IMPACT OF LIQUIDITY ON PROFITABILITY OF PRIVATE

COMMERCIAL BANKS: A COMPARATIVE STUDY OF

NABIL AND NICA BANKS LIMITED

A Dissertation submitted to the Office of the Dean, Faculty of Management,

Tribhuwan University, Kritipur, Kathmandu, in partial fulfilment of the requirements
for
the Degree of Masters of Business Studies (MBS)

by

Aswin Pradhan
Symbol No: 7310/18
T.U. Regd. No: 7-2-31-590-2010
People’s Campus

Kathmandu, Nepal
August, 2022
 IMPACT OF LIQUIDITY ON PROFITABILITY OF PRIVATE
COMMERCIAL BANKS: A COMPARATIVE STUDY OF
NABIL AND NICA BANKS LIMITED

A Dissertation submitted to the Office of the Dean, Faculty of Management,

Tribhuwan University, Kritipur, Kathmandu, in partial fulfilment of the requirements
for
the Degree of Masters of Business Studies (MBS)

by

Aswin Pradhan
Symbol No: 7310/18
T.U. Regd. No: 7-2-31-590-2010
People’s Campus

Kathmandu, Nepal
August, 2022
 CERTIFICATION OF AUTHORSHIP

I hereby declare that I have researched and submitted the final draft of dissertation
entitled “Impact of liquidity on profitability of private commercial banks: A
comparative study of Nabil and Nica Banks limited ”. The work of this dissertation
has not been submitted previously for the purpose of conferral of any degrees nor it
has been proposed and presented as part of requirements for any other academic
purposes.

The assistance and cooperation that I have received during this research work has
been acknowledged. In addition, I declare that all information sources and literature
used are cited in the reference section of the dissertation.

............................
Aswin Pradhan
01-08-2022

i
 REPORT OF RESEARCH COMMITTEE

Aswin Pradhan has defended research proposal entitled "Impact of liquidity on

profitability of private commercial bank: A comparative study of NABIL and NICA
bank limited” successfully. The research committee has registered the dissertation for
further progress. It is recommended to carry out the work as per and submit the thesis
for evaluation.

Gopal Krishna Shrestha, PhD Dissertation Proposal Defended Date:

Position: Supervisor
----------------------------------------------
Signature -----------------------

Rajan Bilas Bajracharya Dissertation Submitted Date:

Position: Supervisor ----------------------------------------------

Signature --------------------------

Dissertation Viva Voice Date:

Gopal Krishna Shrestha, PhD
Position: Head of Research Committee ----------------------------------------------

Signature ----------------------------

ii
 APPROVAL SHEET

This thesis entitled "Impact of liquidity on profitability of private commercial bank: A

comparative study of NABIL and NICA bank limited.” submitted by Aswin Pradhan
to the faculty of management, Tribhuvan University, in partial requirements for the
degree of Master of business studies has been found satisfactory in scope and quality.
Therefore, we hereby certify that the presented dissertation is acceptable for the award
of MBS degree.

----------------------------
Dissertation Supervisor
Signature

----------------------------
Internal Examiner
Signature

----------------------------
External Examiner
Signature

-----------------------------
Chairperson Research Committee
Signature

iii
 ACKNOWLEDGEMENTS

This study entitled “Impact of liquidity On Profitability of Private Commercial Bank:

A Comparative Study of NABIL and NICA Bank LTD” has been prepared for partial
fulfillment of requirements for the degree of Masters of Business Studies. It is
directed towards determining the factors that influence the profitability on liquidity of
the banks. This would not have been possible without the kind support and help of
many individuals. Therefore, I would like to acknowledge with gratitude to all of
them. It is a genuine pleasure to express my deep sense of thanks and gratitude
towards Rajan Bilas Bajracharya for giving me the responsibility to prepare this
report along with their guidance, valuable advice, continuous encouragement, and
motivational support.

I would like to express grateful thanks to all the respondents who participated in
filling the questionnaires and provided the necessary information for this study. My
thanks also go to all well-wishers for their valuable comments, understandings and
encouragement when it was required. I greatly thank my parents for their endless
love. With this help and support, I have been able to complete this work. I would like
to take the responsibility of any possible mistakes that may have occurred in the
report. I would be delighted to welcome readers for their suggestion and
recommendation to improve the report.

Aswin Pradhan
01-08-2022

iv
 TABLE OF CONTENTS
TITLE PAGE .............................................................................................................................. i
CERTIFICATE OF AUTHORSHIP .......................................................................................... ii
REPORT OF RESEARCH COMMITTEE............................................................................... iii
APPROVAL SHEET ................................................................................................................ iv
ACKNOWLEDGEMENTS ............................................................................................... ……v
TABLE OF CONTENT ............................................................................................................ vi
LIST OF TABLES .................................................................................................................. viii
LIST OF FIGURES .................................................................................................................. ix
ABBREVIATIONS ................................................................................................................... x
ABSTRACT.............................................................................................................................. xi

CHAPTER I - INTRODUCTION .............................................................................. 1

1.1 Background of the Study ............................................................................................... 1
1.2 Statement of the Problem .............................................................................................. 4
1.3 Objective of the study .................................................................................................... 5
1.4 Hypothesis of the Study ................................................................................................. 6
1.5 Rational of the study ...................................................................................................... 7
1.6 Limitation of the Study .................................................................................................. 7
1.7 Chapter plan................................................................................................................... 8

CHAPTER- II LITERATURE REVIEW ................................................................. 9

2.1 Theoretical Review ........................................................................................................ 9
2.1.1 Theories of Liquidity and Liquidity Management ......................................... 10
2.1.2 Importance of Liquidity ................................................................................. 12
2.1.3 Source of Banks Liquidity.............................................................................. 13
2.1.4 Needs and importance pf Liquidity Management ......................................... 13
2.1.5 Liquidity Measurement in Commercial Banks............................................... 14
2.1.6 The Concept of Profitability in Banks ............................................................ 17
2.1.7 Measure of Bank Performance ......................................................................... 17
2.2 Empirical Review ........................................................................................................ 19
2.3 Conceptual Framework................................................................................................ 21
2.3.1 Definition of Terms ....................................................................................... 22
2.4 Research Gap ................................................................................................................... 23

v
CHAPTER-III RESEARCH METHODOLOGY ................................................... 24
3.1 Research Design .......................................................................................................... 24
3.2 Sources and Tools of Collection .................................................................................. 24
3.3 Population and samples ............................................................................................... 25
3.4 Method Of Analysis.................................................................................................... 25
3.5 Data Analysis Tools..................................................................................................... 26
3.5.1 Financial Tools ............................................................................................... 26
3.6 Statistical Tools ........................................................................................................... 28

CHAPTER- IV RESULTS AND DISCUSSION ..................................................... 31

4.1 Data Presentation and Analysis ................................................................................... 31
4.1.1 Liquidity Ratio ............................................................................................... 31
4.1.1.1 Liquid Fund to deposit ratio (LFTRD) ............................................. 31
4.1.1.2 Liquid fund to total asset ratio (LFTAR) ......................................... 33
4.1.1.3 NRB Balance to deposit ratio (NRBTDR) ....................................... 35
4.1.1.4 Cash in hand to total deposit ratio (CHTDR) ................................... 36
4.1.1.5 Cash and bank balance to total deposit ratio (CABTDR) ................ 38
4.1.1.6 Total liquid fund to current liabilities ratio (LFTCLR) .................... 39
4.1.2 Profitability Ratio ........................................................................................... 41
4.1.2.1 Return on a assets (ROA) .................................................................. 41
4.2 Descriptive Statistics of Variables ............................................................................... 42
4.3 Correlation analysis ..................................................................................................... 44
4.4 Regression Analysis .................................................................................................... 45
4.5 Multicollinearity Test .................................................................................................. 47
4.6 Concluding Remarks ................................................................................................... 47

CHAPTER- V SUMMARY AND CONCLUSION ................................................. 49

5.1. Summary ..................................................................................................................... 49
5.2. Conclusions ................................................................................................................. 53
5.3. Implications ................................................................................................................. 53
5.3.1 Future scope ................................................................................................... 55

REFERENCES........................................................................................................... 56
APPENDICES ............................................................................................................ 58

vi
 LIST OF TABLES

Table 1 Liquid fund to deposit ratio .............................................................................. 32

Table 2 Liquid fund to total asset ratio ......................................................................... 34
Table 3 NRB Balance to total deposit ratio................................................................... 35
Table 4 Cash in hand total deposit ratio ........................................................................ 36
Table 5 Cash and bank balance deposit ratio ................................................................ 38
Table 6 Total liquid fund to current liabilities ratio ...................................................... 40
Table 7 Return on assets ............................................................................................... 41
Table 8 Descriptive Statistics ........................................................................................ 43
Table 9 Pearson’s correlation coefficient matrix .......................................................... 44
Table 10 Estimated Regression Results .......................................................................... 46
Table 11 Test of Multicollinearity .................................................................................. 47

vii
 LIST OF FIGURES

Figure 1 Liquid fund to deposit ratio.................................................................................. 22

Figure 2 Liquid fund to total asset ratio ............................................................................... 34
Figure 3 NRB Balance to total deposit ratio ........................................................................ 36
Figure 4 Cash in hand total deposit ratio .............................................................................. 37
Figure 5 Cash and bank balance deposit ratio ...................................................................... 39
Figure 6 Total liquid fund to current liabilities ratio ............................................................ 40
Figure 7 Return on assets ..................................................................................................... 42

viii
 ABBREVIATIONS

ALCO : Accounts and Finance Department, Treasury & Fund

Management Department, Asset Liability Committee
ATM : Automatic Teller Machines
BOD : Board Of Director
CABTDR : Cash and bank balance to total deposit ratio
CHTDR : Cash in hand to total deposit ratio
CORE Banking : Centralized online Real-time Electronic Banking
CDR : Cash Deposit Ratio
CDTA : Cash & due from banks to total assets
FY : FISCAL YEAR
GDP : Gross Domestic Product
IDR : Investment Deposit Ratio
LDR : Loan to Deposit Ratio
LFTAR : Liquid fund to total asset ratio
LFTCLR : Total liquid fund to current liabilities ratio
LFTDR : Liquid fund to deposit ratio
MIS : Management Information System
NABIL : Nepal Arab Bank Limited
NICA : Nepal Industrial and Commercial Bank and Bank Of Asian
NIM : Net Interest Margin
NRB : NEPAL RASTRA BANK
NBFIs : Non-Bank Financial Institutions
INVESTDA : Investment to total assets
NRBTDR : NRB Balance to total deposit ratio
POS : Point of Sale
PTL : Provision to total loan ratio
ROA : Return on asset
ROA : Return on Asset
ROE : Return on Equity
VIF : Variance Inflation Factor

ix
 ABSTRACT

Liquidity management is crucial, given highly volatile markets and increasingly

complex investment options. The misalignment of a portfolio’s liquidity profile with
cash flow demands can lead to a liquidity squeeze and cause drastic effect on bank
profitability. Accordingly, the overall performance of an institution will be adversely
affected. This study intended to investigate the impact of liquidity on profitability to
address the objectives, the article has sampled 2 commercial bank NABIL Bank and
NICA Bank quantitative data were used for the objective of the study. Considering
the liquidity management can increase the profitability of the bank. Descriptive
method and Casual comparative method was used in this study. The time series data
taken from the audited financial statements of the Bank, particularly balance sheet
and income statements during FY 2016/17 to FY 2020/21 were analyzed using
Financial ratios, regressions and correlation. Results of the correlation and
regression analysis shows positive relationship between LFTDR, LFTAR, CHTDR,
CABTDR and LFTCL with ROA which indicate increasing in LFTDR, LFTAR,
CHTDR, CABTDR AND LFTCR will increase ROA of bank. Similarly, There is
NEGATIVE RELATION BETWEEN NRBTDR and ROA which indicate increase in
NRBTDR will decrease ROA of bank. In addition, the existing liquidity measurement
tools were found out to be applicable and effective in terms of liquidity measurement
and management. Finally, the study concluded that the impact of liquidity on
profitability of NABIL Bank and NICA Bank was positive and significant.

x
 CHAPTER I
INTRODUCTION

1.1. Background of the study

Banks are financial institutions that play intermediary role in the economy through
channeling financial resources from surplus economic units to deficit economic units.
In turn, they facilitate the saving and capital formation in the economy. In performing
these activities, banks are highly dependent upon public confidence and requirement
to meet increasing customers’ needs and expectations. To fulfil these expectations
banks’ liquidity position plays a significant role.

The principal types of banking in the modern industrial world are commercial banking
and central banking. A commercial banker is a dealer in money and in substitutes for
money, such as checks or bills of exchange. The banker also provides a variety of
other financial services. The basis of the banking business is borrowing from
individuals, firms, and occasionally i.e., receiving “deposits” from them. With these
resources and with the bank’s own capital, the banker makes loans or extends credit
and invests in securities. The banker makes profit by borrowing at one rate of interest
and lending at a higher rate and by charging commissions for services rendered.
Commercial banks are the major financial institutions that occupy quite an important
place in the framework in the economy development sectors as well as in saving and
investment sectors. Commercial banks are suppliers of finance they are the life blood
for circulation of countries trade and industry and play a vital role in the economic
development and financial life of the country. They also provide an opportunity in the
development of individual industries, trade and business organization by investing
savings and collected deposits. Besides they also render numerous services to its
customers in a view of providing facilities to theirs economic and social life in the
community. Banks accept deposit, make loans, and derive a profit from the difference
in the interest rates paid and charged, respectively. Depositors may be either
individual or institutions. These deposits may be current, saving or fixed and the
tenure depends upon the mutual agreements between the bank may be either an
individual or institutions. The tenure of the loan may vary as per the demand, criteria
and the usefulness of the loan. Some banks also have the power to create money
 2

Bank is considered as the backbone in the development of the national economy. It is

financial institution, which act as a transaction of money by accepting various types of
deposit, disbursing loans and rendering other financial services. So, among the
various function to provide loan to the investors is the major function. Liquidity of
respected banks or firms consider to be ability to meet all its obligations. The banks
need to repay its depositors and full fill the all of transaction without delay. In
banking sector, liquidity issues consider to be important because its smoothness build
public trust (Anggari & Dana, 2020). Rosyid and Irawan Noor (2018) stated that the
Loan to Deposit Ratio is how far the bank's ability to repay the withdrawal of funds.
Loan to deposit ratio is one of important ratio that measure the liquidity condition of
banks. Kusumastuti and Alam (2019) found that LDR has negative effect and has no
significant effect on profitability. Rosyid and Irawan Noor (2018) also found that
LDR has significant effect on profitability of commercial banks. This research
expected LDR have both negative and positive affect on profitability of commercial
banks.

Basel Committee on Banking Supervision (2008) defined liquidity as the ability of a

bank to fund increase in assets and meet its obligations as they come due without
incurring unacceptable losses. Hence, liquidity risk arises from the fundamental role
of banks in the maturity transformation of short-term deposits into long-term loans.
Through the loan, there will be increase in the environment of the investment and the
bank has the major role in creating such an environment (Singh, 2007).

Liquidity risk is said to be assassin of banks. This risk can adversely affect both
bank’s earnings and the capital. Therefore, it becomes the top priority of a bank’s
management to ensure the availability of sufficient funds to meet future demands of
providers and borrowers, at reasonable costs. The optimal of liquidity management
could be achieve by company that mange the trade off between liquidity and
profitability Episodes of failure of many conventional banks from the past and the
present provide the testimony to this claim. It is evident that liquidity and liquidity
risk is very up-to-date and important topic. Therefore banks and more so their
regulators are keen to keep a control on liquidity position of banks. As there has been
number of commercial banks established, the research has been taken into
 3

consideration of NABIL and NICA. Therefore, short glimpse of these commercial

banks are given as:

Nepal Arab Bank Ltd (NABIL)

Nabil Bank Limited is the nation’s first private sector bank, commencing its business
since July 1984. Nabil was incorporated with the objective of extending international
standard modern banking services to various sectors of the society. Pursuing its
objective, Nabil provides a full range of commercial banking services through its 118
points of representation. In addition to this, Nabil has presence through over 1500
Nabil Remit agents throughout the nation.

