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CHAPTER-I INTRODUCTION 1.1 Background of the Study 1.1.1 Concept of Bank A bank is the financial institution which deals with the money and credit. Bank is most important financial institution in the economy and essential business in any countries. Generally, it collects deposits from general people and provides loan by charging a certain rate of interest. Thus, the accumulated money can be advancing loan in different sectors such as business, foreign trades, agricultures, industries, social works and individual also for different purpose with certain charges. Beside, a bank also involves agency services like remitting and collecting cash on behalf of its clients, opening bank draft and underwriting shares of newly established company etc. Bank has a vital role to develop a country’s economic growth. A bank can be defined as those organization which deals with deposits, credits foreign exchanges. Bank gives all kind of financial services to all kind of persons without differentiating with caste, religion, sex, economic condition, nationality etc. According to oxford Dictionary Bank means “an establishment for keeping money and valuable things safely, safety of the money being out on the customer order by means of cheque”. “A bank collects money from those who have it to spare or who are saving it out of their incomes, and it lends this money to those who require it”. - C.R. Crowther “A commercial bank is a bank, which deals in exchanging currency, accepting deposits giving loans and doing commercial transaction’.-The commercial Bank 2003 A bank is an institution established by law, which deals with money and credit. Bank fulfills the investment requirement of saver with the end it needs of investors. In this way bank plays on imperative role in our economy by providing effective service efficiently towards the attainment of economic development. Therefore, bank means a financial establishment for the deposit, loans exchanges issue of money and for the transmission of funds. 1.1.2 History of Bank The word “bank” is derived from the Italian word “banco” which means bench the people who does transaction of the money by sitting in bench and carry out exchange function. After the completion of transaction if they makes profit they worships the bench and if they make loss they destroy the same bench. In this way same word “banco” letter on turned to “bank”. The evaluation and development of bank did not take place at once in all countries. The history of banking is not exactly known but in 1157 A.D first public bank was established in the name of “Bank of Venice” in Italy. Then after “Bank of Barcelona” of Spain was established in 1401 A.D. and “Bank of Genoce” in 1408 A.D. as public bank. In Netherlands the “Bank of Amsterdam” was established in 1609 A.D. which famous batak at that time. But in reality the modern bank was started only after the establishment of “Bank of England” in 1694 A.D. Bank sector was rapidly developed due to adaptation of technology and 1
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development of transportation system in England. The banking business took its new height so we can say that the modern banking was developed in 17th century. In Nepal the system of granting loans was prevalent from ancient time. In 14th century a class of people called “tankdhary” used to exchange money and provide loans. The “tejarath adda” was established in 1876 A.D. which provide loans to government employees and public against the bullion without collecting the deposit from the public. However, Nepal Bank Limited (commercial bank) is the first bank established in Nepal I 1937 A.D (1994 B.S.). Nepal Rastra Bank, the central bank of Nepal was established in 1956 A.D. In 1959 A.D. one industrial bank namely “Nepal Industrial Development Bank” was established. Likely Rastriya Banijaya Bank was established in 1965 A.D. the 2nd commercial bank in Nepal. Though commercial bank was raising 2but 90% of Nepalese populations were depended upon agriculture with 0the traditional system of farming which made realize the importance of 2Agricultural Development Bank then Commercial Bank. Finally, “Agricultural Development Bank” was established in 1968 A.D. 1.1.3 Historical Development of Commercial Bank in Nepal In Nepal, “Tejarath Adda” was established in 1877 A.D by the government. The main purpose of this institution was to provide credit facilities to the general public at minimum interest rate of 5%. The establishment of this institution marked