WORKING CAPITAL MANAGEMENT OF

COMMERCIAL BANKS IN NEPAL

(With Special Reference to NIBL, HBL, EBL & NABIL)

By:
RAJARAM JOSHI
Shanker Dev Campus
Campus Roll No.: 1204/063
T.U. Regd. No.: 7-2-31-535-2003
Second Year Exam Roll No.: 2486

A Thesis Submitted to:

Office of the Dean
Faculty of Management
Tribhuvan University

In partial fulfillment of the requirement for the degree of

Master of Business Studies (MBS)

Kathmandu, Nepal
September 2013
 RECOMMENDATION
This is to certify that the thesis

Submitted by:
Rajaram Joshi

Entitled:
WORKING CAPITAL MANAGEMENT OF
COMMERCIAL BANKS IN NEPAL
(With Special Reference to NIBL, HBL, EBL & NABIL)

has been prepared as approved by this Department in the prescribed format of

the Faculty of Management. This thesis is forwarded for examination.

....... ...... .....

Joginder Goet Prof. Dr. Kamal Deep Dhakal Asso. Prof. Prakash Singh Pradhan
(Thesis Supervisor) (Head, Research Department) (Campus Chief)
 VIVA-VOCE SHEET
We have conducted the viva voce of the thesis presented

by:

Rajaram Joshi

Entitled:
WORKING CAPITAL MANAGEMENT OF
COMMERCIAL BANKS IN NEPAL
(With Special Reference to NIBL, HBL, EBL & NABIL)

And found the thesis to be the original work of the student and written
According to the prescribed format. We recommend the thesis to be
accepted as partial fulfillment of the requirement for the degree of
Master of Business Studies (MBS)

Viva-Voce Committee

Head, Research Department .

Member (Thesis Supervisor) .

Member (External Expert) .

 DECLARATION

I hereby declare that the work reported in this thesis entitled Working
Capital Management of Commercial Banks in Nepal (With Special
Reference to NIBL, HBL, EBL & NABIL)" submitted to Office of the Dean,
Faculty of Management, Tribhuvan University, is my original work done in the
form of partial fulfillment of the requirement for the degree of Master of
Business Studies (MBS) under the supervision of Joginder Goet of Shanker
Dev Campus, T.U.

..
Rajaram Joshi
Shanker Dev Campus
Campus Roll No.: 1204/063
T.U. Regd. No.: 7-2-31-535-2003
Second Year Exam Roll No.:2486
 ACKNOWLEDGEMENT

This thesis has been prepared to fulfill the partial requirements for the degree
of Masters of Business Studies (MBS) of Tribhuwan University. For this, I
would like to acknowledge the effort of Office of the Dean, Faculty of
Management, T.U., for offering such a great course in our syllables to enhance
the quality of management education in the country.

This product of research, definitely is my original work, would not have taken
this shape without sincere help and continuous encouragement from different
respectable persons. I feel my duty to remember and express my heartfelt
acknowledgement to those all.

First, I would like to extend my cordial thanks and deep gratitude towards my
reverent supervisor Joginder Goet for his kind guidance & encouragement
throughout the research work. I am grateful to Saroj Joshi, Niranjan Sigdel &
Lekhnath Paudel very good friend of mine. I would like to express my sincere
thanks to the staff of library of and administration of Shanker Dev Campus
whose kind cooperation has made it possible to complete the work.

I also cannot forget the co-operation behavior of the staffs of concerned banks
for their great support in providing the data.

Finally I would like to thank to my all family members who always encouraged
and inspired me to prepare this research work, especially to my wife Bunu
Timsina Joshi for her great support and help to prepare this thesis.

Rajaram Joshi
 ABBREVIATIONS

A/P = Accounts Payable

A/R = Accounts Receivable
AD = Anno Domini
ATM = Automatic Taller Machine
BS = Bikram Sambat
CA = Current Assets
CL = Current Liabilities
CR = Current Ratio
CRR = Cash Reserve Ratio
CV = Coefficient of Variation
e.g. = Example
EBL = Everest Bank Limited
EOQ = Economic Order Quantity
F/Y = Fiscal Year
FA = Fixed Assets
GDP = Gross Domestic Product
GWC = Gross Working Capital
HBL = Himalyan Bank Limited
i.e. = That is
NABIL = Nabil Bank Limited
NEPSE = Nepal Stock Exchange
NIBL = Nepal Investment Bank Limited
NIC = Nepal Insurance Company
NL = Nepal Lever Ltd
NLO = Nepal Lube Oil Ltd
NPAT = Net Profit after Tax
NRB = Nepal Rasta Bank
NTL = National Trading Limited
NWC = Net Working Capital
PE = Probable Error
PEs = Public Enterprises
QR = Quick Ratio
ROE = Return on Equity
ROI = Return on Investment
SCT = Smart Choice Technology
SD = Standard Deviation
SLR = Statutory Liquidity Ratio
TA = Total Assets
TU = Tribhuvan University
UAE = United Arab Emirates
VDC = Village Development Committee
WC = Working Capital
 CHAPTER - I
INTRODUCTION

