of presentation and analysis of
data and major finding. Before analyze, collected data are coded, edited, and tabulated.
The data collected after processing have been presented using figure and result of
statistical analysis are interpreted in this chapter.
Chapter V: Summary and Conclusion

This chapter include summary, conclusion and recommendation which ultimately shows
the judgement analysis through success or failure of the study carried out. And finally
references and appendix have been prepared at the end of the study paper.
 CHAPTER-TWO

REVIEW OF LITERATURE

A literature review is a text of scholar paper which includes the current knowledge
including substantive finding as well as theoretical and methodological contribution to
the particular topic (Mahandar 2017). A comprehensive study of such document and
preparation of summary of such study on a topic is known as literature review. Literature
review are secondary sources and do not report new experimental work.

The process of studying different books, journals, newspapers, published or unpublished

bibliographies is called review of literature. Review of literature is also defined as the
process of studying different educational materials to collect the information about the
selected topic of the research. It is important part of every research. This chapter includes
the conceptual framework, overall information of liquidity and profitability position of
commercial bank of Nepal.

This chapter deals with study of past research studies and relevant materials. It is an
advancement of existing knowledge and in-depth study of subject matter. The main
reason for a full review of research is known as the outcome of those investigation in the
area where similar concept and methodologies had been used successfully. This chapter
provide the information about the study related material which are reviewed during study
period.

2.1 Conceptual Review

Conceptual means know about the theme of subject matter. For this purpose, we have to
review the different books of different writers, journals, articles and related publications.

Liquidity ratio measure the short- term solvency or liquidity of a firm. It measures the
short -term financial strength of a business. They indicatewhether a firm is in the position
to meet its short- term obligations timely or not. Liquidity ratios determine a company’s
ability to cover short term obligation and cash flows, solvency ratio is concerned with a
longer -term ability to pay ongoing debt.
Profitability is the primary goal of all business organization. Without profitability the
business will not survive in the long run. So, measuring the current and past profitability
is very important. Profitability is measure by income and expenses. This study is mainly
based on secondary data and annual report of four selected commercial bank of Nepal
namely Nepal bank limited, NMB bank limited, Nabil bank limited and Kumari bank
limited.

2.2 Review of RelatedStudies

There are plenty of studies available for the analysis on liquidity and profitability position
of commercial bank in Nepal.

2.2.1 Review of Journals and Articles

Liquidity management and profitability in industrial bank are serious issue inside
operation of commercial bank and of which data on them are severally hoarded. Shrestha
(2018) examined liquidity management and profitability of commercial bank in Nepal for
period from (2012-2016). Finding of the study reveals that liquidity does not have its
significant impact on profitability in Nepalese commercial banks- Ally (2014).

Mishra and Pradhan (2019) have used cash deposit ratio (CDR), credit deposit ratio
(CRDR), and investment deposit ratio (IDR) as independent variable to denote the
liquidity management of the bank while Return on Asset (ROA) and Return on Equity
(ROE) have been used as dependent variable for the profitability of the bank. Result
reveals that there is a significant negative effect of CDR and IDR on ROA and found that
there is no significant relationship between banks profitability and liquidity taking all the
variables into consideration taking sample 10 private sector bank for the period from
2013-2017.

Rijal (2019) conducted research to explore impact of liquidity on profitability of

Nepalese commercial banks taking sample of eight commercial bank covering the period
from 2011-2017. The result showed that credit to deposit, assets quality and liquidity
ratio are significant and positive with net interest margin whereas only credit to deposit
ratio is significant and positive to return on assets.
Bourke(9), using the international bank data for the period 1972-1981, observed that the
profitability is positively correlated with both capital and liquidity ratio. In another study,
Rhoades(33) identified the positive relation between risk and profitability for bank from
1969to 1978 in the USA whereas Molyneux and Thornton(26) using data for 1986-1986
in the European banking system, found that the relationship between liquidity and
profitability is negative,

Another study about the liquidity buffer factors over the banks of the United Kingdom
and found the liquidity is very much recurring. The liquidity level compared to the total
assets and deposit is determined by phase of economic growth. Higher GDP growth is
observed with lower- level liquidity in banking system.

Sopan and Dutta(35) explore the determinants of liquidity risk in45 Indian banks over
2005-2016 financial year period by examining the bank specific and macro- economic
factor that affects a bank’s liquidity. The bank specific factor includes the bank size,
profitability, capitalization etc. macroeconomics determinants include GDP and Inflation
rate. The empirical analysis found the bank size, profitability ratio, inflation rate
positively affects the liquidity risk whereas GDP has negative effects.

Business Dictionary com, Profitability is the ability of a firm to generate net income on
consistent basis. It is often measured by price to earning ratio. Review of literature and
theories on determinants of profitability explains that the profitability determinants were
basically divided into two main categories, namely the internal determinants and external
determinants. The internal determinants include management controllable factor such as
liquidity, investment in securities, investment in subsidiaries, loan and overhead
expenditure.

Liquidity of a bank act as the blood of human body that enable a bank to maintain its
operational activities and to survive in the competitive market. Odunga(2013) reveals that
a positive relationship exist between liquidity, capital and operational efficiency. They
explained that the bank should give importance to such activities that improve their
liquidity and capital ratio to enhance operational efficiency
Muya and Gathogo (2016), profitability implies the efficiency of the management in
transforming the firm resources to profit. Tariq etal (2014) stated that profitability
become a key factor for running the business smoothly and has the significant effect on
both performance of bank and economic development in todays competitive world.
Usually, the profitable firms are more efficient because of having their lower costs.

Berger (1995) reveal that highly efficient firm can maximize profit relative to its
competitors by maintaining its current size and pricing strategy or by reducing the price
and expanding its operation. Ahmad (2007) reveals that efficiency level are different
among the various branches of bank. They suggest that bank can reduce employee
expenses and other operating expenses along with an increase in the total loan portfolio
by giving focus on operational improvement efforts.

Fredrick(2012) analyzed the impact of liquidity management on the financial

performance of commercial bank in Kenya. The study has used the CAMEL Model as a
proxy for liquidity management. The author found that the strong impact of CAMEL
(credit risk component) on the financial performance of commercial banks.

Funsoet.al.(2012) examined the effect of credit risk on the performance of commercial

bank in Nigeria over the period of 11 years (2000-2010). Panel model analysis was used
to estimate the determinants of the profit function. The result showed that the effect of
credit risk on the bank performance measured by the Return on Assets of bank is cross-
sectional invariant.

Based on our finding it is recommended that the bank in Nigeria should enhance their
capacity in credit analysis and loan administration while the regulatory authority should
pay more attention to bank’s compliance to relevant provision of the Bank and other
Financial Institutions Act (1999) and prudential guidelines.

Kumar and Yadav (2013) assessed on liquidity risk management in bank that Liquidity is
a bank’s capacity to fund increases in assets and meet both expected and unexpected cash
and collateral obligation at reasonable cost and without incurring unacceptable losses. In
the context of banking, liquidity, or the ability of the fund increases in the assets and meet
the obligation as they come due, is critical to the ongoing viability of the banking
institution.

Effective liquidity risk management helps ensure a bank’s ability to meet its obligation as
they fall due and reduce the profitability of an adverse situation developing. They
examined the sound practices for liquidity risk management in bank. They went along
with the suggestion of the Basel Committee and Reserve Bank of India on management
of liquidity risk. They explained the meaning of liquidity, liquidity risk, and liquidity risk
management.

2.2.2 Review of Books

Brigham E.F and J.F Houston (1985), has published books “Fundamental of
FinancialManagement”. They have described about the analysis on profitability based on
their research study which gives clear picture about the concept regarding the profit in the
financial management. The profit in financial management is assessed in two ways: on
the one hand, the profit shows the company’s performance result, on the other hand, it is
the most important factor in the development of the company. Naturally, the companies
acquire the as a mean to gain profit, and the later, in turn, is the main sources of the
company’s asset increases.

Van Horne James c.(1996)has published the book “Financial Management and Policy”.
They have described the determinants of profitability. To be more specific, bank risk,
bank efficiency, bank diversification and bank size are internal factor while GDP, money
supply growth, inflation and stock market capitalization are the external factors. The
result from the fixed effect estimation shows that bank size, bank risk and expenses
preference behavior are significant. Finally, it is suggested that inflation is significantly
related to bank profitability.

Willison (1988), in his book, “Basic Statistic of Business”. He analyzed the effect of
tangible assets and profitability of bankruptcy on the relationship between capital
structure, leverage and asset liquidity. He predicted that asset liquidity will increase the
optimal leverage, which means he concluded a positive relationship between asset
liquidity and capital structure.
Myers and Rajan(1998) have published “Financial Market and Institution”. “They have
described that the asset liquidity is almost always a plus for non-financial corporations or
individual investors.” However increased liquidity can be a negative point for financial
institutions. Although assets with more liquidity increase the ability of firms to increase
cash on short notice, this also decrease the ability of management to commit reasonably
to an investment and financing strategy which will protect the firm creditors.