the beginning of organized financial institution in Nepal. Nepal Bank Limited is the real and 1st commercial bank in Nepal which was established in 1937A.D (1994B.S). Nepal Rastra Bank(NRB) is the central bank of Nepal. It was established in 1956A.D (2013B.S) to regulate issue of currency, securing country wide circulation of Nepalese currency, achieving stable exchange rate and to mobilize capital for economic development and for stimulation of trade development of banking sector. After this, NRB diverted its attention towards development of banking system by formulating relevant policies and procedures. Rastriya Banijya Bank (RBB) was established in 2022 B.S. (1965A.D) under the RBB act 2021. The establishment of commercial bank was total stopped for almost two decades after declaration of free economy and privatization policy the foreign joint Venture Bank and Nepalese promoter setup banks in the country. Currently there are more than 32 commercial banks performing their functions in Nepal. The lists of banks are listed below with ranking their establishment date. Table No.1.1 List of Banks in Nepal S.No 1 2 3 4 5 6 7 8 9
Banks Name Nepal Bank Ltd. Rastriya Banijya Bank Ltd. Agriculture Development Bank Ltd. Nabil Bank Ltd. Nepal Investment Bank Ltd. Standard Chartered Bank Nepal Ltd.. Himalayan Bank Ltd. Nepal SBI Bank Ltd. Nepal Bangladesh Bank Ltd. 2
Est. Date(A.D.) 1937/11/15 1966/01/23 1968/01/02 1984/07/16 1986/02/27 1987/01/30 1993/01/18 1993/07/07 1994/06/05
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10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32
Everest Bank Ltd. Bank of Kathmandu Ltd. Nepal Credit and Commerce Bank Ltd. Lumbini Bank Ltd. Nepal Industrial & Commercial Bank Ltd. Machhapuchhre Bank Ltd. Kumari Bank Ltd. Laxmi Bank Ltd. Siddhartha Bank Ltd. Global Bank Ltd. Citizens Bank International Ltd. Prime Commercial Bank Ltd Sunrise Bank Ltd. Bank of Asia Nepal Ltd. DCBL Bank Ltd. NMB Bank Ltd. Kist Bank Ltd. Janata Bank Nepal Ltd. Mega Bank Nepal Ltd. Commerz & Trust Bank Nepal Ltd. Civil Bank Litd. Century Commercial Bank Ltd. Sanima Bank
1994/10/18 1995/03/12 1996/10/14 1998/07/17 1998/07/21 2000/10/03 2001/04/03 2002/04/03 2002/12/24 2007/01/02 2007/06/21 2007/09/24 2007/10/12 2007/10/12 2008/05/25 2008/06/05 2009/05/07 2010/04/05 2010/07/23 2010/09/20 2010/11/26 2011/03/10 2012/02/22 (Source: www.nrb.org.np) 1.1.4 Role of Commercial Banks in Economic Development A well developed banking system is necessary pre-condition for economic development in a modern economy. Besides providing financial resources for the growth of industrialization, banks can also influence the direction in which these resources are to be utilized. In a modern economy, banks are to be considered not merely as dealers in money but also the leaders in development. They are not only the store house of the country’s wealth but also utilize the resources necessary for economic development. It is the growth of commercial banking in 18th and 19th centuries that facilitated the occurrence industrial revolution. The main objective of commercial banks is to mobilize idle resources for productive use after collecting them from different places. It brings about greater mobility of resources to meet the emerging necessity of the economy. There are various roles played by a commercial bank for the development of an economy, which are capital formulation, encouragement to entrepreneurial innovation, influencing economic activity, promotion of trade and industry, development of agriculture and other neglected sectors. The major problem in almost all under developed countries like Nepal is lack of capital formulation and their proper mobilization. In such countries, commercial banks should act as a development bank. Nepal is a small and poor country but it has sufficient natural resources. To utilize those resources capital is required. Commercial bank gather monetary resources from different areas the form of deposits and provide loan to investing areas like industry, agriculture etc. 3