1.1 Background of the Study

As a developing country, Nepal is striving to develop and modernize economy

rapidly on rational and socially desired footings but the structure of the
economy is largely dominated by agriculture with very small industry base, so
to divert and modify agro-based economy, Nepal adopted mixed economic
model with implicit objective to help the state and private sector economy that
complement each other in the development process from very inception of
economic planning process back in 1956. The primary goal of the developing
country like Nepal is to develop economy rapidly and to promote the welfare of
the people and nation. So, very recently, Nepal has adopted the path of
economic liberalization for the sake of the economic growth of the nation.
After the restoration of the democracy, the concept of liberalization policies has
been incorporated as directive principal and state policies (The Constitution of
the Kingdom of Nepal, 1990: 14-17).
Development of trade, commerce and industry are the prime requisite for the
attainment of the economic, political and social goals. To fulfill the purpose of
planning, financial functions more often dominates the other functions. There is
always lack of finance in underdevelopment economy because natural resource
are either underutilized or unutilized in productive sectors or even other
purposes i.e.; social welfare and so on. Likewise, underdeveloped countries are
not deficient in land, water, mineral, forest or power resources, thought they
may be untapped; constituting only potential resources. And in the
underdevelopment countries like Nepal there is always lack of financial
resources not only because of its real absence but because of the available
resource are not properly mobilized and are not fully utilized for the productive
purpose.
So, for the rapid economic development in the underdevelopment countries like
Nepal there should be proper utilization of resources. Due to various
difficulties or even ignorance of the people, such resources have not been
properly utilized. Hoarding could be one of the reasons for this. So, financial
institutions pay a vital role of encourages thrift and discourage hoardings by
mobilizing the resources and removing the habits of hoarding. They pursue
rapid economic growth, development the banking habit among the people,
collecting the small-scattered resources in one bulk and utilizing them in
further productive purposes and rendering other valuable services to the
country. Thus, this gives the individuals an opportunity to borrow funds against
future income, which may improve the economic well begin of the borrower. In
this course the banks play the most important role in modern economic
organization. Their business mainly consists of receiving deposits, giving loans
and financing the trade of a country. They provide short-terms credit i.e. lend
money for short periods.
Bank is the main financial institution, which plays an important role in the
economic development of the nation. It is the backbone as well as the
foundation for the development of the country. Its principal operations are
concerned with the accumulation on the temporary idle money of the public for
advancing others for expenditures. In other words, Bank is an institution that
deals in money and its substitutes and provides other financial services. Banks
accept deposit and make loans and derive a profit from the difference in the
interest rates paid and charged, respectively. Depositors may be either
individual or institutions. These deposits may be current, saving or fixed and
the tenure depends upon the mutual agreements between the bank may be
either an individual or institutions. The tenure of the loan may vary as per the
demand, criteria and the usefulness of the loan. Some banks also have the
power to create money.
The principal types of banking in the modern industrial world are commercial
banking and central banking. A commercial banker is a dealer in money and in
substitutes for money, such as checks or bills of exchange. The banker also
provides a variety of other financial services. The basis of the banking business
is borrowing from individuals, firms, and occasionally i.e., receiving deposits
from them. With these resources and also with the banks own capital, the
banker makes loans or extends credit and also invests in securities. The banker
makes profile by borrowing at one rate of interest and lending at a higher rate
and by charging commissions for services rendered. Commercial banks are
the major financial institutions that occupy quite an important place in the
framework in the economy development sectors as well as in saving and
investment sectors. Commercial banks are suppliers of finance for trade and
industry and play a vital role in the economic and financial life of the country.
They also provide an opportunity in the development of individual industries,
trade and business organization by investing savings and collected deposits. By
investing the saving and collected deposits in the productive sectors, they help
in the formation of capital. Besides they also render numerous services to its
customers in a view of providing facilities to theirs economic and social life in
the community.
A bank must always have cash balances on hand order to pay its depositors
upon demand or when the amounts credited to them due. It must also keep a
proportion of its assets in forms that can readily be converted into cash. Only in
this way the confidence in the banking system can be maintained. Working
Capital is the lifeblood of the organization. To sustain the belief of the people
& customer, the organization should always get ready to meet the obligations.
Working capital management is the crucial aspect of the financial management.
It is the Life-blood and controlling nerve center for any types or business
organization because without the proper control upon it no business can run
smoothly. The management of current assets and current liabilities is necessary
for daily operations of any organizations. Thus, it plays the vital role in the
success and failure of the organizations as it deal with the part of assets, which
are transformed from one form to another form during the course of
manufacturing cycle. Therefore, the role of working capital management is
more significant for every business organization irrespective to their nature.
Working Capital Management refers to the administration of all aspects of
current assets, namely cash, marketable securities, stock and current liabilities.
It is the functional area of finance that covers all the current accounts of the
firm. It is concerned with the adequacy of current assets as well as the level of
risk posed by current liabilities. It is a discipline that seeks proper policies for
managing current assets liabilities and practical for maximizing the benefits
from managing working capital.
1.1.1History of Banks in Nepal

