ISSN: 0974-3308, VOL. 2, NO.

1, JUNE 2009 © SRIMCA 117

D I M E N SI O NS O F L IQ U I D I T Y M A NA G EM E N T – A C AS E S TU DY
O F T H E SU RA T T E XT IL E ’S T RA D E RS C O -O PE R A T I V E B A N K
L T D., SU RA T
Dr Manisha Panwala

A B ST R AC T
The paper illustrates the concept of liquidity management with reference to The Surat
Textile’s Traders Co-Operative Bank Ltd., Surat, using seven parameters viz: current ratio,
liquidity ratio, cash position ratio, short-term investment to current assets ratio, short-
term advances to current assets ratio and short-term investment & short-term advances to
short-term deposits ratio.
Keywords: Data Mining, Spatial Data, Data Hiding Technique.

1 . I N T RO DU C T IO N
UCBs(Urban Co-Operative Bank) function is characterized by the UCBs
considerable uncertainty regarding the demand, market, quality, product
innovation and availability of its resources and their means of utilization. This
real world circumstances introduce problems with which the UCBs must deal.
The UCBs has many strategies available to financing with working capital
accounts often offer a substantial advantage over the other techniques. The
importance of working capital management is reflected in the fact that financial
manages spend a great deal of time in managing current assets and current
liabilities like, arranging short-term, controlling the movement of cash,
administering of advance management and monitoring investment management
etc. Decisions concerning the areas play a vital role in maximizing over all value
of the UCBs. This critical role can be enunciated by examining the flow of
resources through the UCBs. By far, the major flow is the working capital cycle.
Liquidity in general refers to the financial strength of an organization. The term
financial relates to two major sources of finance. These sources are categorized as
internal sources and external sources of an organization. ‘Strength reveals the
ability to meet obligations when they become due. Liquidity management in
general has three dimensions.
 Dimension I is concerned with the formulation of policies with regard to
risk liquidity and return, keeping in view the goals and responsibilities of
the UCBs.
 Dimension II is concerned with the decisions about the level and the
composition of current assets.
 Dimension III is concerned with the decisions about the level and the
composition of current liabilities.
 NJSIT Vol 2 No 1 June 2009 118

Liquidity is the stage where assets may be converted in to cash with out losses.
There is a need to balance between earning adequate returns, and cover the
financial and business risk. IT also enables UCBs to make a rapid shift in its
direction in accordance with the market demand. In order to measure the
liquidity position of Sutex Bank (The Surat Textile’s Traders Co-Operative Bank
Ltd.) during the period 2000 to 2005 certain important ratios have been
computed.
2 . N E E D FO R T H E S TU D Y
The important of goals (liquidity and profitability) varies from UCBs to UCBs
and also from time to time in UCBs. Liquidity and profitability are two vital
aspects of corporate banking business life. Goal of profitability can be achieved
by efficient use of resources. It is concerned with maximization of shareholder’s
or owners’ wealth. Goal of liquidity can be achieved by ensuring capability of
the UCBs to meet current financial obligations and to have adequate funds for
longer-range activities. Many UCBs both in public and private sector irrespective
of their size, age or product range have been experiencing difficulties in meeting
their short-term maturing liabilities. The dual objectives have opposite
directions. No UCBs survive without liquidity. A UCBs not making profit may be
considered as sick but, one having no liquidity may soon meet its downfall and
ultimately die and hence is the pre requisite for the very survival of a UCBs.
Liquidity management has thus, become a basic and broad aspect of judging the
performance of a corporate entity. It is, therefore, essential to maintain an
adequate degree of liquidity for smooth running of the banking business
operation. The liquidity should be neither excessive nor inadequate.
Excessive liquidity indicates accumulation of idle funds which do not earn any
profit for the business and inadequate liquidity not only adversely affects the
credit worthiness of the UCBs but also interrupts the investment process and
hampers its earning capacity to a great extent. Thus the need for the efficient
liquidity management in corporate business life has always been significant for
smooth running of the business and an indicator for performance management.
The goal of profitability can be achieved by efficient use of resources. Goal of
liquidity can be ensuring capability of the UCBs to meet current financial
obligations and to have adequate funds for longer-range activities. This paper is a
modest attempt to analyze the dimensions of liquidity management. Such
analysis is expected to shed light on the strengths and weakness regarding
various aspects of a UCBs liquidity dimensions and working capital management
pattern.
Dimensions of Liquidity Management - A Case Study of The Surat ... Dr Panwala 119

