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LIQUIDITY ANALYSIS
OF
NEPAL INVESTMENT BANK LTD.
Contents
Acknowledgement …………………………………………………….I
Table of
content……………………………………………………………II
List of
table………………………………………………………………...III
Table of Contents
Chapter- one Page No.
1
1. Introduction 1
1.1. concept of banking 1
1.2. The banking in Nepal 2
1.3. List of commercial bank in Nepal
3
1.3.1. List of licensed commercial bank in Nepal
1.3.2. Functions of commercial bank 4
1.4. Overview of Nepal investment bank ltd. 5
1.4.1. Board of directors 5
1.4.2. Management team 6
1.4.3. Branches and Counters 7
1.4.4. Products and Services 8
1.5. Strategies and future plans of Nepal investment bank ltd. 8
1.6. Statement of problem 9
1.7. objectives of the study
9
1.8. Significance of the study
1.9. Limitations of the study 10
1.10. Scope and importance of the study 10
10
Chapter -two
2. Review of Literature 11
2.1. Conceptual framework 11
2.1.1. Liquid Assets
11
2.1.2. Cash Reserve ratio(CRR)
2.1.3. Statutory Liquidity ratio(SLR) 11
2.1.4. Importance of the liquidity for the bank 11
2.1.5. Need of the liquidity for the bank 12
2.1.6. Demand for the liquidity 12
2.1.7. Supply for the bank liquidity 12
2.1.8.Criteria of measuring the bank liquidity
12
2.1.9. Liquidity to be maintained with the central bank
2.1.10. penalty for non-compliances 12
2.1.11. Applicable penalty rates 12
13
13
2.1.12. Composition 13
2.1.13 Basis for the liquidity Requirement prediction 14
2.1.14Review of related study
14
Chapter three
3. Research methodology
3.1. Research design 15
3.2. Data collection techniques 15
3.3. Data analysis tools 15
3.3.1. Ratios
Chapter Four
4.Data presentation and analysis
4.1. Participation of all deposits in the total deposit liability 17
4.2. Liquidity Ratio 17
4.2.1. saving deposit to total deposit ratio 18
4.2.2. fixed deposit to total deposit ratio 19
4.2.3. Cash and bank balance to current deposit ratio 20
4.2.4. Cash and bank balance to total deposit ratio 20
4.2.5. Cash and bank balance to total deposit 21
(Excluding fixed deposit ) ratio
4.2.6. Balance with NRB to current and saving 22
deposit ratio
4.2.7. Balance with NRB to fixed deposit ratio 23
4.2.8. Total investment to total deposit ratio 24
4.2.9. Liquid asset to total deposit ratio 25
Chapter five
5. Summary, Conclusion and Recommendation
5.1. Summary 27
5.2 Conclusion 27
5.3. Recommendation 28
Bibliography
List of table
INTRODUCTION
Generally, bank is an institution which accepts deposits, makes business loans, and offers related
services. Commercial banks also allow for a variety of deposit accounts, such as checking,
saving, and time deposit. There institutions are run to make a profit and owned by a group of
individuals, yet some may be members of the Federal Reserve System. While commercial banks
offer services to individuals, they are primary concerned with receiving deposits and lending to
businesses.
In an economy the bank is regarded as one
of the economic backbone of the country for its development. Bank is a financial institution that
deals in money. The basic function of bank is collecting deposit and granting the loans. It
involves in credit creation that in related to creation of deposit and loan. In the economy, the
banks collects small saving of general people, accumulative it and lends the productive sectors of
the society for the overall economic development.
Various writers have been defined the word “bank” in different ways.
According to Scholars, “The bank is defined as factory of money for credit where it does not
purchase goods and sells it rather produces credit inform of deposit and sells it inform of loans.”
According to C.R. Crowther,”A banks collects money from those who have it to spare or who
are saving it out of their income and lends this money to those who required it.”
Thus in conclusion, we can say that bank is an organization which deals with the monetary
transactions for the mobilization of idle money or deposits in productive sectors, is essentially
essential for the development of the whole net.
1.2. THE BANKING IN NEPAL
In the context of Nepal, like as in other country the goldsmiths and landlord was the
ancient banker. The Nepalese people were highly exploited by shahu mahajan by charging higher
interest rate that is compound interest rate and even by manipulating the principle amounts. If we
try to see the history of banking transaction in depth then evidence of money landing function are
found in practice before 8th century in 780 B.S.
