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CHAPTER I
INTRODUCTION

1.1 Background of Study

Profitability and liquidity are two important variables which give information about the
performance of any business entity for long-term survival and healthy growth both
profitability and liquidity should parallel to each other. Profitability is one of the major
goals of any business. Without being profitable it is not possible for a business to survive
and the business growth is difficult. To generate profit a business need short term funds
to fulfill its day to day needs in operations and other requirements. Business will be more
profitable when this short-term need of funds is generated by business operation not
through external debts. So the liquidity tells about the business capability to meet short
term need of funds by the business and profitability tells about the profit generated from
the operations of business.

Liquidity and profitability are often seen like different sides of a coin. According to risk
and return theory which states that higher the risk the higher the return and vice versa.
Profitability and liquidity are not in the same line meaning that they have an inverse
relationship because the more liquid a company is it indicates funds are confined to
liquid assets, making them inaccessible for productive activities that generate profit or for
investments. Moreover the maintenance of cost for all those liquid assets could affect
the overall profitability of a company. Liquidity is really important for a company’s
survival of a company and also keep profitability maintained in order to give the optimal
return for its shareholder (Shin & Soenen, 1998)

However despite the risk and return theories indicates that the relationship between
liquidity and profitability should be negative there have been studies that produce
different results. These findings seems to be really interesting because they indicate that
there are different kind of relationship between liquidity and profitability in different
industries and these relationship in different industries might be different in different
situations as well. These difference in relationship of liquidity and profitability could
lead to a difference in management of the liquidity
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Liquidity refers to a company’s ability to pay its bills from cash or from assets that can be
turned into cash very quickly.

The quick ratio, also non as the acid- test ratio, each an indicator of a company’s liquidity
Liquidity describes degree to which an assets or security can be quickly bought or sold in
the market without affecting the asset’s price.

Market liquidity refers to the extent to which a market, such as country’s stock market or
a city’s real state market, allow follows assets to be bought and sold at stable prices. Cash
is considered the most liquid assets, while real state, fine and collectibles are all relatively
liquid.

A bank’s liquidity ratio is a measurement of its ability to pay of all its debts with current
assets. The ratio is calculated by taking different between liabilities and conditional
reserve and using that figure to dived the bank’s assets . The liquidity ratio is a valuable
metric for market analysis and potential investors in helping determine if a Bank is stable
and financially healthy enough to pay off the debts and outstanding liabilities it has
incurred. Allow liquidity ratio cool single the Bank is suffering financial trouble.
However, a very high liquidity ratio is not necessarily a good things either; it may be a
indication that the Bank is to focus on liquidity to the detriment of efficiency utilizing
capital to grow and expand is business.

To commonly reviewed liquidity ratios are the current ratio and quick ratio the current
ratio examines the percentage of currently available assets of bank has to meet its
liabilities and provides a good indication of a bank’s ability to cover its short term
liabilities . It’s measure of cash on hand that a bank has to settled expenses short-term
obligations. One way to interest rate account they’re not needed and back to readily
accessible account when necessary. Paying off liabilities also improves current ratio
another popular liquidity ratio is the quick ratio. This tool refines the current ratio,
measuring the amount of the most liquid assets a bank has to cover liabilities. The quick
ratio excludes inventory and some other current assets from the calculation and is a more
conservative measurement then the current ratio. The quick ratio can be improved using
some of the same methods that improve using current ratio. Additional means of
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improving the quick ratio include using long-term financing rather than cash on hand to
acquire inventory or selling unnecessary assets. Ratios analysis is all about predictive
power of accounting ratios. Analysis of these ratios provides the information related to
strength and weakness of financial data in relation to other. Ratios analysis involve a
series of techniques that can be useful to identify the strength and weakness of bank
institution by facilitating the comparison of the available current assets and liabilities.

At present ratios analysis has proven itself as to assist any financial institution bank to set
better plan for future. So, one must appreciate the model of ratios analysis to analyze
one’s finding in behalf of any bank\financial institution, Present study focus on the study
of liquidity ratios of SRDB. It has been successful to open above 32 branches in different
cities and village of Nepal, which are co-ordinate and controlled by Head office Situated
at Siddhartha Margh, Butwal, Rupandehi.

