A
THESIS PROPOSAL
Submitted
By:
Charitra
Shrestha
Nepal
Commerce Campus
Class Roll No: 885/068
MBS Exam Roll No:
250004/070
TU Regd. No. :
7-2-25-375-2004
Submitted
To:
Research Department
Nepal Commerce Campus
In
partial fulfillment of the requirements for the degree of
Master
of Business Studies (M. B. S.)
Kathmandu,
Nepal
October,
2018
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. Banks
accept deposit and 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 very as per the demand,
criteria and the usefulness of the loan. Some banks also have the power to
create money.
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 also with the bank's
own capital, the banker makes loans or extends credit and also 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 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 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 of 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 NBL and SBL. Therefore, short glimpse of these
commercial banks are given as:
Nepal Bank Ltd (NBL)
Nepal
Bank was established in 1994 B.S. Due to the less competition in the Nepalese
Banking sector, Nepal Bank has been able to maintain a lead in the primary
banking activities- Loans and Deposits. Legacy of Nepal Bank lives on in an
institution that's known throughout Nepal of its innovative approaches to
merchandising and customer service. Products such as Premium Savings Account,
NBL Proprietary Card and Millionaire Deposit Scheme besides 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.
A
financial institution is the life blood of economic development of the country.
Financial institution acts as catalyst in the process of economic growth of the
country. A bank I s 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 services 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
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?
· What are the
liquidity trends of commercial banks?
Services
such as ATMs and Tele-banking were first introduced by NBL. Other financial
institutions in the country have been following our lead by introducing similar
products and services. Therefore, we stand for the innovations that we bring
about in this country to help our Customers besides modernizing the banking
sector. With the highest deposit base and loan portfolio amongst private sector
banks and extending guarantees to correspondent banks covering exposure of
other local banks under the bank's credit standing with foreign correspondent
banks, the bank believe to lead the banking sector of Nepal
Siddhartha Bank Limited
Siddhartha
Bank Limited (SBL), established in 2002 and promoted by prominent personalities
of Nepal, today stands as one of the consistently growing banks in Nepal. While
the promoters come from a wide range of sectors they possess immense business
acumen and share their valuable experiences towards the betterment of the Bank.
Within
a short span of time, Siddhartha Bank has been able come up with a wide range
of products and services that best suits its clientele. Siddhartha Bank has
been posting growth in its portfolio size and profitability consistently since
the beginning of its operations. The management of the Bank has been thoroughly
professional.
Siddhartha
Bank has been able to gain significant trust of the customers and all other
stakeholders to become one of the most promising commercial banks in the
country in less than 10 years of its operation. The Bank is fully committed
towards customer satisfaction. The range and scope of modern banking products
and services the Bank has been providing is an example to its commitment
towards customer satisfaction. It is this commitment that has helped the Bank
resister quantum growth every year. And the Bank is confident and hopeful that
it will be able to retain this trust and move even further towards its mission
of becoming one of the leading banks of the industry.
Various
calculated results are then tabulated under different heading which are later
on compared with each other to interpret the result.
1.2 Statement of the Problem
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
tie. Bank manager should know the trends of liquidity demand on the basis of
past experience (Thapa & Rawal, 2016, 2017).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 if and when
withdrawals of fund with be made. So, close contact and prediction of future liquidity
demand provide the bank to make sure that adequate funds are available in time.
The following questions were arisen:
· Is bank in the
right level of liquidity?
· Is bank investing
in good and profitable sectors?
· Has bank been able
to earn profits?
· What are the credit
efficiency of NBL and SBL?
· What is the impact
of growth in deposit on liquidity and lending practice?
· What is the
position of non performing credit in NBL and SBL?
· How far NBL and SBL
are able to use its resources in credit and advances?
1.2.1
Objective of Study
2 To analysis whether
or not commercial banks are able to maintain adequate liquid assets (like cash
reserve, balance with NRB, investment in government securities. etc)
3 To study liquidity
and its' profitability position of NBL and SBL.
4 To analyze the
growth of total deposit, total investment, loan and advances and net profit of
sample banks.
5 To examine the
trend of total deposit, loan and advances, and net profit.
1.3
Research Question
or Hypothesis
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 themselves.
The
significance of the study is mentioned below:-
2 This study helps to
get acquainted with some aspect of liquidity by performing various financial
analyses.
3 This study is
beneficial to come to conclusion about the liquidity and profitability position
of commercial Banks.
4 This study helps to
find out the position of commercial bank in the banking field of Nepal
4.3
Significance of 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 themselves.
The
significance of the study is mentioned below:-
· This study helps to
get 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
1.5 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.
· Thought there are
around 28 commercial banks, the study covers only 2 commercial banks: Himalayan
Bank International Limited and Siddhartha bank limited.
· The research is
based to secondary data only.
· The study period
cover five fiscal years beginning from 2013/14 to 2017/18.
· Being a student
time and resource consentient.
· Limited variable
has been selected.
· The truth of the
project depends upon the available data from the bank.