1
gunakamdev the ruler of Kathmandu reconstructed Kathmandu valley by borrowing dept from
the people. In 14th century tankdhari system had been running in the period of ranodip shing in
Kathmandu established and office called tejarath adda. From the office the government
distributed salary to their employees and provided loan to government employment @5% of
interest against the security gold, silver etc.
To fulfill the growing credit requirement of the country. The commercial bank i.e. Rastraya
Banijya bank was establishes in 10th bhadra 2022 B.S. this bank also provides facility for the
economy welfare of the general public. Nepal is an agricultural country to develop agriculture
system. Industry agriculture development bank and Nepal industrial development corporation
was established in 2024 B.S. 2016 B.S. respectively.
The initiation of the financial sector; liberalization policy by Nepal rastra bank, a board
of joint venture banks entered with the view to accelerate the race of development of nation. At
present, there are many joint venture banks which are running successfully in a competitive
environment. His majesty government deliberates policy of allowing foreign joint venture banks
to operate in Nepal basically targeted, to encourage local tradition commercial bank to enhance
their capacity through competitor’s efficiencies mechanization modernization prompt customer
service. Nepal Arab bank ltd was established in 2041 as a first foreign joint venture bank.
Now in our country there are 31 commercial bank, 87 development bank, 79 finance
company and 21 micro credit development banks after mid July 2011(licensed by NRB)
2
After that the first commercial bank of Nepal, Nepal bank
Limited (NBL) was lunched with the cooperation of imperial bank of India in November 1937.
holding 51% government equity. The second commercial bank, Rastriya Banijya bank come into
existence in 1966 A.D. with 100% government ownership. In early 1980, to meet the need of
health completion in the financial system, Nepal allowed to entry of foreign banks as joint
ventures with up to maximum of 50% equity participation.
Nepal arab bank limited was the first joint venture bank which was established with the
joint venture of arab bank emirates in 1984. in 1986, Nepal grind lays bank limited (now
chartered bank limited) entered in nepali financial market as a joint venture with ANZ-Grind
lays.
Although profit maximization is a major objective of commercial bank, to achieve this objectives
commercial bank performs various functions under the mandatory rules and registrations and
directives of NRB and commercial Bank Act 2031(1974) which are:
Primary functions
a) accepting Deposits:
Accepting deposits is the main function of commercial banks. Commercial banks collects money
from those who want to deposit in different types of deposits accounts such as:
Fixed deposit account
Current deposit account
Saving deposit account
b) Advancing of Loans:
Commercial banks provide the required loan or credit to various sectors of economy such as
industry, trade, agriculture, business deprived sector etc. in this way bank creates facilities. It
provides loans from various procedures in different form such as:
Overdraft
Cash credit
Direct loan with collateral
Discounting bill of exchange
Loans of money at call and notice
Agency Functions
Apart from the above function, commercial banks also perform agency functions for which they
act as agent and claim commission on some facilities such as:
Nepal investment Bank Ltd. (NIBL), previously Nepal Indosuez bank Ltd., was established in
1986 as a joint venture between neplise and French partners. The French partner (holing 50% of
the capital of NIBL) was credit agricole Indosuez, a subsidiary of one the largest banking group
in the world.
With the decision of credit agricole Indosuez to divest, a group of companies comprising of
bankers, professionals, industrialists and business man, had acquired on april 2002 the 50% share
holding of credit agricole Indosuez in Nepal Indosuez bank Ltd.
The name of the bank has been change to Nepal investment bank Ltd.Upon approval of
bank’s annual general meeting, Nepal rastra bank and company register’s office with the
following share holding structure.
7
Ø WALING BRANCH , SYANJA
ü Deposit
· Saving deposit
· Current deposit
· Fixed deposit
· Call deposit
ü Lending
ü Documentary credits
ü Guarantee
ü Collections (agency functions)
ü Credit card
ü Safe deposit locker
ü Fund transfer
ü Remittance
ü SWIFT member
ü ATM
· Fast cash
· Withdrawal
· Pin change
· Enquiry
1.5. STRATEGIES AND FUTURE PLANS OF THE NEPAL INVESTMENT BANK LTD.
The Nepal investment Bank Ltd.’s mission is to be the “Bank of the first choice” to attain the
goal to be the “Bank of the first choice”, bank is concerting into the service of its customers and
social issues. So Nepal investment is the customer focus and goal oriented.