Nabil, as a pioneer in introducing many innovative products and marketing concepts

in the domestic banking sector, represents a milestone in the banking history of Nepal
as it started an era of modern banking with customer satisfaction measured as a focal
objective while doing business. Operations of the bank including day-to-day
operations and risk management are managed by highly qualified and experienced
management team. Bank is fully equipped with modern technology which includes
international standard banking software that supports the E-channels and E-
transactions.

Nabil is moving forward with a Mission to be “1st Choice Provider of Complete

Financial Solutions” for all its stakeholders; Customers, Shareholders, Regulators,
Communities and Staff. Nabil is determined in delivering excellence to its
stakeholders in an array of avenues, not just one parameter like profitability or market
share. It is reflected in its Brand Promise “Together Ahead”. The entire Nabil Team
embraces a set of Values “C.R.I.S.P”, representing the fact that Nabil consistently
strives to be Customer Focused, Result Oriented, Innovative, Synergistic and
Professional.

Nepal Industrial and Commercial Asia Bank (NICA)

NIC ASIA Bank has its antecedents in NIC Bank which was established on 21st July
1998. The Bank was rechristened as NIC ASIA Bank after the merger of NIC Bank
with Bank of Asia Nepal on 30th June 2013. This was a historic merger in the annals
of the Nepalese financial landscape as the first of its kind merger between two
 4

successful commercial banks in the country. Today, NIC ASIA has established itself
as one of the most successful commercial banks in Nepal.

During the post-merger integration phase, NIC ASIA managed the transition very
smoothly receiving accolades from the regulators as well as the stakeholders, paving
the way for other mergers and consolidation in the Nepalese financial sector. After the
merger, NIC ASIA was recognized as ”Bank of the Year 2013-Nepal” by The Banker,
Financial Times, UK. This is the second time that the Bank was recognized with this
prestigious award, the previous occasion being in 2007.

NIC ASIA Bank is now, one of the largest private-sector commercial banks in the
country in terms of capital base, balance-sheet size, number of branches, ATM
network, and customer base. The Bank has 352 branches, 75 extension counters
80 branchless banking, and 471 ATMs across Nepal with a network covering all
major financial centers of the country. The Bank strongly believes in Meritocracy,
Transparency, Professionalism, Team spirit, and Service Excellence. These core
values are internalized by all functions within the Bank and are reflected in all actions
the Bank takes during its business.

1.2. Statement of the Problem

In the course of the financial inter-mediation role, commercial banks reactivate the
idle funds borrowed from the lenders (depositors) by investing such funds in different
classes of portfolios. Such business activity of a bank is not without problems since
the deposits from these fund savers which have been invested by the banks for profit
maximization, can be recalled or demanded when the later is not in position to meet
their financial obligations. Considering the public loss of confidence as a result of
bank distress which has affected the financial sector in the last decade. Both the
liquidity deficit and more liquidity surplus indicate the problems in banks as it reduce
the return on assets. Similarly, liquid deficit also cost much to the bank in term of the
higher purchasing price of liquidity and affects reputation of the banks and the
intensity of competition in the banking sector due to the emergence of large number
of new banks, every commercial bank should ensure that it operates for profit and at
the same time meets the financial demands of its depositors by maintaining adequate
liquidity.
 5

Tseganesh (2014) made a study so as to identify determinants of commercial banks

liquidity in Ethiopia and then to spot the impact of banks liquidity upon financial
performance through the significant variables explaining liquidity. Accordingly, the
researcher found out that there exist non-linear relationship between liquidity and
bank performance. Lily (2014) to assess the impact of liquidity on profitability of
Awash International Bank S.C., it was also found out that there is non-linear
relationship between liquidity and profitability.

Bassey & Tobi (2016) This study support the fact that there is a strong relationship
between banks reserve requirement and bank deposits in one hand, and bank
investment and cash ratio in the other handMalik, Awais, & Khursheed (2016)
reached at a step that obviously there is negative relationship between the Profitability
Ratio and the Liquidity Ratio. Some-times, there may be a weak positive relation
between these ratios.

Hlebik & Ghillani (2017) explain that If banks decide to increase the liquid portion of
assets, risk weights diminish and consequently required capital is reduced.

(Shrestha, 2018) indicate that there is a significant relationship between Profitability

of commercial banks and Credit Deposit Ratio and Cash Reserve Ratio. The
conclusion of the study is that CRR has great impact on ROA than other components
which are influenced by other factors such as savings, interest rates other than CRR
and CDR

(Satyakama & Pradhan, 2019). It is found that there is a significant negative effect of
CDR and IDR on ROA. However, in the case of ROE, it is found that there is no
significant relationship between banks’ profitability and liquidity.

(Khati, 2020) The findings of such study clarify that cash-deposit ratio (CDR) has
positive and insignificant relationship with banks profitability when it is analyzed by
banks profitability determinants return on assets (ROA) and return on equity (ROE).
The finding indicates that credit-deposit (CDR) has positive but insignificant
relationship with ROA. However credit-deposit (CDR) has negative and insignificant
relationship with return on equity (ROE). This reveals that profitability ratio ROE has
no relationship with those liquidity ratios.
 6

Dzapasi (2020) indicated that a positive and significant relationship does exist
between liquidity management and financial performance. However, Onyango and
Olando (2020) analyzed the impact of bank-specific factors on the profitability of
commercial banks in Kenya and the results show that liquidity has a negative effect
on ROA

(Niroula & Singh, 2021) The finding shows that the CAR has highly significant and
negative effect on ROE. Furthermore, variable CRR has positive and significant effect
on both ROA and ROE.

(Javid, Chandia, Zaman, & Akhtar, 2021) study found a negative relationship of
liquidity creation with profitability meanwhile positive relation with banking stability.
However, this study shows a negative relation of political instability with liquidity
creation, profitability and stability of overall banks of Pakistan.

Therefore, this study will attempt to investigate this trade-off and what kind of
relationship exists between the aforementioned two variables (liquidity and
profitability) in the context of comparative analysis between NABIL and NICA
Banks.

The study will be directed towards answering following questions :

• What is the relationship of LFTDR, LFTAR, NRBTDR, CHTDR,

CABTDR and LFTCLR with ROA of NABIL and NICA Bank?

• What is the Impact of LFTDR, LFTAR, NRBTDR, CHTDR,

CABTDR and LFTCLR with ROA of NABIL and NICA Bank?

1.3 Objective Of The Study

The main objective of this study is to identify the impact of liquidity on profitability
of private commercial bank in Nepal.

The Specific objectives are as follows

• To identify the profitability and liquidity position of NABIL and NICA
• To investigate the relationship that prevails between liquidity and
profitability of NABIL and NICA
 7

• To find out the extent to which liquidity affects profitability of the

NABIL and NICA
• To evaluate the effect of external factors on performance of NABIL
and NICA

1.4 Hypothesis of the study

H01:- There is a significant effects of liquidity fund to current liabilities ratio

(LFTCLR) on return on assets (ROA) in both NABIL and NICA.

H02 :- There is a significant effects of liquidity fund to total deposits ratio (LFTDR)
on return on assets (ROA) in both NABIL and NICA.

H03 :- There is a significant effects of total liquidity fund (LFTAR) on return on

assets (ROA) in both NABIL and NICA.

H04 ;- There is a significant effects of NRB balance to total deposits ratio (NRBTDR)
on return on assets (ROA) in both NABIL and NIC

H05 :- There is a significant effects of cash in hand to total deposits ratio (CHTDR)
on return on assets (ROA) in both NABIL and NICA.

H06 :- There is a significant effects of cash and bank balance to total deposits ratio
(LFTCLR) on return on assets (ROA) in both NABIL and NICA.

1.5 Rational of the Study

• The research will identify the technical and operational challenges of
NABIL and NICA Bank to remain liquid and at the same time
profitable.
• This research will also add to the body of literature about determining
the impact of liquidity on profitability of commercial banks.
• The outcome of this study will further assist other researchers in
paving the way for additional studies in the area of the topic under
study.

1.6 Limitations of the Study

 8

Never the less, the analysis performed and conclusion drawn regarding the liquidity
and profitability position of commercial Bank; there is considerable place for arguing
about its accuracy and reliability. There are limitations, which weaken the conclusion
e.g. inadequate data, time and other variable.
• Though there are around 27 commercial banks, the study covers only 2
commercial banks: NABIL Bank Limited and NICA Bank Limited.
• The study period cover five fiscal years beginning from FY2016/017 to
FY2020/021
• The study has considered only the secondary data. The data collection
conducting primary survey has not been taken into consideration.
Hence, the result of the study is not broad and flexible. It is limited to
the data available in the annual reports of the banks and financial
reports published by Nepal Rastra Bank.
• the study has focused only on commercial bank and has excluded other
institution such as development banks, finance companies, and
microfinance
• All the portion of the analysis is based on the secondary data and
available information. Therefore the consistency of finding and
conclusion are dependent upon the reliability of secondary data and
information.
• Many factors affect liquidity of bank, International liquidity and
valuation of firm however only related factor are taken into
consideration in this study.

1.7. Chapter Plan

The study is organized into five chapters. The first chapter provides background of the
study, background of the company, statement of the problems, objectives of the study,
research questions, significance of the study and scope and limitations of the study. In
the second chapter, review of literature and empirical studies are covered. The
research design and methodology is presented in the third chapter. The fourth chapter
deals with analysis, presentation and interpretation of data. The fifth chapter provides
summary, conclusion and recommendation of the study. Finally the bibliography and
appendices are attached with the research paper.
 CHAPTER II
LITERATURE REVIEW

2.1 Theoretical Review

Financial intermediation role of commercial banks is the bed-rock of the two major
functions of commercial banks namely deposit mobilization and credit extension. An
adequate financial intermediation requires the purposeful attention of the bank
management to profitability and liquidity, which are two conflicting goals of the
commercial banks. These goals are parallel in the sense that an attempt for a bank to
achieve higher profitability will certainly erode its liquidity and solvency positions
and vice versa.

Bank Liquidity simply means the ability of the bank to maintain sufficient funds to
pay for its maturing obligations. It is the bank’s ability to immediately meet cash,
cheques, other withdrawals obligations and legitimate new loan demand while abiding
by existing reserve requirements.

Definition of Liquidity by Basel Committee on Banking Supervision

The Basel Banking Supervision Committee defines liquidity as an entity’s capacity to

finance increases in its volume of assets and to comply with its payment obligations
on maturity, without incurring unacceptable losses.

In this regard, liquidity risk can be expressed as the probability of incurring losses
through insufficient liquid resources to comply with the agreed payment obligations
within a certain time horizon, and having considered the possibility of the entity
managing to liquidate its assets in reasonable time and price conditions.

Liquidity Management

According to Adebayo et.al (2010), Liquidity management refers to the planning and
control necessary to ensure that the organization maintains enough liquid assets either
as an obligation to the customers of the organization so as to meet some obligations
incidental to survival of the business or as a measure to adhere to the monetary
policies of the central bank. For a commercial bank to plan for or manage its liquidity
position, it first manages its money position by complying with the legal requirement.
 10

Actually, management of money position is essential if a bank must avoid excesses

or deficiencies of required primary reserves. Where there is a decline in market price
of securities or where additional funds needed to correct the bank reserve position are
for a very short time, it will be definitely expensive to sell securities than to borrow
from another bank.

Moreover, it may be more desirable to borrow for bank's liquidity needs than to call
back outstanding loans or to cancel or place embargo on new loans, a situation that
will reduce the existing and potential customers of a bank. Commercial banks are
expected to maintain certain levels of reserves. These reserves are statutory
requirements stipulated by the central bank specifying the cash reserves equal to
certain fraction of the banks’ deposits or loans and advances which bank must
maintain. The purpose of liquidity management is to ensure that every bank is able to
meet fully its contractual commitments. The ability to fund increases in assets and
meet obligations as they come due is critical to the ongoing viability of any bank.

Therefore, managing liquidity is among the most important activities conducted by

banks.

Sound liquidity management can reduce the probability of serious problems. Indeed,
the importance of liquidity transcends the individual bank, since a liquidity shortfall at
a single bank can have system-wide repercussions. For this reason, the analysis of
liquidity requires the management of the bank not only to measure the liquidity
position of the bank on an ongoing basis, but also to examine how funding
requirements are likely to evolve under various scenarios, including adverse
conditions (NBE Risk Management Guidelines, 2010).

2.1.1 Theories of Liquidity and Liquidity Management

The theories and management of liquidity are outlined and explained in this section.

Anticipated Income Theory :-

This theory holds that a bank’s liquidity can be managed through the proper phasing
and structuring of the loan commitments made by a bank to the customers. Here the
liquidity can be planned if the scheduled loan payments by a customer are based on
 11

the future of the borrower. According to Nzotta (1997) the theory emphasizes the
earning potential and the credit worthiness of a borrower as the ultimate guarantee for
ensuring adequate liquidity. Nwankwo (1991) posits that the theory points to the
movement towards self- liquidating commitments by banks. This theory has
encouraged many commercial banks to adopt a ladder effects in investment portfolio.

Shift ability Theory :-

This theory posits that a bank’s liquidity is maintained if it holds assets that could be
shifted or sold to other lenders or investors for cash. This point of view contends that
a bank’s liquidity could be enhanced if it always has assets to sell and provided the
Central Bank and the Discount Market stands ready to purchase the asset offered for
discount. Thus this theory recognizes and contends that shiftability, marketability or
transferability of a bank's assets is a basis for ensuring liquidity.

This theory further contends that highly marketable security held by a bank is an
excellent source of liquidity. Liquidity management theory according to Dodds (1982)
consists of the activities involved in obtaining funds from depositors and other
creditors (from the market especially) and determining the appropriate mix of funds
for a particularly bank. This point of view contends that liability management must
seek to answer the following questions:
- How do we obtain funds from depositors?
- How do we obtain funds from other creditors?
- What is the appropriate mix of the funds for any bank?

Management examines the activities involved in supplementing the liquidity needs of

the bank through the use of borrowed funds.

The liquidity management theory focuses on the liability side of bank balance sheet.
This theory contends that supplementary liquidity could be derived from the liabilities
of a bank. According to Nwankwo (1991) the theory argues that since banks can buy
all the funds they need, there is no need to store liquidity on the asset side (liquidity
asset) of the balance sheet.

Liquidity theory has been subjected to critical review by various authors. The general
consensus is that during the period of distress, a bank may find it difficult to obtain
 12

the desired liquidity since the confidence of the market may have seriously affected
and credit worthiness would invariably be lacking. However, for a healthy bank, the
liabilities (deposits, market funds and other creditors) constitute an important source
of liquidity.

Commercial Loan Theory :-

A critical underlying assumption of the theory held that short-term commercial loans
were desirable because they would be repaid with income resulting from the
commercial transaction financed by the loan. This theory has been subjected to
various criticisms by Dodds (1982) and Nwankwo (1992). From the various points of
view, the major limitation is that the theory is inconsistent with the demands of
economic development especially for developing countries since it excludes long term
loans which are the engine of growth. The theory also emphasizes the maturity
structure of bank assets (loan and investments) and not necessarily the marketability
or the shiftability of the assets.

Moreover, the theory fails to reflect in the normal stability of demand deposits in the
liquidity consideration.

This obvious view may eventually have impact on the liquidity position of the bank.
Also the theory assumes that repayment from the self-liquidating assets of a bank
would be sufficient to provide for liquidity. This ignores the fact that seasonal
deposit-withdrawals and meeting credit request could affect the liquidity position
adversely.

2.1.2 Importance of Liquidity

Banks are facing problems with the liquidity crisis because of poor liquidity
management. As every transection or commitment has implication for a banks
liquidity, managing liquidity risk are of paramount importance. Liquidity risk has
become one of the most important elements in enterprise-wide risk management
framework. A bank’s liquidity framework should maintain sufficient liquidity to
withstand all kinds of stress events that will be faced. Constant assessment of liquidity
risk management framework and liquidity position is an importance supervisor action
 13

that will ensure the proper functioning of the banks. The importance of liquidity is
mention below:

For withdrawal of deposits for lending loans and advance for meeting official and
personnel expense. For invest money in different sector. For catching external
opportunitie. For fulfillment of administrative expenses. Fpr meeting contingent
liabilities such as invocation of guarantee, payment pf LC, and other payment like
fines etc.

