Proposal of Laxmi Bank and Prabhu Bank
Proposal of Laxmi Bank and Prabhu Bank
Proposal of Laxmi Bank and Prabhu Bank
Submitted By
Binita Chhetri
Submitted To:
Tribhuvan University
Kathmandu
Tillottma, Rupandehi
February, 2020
1.1 Background of the study
Harsh, (2014) stated that the banking sector was always deemed to be one of the most vital
sectors for the economy to be able to function. Its importance as the “lifeblood” of economic
activity, in collecting deposits and providing credits to states and people, households and
businesses is undisputable. The researcher chooses this topic because numerous researchers have
conducted the research in related field and also for the partial fulfillment of requirement for
degree of BBS.
Sayers ( 1967), in his book Modern Banking stated that ordinary banking business consists of
changing cash for bank deposits and bank deposits from one person to corporation (one depositor
to another) giving bank deposits in exchange for bill of exchange, government banks, recurred
and unsecured promises businessmen to repay.
Pandey (1997), in his book, Financial Management stated that a firm should ensure that it does
not suffer from lack of liquid. And also that it is not too much high liquid. The failure of a
company to meet its obligations, due to lack of sufficient liquidity will result in bad credit image.
Loss of creditor’s confidence, or even in low suits resulting in the closure of the company. A
very high degree of liquidity is also bad; idle assets earn nothing. The firm’s funds will be
unnecessarily tied up in current assets. Therefore, it is necessary to strike a proper balance
between liquidity and lack of liquid.
Many researchers have been conducted research on related topic in past. Kumbirai & Webb
(2010) conducted on a financial ratio of analysis of commercial performance in South Africa;
Shakya (2010) conducted on financial performance of Nepal SBI Bank Limited and Everest
Bank Limited; Mishra (2012) conducted on A CAMEL model analysis of state bank group; Ally
(2013) conducted on comparative analysis of financial performance of Commercial Bank in
Tanzania.
1.3 Objective of the Study
The general objective of this study is to make comparative liquidity analysis between LBL and
PBL.
a. To examine liquidity position of Laxmi Bank Limited and Prabhu Bank Limited.
b. To analyses the comparative liquidity position of Laxmi Bank Limited and Prabhu Bank
Limited.
This study is conducted to comparative analysis of liquidity position of these two banks LBL and
PBL. The findings of this study will contribute to existing literature on banks liquidity analysis.
This study will also useful to investors for getting information about the liquidity position of
these banks before investment; creditors to know the payable trend of the banks; banks to know
actual liquidity position of bank comparative to others; customers to know the credit worthiness;
and other parties who are related to these two banks to acquire required information related to
liquidity position of banks. Findings of this study facilitate to management team to amend the
rules and policies of the banks. NRB can use this report for different purposes.
Literature review comprises upon the existing literature and research related to the present study
with a view to find out what had already been studied. Literature review is a process of
systematic way of accumulation, analysis and evaluation of facts or knowledge of selected topic
or problem. It provides direction for doing something new with appropriate variables, and
methodology. It is both summary and explanation of current state of knowledge of intended
research questions.
Conceptual Review
Banks play an important role in an economy of the country. Banks’ performance has greatly
affected by the liquidity position of the banks. . Liquidity is crucial in the business like banking
sector. Banks have to maintain liquidity, if the bank has high liquidity it cannot gain desired
profit and if bank has the shortfall of the liquidity it cannot satisfy its customers. Inadequate
liquidity may lead to collapse of the bank while excess liquidity is determinant to banks’
profitability in order to remove demerit’s associated with maintaining inadequate and excess
liquidity, bank should maintained and optimum level of liquidity. Banks have to maintain
adequate liquidity to smooth running of firm.
This study conducted to analyze comparative liquidity position of NIBL and PBL. Theoretical
framework helps to conduct good report writing. So that researcher prepared theoretical
framework which includes different ratios which helps to analyze liquidity position of these two
banks.
Liquidity Ratio reflects the short-term obligation of the firm. This ratio shows that if firm need
cash amount in short period without any notice, can firm fulfill its need or how it manage the
need. Commercial banks need liquidity to meet loan demand and deposit withdrawals. Liquidity
is also needed for the purpose of meeting Cash Reserve Ratio (CRR) and Statutory Liquidity
Ratio (SLR) requirements prescribed by the central Bank. The following ratios are calculated
under the liquidity ratios.
a. Current ratio
Many researchers have conducted various research on related topic in past. There are some
previous works are as follows which are related to present study:
Kumbirai & Webb (2010) investigated the performance of South Africa’s commercial banking
sector for the period 2005- 2009. Financial ratios are employed to measure the profitability,
liquidity and credit quality performance of five large South African based commercial banks.