Talking about the history of bank, an institutional banking system came into
existence in Nepal only in the 19th century. Nepal Bank Limited was the first
financial institutional of Nepal established on the 30th of Kartik 1994. Being a
commercial bank, it focuses on income generating and profit maximization. As
it was only one commercial bank, it has to look the economic condition of
country. Only one Nepal Bank Limited was not sufficient to look all the sector
of country. So in 2013 B.S. another bank named Nepal Rastra Bank was
established as the central bank. Similarly the 2nd commercial bank Rastriya
Banijya Bank was established as the second commercial bank of Nepal in
Magh 10, 2022 B.S., under Rastriya Banijya Bank Act 2021. This act is now
revised as Commercial Bank Act 2031. B.S. Accepting deposits, granting loan
and performing commercial banking functions are the main motto of
commercial bank (Commercial Bank Act, 2031). For the development of
industry, commerce and trade, Nepal Industrial Development Corporation was
established under Industrial Development Corporation Act 2016. For the
development of agricultural section, Agricultural Development Bank was
established on Magh 7th 2024 B.S., under the Agricultural Bank Act 2024 B.S.
The government of Nepal observed the necessities of rapid development of the
country for which it has adopted liberalized economic policy, laissez fair
economy and encouraged foreign investment. The government formed
Foreign Investment & Technology Act 1981 A.D. which was later revised as
Act 1992 A.D. by new elected democratic government(Foreign Investment
and Technology Act, 1992). The joint venture bank was introduced in Nepal in
2041 B.S. with the establishment of Nepal Arab Bank Limited. It was
established with joint venture of U.A.E bank, financial institution of Nepal.
The second joint venture bank, Nepal Indosuez Bank Limited was established
in 6th Magh 2042 B.S. Similarly, others joint venture banks like, Nepal
Grindlays Bank Limited on 16th Marg 2043, Himalayan Bank Limited on 2049
B.S., Nepal State Bank of India Limited on 2050 B.S., Nepal Bangladesh Bank
Limited on 2051 B.S., Everest Bank Limited on 2051 B.S., Bank of
Kathmandu on 2052 B.S. and Nepal Bank of Celon Limited on 2052 B.S. have
been established. Till now other commercial banks have been also established.
Among them majority of banks are established in joint venture banks. A joint
venture is the joining of forces between two or more enterprises for the purpose
of carrying out a specific operation industrial or commercial investment,
production or trade (Gupta, 1984: 15).
Joint venture banks play an important role for economic development of nation.
They have been adopted new banking technique, management like
hypothecation, syndication lending policies, tale banking credit card, master
card from international banking technique. They render various services to
their customers in order to facilitate their economic and social life. Joint
venture banks are operating in Nepal in an act as commercial banks are
operating and performing their work under the direction and supervision of
Nepal Rastra Bank. Nowadays, there are many joint venture banks and other
financial institutions, but there are little opportunities to make fair investment.
Meanwhile, the banks and financial institutions are offering competitive
deposit and credit interest rate. So to survive in the spirited banking market,
one should follow the fundamental principles of sound investment policy with
minimum risk and maximum profit.
At present, about a dozen of the commercial banks are operating in Nepal and
are playing important role in the economic development of the country.

1.1.2 Introduction of Selected Banks

Nepal Investment Bank Limited (NIBL)
Nepal Investment Bank Ltd. (NIBL), previously Nepal Indosuez Bank Ltd.,
was established in 1986 as a joint venture between Nepalese and French
partners. The French partner (holding 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 Businessmen had
acquired on April 2002 the 50% shareholding of Credit Agricole Indosuez in
Nepal Indosuez Bank Limited.

The name of the Bank has been changed to Nepal Investment Bank Limited
upon approval of Banks Annual General Meeting (AGM), Nepal Rastra Bank
and Company Registrars office with the following shareholding structure.

A group of companies holding 50% of the capital

Rashtriya Banijya Bank holding 15% of the Capital.
Rashtriya Beema Sansthan holding the same percentage.
The remaining 20% being held by the General Public (which means that
NIBL is a Company listed on the Nepal Stock Exchange).

NIBL is committed to building and maintaining a strong relationship between

the Bank and the larger community. In order to do so the bank invests in
various projects that promote our heritage and the arts, in education & health
initiatives, various NGO programs, sports as well as in supporting the less
privileged sections of our society. Each year, NIBL sponsors a diverse range of
programs that encourage a strong corporate culture of giving in the name of
charity and responsibility to our community and nation.