Gitman(1988:275)“ Ratio analysis is used to compare a firms financial performance and

status so that of other firms or to itself of over time”. Ratio helps to analyze the financial
statement. When this definition of ratio is explained with reference to the items shown in
the financial statements, then it is called accounting ratio. It is the mathematical
relationship between two related items expressed in quantitative form. The ratio is the
measurement of quantitative relationship between two or more items of financial
statement connected with each other

2.3 Research Gap

Profit is one of the basic indicators of sound financial performance. The sound business
management, credit risk management, cost control and general efficiency of operation
directly affect the liquidity and profitability of the bank because it is essential for a bank
for its survival, growth and maintain capital adequacy through profit retention.

Today’s world is surrounded by rapid change and new development in the market.
Research conducted a few years back may not be adequate to explain the current
phenomena. The purpose of the present research work is quite different from the studies
made by the previous. This study covers the latest financial data related to liquidity and
profitability position of commercial bank of Nepal from 2016/17 to 20120/21.

Under research gap, the gap between past and present situation are followed. This study
covers the more recent financial data, NRB circulars and the guidelines than the
previously conducted studies. The researcher found that mostly the research had done in
the profitability of bank and their impact in the management of profitability position of
commercial bank in the different countries. While the Nepalese banking sector is being
more competitive, on the basis of creation of the credit and liquidity management process
to achieve the high earning. It is difficult to identify which commercial bank have well
financial strength and poor performance.

This research was conducted to understand whether the sample bank have been
successful in maintaining balance. Every year financial performance is changing
according to the environment of the country. Hence this study full-fill the prevailing
research gap about the depth analysis of financial performance of the bank and it has
suggested and recommended the liquidity and profitability position of commercial bank
in Nepal.

The research work will help acquire knowledge regarding tools and technique used and
extra knowledge for the further researcher who is going to study in the concern topic.
Therefore, this study fulfills the confusion and uncertainty about liquidity and
profitability position and financial ratio of the sample commercial bank of Nepal.
 CHAPTER- THREE

RESEARCH METHODOLOGY

Research methodology is a sequential procedure and collection of scientific method to be

adopted in a systematic study. In other words, research methodology describes the
methods and the process applied in the entire of the study. It is the way to systematically
solve the research problem. It may be understood as a science of studying how research is
done scientifically. The research methodology highlights about how the research problem
has been defined, what data have been collected, what particular method has been
adopted and why hypothesis has been formulated etc.

Research methodology depends on the various aspects of the research projects. The size
of the projects, the objectives of the study, importance of the project, time frame of the
project, impact of the project in the aspects of human life are the variables that
determines the research methodology of the particular projects.

Research methodology will follow to achieve the objective of research paper. The
research methodology includes the research design, population and sample, nature and
sources of data, data collection and processing procedure, and data analysis tools and
technique. The research methodology is the way to solve the research problem in order to
make any type of research systematically, which fulfill the objective of the study.

3.1Research Design

Researchdesign is a method of defining the research problem. Research design is the

plan, structure and strategy of investigation conceived to obtained answer to the research
question, study and propound the way for research variability. “Research Design is the
plan, structure, and strategy of investigation conceived so as to obtain the answer of
research question and to control variance. Thus, it means an overall framework or plan
for the collection and the analysis of the data (Kerlinger).

Research design is a framework of the study. It is a blue print for any kind of studies.
Research design is the arrangement of the condition and analysis of data in a manner that
aims to combine relevance to the research purpose with economy in procedure. The
purpose of research design is to provide answer to research question and to control
variance. Some financial and statistical tools will be used to examine the facts and
descriptive technique to evaluate the financial performance of four selected banks and
comparing between themselves. It helps to find out the solution to the problem and draw
the conclusion.

The main step carried out by the student during their field visit is research methodology.
Our creativity leads us to make our identity. Research methodology evaluates the student
best performance. There are two type of research design. They are descriptive and
analytical research design.

Descriptive research is the research design which includes the detail investigation of the
individual or population. It is also the research method that describe the characteristics of
the population or phenomenon studied.it describe the subject of the study. It is also
similar to the experimental research designthe investor does not control any variable. The
qualitative and quantitative method are used under this research.

Analytical research design is defined as the study of only elemental parts or small parts of
research. It focuses on understanding the cause-effect relationship between two variables.
The main purpose of this research is to analyze the available data. Quantitative method is
only used under this method. The researcher has to used the fact or information already
available.

The research design followed for this study is descriptive research design. The data were
collected from the bank annual reports like balance sheets, profit and loss account and
other printed material like published literature, journal, annual reports, articles, internet,
websites of the selected bank. The detail investigation is done to find out the exact data

3.2 Nature and Sources of Data

Mainly the study is conducted on the basis of secondary data. The data relating to income
statement and balance sheet of the commercial bank are collected through the related
website. The supplementary data and information are obtained through the annual report
of the concerned commercial bank. Other sources through which the information
collected are as follows:
  Income statement of concerned bank.
 Balance sheet of concerned bank.
 Website of concerned joint venture bank.

3.3 Classification and Tabulation of Data

The data are classified and arranged in the table with column and rows. They are
classified in the chronological order i.e on the basis of time intervals.

3.4 Population and Sample

Currently there are 27 commercial banks in Nepal. Out of this, the study chooses the four
banks that are Nepal Bank Limited, NMB Bank Limited, Nabil Bank Limited, and
Kumari Bank Limited as a sample. The financial statement of latest five year (i.e2016/17
to 2020/2021) have been taken as the sample data for analyzing the financial
performance.

The data presented in this study is based on secondary data. The annual reports of the
concerned banks are the major sources of the data for the study. The annual reports of the
concerned banks are collected from the concerned banks, especially from the websites.

3.5 Data Collection Procedure

This study is based on the secondary data obtained from some published and unpublished
sources. The data required for the analysis are directly obtained from balance sheet, profit
and loss account of the concerned banks annual reports and other publications.
Supplementary information is collected from the institution and the authorities like NRB
and official sites of the selected banks, ministry of finance and economic surveys.
Likewise, various data and information are collected from the economic journals,
periodicals, bulletins, magazines, websites and other published and non-published report
and documents from the various sources.

3.6 Data Processing Procedure

Firstly, data are extracted from the annual reports of the bank and put them in a sheet.
The data were entered into spreadsheet to work out the financial ratio and prepare the
necessary figures according to the need and requirement of this study. For this purpose,
gathered data have been proceed using computer programs like Microsoft Excel and word
etc.

3.7 Tools and Technique for Data Analysis

On the basis of the historical data, financial and statistical tools are used for the analysis
and interpretation of data.

3.7.1 Financial Tools

Financial tools are those which are used for the analysis and the interpretation of financial
data. These tools are designed to determine the relative strength and weakness of business
operations. It also provides a framework for financial planning and control. Financial
manager needs the information provided by analysis both to evaluate the firm past
performance and match the future plans. In order to meet the purpose of the study,
following financial tools have been used.

3.7.1.1 Ratio Analysis

Ratio analysis is a widely used tool of financial analysis. The systematic use of ratio
helps to interpret the financial statement so that the strength and weakness of a firm can
be determined and assessed. The ratio describes the significant relationship that exist
between the figures shown on the balance sheet and income statement or any part of
financial statement.

Financial ratios are customarily expressed in the form of times, proportion and
percentage. They may also be depicted in the formof graphs. Ratio makes the related
information comparable. It helps to summarize the large quantities of financial and to
make quantitative judgement about the firm financial performance. The ratio calculated
for the study is described separately under following heading.

3.7.1.1.1 Liquidity Ratio

Liquidity ratio are the ratio that shows the relationship of a firmcash and other current
assets to its current liabilities. The purpose of this ratio is to test the solvency position for
the payment of short- term liabilities. Solvency position or liquidity denotes the ability
for payment of short -term liabilities.

Liquidity ratio measures the firm ability to fulfill the short- term commitment out of its
liquid assets. Assets are liquid if they are either cash or relatively easy to convert into
cash. Short term creditors are generally very interested in the liquidity ratio. The current
ratio and quick ratio are most commonly used liquidity ratio. But some time cash ratio is
also used to measure the most liquid condition.

a. Current Ratio

The current ratio measures the extent to which the claim of short- term creditors are
covered by short term assets. This ratio is calculated by dividing current assets by current
liabilities. Current assets are viewed as relatively liquid which means they can generate
the cash in a relatively short time period. The major current assets are cash, marketable
securities, sundry debtors, bills receivable and inventory. Current liabilities are debt that
will come due with in a year. The major current liabilities are bank overdraft, sundry
creditors, bills payable and outstanding expenses. It can be calculated as:

Current ratio =Current Assets/Current Liabilities

Interpretation

Current ratio of 2:1 is considered satisfactory. If the current ratio of the firm is less the
2:1 the solvency position of the firm is not good. The cash may not be available to pay
current liabilities. If the ratio of the firm is under financial standard, the firm liquidity
position measured as better. Higher the ratio of the firm measured the higher liquidity i.e
the firm has excessive investment in current assets that do not produce a return. So more
than financial standard is poor utilization of assets.

b. Quick Ratio

Quick ratio is also known as Acid test ratio or liquid ratio. Quick ratio established a
relationship between quick assets and current liabilities. The purpose of this ratio is to
test the ability of the firm for immediate payment of current liabilities. The ratio
calculated by deducting the inventories from current assets and dividing the remainder by
current liabilities. Inventories are excluded because it may be difficult to liquidate (less
liquid) them at their full book value. It can be calculated as:

Quick ratio = Quick Assets/Current Liabilities

Interpretation

Generally quick ratio of 1:1 is considered satisfactory as a firm can easily meet current
liabilities. More or less than standard ratio is not favorable for a company.

c. Cash Ratio

Cash ratio is calculated by dividing most liquid assets by current liabilities. This ratio is
found out the ability of the banks to pay total cash made on current deposit. Cash and
bank balance is highly liquid assets. Higher ratio indicates the bank sound ability to meet
its demand for daily cash requirement to customer’s deposit. It can be calculated as:

Cash Ratio= Cash +Marketable Securities/Current Liabilities

Interpretation

A low cash ratio may not be matter if the firm can borrow on short notice. But if the cash
ratio is 2 times then cash equivalent is sufficient to pay current liabilities.