3 . O BJ E C T I V ES O F TH E ST U DY
The present paper seeks to achieve the following objectives:
1. To understand the quantum of liquidity maintained by the Sutex Bank and
to analyze the amount tied-up in various components of working capital.
2. To examine the pattern of the liquidity position of the Co-Operative during
the period under study on the basis of certain parameters of liquidity
management.
3. To compare the liquidity position of the Co-Operative from year to year by
applying Motaal’s Comprehensive test.
4. To measure the extent of relationship between liquidity and profitability by
using Spearma’s rank correlation co-efficient and also to test significance of
such correlation co-efficient.
5. To provide suggestion wherever necessary to improve the efficiency of
liquidity management of Sutex Bank.

4 . M E T H OD OLO GY
The information required for this study has been collected from the annual
reports of Sutex Bank from 2000 to 2005. For the purpose of analysis the
efficiency of liquidity management of Sutex Bank, the technique of Ratio
analysis, Mottal’s comprehensive rank test, statistical techniques like averages,
standard deviation, co-efficient variation, Spearman’s rank correlation etc. have
been used in the study to test the significance of relationship between the
liquidity and profitability. Table 1 explains the ratios relating to liquidity.

Current Ratio (CR)

Current Ratio (CR) is an important measure of analyzing the any firm’s or UCBs
ability to pay off its current obligations out of its short-term resources. Thus it
indicates the relationship between current assets and current liabilities of UCBs.
The higher the CR, the higher amount available per rupee of current obligations
and accordingly, the higher is the feeling of safety and security. The rule of
thumb about the CR is 2:1. The logic underlying this rule is that even when the
assets realized 50% of their book value yet the proceeds would be adequate to
meet short-term obligations. However, this rule is not a general guide and
applicable to all type of businesses. Each UCB should develop its own standard
for CR from past experience.
 NJSIT Vol 2 No 1 June 2009 120

Table 1. Liquidity Ratios of Sutex Bank from 2000 to 2005

Year C.R L.R C.C.R C.T.T.R I.C.R A.C.R I.A.D.R

2000 1.86 1.75 12.51 58.15 70.47 11.44 173.58
2001 2.06 1.80 6.49 61.00 72.51 16.22 202.75
2002 2.03 1.87 5.93 66.28 75.87 13.62 204.30
2003 2.36 2.17 5.86 70.27 72.80 15.99 244.49
2004 2.29 2.13 6.26 62.60 75.46 12.80 213.49
2005 2.13 1.84 6.16 54.64 67.62 19.56 217.02
Average 2.12 1.93 7.20 62.16 72.46 14.94 209.27
 ( std .deviation) 0.17 0.16 2.38 5.11 2.83 2.64 21.05

C.V.(σ/Average) 7.84 8.44 33.09 8.23 3.91 17.65 10.06

Source: Computed from the reports of Sutex Bank from 2000 to 2005 CR=
Current Ratio; LR= Liquidity Ratio; CTTR= Current Assets to Total Assets Ratio;
ICR= Investment to Current Assets Ratio; ACR= Advances to Current Assets
Ratio; Short-term Investment & Advances to Short-term Deposits Ratio.
The data in table 1 reveals that the CR in Sutex Bank registered an increasing
trend during the period under study. It’s increased from 1.86 times in 2000 to
2.36 times in 2003 but last two years quite decreased from 2.29 times & 2.13
times in year 2004 to 2005 and on an average the CR of Sutex Bank was 2.12
times during the period under study. But the CR shows the below five years
higher than the conventional norms.
Interpretation:
From the figure value we could say that the liquidity position of the UCBs was
satisfactory. However definite inference can be drawn on the basis of this ratio
about the liquidity position of the UCBs. The Ratio indicates that higher the
ratio the more liquid the UCBs. However, a higher ratio often indicates lower
profitability. Thus it needs a further analysis of quality of short-term assets.
Liquidity Ratio (LR)
This ratio is widely used parameter of judging the short-term repaying ability of
UCBs in the near future. The rule of thumb about Liquidity Ratio is 1:1. This
ratio is a refinement over current ratio as it considers the quality of current
assets. The exclusion of short advance is based on the fact that it cannot be easily
and readily converted into cash. Prepaid expense by their very nature cannot be
used for payment of current obligations. Liquidity liabilities refer to those
current liabilities, which are required to be paid off immediately or at short
Dimensions of Liquidity Management - A Case Study of The Surat ... Dr Panwala 121