CHAPTER – TWO
Review of Literature
This chapter deals with the theoretical aspects of the topic of financial analysis of
Nepal investment bank Ltd. in more detail and descriptive manner. For this study, journals,
articles, and some research reports related with this topic have been reviewed. This study has to
refer almost all books related with this topic published. Some of the prior reports by students of
BBS regarding this topic have also been reviewed.
Liquidity is also defined as the position or capability of a bank to meet the current
obligation of customers such as payment of cheque. Payment of demand drafts, disbursement of
approved loan etc. Bank needs to maintain some reasonable level of liquidity to fulfill different
commitments such as provide money to depositors when they demand for administrative
expenses, for maintaining cash bank’s capacity to pay cash in exchange of deposits. Liquidity is
crucial in the business like banking. Because if the bank has high liquidity, it can no earn a desire
profit and if the bank has the shortfall of the liquidity it cannot satisfy its customers. Inadequate
liquidity may lead to collapse of the banks while excess liquidity is detrimental to bank’s
profitability. In order to remove demerits associated with maintaining inadequate and excess
liquidity, banks should maintain an optimum level of liquidity. This possible only when bank’s
liquidity needs is correctly predicted. Prediction covers in present outflows of liquidity. If
prediction shows more outflows, bank should be prepared to cover the shortfall by borrowing or
by liquidating assets. If inflow greater than outflow, bank should plan where to invest so that
income can be increase. Banks attach great importance short term and long term predictions.
Prediction of liquidity need should be in the firm of primary and secondary reserves so that bank
generates income and at the same time does not compromise to liquidity.
2.1.1. Liquidity assets: the assets which can be converted into cash immediately with or
without a nominal loss of value. Liquidity can be in the firm of treasury bills, investments in
government securities, gold and silvers, inventories and marketable securities etc.
2.1.2. Cash reserve Ratio (CRR): Central banks the world over make banks maintains the
certain level of liquidity to total deposit liabilities in the form of the cash and bank balance. This
ratio is known as the cash reserve ratio or primary reserve.
2.1.3. Statutory liquidity ratio (SLR): Central bank orders to the banks to maintain the certain
level of liquidity to total deposit liabilities in the form of the cash and bank
11
balance and treasury bills and government securities and bonds. Such liquidity requirement is
called the statutory liquidity ratio.
2.1.4. Importance of liquidity for the bank: The liquidity is important for the bank for the
motives cited as follow:
Transaction motive
Speculative motive
Precautionary motive
12
Balance at Nepal Rastra bank – 7% current and saving deposit liabilities. 4.5%
of fixed deposit liabilities.
Cash in vault – 2 % of deposit liabilities
2.1.12. Composition:
a. Total deposit means current, saving and fixed deposit account as well as call money
deposit and certificate of deposit. For the purpose, deposits held in convertible foreign
currency, employees guarantee amount and margin account will not be included.
b. Fixed deposit means a deposit in local currency accepted under the condition to repay on
completion so stipulated time period.
c. Current and saving deposit means all deposit accounts other than the fixed deposits.
d. Cash in vault shall include only the local currency and foreign currency (except clearing
cheque etc.)
e. Balance held with Nepal rastra bank in ordinary account only will be eligible for liquidity
calculation. Special accounts opened with Nepal rastra bank for specific purpose and
foreign currency designated accounts will not be included for the purpose.
f. For the purpose of liquidity examination, all branches of the bank shall constitute one
unit.
13
International federation of accountants has recommended the measuring the liquidity of bank by:
Liquidity of the bank should be maintained according to standard; excel liquidity as well as
lack of the liquidity indicates that a bank is serious financial problems. The implication of the
financial problem results losing of deposits, which erodes its supply of cash and forces the
institutions to dispose of its safer and more liquid assets. On the other hand, other banks that are
strong in liquidity will be increasingly reluctant to lend the problem bank liquid funds at higher
interest rates. Thus, we can say that it is optimism necessity of the bank to maintain a proper
balance between high liquidity and low liquidity.
The tools used for analysis are:
ü Cash and bank balance to total deposit ratio
ü Current deposit to total deposit ratio
ü Saving deposit to total deposit ratio
ü Investment to total deposit ratio
ü And fund fluctuation trend line
CHAPTER – THREE
Research Methodology
The method which is use in the research is called research methodology. How the data is
collected and which source the research use for getting the data is under the research
methodology. Research methodology covers the data analysis tools as well.