2.1.3 Sources for Bank’s Liquidity

▪ Primary Depsoites : Bank accept deposit from customers in cash,
cheques and remittance from various banks. This increase the bank’s
cash in hand or deposits with other banks, which is an increase in the
bank’s liquidity.
▪ Capital : By issuance of shares, liquidity is supplied to the bank.
▪ Loans : Borrowing made by banks and from central banks under
refinance facility increase the bank’s liquidity.
▪ Repayment of Loan ; When loan or its interest is repaid by the
customers, bank’s liquidity increases.
▪ Miscellaneous sources ; Cheque sent on collection, fund transferred
fron the other banks and sales of assets increases the bank’s liquidity.

2.1.4 Need and Importance of liquidity Management for Commercial Banks

People deposits their savings into the banks to safeguard them, earn interest, and get
back whenever they need. Therefore, banks must maintain liquidity to refund the
deposits, when accountholders withdraw deposits. Hence, liquidity is the life-blood of
bank, without which a bank cannot survive for long. Banking transection are more
dependent upon the mutual faith between bankers and customers. It is essential to
maintain sufficient cash reserve in banks to maintain the public faith (Singh, 2007).
The basic importance of effective liquidity management can be presented as given
below:
• Payment of Cash.
• Cash Reserve ratio
• Statutory Liquidity Ratio
 14

• Loan Advancement
• Administrative expenses
• Dividend payment
• Risk
• Expansion and Growth

2.1.5 Liquidity Measurement in Commercial Banks

Practically, liquidity management in commercial banks is surrounding both size of the

prospective needs for liquidity at any given time and the availability of sources of
liquidity sufficient to meet them. The importance of accurate liquidity measurement
cannot be over stressed as it reveals the liquidity positions of the banks through which
the operators of the financial market and other creditors adjudged the credit
worthiness of the banks.

Liquidity can be measured as a stock or as a flow. From the stock perspective,

liquidity management requires an appraisal of holdings of assets that may be turned
into cash. The determination of liquidity adequacy within this framework requires a
comparison of holding of liquid assets with expected liquidity needs. Stock concept of
liquidity management has been criticized as being too narrow in scope.

The flow concept of liquidity measurement views liquidity not only as the ability to
convert liquid assets into cash but also the ability of the economic units to borrow and
generate cash from operators. This approach recognizes the difficulty involved in
determining liquidity standards since future demands are not known. It also
recommends accurate forecast of cash needs and expected level of liquid assets and
cash receipts over a given period of time for there to be a realistic appraisal of a
bank's liquidity position.

Between the two concepts, the stock concept is the widely used and involving the
application of financial ratios in the measurement of liquidity positions of commercial
banks. One of the popular financial ratios used in such measurement is liquidity ratios
which measures the ability of the bank to meet its current obligations. The liquidity
ratios are composed of current ratio and quick ratio.
 15

Current ratio is a measure of a commercial bank's short term solvency and is

calculated by dividing current assets by current liabilities incurred. The current assets
are composed of cash and those assets which can be converted into cash in a short
period which include marketable securities, receivables, inventories, and prepaid
expenses. Current liabilities consist of all obligations maturing within a year. They
include accounts payable, bills payable, note payable, accrued expenses and tax
liability. A current ratio that is greater than one is adjudged satisfactory for most
business firms even though it is difficult to authoritatively set one standard for all
firms. The problem associated with the measure of liquidity with current ratio is that it
is the test of quantity and not quality of the assets and hence, it does not reveal the
true position of a firm's liquidity. Current ratio gives a rough idea of the firm's
liquidity.

Another aspect of liquidity ratio is quick ratio, which indicates the relationship
between liquid assets and current liabilities. Quick ratio is calculated by dividing the
quick asset (current asset less inventories) by current liabilities. The quick assets are
the assets that can be converted into cash immediately without losing their values.
Inventories are subtracted from the current assets because they normally require some
time for realizing cash and their value has a tendency to fluctuate.

Quick ratio is considered to be a better guide to the short-term solvency of a firm. A

quick ratio is considered to represent a satisfactory current financial condition.
However, each industry has its own operating characteristics which demands different
financial standards.

Other ratios which have been developed to measure liquidity are liquid assets to total
assets; liquid assets to total deposits; loans and advances to deposits. Calculating the
ratio of liquid assets to total assets explains the importance of a bank's liquid assets
among its total assets. It indicates the proportion of a bank's total assets that can be
converted into cash at a short notice. The ratio of liquid assets to total deposits shows
what percentage of a bank's deposits is held in liquid form. It relates liquid assets
directly to deposit level.

The ratio of loan and advances to deposits reflects the quantity or proportion of the
customers' deposits that has been given out in form of loans and the percentage that is
 16

retained in the liquid forms. The ratio serves as a useful planning and control tool in
liquidity management since commercial banks use it as a guide in lending and
investment, and to make a total evaluation of their expansion program. When the ratio
rises to a relatively high level, banks are encouraged to lend and invest and vice versa,
to take some benefit of profitability.

Cash ratio i.e. ratio of cash to total deposits or assets is another measure of bank
liquidity. Its advantage over others is that liquid assets are related directly to deposits
rather than to loans and advances that constitute the most illiquid of banks assets. Its
drawback is that a substantial part of the cash assets is not really available to meet
most liquidity assets.

According to Obilor (2013), another measure of bank liquidity is the loan to liabilities
ratio. The approach recognises that liabilities other than deposits ratio represent
potential drain on bank funds.

According to State Bank of Pakistan category, all the above mentioned ratios and
measures are classified in the following manner:

i. Cash Flow Ratios and Limits. One of the most serious sources of liquidity
risk comes from a bank's failure to "roll over" a maturing liability. Cash flow
ratios and limits attempt to measure and control the volume of liabilities
maturing during a specified period of time.

ii. Liability Concentration Ratios and Limits. Liability concentration ratios

and limits help to prevent a bank from relying on too few providers or funding
sources. Limits are usually expressed as either a percentage of liquid assets or
an absolute amount. Sometimes they are more indirectly expressed as a
percentage of deposits, purchased funds, or total liabilities.

iii. Other Balance Sheet Ratios. Total loans/total deposits, total loans/total
equity capital, borrowed funds/total assets etc are examples of common ratios
used by financial institutions to monitor current and potential funding levels.
 17

2.1.6 The Concept of Profitability in Banks

Corporate profit planning remains one of the most difficult and time consuming
aspects of financial management because of the many variables involved in the
decision which are often outside the control of the company. It is even more difficult
if the company is operating in a highly competitive economic environment. A
business unit can only grow focusing on its inner strengths to exploit the opportunities
in the market. Consequently, the best definition as cited in Obilor (2013) that was
opined by Tsomocos (2003) should be adopted from a survival growth perspective as
business unit should think of surviving before making profit. Again, optimizing profit
involves two variables; revenue and cost. The issue of profitability is a continuous
issue that a company has to consistently make. Essentially profitability is concerned
with the level of turnover that must be achieved in order to cover the level of turnover
that must be achieved in order to cover costs and make surplus.

Corporate profitability may be improved through ratio analysis, breakeven analysis,

marginal analysis, cost control or through financial control. It is therefore necessary to
mention at this juncture that whether a bank is planning for profit or taking steps to
improve its profitability, it must ensure that it has adequate liquidity to transact
business and finance operations. If the plan is to improve or increase profitability by
increasing the income level, the bank must be able to determine the financing needs
for the new income level.

2.1.7 Measure of Bank Performance

a) Income

Net operating income is computed by subtracting the operating expenses from the
operating income of the Bank. It is closely watched by bank managers, bank
shareholders, and bank regulators because it indicates how well the bank is doing on
an ongoing basis. Net income, usually referred to as profits after taxes, is the figure
that tells us most directly how well the bank is doing because it is the amount that the
bank has available to keep as retained earnings or to pay out to stockholders as
dividends.

b) Return on Asset (ROA)

 18

The return on assets ratio, often called the return on total assets, is a profitability ratio
that measures the net income produced by total assets during a period by comparing
net income to the average total assets. ROA is a basic measure of bank’s profitability
that corrects for the size of a bank. In other words, the return on assets ratio measures
how efficiently a bank can manage its assets to produce profits during a period.

Since company assets' sole purpose is to generate revenues and produce profits, this
ratio helps management see how well the company can convert its investments in
assets into profits.

c) Return on Equity (ROE)

This ratio indicates how profitable a bank is by comparing its net income to its
average shareholders' equity. The return on equity ratio (ROE) measures how much
the shareholders earned for their investment in the bank. The higher the ratio
percentage, the more efficient management is in utilizing its equity base and the better
return is to investors.

d) Net Interest Margin (NIM)

Net interest margin (NIM) is a measure of the difference between the interest income
generated by banks or other financial institutions and the amount of interest paid out
to their lenders (for example, deposits), relative to the amount of their (interest-
earning) assets.

It is a performance metric that examines how successful a bank's investment decisions

are compared to its debt situations. A negative value denotes that the firm did not
make an optimal decision, because interest expenses were greater than the amount of
returns generated by investments.

Although net income gives an idea of how well a bank is doing, it suffers from one
major drawback: It does not adjust for the bank’s size, thus making it hard to compare
how well one bank is doing relative to another or at various levels of asset position.
Return on Equity on the other hand is concerned about how much the bank is earning
on owners equity investment instead of earning assets. In addition to this, the major
weakness of Net Interest Margin as a measure of profitability is that it focuses only on
income related to interest by disregarding other forms of income like fees,
 19

commissions and others. In general, the aforementioned measurements fail to show

the overall performance of a bank. Therefore, for this specific study, the researcher
preferred to use ROA as a measure of bank performance due to the above mentioned
reasons.

2.2. Empirical Review

A study undertaken by Obilor (2013) on the same topic in Nigerian commercial banks
with a sample of 3 commercial banks came up with the finding that for banks to
resolve the liquidity/profitability trade-off, there is a need for each bank to determine
its optimal liquidity position.

The researcher has identified 3 variables such as Bank cash asset, Bank balances, and
Treasury Bills and Certificate of Deposit as its independent variables and profit as
dependent variable. The source of data and method of data analysis employed by this
study were secondary data and regression analysis respectively.

Bordeleau & Graham (2010) the question of liquidity impact on banking profitability
is a complex issue which could depend upon many factors, including the bank’s
business model.

Tseganesh (2014) that tries to identify determinants of commercial banks liquidity in

Ethiopia and then to spot the impact of banks liquidity upon financial performance
through the significant variables explaining liquidity. Balanced fixed effect panel
regression was used for the data of eight commercial banks in the sample covered the
period from 2000 to 2011. Eight factors affecting banks liquidity were selected and
analyzed.

Dereje (2015), made an exploratory study titled assessment of liquidity risk

management practices at Wegagen Bank. The researcher used questionnaires,
interview and annual audited reports and identified that the Bank has been trying to
establish independently organized liquidity risk management functions and
established Asset Liability Management Committee and put in place polices and
limits though they are not effective in dealing with liquidity risks. Despite the Bank
has a problem in monitoring and controlling liquidity position in light of the existing
 20

policies and limits, weak management information system and there exist
concentration risk of funding sources.

Pradhan & Shrestha (2016) Indicated that increase in liquidity ratio and quick ratio
leads to decrease in the performance and profitability of the Nepalese commercial
banks. Rifat (2016) analyzed a panel data-set consisting of seven NBFI with a time-
span of 12 years (2003-2014) is analyzed for this purpose. Among macroeconomic
variables, GDP growth rate, inflation rate and broad money in GDP are used. To
capture management ability, firm-specific variables like, loan growth, loan to asset
ratio, return on asset and relative size of firm were included in the study. Results show
that firm-specific factors were more significant for non-performing loan of the NBFIs.
Among macroeconomic variables, money supply was found to have significant
impact.

Hakimi & Zaghdoudi (2017) aim to investigate the effect of liquidity risk on bank
performance. To this end, resercher used a sample of 10 Tunisian banks during the
period 1990-2013. The econometric method served in this study is panel data analysis
precisely the random effect model. Empirical results show that liquidity risk decreases
significantly bank performance. Also, findings indicate that international financial
crisis and inflation act negatively and significantly on bank performance. However,
the effect of the other bank specifics such as credit risk, size and capital adequacy
ratio are not significant.

Akhtar (2018) revealed the results of the empirical study indicate that liquidity and
profitability combined explain about 66.23% and 98.85% of the bank’s operating
efficiency under Fixed Effect Regression Model and Panel Correlated Standard Error
Model respectively, and after maintaining minimum liquidity, banks are motivated to
follow high quality lending policy and ensure proper utilization of their customer’s
deposits and borrowings through making high-quality loan portfolio to ensure
earnings for their shareholders.

Chen et al. (2018) The question of liquidity impact on banking profitability is a

complex issue which could depend upon many factors, and different financial systems
within which the bank is operating.
 21

Abbas et. al., (2019) The study shows that the liquidity has strong influence on
profitability as compared to other variables.

Paul, Bhowmik and Famanna (2020) investigate the effect of banks' liquidity on its
profitability. A quantitative analysis is performed on a statistical sample of forty (40)
commercial banks in Bangladesh. Secondary data is used to evaluate the performance
of the last ten years (2009-2018) of the annual report of the commercial banks in
Bangladesh. It is observed that LDR, DAR and CDR had a substantial effect on the
profitability measured as ROE, but LAR and CR proved insignificant. Therefore, it
can be concluded that, in general, the impact of liquidity has a significant effect on the
profitability in the commercial banking sector of Bangladesh.

Lebbaz, & Boukhari, (2020). The study conducted a panel regression analysis, to
estimates the variation of the performance measures using fixed and random effects
methods, after that, a Hausman’s test was established to determine the appropriate
model to estimate. The results show that financial performance in Algerian banks
measured using ROA and ROE, have a significant relationship with both bank
specific variables and macroeconomic variables: interest rate risk (IRR), funding
liquidity ratio (FL), provision to total loans ratio (PTL), GDP, inflation, real exchange
rate (USD/DZD) and to real interest rate. Findings also indicate that Algerian banks
need to improve loan quality and have sound credit risk management procedures

2.3 Conceptual Framework

Summarizing the results from numerous studies; Liquidity ratio and loan to deposit
ratio (Adebayo et.al. 2011 and Oblior, 2013) were taken as internal factors affecting
banks performance. On the other hand; Gross Domestic Product, inflation, interest
rate and NBE Bills to Net Loans and Advances ratio were among the external factors
that can affect the Overall, the framework shows the internal and external factors as
the independent variables and bank profitability, which is expressed as Return on
Asset as the dependent variable.
 22

External factors

Interest rate
Inflation
NBE Bills to Loans and
Advances ratio
Dependent Variable

Return on Assets

Internal factors

Liquidity ratio
Loan to deposit ratio
Figure 1: Conceptual Framework
Note : From performance of a particular bank (NABIL Bank LTD and NICA Bank
LTD ).