The study found that overall bank performance increased considerably in the first two years of
the analysis. A significant change in trend is noticed at the onset of the global financial crisis in
2007, reaching its peak during 2008-2009. This resulted in falling profitability, low liquidity and
deteriorating credit quality in the South African Banking sector.
Shakya (2010) analyzed different ratio of NSBIBL and EBL for the period five years till fiscal
year 2008. In his study, some cases the liquidity position of EBL is slightly stronger than the
NSBIBL where NSBIBL‘s ratio is higher. It concludes that liquidity position of these banks is
sound. NSBIBL has better utilization of available resource in income generating process than
EBL. In the overall, this study concluded that EBL is better than the NSBIBL and both banks are
highly leveraged.
Xuezhi Qin and Dickson (2012) employed the liquidity measures of the commercial banks; avid
on that basis the performance in terms of the liquidity position was established. The paper used
the causal research design as the methodology of the study since the causal design is best suited
to determine cause and effects of the phenomena. This paper utilizes the secondary data from
National Bank of Commerce (NBM) CRDB and National Microfinance Bank (NMB). The
criteria used in total deposit to core funding, liquid asset to demand liabilities and Gross loans to
total deposit Tanzania for the period of ten .
Nepal Investment Bank (2012), revealed the following key points: 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. 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. 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. 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. 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. 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.
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. 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. 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. Balance with NRB to current plus saving deposit should be
maintained at the below than 0.11 times. 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. Bank should not
spend too much in the fixed assets because it yields only a nominal portion, almost no yield.
Mishra & Aspal (2012) stated that the economic importance of banks to the developing countries
may be viewed as promoting capital formation, encouraging innovation, monetization, influence
economic activity and facilitator of monetary policy. Performance evaluation of the banking
sector is an effective measure and indicator to check the soundness of economic activities of an
economy. In the present study an attempt was made to evaluate the performance & financial
soundness of State Bank Group using CAMEL approach. It is found that in terms of Capital
Adequacy parameter SBBJ and SBP were at the top position, while SBI got lowest rank. In terms
of Asset Quality parameter, SBBJ held the top rank while SBI held the lowest rank. Under
Management efficiency parameter it was observed that top rank taken by SBT and lowest rank
taken by SBBJ. In terms of Earning Quality parameter the capability of SBM got the top rank
while SBP was at the lowest position. Under the Liquidity parameter SBI stood on the top
position and SBM was on the lowest position. SBI needs to improve its position with regard to
asset quality and capital adequacy, SBB should improve its management efficiency and SBP
should improve its earning quality.
Sthapit & Maharjan (2012) examined the effects of liquidity on profitability. To address the
objective, the article has taken NABIL and SCBN for the period between 2003/04 and 2010/11.
Considering the liquidity management can increase the profitability, the study has examined their
liquidity management of NABIL and SCBN as well as profitability positions, using various
financial tools and indicators. It was found that trend of average liquidity ratios and profitability
of both banks are not seems to be fluctuating but average variation in liquidity ratios as well as
profitability of SCBN is lower than that of NABIL. The study concluded that the LFTDR and
NRBTDR have a negative significant effect on ROA of SCBN whereas CHTDR has a positive
significant effect. But liquidity ratios have not significant effects on profitability of NABIL.
Therefore, the liquidity performance of SCBN is better than NABIL and finally the hypothesis
was tested to know whether there is a significant difference in terms of liquidity position by
using ANOVA test. The findings revealed that the commercial banks under study have strongest
liquidity level although it varied over years and National Microfinance Bank maintained
strongest liquid level compared to the other two banks.
Ally (2013), analyzed the financial performance of commercial banking sector in Tanzania for
the period of 7 years from 2006 to 2012. Financial ratios were employed to measure the
profitability and liquidity of banks; in addition Analysis of Variance (ANOVA) was used to test
the significance differences of profitability means among peer banks groups. The study found
that overall bank financial performance increased considerably in the first two years of the
analysis. A significant change in trend is noticed at the onset of the global financial crisis from
2008 to 2009. However, Tanzania banking sector remained stable; banks are adequately
capitalized and profitable and remained in a sound position. The study found that, there is no a
significant means difference of profitability among of peer banks groups in term of ROA,
however, a significance differences among banks group is existed in term of ROE and NIM.