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Therefore, the fate of the country is greatly determined by the active role of commercial bank. Bank provides facilities to their customers by providing loans, remitting funds, purchase and sale of bills and other market information. These services help to run the business and other economic activities rapidly well as smoothly which ultimately helps in economic development. 1.1.5 Introduction of Lumbini Bank Ltd. After the economic liberalization policy of HMG/N & financial sector reforms in late eighties, the joint venture commercial banks comes into existence. Lumbini Bank Limited is a national level commercial bank offering a wide range of banking solutions and services meticulously customized to the needs of the customers. LBL was established in 2055 B.S. 1st Shrawan (1998 A.D.) according to the Nepal Commercial Bank Act 2031, the proportional rating of the Bank’s promoters holds 66% & General Nepalese people hold 34% share of the Bank. This is the first regional commercial bank in Nepal, which started its operation from Narayangadh spreading its wings to further four more places at Hetauda, Butwal, Durbarmarg and Biratnagar. Lumbini Bank Limited is highly committed to assure of the standard and excellence in the services it offers. Our team is guided towards obtaining new challenges and opportunities. Backed by state-of-the-art technology and experienced professionals adept in modern banking management, we strive to make banking simple, fast and customer friendly. Just the way you like it. Lumbini Bank Limited has restructured various products, as a part of an ongoing process, to cater to the retail segment. The newly structured products cover Personal Loan, Home Loan, Vehicle Loan, Mortgage Loan, Educational Loan, Time Loan etc. After controlled the management by NRB the Bank increased total interest income is Rs.247, 000,000. Total operating profit is Rs.331.100, 000 and improved the Reserve loss to Rs.702, 016,312 in 2064/65. The Bank’s authorized capital amount to Rs.1,600,000,000 & issued capital to Rs.1,000,000,000 while the paid up capital amount to Rs.1,000,000,000. There are 8 members in the Board of directors of the Bank. Up to 31st Ashad, 2065, the Bank deposit accepted amount to Rs. 5, 703,733,802 whereas on the same date the loan & Bills purchased of Bank amount to Rs 4, 489,493,956. The reserve fund of the bank is negative (i.e.Rs.702, 016,312).
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1.1.6. Objectives of LBL The objectives of LBL are listed below: a. To provide Personal Loan, Home Loan, Vehicle Loan, Mortgage Loan, Educational Loan, Time Loan etc. b. To assure of the standard and excellence in the services it offers c. To develop the team that is guided towards obtaining new challenges and opportunities. 1.1.7. Organizational Structure of LBL
Figure No. 1.1 Organizational Structure of LBL
Board of Director
Chief Executive Officer
Deputy Chief Executive Officer
Head Central Operating/General Administration
Head Marketing
Branch Manager
Head Legal/ Company Secretary
Head Retail Banking
Head Finance/HRD
Branch Manager
Head Information Technology
Branch Manager
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Branch Manager
Head Internal Audit
Branch Manager
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1.2. Objectives of the Study Based on this aspect, this study tries to deal with the study of ratio analysis of Lumbini Bank Limited. The objectives of the study are as follows: a. To analyze the liquidity of the Lumbini Bank Ltd. to meet its current obligation. b. To show the level of current asset relative to current liabilities of the bank. c. To evaluate the relation between cash/marketable securities & the current liabilities. d. To suggest & recommend for further improvement. 1.3. Needs and Significances of the Study The following are the few points, which throw light on the importance of the study report: a. This study report may be useful for those who are willing to know something about the Liquidity analysis of Lumbini Bank Ltd. b. This study assignment report has been prepared as internship report for acquiring the degree of BBS under the curriculum of TU. c. This report can be used as a guideline while preparing a small project report. d. This study report may be useful for the library purpose so that any student willing to prepare a report can have some ideas about it. e. This report contains the description of various Liquidity and their uses 1.4. Research Methodology The research basically is the outcome of the various sort of secondary data provided the Lumbini Bank Ltd. Various consults other book, articles, literature, & published data in related with the topic. The finding in this report is the major outcome of the annual report of the Lumbini Bank Ltd. from year 2064/65 to 2068/69. The annual report is dissected in various parts for the analysis. Especially the Liquidity analysis is done on the base of B/S, & other annexure related to it. The required figure from B/S is extracted & the analysis is done