NIBL, which is managed by a team of experienced bankers and professionals

having proven track record. The bank has 43 branches and 72 ATMs.
Himalayan Bank Limited (HBL)
The bank was incorporated in 1992 by a few distinguished business
personalities of Nepal in partnership with Employees Provident Fund and
Habib Bank Limited, one of the largest commercial Banks of Pakistan.
Banking operation was commenced from January 1993. Himalayan Bank is the
first commercial bank of Nepal whose maximum shares are held by the
Nepalese private sector. Besides commercial banking services, the Bank also
offers industrial and merchant banking services.
Himalayan Bank has a total network of 41 branches and 73 ATM outlets across
the Country. Himalayan Bank is always committed to providing a quality
service, with a personal touch, to its valued customers. All customers are
regarded as valued clients and treated with utmost courtesy. The Bank,
wherever possible, offers tailored facilities to its clients, to meet unique needs
and requirements of different clients. To further extend the reliable and
efficient services to its valued customers, Himalayan Bank has adopted the
latest banking technology and runs the world class banking software Globus on
IBM platform. The Bank can now boast of its state-of-the-art IT infrastructure
with an identical Disaster Recovery System, offsite. This has not only helped
the Bank to constantly improve its service level but has also prepared the Bank
for future adaptation to new technology. The Bank already offers unique
services such as Himal Remit, SMS Banking, Pre-paid Credit Cards and
Internet Banking to customers and will be introducing more services like these
in the near future.
Everest Bank Limited (EBL)
Everest Bank Limited (EBL) with slogan Consistent, Strong, Dependable,
started its operations in 1994 with a view and objective of extending
professionalized and efficient banking services to various segments of the
society. EBL joined hands with Punjab National Bank (PNB), India as its joint
venture partner in 1997.
Punjab National Bank (PNB), our joint venture partner (holding 20% equity in
the bank) is the largest nationalized bank in India. With its presence virtually in
all the important centers at India and over 6000 ATM counters, Punjab
National Bank offers a wide variety of banking services which include
corporate and personal banking, industrial finance, agricultural finance,
financing of trade and international banking. For its excellence in banking
services, it was awarded the "Best Bank Award 2011"amongst all banks in
India by the leading corporate magazine, Business India and also has been
conferred with Bank of the Year 2006, Nepal by the Banker, a publication of
financial times, London. The bank was bestowed with the NICCI Excellence
award by Nepal India chamber of commerce for its spectacular performance
under finance sector.
The bank is providing its services through a wide network of 52 branches
across the nation and over 250 correspondents across the globe. All the major
branches of the bank are connected through Anywhere Branch Banking System
(ABBS), a facility which enables a customer to do banking transactions from
any of the branches irrespective of their having accounts in other branch.
The Bank in association with Smart Choice Technology (SCT) is providing
ATM services for its customers. EBL Debit Card can be accessed at more than
67 ATMs and over 250 Point of Sales across the nation, 5 extension counter &
20 Revenue Collection across the country making it a very efficient and
accessible bank for its customers, anytime, anywhere. The bank is also
managing the SCT ATM at Tribhuvan International Airport for the
convenience of the customers and the travelers, the first Bank in Nepal to place
ATM outlet at the Airport.
EBL is playing a pivotal role in facilitating remittance to and from across
globe. Being the first Nepalese bank to open a representative office in Delhi,
India, the Nepalese in India can open account in Nepal from the designated
branches of Punjab National bank and remit their savings economically through
banking channels to Nepal. The bank has a Drafts Drawing Arrangement with
175 branches of PNB all over India.
With an aim to help Nepalese citizens working abroad, the bank has entered
into arrangements with banks and finance companies in different countries
which enable quick remittance of funds by the Nepalese citizens in countries
like UAE, Kuwait, Bahrain, Qatar, Saudi Arabia, Malaysia, Singapore and UK.
The Bank recognizes the value of offering a complete range of services. We
have pioneered in extending various customer friendly products such as Home
Loan, Education Loan, EBL Flexi Loan, EBL Property Plus (Future Lease
Rentals), Home Equity Loan, Car Loan, Loan Against Shares, Loan Against
Life Insurance Policies and Loan for Professionals. EBL have always
endeavored in delivering innovative products suiting the consumer's
requirements and needs thus enriching, enabling and beautifying their lives.