1.2 Profile of Shine Resunga Development Bank Limited (SRDB).

Shine Resunga Development Bank Limited (SRDB) is a "B" class regional level licensed
financial institution from Nepal Rastra Bank (NRB). SRDB has been able lead the way
for regional level development banks of Nepal in terms of balance sheet size, number of
clients, customer service and satisfaction, and good governance. SRDB operates in ten
districts which are:   Rupandehi, Nawalparasi, Kapilvastu, Palpa, Gulmi, Argakhachi,
Baglung,  Dang, Pyuthan & Chitwan. Whereas nine districts have already been covered
by the bank, it’s going to expand its operation in Chitwan district very soon.The bank
hasthe privilege to be the first regional bank to complete merger in Western Region of
Nepal. As a merged entity, Shine  Resunga Development Bank Limited started joint
operation from 4th of Chaitra 2069 after successful merger of Shine Development Bank
Limited based on Rupandehi and Resunga Bikas Bank Limited based on Gulmi.
Encouraged as being the leader among regional development bank, it further completed
successful second merger with Guamukhee  Bikas  Bank  Limited  based on Pyuthan and
started joint operation from 29th Jestha 2073. SRDB, since then, is operating as a cohesive
unit aiming at best possible services to its most valued customers. The bank is providing
various financial services to more than 150,000 clients through its 33 branches and 2
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extension counters spread over nine districts. SRDB is committed to achieve its ultimate
goal of providing service excellence to the clients associated with it. In addition to that,
as a leading regional development bank, it realizes its role to be one of the most
professionally run and governed bank. Therefore, SRDB is proud to have gained great
level of trust and continues support from its valued clients. Furthermore, the bank is fully
focused to provide access to finance to underprivileged and backward communities
residing in remote parts of its working area. Providing financial literacy programs,
financing agricultural needs, and trying to uplift the economic status of the community
are other main objectives of the bank. The bank believes that safeguarding and efficiently
utilizing financial resources of its depositors and shareholders, providing great service
experience and financial service to its valued clients, making bank a good employer to its
employees by providing them opportunities to learn and grow are its main social
responsibility function. However, SRDB, as a good corporate citizen, is also proud to get
involved in other activities of social cause and importance.

Vision
To be a Bank of Excellence in the communities and corporate sector of Nepal
Mission
Creating values to our customers, investors, human resources and all of our stakeholders'
for being a "Bank of Choice" in the Nation.
1.2 Statement of Problem
A study conducted by WolskiBolek (2016) found that there is negative relationship
between liquidity and profitability. The increase in liquid assets dcreased the profitability
as there is tradeoff between these two components. However a study conducted by
Ahamad (2016) in Pakistan fount that there is positive relationship between liquidity and
profitability. There is controversial thoughts among scholars on relationship between
liquidity and profitability. In Nepal very few researches have been conducted in areas of
liquidity and profitability. Some studies are found. However they are focused on entire
banking industry rather than a single company. We can conduct a study by talking a
single bank as a case as well. So considering these two research gap , this study is going
to be conducted. This study deals with following statements of Problem
 How is the liquidity position of Shine Resunga Development Bank limited?
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 What is the relationship between liquidity and profitability of Shine Resunga

Development Bank limited?

1.4 Objectives of the Study

The major objective of the study is to analyze the position of the SRDB Rupandehi,
finding out liquidity ratios so as to determine its current ratio & quick ratio position from
the available current assets and current liabilities. Other specific objective, however, are
as follows:

 To find out trend of liquidity

 To find out relationship between liquidity and profitability

1.4 Rationale

There is lots of research work on the other ratios of development banks but this
specific function does not seem given importance before.Therefore this study is an effort
to bring the facts related to liquidity Ratios of Shine Resunga Development Bank in the
expectation that it will add to the management literature the idea & findings related to the
bank is an effort to bring the facts related to liquidity ratio of Shine Resunga
Development Bank in the expectation that it will add to the management literature the
idea and findings related to the bank. It is an attempt to help the bank to improve its
performance and able to face competition. Some rationale of SRDV can be mention in
following points

 To resolve economic fluctuation

 To meet administrative expenses
 To pay bill of exchange
 To maintain cash reserve ratio
 To meet loan demand

1.5 Review of Literature

Literature survey is that descriptive analysis of any specific topic which is related only
that topic gives more essential information. For preparing this field work report, the
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researcher uses the different books and idea, social media eg; Google, bank website,
references books & article etc which helps to presenting clear objectives of the study.