3.7.1.1.2 Profitability Ratio

Profitability ratio measures overall organization performance. It measures the success of

the firm in the earning, net return on sales or on investment. Since the profit is the
ultimate objective of the firm, poor performance here indicates the basic failure that is not
corrected and would probably result in firms going out of business. It shows the
combined effect of liquidity, assets management and debt management on operating
result. It measures the earning of the company for a certain period to meet the objective
of the study. The following ratio are calculated under this ratio.

a. Return on Total Assets

The ratio is measuring the profitability of funds invested in the bank assets. In other word
it measures the efficiency of the bank in utilization of the overall assets. High ratio
indicates the success of management in overall working fund i.e total assets. It is also
called net profit or loss to working fund i.e total asset ratio or simply called Return on
Assets (ROA). The firm has to earn satisfactory return on assets or working fund
otherwise its survival is threatened. It measures the return on all the firm assets after
interest and taxes. It can be calculated as:

Return on Total Assets (ROA)= Net Income/Total Assets

Interpretation

Net profit refers to the profit after deduction of the interest and tax (NPAT). Total assets
mean the assets that appears in the assets side of balance sheet. Increasing ratio is
favorable

b. Return on Common Equity/Shareholder Equity (ROE)

It is the ratio of net income to common equity. It measures the rate of return on common
stockholder investment. Management objectives is to generate the maximum return on
shareholder’s investment in the firm. It is therefore the best single measure of the
company’s success in fulfilling its goal. It can be calculated as:

Return on Equity (ROE)= Net Income/ Total Equity

Total Equity =Common Equity+ Shareholders Equity

=Common Stock + Share Premium (Additional Paid in Capital) + General

Reserve (Retained Earning)

Interpretation:

Increasing ratio is favorable for a company which shows that the net profit is increasing.

c. Dividend Per Share (DPS)

The whole amount of earning may or may not be distributed to shareholders by a

company. How much per share the dividend is distributed to common shareholder by a
company can be known from this ratio. The amount of earning distributed and paid as
cash dividend is considered as dividend per share. Higher the DPS shows the efficiency
of management and vice versa.

Dividend implies that the portion of net profit, which is allocated to shareholders return
either investment on cash. It is the net profit after tax belong to shareholders. It can be
calculated as:

DPS=Dividend Paid to Equity Shareholders/Number of Equity Shares

Interpretation:

The dividend per share is considered excellent which it is higher. A large number of
present and potential investors may be interested in DPS rather than EPS.

d. Earning Per Share (EPS)

The earning per share (EPS) after income tax is one of the most important determinants
of a common stock’s value because it measures the earning power under each share of
stock. The income per common share is known as earning per share

This ratio indicates how well the firm utilizes the resources of owners. In facts, this ratio
of great interest to present as well as prospective shareholder is also of great concern to
the management which has the responsibility of maximizing the owner welfare. It can be
calculated as:

EPS= Net Profit After Tax -Preference Dividend/ Number of Common Shares

Interpretation:

Higher earning per share is preferable and vice versa.

e. Return on Investment (ROI)

Return on investment measure the company’s return from investment or the capacity to
generate profit from investment. The ratio is considered to know the investment generates
income from investment. The high ratio is considered as good performance of the
company. The ratio is calculated as:

ROI=Net Income/Investment
Interpretation:

Higher return on investment is better for a company.

f. Return on Fixed Assets (ROFA)

The fixed assets include assets after deducting depreciation, sales and adding of capital
construction expenses. The ROFA measures the efficiency with which the firm has been
using its fixed assets to generate profit and the effectiveness of net fixed assets employed
in the bank. The higher return on fixed assets denotes the net fixed assets. It can be
calculated as:

ROFA= Net Profit After Tax/ Net Fixed Asset

3.7.2 Statistical Tools

Various statistical tools can be used to analyze the liquidity and profitability position of
commercial bank in Nepal. These tools are used in order to draw the reliable conclusion
through the analysis of financial data. The following tools are used for this purpose.

i) Mean
Arithmetic mean of a given set of observations is their sum divided by the number of
observations. In general, if X 1, X2.........Xn are the given N observations, then their arithmetic

mean, denoted by X is given by,

X=
x 1 + x 2 + .. .. .+ x n
=
∑x
N N
Where,

∑ X = Sum of the observations, and

N = Number of Years
ii) Standard Deviation
Standard deviation is the square root of the sum of the squares of the deviations measured from
the mean. Thus, in the calculation of standard deviation, first the arithmetic average is calculated
and the deviation of various items from the arithmetic average are squared. The squared
deviations are totaled and the sum is divided by the number of items. The square root of the
resulting figure is the standard deviation of the series (Elhance& Agarwal, 2000). The Greek
letter sigma conventionally represents the standard deviation. If X1, X2… Xn is a set of N
observations then, standard deviation is given by,

σ=
√ ∑ ( X− X )2
N
∑ (X- X )= Sum of the squares of the deviations measured from mean N = Number of
Observations.

iii) Coefficient of Variation (C.V.)

Coefficient of variation is computed for comparing the variability of two distributions. A
distribution with smaller C.V. is said to be more homogeneous or uniform or less variable than-
the other, and the series with greater C.V. is said to be more heterogeneous or more variable than
the other. It is computed as under.
σ
C .V . = ×100%
X

iv) Coefficient of Correlation

The correlation is a statistical tool which studies the relationship between two variables and
correlation analysis involves methods and techniques used for studying and measuring the extent
of the relationship between the two variables. Correlation analysis enables to have an idea about
the degree and direction of the relationship between the two variables under study. However, it
fails to reflect upon the cause and effect relationship between the variables. The coefficient of
correlation, denoted by r is computed as under:

N ∑ XY −∑ X . ∑ Y
r=
√ N ∑ X 2−( ∑ X )2 √ N ∑ Y 2−(∑ Y )2
v) Regression Analysis
The literal or dictionary meaning of the regression is moving backward or going back or
the return to the average value. Regression analysis is the technique of studying how the
variations on one series are related to variation in another series. It determines the nature
and strength of relationship between two variables. Thus, regression is the estimation of
unknown values or prediction of one variable from known values of other variables.

The Regression Model,

ROAit =α0 + α1DPSit+ α2EPSit + α3ROI it + α4ROFit + εit
 ROEit = 0 + α1DPSit+ α2EPSit + α3ROI it + α4ROFit + εit

CHAPTER- FOUR

RESULTS AND DISCUSSION

In this chapter the analysis part is presented in detail. Raw form of data of NBL, NMB,
NABIL, and Kumari bank which were collected from various sources are changed to an
understandable presentation using tools in the previous chapter [ Research Methodology].
This is the heart of research report in which an organized presentation of result of NBL,
NMB, NABIL and Kumari bank and each major division of the problem is presented in a
separate chapter. Generally, collected secondary data have been analyzed and presented
in table and figures including discussion of the issue or parts of the problem investigated
and evidence use in its solution.

The main objective of this study is to examine, analyze and interpret the financial
position of four selected bank with the help of various accounting financial and statistical
tools. All the interpretation, summary and recommendation have been arrived and based
on this chapter. The collected relevant data and information have been analyzed and
presented systematically using financial and statistical tools to interpret data and make
conclusion in required forms and formats.

4.1Liquidity Ratio

Liquidity ration are an important class of financial metrics used to determine a debtor’s
ability to pay off current debt obligations without raising external capital. Liquidity ratio
measures a company’s ability to pay debt obligation and its margin of safety through the
calculation of metrics including current ratio, quick ratio, and operating cash flow ratio. It
determines a company’s ability to cover short term obligations and cash flows while
solvency ratios are concerned with a longer-term ability to pay ongoing debts.

4.1.1 Current Ratio

The current ratio is a liquidity ratio that is used to calculate a company’s ability to meet
its short- term debt and obligation. It is also known as working capital ratio. A current
ratio less then one is an indicator that the company may not be able to serve its short-term
debt. On the other hand, a current ratio greater than one can also be sign that the company
has too much unsold inventory or cash on hand.