of various years. All the ratios are calculated from yare 2064/64 to 2068/69 B.S. The various tables and figures are presented where required to give the bird’s eye view to the liquidity position of the bank since it is the analysis based upon the single bank the ratio are compare among the different years but not the industry average. All the data on which the finding is based totally on secondary data. The study is not subjected to any of primary data. 1.4.1. Research Design The descriptive and analytical in research design have been used to achieve the objective of this study. Accounting and statistical tools, formula, technique has also been applied to examine facts and descriptive technique to show result. 6
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1.4.2 Sources of Data This report has been prepared on the basis of primary as well as secondary data of the bank. A. Primary data The data that are originally collected by an investigator or researcher for the first time for the purpose of statistical enquiry are known as primary data. Primary data had been collected from oral interview and questionnaire method with related personnel of the office for the study. B. Secondary data Data which are originally collected but acquired from some published or unpublished sources by the researcher himself is called secondary data. Secondary data are the brochures, annual reports, published reports and statements, published official documents, etc. This study is mainly based on secondary data. 1.4.3. Data Collection Procedures The required data for the study have been collected from secondary data & annual report of concern bank. Then concern people; concern teachers & concern friends have been selected. 1.4.4. Tools for Analysis In this report liquidity ratio, statistical techniques and charts are used. To achieve objective of this study various tools and techniques are used. Main tools of ratio used and their calculation are as following. A. Liquidity Ratio Liquidity ratio measures the ability of the firm to meet its current obligations. It is one of the first concerns of most financial analysts. It is extremely essential for a firm to be liquid or to meet its obligation as they become due. A firm should ensure that it does not suffer from lack of liquidity, & also that is not too much liquid. The failure of a result in bad credit image, lots of creditor’s confidence or even in law suits resulting in the closure of the company. The various liquidity ratios selected for the ratio analysis of the Lumbini Bank Ltd are namely: a. Current Ratio b. Quick or Acid Test Ratio c. Cash Ratio or Cash to Current Liabilities Ratio d. Net Working Capital Ratio 7
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a) Current Ratio The current ratio is computed by dividing current assets by current liabilities. Current assets normally include cash and those assets, which can be converted into cash within a year such as marketable security, debtors, inventories & prepaid expenses. Current assets of Lumbini Bank Ltd. include cash in hand, cash at bank, call at shortnotice receivables, overdraft & loan, bills purchase, other current assets (inventories, prepaid expenses). Current liabilities are the obligation maturing within a year. Current liabilities generally include creditors, bills payable, accrued expenses, shortterm bank loan, income tax liabilities etc. Current liabilities of the Lumbini Bank Ltd. includes deposit (current & saving), payable at call, bill payable, other current liabilities (income tax, dividend, employees welfare fund etc). Current Ratio =
Current Assets Current Liabilities
b) Quick or Acid-test Ratio It is ratio between quick or liquid asset & current liabilities. An asset is liquid if it can be converted cash immediately on reasonably soon without a loss of value. So inventories and prepaid expenses are deducted from current assets to arrive at quick or liquid assets. Quick or Acid-test Ratio =
Quick Assets Current Liabilities
c) Cash Ratio or Cash to Current Liabilities Ratio Cash ratio is the ratio between very liquid assets & cash & marketable security (call at short notice receivable) to current liabilities. Cash Ratio =
Cash + Marketable Securities Current Liabilities
d) Net Working Capital Ratio The difference between current asset & current liabilities is called Net Working Capital. Net Working Capital is also used as a measure of firm’s liquidity. Net Working Capital measures the firm’s potential reservoir of funds. It is computed by dividing net working capital by net assets.