NABIL Bank Limited (NABIL)

NABIL Bank Limited, the first foreign joint venture bank of Nepal, started
operations in July 1984. NABIL was incorporated with the objective of
extending international standard modern banking services to various sectors of
the society. Pursuing its objective, NABIL provides a full range of commercial
banking services through its 51 points of representation across the nation and
over 170 reputed correspondent banks across the globe. What is more
admirable is with the opening of then Nepal Arab Bank Ltd, Customer Service
or marketing took a U-turn. That in substance accelerated the evolution in
banking products and services thereafter in Nepal. The bank commenced with a
team of about 50 staff members and Rs. 28 million as capital. From the very
inception in 1984 as the first joint venture bank to commence operations in
Nepal, NABIL has been a leader in terms of bringing the very best international
standard banking practices, products and services to the nation.
Today the banks mission is to be the Bank of 1st Choice to all stakeholders.
For the customers, the Bank craves to be the first choice in meeting all
financial requirements, for shareholders the bank wants to be the investment of
choice, for Regulators to be an example of a model Bank, and wants to be an
outstanding corporate citizen in all the Communities and finally to be the first
choice as an employer with whom to build a career.
Today NABIL Bank is a leader in the financial sector in Nepal with a network
that has 49 Branches spread across the nation; complimented by a network of
79 ATM outlets and now NABIL Net and NABIL Tele the ease of access of
accounts and information for our customers has never been more convenient.
NABIL is a full service Bank providing an entire range of products and
services, starting with deposit accounts in local and foreign currency, Visa and
Master Card denominated in rupees and dollars, Visa Electron debit cards,
Personal Lending products for Auto, Home and Personal loans, Trade Finance
products, Treasury services and Corporate Financing. NABIL aims to be able
to meet entire gamut of financial requirements that is why the banks prides
itself in being 'Your Bank at Your Service'.

NABIL, as a pioneer in introducing many innovative products and marketing

concepts in the domestic banking sector, represents a milestone in the banking
history of Nepal as it started an era of modern banking with customer
satisfaction measured as a focal objective while doing business.

Operations of the bank including day-to-day operations and risk management

are managed by highly qualified and experienced management team. Bank is
fully equipped with modern technology which includes ATMs, credit cards,
state-of-art, world-renowned software from Infosys Technologies System,
Bangalore India, Internet banking system and Tele banking system.

1.2 Statement of the Problem

Working capital management has been regarded as one of the conditioning
factor in the decision-making issues. The management of working capital is
synonymous to the management of short-term liquidity. Working capital is
regarded as the lifeblood and nerve of a business concern and is essential to
accommodate the smooth operations of any organization. Under and over
allocation of working of working capital is harmful to an enterprise to achieve
its primary objectives. Therefore, maintaining optimal level of working capital
is the crux of the problem as it is strongly related to the tradeoff between risk
and return. However, if it is difficult to point out as to how much working
capital need by a particular business organization. An organization, which is
not willing to take more financial risks, can go for more short-term liquidity.
The more of short-term liquidity means more of current liabilities imply less
short-term financing heading. So it is very essential to analyze and find out
problems and its solutions to make efficient use of funds for minimizing the
risk of loss to attain profit objective. Inadequate investment in working capital
threatens the solvency of enterprise as well as affects its growth. On the other
hand, excessive investment in working capital yields nothing. Therefore,
working capital should be determined in such a way that total cost i.e. cost of
liquidity and cost of non-liquidity is minimum. Hence, the goal of working
capital management is to manage the firms current assets and current liabilities
in such a way that it should maintain satisfactory level. Working capital
management of banks is more difficult than that of manufacturing and non-
manufacturing business organizations. Commercial banks are great monetary
institutions, which are playing important role to general welfare of the
economy. The responsibility of commercial banks is more than any other
financial institutions. They must be ready to pay on demand without warning or
notice, a good share of their liabilities. Banks collected funds from different
types of deposits for providing loan and advance to different sector. To get
higher return, banks must try to increase funds from deposits as well as their
investment. The first motive of banking business is to borrow public saving and
lend to needy people. But commercial banks always face the problem for
utilizing more deposits as investment of loans increase the cash balance on
bank, which require paying its large among of liabilities on its depositors
demand without notice. But large amount of idle cash balance also decrease
profitability of banks.

The sample banks viz. Nepal Investment Bank Limited (NIBL), Himalayan
Bank Limited (HBL), Everest Bank Limited (EBL) and NABIL Bank Limited
(NABIL) seen well in comparison to other Commercial banks on the account of
their performance and profitability as well. It is the question of the study that
whether there is any relationship of working capital management with regard to
their performance and profitability among these banks.
So, following are the major problems that have been identified for the purpose
of this study.
What is the banks image in relation to working capital?
What are the major factors affecting the management of working capital
of NIBL, HBL, EBL and NABIL?
Which of the current assets are more problematic in NIBL, HBL, EBL
and NABIL?
What is the lending pattern of loan and advance and other investment?
What are the components of working capital, which affect the operating
income of NIBL, HBL, EBL and NABIL?

1.3 Objective of the Study

The main objective of this study is to examine of the management of working
capital in commercial banks. The specific objectives of this study are as fallow:
To examine the major factors affecting the management of working
capital.
To evaluate the working capital financing policy adopted by the banks.
To analyze the liquidity maintenance and the efficiency in equity
management to generate profit of the banks.
To show the relationship of net profit with the working capital, and debt
of the banks.
To provide appropriate suggestions.