notice. The exclusion of bank overdraft is due to the fact that it tends to become
permanent mode of financing.
Interpretation:
It is evident from Table 1 that the LR also marked an increasing trend during the
period under study and increased from 1.75 times in 2000 to 2.17 times in 2003,
but last two year it’s decreasing trend and decreased from 2.13 times in 2004 and
1.84 times in 2005. On an average the LR in Sutex Bank was 1.93 times, higher
to the conventional norms of 1:1 throughout the period study. It clearly
indicates that the liquidity position of the UCBs was satisfactory. One can infer
that throughout the period under study particularly 2003 & 2004 liquid assets of
Sutex Bank were improved and there are adequate assets to meet its short-term
obligations.
Cash to Current Assets Ratio (CPR)
Cash is the most important element used in a banking operation. Without
adequate cash, the banks cannot function. As it is the idlest form of current
assets and earns nothing in its original forms, efficient management of cash is
very important. Excessive balance of cash hampers the earning of the banks and
affects its profitability, while lower cash balance may lead a bank into serious
difficulty in daily payment. This ratio indicates the relation of cash with current
assets. From the liquidity position of view; a higher ratio is desirable in the
banking sector.
Interpretation:
Table 1 depicts a decreasing trend during the period under study and decreased
from 12.51 in 2000 and 6.16 in 2005 and on an average ratio was 7.20 during the
period of study. This ratio was almost more in 2000 and other five year it’s
marked quite less than the average ratio. This ratio indicates that the liquidity
position of the UCBs in most of the years was good enough to meet its obligation
in time.
Current Assets to Total Assets Ratio (CTTR)
Current assets are the lifeblood of banking organization, which keeps the banks
alive. Higher investment of current assets causes smooth running of banking
business as well as indicates goodwill of the bank in society and profitability also
depends on the current assets. It shows that how much funds are invested or
advanced in total assets. A higher ratio indicates higher liquidity and lesser
profitability. Current assets own importance that because current asset provides
the higher liquidity of the bank. This ratio explains the extent of total funds
invested for working capital purpose,
Interpretation:
Table 1 presents CTTR recorded almost increasing trend in first four years but
last two years its decreasing trend under the period of study. It was as high as
 NJSIT Vol 2 No 1 June 2009 122

70.27 in 2003 and as low as 54.64 in 2005. The average percentage of current
assets in relation to total assets in Sutex Bank was 62.16. Which showed that
about nearly 60 percentages of funds remained invested in working capital and
another about 40 percentages remained invested in permanent assets during the
period under study.
Short-term Investment to Current Assets Ratio (ICR)
This ratio throws light on the investment control policy adopted by a concern.
This ratio shows the relationship between the interest income received during a
particularly year and investment kept by a concern during that year. Higher
ratio shows a higher efficiency of the management and vice-versa.
Interpretation:
Table 1 that ICAR, recorded satisfactory trend during the period under study in
Sutex Bank. The higher was in the 75.87 & 75.46 in the year 2000 & 2004 and
lowest in 67.62 in 2005. The average of this ratio was 72.46 during the study
period. It is observed from the table 1 that this ratio has improved from 70.47 in
2000 to 75.87 in 2002 and to 72.46 in the year 2004. It is thus, clear that the
management trend to invested in profitable manner. It is clear that in general
the investment management of Sutex Bank was satisfactory during period of
study.
Short-term Advance to Current Assets Ratio (ACR)
This ratio throws light on the credit and collection policy pursed by a concern.
ACR is important tool of analyzing the efficiency of liquidity management of
UCBs. The liquidity position of UCBs depends on the quality of debtors to a
great extent. It measures the rapidity or the slowness of their collectibles. The
higher ACR implies the prompt recovery policy of advances.
Interpretation:
It is evident from the Table 1 that the registered a fluctuating trend during the
period of study. The highest was in the year 19.56 in 2005 and lowest in 11.44 in
2000 and on an average of 14.94 during the selected period of study. It clear that
in general advance management of Sutex Bank was quite not satisfactory during
the study period. This indicates that the liquidity position of the UCBs in most of
the year was not good enough to meet its obligations in time.