2.3.1 Definition of Terms

For the purpose of this paper,

i. Interest rate: refers to the cost of fund that will be incurred by commercial
banks while mobilizing deposits. In fact, the minimum rate of saving deposit is
determined by NBE.

ii. Annual Inflation rate: it measures the overall percentage increase in

consumer price indices for all goods and services. considering the findings of
previous studies ( Demirguc-Kunt & Huizinga, 1999), proposed a positive
association between inflation and bank profitability. In consideration of this,
the study is expected to show a positive relationship between inflation rate and
performance of the private commercial banks.

iii. Profitability : It is a business ability to produce a return on an investment

based on its resources in comparison with an alternative.

iv. Liquidity ratio: here liquidity was measured as the ratio of liquid assets to
total current liabilities.

v. Loans to Deposit Ratio: the ratio of credit to deposits may give indications of
the ability of the bank to mobilize deposits to meet credit demand. This
 23

indicates the degree to which a bank can support its core lending business
through its deposits.

vi. Return on Assets (ROA): shows how profitable a company's assets are in
generating revenue. Return on assets is computed as net income divided by
average total assets

2.4 Research Gap

From the above literature, it can be concluded that there is no any similar findings of
the studies. Most of the studies have used either time series or cross section data. In
the context of Nepal only few efforts have been made to examine the issue related to
liquidity and profitability. It is clear that the new research cannot found on that extent
topic comparative analysis on liquidity and profitability analysis of these two selected
banks. Under this topics many researcher have been done but none of the researcher
undertaken regarding the study of impact of liquidity on profitability analysis of
NABIL Bank Limited and NICA Bank Limited. NABIL banks is consider as a blue-
chip bank and of the well managed bank in banking sector and NICA Bank is the
example of one of the fastest growing banks for commercial banking sector in Nepal..
Hence, this study fulfills the prevailing research gap about the in depth analysis of
liquidity and profitability which is the major concern of the shareholders and
stakeholders, not only that because of COVID-19 pandemic entire world is suffering
from economic crises and it’s the one of the major question of now and challenging
situation to commercial banks for managing liquidity levels and sustain profitability.
Specifically, the study is primarily designed to fill the gap of similar studies in
Nepalese context. This study has attempted to carry out distinctly from the previous
studies in terms of sample size, nature of the sample firms and the research
methodology used. This study has covered 2 blue-chip banks with 5 years data. This
study mostly used foreign writer’s articles to explore impact of liquidity on
profitability of commercial banks. This study has applied casual comparative research
design and descriptive research design to explore the in depth analysis. Though, a
number of studies in various developing and developed countries have been carried
out, findings of these studies may not be applied in Nepalese context. The study
attempted to explore the various factors affecting the impact of the liquidity on
profitability of Nepalese commercial banks.
 CHAPTER III
RESEARCH METHODOLOGY

Research method is plan to obtain to answer of the research questions throw analysis
the data. It is systematic way to solving the overall problem. Research methodology
refers overall process to analysis the data and finding and solving the problems.
Research methodology refers to the overall research process, which a researcher
conduct during their overall study. Research can be conducted based on various data.
Here in the study all the data and observe data are analyzed with using appropriate
financial tools, To evaluate, analyze and interpret on every subject and discipline a
detailed research plan is required. On top of this, the type of model and the
components of the model meaning both the dependent and the independent variables
together with model specification will be explained

3.1 Research framework

The general objective of this study will be investigating the impact of liquidity on
profitability of NABIL Bank and NIICA Bank to conduct the research, a mixed use
approach will be employed. The use of such mixed approach would substantiate and
validate the finding from different data sources. In this research historical data are
used to identify and analyze the liquidity and profitability of sample of banks. In line
with this, the study will use inferential statistical tool such as correlation, regression to
analyze the secondary data and to make comparative study between these two banks.

3.2. Sources and Tools of Collection

The study based on the secondary data, secondary data are used to analyze historical
tools in liquidity management and measuring profitability after defining the research
design, how the work comes to define the sources of relevant data for the research
study. The audited annual financial statements of the Bank will be used in order to
gather the required secondary data to investigate the relationship that prevails between
liquidity and profitability of the Bank as well as to find out the extent to which
liquidity affects profitability of the Bank. On top of this, annual reports of will be
used to evaluate the effect of external factors on performance of the Bank. However,
besides the annual report various others sources of data have also been used for the
 25

purpose of the study plan documents, newspaper, magazine, economic journal, NRB
reports etc.

3.3. Population and Samples

The population of the study is 27 commercial banks in Nepal and their annual report
published since their establishment. In order to observe the the impact of financial
distress on profitability of Nepalese commercial banks, this study contains a sample
of 2 commercial banks of Nepal for the time period of 2016/17 to 2020/21. The
samples of banks are as follows :-
• Nepal Arab Bank Limited (NABIL)
• Nepal Industrial and Commercial Bank and Bank Of Asian (NICA)

NABIL bank is taken as a sample among population because it is a first bank in Nepal
incepted by multinational (primarily foreign) investors (as Nepal Arab Bank Ltd) on
12 July 1984. Nabil bank consider as the blue chip in commercial banking sector. The
bank was incorporated with the objective of providing modern, international-standard
financial services to businesses. It is the nation’s first private sector bank,
commencing its business in Nepal. The bank has proven that, they posses leading
capacity in terms of service, deposit and profit.

NICA bank is taken as a sample among population because in the past few year they
have prove that NICA is also a strong competitor in commercial bank sector. By their
intense corporate policy, expansion of their branches, and sophisticated service they
have succeed to increase deposit drastically and break through on profit scenario of
bank. NICA bank has drastically improved their management, investing sector, and
drastically changed in profit as well, they has succeed to be the highest deposits from
customer among the commercial banks of Nepal. NICA has deposited of RS 268.1
Arba until Poush end, 2077.

3.4. Method of Analysis

Various financial tools have been used in the study. The analysis of the data will be
done according to pattern of data available. The relationship between different figures
topic will be drawn out using ratios analysis. The various calculated results are then
 26

tabulated under different heading which are later compared each other to interpret the
result.

3.5 Data Analysis Tools

The study will use correlation and regression technique to analyze the secondary data
which will be collected from the Bank’s audited financial statements and other
secondary sources. This method was chosen due to the nature of the data which
comprise of time-series elements reflected by the period of study FY 2016/017 to FY
020/021.

The various results obtained with the help of financial, accounting and statistical tools
are tabulated under different headings. Then they are compared with each other to
interpret the results. Two kinds of tools have been used to achieve the certain goals.
• Financial Tools
• Statistical Tools

3.5.1 Financial Tools

1. Total liquid fund to current liabilities ratio (LFTCLR) :-

It indicates that the ratio total liquid fund on current liabilities (i.e., Sum of Current
Deposits, Saving Deposits, Bills payables and Creditors) as per given in balance
sheets of the commercial banks. Higher ratio shows the higher liquidity position of the
banks that is beneficial for new investment opportunity.

LFTCLR = Total Liquidity Fund

Current Liabilities

2. Liquid fund to deposit ratio (LFTDR) :-

It shows that the ratio between total liquid fund (i.e., cash balance plus outside bank
balance and money at call) and total deposits collection by the commercial banks.
Higher ratio indicates more sound liquidity position of the banks.

LFTDR = Total Liquid Fund

Total Deposits
 27

3. Liquid fund to total asset ratio (LFTAR) :-

It shows the ratio of total liquid fund on total assets as per given in balance sheets of
the commercial banks. Higher ratio shows the higher liquidity position of the banks
that is beneficial for new investment opportunity

LFTAR = Total Liquidity Fund

Total Assets

4. NRB Balance to total deposit ratio :-

It indicates ratio of the amount deposited in Nepal Rastra Bank and total deposits
collected by the commercial banks. Higher ratio means that there is a high liquidity
position in the banks.

NRBTDR = NRB Balance

Total Deposits

5. Cash in hand to total deposit ratio (CHTDR) :-

It is the ratio of cash balance on total deposit collection by the commercial banks.
Higher ratio indicates there is a sufficient cash balance to pay creditors of the banks.

CHTDR = Cash in hand

Total Deposits

6. Cash and bank balance to total deposit ratio (CABTDR) :-

It shows the ratio of cash and bank balance on total deposits per given in balance
sheets of the commercial banks. Higher ratio shows the higher liquidity position of the
banks that gives more useful for new investment opportunity.

CABTDR = Cash and Bank Balance

Total Deposits

7. Return on asset (ROA) :-

It shows the ratio of net profit after tax as per given in profit and loss account to total
assets as shown in balance sheets of the NABIL and NICA. Higher ratio shows the
higher profitability position of the banks that gives the strength of the banks. Though
 28

different indicators can be used to measure the profitability of banks, return on assets
(ROA) is used in this study as per given in annual reports of the NABIL and NICA.

Net Profit After Tax

ROA =
Total Assets

Though different indicators can be used to measure the profitability of banks, return
on assets (ROA) is used in this study as per given in annual reports of the sampled
banks.

3.6 Statistical Tools

To meet the objectives of the study statistical tools are equally important. It helps us
to analyze the relationship between two or more variables. In this research, Simple
analytical tools are used such as coefficient of determination, regression, probable
error, standard deviation, Karl Pearson’s coefficient of correlation; trend analysis
adopted which are as follows:

i. Mean

The most popular and widely used measure of representing the entire data by the one
value is known as average. Its value is obtained by adding together all times and the
summation of times is divided by the number of sample periods. If the past items of
the sample periods are Xt, number of periods are, then Mean is defined as follows.

ii. Standard Deviation (S.D.)

The standard deviation is an important and widely used measure of dispersion. The
measurement of the scatterings of the mass of figure in a series about an average is
known as dispersion. The greater the value of dispersion, greater the standard
deviation. A small standard deviation means a high degree of uniformity of the
observation as well as homogeneity of a series; a large standard deviation means just
the opposites it is denoted by the letter σ.
 29

∑(𝑿−𝐗)𝟐
S.D(σ) = √
𝑵−𝟏

Where,
N = Number of observations
X = Expected return of the historical data

iii. Coefficient of Variation (C.V.)

The coefficient of variation is the most commonly used measure of relative variation.
It is used in such problems where the researcher wants to compare the variability of
more than two years. Greater the C.V, the variable or conversely less consistent, less
uniform, more consistent, more uniform, more stable and homogeneous.

𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐷𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛
C.V. =
𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑅𝑒𝑡𝑢𝑟𝑛

iv. Coefficient of corrélation (r)

This statistical tool has been used to analyze, identify and interpret the relationship
between two or more variables. It interprets whether two or more variables are
correlated positively or negatively. Statistical tool analyses the relationship between
those variables and helps the selected banks to make appropriate investment policy
regarding to profit maximization and deposit collection; fund mobilization through
providing loan and advances.

For the purpose of decision-making, interpretation is based on following term:

• When r = 1, there is perfect positive correlation.
• When r = -1, there is perfect negative correlation.
• When r = 0, there is no correlation.

Regression Coefficients

Regression coefficients are estimates of the unknown population parameters and

describe the relationship between a predictor variable and the response. In
linear regression, coefficients are the values that multiply the predictor values
The regression coefficients are a statically measure which is used to measure the
average functional relationship between variables. In regression analysis, one variable
 30

is dependent and other is independent. Also, it measures the degree of dependence of

one variable on the other(s).

v. Probable Error (P.E)

Probable error is measured for testing the reliability of an observed value of

correlation coefficient. It is computed to find the extent to which it is dependable. If
correlation coefficient is greater than 6 times P.E the observed value of r is said to be
significant, otherwise nothing can be concluded with certainty. But if the calculated
(r) is less than the P.E correlation is not at all significant. It is calculated by using
following formula:
0.6745(1−𝑟 2)
P.E =
√𝑁
Where,
P.E. (r) = Probable error of correlation coefficient
r = Correlation coefficient
n = Number of observations
 CHAPTER IV
RESULT AND DISCUSSION

From various sources and also presents and analyzes them to measure the various
dimensions of the problems of the study. This is the section where, the filtered data
are presented and analyzed. This is one of the major chapters of this study
because it includes detail analysis and interpretation of data from which concrete
result can be obtained. This chapter consists of various Calculation made for the
financial performance analysis of the sample banks. To make our study effective,
precise and easily understandable, this chapter is categorized in five parts. The first
section deals with data presentation and analysis, second section deals with
descriptive statistics, third section deals with the correlation analysis, fourth section
deals with regression analysis and the final section wraps up this chapter with
concluding remarks about the result derived from the secondary data.

4.1 Data Presentation and Analysis

This chapter "Data presentation and Analysis" is an important part of the study.
Here, the calculated data are interpreted and analyzed to fulfill the objectives of this
research. Under this chapter various financial ratios are used which are related to
analyze the investment policy of the selected banks. The financial indicators of
selected banks are compared with the help of statistical tools i.e. mean, S.D etc.

4.1.1 Liquidity Ratio

Liquidity ratios focus on current assets and liabilities and are use to ascertain the
short-term solvency position of a firm. Following ratios are used to measure the
liquidity position of sample banks.

4.1.1.1 Liquid fund to deposit ratio (LFTDR)

It shows that the ratio between total liquid fund (i.e., cash balance plus outside bank
balance and money at call) and total deposits collection by the commercial banks.
Higher ratio indicates more sound liquidity position of the banks.
 32

LFTDR = Total Liquid Fund

Total Deposits

The following table shows the LFTDR of sample banks over the past five years of
the study period.
Table 1
Liquid fund to deposit ratio
Year NABIL NICA
2016/2017 28.64 22.89
2017/2018 18.9 18.32
2018/2019 23.5 25.49
2019/2020 24.06 18.18
2020/2021 17.36 13.36
Mean 22.49 19.65
S.D 4.4864 4.693

Noted from: Appendix A1 and Appendix A8.

Table 1 show that the highest LFTDR ratio of NABIL and NICA are 28.64percent and
25.49 percent respectively. Similarly, the lowest LFTDR ratio maintained by NABIL
and NICA are 17.36 percent and 13.36 percent respectively. The mean value of
LFTDR ratio of NABIL is 22.49 percent, which are greater than that of NICA 19.65
percent. This shows that NABIL has maintained higher LFTDR ratio in average as
compared to NICA. Also comparing two banks, S.D. of NABIL i.e. 4.4864 is lower
than that of NICA 4.693.So; NABIL is less risky than NICA in term of S.D.
 33

Liquid Fund To Deposite Ratio (LFTDR)

NABIL NICA
35

30

25
In Percent

20

15

10

0
2016/2017 2017/2018 2018/2019 2019/2020 2020/2021
Time (Year)

Figure 1: Liquid fund to deposit ratio

The above figure 4.1 shows that Liquid fund to deposit ratio (LFTDR) of NICA seem
quite volatile. LFTAR has rapidly increased in FY 2018/019 and has continuously
decreased thereafter. On the other hand, Liquid fund to deposit ratio (LFTDR) of
NABIL has highest in FY 2016/017 then in FY 2018/19 LFTDR is increased then
after NABIL tries to attend LFATR in constant position, which is NABIL strong point
comparing with NICA.

4.1.1.2 Liquid fund to total asset ratio (LFTAR)

It shows the ratio of total liquid fund on total assets as per given in balance sheets of
the commercial banks. Higher ratio shows the higher liquidity position of the banks
that is beneficial for new investment opportunity.

LFTAR = Total Liquidity Fund

Total Assets

The following table shows the LFTAR of sample banks over the past five years of
the study period.
 34

Table 2
Liquidity fund to total asset ratio
Year NABIL NICA
2016/2017 23.36 17.74
2017/2018 15.83 14.96
2018/2019 19.04 19.7
2019/2020 19.32 14.63
2020/2021 13.33 11.07
Mean 18.176 15.62
S.D 3.805 3.288

Noted from: Appendix A2 and Appendix A9.

Table 2 show that the highest LFTAR ratio of NABIL and NICA are 23.36 percent
and 19.7percent respectively. Similarly, the lowest LFTAR ratio maintained by
NABIL and NICA are 13.33 percent and 11.07 percent respectively. The mean value
of LFTAR ratio of NABIL is 18.176 percent, which are greater than that of NICA
15.62 percent. This shows that NABIL has maintained higher LFTDR ratio in average
as compared to NICA. Also comparing two banks, S.D. of NICA i.e. 3.288 is lower
than that of NABIL 3.805. So, NICA is less risky than NABIL in term of LFTAR rat.

Liquidity Fund To Assets Ratio (LFTAR)

NABIL NICA
25

20
In Percent

15

10

0
2016/2017 2017/2018 2018/2019 2019/2020 2020/2021
Time (Year)

Figure 2 Liquid fund to total asset ratio

In the above figure 4.2 shows thar LFATR of NICA has fluctuating constantly. In FY
2018/19 it has in the peak thereafter, it has continuously decreased. NABIL has also
 35

seems to be very fluctuating it has highest peak in FY 2016/017 then is decline

directly and tries to recover their position from FY 2017/018 to 2019/020 and again it
declined in FY 2020/2021.

4.1.1.3 NRB Balance to total deposit ratio (NRBTDR)

It indicates ratio of the amount deposited in Nepal Rastra Bank and total deposits
collected by the commercial banks. Higher ratio means that there is a high liquidity
position in the banks.

NRBTDR = NRB Balance

Total Deposits

The following table shows the NRBTDR of sample banks over the past five years of
the study period.
Table 3
NRB Balance to total deposit ratio
Year NABIL NICA
2016/2017 4.45 12.88
2017/2018 4.39 11.36
2018/2019 4.52 9.39
2019/2020 10.5 9.29
2020/2021 3.58 3.16
Mean 5.488 9.216
S.D 2.8275 3.699

Noted from: Appendix A3 and Appendix A10.