Current ratio= Current assets /Current liabilities

Current assets include cash, bank balance, marketable securities, short term investment,
accured incomes etc and those assets can be converted int cash within a year.

Current liabilities are those liabilities which are to be discharged normally with in one
accounting year are called current liabilities such as bills payable, account payable,
sundry creditors, bank overdraft, outstanding expenses etc.

Table 4.1.1

Current ratio (in times)

Year NBL NMB NABIL Kumari

2073/74 3.28 3.19 2.69 2.26
2074/75 2.69 5.75 2.54 3.26
2075/76 2.54 2.236 2.37 2.16
2076/77 2.13 3.28 2.20
2.98
2077/78 2.22 2.26 2.29 2.10
Mean 2.738 3.113 2.634 2.396
Standard 0.39 1.37 0.35 0.44
Deviation
CV 14.24 44 13.29 18.36
Source: Annual Report of NBL, NMB, NABIL, KUMARI Bank (2073/74 to 2077/78)
 50
45
40
35
30
25
20 NBL
15 NMB
10 NABIL
5 Kumari
0
/7
4
/7
5
/7
6
/7
7
/7
8
ea
n
tion CV
3 4 5 6 7 m a
7 7 7 7 7 vi
20 20 20 20 20 De
r d
nda
a
St

The above table 4.1.1 shows the current ratio of Nepal bank limited from 2073/74 to
2077/78. Normally current ratio of 2:1 is considered as satisfactory. Hence the current
ratio of NBL is more than 2 the firm is adequately liquid and shows the ability to meet its
current obligation. But it is in decreasing trend in comparing to 2073/74. A very high
current ratio does not indicate inadequate current assets to meet current liabilities. Hence,
the current ratio of NBL is satisfactory in all five years. The highest ratio is 3.28 in
2073/74 and the lowest ratio is 2.22 in 2077/78. The mean, standard deviation and CV of
NBL are 2.738, 0.39 and 14.24% respectively. The CV shows the ratio are satisfactory.

Similarly, the NMB bank highest current ratio is 5.75 in 2074/75 and lowest current ratio
is 2.13 in 2076/77. The current ratio of NMB bank in all five years meet its short -term
obligation. The current ratio of NMB bank is in increasing trend in 2074/75 but it is in
decreasing trend from 2075/76 to 2077/78. The current ratio of NMB bank in all five
years is above the standard mentioned by NRB. The mean, standard deviation and CV are
3.113, 1.37 and 44% respectively.

The current ratio of NABIL bank is decreasing in 1 st three years from 2073/74 to
2075/76. But it is in increasing trend in 2076/77 and in decreasing in 2077/78. The
highest current ratio of NABIL bank is 3.2times in 2076/77 and lowest ratio is 2.29 times
in 2077/78. But all the current ratio of NABIL bank can meet its short -term
obligationbecause it is above the standard mentioned by NRB i.e 2:1. The mean, standard
deviation and CV is 2.634, 0.35 and 13.29% respectively.

Similarly,the current ratio of KUMARI bank is slightly lower in comparing to other

banks. The highest ratio of Kumari bank is 3.26 times in year 2074/75 and lowest ratio is
2.10 times in year2077/78. The current ratio of Kumari bank is also above the standard
mentioned by NRB and meet its short- term obligation. The mean, standard deviation and
CV of Kumari bank is 2.396, 0.44 and 18.36% respectively.

4.1.2 Quick Ratio

The quick ratio is an indicator of company’s short-term liquidity position and measures a
company’s ability to meet its short- term obligation with its most liquid assets. Since it
indicates the company’s ability to instantly use its near- cash asset (asset that can be
converted quickly to cash) to pay down its current liabilities. The quick ratio measures a
company’s capacity to pay its current liabilities without needing to sell its inventory or
obtain additional financing.

Quick Ratio=Quick Assets/ Current Liabilities

Table4.1.2

Quick ratio (in times)

Year NBL NMB NABIL KUMARI

2073/74 2.22 1.06 1.32 1.26
2074/75 2.16 1.05 1.64 1.20
2075/76 1.90 1.20 1.96 1.03
2076/77 1.11 1.06 1.99 1.56
2077/78 1.29 1.9 1.74 1.60
Mean 1.736 1.254 1.73 1.33
Standard 0.46 0.39 0.25 0.22
Deviation
CV 26.49 31.10 14.44 16.54
Sources: Annual Report of NBL, NMB NABIL KUMARI bank (2073/74 to 2077/78)
 35
30
25
20
15 NBL
10 NMB
NABIL
5 KUMARI
0
/7
4
/7
5
/7
6
/7
7
/7
8
ea
n on CV
3 4 5 6 7 m iati
07 07 07 07 07 v
2 2 2 2 2 De
rd
nda
a
St

From the above table 4.1.2 the quick ratio of NBL is in decreasing trend. The ratio of
NBL is above the standard mentioned by NRB. The highest quick ratio of NBL is
2.22times in FY 2073/74 and the lowest ratio is 1.11times in FY2076/77. The quick ratio
of NBL shows that the liquid assets is available for meeting short-term obligation of Re1
which can be taken as satisfactory. The mean, SD and CV of NBL is 10736, 0.46 and
26.49% respectively.

Similarly, the quick ratio of NMB bank is lowered as compared to NBL but it is also
above the standard mentioned by NRB. The ratio is in decreasing trend as compared to
NBL. The highest quick ratio is 1.90 times in FY2077/78 and lowest ratio is 1.05 times in
FY2074/75. The mean SD and CV of NMB bank is 10254, 0.39 and 31.10% respectively.

The quick ratio of NABIL bank is slightly higher than NMB bank limited and lowered
than NBL. The highest quick ratio is 1.99times in FY2076/77 and lowest ratio is 1.32
times in FY2073/74. The ratio is above the standard and the liquid assets is available for
meeting the short -term obligation. The mean, SD and CV of NABIL bank is 1.73, 0.25
and 14.44% respectively.

Again, the quick ratio of KUMARI bank is above the standard and the liquid assets is
available for meeting its short -term obligation and taken as satisfactory. The highest
quick ratio of KUMARI bank is 1.60times in FY2077/78 and lowest is 1.03 times in
FY2075/76. The mean SD, and CV of Kumari bank Quick ratio is 1.33,0.22 and 16.54%
respectively.

4.1.3 Cash ratio

The cash ratio is the liquidity measure that shows the company’s ability to cover its short-
term obligation using only cash and cash equivalents. The cash ratio is derived by adding
a company’s total reserve of cash and near cash securities and dividing that sum by its
total current liabilities. The cash ratio is more conservative than other liquidity ratios
because it only considers a company’s most liquid resources. A calculation greater than 1
means company has more cash on hand than current debts, while a calculation less than1
means a company has more short -term debt than cash.

Cash Ratio=Cash +Marketable Securities/Current Liabilities

Table 4.1.3

Cash ratio (in times)

Year NBL NMB NABIL KUMARI

2073/74 1.20 0.17 1.01 1.06
2074/75 1.26 1.04 1.10 1.25
2075/76 1.33 1.02 1.06 0.63
2076/77 1.08 1.03 1.25 0.70
2077/78 1.05 1.25 1.45 0.56
Mean 1.184 0.902 1.174 0.844
Standard 0.11 0.37 0.15 0.25
deviation
CV 9.29 41.02 12.78 29.62
Sources: Annual Report of NBL, NMB, NABIL AND KUMARI bank (2073/74
to2077/78)
 45
40
35
30
25
20 NBL
15 NMB
10 NABIL
5 KUMARI
0
/7
4
/7
5
/7
6
/7
7
/7
8
ea
n on CV
3 4 5 6 7 m iati
2 07 2 07 2 07 2 07 2 07 de
v
d
dar
an
St

The above table4.1.3 shows the cash ratio of NBL, NMB, NABIL, KUMARI bank. The
cash ratio of NBL is fluctuating. The highest cash ratio of NBL is 1.33 times in
FY2075/76 and lowest cash ratio is 1.05 times in FY 2077/78. The overall average for the
five-year period is 1.184. The SD and CV of NBL is 0.11 and 9.29% respectively. So the
cash equivalent is sufficient to pay current liabilities.

Similarly, the cash ratio of NMB bank is in increasing trend as compared to NBL. The
highest cash ratio of NMB bank is 1.25 times in FY2077/78 and the lowest ratio is 0.17
in FY2073/74. The cash equivalent of NMB bank in FY 2073/74 is not satisfactory as it
is not above the standard. The mean, SD and CV of cash ratio is 0.902,0.37 and 41.02%
respectively.

The cash ratio of NABIL bank is satisfactory as compared to NBL and NMB bank. The
ratio is above the standard in all five year. The highest cash ratio of NABIL bank is 1.45
times in FY2077/78 the lowest ratio is 1.01 in FY 2073/74. The mean SD and CV of cash
ratio is 1.174, 0.15 and 12.78% respectively.