Short-term Investment & Advance to Short-term Deposits Ratio (IADR)

This ratio is an important measure of analyzing the UCBs ability to pay off its
short-term obligation as and when due. Thus it indicates the relationship
between short-term investment & advances to short-term deposits of UCBs. The
higher the ratio better the position of short-term depositors as it provides
cushion of safety to short-term creditors but it not provide big margin of profit.
Dimensions of Liquidity Management - A Case Study of The Surat ... Dr Panwala 123

Interpretation:
It is evident from table 1 that the IDAR also marked an increasing trend during
the study period and ranged between 244.49 in the year 203 and 173.58 in the
year 2000. On an average the IDAR in Sutex Bank was 209.27 during the study.
It clearly indicates that the liquidity position of the UCBs was at all satisfactory.
It can be included that throughout the period under study short-term
investment & advances of Sutex Bank were adequate to meet its short-term
obligation and depositors.
Interpretation of covariation:
In Table 1 an effort has been made to measure the consistency among all seven
parameters of liquidity management more precisely by applying the co-efficient
of variation (C.V.). The C.V. is the most commonly used statistical method
where the variability between two or more variable is compared. The variable
for which C.V. is greater is said to be fluctuating or conversely less consistent,
less stable or less uniform. On the other hand, the variable for which C.V. is less
it is regarded as less fluctuating, more consistent, more stable or more
homogenous. Table 1 reveals that out of the seven different parameters of
liquidity management, the co-variation is low in case of ICR. If the ICR is less
variable it means that it is more consistent and stable with 3.91. At the same
time CPR is more variable and less consistent with 33.09. The remaining ratio
trend has been followed lower to higher degree viz… 7.84(CR), 8.44 (LR), 8.23
(CTTR), 17.65 (ACR), and 10.06 (IACR) respectively. The CPR in Sutex Bank
Ltd is consistent. It further supports IADR, CTTR, CR, ACR, and LR. The C.V. is
fluctuating ranges in between lower 3.91 and higher 33.09 variation.

Motaal’s Comprehensive Test

Motaal’s comprehensive test method of ranking has been applied to reach at a
more comprehensive assessment of liquidity in which four different ratios viz.
net working capital to current assets ratio, investment to current assets ratio,
advance to current assets ratio, and liquid assets to current assets ratio have been
computed and combined in a points score. A high value of net working capital to
current assets ratio or liquid assets to current assets ratio shows greater liquidity
accordingly ranking has been done in that order. On the other hand, a high
investment to current assets ratio or short-term advance to current assets ratio
more favorable liquidity position and therefore, ranking has been done
accordingly in that order. Ultimate ranking has further been done on the basis
that the lower the total of individual ranks, the more favourable is the liquidity
position of the concern.
 NJSIT Vol 2 No 1 June 2009 124

Table 2. Ranking in Order Liquidity of Sutex Bank from 2000 to 2005

Total
NEW to Inv. T Adv. to Liquid to Rank Total
Year C.A. o C.A. C.A. C.A. A+B+C+D Ultimate
% Rank % Rank % Rank % Rank Total Rank
A B C D
2000 46.33 6 70.47 5 11.44 6 82.98 1 18 6
2001 51.55 4 72.51 4 16.22 2 79.00 4 14 4
2002 50.68 5 75.87 1 13.62 4 81.80 2 12 2
2003 57.57 1 72.80 3 15.99 3 78.66 5 12 2
2004 56.25 2 75.46 2 12.80 5 81.72 3 12 2
2005 53.05 3 67.62 6 19.56 1 73.78 6 16 5
Source: Computed from Annual Reports of Sutex Bank from 2000 to 2005

NWC= Net Working Capital to Current Assets; Investment to Current Assets

Ratio; Advance to Current Assets Ratio; Liquid Assets to Current Assets Ratio.
Interpretation:
The table 2 furnishes that in Sutex Bank the year 2002 to 2004 marked the sound
liquidity position and it was followed by the years 2001, 2005 and 2006.