Bhandari A (2014) explored the determinants of performance exposed by the financial ratios and
determines the financial performance of commercial banks in Nepal through Analytical
Hierarchy Process based on their financial characteristics. The financial parameters were derived
by segregating 5 major criteria which were Liquidity, Efficiency, Profitability, Capital Adequacy
and Assets Quality. These criteria were further classified into 21 hierarchical sub-criteria. The
performance evaluation was done for 13 commercial banks for financial data from year 2008/09
to 2011/12. The paper emphasizes financial decision problems to have strong multi criteria
character and establishes priorities for performance parameters of commercial banks among
financial indicators identified and ranks banks according to those indicators. This study has
added one more literature to demonstrate the utility of AHP based bank evaluation to Nepalese
banking community in particular, which not only evaluates the performance of banks but also
gives insights to focus in the area of improvement to a particular bank in comparison to others.
Islam (2014), attempted to measure the financial performance of National Bank Limited which
one of the largest and prominent private commercial banks in Bangladesh for the period 2008-
2013 and to identify whether any difference exists between a banks’ years of operation and its
performance classifying two period(2008-10 & 2011-13). To complete my task I have to use
various materials and take help form online source. Analyze the ratio here used financial ratio
analysis (FRA) method which helps to draw a overview about financial performance of the
National bank limited in terms of profitability, liquidity and credit performance. To test the
hypothesis the study has been worked on Student t-test by using SPSS. These analyses helps to
see the current performance condition of this bank compare past performance. Because now a
day’s banking sector of Bangladesh is suffering the disease of default culture which is the
consequence or result of bad performance of most banks. The performances of banks are
dependent more on the management’s ability in formulating strategic plans and the efficient
implementation of its strategies. The study findings can be helpful for management of National
bank ltd. always for private commercial banks in Bangladesh to improve their financial
performance and formulate policies that will improve their performance. The study also
identified specific areas for bank to work on which can ensure sustainable growth for these
banks.
Olarewaju & Adenyemi (2015) examined the existence and direction of causality between
liquidity and profitability of deposit money banks in Nigeria. Fifteen quoted banks out of the
existing nineteen banks were selected for the study. They are; Guarantee Trust bank, Zenith
bank, Skye bank, Wema bank, Sterling bank, First City Monument bank, United Bank for
Africa, Eco bank, First bank, Access bank, Diamond bank, Unity bank, Fidelity bank, Union
bank and IBTC bank. Pair wise Grange Causality test was carried out to determine the presence
and direction of causality between banks’ liquidity and profitability. From the finding of this
study, at 5% and 10% level of significance, it was revealed that the F-statistics corresponding to
the null hypotheses of no causal relationship (both unidirectional and bidirectional) between
LODEP (a proxy for liquidity) and ROE (profitability measure) for banks like Guaranty trust
bank, Zenith bank, Sterling bank, Diamond bank, IBTC, Unity bank, UBA, Fidelity bank,
Wema bank, Union bank, and Eco bank, are too low and as such there is no enough evidence for
the rejection of the corresponding null hypotheses. Thus, the result revealed that there is no
causal relationship be it unidirectional or bidirectional) between liquidity and probability of
Guaranty trust bank, Zenith bank, Sterling bank, Diamond bank, IBTC, Unity bank, UBA,
Fidelity bank, Wema bank, Union bank, and Eco bank. The result also shows that there is a trace
of unidirectional causality relationship running from liquidity to profitability for banks like Skye
bank, First bank, Access bank and FCMB. Based on the findings and conclusions, the study
recommend that the apex bank (Central Bank of Nigeria) should ensure close supervision and
monitoring of deposit money banks’ strength and level of liquidity in an attempt to stabilize and
strengthen the financial sector of the economy.
In this study, the major area is to disclose the liquidity analysis relates to Nepalese commercial
banks. This study shows that the unique feature of findings. Previous researches on the basis of
financial performance liquidity analysis of commercial banks in Nepal. But this research is about
comparative liquidity analysis of Nepalese commercial with sample of Laxmi Bank Limited
and Prabhu Bank Limited. In the previous research, there is not taken LBL and PBL for sample.