Similarly the cash ratio of KUMARI bank is in decreasing trend as compared to NBL,
MNB and NABIL bank. The cash ratio of KUMARI bank is satisfactory in FY2073/74
and 2074/75. The cash ratio of Kumari bank is not satisfactory in FY 2075/76 to 2077/78.
The highest cash ratio is 1.25 in FY 2074/75 and lowest ratio is 0.56 in FY2077/78. The
mean SD and CV of KUMARI bank is 0.844, 0.25 and 29.62% respectively.
4.2 Profitability Ratio

Profitability is the process of identifying strength and weaknesses of the firm by properly
establishing the relationship between the items of balance sheet and profit and loss
account. It indicates the public acceptance of the product and shows that the firm can
produce competitively. Profitability is the net result of the number of policies and
decisions.

Profit is the difference between revenue and expenses over the period of time. Profit is
the ultimate output of the company and it will have no future if it fails to make sufficient
profit. Therefore, the financial manager should continuously evaluate the efficiency of
the company in terms of profit. Profitability position of the bank is measure by the
profitability ratio. Beside management of the company creditors and owners are also
interested in the profitability of the firms.

4.2.1 Return on Total Assets (ROA)

Return on total assets measures the profitability of the firm that explains firms to earns
satisfactory return and financial invested assets otherwise its survival is threatened. It is
an indication of how profitable a company is relative to its assets. ROA gives an idea as
to how efficient management is at using its assets to generate earnings.

ROA is displayed as percentages. The ratio explains net income for each unit of assets.
Higher the ratio means efficiency in utilizing its overall resources and vice versa. It is
computed as follows.

Return on Asset= Net Profit After Tax/Total Asset

Table 4.2.1

Return on Total Assets (in %)

Year NBL NMB NABIL KUMARI

2073/74 2.78 1.82 2.57 1.29
2074/75 2.41 1.80 2.47 1.26
2075/76 1.51 1.83 2.11 1.17
2076/77 1.22 1.09 1.58 0.78
2077/78 1.33 1.32 1.71 1.04
Mean 1.85 1.572 2.088 1.108
SD 0.63 0.32 0.39 0.39
CV 34.05 20.36 18.68 35.20
Sources: Annual Report of NBL, NMB, NABIL, and KUMARI bank (2073/74 to
2077/78)

40

35

30

25

20 NBL
NMB
15 NABIL
10 KUMARI

0
/7
4
/7
5
/7
6
/7
7
/7
8
ea
n SD CV
3 4 5 6 7 m
2 07 2 07 2 07 2 07 2 07

The above table shows that the ROA of NBL is in decreasing trend. The highest ROA of
NBL is 2.78% in FY 2073/74 and the lowest ROA is 1.22% in FY 2076/77. The average
ratio of NBL is 1.85%. As the ratio is decreasing it is not favorable for the bank and
financial institutions. The SD and CV of NBL is 0.63 and 34.05% respectively.

Similarlythe ROA of NMB bank is slightly decreasing as compared to NBL. The highest
ROA of NMB bank is 1.83% in FY2075/76 and the lowest ROA IS 1.09% in FY2076/77.
The ROA of NMB bank is favorable in comparison to NBL because the change in the
percentage of NMB is positive. The average ratio of NMB bank is 1.572%. The SD and
CV of NMB is 0.32 and 20.36% respectively.

The ROA of NABIL bank is slightly decreasing in every year. The highest ROA of
NABIL bank is 2.57% in FY 2073/74 and the lowest ROA is 1.58% in FY2076/77. The
ROA of NABIL bank is favorable from FY2073/74 to FY 2075/76 and the ROA of Nabil
is unfavorable in FY 2076/77 and 2077/78. The average ratio of NABIL bank is 2.088%.
The SD and CV of NABIL bank is 0.39 and 18.68% respectively.

Again the ROA of KUMARI bank is not favorable in comparison to NBL, NMB and
NABIL bank.The highest ratio of Kumari bank is 1.29% in FY 2073/74 and the lowest
ratio is 0.78%in FY2076/77. The average ROA of Kumari bank is lowered in comparison
to others selected bank. As the ROA is decreasing it is unfavorable for the BFIS. The
average, SD and CV of KUMARI bank is 1.108,0.39 and 35.20% respectively.

4.2.2 Return on Equity (ROE)

Return on shareholder’s equity is the ratio that is calculated by dividing the net income
after tax by shareholders Equity or common Equity. ROE is also defined as the amount of
net income returned as the percentage of shareholders equity.

It measures rate of return on common stockholder investment. The ratio of profitability of

profitability can be measured by dividing NPAT by shareholders equity. Higher the ratio
higher will be the investment. ROE is calculated as follows

Return on Equity=NPAT/Total equity*100

Table 4.2.2

Return on Equity (in %)

Year NBL NMB NABIL KUMARI

2073/74 9.26 16.49 22.41 11.32
2074/75 13.12 13.54 20.94 13.20
2075/76 7.77 13.32 17.76 10.50
2076/77 8.86 8.94 13.61 6.70
2077/78 8.89 12.08 15.19 12.26
Mean 9.58 12.87 17.98 10.80
SD 1.87 2.46 3.34 2.22
CV 19.52 19.11 18.58 20.56
Source: Annual Report of NBL, NMB NABIL and KUMARI bank (2073/74 and
2077/78)

25

20

15
NBL
NMB
10
NABIL
KUMARI
5

0
/7
4
/7
5
/7
6
/7
7
/7
8
ea
n SD CV
3 4 5 6 7 m
2 07 2 07 2 07 2 07 2 07

The above table shows that the ratio of ROE of NBL is fluctuating because in some year
it is in increasing trend and in some year it is in decreasing trend.it is satisfactory only in
FY2074/75. The highest ROE of NBL is 13.12% in FY2074/75 and lowest ROE is7.77%
in FY 2075/76. The average ratio of NBL is 9.58%. The standard deviation and CV of
NBL is 1.87 and 19.52% respectively.
Similarly the Return on equity of NMB bank is also fluctuating because in some year it is
in increasing trend and in some year it is in decreasing trend. The highest ROE of NMB
bank is 16.49%in FY2073/74 and the lowest ROE is 8.94% in FY 2076/77. The average
ratio of NMB bank is 12.87% and it highest in comparison to NBL. The SD and CV of
NMB is 2.46 and 19.11% respectively.

Again the ratio of NABIL bank is highest in all five year period as compared to NBL and
NMB banks. The highest ROE of Nabil bank is 22.41% in FY 2073/74 which is
favorable for the company and the lowest ROE of NABIL bank is13.615 in FY2076/77
which is unfavorable for the company. The average, SD and CV of NABIL bank is 17.98,
3.34 and 18.58% respectively.

The ratio of KUMARI bank is fluctuating. In FY 2073/74 ROE is 11.32% and it is

increasing and reaches to 13.10% in FY 2074/75.Then slightly decreasing and reaches to
10.50% in FY 2075/76. In FY 2075/76 the ROE is 6.70% which is not favorable for the
company. The ROE is increasing and reaches to 12.26% in FY 2077/78. The mean SD
and CV of KUMARI bank is 10.80%, 2.22 and 2.56% respectively.

4.2.3 Dividend Per Share (DPS)

Dividend per share refers to the amount of dividend paid to each share-holder. Dividend
is given to share-holders when the organization earn appropriate amount of profit. It also
measures a profit earning capacity of the organizations. DPS is all the dividend that a
company has paid out for each of its outstanding shares during a certain period of time.
The position of DPS bonus share has been presented in the following table

Dividend Per Share=Dividend Paid to Equity Shareholders/Number of Equity Shares

Table 4.2.3
Dividend Per Share (inRs)

Year NBL NMB NABIL Kumari

2073/74 - 15.79 48 12.75

2074/75 10 30 34 8.50

2075/76 15 35 34 10.00

2076/77 12 16.20 35.26 10.85

2077/78 14 15.8 38 6

Mean 10.2 22.56 37.85 9.62

Standard 5.38 8.27 5.29 2.27

deviation
CV 52.74 36.66 13.98 23.60

Sources: Annual Report of NBL, NMB, NABIL and KUMARI bank (2073/74to 2077/78)

60

50

40

30
NBL
20 NMB
NABIL
10 Kumari
0
4 5 6 7 8 n on CV
/7 /7 /7 /7 /7 ea
7 3 7 4 7 5 7 6 7 7 M iv ati
20 20 20 20 20 de
d
dar
an
St

The above table shows that the dividend per share of NBL is fluctuating. There is no DPS
of NBL in FY 2073/74. In FY 2074/75 the DPS is RS 10 and reaches to RS 15 in FY
2075/76. Then slightly decreases in FY 2076/77 and reaches to RS 12. The DPS in FY
2077/78 is RS 14. The highest DPS of NBL is Rs 15 and the lowest DPS is Rs10. The
average DPSof NBL IS Rs 10.2. Decreasing ratio indicates the inefficient utilization of
assets. The SD and CV of NBL is 5.38 and 52.74% respectively.

Similarly the DPS of NMB bank is in increasing trend for past three years from 2073/74
to 2075/76 and in increasing trend for current two years i.e 2076/77to 2077/78. The
highest DPS of NMB bank is Rs35 in FY 2075/76 and the lowest DPS is Rs 15.79 in FY
2073/74. The DPS of NMB bank is highest as compared to NBL. The mean, SD and CV
of NMB bank is RS 22.56, 8.27 and 36.66% respectively.