Thapaliya Uma (2017) conducted a study entitled “ A liquidity management of Nepalese

Commercial banks with reference to Everest Bank limited and Nepal SBI bank limited”
the main objective of the study was to analyze the liquidity position of sample bank and
explore the deposit and investment trend.

Adhikari (2010) conducted a study entitled “ Comparative analysis of financial

performance of Nepal Bank limited and Nabil Bank limited” the main objective of the
study was to compare the financial performance between governed owned banks and
private sector banks and finding of this research is that Nepal Bank is better at liquidity
management where as Nabil Bank limited was better at profitability.

1.6 Method of study

Research Methodology is the way to solve the problem systematically and scientifically.
Research is undertaken not only to solve a problem existing in the work setting but also
to add or contribute to the general body of knowledge in a particular area of interest to
the researcher. Research is mainly used to build a theory, develop policies , support
decision making and solve problems. The main objective of research methodology are to
achieve the basic objective and goals of research study.

1.6.1 Research Design

The research design is the outline of a plan to test the hypothesis and should include
all the procedures that follow. It is said that the formidable problem that follows in
tasks of defining the research is the preparation of design of the research project,
popularly known as research design. Basically, the research design has two purpose .
The first purpose is to answer research question or test the research hypothesis the
second purpose of research design is to control variance. The main objective of the
study is to analyze and evaluate the relationship between liquidity and profitability
position of the selected banks and provide suggestion on the basis of the evaluation.
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To accomplish this objective, analytical and descriptive research design has been
adopted. It tries to describe and analyze all these facts that have been collect for
the purpose of the study.

1.6.2 Population And Sample

The sample banks are selected on the basis of convenience sampling methods.
Presentation of the data form a clear image of specific event i.e, the liquidity of Shine
Resunga Development Bank Limited.

1.6.3 Methods of Data Collection

The major data used in this project are derived from the secondary source & some
analysis is based on the primary source in order to meet the requirement of this project
work report. The details sources are as follows;-

1) Secondary data:
As it is already mentioned that mass coverage of this project work report is based
on secondary sources of data collection.Without which the liquidity ratios of the
Shine Resunga Development Bank Ltd.

1.6.4 Data Collection procedure

Questionnaires were distributed to the selected respondents in order to get actual and
accurate information. Distribution work has been done thoughpersonal visit rather than
sending by any means to get accurate and actual information. Secondary data sources are
as follows:-

 Annual report of shine Resunga Development Bank limited for each sample
period.
 Different books, newspaper & published in behalf Shine ResungaDevelopment
Bank limited.
 Social website; https\www.ShineResunga Development Bank ltd.
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1.6.5 Techniques of data Analysis

At the time of presentation and analysis of secondarydata, were edited & processed.
table, simple % & time series analysis, are used for the purpose of data presentation &
analysis of data. Following tools used from various fields:

 Trend Line
 Table
 Chart

1.6 Limitation of the Study

Every research has to be conducted within certain period. This study is related of Shine
Resunga Development Bank with reference to liquidity ratios of SRDB. The following
points will determine the certain limitations for the study;-

 The study focuses on one bank SRDB only.

 The study covers the period of 5fiscal years only.
 This study based on secondary data.
 The study is mainly based on data provided in the annual report.
 The report is prepared for academic purpose only.
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CHAPTER II

RESULTS AND ANALYSIS

2.1 Data Presentation & Analysis

Merely the data collection is not a full featured project work the way of representing it
must be adopted in such a way that they can be easily understood. Method of analysis the
modes of tool on which the conclusion is based. Also it facilities very easy comparison of
data and information. Data presentation and analysis forms an integral part of all
academic studies. It is necessary to make use of collected data which considered to be
raw data which must be processed to put for any application. Data analysis helps in the
interpretation of data and take a decision or answer the research question.