Net Working Capital Ratio =
Net Working Capital Net Assets
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1.4.5. Standards of Comparison The ratio of a firm by themselves does not reveal anything. It should be compared with some standards. For meaningful interpretation, the ratio of a firm should be compared with the ratio of similar firms and industry. The comparison will ultimately force the firm to take necessary steps, whether to maintain the firm at current position or to take necessary corrective action to maintain the firm in strong position in competition with its competitors. The analysis done in this report is the trend analysis of liquidity ratio of Lumbini Bank Ltd. The various liquidity ratios of past five years is analyzed & presented to show the performance of the bank of past five years regarding the liquidity position. By the comparison, it gives us indication of the direction of change & reflects; whether the bank’s financial performance has improved, deteriorated or remained constant over time. Although the analysis is the trend analysis of past five years, the ratios are compared to the conventional standards of current ratio is 2:1 & quick ratio is 1:1. 1.5. Limitation of the Study Some limitations of this study report are as follows: a. The study period only covers five-income year from 2064/65 to 2068/69. b. Since the study is based upon the secondary data provided by the bank, the findings are more or less the approximate. The finding should not be considered the exact figure. c. Due to lack of detail information (data), the assumption is made whenever required. d. Due to time constraint & lack of the data the Liquidity analyzed in the report is on 5 years of the same bank. The Liquidity are not compared and analyzed with the Liquidity of the industry & the organization of the same type. e. The Liquidity analyzed should not be taken as the authorized ratios of the bank. 1.6. Chapter Scheme This field report has been derived into three sequential chapters along with by bibliography & appendices. The first chapter includes Background of the study, list of commercial bank in Nepal, statement of problem, objectives of the study, needs of the study, limitation of the study. It also includes Research Methodology, Sources of data, data collection procedure, data processing, liquidity analysis. The second chapter contains data analysis & interpretation using various ratios. The third chapter implies summary, conclusion & recommendations. 9
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CHAPTER II PRESENTATION AND ANALYSIS OF DATA
2.1. Presentation and Analysis of Data 2.1.1. Liquidity Ratio Analysis of Lumbini Bank Ltd. The current ratio, quick assets ratio, cash ratio and networking capital ratio is presented and analyzed in brief. a. Current Ratio A relation between current assets and current liabilities is called current ratio. It measures the ability of current assets to pay the current liabilities. Higher the current ratio, better the liquidity position & vice versa. Formula to calculate the current ratio is given below: Table No. 2.1 Current Ratio of LBL (Rs in millions) Fiscal Year Current Assets Current Liabilities Ratios 2064/65 3765.94 2014.19 1.86 2065/66 3734.48 2114.83 1.77 2066/67 3494.23 2588.19 1.35 2067/68 4724.85 3098.88 1.53 2068/69 5256.96 3005.92 1.75 (Source: Annual Report of LBL of 2068/69) In the above table, current assets, current liabilities and current ratio of five fiscal years 2064/65 to 2068/69 are presented. The current ratio is calculated by dividing current assets by current liabilities of bank. It has been ascertained that the current ratio of bank is higher (1.86) in year 2064/65 & minimum (1.35) in year 2066/67. The current ratio of LBL is below the standard current ratio 2:1 in all fiscal years.
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Figure No. 2.1 Current Assets and Current Liabilities of LBL
Amount (in Rs. millions)
6000 5000 4000 3000 2000 1000 0
Current Assets Current Liabilities
2064/652065/66 2066/67
2067/68
2068/69
Fiscal Years
In the above figure, x-axis represents fiscal years and y-axis represents amount (in Rs. millions). The current assets decrease from FY 2064/65 to FY 2066/67 and then increases to 4724.85 and 5256.96 millions in FY 2067/68 and 2068/69 respectively. The current liabilities continuously increase from FY 2064/65 to FY 2067/68 and decrease to 3005.92 millions in FY 2068/69. Figure No. 2.2 Current Ratio of LBL 2.5
Ratio
2 1.5
Standard
1
Current Ratio 0.5 0 2064/65
2065/66
2066/67 2067/68 Fiscal Years
2068/69
In the above figure, fiscal years and ratio are represents by x-axis and y-axis respectively. The solid line represents actual current ratio and the dotted line represents standard current ratio. The maximum current ratio of the bank is 1.86:1 in the year 2064/65 B.S. and the minimum is 1.35:1 in the year 2066/67 B.S. The current ratio does not seem to be uniform for 5 years. The current ratio is in declining trend up to 3rd year but the current ratio rising from 4th year. The current ratio is below the
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standard in all fiscal years. Therefore the bank is in worst liquidity position. It means the bank is not able to pay the current liabilities with its current assets. b. Quick/Acid Test Ratio A relation between liquid assets & current liabilities is called quick ratio. It shows a firm’s ability to meet current liabilities which is most liquid (quick) asset. Current assets except inventory & prepaid expenses is called liquid (quick or acid-test) ratio. Acid-test ratio also measures the availability of highly liquid or immediate fund to meet the banks anticipated calls on the types of liabilities. Formula to calculate quick ratio: Table No.2.2 Quick Ratio of LBL Fiscal Year 2064/65 2065/66 2066/67 2067/68 2068/69
(Rs. in millions) Quick Assets Current Liabilities Ratios 3765.94 2014.19 1.86 3734.48 2114.83 1.77 3494.23 2588.19 1.35 4724.85 3098.88 1.53 5256.96 3005.92 1.75 (Source: Annual Report of LBL of 2068/69)
In the above table, quick assets, current liabilities and acid-test ratio of five fiscal years 2064/65 to 2068/69 is presented. When the quick assets is divided by current liabilities, the quick ratio is obtained. It has been ascertained that the quick ratio of bank is higher (1.86) in year 2064/65 & minimum (1.35) in year 2066/67. The quick ratio of LBL is below the standard quick ratio 1:1 in all fiscal years.