Table 3 show that the highest NRBTDR ratio of NABIL and NICA are 10.5 percent
and 12.88percent respectively. Similarly, the lowest NRBTDR ratio maintained by
NABIL and NICA are 3.58 percent and 3.16 percent respectively. The mean value
of NRBTDR ratio of NABIL is 5.488%, which are lesser than that of NICA 9.216
percent. This shows that NICA has maintained higher NRBTDR ratio in average as
compared to NABIL. Also comparing two banks, S.D. of NABIL i.e. 2.8275 is lower
than that of NICA 3.699. So, NABIL is less risky than NICA in term of NRBTDR
ratio.
 36

NRB Balance To Total Deposit Ratio (NRBTDR)

14 NABIL NICA

12

10
In Percent

0
2016/2017 2017/2018 2018/2019 2019/2020 2020/2021
Time (Year)

Figure 3 NRB Balance to total deposit ratio

In Figure 4.3 NABIL bank has constantly maintained their NRBTDR from FY
2016/07 at almost same point and in FY 2019/18 NABIL has drastically increased
their NRBTDR then again it is drop to almost same point of last FY. NICA has
highest NRBDTR in FY 2016/17 and has continuously decreased thereafter, which is
not good sign for organizational health.

4.1.1.4 Cash in hand to total deposit ratio (CHTDR)

It is the ratio of cash balance on total deposit collection by the commercial banks.
Higher ratio indicates there is a sufficient cash balance to pay creditors of the banks.

CHTDR = Cash in hand

Total Deposits

The following table shows the CHTDR of sample banks over the past five years of
the study period
 37

Table 4
Cash in hand to total deposit ratio
Year NABIL NICA
2016/2017 6.1 4.35
2017/2018 31.2 5.83
2018/2019 7.66 11.79
2019/2020 2.52 6.1
2020/2021 3.26 8.32
Mean 10.15 7.28
S.D 11.952 2.894

Noted from: Appendix A4 and Appendix A11.

Table 4 show that the highest CHTDR ratio of NABIL and NICA are 31.2 percent and
11.79 percent respectively. Similarly, the lowest CHTDR ratio maintained by NABIL
and NICA are 2.52 percent and 4.35 percent respectively. The mean value of
CHTDR ratio of NABIL is 10.15 percent, which are higher than that of NICA 7.28
percent. This shows that NABIL has maintained higher CHTDR ratio in average as
compared to NICA. Also comparing two banks, S.D. of NABIL i.e. 11.952 is higher
than that of NICA 2.894. So, NICA is less risky than NABIL in term of CHTDR ratio.

Cash In Hand To Total Deposit Ratio (CHTDR)

35 NABIL

30

25
In Percent

20

15

10

0
2016/2017 2017/2018 2018/2019 2019/2020 2020/2021
Time (Year)

Figure 4 Cash in hand to total deposit ratio

 38

The above figure 4.4 shows that CABTDR of NABIL has volatile trend comparing
with NICA from FY 2016/017 to 2017/018 it has increased drastically and thereafter
it has direct fall up to 2019/020 and then in FY 2020/021 it has slightly increased.
NICA has continuously increased up to FY 2018/019 and it has slightly decreased and
again increases.

4.1.1.5 Cash and bank balance to total deposit ratio (CABTDR)

It shows the ratio of cash and bank balance on total deposits per given in balance
sheets of the commercial banks. Higher ratio shows the higher liquidity position of the
banks that gives more useful for new investment opportunity.

CABTDR = Cash and Bank Balance

Total Deposits

The following table shows the CABTDR of sample banks over the past five years of
the study period.
Table 5
Cash and bank balance to total deposit ratio
Year NABIL NICA
2016/2017 28.62 19.1
2017/2018 18.9 17.41
2018/2019 18.26 21.41
2019/2020 18.37 15.38
2020/2021 11.27 11.49
Mean 19.08 16.96
S.D 6.189 3.775

Noted from: Appendix A5 and Appendix A12.

Table 5 show that the highest CABTDR ratio of NABIL and NICA are 28.62 percent
and 21.41 percent respectively. Similarly, the lowest CABTDR ratio maintained by
NABIL and NICA are 11.27 percent and 11.49 percent respectively. The mean value
of CABTDR ratio of NABIL is 19.08%, which are higher than that of NICA 16.96
percent. This shows that NABIL has maintained higher CABTDR ratio in average as
compared to NICA. Also comparing two banks, S.D. of NABIL i.e. 6.189 is higher
 39

than that of NICA 3.775. So, NICA is less risky than NABIL in term of CABTDR
ratio.

Cash And Bank Balance To Total Depsit Ratio CABTDR

35 NABIL

30

25
In Percent

20

15

10

0
2016/2017 2017/2018 2018/2019 2019/2020 2020/2021
Time (Year)

Figure 5 Cash and bank balance to total deposit ratio

In the above figure NABIL is Continuously declined form 2016/017 to 2020/2021

making bad reputation of company. NICA has tried to maintain sustainable CABTDR
and increased in FY 2018/19 but thereafter it also declines.

4.1.1.6 Total liquid fund to current liabilities ratio (LFTCLR)

It indicates that the ratio total liquid fund on current liabilities (i.e., Sum of Current
Deposits, Saving Deposits, Bills payables and Creditors) as per given in balance
sheets of the commercial banks. Higher ratio shows the higher liquidity position of the
banks that is beneficial for new investment opportunity.

LFTCLR = Total Liquidity Fund

Current Liabilities

The following table shows the LFTCLR of sample banks over the past five years of
the study period.
 40

Table 6
Total liquid fund to current liabilities ratio
Year NABIL NICA
2016/2017 23.78 18.19
2017/2018 16.16 15.97
2018/2019 19.41 20.28
2019/2020 19.65 15.11
2020/2021 13.58 11.44
Mean 18.52 16.2
S.D 3.864 3.3356

Noted from: Appendix A6 and Appendix A13.

Table 6 show that the highest LFTCLR ratio of NABIL and NICA are 23.78 percent
and 20.28percent respectively. Similarly, the lowest LFTCLR ratio maintained by
NABIL and NICA are 13.58 percent and 11.44 percent respectively. The mean value
of LFTCLR ratio of NABIL is 18.52 percent, which are higher than that of NICA
16.2 percent. This shows that NABIL has maintained higher CABTDR ratio in
average as compared to NICA. Also comparing two banks, S.D. of NABIL i.e. 3.864
is higher than that of NICA 3.3356. So, NICA is less risky than NABIL in term of
LFTCLR ratio.

Total Liquid Fund To Current Liabilities Ratio TLFCLR

25 NABIL

20
In Percent

15

10

0
2016/2017 2017/2018 2018/2019 2019/2020 2020/2021
Time (Year)

Figure 6 Total liquid fund to current liabilities ratio

 41

The above figure 4.6 Depicts that LFCLR of NABIL bank has volatile trend in other
hand NICA has highest in FY 2018/019 then thereafter it has continuously declined.

4.1.2 Profitability Ratio

Profitability ratios focus on profit of particular organization. There are many ways to
determine the profit of commercial banks but we have use ROA as a major factor of
profitability.

4.1.2.1 Return on asset (ROA)

It shows the ratio of net profit after tax as per given in profit and loss account to total
assets as shown in balance sheets of the NABIL and NICA. Higher ratio shows the
higher profitability position of the banks that gives the strength of the banks. Though
different indicators can be used to measure the profitability of banks, return on assets
(ROA) is used in this study as per given in annual reports of the NABIL and NICA.

ROA = Net Profit after Tax

Total Assets

Though different indicators can be used to measure the profitability of banks, return
on assets (ROA) is used in this study as per given in annual reports of the sampled
banks. The following table shows the Return on asset of sample banks over the past
five years of the study period.
Table 7
Return on asset
Year NABIL NICA
2016/2017 2.5708 1.3243
2017/2018 2.4736 0.7809
2018/2019 2.1074 1.3763
2019/2020 1.4571 1.2365
2020/2021 1.5555 0.9398
Mean 2.033 1.13
S.D 0.512 0.259

Noted from: Appendix A7 and Appendix A14.

 42

Table 7 show that the highest ROA ratio of NABIL and NICA are 2.5708 percent and
1.3763 percent respectively. Similarly, the lowest ROA ratio maintained by NABIL
and NICA are 1.4571 percent and 0.7809 percent respectively. The mean value of
LFTDR ratio of NABIL is 2.033 percent, which are greater than that of NICA 1.13
percent. This shows that NABIL has maintained higher ROA ratio in average as
compared to NICA. Also comparing two banks, S.D. of NABIL i.e. 0.512 is lower
than that of NICA 0.259. So, NABIL is less risky than NICA in term of S.D.

Return on Assests ROA

25 NABIL

20
In Percent

15

10

0
2016/2017 2017/2018 2018/2019 2019/2020 2020/2021
Time (Year)

Figure 7 Return on asset

The above figure 4.7 Shows that NABIL ROA has declined from FY 2016/017 to FY
2019/020 and again slightly increased in FY 2020/021. NICA ROA has very volatile
in nature but has no match with NABIL ROA.

4.2 Descriptive analysis

The descriptive statistical used in this study consists of mean, median, standard
deviation minimum and maximum values associated with variables under
consideration. Table summarizes the descriptive statistics for the Nepalese
commercial banks used in this study during the period 2016/17 through 2020/21 for 2
sample commercial banks of Nepal. This table shows the descriptive statistics of
dependent and independent variables. Dependent variables is ROA (Return on asset
defined as net income to total assets, in percentage) and independent variables are
 43

LFTDR (Liquid fund to total deposit ratio), LFTAR (Liquid fund to total asset ratio),
NRBTDR (NRB balance to total deposit ratio), CHTDR (Cash in hand to total deposit
ratio), CABTDR(Cash and bank balance to total deposit ratio) and LFTCLR(Total
liquid fund to current liability ratio). The descriptive statistics are based on panel
data of 2 banks with 10 observations for the period of 2016/17 to 2020/21 in Nepal.
Table 8
Descriptive statistics
Variables N Minimum Maximum Mean Median
ROA 10 0.7809 2.5708 1.5822 1.4167
LFTDR 10 13.36 28.64 21.07 20.895
LFTAR 10 11.07 23.36 16.9 16.78
NRBTDR 10 3.16 12.88 7.35 6.9
CHTDR 10 2.52 31.2 8.713 6.1
CABTDR 10 11.27 28.62 18.021 18.315
LFTCLR 10 11.44 23.78 17.357 17.175

Noted from: Researcher calculation

Table 8 shows the descriptive statistics of dependent and independent variables for the
Nepalese Commercial banks. Clearly, return on assets ranges from minimum of
0.7809 percent to maximum of 2.5708 percent leading to an average of 1.5822
percent. The average LFTDR of selected banks during the study period is noticed to
be with a minimum of 13.36 percent and a maximum of 28.64 percent with an
average of 21.07 percent. Likewise, LFTAR revealed a minimum of 11.07 percent to
maximum of 23.36 percent with an average of 16.9 percent. The average of NRBTDR
of selected banks during the study period is noticed to be 7.35 percent with minimum
of 3.16 percent and maximum of 12.88 percent. Similarly, the average of CHTDR
during the study period is noticed to be 8.713 percent with a minimum of 2.52 percent
and a maximum of 31.2 percent. And the average ratio of CABTDR ranges from
minimum of 11.27 percent to maximum of 28.62 percent, leading to an average
18.021 percent. However the average LFTCLR of selected banks during the study
period is noticed to be with a minimum of 11.44 percent and a maximum of 23.78
percent with an average of 17.357 percent.
 44

4.3 Correlation analysis

Pearson’s correlation is used to analyze the relationship between LFTDR, LFTAR,

NRBTDR, CHTDR, CABTDR, LFTCLR with ROA in Nepalese commercial banks.
Pearson’s coefficient is often used as a test statistic in a statistical hypothesis test to
establish whether two variables may be regarded as statistically dependent.
Correlation measures the strength and the direction of a linear relationship between
dependent and independent variables. The study has used correlation analysis to show
the correlation between the dependent variable Return on Assets (ROA) and the
independent variables are LFTDR, LFTAR, NRBTDR, CHTDR, CABTDR, and
LFTCLR

This table shows the bi-variant Pearson’s correlation coefficients between dependent
and independent variables. independent variables are LFTDR (Liquid fund to total
deposit ratio), LFTAR (Liquid fund to total asset ratio), NRBTDR (NRB balance to
total deposit ratio), CHTDR (Cash in hand to total deposit ratio), CABTDR (Cash and
bank balance to total deposit ratio) and LFTCLR (Total liquid fund to current liability
ratio).The correlation statistics are based on panel data of 2 banks with 10
observations for the period 2016/17 to 2020/21in Nepal.
Table 9
Pearson’s correlation coefficients matrix
Variables ROA LFTRD LFTAR NRBTDR CHATDR CABTDR LFTCLR
ROA 1
LFTDR 0.530 1
LFTAR 0.587 0.991** 1
NRBTDR -0.512 0.236 0.185 1
CHTDR 0.476 -0.132 -0.074 -0.319 1
CABTDR 0.593 0.888** 0.921** 0.154 0.117 1
LFTCLR 0.557 0.989** 0.998** 0.218 -0.081 0.929** 1

Notes: The asterisk signs (**) and (*) indicate that the results are significant at 1
percent and 5 percent level respectively.

The result shows that higher the ratio of LFTDR, higher would be ROA of bank.
There is a positive relationship between return on asset and LFTDR. Likewise, there
 45

is positive relationship between LFTAR and return on asset which indicates that
increase in LFTAR leads to increase in return on asset. Similarly, there is negative
relationship between NRBTDR and return on asset. It indicates that more the
NRBTDR ratio lower would be return on asset. Likewise, there is positive
relationship between CHTDR and return on asset which indicates that higher the ratio
of CHTDR, higher would be the return on asset. Likewise, there is positive relation
between CABTDR and return on asset which shows that increase in the proportion
CABTDR ratio leads to increase in return on asset. Similarly, there is positive
relationship between LFTCLR ratio and return on assets. It indicates that more the
LFTCLR ratio the firm has; higher would be the return on assets.

4.4 Regression analysis

In order to test the statistical significance and robustness of the results, this study
relies on secondary data analysis based on the regression models specified in chapter
three. Regression analysis having indicated the Pearson’s correlation coefficients, the
regression analysis has been carried out and the results are shown in the table below.
The regression analysis has been conducted to examine whether there is any impact of
liquidity ratio on profitability. The regression of return on assets has been analyzed.
To be more specific, it shows the regression results of LFTDR, LFTAR, NRBTDR,
CHTDR, CABTDR, and LFTCLR.

The results are based on cross-sectional data of 2 banks with 10 observations

from2016/17 to 2020/21 by using linear regression model. The models are ROA= α0 +
α1LFTDR+ α2LFTAR+ α3NRBTDR + α4CHTDR+ α5CABTDR+ α6LFTCLR+ eit ,

where ROA (Return on assets defined as net income to total assets, in percentage) is
the dependent variable. Independent variables are LFTDR (Liquid fund to total
deposit ratio), LFTAR (Liquid fund to total asset ratio), NRBTDR (NRB balance to
total deposit ratio), CHTDR (Cash in hand to total deposit ratio), CABTDR (Cash and
bank balance to total deposit ratio) and LFTCLR (Total liquid fund to current liability
ratio). The regression statistics are based on panel data of 2 banks with 10
observations for the period 2016/17 to 2020/21 in Nepal. The value in parentheses is
p-value.
 46

Table 10
Estimated regression results of LFTDR0, LFTAR, NRBTDR, CHTDR, CABTDR and
LFTCLR on return on asset.
Model Constant LFTDR LFTAR NRBTDR CHTDR CABTDR LFTCLR R2 F
1 0.095 0.53 0.281 3.127
(0.001) (0.115)
2 -0.092 0.587 0.345 4.205
(0.001) (0.074)
3 2.207 -0.512 0.262 2.843
(0.001) (0.130)
4 1.279 0.476 0.227 2.345
(0.001) (0.164)
5 0.269 0.593 0.352 4.338
(0.001) (0.071)
6 -0.048 0.557 0.310 3.593
(0.001) (0.095)

Noted from: Researcher calculation.