Co-efficient of Rank Correlation and Testing the Significance

Table 3 reveals the extent of relationship between liquidity and profitability of
Sutex Bank by computing Spearman’s rank correlation co-efficient. An attempt
has also been made to test whether the computed value of such correlation co-
efficient is significant or not. For the purpose, the ratio of current asset to total
asset ratio has been used as the liquidity indicator and the ratio of Return on
Capital Employed of Sutex Bank was 0.7714. The “t” test proves that the
correlation co-efficient between CTTR and ROCE is statistically not significant.
It is therefore, concluded that the liquidity and profitability move in the same
direction.
Testing the Significance of Correlation Co-efficient
 Ho = Null hypothesis – there is no correlation between the ranked data.
 H1 = Alternative hypothesis – there is correlation between the ranked data
of Sutex Bank
  (: 0.05) level of significance for testing these hypotheses.
Dimensions of Liquidity Management - A Case Study of The Surat ... Dr Panwala 125

Table 3. Rank Correlation between Liquidity and Profitability of Sutex Bank

from 2000 to 2005

Current (CTTR) Return on (ROCE)

Year Assets Total Rank Capital Rank R1-R2
Assets (R-1) Employed (R-2) D D2
(CTTR) (ROCE)
2000 58.15 5 1.77 4 1 1
2001 61.00 4 1.68 5 -1 1
2002 66.28 2 5.53 1 1 1
2003 70.27 1 2.39 3 -2 4
2004 62.60 3 5.14 2 1 1
2005 54.64 6 1.36 6 0 0
Total 8
Source: Computed from Annual Reports of Sutex Bank from 2000 to 2005

6D2
r = 1 - ------------
n (n2-1)

6(8)
r = 1 - -------------
6 (62-1)

r = 1 - 0.2286

r = 0.7714

r
t = --------- X n-2
1 - r2

t = 3.81 t Critical Value = 2.2776

Interpretation:
The computed value of “t” (3.81) is more than the critical value of “t” (2.2776),
hence the alternative hypothesis is accepted, which means there is a significant
correlation between liquidity and profitability in Sutex Bank.
 NJSIT Vol 2 No 1 June 2009 126

5 . C O NC LU S IO N
Thus from the above analysis of various dimension of liquidity management, it
can be concluded that liquidity management is a sound method that urban
cooperatives have to gauge the soundness of their financial position and if a bank
keeps a check on this dimensions the bank is in a position to fulfill its major
banking objective that is profitability and maximizing the shareholders value.
The aim of the paper was to test the dimensions of liquidity management and
then check how it reflects the real situation. The objective was to apply the
analytical tool and infer about the bank’s financial health and also suggest, based
on the analysis where the bank can still improve upon. Similar analysis can
further be done on other banks to find their position of liquidity management.
In the era of competition the risk can be reduced, or detected in time to save
stakeholders money.

RE F ER E NC E S:
1. Annual Reports of Sutex Bank, Surat, from 1994-1995 to 2004-2005.
2. Pandey I.M., “Financial Management” Vikas Publishing House (P) Ltd., New Delhi.
3. Parashar S.P., “Liquidity Management: Principles and Practices (of Managing Cash
Flow)”, New Delhi, Vision Book (P) Ltd., P. 9 to 10
4. Ravi M. Kishore, “Financial Management” New Delhi Taxman allied Services (P) Ltd.
5. Sur D., “Liquidity Management: An overview of four companies in Indian Power
Sector” The Management Account Vol. 36(6). Pp. 407-412
6. Basu S. N.(1992), “Working Capital Management – Tyre Companies”, The
Management Accountant, Vol. 27, No.5, Calcutta, P. 332.
7. Bardia Dr. S.C.(2001), Liquidity of Working Capital: An overview of five Indian
Petrochemical Companies, Economic Administration Review, Vol. 1 No.2, Jaipur,
P.151– 158.
8. Richard I. Levin and David S. Rubin (1995), “Statistics for Management”, Prentice –
Hall of India (P) Ltd. New Delhi,
9. S.H.PM. Reddy and C.S. Reddy (1999), “Liquidity in Small Scale Industries: An
Analysis”, Management Perspective journal, Vol. 2 No 1, p-48