3.3.1. Ratios:
An arithmetical relationship between two figures is called ratio. It is the most useful and
analytical tools to evaluate in respect to one variable over another. Here, for our purpose, only
the liquidity related ratios are calculated.
1) Liquidity ratio
2) Cash and bank balance to current deposit ratio
3) Saving deposit to total deposit ratio
4) Cash and bank to total deposit ratio
5) Fixed deposit to total deposit ratio
6) Cash and bank balance to total deposit ratio(excluding fixed deposit)
7) NRB balance to total deposit(excluding fixed deposit)
8) NRB balance to fixed deposit ratio
9) Deposit to investment ratio
15
17
In the above table and chart, we see that, in fiscal year 2005/06, the current deposit account
occupied 11%, saving deposit account 53%, fixed deposit account 37%.in fiscal year 2006/7 the
current deposit account occupied 10%, saving deposit account53%, fixed deposit account 36%
occupied. In fiscal year 2007/08 the saving deposit account occupied 13%, saving deposit
account 53%, fixed deposit account 37% occupied. In fiscal year 2008/09 the current deposit
account occupied 13% saving deposit account55%, fixed deposit account32% occupied. In fiscal
year 2009/10 the current deposit account occupied 11%, saving deposit account42%, fixed
deposit account occupied 48%.
Fiscal year
From the above table and trend line chart, the ratio is fluctuating state. In the fiscal year 2005/06,
the bank has the saving deposit of 0.53 times of total deposit liability. And 0.53, 0.55, 0.53, 0.41
times of total deposit liability in fiscal year 2006/07, 2007/08, 2008/09, 2009/
10 respectively.
18
Fiscal year
From the above table and trend line chart, the ratio is fluctuating in increasing and decreasing
trend. The highest ratio is 0.48 times in year 2009/10 and lowest ratio is 0.32 times in fiscal year
2007/08. And 0.36 times, 0.37 times and 0.35 times in year 2005/06, 2006/07, and 2008/09
respectively.
19
4.2.3 CASH AND BANK BALANCE TO CURRENT DEPOSIT RATIO:
From the above table and trend line chart, the ratio is fluctuating in not normally. In fiscal year
2005/06, the bank has the liquidity against current deposit is 0.48 times. And the bank has the
liquidity against current deposit are0.49, 0.62, 0.95, 0.87times in year 2006/07, 2007/08,
2008/09, 2009/10 respectively.
20
Fiscal year
From the above table and trend line chart, the ratio is fluctuating. In fiscal year 2005/06, the bank
has the liquidity for total deposit in the ratio of 0.05 times. And in fiscal year 2006/07, 2007/08,
2008/09, and 2009/10, the bank has the liquidity for the total deposit in ratio of 0.05, 0.08, 0.11
and 0.10 times respectively.
21
Fiscal year
From the above table and trend line chart, the ratio is fluctuating in increasing state. In fiscal year
2005/06, the bank has the liquidity against current and saving deposit account deposit account
liability in the ratio of 0.08 times. And in fiscal year 2006/07, 2007/08, 2008/09, and 2009/10,
the bank has the liquidity against current and saving deposit account liability in the ratio of 0.08
times, 0.11 times, 0.17 times and 0.19 times respectively.
22
Fiscal year
From the above table and trend line chart, the ratio has been maintained in fiscal year 2005/06 by
0.16 times. And the bank has been maintained its ratio in fiscal year 2006/07, 2007/08, 2008/09,
2009/10 by 0.11 times, 0.11 times, 0.16 times and 0.18 times respectively.
23
Fiscal year
From the above table and trend line chart, the ratio is fluctuating. In fiscal year 2005/06, the bank
has the balance with NRB against fixed deposit liability in the ratio of 0.28 times. And in fiscal
year 2006/07, 2007/08, 2008/09, 2009/10, the bank has the balance with NRB against fixed
deposit liability in the ratio of 0.18 times, 0.23 times, 0.38 times and 0.19 times respectively.
24
Fiscal year
From the above table and trend line chart, the ratio is fluctuating. In fiscal year 2005/06, the bank
has invested 37% of the deposit in investment. In fiscal years 2006/07, 2007/08, 2008/09,
2009/10, the bank has invested 32%, 28%, 23% and 25% of the deposit in investment
respectively.