Again the DPS of NABIL bank is in increasing trend as compared to NBL and NMB
bank. The highest DPS of NABIL bank is Rs48 in FY 2073/74 and the lowest DPS is Rs
34 in FY2074/75 and 2075/76. The average DPS of NABIL bank is Rs37.85. Decreasing
ratio indicates the inefficient utilization of assets. The SD and CV of NABIL bank is 5.29
and 23.98% respectively.

Similarly the DPS of KUMARI bank is lowered as compared to NBL, NMB, and NABIL
bank. Decreasing ratio indicates the inefficient utilization of assets. The highest DPS of
KUMARI bank is Rs12.75 in FY 2073/74 and the lowest DPS is Rs 6 in FY 2077/78.
The average DPS of KUMARI bank is Rs9.62 and is lowest as compared to other bank.
The SD and CV of KUMARI bank is 2.27 and 23.60% respectively.

4.2.4 Earning Per Share (EPS)

It is the ratio of net profit after tax to number of Equity share. EPS indicates how much
money company makes for each share of its stock. The profitability of the firm from the
part of view of ordinary shareholders is earning per share. The ratio explains the net
income for each unit of share. EPS of the firm gives the strength of the share in the
market. It is computed as follows.

Earning Per Share=Net Profit After Tax -Preference Dividend/Number of Common

Shares
Table 4.2.4

Earning Per Share (in Rs)

Year NBL NMB NABIL KUMARI

2073/74 38.77 22.24 59.86 13.29
2074/75 39.98 21.86 51.84 14.54
2075/76 26.99 18.79 50.57 14.81
2076/77 20.68 11.18 36.16 12.08
2077/78 23.43 16.66 33.57 14.20
Mean 29.97 18.15 46.4 13.78
Standard 7.94 4.02 9.93 1.05
Deviation
CV 26.49 22.15 21.40 7.62
Sources: Annual Report of NBL, NMB, NABIL and KUMARI bank (2073/74 to
2077/78)

70
60
50
40
30 NBL
20 NMB
NABIL
10 KUMARI
0
/7
4
/7
5
/7
6
/7
7
/7
8
ea
n on CV
3 4 5 6 7 m iv ati
07 07 07 07 07
2 2 2 2 2 De
rd
nda
a
St

The above table shows the EPS of NBL over five years period. In this table EPS of NBL
is fluctuating. The EPS of NBL is Rs 38.77 in FY 2073/74 and it reaches to Rs39.98 in
FY 2074/75. The EPS of NBL is decreasing and reaches to Rs 26.99 and Rs 20.68 in FY
2075/76 to 2076/77. The EPS of NBL in FY 2077/78 is Rs23.43. The mean SD and CV
of NBL is Rs 29.97, 7.94 and 26.49% respectively.
Similarly the EPS of NMB bank is decreasing trend as compared to NBL. The highest
EPS of NMB is Rs22.24 in FY 2073/74 and the lowest EPS is Rs11.18 in FY 2076/77.
The EPS of NMB bank is satisfactory in FY2073/74. The average EPS of NMB is not
satisfactory as compared to NBL. The SD and CV of NMB bank is 4.02 and 22.15%
respectively.

The EPS of NABIL bank is gradually decreasing in all five years. The highest EPS of
NABIL bank is Rs 59.86 in FY 2073/74 and the lowest EPS is Rs33.57 in FY2077/78.
The EPS of NABIL bank is satisfactory as compared to NBL and NMB bank. The Mean,
SD and CV of NABIL bank is Rs 46.4, 9.93 and 21.40% respectively.

Again the EPS of KUMARI bank is not satisfactory as compared to other bank (NBL,
NMB and NABIL). The highest EPS of KUMARI bank is Rs14.81 in FY2075/76 and the
lowest EPS of KUMARI bank is Rs12.08 in FY 2076/77. The average EPS of KUMARI
bank is Rs 13.78. The standard deviation and CV of KUMARI bank is 1.05 and 7.62%
respectively.

4.2.5 Return on Investment (ROI)

Return on investment is defined as the ratio that are to evaluate the efficiency of an
investment. In other words, it is also defined as the fund supply creditors and owner of
the firm. It tries to measure the amount of return on particular investment relate to
investment cost.

Return on Investment=Net Income/Investment

Table4.2.5

Return on Investment (in %)

Year NBL NMB NABIL Kumari
2073/74 23.24 16.73 10.29 8.03
2074/75 26.32 28.32 13.89 9.02
2075/76 22.63 26.72 11.60 12.99
2076/77 22.92 23.59 12.36 8.80
2077/78 22.67 30.82 10.26 11.30
Mean 23.56 25.24 11.68 10.03
Standard 1.33 4.84 1.36 1.83
Deviation
CV 5.65 19.18 11.64 18.25
Source: Annual Report of NBL, NMB,NABIL and KUMARI bank(2073/74 to 2077/78)

35
30
25
20
15 NBL
10 NMB
NABIL
5 Kumari
0
/7
4
/7
5
/7
6
/7
7
/7
8
ea
n on CV
7 3 7 4 7 5 7 6 7 7 M iv ati
20 20 20 20 20 De
d
dar
an
St

The above table shows that the ratio of NBL in 2073/74 is 23.24. In year 2074/75 it has
increased up to 26.32. In year 2075/76, 2076/77 and 2077/78 it has decreased and
reached to 22.63, 22.92 and 22.67 respectively. The highest ratio is 26.32% in year
2074/75 and lowest ratio is 22.63 in year 2075/76. The average ratio is 23.56%. A high
ROI means the investment gain compare favorably to its cost. The standard deviation and
CV of NBL is 1.33 and 5.65% respectively.
Similarly, the ROI of NMB bank is also fluctuating. The ROI of NMB bank is 16.73% in
FY 2073/74. The ROI is increases and reaches to 28.32% in FY 2074/75. Then slightly
decreases in FY 2075/76 by 26.72% and 23.59% in FY 2076/77. And then ROI of NMB
bank is increases to 30.82% in FY 2077/78. The average ROI of NMB bank is 25.24%.
The SD and CV is 04.84 and 19.18% respectively. The highest ROI of NMB bank is
30.82% which indicates that investment gain compares favorably to its cost. The higher
the ratio the more efficient is the use of capital employed.

Again, the ROI of NABIL bank is lower as compare to NBL and NMB bank. The highest
ROI of NABIL bank is 13.89% in FY 2074/75 and the lowest ROI is 10.26% in FY
2077/78. It indicates that there is no efficient use of capital employed. The average ROI
NABIL bank is 11.68%. The standard deviation and CV of NABIL bank is 1.36 and
11.64% respectively.

The ROI of Kumari bank in FY 2073/74 is 8.03%. Then slightly increase in FY 2074/75
and 2075/76 by 9.02% and 12.99% respectively. The ROI of Kumari bank decreases FY
2076/77 and reaches to 8.80%. In FY 2077/78 ROI of Kumari bank is 11.30%. The
highest ROI of Kumari bank is 12.99% and the lowest ROI is 8.03%. The mean, standard
deviation and CV of Kumari bank is 10.03%, 1.83 and 18.25% respectively.

4.2.6. Return on Fixed Assets (ROFA)

Return on fixed assets measure calculates return on long term assets (e.g., property, plant
or equipment) not purchased or sold in the normal course of business but instead used by
the company to generate revenue. It is the part of a set of process efficiency measure that
help company to optimize their “perform fixed-assets accounting” process by minimizing
waste and refining resources consumption. It can be calculated as follow:

Return on Fixed Assets=Net Profit After Tax/Net Fixed Asset

Table 4.2.6
Return on Fixed Assets (in Times)

Year NBL NMB NABIL Kumari

2073/74 0.121 1.08 4.34 3.26
2074/75 0.221 1.06 3.83 3.02
2075/76 0.219 1.02 3.88 1.85
2076/77 0.194 1.05 3.12 1.25
2077/78 0.24 1.70 4.20 2.78
Mean 0.20 1.182 3.87 2.43
Standard 0.04 0.24 0.46 0.77
Deviation
CV 20% 20.30% 11.89% 31.68%
Sources: Annual Report of NBL, NMB, NABIL and Kumari bank (2073/74 to 2077/78)

5
4.5
4
3.5
3
2.5
2 NBL
1.5 NMB
1 NABIL
0.5 Kumari
0
4 5 6 7 8 n
3 /7 4 /7 5 /7 6 /7 7 /7 ea tion CV
7 7 7 7 7 M via
20 20 20 20 20 De
d
dar
an
St

The above table shows that ROFA of NBL id fluctuating. In FY 2073/74 ROFA of NBL
is 0.121 times. It is increasing in FY 2074/75 i.e.0.221 times. The ROFA of NBL slightly
decreases in FY 2075/76 i.e. 0.219 times. The highest ROFA of NBL is 0.221 times and
the lowest ROFA is 0.194 times in FY 2076/77. The average ROFA of NBL is 0.20
times. The Standard Deviation and CV of NBL is 0.04 and 20% respectively.