This chapterprovides a mechanism for meeting the basic objectives as stated earlier in the
first chapter of the study. The study has followed the methodology as described in the
third chapter in order to attain the objectives. Data collected for the analysis of trade off
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in liquidity and profitability position of SRDB is presented in the form of tabular and
diagrammatic form. The different tools brought up to prepare final report are as follows;-

 Table
 Chart
 Trend line

2.1.1 Liquidity Ratio of SRDB

Liquidity ratio measure the firm’s ability to met current obligation. These ratios focus on
current assets and liabilities and are used to ascertain the short-term solvency position of
a firm. A firm should ensure that it does not suffer from lack of liquidity and also that it
does not have excess liquidity. The failure of company to meet its obligation due to lack
of sufficient will result in a poor credit worthiness’, loss of creditors confidence or even
in legal triangle resulting in the closure of the company. A very high degree of liquidity is
also bad idle assets earns nothing the firm’s funds will be unnecessarily tied up in current
assets. Again very little amount contradictory is not good for the firm. Therefore proper
balance between the two contradictory requires marks that are liquidity. The most
common ratios which indicate the extent of liquidity are:

2.1.1.1 Current Ratio

Current ratio (CR) is the quantitative relationship between current assets (CA) and
current liabilities (CL), current assets are those, which can be normally converted into
cash within a year. On the other hand, current liabilities refer to that obligation, which
must be paid within an accounting cycle . The CR shows bank ability to pay liability; it is
accurate and quick measure of the firm’s ability to meet current obligations. It is
calculated by dividing CA by CL.The ideal current ratio is 2:1 it is a stark indication of
the financial soundness of a business concern. When current assets double the current
liabilities, it is considered to be satisfactory. Higher value of current ratio indicates more
liquid of the form’s ability to pay it,s current obligation in time.It can be expressed by
following foemula
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Total Current Assets

 Current Ratio (CR)=
Total Current Liabilities

Table 2.1
Current ratio of SRDB

Fiscal
Year Current Ratio Current Assets Current Liabilities

2013\14 1..08 9479854944 8817885828

2014\15 1.07 12757486100 19586354020

2015\16 1.08 16073298240 14956863180

2016\17 1.06 21893814720 20647934150

2017\18 1.07 24551799790 22994173710

Sources : Annual Report of SRDB

In the above table shows the current ratio of SRDB in fiscal year 2013\2014 to 2017/18.
The current ratio of SRDB is 1.08 times, 1.07 times, 1.08 times, 1.06 times and 1.07
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times from fiscal year 2013/14 to 2017/18 respectively. According to table shows the
current ratio of the SRDB is in fluctuating.

Figure no 2.1

Current Ratio of SRDB

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Current ratio of SRDB

1.09

1.08

1.08

1.07 Current ratio of SRDB

1.07

1.06

1.06

1.05
2013/14 2014/15 2015/16 2016/17 2017/18

Figure 2.1 Shows the current ratio of SRDB in different financial year 2013 to 2018. The
CR of SRDB is not satisfactory as it has been less than 2:1 are typically considered very
low and indicate financial difficulties for SRDB the CR for the fiscal years 2013-18 are
which seems to be poor however, CR is the quantitative test of a firm’s liquidity. It does
not consider the quality of current assets, therefore that ratio equals to or greater than 2:1
may not be doing good due to slow paying debtors or less convertible inventory. But a
poor ratio less than 2:1 may be performing well if it has highly liquid stock of quality
account receivable.

2.1.1.2 Quick Ratio

Quick ratio also termed as acid test ratio or liquid ratio is another measure of short-term
solvency of a firm. It defines the firm’s ability to pay its short-term obligation without
relying on the sale of inventories. It establishes quantitative relationship between quick
assets and current liabilities. A quick ratio higher than 1:1 indicates that the business can
meet its current financial obligation with the available quick funds on hand. A quick ratio
lower than 1:1 may indicate that the company relies too much on inventory or other
assets to pay its short-term liabilities. Quick ratio specifies whether the assets that can be
quickly converted into cash are sufficient to cover current liabilities. If quick ratio is
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higher, company may keep too much cash on hand or have a problem collecting its
account receivable .It can be shows by following formula.