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Figure No. 2.3 Quick Assets and Current Liabilities of LBL
Amount (in Rs. millions)
6000 5000 4000 3000 2000 1000 0
Quick Assets Current Liabilities
2064/652065/66 2066/67
2067/68
2068/69
Fiscal Years
In the above figure, x-axis represents fiscal years and y-axis represents amount (in Rs. millions). The quick assets decrease from FY 2064/65 to FY 2066/67 and then increases to 4724.85 and 5256.96 millions in FY 2067/68 and 2068/69 respectively. The current liabilities continuously increase from FY 2064/65 to FY 2067/68 and decrease to 3005.92 millions in FY 2067/68. Figure No. 2.4 Quick Ratio of LBL 2.5
Ratio
2 1.5
Standard
1
Quick Ratio 0.5 0 2064/65
2065/66
2066/67 2067/68 Fiscal Years
2068/69
In the above figure, fiscal years and ratio are represents by x-axis and y-axis respectively. The dotted line represents standard quick ratio and the solid line represents actual quick ratio. The maximum quick ratio of the bank is 1.86:1 in the year 2064/65 B.S. and the minimum is 1.35:1 in the year 2066/67 B.S. The quick ratio does not seem to be uniform for 5 years. The quick ratio is in declining trend up to 3rd year but the quick ratio rising from 4th year. The quick ratio is above the standard in all fiscal years. 14
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c. Cash Ratio or Cash to Current Liabilities Ratio Cash ratio is the ratio between very liquid assets & cash & marketable security (call at short notice receivable) to current liabilities. Table No.2.3 Cash Ratio of LBL Fiscal Year 2064/65 2065/66 2066/67 2067/68 2068/69
(Rs. in millions) Current Liabilities Ratios 2014.19 0.28 2114.83 0.198 2588.19 0.21 3098.88 0.26 3005.92 0.24 (Source: Annual Report of LBL)
Cash 561.13 419.01 542.13 796.41 710.32
Amount (in Rs. millions)
In the above table, it presents total cash & current liabilities of five fiscal years. It also shows the cash ratio of the bank which is higher (0.28) in 2064/65 & lower (0.198) in 2065/66. Figure No. 2.5 Cash and Current Liabilities of LBL
4000 3000 2000
Cash Current Liabilities
1000 0
2064/65
2065/66
2066/67
2067/68
2068/69
Fiscal Years
In the above figure, x-axis represents fiscal years and y-axis represents amount (in Rs. millions). The cash of the bank fluctuates in different fiscal years. There is continuous increase in current liabilities from FY 2064/65 to FY 2067/68 and decrease to 3005.92 millions in FY 2068/69.