Similarly, the ROFA of NMB bank is higher than NBL. The highest ROFA of NMB
bank is 1.70 in FY 2077/78 and thew lowest ROFA is 1.02 times in FY 2075/76. The
ROFA of NMB bank is satisfactory as compared to NBL. The average ROFA of NMB
bank is1.18 times. The standard deviation and CV of NMB bank is 0.24 and 20.30%
respectively.

Again, the ROFA of NABIL bank is satisfactory as compare to NBL and NMB bank. The
highest ROFA of NABIL bank is 4.34 times in FY 2073/74 and lowest ROFA of NABIL
is 3.12 times in FY 2076/77. The ROFA of NABIL bank is highest as compare to other
(NBL, NMB) bank. The average ROFA of NBL is 3.87 times. The Standard Deviation
and CV of NBL is 0.46 and 11.89% respectively.

The ROFA of Kumari bank is in decreasing trend from FY 2073/74 to 2076/77 and then
in increasing trend in FY 2077/78. The highest ROFA of Kumari bank is 3.26 times in
FY 2073/74 and lowest ROFA is 1.25 times in FY 2076/77. The average ROFA of
Kumari bank is 2.43 times. The Standard Deviation and CV of Kumari bank is 0.77 and
31.68% respectively.

Correlation Analysis

Table 4.7

Correlation Analysis with ROE as dependent variable

Correlations
Variables
DPS EPS ROI ROFA ROE
DPS 1 -.207 .865** -.448** .588**
.148 .000 .001 .000
EPS 1 -.274 .361** -.499**
.054 .010 .000
ROI 1 -.687** .476**
.000 .000
ROFA 1 -.133
.358

**. Correlation is significant at the 0.01 level (2-tailed).

*. Correlation is significant at the 0.05 level (2-tailed).

Source: Extract from Regression Estimation Result

The table shows correlation analysis with ROE. Study reveals that there is positive
correlation between return on equity and capital adequacy ratio. Positive correlation
between return on equity and capital adequacy ratio implies that when capital adequacy
ratio increases, the return on equity also increases, as they lead one another in the same
direction. However, loan and advance ratio has negative correlation with return on equity
which indicates that they lead each other in the inverse direction. Positive direction
implies that when there is positive change in one variable another variable is positively
affected and vice versa. Negative direction implies that when there is positive change in
one variable as a result negative consequence may find in another variable.

Table 4.8

Correlation Analysis with ROA as dependent variable

Correlations
Variables
DPS EPS ROI ROFA ROA
DPS 1 -.207 .865** -.448** .442**
.148 .000 .001 .001
EPS 1 -.274 .361** .142
.054 .010 .326
ROI 1 -.687** .349*
.000 .013
ROFA 1 .262
.066
ROA 1
**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).

Source: Extract from Regression Estimation Result

The table depicts correlation analysis with ROA.

The table depicts correlation analysis with ROA. Study also reveals that there is positive
correlation between return on assets, DPS, EPS, ROI and ROFA thus they lead each other
in the same direction. Thus, as a result, when there is increment over DPS, EPS, ROI and
ROFA there would also be increment over return on assets.

4.3 Regression Analysis

The two dependent variables have been undertaken thus the regression analysis deals
with both variables.
Table 4.9

Regression Analysis of DPS, EPS, ROI, ROFA on ROE and ROA

Regression Coefficients F-
M Intercept R2 P-Value
DPS EPS ROI ROFA Value
13.167 0.171
1 .35 25.35 0.00**
(11.095) (5.035)
19.210
2 .012 .599 .443
(10.410)
28.562 -.856
3 .249 15.94 0.00**
(10.332) (-.993)
15.321 .245
4 .226 14.04 0.00**
(14.671) (3.747)
19.700 -.026
5 .018 .863 358
(9.501) (-.929)
22.053
6 .104 5.578 .022*
(11.455)
19.537 .156 -.922 .087 .060
7 .59 10.31 0.00**
(5.229) (2.312) (-4.774) (.640) (1.220)
Source: Extract from Regression Estimation Result
(i) Figures in parentheses are t- values.
(ii) The asterisk (*) sign indicates that result is significant at 5 percent level and double
asterisk (**) sign indicates that result is significant at 1 percent.

The table deals with regression analysis with ROA. It also depicts the simple linear
regression and multiple linear regression analysis undertaking ROA as dependent
variable. The regression coefficient of EPS in the regression coefficient analysis is
.015 which indicates that if EPS is increased by one percent, the average influence on
return on assets will increase by 12.7 percentage. The R-square value of .195 indicates
that return on assets i.e. profitability is explained 19.5 percent by capital adequacy
ratio. The corresponding p-value is .01 which is less than 0.05; hence, there is
statistically positive and significant relationship between EPS and return on assets.
Thus, the alternative hypothesis; there is significant relationship between capital
adequacy ratio and return on assets is accepted.
The regression coefficient of ROI in the regression coefficient analysis is .029 which
indicates that if ROI is increased by one percent, the average influence on return on
assets will increase by 2.9 percentage. The R-square value of .20 indicates that return
on assets i.e. profitability is explained 20 percent by loan and advance ratio. The
corresponding p-value is .326 which is greater than 0.05; hence, there is statistically
positive but insignificant relationship between ROI and return on assets. Thus, the
alternative hypothesis; there is significant relationship between ROI ratio and return
on assets is not accepted.

The regression coefficient of DPS in the regression coefficient analysis is .021 which
indicates that if DPS is increased by one percent, the average influence on return on
assets will increase by 2.1 percentage. The R-square value of .122 indicates that non-
performing loan ratio i.e. profitability is explained 12.2 percent by non-performing
loan ratio. The corresponding p-value is .013 which is less than 0.05; hence, there is
statistically positive and significant relationship between DPS and return on assets.
Thus, the alternative hypothesis; there is significant relationship between DPS and
return on assets is accepted.

The regression coefficient of ROFA in the regression coefficient analysis is .006

which indicates that if credit deposit ratio is increased by one percent, the average
influence on return on assets will increase by 0.6 percentage. The R-square value of
.069 indicates that return on assets i.e. profitability is explained 6.9 percent by credit
deposit ratio. The corresponding p-value is .066 which is greater than 0.05; hence,
there is statistically positive but insignificant relationship between ROFA and return
on assets. Thus, the alternative hypothesis; there is significant relationship between
ROFA and return on assets is not accepted.

The multiple regression model summary, the R Square for this model, which .627.
This means that 62.7 percent of the variation in the dependent variable return on
assets can be explained by independent variables such as DPS, EPS, core capital ratio,
ROFA, ROI. The fitness of the model stated by an F-value of 12.06 at a 0.00 percent
level of significance is significant. This implies that the research model is also a
 good-fit in explaining the credit risk management and its effect on profitability of
commercial banks of Nepal.

4.3 Major Finding of the Study

All the commercial bank are required the regulation of central bank regarding different
statutory issues of liquidity and profitability. After analyzing the (NBL, NMB, NABIL
and Kumari) bank of Nepal from the financial and statistical aspects the major finding of
the study are described below.

Liquidity:

1. The current ratio of all four bank (NBL, NMB, NABIL and Kumari) shows that
bank have ability to meet their short-term obligation for the study period 2073/74
to 2077/78 because this ratio is above the standard i.e. 2:1. They are able to meet
their short term obligation. All bank maintained their NRB standard. From this
analysis we can conclude that the overall current ratio of NMB bank is better than
that of other (NBL, NABIL and Kumari) selected bank. They are well managed
bank in subject to the current ratio to absorb the probable market.
2. The quick ratio of all four bank (NBL, NABIL, NMB and Kumari) are able to test
the ability of the firm for immediate payment of current liabilities for the study
period of 2073/74 to 2077/78. All the bank were maintained NRB standard. The
average of NBL is little bit higher as compared to other selected bank.
3. The mean ratio of Quick assets to current liabilities of NBL, NMB, NABIL and
Kumari bank are 1.736, 1.254, 1.73, and 1.33 respectively. The highest ratio is
1.736 of NBL and the lowest ratio is 1.33 of Kumari bank. The CV of NMB bank
is higher i.e. 31.10% which indicates uniformity in maintaining the ratio over the
period. The CV of Kmari bank is lowered as compare to other selected bank i.e.
16.54% which indicates more uniformity in maintaining the ratio over the period.
4. The ratio of cash and marketable securities to current liabilities of NBL is higher
which indicates that the bank sound ability to meet its demand for daily cash
requirement to customer deposit and Kumari bank is lowered i.e. 0.844 which
indicates that bank is unable to meet its demand for daily cash requirement.
5. Return on assets of NABIL range from 1.71 to 2.57 percent with average 2.088
percent. The return on assets of NABIL bank is better than other (NBL, NMB,
Kumari) bank. ROA determines the productivity of bank. So, NABIL bank is
more productivity than other (NBL, NMB, Kumari) selected bank. It means that
NABIL bank has the better productivity of assets.
6. Return on shareholder equity of NABIL range from 13.61%to 22.41% with
average 17.98 percent. All the selected (NBL, NMB,KUMARI)bank have the
ratio of return on shareholder’s equity is in fluctuating trend. As the ratio of
NABIL is higher there will be higher investment and it earns more profit. The
return on shareholder’s equity of NBL is lowered as compared to other bank and
there is lower investment and earn low profit.
7. The DPS of NABIL bank is higher then the other selected (NBL,NMB
KUMARI)bank. The average DPS of NABIL bank is higher i.e Rs 37.85 which
indicates that efficient utilization of assets. The volume of DPS is fluctuating in
every year of all selected banks. The average DPS of KUMARI bank is lowered
i.e Rs 9.62 which indicates inefficient utilization of assets. The volume of DPS is
increasing continuously but the return on them is decreasing.
8. The EPS of NABIL bank is in decreasing trend and the EPS of other banks is
fluctuating. The average EPS of NABIL bank is higher i.e Rs 46.4 and the
average EPS of KUMARI bank is lowered i.e Rs13.78. The EPS of NABIL bank
is satisfactory as compared to other (NBL,NMB, KUMARI) banks.
9. The ROI of all selected (NBL,NMB,NABIL, KUMARI) bank are fluctuating. The
average ROI of NMB bank is higher i.e 25.24% and the average ROI of
KUMARI bank is lowered i.e10.83%. Ahigh ROI means the investment gains
compare favorably to its cost. The higher the ratio the more efficient will be the
use of capital employed.
10. The ROFA of NBL is lowered in all five years period of study from FY2073/74 to
2077/78 than other(NMB,NABIL,KUMARI) bank. The highest average ROFA is
3.87 times of NABIL bank and lowest average ROFA is 0.20 times of NBL. The
highest ROFA denotes the net fixed assets. It helps to measure the efficiency of
the firm.
 Discussion