In model 1, while introducing LFTDR as independent variable and by controlling

LFTAR,NRBTDR,CHTDR,CABTDR and LFTCLR, the impact on return on asset is
observed to be positive with the coefficient of 0.53 and insignificant (p >0.001) with
the explaining power of 28.1%, since F is less than 5 so the model is not fit.

In model 2, while introducing LFTAR as independent variable and by controlling

LFTDR,NRBTDR,CHTDR,CABTDR and LFTCLR, the impact on return on asset is
observed to be positive with the coefficient of 0.587 and insignificant (p >0.001) with
the explaining power of 34.5%, since F is less than 5 so the model is not fit.

In model 3, while introducing NRBTDR as independent variable and by controlling

LFTDR, LFTAR, CHTDR, CABTDR and LFTCLR, the impact on return on asset is
observed to be negative with the coefficient of -0.512 and insignificant (p >0.001)
with the explaining power of 26.2%, since F is less than 5 so the model is not fit.

In model 4, while introducing CHTDR as independent variable and by controlling

LFTDR, LFTAR, NRBTDR, CABTDR and LFTCLR, the impact on return on asset is
observed to be positive with the coefficient of 0.476 and insignificant (p >0.001) with
the explaining power of 22.7%, since F is less than 5 so the model is not fit.
 47

In model 5, while introducing CABTDR as independent variable and by controlling

LFTDR, LFTAR, NRBTDR, CHTDR, and LFTCLR, the impact on return on asset is
observed to be positive with the coefficient of 0.593 and insignificant (p >0.001) with
the explaining power of 35.2%, since F is less than 5 so the model is not fit.

In model 6, while introducing LFTCLR as independent variable and by controlling

LFTDR, LFTAR, NRBTDR, CHTDR and CABTDR, the impact on return on asset is
observed to be positive with the coefficient of 0.557 and insignificant (p >0.001) with
the explaining power of 31%, since F is less than 5 so the model is not fit.

4.5 Multicollinearity Analysis

In the study, Variance inflation factor analysis (VIF) is performed to find out the
correlation between explanatory variable and exclude the variables having correlation
≥ 0.8 and VIF > 5

Table 11

Test of Multicollinearity
Variable VIF 1/VIF
NRBTDR 2.163 0.462321
CHTDR 1.645 0.607903
Mean 1.904

The result shows that there is no multicollinearity among the selected variables as
correlation < 0.80 (Table 9) and VIF < 5 as follows (Table 11).

4.6 Concluding remarks

This chapter is devoted to analyze and present results derived from the use of
secondary data. This study attempts to study the impact of liquidity ratio on
profitability of Nepalese commercial banks. The descriptive analysis shows that the
averages return on asset of Nepalese commercial banks are Rs. 1.5822 percent. The
average LFTDR of selected banks during the study period is noticed to be 21.07%.
Likewise, LFTAR has average of 16.9 percent. The average ratio of NRBTDR of
selected banks during the study period is noticed to be 7.35%. Similarly, the average
of CHTDR during the study period is noticed to be 8.713%. Likewise, CABTDR has
average of 18.021 percent. And the LFTCLR is 17.357% on an average of selected
commercial banks.
 48

The correlation analysis shows that there is a negative relationship between return on
asset and NRBTDR which reveals that higher the ratio of NRBTDR lower would be
the return on asset. Likewise, there is positive relationship between LFTDR and return
on asset which indicates that increase in LFTDR leads to increase in return on asset.
Similarly, there is positive relationship between LFTAR and return on asset. It
indicates that more the LFTAR firm has; higher would be the return on asset.
Likewise, there is positive relationship between CHTDR and return on asset which
indicates that higher the ratio CHTDR, higher would be the return on asset. Likewise,
there is positive relation between CABTDR and return on asset which shows that
increase in the proportion of CABTDR leads to increase in return on asset. . Similarly,
there is positive relationship between LFTCLR and return on asset. It indicates that
more the LFTCLR firm has; higher would be the return on asset.

The regression analysis shows that there is a negative impact of NRBTDR on return
on asset which reveals that higher the ratio of NRBTDR lower would be the return on
asset. Likewise, there is positive impact of LFTDR on return on asset which indicates
that increase in LFTDR leads to increase in return on asset. Similarly, there is positive
impact of LFTAR on return on asset. It indicates that more the LFTAR firm has;
higher would be the return on asset. Likewise, there is positive impact of CHTDR on
return on asset which indicates that higher the ratio CHTDR, higher would be the
return on asset. Likewise, there is positive impact of CABTDR on return on asset
which shows that increase in the proportion of CABTDR leads to increase in return on
asset. . Similarly, there is positive impact of LFTCLR on return on asset. It indicates
that more the LFTCLR firm has; higher would be the return on asset.
 CHAPTER V
SUMMARY AND CONCLUSION

This chapter presents the brief summary of the entire study and highlights major
findings of the study. In addition, the major conclusions are discussed in separate
section of this chapter which is followed by some implications and the
recommendations regarding the effect of the liquidity on profitability of Nepalese
commercial banks. Finally, the chapter ends with the scope of the future research in
same field.

The aim of this research paper was to assess the impact of liquidity on profitability of
NABIL Bank and NICA Bank. To achieve the intended objective, the study used
secondary data sources. Hence, the secondary data was gathered through the
secondary sources, time series data was used that covered 5 years of operation from
2016/17 – 2020/21 i.e. 5 budget year of the bank. The secondary data was based on
the audited financial statements of the bank and basically the balance sheet and
income statements of NABIL and NICA Bank are used.

5.1 Summary

Liquidity as the ability of a bank to fund increase in assets and meet its obligations as
they come due without incurring unacceptable losses. Hence, liquidity risk arises from
the fundamental role of banks in the maturity transformation of short-term deposits
into long-term loans. More specifically; liquidity risk arises when liability holders
such as depositors demand the most liquid asset- cash or when holders of off-balance
sheet loan commitments exercise their right to claim the amount (Saunders, et al,
2004). Thus, bank’s management must be able to measure and monitor its liquidity
position frequently to be able to directly meet liability holder’s and borrowers demand
so that it can maximize its profit

Liquidity risk is said to be assassin of banks. This risk can adversely affect both
bank’s earnings and the capital. Therefore, it becomes the top priority of a bank’s
management to ensure the availability of sufficient funds to meet future demands of
providers and borrowers, at reasonable costs. The optimal of liquidity management
could be achieved by company that mange the trade of between liquidity and
 50

profitability Episodes of failure of many conventional banks from the past and the
present provide the testimony to this claim. It is evident that liquidity and liquidity
risk is very up-to-date and important topic. Therefore banks and more so their
regulators are keen to keep a control on liquidity position of banks.

The major objective of the study is to analyze the impact of liquidity on profitability
of Nepalese commercial banks. The specific objectives are to analyze the structure
and pattern of LFTDR (Liquid fund to total deposit ratio), LFTAR (Liquid fund to
total asset ratio), NRBTDR (NRB balance to total deposit ratio), CHTDR (Cash in
hand to total deposit ratio), CABTDR (Cash and bank balance to total deposit ratio)
and LFTCLR (Total liquid fund to current liability ratio) of Nepalese commercial
banks. To determine the relationship of Liquid fund to total deposit ratio, Liquid fund
to total asset ratio, NRB balance to total deposit ratio, Cash in hand to total deposit
ratio, Cash and bank balance to total deposit ratio and Total liquid fund to current
liability ratio with return on assets of Nepalese commercial banks. To examine the
impact of Liquid fund to total deposit ratio, Liquid fund to total asset ratio, NRB
balance to total deposit ratio, Cash in hand to total deposit ratio, Cash and bank
balance to total deposit ratio and Total liquid fund to current liability ratio on earnings
per share of Nepalese commercial banks. To identify the most significant factor
affecting the profitability of Nepalese commercial banks.

This study based on the secondary source of data which were gathered for a sample of
2 commercial banks of Nepal within the time period from 2016/17-2020/21, leading
to the total of 10 observations . The secondary data have been obtained from annual
report of selected banks. The research design adopted in this study is descriptive and
causal comparative types as it deals with liquidity factors prevailing in Nepalese
banking sector along with its impact on profitability of the banks. Study shows the
relationship using liquidity variables like Liquid fund to total deposit ratio, Liquid
fund to total asset ratio, NRB balance to total deposit ratio, Cash in hand to total
deposit ratio, Cash and bank balance to total deposit ratio and Total liquid fund to
current liability ratio with return on assets . The statistical methods used in the
analysis are descriptive statistics, correlation analysis and regression analysis. The
sampling method used in this study is convenience sampling.

Based on the analysis of data, the major findings are summarized as under:
 51

• The average LFTDR is highest for NABIL bank (22.49%) and lowest
for NICA bank (19.65%).Similarly standard deviation of NABIL bank
is lower than NICA bank so that liquidity risk is lower For NABIL
bank
• The average LFTAR is highest for NABIL bank (18.176%) and lowest
for NICA bank (15.62%).Similarly standard deviation of NABIL bank
is higher than NICA bank so that liquidity risk is higher For NABIL
bank
• The average NRBTDR is lowest for NABIL bank (5.488%) and
highest for NICA bank (9.216%).Likewise standard deviation of
NABIL bank is lower than NICA bank so that liquidity risk is lower
For NABIL bank
• The average CHTDR is highest for NABIL bank (10.15%) and lowest
for NICA bank (7.28%).Similarly standard deviation of NABIL bank
is higher than NICA bank so that liquidity risk is higher For NABIL
bank
• The average CABTDR is highest for NABIL bank (19.08%) and
lowest for NICA bank (16.96%).Likewise standard deviation of
NABIL bank is higher than NICA bank so that liquidity risk is higher
For NABIL bank
• The average LFTCLR is highest for NABIL bank (18.52%) and lowest
for NICA bank (16.2%).Likewise standard deviation of NABIL bank is
higher than NICA bank so that liquidity risk is higher For NABIL bank
• The average ROA is highest for NABIL bank (2.033%) and lowest for
NICA bank (1.13%).Similarly standard deviation of NABIL bank is
lower than NICA bank so that liquidity risk is lower For NABIL bank
• The descriptive analysis shows return on asset ranges from a minimum
of 0.7809% to a maximum of 2.5708%, leading to the average of
1.5822%.
• The descriptive analysis the average LFTDR of selected banks during
the study period is noticed to be with a minimum of 13.36 percent and
a maximum of 28.64 percent with an average of 21.07 percent.
 52

• The descriptive analysis shows LFTAR revealed a minimum of 11.07

percent to maximum of 23.36 percent with an average of 16.9 percent.
• The descriptive analysis shows average of NRBTDR of selected banks
during the study period is noticed to be 7.35 percent with minimum of
3.16 percent and maximum of 12.88 percent.
• The descriptive analysis the average of CHTDR during the study
period is noticed to be 8.713 percent with a minimum of 2.52 percent
and a maximum of 31.2 percent.
• The descriptive analysis shows the average ratio of CABTDR ranges
from minimum of 11.27 percent to maximum of 28.62 percent, leading
to an average of 18.021 percent.
• The descriptive analysis shows LFTCLR revealed a minimum of 11.44
percent to maximum of 23.78 percent with an average of 17.357
percent.
• The correlation of the commercial banks shows that there is a negative
relationship between return on asset and NRB balance to total deposit
ratio.
• The correlation of the commercial banks shows that there is a positive
relationship between return on asset and liquid fund to total deposit
ratio.
• The correlation of the commercial banks shows that there is a positive
relationship between return on asset and liquid fund to total asset ratio.
• The correlation of the commercial banks shows that there is a positive
relationship between return on asset and cash in hand to total deposit
ratio.
• The correlation of the commercial banks shows that there is a positive
relationship between return on asset and cash and bank balance to total
deposit ratio.
• The correlation of the commercial banks shows that there is a positive
relationship between return on asset and total liquid fund to current
liability ratio.
 53

• The beta coefficients for NRB balance to total deposit ratio is negative
and insignificant with return on asset. It indicates that NRB balance to
total deposit ratio has negative impact on return on asset.
• The beta coefficients for liquid fund to total deposit ratio, liquid fund
to total asset ratio, cash in hand to total deposit ratio, cash and bank
balance to total deposit ratio and total liquid fund to current liability
ratio are positive and insignificant with return on asset. This reveals
that liquid fund to total deposit ratio, liquid fund to total asset ratio,
cash in hand to total deposit ratio, cash and bank balance to total
deposit ratio and total liquid fund to current liability have positive
impact on return on asset.

5.2 Conclusion

The major conclusion of this study is that profitability of Nepalese commercial banks
is affected by liquidity factors. The study sought to determine the influence of
liquidity on profitability of commercial banks in Nepal. From the results of the
analysis conducted by the study and hypothesis tested, it was concluded that liquid
fund to total deposit ratio, liquid fund to total asset ratio, cash in hand to total deposit
ratio, cash and bank balance to total deposit ratio and total liquid fund to current
liability ratio has a positive and significant influence on the profitability of
commercial banks in Nepal.

The study shows that the liquid fund to total deposit ratio, liquid fund to total asset
ratio, cash in hand to total deposit ratio, cash and bank balance to total deposit ratio
and total liquid fund to current liabilities ratio have positive impact on the return on
asset. However, the result shows that there is negative impact of NRB balance to total
deposit ratio on return on asset.

5.3 Implications

Based on the above findings, the following recommendations are made:

• The study observed positive relationship between liquid fund to total
deposit ratio and return on assets. Hence, the banks willing to increase
return on assets should increase liquid fund to total deposit ratio.
 54

• The study observed positive relationship between liquid funds to total

asset ratio and return on assets. Hence, the banks willing to increase
return on assets should increase liquid fund to total asset ratio.
• The study observed positive relationship between cash in hand to total
deposit ratio and return on assets. Hence, the banks willing to increase
return on assets should increase cash in hand to total deposit ratio.
• The study observed a negative relationship between the NRB balance
to total deposit ratio and return on assets and hence commercial banks
willing to increase the return on assets should decrease NRB balance to
total deposit ratio.
• The study observed positive relationship between cash and bank
balance to total deposit ratio and return on assets. Hence, the banks
willing to increase return on assets should increase cash and bank
balance to total deposit ratio.
• The study observed positive relationship between total liquid fund to
current liability ratio and return on assets. Hence, the banks willing to
increase return on assets should increase liquid fund to current liability
ratio.
• The Bank should adopt international standards in the liquidity
management practice as it affects the overall performance;
• The Bank should provide adequate training to the concerned staff
members as to the utilization and analysis on liquidity measurement
tools;
• The Bank should introduce new liquidity measurement tools as per the
current international practice;
• Decision is the day to day activities of management. In the current
dynamic and competitive business environment timely information is
mandatory. Thus, the Bank should have effective Management Information
System (MIS) to provide relevant information and mitigate any potential
liquidity risk;
• The Bank should broaden the deposit bases into the masses so as to
minimize the expected concentrations and sudden deposit run-off;
 55

• The bank should enhance coordination among Accounts and Finance

Department, Treasury & Fund Management Department, Asset
Liability Committee (ALCO) and other functional units;
• The ultimate responsible organ of the Bank is the Board of Directors.
Thus, trainings related to liquidity management practices and the
associated liquidity risk should be provided to BOD’s members;

5.3.1 Future scope

The study has examined the impact of liquidity variables on profitability of Nepalese
commercial banks. There remains enough ground of scope in terms of data, models
and methodology for studies in days to come. The study remains enough ground for
the further studies, which are listed below:
• The result of the study is basically from the commercial banks of
Nepal. Thus, the future study may include other financial sectors such
as development bank, finance companies and micro finance
companies.
• Similarly, further studies can be done by using some advance statistical
tools. For example, the future studies can use non-linear statistical
tools and causality tools.
• This study is based only on secondary data. Thus, the further study can
make much more comprehensive by using primary source such as
survey, questionnaire, special group discussion etc. The qualitative
phenomena can be considered for the research in future.
• There are many other variables that define the profitability in banking
sector. So, the future studies can add more dependent variables like
return on equity, profit margin ,EPS etc.
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 Appendices