The research can help the people who wanted to know about the liquidity position of these two
banks.
The method which is using in the research to plan the how the data is collected and which source
the study use for getting data is under the research methodology. It includes the Type of
Research, Population and Sample, Types and sources of Data, Data collection Procedure and
Analysis techniques which are as follows:
1.6.2 Types of data
To fulfill the objectives of the study, certain research type is essential; so the research type of this
study is based on the nature and tools for analysis. To put the objectives stated above into effect
a descriptive analytical research design is employed. Descriptive analytical means discuss the
problem and objectives of the study and analyze the data.
For this research all commercial banks are regarded as population and out of these two banks
LBL and PBL are taken as sample. All commercial are as follows:
1. Kumari Bank
2. Nepal Bank
3. Rastriya Banijya Bank
4. Agriculture Development Bank
5. Nabil Bank
6. Nepal Investment Bank
7. Standard Chartered Bank Nepal
8. Himalayan Bank
9. Nepal SBI Bank
10. Nepal Bangladesh Bank
11. Everest Bank
12. Bank of Kathmandu Limited (After the merger with Lumbini Bank)
13. Nepal Credit and Commerce Bank Limited
14. Prabhu Bank
15. Laxmi Bank
16. Global IME Bank Limited (After the merger with Janata Bank Nepal Limited)
17. Citizens Bank International Limited
18. Prime Commercial Bank
19. Sunrise Bank
20. NMB Bank Nepal
21. NIC Asia Bank
22. Siddhartha Bank
23. Machhapuchchhre Bank
24. Mega Bank Nepal Limited
25. Civil Bank Limited
26. Century Bank Limited
27. Sanima Bank
Researcher uses the secondary and quantitative data for this study. To gather data which is used
in the present study, financial information were collected from audited financial statements,
articles, previous studies on related topic, published articles of different authors and journals.
Furthermore, other necessary data are collected from the annual reports of these two banks: LBL
and PBL.
This study is conducted to comparative liquidity analysis of LBL and PBL. So, it needs various
data to analyze liquidity position of such banks. For the purpose of data collection researcher
visit at head office of both banks and collect the data. Researcher also collects the data by using
website of banks, annual report of both banks and so on.
To analyze the liquidity position of these two banks through the financial tools. Findings are
present in the table, trend line and so on.
Financial tools are those, which are used for the analysis and interpretation of financial data.
These tools can be used to get the precise knowledge of a business, winch in turn, are fruitful in
exploring the strengths and weaknesses of the financial policies and strategies. For the sake of
comparative liquidity analysis of LBL and PBL ratio analysis have been used in order to meet
the purpose of the study.
Ratio Analysis
Ratio analysis is very much powerful & widely used tool of financial analysis. It is define as the
systematic use of ratio 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. It
helps the analysis to make qualitative judgment in about the financial position and performance
of the firm. Therefore, it is helps to establish relationship among various ratios and interpret
there on specially, based on comparison between two or more firms or inters firm comparison
and comparison between present and past ratios for the same firm give enormous and fruitful
results to examine the liquidity position of the banks.
Ratio analysis is very much powerful & widely used tool of liquidity analysis. It is define as the
systematic use of ratio 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. It
helps the analysis to make qualitative judgment in about the financial position, performance and
liquidity position of the firm. Therefore, it is helps to establish relationship among various ratios
and interpret there on specially, based on comparison between two or more firms or inters firm
comparison and comparison between present and past ratios for the same firm give enormous
and fruitful results to examine the comparative liquidity position of the banks. Liquidity ratio
includes current ratio, loan to deposit ratio, Current ratio, loan to deposit ratio, cash and bank
balance to total deposit ratio, cash and bank balance to current & saving deposit ratio, NRB
balance to current and saving deposit ratio, NRB balance to fixed deposit ratio, fixed deposit to
total deposit ratio, NRB balance to total deposit / Cash Reserve Ratio (CRR).
This report is held within the following limitations and constraints, they are:
i. The study is limited only in the liquidity analysis of the two banks.
ii. Due to the shortage of the time volume and budget, new method may not be developed.
iv. Certain period’s data (5 years.) has been taken for the analysis; result is based on this data.
Due to availability of Limited information this study will not cover every part of the performance
aspect.
Submitted By:
Binita Chhetri
Manigram Rupandehi