· There are many
factors that affect liquidity of bank, International liquidity and valuation of
firm however only related factor are taken into consideration in this study.
2.1 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
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
Data
presentation and analysis contained in the fourth chapter dealt with
presentation of the data collected through various sources and analysis of data
as well as major findings of the study.
Chapter
V: Summary, Conclusions and Recommendations
This
is the last chapter of the study covered the summary of study and the main
conclusion drawn from the study and some recommendations as well as suggestions
on the basis of the study. Last but not least, an intensive Bibliography, Annex
and are in corporate at the end of the study.
RESEARCH
METHODOLOGY
The
research methodology is systematic way of solving research problem. Research
methodology refers to the overall research process, which a researcher conducts
during their study. Research can be conducted on the basis of primary and
secondary 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. Without
gathering detailed data and without applying different analytical tool it is
impossible to confess anything about the related subject.
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 (Wolf & Pant, 2014). Specially speaking, research
design describes the general plan for collecting, analyzing and evaluating data
after indentifying:
· What the researcher
wants to know?
· What has to be
dealt with 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. To
achieve the objective of study descriptive and analytical research designs has
been used.
3.2 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 8
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
Bank Limited (NBL)
Siddhartha
Bank Limited (SBL)
3.3
Sources of Data
After
defining the research design, how the work comes to define the sources of
relevant data for the research study. Generally, Secondary data are sources of
this study.
3.4 Data Processing Procedure
Data
collected from questionnaire were classified and tabulated in the required
form. Simple arithmetic percentage tools were used for analysis. Table and
charts were also demonstrated as per the requirement.
3.5 Tools of the Study
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 have been used. These
tools make the analysis more effective, convenience, reliable and authentic.
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
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 etc. 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 have also been used for the purpose of the study plan documents,
newspaper, magazine, economic journals, NRB reports etc.
3.5.1
Financial
Tools
Financial tools
are used to examine the strength and weakness of the study. Financial tools
like interest rate spread and ratios have been used. Ratio is the
mathematically relationship between two accounting figures. Ratio analysis has
been used to compare a firm's financial performance and status to that of other
firm's or to it overtime. The qualitative judgment regarding financial
performance of firm can be done with the help
Liquidity
Ratio:
Liquidity is
measure by the speed with which a bank's assets can be converted into a cash to
meet deposit withdrawals and other current obligation. These ratios provide
insight into the present cash solvency in the event of adverse financial
condition. This ratio is used to measure the company's short-term obligation
with short term resources available at a given point of time.
The following
ratios are evaluated liquidity ratios:
Current Ratio
It is computed
dividing current assets by current liability
Current
ratio = 
Profitability
Ratio:
Profitability
ratio measures the efficiency of a business enterprise. The profit measure the
management ability regarding how well they have utilized their funds to
generate surplus for this following ratio has been analyzed.
Return
on total assets ratio
It is computed
by dividing net profit after tax by total assets
Return on total
assets ratio = 
Return
on Net worth Ratio
It is computed
by dividing net profit by net worth.
In total deposit
ratio = 
Return on net
worth ratio = 
Return
in Total Deposit Ratio
It is computed
by dividing net profit after tax by total deposit
Return
Interest
Earned to Total Assets Ratio
It is calculated
by dividing interest income by total assets of the bank
Interest earned
to total assets ratio= 
3.5.2 Statistical Tools
Arithmetical Mean
Arithmetical Mean is a given set of observation in
their sum divided by the variation of observation that is calculated as below:
Arithmetic Mean
∑x = Sum of the
sizes of items
N = Number of
items
Standard Deviation
Karl Pearson
first introduced the concept of standard deviation in 1983. Standard deviation
is the positive square root of the arithmetic average of the square of all
deviation measured from the arithmetic average o the series. The standard deviation
measures the absolute dispersion of a distribution. The greater the amount of
dispersion the greater will be the magnitude of the values from their mean.
Deviation means
a high degree of uniformity of the observation as well as homogeneity of a
serves. Standard deviation is denoted by a Greek letter 'o' (sigma) and is
calculated as follows.
Standard
Deviation 
Where
n = Number of
items in the series
= Mean
x = Variable
Coefficient of
Correlation (r)
The correlation
analysis is the technique used to measure the closeness of the relationship
between the variables. It helps in determining the degree of relationship
between two or more variables. It describes not only the magnitude of
correlation but also its direction. The coefficient of correlation is a number
which indicates to what extent two variables are related with each other and to
what extent variations is one leads to the variation in the other. Correlation
may be positive or negative which lies between 
1. Simple correlation
between interest rate on deposit and deposit amount interest rate on lending
and credit or lending amount and is computed in this thesis. The correlation
between interest rate on deposit and deposit amount is positive. Interest rate
on lending and leading amount is negative when inflation increases, interest
rate also increases in same direction and vice versa. For our study following
reference is used.
The correlation
coefficient can be calculated as:
Coefficient
of Determination (R2)
Coefficient of determination (r212)
= (r12)2
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