Liquidity Ratios Of NICA Bank

Appendix A1: LFTDR
Year Total Liquid Assets Total Deposit LFTDR Percent
073/74 016/17 18293219874 79905602416 0.22894 22.894
074/75 017/18 25573166678 139589607845 0.1832 18.32
075/76 018/19 43702416121 171428410596 0.25493 25.493
076/77 019/20 36652239980 201630384459 0.18178 18.178
077/78 020/21 38308330113 286820615213 0.13356 13.356

Appendix A2: LFTAR

Year Total Liquid Assets Total Assets LFTAR Percent
073/74 016/17 18293219874 103108361998 0.17742 17.742
074/75 017/18 25573166678 170943177826 0.1496 14.96
075/76 018/19 43702416121 221849999497 0.19699 19.699
076/77 019/20 36652239980 250590379057 0.14626 14.626
077/78 020/21 38308330113 345940258246 0.11074 11.074

Appendix A3: NRBTDR

Year NRB Balance Total Deposit NRBTDRR Percent
073/74 016/17 10291445440 79905602416 0.1288 12.88
074/75 017/18 15860733092 139589607845 0.11362 11.362
075/76 018/19 16097915246 171428410596 0.0939 9.3905
076/77 019/20 18721482611 201630384459 0.09285 9.2851
077/78 020/21 9072897671 286820615213 0.03163 3.1633

Appendix A4: CHTDR

Year Cash Balance Total Deposit CHTDR Percent
073/74 016/17 3479828475 79905602416 0.04355 4.3549
074/75 017/18 8132486809 139589607845 0.05826 5.826
075/76 018/19 20214540268 171428410596 0.11792 11.792
076/77 019/20 12294510663 201630384459 0.06098 6.0975
077/78 020/21 23876051962 286820615213 0.08324 8.3244
 61

Appendix A5: CABDTR

Year Cash & Bank Balance Total Deposit CABTDR Percent
073/74 016/17 15264658883 79905602416 0.19103 19.103
074/75 017/18 24307149092 139589607845 0.17413 17.413
075/76 018/19 36696405514 171428410596 0.21406 21.406
076/77 019/20 31015993274 201630384459 0.15383 15.383
077/78 020/21 32948949633 286820615213 0.11488 11.488

Appendix A6: LFTCLR

Year Total Liquid Assets Total Current Aseets LFTCLR Percent
073/74 016/17 18293219874 100568546394 0.1819 18.19
074/75 017/18 25573166678 160168701093 0.15966 15.966
075/76 018/19 43702416121 215461735432 0.20283 20.283
076/77 019/20 36652239980 242496221656 0.15115 15.115
077/78 020/21 38308330113 334773124373 0.11443 11.443

Appendix A7: ROA

Year NPAT Total Assets ROA Percent
073/74 016/17 1365415593 103108361998 0.01324 1.3243
074/75 017/18 1334861927 170943177826 0.00781 0.7809
075/76 018/19 3053304065 221849999497 0.01376 1.3763
076/77 019/20 3098536965 250590379057 0.01236 1.2365
077/78 020/21 3251084144 345940258246 0.0094 0.9398
 62

Liquidity Ratios Of NABIL Bank

Appendix A8: LFTDR
Year Total Liquid Assets Total Deposit LFTDR Percent
073/74 016/17 33639090554 117436362752 0.28645 28.645
074/75 017/18 25484916719 134810669677 0.18904 18.904
075/76 018/19 38289311829 162953999572 0.23497 23.497
076/77 019/20 45910838200 190806469972 0.24061 24.061
077/78 020/21 38790352863 223474470361 0.17358 17.358

Appendix A9: LFTAR

Year Total Liquid Assets Total Assets LFTAR Percent
073/74 016/17 33639090554 144017861128 0.23358 23.358
074/75 017/18 25484916719 160978071329 0.15831 15.831
075/76 018/19 38289311829 201138821464 0.19036 19.036
076/77 019/20 45910838200 237680029570 0.19316 19.316
077/78 020/21 38790352863 291066222914 0.13327 13.327

Appendix A10: NRBTDR

Year NRB Balance Total Deposit NRBTDRR Percent
073/74 016/17 5231334342 117436362752 0.04455 4.4546
074/75 017/18 5924569696 134810669677 0.04395 4.3947
075/76 018/19 7372284966 162953999572 0.04524 4.5242
076/77 019/20 20021031281 190806469972 0.10493 10.493
077/78 020/21 8001196207 223474470361 0.0358 3.5804

Appendix A11: CHTDR

Year Cash Balance Total Deposit CHTDR Percent
073/74 016/17 7167160590 117436362752 0.06103 6.103
074/75 017/18 7952350362 134810669677 0.31204 31.204
075/76 018/19 12479697526 162953999572 0.07658 7.6584
076/77 019/20 4799629907 190806469972 0.02515 2.5154
077/78 020/21 7285636456 223474470361 0.0326 3.2602
 63

Appendix A12: CABTDR

Year Cash & Bank Balance Total Deposit CABTDR Percent
073/74 016/17 33606435179 117436362752 0.28617 28.617
074/75 017/18 25484916719 134810669677 0.18904 18.904
075/76 018/19 29750254270 162953999572 0.18257 18.257
076/77 019/20 35051240651 190806469972 0.1837 18.37
077/78 020/21 25175020285 223474470361 0.11265 11.265

Appendix A13: LFTCLR

Year Total Liquid Assets Total Current Aseets LFTCLR Percent
073/74 016/17 33639090554 141481546841 0.23776 23.776
074/75 017/18 25484916719 157743934068 0.16156 16.156
075/76 018/19 38289311829 197288638924 0.19408 19.408
076/77 019/20 45910838200 233695469713 0.19646 19.646
077/78 020/21 38790352863 285609446048 0.13582 13.582

Appendix A14: ROA

Year NPAT Total Assets ROA Percent
073/74 016/17 3702382810 144017861128 0.02571 2.5708
074/75 017/18 3981892950 160978071329 0.02474 2.4736
075/76 018/19 4238853581 201138821464 0.02107 2.1074
076/77 019/20 3463240822 237680029570 0.01457 1.4571
077/78 020/21 4527552838 291066222914 0.01556 1.5555
IMPACT OF LIQUIDITY ON PROFITABILITY OF PRIVATE
COMMERCIAL BANKS: A COMPARATIVE STUDY OF
NABIL AND NICA BANKS LIMITED

A THESIS PROPOSAL
Submitted By:
Mr. Aswin Pradhan
People’s Campus
Class Roll No.: 10/075
MBS Exam Roll No: 7310/18
T.U. Regd. No: 7-2-31-590-2010

Submitted To:
People’s Campus
Faculty of Management
Tribhuvan University
In partial fulfillment of the requirements for the degree of
Master of Business Studies (M.B.S.)

Kathmandu, Nepal
May, 2022
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1. INTRODUCTION

1.1 Background of the Study

Bank is the main financial institution, which plays an important role in the economic
development of the nation. It is the backbone as well as the foundation for the
development of the country. Its principal operations are concerned with the
accumulation on the temporary idle money of the public for advancing others for
expenditures. In other words, Bank is an institution that deals in money and its
substitutes and provides other financial services. The principal types of banking in the
modern industrial world are commercial banking and central banking. A commercial
banker is a dealer in money and in substitutes for money, such as checks or bills of
exchange. also The banker provides a variety of other financial services. The basis of
the banking business is borrowing from individuals, firms, and occasionally i.e.,
receiving “deposits” from them. With these resources and with the bank’s own
capital, the banker makes loans or extends credit and invests in securities. The banker
makes profit by borrowing at one rate of interest and lending at a higher rate and by
charging commissions for services rendered. Commercial banks are the major
financial institutions that occupy quite an important place in the framework in the
economy development sectors as well as in saving and investment sectors.
Commercial banks are suppliers of finance for trade and industry and play a vital role
in the economic and financial life of the country. They also provide an opportunity in
the development of individual industries, trade and business organization by investing
savings and collected deposits. By investing the saving and collected deposits in the
productive sectors, they help in the formation of capital. Besides they also render
numerous services to its customers in a view of providing facilities to theirs economic
and social life in the community. Banks accept deposit, make loans, and derive a
profit from the difference in the interest rates paid and charged, respectively.
Depositors may be either individual or institutions. These deposits may be current,
saving or fixed and the tenure depends upon the mutual agreements between the bank
may be either an individual or institutions. The tenure the loan may vary as per the
demand, criteria and the usefulness of the loan. Some banks also have the power to
create money A financial institution is the lifeblood of economic development of the
country. Financial institution acts as catalyst in the process of economic growth of the
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country. A bank is a financial institution, which can play a significant role in the
upliftment of the economic situation of the developing country like Nepal. Bank
plays a vital role to encourage thrift and discourage hoarding by mobilizing the
resources and removing the habit of hoarding. They pursue economic growth rapidly,
developing the banking habit among the people by collecting the small-scattered
resources in one bulk, using them in the further productive purposes, and rendering
other valuable service to the country. Thus, this gives the individual an opportunity to
borrow funds against future income, which may improve the economic well being of
the borrower. Bank deals with the offer of collected deposits and provides the loan for
commercial purpose. Bank is considered as the backbone in the development of the
national economy. It is financial institution, which act as a transaction of money by
accepting various types of deposit, disbursing loans and rendering other financial
services. So, among the various function to provide loan to the investors is the major
function. Through the loan, there will be increase in the environment of the
investment and the bank has the major role in creating such an environment (Singh,
2007, 26). Liquidity is much more important than we may realize, because both
excess as well as insufficient liquidity is injurious to the banks’ profitability. In order
to pay current obligations, liquidity management is very important for every business
organization. Liquidity management is of crucial importance in financial management
decision. The optimal of liquidity management is could be achieve by company that
manage the trade-off between profitability and liquidity management Liquidity
management refers to the planning and control necessary to ensure that the
organization maintains enough liquid assets either as an obligation to the customers of
the organization so as to meet some obligations incidental to survival of the business
or as a measure to adhere to the monetary policies of the central bank. For a
commercial bank to plan for or manage its liquidity position, it first manages its
money position by complying with the legal requirement. Actually, management of
money position is essential if a bank must avoid excesses or deficiencies of required
primary reserves. Where there is a decline in market price of securities or where
additional funds needed to correct the bank reserve position are for a very short time,
it will be definitely expensive to sell securities than to borrow from another bank.
Moreover, it may be more desirable to borrow for bank's liquidity needs than to call
back outstanding loans or to cancel or place embargo on new loans, a situation that
will reduce the existing and potential customers of a bank. Commercial banks are
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expected to maintain certain levels of reserves. These reserves are statutory

requirements stipulated by the central bank specifying the cash reserves equal to
certain fraction of the banks’ deposits or loans and advances which bank must
maintain.

1.1.1 Profile of the Sample Banks

As there has been number of commercial banks established, the research has been
taken into consideration of HBL and SBL. Therefore, short glimpse of these
commercial banks are given as:

Nepal Arab Bank Ltd (NABIL)

Nabil Bank Limited is the nation’s first private sector bank, commencing its business
since July 1984. Nabil was incorporated with the objective of extending international
standard modern banking services to various sectors of the society. Pursuing its
objective, Nabil provides a full range of commercial banking services through its 118
points of representation. In addition to this, Nabil has presence through over 1500
Nabil Remit agents throughout the nation.

Nabil, as a pioneer in introducing many innovative products and marketing concepts

in the domestic banking sector, represents a milestone in the banking history of Nepal
as it started an era of modern banking with customer satisfaction measured as a focal
objective while doing business. Operations of the bank including day-to-day
operations and risk management are managed by highly qualified and experienced
management team. Bank is fully equipped with modern technology which includes
international standard banking software that supports the E-channels and E-
transactions.

Nabil is moving forward with a Mission to be “1st Choice Provider of Complete

Financial Solutions” for all its stakeholders; Customers, Shareholders, Regulators,
Communities and Staff. Nabil is determined in delivering excellence to its
stakeholders in an array of avenues, not just one parameter like profitability or market
share. It is reflected in its Brand Promise “Together Ahead”. The entire Nabil Team
embraces a set of Values “C.R.I.S.P”, representing the fact that Nabil consistently
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strives to be Customer Focused, Result Oriented, Innovative, Synergistic and

Professional.

Nepal Industrial and Commercial Asia Bank (NICA)

NIC ASIA Bank has its antecedents in NIC Bank which was established on 21st July
1998. The Bank was rechristened as NIC ASIA Bank after the merger of NIC Bank
with Bank of Asia Nepal on 30th June 2013. This was a historic merger in the annals
of the Nepalese financial landscape as the first of its kind merger between two
successful commercial banks in the country. Today, NIC ASIA has established itself
as one of the most successful commercial banks in Nepal.

During the post-merger integration phase, NIC ASIA managed the transition very
smoothly receiving accolades from the regulators as well as the stakeholders, paving
the way for other mergers and consolidation in the Nepalese financial sector. After the
merger, NIC ASIA was recognized as ”Bank of the Year 2013-Nepal” by The Banker,
Financial Times, UK. This is the second time that the Bank was recognized with this
prestigious award, the previous occasion being in 2007.

NIC ASIA Bank is now, one of the largest private-sector commercial banks in the
country in terms of capital base, balance-sheet size, number of branches, ATM
network, and customer base. The Bank has 352 branches, 75 extension counters
80 branchless banking, and 471 ATMs across Nepal with a network covering all
major financial centers of the country. The Bank strongly believes in Meritocracy,
Transparency, Professionalism, Team spirit, and Service Excellence. These core
values are internalized by all functions within the Bank and are reflected in all actions
the Bank takes during its business.

1.2 Focus of the Study

This study is focused on the liquidity analysis of commercial banks in Nepal.

Financial analysis is the process of determining the significant operating and financial
characteristics of a firm from accounting data and financial statement. Financial ratio
analysis is a widely used tool of financial analysis and its performance. The goal of
such analysis is to determine the efficiency and the performance of the firm’s
management as reflected in the financial record and report. This study tries to analysis
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banks liquidity position and its relation with profitability. Financial ratios are
evaluated with the help accounting data and financial statements like balance sheets
and profit and loss accounts. With the help of these tools, we can measure the
liquidity in rational way.

1.3 Statement of the Problems

Liquidity and Profitability is the most sensible and critical aspect of banks. The
managers should be foresighted and able to predict future demand and supply of
liquidity and Profitability. The bank must always stand ready to meet immediate cash
demands made by the depositors and borrower that can be substantial at any time.
Bank manager should know the trends of liquidity demand based on experience

(Thapa & Rawal, 2012, 106).

Bank must give high priority to meet demands for liquidity. Many depositors were
crowded into bank to withdraw their deposit. In this situation, most banks in the
Kathmandu valley suffered a lot from the scarcity of liquidity. Thus, one of the most
important tasks of a liquidity manager is to keep close contact with the bank’s largest
depositors and holders of large unused credit line. It is essential to predict when
withdrawals of fund will be made. Therefore, close contact and prediction of future
liquidity demand provide the bank to make sure that adequate funds are available in
time. Although many commercial banks are established, most of them are not seen so
serious regarding dividend decision. Each company has its own policy. There are not
any certain rules and regulations. In these circumstances, this study seeks to find out
the solution of the following problems. Whether commercial banks are able to
maintain adequate liquidity or not?
• Do commercial banks examine the liquidity and profitability?
• Are commercial banks are following NRB guideline with respect to
liquidity?
• Is there any relationship that prevails between liquidity and
profitability of the Banks?
• What is the level of effect of liquidity on profitability of the Banks?
• What are the external factors that affect performance of the Banks?
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• What is the level of effectiveness of the Bank’s liquidity measurement

tools?

1.4 Objectives of the Study

Based on the aspect this thesis tries to deal with the study of liquidity and profitability
position of Himalayan Bank International Limited and Siddhartha Bank Limited. The
specific objectives of the study are:
• To analysis ability to maintain adequate liquid assets of commercial
banks in Nepal
• (like cash reserve, balance with NRB, investment in government
securities, etc)
• To analysis the profitability position of commercial banks in Nepal
• To study liquidity and its’ profitability position of NABIL and NICA.
• To analyze the growth of total deposit, total investment, loan and
advances and net profit of sample banks.
• To examine the trend of total deposit, loan and advances, and net
profit.