Quick Assets
Quick ratio(QR)=
Current Liabilities

Table2.2

Quick ratio of SRDB

Fiscal
Year Quick Ratio Quick Assets Current Liabilities

2013\14 1.11 9789993682 8817885828

2014\15 1.10 13177327070 19586354020

2015\16 1.11 16604054470 14956863180

2016\17 1.09 22613956120 20647934150

2017\18 1.10 25359521150 22994173710

Sources: Annual Report of SRDB

In the above table 2.2 shows the quick ratio of SRDB in fiscal year 2013/14 to 2017/18.
The quick ratio of SRDB is 1.11times, 1.10 times, 1.11 times, 1.09 times, and 1.10 times
from fiscal year 2013/14 to 2017/18. According to table shows the quick ratio of the
bank is decreasing order infiscal year 2013/14 to 2017/18

Figure 2.2
Quick Ratio of SRDB
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Quick Ratio
1.12

1.11

1.11

1.1 Quick Ratio

1.1

1.09

1.09

1.08
2013/14 2014/15 2015/16 2016/17 2017/18

AS a conventional rule, the ratio 1.1 is employed as a standard of comparison.

Hence, again the ratio below 1:1 is supposed to be the indicator of alarming short
term solvency that the ratio 1:1 or more must be performing well. It depends on
the quality of the debtor by looking the above table & figure of SRDB, it is trying
to maintain the QR in the standard is successful in the FY 2013\14 even though
the bank poor ratio may do well if the bank has high quality receivable and
inventories.
2.1.2 Return on assets
Return on assets (ROA) is a financial ratio that shows the percentage of profit that a
company earns in relation to its overall resources (total assets). Return on assets is a key
profitability ratio which measures the amount of profit made by a company per dollar of
its assets. This ratio is calculated as net profit after tax divided by the total assets. This
ratio measure for the operating efficiency for the company based on the firm’s
generated profits from its total assets. It shows the efficient management at using
assets to generate earnings. The ratio of net income to total assets measures the return
on total assets (ROA) after interest and taxes (Siraj and Pillai, 2012). Posnikoff (1997)
and 5 Margolis & Walsh (2003) found a positive and significant relationship between
liquidity and financial performances. ROA is the ratio of net income to total assets. This
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ratio measures the profitability achieved by the bank by investing its assets in various
activities, and is calculated by dividing net income by total assets. Return on assets
(ROA) is a financial ratio that shows the percentage of profit that a com
The amount of net income returned as a percentage of shareholders equity. Return on equity
measures a corporation's profitability by revealing how much profit a company generates with
the money shareholders have invested (Siraj and Pillai, 2012). Net income is for the full fiscal
year (before dividends paid to common stock holders but after dividends to preferred stock).
Authors found that liquidity status positively affects the bank performance. ROE is the ratio of
net income to shareholder’s equity. This ratio measures the management efficiency in utilizing
the bank funds in achieving a profit, and is calculated by dividing net income (net profit after
tax) by equity
Capital ratio It measures the financial strength of a bank and indicates the extent of financial
stability at the bank. Capital can be calculated by dividing capital by total assets. The equity-to-
asset ratio measures how much of bank’s assets are funded with owner’s funds and is a proxy
for the capital adequacy of a bank by estimating the ability to absorb losses. As the literature
review pointed out, there are mixed results regarding the relationship between the equity-to-
asset ratio and banks‟ profitability. Following the risk-return trade off, a higher equity-to-asset
ratio leads to a lower expected return. Opposed to the risk-return hypothesis, Berger (1995b)
examines the signalling hypothesis and bankruptcy cost hypothesis; suggesting that a higher
equity-to-asset ratio increase profitability due to signaling issues or lower costs of financial
distress. Based on it, this study has developed the following hypothesis; H1: There is positive
relationship between capital ratio and bank profitability. Investment ratio Loan to deposit is the
most important ratio to measure the liquidity condition of the bank. Loan means the advances
for the conventional banks. Bank with Low LDR is considered to have excessive liquidity,
potentially lower profits, and hence less risk as compared to the bank with high LDR. However,
high LDR indicates that a bank has taken more financial stress by making excessive loans and
also shows risk that to meet depositors’ claims bank may have to sell some loans at loss
(Ahmed, 2009). The investment ratio indicates to the appropriateness of investing the available
funds to the bank which derived from deposits, to meet the demands of credited loans and
advances. Investment ratio can be calculated by dividing the credit facilities by total deposit.
2.1.2 Profit Margin
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Profit margin is one of the commonly used profitability ratios to gauge profitability of a business
activity. It represents how much percentage of sales has turned into profits. Simply put the
percentage figure indicates how many cents of profit of business has generated for each sale. It
is relationship between net profit and total revenue. This ratio is calculated as follows :