25
Fiscal year
From the above table and trend line chart, the ratio is fluctuating slightly except fiscal year
2005/06 in fiscal year 2005/06; the bank has invested 26% of the deposit in the liquid assets. In
fiscal year 2006/07, the bank has invested 51% of deposit in liquid assets. In fiscal year 2007/08,
2008/09 and 2009/10, the bank has invested 51%, 50%, and 48% of the deposit in the liquid
assets respectively.
CHAPTER – FIVE
Nepal is one of the least developed countries of the world. For most of the developing
process, it is financially depending upon the foreign countries. It is economically too weak. Thus,
the economic condition of the people is weak. In Nepal 85% of the people are depended upon
agricultural sector which is unable to provide full employment to the people. Nepal government
has to activate people in the nation’s development through overall industrialization of nation. For
this purpose, development of sound banking system is essential.
In neplese banking sector, commercial banks including ventures banks are operating at
present. In the absences of modern banking any country cannot develop the economic activity.
Therefore, it is essential to find out whether or not the banks are serving an important
contribution to develop sectors of economy. Liquidity is said to be general business of fund,
which shows the bank ability to meet cash requirement. In this record, this study has been based
upon the objective to evaluate the liquidity position of Nepal investment bank ltd.
5.2. CONCLUSION
a) The saving deposit account is nearly constant trend. The highest ratio is 0.55 times in fiscal year
2007/08 and the lowest ratio is 0.41 times in fiscal year 2009/10. But the ratio is not satisfactory
due to the last year ratio was decline.
b) Fixed deposit is fluctuated. The lowest ratio is 0.32 times and highest ratio is 0.48 times. It is
decrease up to fiscal year 2007/08 and grows up then. And it is 0.48 times on 2009/10. It is
satisfactory. Bank made good ratio after 2007/08.
c) From the cash and bank balance to current deposit liability is fluctuating. The ratio is moving
around between 0.48 times to 0.95 times. It is satisfactory.
d) Cash and bank balance to total deposit ratio is fluctuating. But the ratio is somehow satisfactory
even though the ratio is higher than the central banks prescription. The ratio is moving around
the between 0.05 times to 0.11 times.
e) Cash and bank balance to total deposit (excluding fixed deposit) ratio is fluctuating in increasing
state. The ratio is satisfactory. It is moving around between 0.08 times to 0.19 times.
f) The ratio of balance with the NRB to current and saving deposit has been fluctuating. The ratio
is declined in year 2006/07 and constant in 2007/08 and then it is grow up. so, the ratio is
satisfactory.
g) The balance with the NRB to fixed deposit ratio is fluctuating. It is moving around between 0.18
times to 0.39 times.
h) The investment to total deposit ratio is fluctuating adversely. Since the ratio is fluctuating the
bank has unsatisfactory result. However the investment from source of deposit is
27
higher. It will give a higher return without risk only if the ratio is stabilized.
i) The liquid assets to total deposit ratio is fluctuating slightly except fiscal year 2005/06.
However the ratio is higher and somehow may be considered satisfactory.
5.3 RECOMMENDATION
a) The overall results are satisfactory. But in some case the Nepal investment Bank should take
certain steps to improve the bank current financial condition. Therefore some recommendations
are being put forward for its improvement along with its development of the country.
b) The proportion of the saving deposit account is high in total deposit liability. So, it is
recommended that the bank should utilize the amount collected from the saving deposit account
carefully. It should be invested in the higher yielding areas.
c) The cash and bank balance in the Nepal investment bank is satisfactory. It is higher a bit though.
Bank should analyze the opportunities for short term investment.
d) Balance with NRB to current plus saving deposit should be maintained at the below than 0.11
times.
e) Investment to deposit ratio is fluctuating adversely. It may harm the operation of the bank. So,
the investment from the deposit source should always be aware of liquidity need and keep in
mind to maintain the optimum liquidity.
f) Bank should not spend too much in the fixed assets because it yields only a nominal portion,
almost no yield.
28
BIBLIOGRAPHY
Bajracharya, B.C. (2053), Business statistics & mathematics, M.K. publishers and Wistributors.
Kothari, C.R., Research Methodology”, Mc. Grow Hill Company, second Edition.
Shekhar and Shekhar “Banking Theory & Practice”, Eighteenth Revised Edition, 1996.
http:// www.nrb.org.np