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Figure No. 2.6 Cash Ratio of LBL Trend Line showing Cash Ratio of LBL 1
Ratio
0.8 0.6 0.4
Cash Ratio
0.2 0 2064/65
2065/66
2066/67 2067/68 Fiscal Years
2068/69
The fiscal years and ratio are represents by x-axis and y-axis respectively in the above figure. In the figure, the solid line represents actual cash ratio which is more or less stable for 5 fiscal years. The cash ratio presents the ability of the firm to meet current obligation by cash only. The maximum cash ratio of the bank is 0.28 in the year 2064/65 B.S. and the minimum is 0.198 in the year 2065/66 B.S. The cash ratio fluctuates for 5 years. d. Net Working Capital Ratio The difference between current assets and current liabilities is called net working capital. Net working capital is also used as a measure of a firm’s liquidity. Net working capital measures the firm’s potential reservoir of funds. It is computed by dividing net working capital by net assets. Net assets are the summation of working capital and net fixed assets. Table No.2.4 Net working capital ratio of LBL Fiscal Year
Net Working Capital
(Rs. in millions) Net Assets Ratios
2064/65
1751.75
3806.02
0.46
2065/66
1619.07
3782.82
0.42
2066/67
906.03
3536.22
0.26
2067/68
1625.97
4767.55
0.34
2068/69
2251.04
5298.25
0.42
(Source: Annual Report of LBL of 2068/69) In the above table, it shows the net working capital & net assets of five fiscal years. It also shows that the net working capital ratio of bank is 0.46 in FY 2064/65, the highest and 0.26 in FY 2066/67, the lowest among all fiscal years. 16
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Figure No. 2.7 Net Working Capital and Net Assets of LBL 6000
Amount (in Rs. millions)
5000 4000 3000
2000
Net Working Capital
1000
Net Assets
0
2064/65
2065/66
2066/67
2067/68
2068/69
Fiscal Years
The x-axis and y-axis denotes fiscal years and amount (in Rs. millions) respectively in the above figure. As shown in above figure, the net working capital fall up to FY 2066/67 then rise in FY 2067/68 and 2068/69. The net assets also fall slightly up to FY 2066/67 and rise in FY 2067/68 and 2068/69 to 4767.55 and 5298.25 millions.
Figure No. 2.8 Net Working Capital Ratio 1
0.8
Ratio
0.6
Net Working Capital Ratio
0.4
0.2
0 2064/65
2065/66
2066/67 2067/68 Fiscal Years
2068/69
The above figure presents the trends of net working capital ratios, which is more or less stable for last 5 years. In Figure No. 2.8, the x-axis represents fiscal years and yaxis measures ratios. There is minimum ratio of 0.26 and the maximum ratio of 0.46 in the years 2064/65 & 2066/67 B.S. respectively. 17
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2.2. Major Findings The major findings are listed as follows: a) The maximum current ratio is 1.86:1 in fiscal year 2064/65. The bank is not in better financial position as its current ratio is below the standard 2:1. b) There is satisfactory regarding quick ratio as it is above the standard 1:1 in every fiscal year. However, it cannot be better financial position. c) The cash to current liabilities ratio around 0.2 in every fiscal years. It decreases in FY 2065/66 than FY 2064/65 and FY 2066/67 than FY 2065/66. d) There is decreasing trends in net working capital ratio from FY 2064/65 to FY 2066/67 and then after rising trends. e) There is minimum ratio of net working capital 0.26 and the maximum ratio of net working capital 0.46 in the years 2064/65 & 2066/67 B.S. respectively f) The net assets also fall slightly up to FY 2066/67 and rise in FY 2067/68 and 2068/69 to 4767.55 and 5298.25 millions. g) The cash of the bank fluctuates in different fiscal years. There is continuous increase in current liabilities from FY 2064/65 to FY 2067/68 and decrease to 3005.92 millions in FY 2068/69. h) The maximum cash ratio of the bank is 0.28 in the year 2064/65 B.S. and the minimum is 0.198 in the year 2065/66 B.S. The cash ratio fluctuates for 5 years.