1.4 Significance of the Study

Working capital is regarded as the lifeblood and nerve of a business concern

and is essential to accommodate the smooth operations of any organizations.

Under and over allocation of working capital is harmful to an enterprise to

achieve its primary objectives. Inadequate investment in working capital

threatens the solvency of enterprise as well as affects its growth. On the other

hand, excessive investment in working capital yields nothing. Nepalese

commercial banks are operating in the competitive environment. In this

situation, banks have to adopt suitable strategies for their existence. They

should balance and coordinate the different functional areas of business

concern. The success or failure of any organization depends on its strategy,

which is affected by working capital management. Working capital

management is the crux of problem to prepare the proper strategy on its favors.

So the study might be helpful for the management of the concerned bank as

well as it might be valuable for the researcher, scholars, student who wants to

study into the working capital management of the Commercial bank.

1.5 Limitations of the Study

None of the study can go beyond the boundary of some limitations and this
study is also not an exception. The scope of the present study has been limited
in terms of period of study as well as sources and nature of data. The following
are the major limitations of the study.
This study is basically based on secondary data. The study is focused on
balance sheet and income statement maintained by banks published in
annual reports, where the informations were given in condensed form.
The period coverage by the study extends over 5 years 2064/065 to
2068/069 because at the time of conducting the present study, the data
 could be available up to 2068/069 only. The data of 2069/070 could not
be obtained, as the year is running and there has not been audited, thus
there may be a chance of failing to the address the recent current
situation.
Out of various commercial banks, this study is concerned with the only
four commercial banks viz. NIBL, HBL, EBL and NABIL.
Although there are various aspects of financial management, this is
mainly concerned with the working capital aspects of the sample banks.
Mainly financial tools and statistical tools are employed for analyzing
the working capital management.

1.6 Chapter Scheme

The entire study has been organized into five main chapters to make the study
more Systematic. The followings are the divisions of Chapters.
Chapter 1: Introduction
The first chapter deals with background of the study, a brief review of sample
banks, statement of problem, objective of the study, significance of the study
and limitations of the study.
Chapter 2: Conceptual Framework & Review of Literature
The second chapter deals with conceptual framework including the
fundamental concept of and tools of working capital management. It also
includes the brief review of previous research work.
Chapter 3: Research Methodology
The third chapter deals with the research methodology which has been
followed to achieve the purposes of the study. It consists of research design, the
period covered, nature and sources of data, tools to be used, research variable
etc.
Chapter 4: Presentation and Analysis of Data
The fourth chapter deals with presentation and analysis of data. It gives a clear
picture of how the collected data has been presented on the study and how it
has been analyzed.
Chapter 5: Summary, Conclusions and Recommendations
The fifth chapter shows the summary of whole study, conclusion drawn and
recommendations given. This ends the study paper. Besides these chapters,
Bibliography and Appendix are included in this research paper.

CHAPTER - II
REVIEW OF LITERATURE
Review of Literature means reviewing research studies or other related
Proposition in related area of the study so that all the past studies, their
conclusions and deficiencies may be known and further research can be
conducted. Under this section of the study the conceptual review related to the
working capital management, the review of Journals and articles and the review
of the thesis have been presented.

2.1 Conceptual Framework

2.1.1 Meaning of Working Capital

Every business needs capital basically for two purposes. The first requires for
long term purpose which is called Fixed Capital. Such funds are required to
create production facility. Investment in plants, machinery, land, building etc.
comes under production activity. Investment in these assets represents that part
of firms capital which is block on a permanent or fixed basis. Such assets are
not purchased with the objective of resale.
To operate business, a firm also needs another type of capital which is known
as Short Term Capital or Working Capital. The funds required for purchased of
raw material, payment of wages and another day to day expenses etc. is called
as Working Capital. Similarly, the investment required for work-in-progress,
raw material, finished goods, sundry debtors, bills receivable etc. also comes
under working capital.

Working Capital refers to the resources of the firm that are used to conduct
day-to-day operation that makes business successful. In simple words working
capital is the excess of current Assets over current liabilities. Working capital
has ordinarily been defined as the excess of current assets over current
liabilities. Without cash, bills cannot be paid, without receivable the firm
cannot allow timing different between delivering goods to services and
collecting the money to pay for them, without inventories the firm cannot
engage in production nor can it stock goods to provide immediate deliveries.
As a result of the critical nature of current assets the management of working
capital is one of the most important areas in determining whether a firm will be
successful. Need of working capital is directly related to firms growth. The
term working capital refers to the current assets of the firms those items that
can be converted into cash with in the year. Net working capital is defined as
the difference between current assets and current liabilities (Hamption and
Wagner, 1989: 34).