Net profit after tax

Profit Margin =
Total Revenue
Where ,
Total Revenue = interest income+ commission and Discount + Exchange profit+ Other operating
income

Year NPAT (RS) Total Revenue (R) Profit Margin

2014/15 21.49 418.69
2015/16 57.76 536.62
2018/17 85.74 740.341
2017/18 155.22 773.288
2018/19 121.71 1038

2.2 Findings
Finding is an important part of the report writing the presentation, during the time of field
of activities in the SRDB. From the presentation and analysis made above, many results
of the bank have been found. Most of them are elaborated or made clear by presentation
in to the following points which are the major findings of the study.

 The current ratio of SRDB found to be 1.08 times in 2013\14 where as in the
2017\18 is 1.07 times.
 The quick ratio of SRDB is found to be 1.11 times in 2013\14 where as in the
2017\18 is 1.10 times.
 CR is less then 2:1 are typically considered very low and indicate financial
difficulties for the SRDB.
 A poor ratio less then 2:1 may be performing well if it has highly liquid of
quality account receivable.
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 SRDB trying to maintain the QR in the standard is successful in the fiscal year
2013\14 even though the bank poor ratio may do well if the bank has high
quality receivable and inventories.

CHAPTER III
SUMMARY AND CONCLUSION

3.1 Summary
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All the data presented here are of secondary nature. The five fiscal year’s published data
of SRDB are used in this study. Different methods are used in this study to make the
report precious. In this study different accounting ratios are applied whenever necessary.
In the sample of data of last five year the SRDB as well as its importance for the banking
sector and nation is clearly understood.The main objective of the study are to fulfill the
assessment required for the practical study of BBS (4th year of T.U) And another purpose
of this research find out the liquidity ratios of SRDB based. SRDB is one of the
successful banks operating the territory of Nepal, Providing fair banking services to its
customers namely remittance letter of credit, loan, credit, locker, guarantees etc are major
and one of the indirect investment for the nation of SRDB. So, this company is selected
for the purpose of study, the objectives to fuel the Nepalese economy and take it to hover
height as well as to facilities the nation economy to competitive globally.

In the first chapter, the background and subject matter of the study consisting
statement of the problem, significance and limitations of the study has been dealt. In
the second chapter, the relevant review of the literature has been made in terms of
theoretical background of banking principles as well as the journal, articles and
previous thesis have been reviewed. Third chapter , the data and information are
presented , analyzed and interpreted by the help of financial and statistical tools.

3.2 Conclusion

During the visit to SRDB head office at Butwal for the purpose of collecting data’s and
information it was notice that the staff were highly efficient and hard working. They were
very concerned about the customer’s service. The number of customer is increasing each
year. The SRDB’s head office and branch offices as well are providing credit facility by
which lost of customers have been benefiting. The list of the fiscal work report of the
SRDB is presented as below:

 SRDB has been mobilizing its fund in most of the sector of economy as per the
need of country.
 The bank is able to its short term obligation in time out of its earning.
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 The shareholders, creditors of SRDB and employee of the bank are found
satisfied the return they receives from the bank.
 The liquidity ratios are fluctuating over the year.
 The SRDB is trying to maintain the QR in the standard (1:1) in fiscal year
2013\14 even though banks poor ratio may do well if the bank has high quality
receivable and inventories.

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Chettri, R.(2007). Liquidity risk management and credit supply in the financial
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