1.5 Significance of the Study

Generally, the study gives emphasis liquidity and profitability position commercial
banks in Nepal. While preparing this thesis researcher gain knowledge through their
own experience enabling them to deal with problems relating to studies. The study
also intends to let reader know about required information by him or herself. The
significance of the study is mentioned below-
• This study helps to be acquainted with some aspect of liquidity by
performing various financial analyses.
• This study is beneficial to come to conclusion about the liquidity and
profitability position of commercial Banks.
• This study helps to find out the position of commercial bank in the
banking field of Nepal.
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1.6 Limitations of the Study

Never the less, the analysis performed and conclusion drawn regarding the liquidity
and profitability position of commercial Bank; there is considerable place for arguing
about its accuracy and reliability. There are limitations, which weaken the conclusion
e.g. inadequate data, time and other variable.

• Though there are around 27 commercial banks, the study covers only 2 commercial
banks: Nepal Arab Bank Ltd (NABIL) and Nepal Industrial and Commercial Asia
Bank (NICA)
• The research is based to secondary data only.
• The study period cover five fiscal years beginning from FY 2016/017
to 2020/021.
• Being a student time and resources consentient.
• Limited variable has been selected.
• The truth of the project depends upon the available data from the bank.
• Many factors affect liquidity of bank, International liquidity and
valuation of firm however only related factor are taken into
consideration in this study.

1.7 Organizations of the Study

The study is classified into five different chapters, which are briefly discussed as
follows:

Chapter I: Introduction

The first chapter dealt with introduction of the study. It includes background of the
study, focus of the study, statement of the problems, objectives, significance, and
limitations of the study and organizations of the study.

Chapter II: Review of Literature

The second chapter dealt with the review of literature, which included review of
related books, journals, articles and previous unpublished master level thesis etc.

Chapter III: Research Methodology

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This chapter explained the research methodology used in the study. It included
research design, population and sampling, types and sources of data, data collection
procedure, method of analysis and analytical tools used.

Chapter IV: Data presentation and Analysis

In chapter, four contains presentation and analysis of data. This is the main key
chapter of the research study .In this chapter sources of data are collect in various
method, which are presented in appropriate form.

Chapter V: Summary, Conclusions and Recommendations

This chapter contains the summary of study and the main conclusion drawn from the
study and some recommendations as well as suggestions based on the study. Last but
not least, an intensive Bibliography, Annex and are in corporate at the end of the
study.
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2. REVIEW OF LITERATURE

The chapter is concerned with review of literature relevant to the topic liquidity
analysis of commercial banks. It helps in the reviewing the research studies or
strength and weakness of the chosen bank. Therefore, the relevant literature has been
concerned. The review of literature is arranged in the following order: Conceptual
framework is a type of intermediate theory that has the potential to connect to all
aspect of inquiry. Conceptual framework act like maps that give coherence to
empirical inquiry. The frameworks cover the area of research work and theoretical
concepts developed by various scholars.

3. RESEARCH METHODOLOGY

Research method is plan to obtain to answer of the research question throw analysis
the data. It is systematic away to solving the overall problem. Research methodology
refers overall process to analysis the data and finding and solving the problem.
Research methodology refers to the overall research process, which a researcher
conducts during their study. Research can be conducted based on various data. Here
in the study all the data and observed data are analyzed with using appropriate
financial tools. To evaluate, analyze and interpret on every subject and discipline a
detailed research plan is required.

3.1 Research Design

The research design serves as a framework for the study, guiding the collection and
analysis of the data, the research instruments to be utilized, and the sampling plan to
be followed. Specially speaking, research design describes the general plan for
collecting, analyzing and evaluating data after identifying what is researcher wants to
know and what has to be deal in order to obtain the required information. The study is
the blend of analytical type of research. Historical data are used to identify and
analyze the liquidity and profitability of sample banks. Since only two banks have
been selected for the study, thesis study is a comparative study between these two
banks in liquidity and profitability analysis.
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3.2 Sources of Data

The study based on the secondary data, secondary data are used to analyze historical
tools in liquidity management after defining the research design, how the work comes
to define the sources of relevant data for the research study. On the other hand
secondary data are those data that are collected by someone else or used already &
made available to other in the form of published statistics such as annual reports,
periodicals, newspapers, magazines etcepal . once a primary data is used; it loses its
originality & becomes secondary. This study is mainly depends on the use of
secondary data that consists of annual reports of the concerned bank. However,
besides the annual reports various other sources of data were gathered for the purpose
of the study like ;- plan documents, newspaper, magazine, economic journals, NRB
reports etc.

3.3 Population and Sample

Population or universe refers to the industries of the same-nature of its service &
product. It is the collection or the aggregate of objects or the set of results of an
operation. On the other hand sample means the representative parts of population
selected from it with the objectives of investigating its properties. Thus, a sample is
just a portion of the population selected with a view to draw conclusions about the
population under study. In context of Nepal, 28 commercial banks are in operation in
data. Among these 28 commercial banks, two commercial banks have been taken as
sample from the whole population i.e. twenty eight banks. The sample banks are as
follows:-

Nepal Arab Bank Ltd (NABIL)

Nepal Industrial and Commercial Asia Bank (NICA)

3.4 Method of Analysis

Various financial analysis tools have been used in this study. The analysis of data will
be done according to pattern of data available. The relationship between different
figures related to study topic will be drawn out using ratio analysis. The various
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calculated results are then tabulated under different heading which are later on
compared with each other to interpret the result.

3.5 Data Analysis Tools

Analysis and presentation of the data is the core of each and every research work.
This study requires some financial and statistical tools to accomplish the objective of
the study. The financial and statistical tools are most reliable. In this study various
financial, statistical and accounting tools are used. These tools make the analysis more
effective, convenience, reliable and authentic. Two kinds of tools are used to achieve
the certain goals.

• Financial Tools

• Statistical Tools

3.5.1 Financial Tools

Financial tools basically help to identify the financial strengths and weaknesses of the
firm by properly establishing relationships between the items of the balance sheet and
the profit and loss account.

Financial Ratio Analysis

Ratio analysis is one of the most commonly used techniques of financial statement
analysis. It is a simple but meaningful technique of measuring operating performance
and evaluating managerial performance of a firm. The analysis is usually based on
financial statements prepared by the firm. Financial analysis can serve on the basis of
decision making. Ratio analysis is widely used tool of financial analysis. It is defined
on the systematic use of ratios to interpret the financial statements so that the strength
and weakness of a firm as well as its historical performance and current financial
condition can be determined. Following ratios are used to analyze the liquidity and
profitability of sample banks:

3.5.1.1 Liquidity Ratios

The liquidity ratios measure the liquidity position and short-term solvency indicating
the company’s ability to meet short-term obligations. It measures the speed of firms to
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convert the firms asset into cash to meet deposit withdraws and other current
obligations. This is quick measure of the liquidity and financial strength of the firm.
Various types of liquidity ratios are applied in these studies, which are explained
below:

1. Total liquid fund to current liabilities ratio (LFTCLR) :-

It indicates that the ratio total liquid fund on current liabilities (i.e., Sum of Current
Deposits, Saving Deposits, Bills payables and Creditors) as per given in balance
sheets of the commercial banks. Higher ratio shows the higher liquidity position of the
banks that is beneficial for new investment opportunity.

LFTCLR = Total Liquidity Fund

Current Liabilities

2. Liquid fund to deposit ratio (LFTDR) :-

It shows that the ratio between total liquid fund (i.e., cash balance plus outside bank
balance and money at call) and total deposits collection by the commercial banks.
Higher ratio indicates more sound liquidity position of the banks.

LFTDR = Total Liquid Fund

Total Deposits

3. Liquid fund to total asset ratio (LFTAR) :-

It shows the ratio of total liquid fund on total assets as per given in balance sheets of
the commercial banks. Higher ratio shows the higher liquidity position of the banks
that is beneficial for new investment oppurtunity

LFTAR = Total Liquidity Fund

Total Assets

4. NRB Balance to total deposit ratio :-

It indicates ratio of the amount deposited in Nepal Rastra Bank and total deposits
collected by the commercial banks. Higher ratio means that there is a high liquidity
position in the banks.
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NRBTDR = NRB Balance

Total Deposits

5. Cash in hand to total deposit ratio (CHTDR) :-

It is the ratio of cash balance on total deposit collection by the commercial banks.
Higher ratio indicates there is a sufficient cash balance to pay creditors of the banks.

CHTDR = Cash in hand

Total Deposits

6. Cash and bank balance to total deposit ratio (CABTDR) :-

It shows the ratio of cash and bank balance on total deposits per given in balance
sheets of the commercial banks. Higher ratio shows the higher liquidity position of the
banks that gives more useful for new investment opportunity.

CABTDR = Cash and Bank Balance

Total Deposits

3.5.1.2 Profitability Ratios

Profit is only appeared when there is positive difference between total revenues and
total cost over a certain period of time. Profitability ratios show the combined effects
of liquidity, assets management, and debt on operating results. Profitability ratios are
very helpful to measure the overall efficiency of operations of a firm. It is a true
indication of the financial performance of each and every business organization. Here
profitability ratios are calculated and evaluated in terms of the relationship between
net profit and assets. Profitability of the firms can be presented through the following
different ways:

i. Return on Loan and Advances Ratio

Return on loan and advances ratio shows how efficiently the banks have utilized their
resources to earn good return from provided loan and advances. This ratio is
computed dividing net profit (loss) by the total amount of loan and advances and can
be mentioned as,
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Net Profit(Loss)
Return on Loan and Advances Ratio = ∗ 100
Loans and Advances

ii. Return on Total Working Fund Ratio

Return on total working fund ratio measures the profit earning capacity of the banks
by utilizing available resources i.e. total assets. If the bank’s well managed and
efficiently utilized its working fund, it will get higher return. Maximizing taxes, this
in the legal options available will also improve the return. It is computed as:

Net Proft(Loss)
Reuturn on total Working Fund Ratio = ∗ 100
Total Working Fund

iii. Interest Income to Total Loan and Advances

This ratio reflects the extent to which the banks are successful in mobilizing these
total loans and advances to acquire income as interest. This ratio actually reveals the
earning capacity of commercial banks by mobilizing its deposit. Higher the ratio
higher will be the income as interest. We have,

Total Intrest Earned

Total Interest Earned to TWF Ratio = Total Working Fund *100

iv. Return on Equity Ratio (ROE)

Since, shareholders are entitled to the residual profits; ROE shows the relationship
between net income and shareholders’ fund. This ratio indicates the firm’s ability of
generating net income per rupee of shareholders’ fund. The main objective of
computing this ratio is to analyze how effectively the funds supplied by shareholders’
have been utilized.

This ratio is of great interest to the present as well as the future prospective
shareholders and also of great concern to management which has the responsibility of
maximizing the owners’ welfare. This ratio can be computed by using following
formula:

Net Income
ROE = *100
Shareholders equity
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v. Earnings per share (EPS)

The profitability of bank from the point of view of the ordinary shareholders is
earning per share. The ratio explains net income for each unit of share. Earnings per
share of an organization give the strength of the share in the market. It shows how
much of the total earnings belong to the ordinary shareholders. EPS is calculated as:

Net Income
Earnings per share = No. of shares outstandings ∗ 100

vi. Net Worth per Share (NWPS)

Net worth per Share is a measurement of the net worth of the company for each share
of stock that has been issued. The book value per share formula is used to calculate
the per share value of a company based on its equity available to common
shareholders. The term "book value" is a company's assets minus its liabilities and is
sometimes referred to as stockholder's equity, owner's equity, shareholder's equity, or
simply equity.

Common stockholder's equity, or owner's equity, can be found on the balance sheet
for the company. In the absence of preferred shares, the total stockholder's equity is
used.

Shareholders Equity
Equity Net worth per share =
No .of shareoutstanding

3.5.1.3 Growth Ratios

The growth ratios represent how well the commercial banks are maintaining their
economic and financial position. The higher ratios represent the better performance of
the selected firms to calculate, check and analyze the expansion and growths of the
selected banks the following growth ratios are calculated. Growth ratios are directly
related to the fund mobilization and investment of those firms.
i) Growth ratio of total deposits
ii) Growth ratio of total investment
iii) Growth ratio of loan and advances
iv) Growth ratio of net profit
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3.5.2 Statistical Tools

To meet the objectives of the study statistical tools are equally important. It helps us
to analyze the relationship between two or more variables. In this research, Simple
analytical tools are used such as coefficient of determination, probable error, standard
deviation, Karl Pearson’s coefficient of correlation; trend analysis adopted which are
as follows:

i. Mean

The most popular and widely used measure of representing the entire data by the one
value is known as average. Its value is obtained by adding together all times and the
summation of times is divided by the number of sample periods. If the past items of
the sample periods are Xt, number of periods are, then Mean is defined as follows.

ii. Standard Deviation (S.D.)

The standard deviation is an important and widely used measure of dispersion. The
measurement of the scatterings of the mass of figure in a series about an average is
known as dispersion. The greater the value of dispersion, greater the standard
deviation. A small standard deviation means a high degree of uniformity of the
observation as well as homogeneity of a series; a large standard deviation means just
the opposites it is denoted by the letter σ.

∑(𝑿−𝐗)𝟐
S.D(σ) = √
𝑵−𝟏

Where,

N = Number of observations

X = Expected return of the historical data

iii. Coefficient of Variation (C.V.)

The coefficient of variation is the most commonly used measure of relative variation.
It is used in such problems where the researcher wants to compare the variability of
more than two years. Greater the C.V, the variable or conversely less consistent, less
uniform, more consistent, more uniform, more stable and homogeneous.
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Standard Deviation
C.V. =
Expected Return

iv. Coefficient of corrélation (r)

This statistical tool has been used to analyze, identify and interpret the relationship
between two or more variables. It interprets whether two or more variables are
correlated positively or negatively. Statistical tool analyses the relationship between
those variables and helps the selected banks to make appropriate investment policy
regarding to profit maximization and deposit collection; fund mobilization through
providing loan and advances.

For the purpose of decision-making, interpretation is based on following term:

• When r = 1, there is perfect positive correlation.
• When r = -1, there is perfect negative correlation.
• When r = 0, there is no correlation.

a. Coefficient of correlation between deposit and loan and advances

Correlation coefficient between deposits and loan and advances measures the degree
of relationship between two variables i.e. X and Y. In this analysis, deposit is
independent variables (X) and loan and advances is dependent variables (Y). The
main purpose of calculating correlation coefficient is to justify whether the deposits
are significantly used in proper way or not and whether there is any relationship
between these two variables.

b. Coefficient of correlation between deposit and net profit

Correlation coefficient between deposit and net profit is to measure the degree of
relationship between deposit and net profit. In this analysis, deposit is independent
variables (X) and net profit is dependent variables (Y).

c. Coefficient of correlation between cash reserve ratio and return on equity.

Correlation coefficient between cash reserve ratio and profitability ratio measures the
degree of relationship between cash reserve ratio and profitability ratio. Here, cash
reserve ratio is independent variable(x) and return on equity is dependent variable(y).
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GeneYrally it is assumed that cash reserve ratio and the return on equity are
negatively correlated, if cash reserve ratio increases the profit ratio will decreases and
vice versa. The main purpose of analyzing this is to justify whether the profit is
significantly correlated with total assets or not.

Karl Pearson's correlation coefficient can be obtained as.

N ∑ XY−∑ X ∑ Y
R=
{∑ X2 −(∑ X2 )}{∑ Y2 −(∑ Y2 )}
Where,

n = number of observations in series X and Y

∑ X = sum of observations in series X

∑ Y = sum of observations in series Y
∑ X2 =sum of squared observations in series X
∑ Y2 = sum of squared observations in series Y
∑ XY = sum of the product of observations in series X and Y

v. Probable Error (P.E)

Probable error is measured for testing the reliability of an observed value of

correlation coefficient. It is computed to find the extent to which it is dependable. If
correlation coefficient is greater than 6 times P.E the observed value of r is said to be
significant, otherwise nothing can be concluded with certainty. But if the calculated
(r) is less than the P.E correlation is not at all significant. It is calculated by using
following formula:

0.6745(1−r2 )
P.E =
√N
Where,
P.E. (r) = Probable error of correlation coefficient
r = Correlation coefficient
n = Number of observations