Every business needs capital for two purposes. The first requires for long term
purpose which is called Fixed Capital. Such funds are required to create
production facility. Investment in plants, machinery, land, building etc. comes
under production activity. Investment in these assets represents that part of
firms capital which is block on a permanent or fixed basis. Such assets are not
purchased with the objective of resale.
To operate business, a firm also needs another type of capital which is known
as Short Term Capital or Working Capital. The funds required for purchased of
raw material, payment of wages and another day to day expenses etc. is called
as Working Capital. Similarly, the investment required for work-in-progress,
raw material, finished goods, sundry debtors, bills receivable etc. also comes
under working capital. The investment for the working capital may be
transferred into cash within a short period, generally a year. So it is also called
Circulating Capital or Revolving Capital or Floating Capital. Generally, the
capital required for running day-to-day operation of a business is called
Working Capital. It is concerned with current assets and current liabilities.
Asset of an essentially short term nature is known as Current Assets. It is a
short term investment. Current assets are expected to be converted into cash
within a short period. Those assets which are either readily available cash or
are convertible into cash within a short time relatively during the normal course
of business are known as Current Assets. The examples of current assets are
cash in hand, cash at bank, bills receivable, sundry debtors inventory,
prepayments, loans and advances etc. Current liability is another part
concerned with working capital. Those liabilities which are expected to have
been paid within a short period are known as Current Liabilities. The examples
of current liabilities are bank overdraft, sundry creditors, bills payables,
outstanding expenses, received in advance cash credit etc.

The word working means work at present. So, working capital is capital
working at present. Technically, working capital management is an integral
part of overall financial management (Khan and Jain; 1999:15.2). It represents
that part of fund that circulates from one form of current assets to another form
in ordinary course of business. For example, cash is used to purchase raw
material which creates stock of finished goods which, in turn, is sold for cash.
Therefore, working capital management is concerned with problems that arise
within attempting to manage the current assets, current liabilities and the
interrelationship that exists between them (Kulkarni, 1990:374).

2.1.2 Types of Working Capital

On the basis of the concept and the time, the working capital has been
categorized in four main types;
Types of Working Capital

On the basis of concept On the basis of time

Gross Working Net Working Permanent Temporary

Capital Capital Working Capital Working Capital

2.1.2.1 Gross Working Capital

This thought says that total investment in current assets is the working capital
of the company. This concept does not consider current liabilities at all.
Reasons given for the concept are:
When we consider fixed capital as the amount invested in fixed assets.
Then the amount invested in current assets should be considered as
working capital.
Current asset whatever may be the sources of acquisition, are used in
activities related to day to day operations and their forms keep on
changing. Therefore they should be considered as working capital
(Kulkarni, 1990: 374).
Gross Working Capital = Total Current Assets

2.1.2.2 Net Working Capital

It is narrow concept of working capital and according to this, current assets
minus current liabilities forms working capital. The excess of current assets
over current liabilities is called as working capital. This concept lays emphasis
on qualitative aspect which indicates the liquidity position of the
concern/enterprise (Pandey, 1999: 814-815).

Net Working Capital = Current Assets Current Liabilities

2.1.2.3 Fixed or Permanent Working Capital

The need for current assets arises because of the operating cycle. The operating
cycle is a continuous process and, therefore, the need for current assets is felt
constantly. But the magnitude of current assets needed is not always the same,
it increases and decreases over time. However, there is always a minimum level
of current assets which is continuously required by the firm to carry on its
business operations. This minimum level of current assets is referred to as
permanent, or fixed, working capital. It is permanent in the same way as the
firms assets are. Depending upon the changes in production and sales, the need
for working capital, over and above permanent working capital will fluctuate.
The volume of investment in current assets changes over a period of time.
But always there is minimum level of current assets that must be kept in order
to carry on the business. This is the irreducible minimum amount needed for
maintaining the operating cycle. It is the investment in current assets which is
permanently locked up in the business and therefore known as permanent
working capital (Weston, 1996: 333).

2.1.2.4 Variable or Temporary Working Capital

The extra working capital, needed to support the changing production and sales
activities is called fluctuating, or variable, or temporary working capital. Both
kinds of working capital-permanent and temporary-are necessary to facilitate
production and sale through the operating cycle, but temporary working capital
are created by the firm to meet liquidity requirements that will last only
temporarily (Pandey, 1999: 814-815).
It is the volume of working capital which is needed over and above the fixed
working capital in order to meet the unforced market changes and
contingencies. In other words any amount over and about the permanent level
of working capital is variable or fluctuating working capital. This type of
working capital is generally financed from short term sources of finance such
as bank credit because this amount is not permanently required and is usually
paid back during off season or after the contingency (Smith, 1974: 5).

2.1.3 Need and Importance of Working Capital

The connotation of energy in the term working capital is indeed accurate. It
refers to the resources of the firm that are used to conduct operation to do the
day-to-day work that makes the business successful. Without cash, bills
cannot be paid. Without receivables, the firm cannot allow timing differences
between delivering goods and services and colleting the money to pay for
them. Without inventories, the firm cannot engage in production, nor can it
stock goods to provide immediate deliveries. As a result of the critical nature of
current assets, the management of working capital is one of the most important
areas in determining whether a firm will be successful.