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CHAPTER III SUMMARY,CONCLUSIONANDRECOMMENDATIONS
3.1. Summary Liquidity is defined as bank’s capacity to pay cash in exchange of deposits. Liquidity position of the bank is the key factor of sound operating position. The banks have to maintain a sufficient amount of liquidity because there will be large proportions of deposits payable on demand, inability of banks to repay deposits on demand damages the credit worthiness of the bank. This, in turn, may lead to runs in the bank balance, money at call & short notice (placement) and investment in government securities. Cash & bank balance are idle assets placements & investment earns some interest. Inadequate liquidity may lead to collapse of the bank while excess liquidity is detrimental to bank profitability. “A bank is an institution which acts like the bridge between the depositors & borrowers and maximizes the earning mainly through the interest spread. If depositors lose their confidence in the bank, in other words, the absence of endangers even the existence of the bank. In other words the absence of liquidity for its depositors advances make banks run at loss and ultimately closure of the suffer.” Hence the liquidity of the bank determines the profitability of that bank. So the whole existence of the bank centers around the liquidity positions. In the context of Nepal financial reforms are critical for ensuring that Nepal’s financial system will be able to intermediate efficiently in mobilizing domestic savings & providing financial resources & services for private investment & activities. The financial sector is currently facing serious problems. As a result of ongoing liquidity problems of government-owned banks, the new lending of that banks has been curtailed. This has significantly affected the availability of credit to the private sectors. Such a situation normally creates new opportunities for joint venture banks. Hence, to take advantage of such opportunities the banks must be tough in its liquidity position. To fulfill the need, the main criteria could be the large capital base. 3.2. Conclusion From the analysis presented in Chapter II, we have rough idea about the liquidity positions trend of Lumbini Bank Ltd since 2064/65 B.S to 2065/66 B.S. The liquidity of the bank is not stable for the period of time. The minimum current ratio is 1.35, quick ratio is 1.35:1, cash ratio is 0.198 and net working capital ratio is 0.26 of the Lumbini Bank Ltd. Similarly, the maximum current ratio is 1.86, quick ratio is 1.86, cash ratio is 0.28 and net working capital ratio is 0.46. The bank’s main character is the cash, so the liquidity position of the bank should not be quoted badly in sake of current ratio.
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DESTINY EDUCATIONAL MATERIAL
The criteria of liquidity position are not only the liquidity ratio analysis. This report focuses mainly on the Nepal Rastra Bank (NRB’s) mandatory SLR & CRR. For the purpose of SLR, NRB had included government bond, treasury bills, NRB bonds and other reserves whereas CRR includes cash in hand & balance with NRB. Lumbini Bank Ltd seems to overcome the mandatory SLR criteria & CRR criteria. The CRR mandatory of the NRB effective from B.S. 2056-12-12 as under: Balance to maintain with NRB: 80% of current & saving deposit Liabilities: 60% of fixed deposit liabilities Cash in hand: 3% of total deposit liabilities According to the balance sheet figure of Lumbini Bank Ltd, the cash in hand position of the bank are 3.04% of total deposit liabilities in 2064/65 B.S., 2.56% in 2065/66 B.S., 2.79% in 2066/67 B.S., 2.03% in 2067/68 B.S. and 2.57% in 2067/68 B.S. Reviewing this condition the bank seems to be unable to meet the CRR criteria of NRB. Hence the overall liquidity position of Lumbini Bank Ltd seems to be not satisfactory and is in worse position. 3.3. Recommendations The analysis of the liquidity position of Lumbini Bank Ltd reveals some problems & inabilities of the bank. This part of the reports measures the following recommendation for improving the liquidity position of the bank. a) The bank’s current ratio is lower than 2:1 criteria in all fiscal year. So the bank should try to increase its current assets. b) The bank should avoid manual techniques and should adopt modern computerized banking system to provide quick & easy service to the customer. c) The bank should provide more & more improved new services & facilities to attract more customers in the competitive banking industry. d) The bank should find out the new sector to invest the money which is sate & productive. e) The bank should have to increase its investment because the ratio of bank is high. f) Branches of the bank should be extended even up to remote areas of the country. g) As the present situation calms the bank should have to research in new location of the country & research should be made on productive sector.
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