Mishra and Pradhan (2019) have used cash deposit ratio (CDR), credit deposit ratio
(CRDR), and investment deposit ratio (IDR) as independent variable to denote the
liquidity management of the bank while Return on Asset (ROA) and Return on Equity
(ROE) have been used as dependent variable for the profitability of the bank. 2013-2017.

Rijal (2019) impact of liquidity on profitability of Nepalese commercial banks taking

sample of eight commercial bank covering the period from 2011-2017. Bourke(9), using
the international bank data for the period 1972-1981, observed that the profitability is
positively correlated with both capital and liquidity ratio. Sopan and Dutta(35) explore
the determinants of liquidity risk in45 Indian banks over 2005-2016 financial year period
by examining the bank specific and macro- economic factor that affects a bank’s
liquidity. Odunga(2013) reveals that a positive relationship exist between liquidity,
capital and operational efficiency. Muya and Gathogo (2016), profitability implies the
efficiency of the management in transforming the firm resources to profit. Tariq etal
(2014) stated that profitability become a key factor for running the business smoothly and
has the significant effect on both performance of bank and economic development in
todays competitive world. Berger (1995) reveal that highly efficient firm can maximize
profit relative to its competitors by maintaining its current size and pricing strategy or by
reducing the price and expanding its operation. Ahmad (2007) reveals that efficiency
level are different among the various branches of bank. They suggest that bank can
reduce employee expenses and other operating expenses along with an increase in the
total loan portfolio by giving focus on operational improvement efforts.Fredrick(2012)
analyzed the impact of liquidity management on the financial performance of commercial
bank in Kenya.

CHAPTER- FIVE

SUMMARY AND CONCLUSION

Summary

Profitability and liquidity are the primary variables used by bank to gauge its
performance. Liquidity may be defined as the assets or securities which can be without
difficulty convertible into cash. Profitability can be defined as an ability to make profit
from all the business activities of an enterprises. Banks helps to integrate every financial
activity of the community. However, to operate the commercial bank with growth and
improvement liquidity position and profitability position are two major factor which need
to be considered.

This study has been undertaken to evaluate the influence of liquidity and profitability
position of commercial bank with reference to NBL, NMB, NABIL and KUMARI bank.
This study has been carried out with the use of different secondary sources data which
has published financial reports of concerned bank, other related published and
unpublished articles and journals etc. This study has covered five years data from
FY2073/74 to 2077/78.

This study follows the descriptive Research design. The population of the study is 27
commercial bank which are operating in Nepalese financial market among them (NBL,
NMB, NABIL and KUMARI) are selected as sample for the evaluation. The study is
mainly based on secondary data and these reviewing materials are collected from library
of Central Department of Management, other public library and personnel of banks. This
collected data has been arrange in the proper form and analyzed and interpreted through
various financial and statistical tools such as ratio analysis, mean standard deviation,
coefficient of variance.

In Nepalese banking sector, commercial bank including joint venture bank are operating
at present. In the absence of modern banking any country cannot develop the economic
activity. Therefore, it is essential to find out whether or not the bank were serving an
important contribution to develop the sector of economy.

Conclusion

From the study of “Liquidity and Profitability position of Commercial Bank”. It can be
concluded that the role of banking sector is very crucial in the total economy of the
country. In the operation of any bank both liquidity and profitability position occupied
important place and control major parts of banking activities. It will encourage the
industrial and commercial activities, eventually lending to better economic growth, socio-
economic development, employment opportunities etc. The main objective of the bank
are development of trade, commerce, industry and economic condition of the country.

The liquidity ratio analysis of all (NBLNMB,NABIL and KUMARI) bank shows that the
ratio is consistent because all the bank liquidity ratio is above the standard mentioned by
NRB. All the bank’s liquidity ratio is fluctuating. The profitability ratio of NABIL bank
is satisfactory as compared to other (NBL,NMB, NABIKL and KUMARI) bank. Due to
the competition and low marketing knowledge the profit of NBL, NMB and KUMARI
bank is decreasing year by year. To expand their business all selected
(NBL,NMB,NABIL and KUMARI)bank should launch new attractive scheme to attract
customer in competitive market.

Implication

Based on the presentation and analysis of the data following recommendation has been
made. The study is based on modern scenario of the banking and financial institutions. In
the current competitive financial market, the commercial bank and their own strategies
regarding the liquidity management and raising the profitability.

Considering the present economic condition of the country, the bank should play the vital
role for the economic development of the country. They should promote balanced
regional development by financing fund in remote and other priority sectors. It helps in
expanding its branches in rural areas. So that the people in the rural area will be able to
have facilities provided by the bank.

Therefore, to increase the profitability of other(NBL,NMB, NABIL and KUMARI)bank

the bank is recommended to utilize its assets and shareholders fund to profit generating
purpose. The bank must adopt customer oriented new programs like bonus program,
special offer etc. high interest rate policy is instructed by NRB’s policy with in the range
of interest rate. A bank should be flexible enough to set the suitable interest rate to exist
in competitive market.

All bank should follow the discipline and adopt the direction of NRB. This helps to
maintain the harmonious relationship between other joint venture bank as well. The bank
should persuade various kind of welfare program for its staff and society, excellent staff
should be promoted in order to inspire, society welfare program like sponsorship, giving
fund etc. should be organized. Hence staff facilities should be increased in order to
motivate them. This helps to earn goodwill of the bank.

Now some important, valuable and timely suggestion and recommendation can be put
forward on the basis of finding and conclusion or from the critical evaluation of their
financial pictures to overcome weaknesses and inefficiencies. To increase the weaknesses
inefficiencies and present financial position of the NBL,NMB,NABIL and KUMARI
bank. The following recommendation can be given.

1. All banks (NBL,NMB,NABIL and KUMARI) have maintained Adequate liquidity

ratio to meet the NRB standard for probable risk arising from the market operation and
credit expansion. Thus, the Nepalese Commercial bank should follow the prevailing NRB
directives

2.Cash Ratio of NBL is higher than other (NMB, NABIL and KUMARI) bank. It shows
that NBL has lower money supply than other banks. The result of the study reveals that
the cash reserve ratio affects the bank performance. It is recommended that maintain their
liquidity position of bank.

3.The ROA of NABIL bank is stronger than other (NBL, NMB, KUMARI) bank. This
indicates that NABIL has the better productivity of assets rather than other banks. It is
recommended that NABIL bank need to be increasing their productivity and assets
quality.

4. NRB has directed all the commercial bank to classify loan and advances into category
and make provision according to this loan classified. So, NBL, NMB, NABIL and
KUMARI is suggested to follow the NRB directives properly.

5. The overall profitability of NABIL bank is better than other (NBL.NMB, KUMARI)
bank. So the NABIL bank is recommended to maintain the utilization of tis resources
more effectively for generating more profit margin.

6. All the Bank and Financial Institution (NBL, NMB, NABIL and KUMARI) should
published its financial document regularly and in simplified manner. So that the general
people also can understand it. This helps to increase the goodwill and the faith of the
BFIS.

7. All the Bank and Financial Institution (NBL,NMB,NABIL, KUMARI) bank should
extend their ATM counter in large number. So that it will help the save the time and
effort of general public.

8. The bank were suggested to maintain the higher EPS by using its owner’s equity
effectively.

9. All the bank should maintain Customer oriented services more promptly which helps
customer to adopt the reliable data through the concerned bank website.

10. All the bank should increase it’s investment in securities of the government.

Hence, if all the bank and financial institution follows the above recommendation, it will
satisfy the customers as well as staff and it will increase its goodwill.