Following are the main advantages of maintaining adequate amount of working

capital in the business:
I. Solvency
There will be uninterrupted flow of production by an arrangement of adequate
working capital. A business can run smoothly only in the presence of adequate
working capital. In this situation, the short term liability can be paid within a
short period. Thus it helps to strengthen the solvency position of a business.

II. Goodwill
A firm with sufficient working capital can provide the payment within time to
employees, workers and creditors. In such a case, there is no complaint against
the firm. As a result, it helps a firm in creating and maintaining goodwill.

III. Easy Loans

A reputed company having adequate working capital need not face any
problem to get loan. It can arrange the loan easily from the bands and financial
institutions for the funds which are necessary to operate a business.

IV. Cash Discount

A business firm having adequate capital can easily manage the cash for
purchases of the goods. Immediate payment of cash enables a concern to
receive huge discount on purchases and hence it reduces the cost.

V.Regular Supply of Raw Materials

In the case of sufficient working capital, it can easily supply raw materials
necessary for production and there is no chance of disturbance in production.
 The uninterrupted flow of production enables the concern to supply its
production in the market regularly.

VI. Morale of Management

With the help of adequate working capital, the overall efficiency of the
business increases. It creates an environment of security, confidence and high
morale of management.

VII. Smooth Operation of Business

A firm with sufficient working capital can smoothly operate the business. Due
to adequate working capital, it can make regular payment of salaries, wages
and other day-to-day commitments. By paying these expenses regularly at time,
the morale of employees increases on one hand and on the other, their
efficiency also increases.

VIII. Ability to Face Crisis

A business concern has naturally to face various problems such as economic
depression, strike, natural disaster etc. Availability of working capital in
sufficient volume gives the business concern ability to face these kinds of crisis
easily.

IX. Regular Return

The management of ample working capital helps a firm to pay quick and
regular dividends to its investors. Because of adequate working capital, the
firm does not have to plough back of profit and hence it provides confidence to
its investors and creates a favorable market to raise additional funds in the
future.

2.1.4 Factors Affecting Working Capital

The working capital need of a firm depends upon various factors. These factors
may vary from one type of business to another and also keep on changing from
time to time. The working capital needed at one point of time may not be good
enough for some other situations. Internal policies and environmental changes
also affect the working capital. A firm should plan its operations in such a way
that it should have neither too much nor too little working capital. In general,
the following factors are involved in proper assessment of the quantum of
working capital required:

a) Nature and Size of Business

The amount of working capital depends mainly upon the nature of business. It
is the nature and conduct of the business that differentiates one firm from
another as far as working capital requirement is concerned. If we compare
public utility, for example, with manufacturing concern, the later will be found
to be requiring much more working capital. Trading and financial enterprises
may be required to invest even more on working capital for the reason that it
has to maintain sufficient amount of cash, inventories and book debts whereas
public utility concern have a very limited need for working capital because they
have cash sales in most of the cases.

b) Manufacturing Process and Length of Production Cycle

Another factor which has the bearing on the quantum of working capital is the
manufacturing process and production cycle. By production cycle, we mean
the time involved from the procurement of raw material till it is finally
transferred into finished product. In this process, huge fund are tied up on
materials, labor and overhead. The longer the time span i.e. manufacturing
cycle, the larger will be the tied up funds and therefore the larger is the working
capital needed. Opposite is also true.

c) Growth and Expansion of Business

In general, expanding enterprises require more working capital than those
which are static, other things being equal. Fixed capital is needed more for the
developing enterprises, as the theories state, funds required for operation and
maintenance of the fixed capital also increases proportionately whatsoever.

d) Rapidity of Turnover
Turnover represents the speed with which the working capital is recovered by
the sale of goods. If the turnover rate is high, lower amount of working capital
will be sufficient and vice-versa.

e) Terms and Conditions of Purchase and Sales

Credit terms and conditions of sales and purchases have a bearing on the
magnitude of working capital required. If the suppliers or trade creditors avail
liberal credit terms, the firm will require less working capital and vice-versa.
Similarly, the firm selling its product on cash basis will need less working
capital than those which sell their products mostly on credit. The credit sales
result in higher book debts (receivables). Higher book debts mean more
working capital.

f) Seasonal Nature
If raw materials are expected to fall short of demand throughout the year for
some reasons, the enterprise has to buy the materials in bulk involving huge
fund i.e. working capital to make it sure that the production process will not be
interrupted during the entire year.

g) Dividend Policy
The firm having satisfactory level of earning capacity may generate cash profit
from operation. The need for working capital can be met with the retained
earnings. A firm which declares dividend and distributes large proportion of
cash irrespective of its profit need larger amount of working capital than that
which retains larger part of its profits and distributes lower amount of cash
dividend.

h) Operating Efficiency of the Firm

The operating efficiency of the concern also plays the key role in determining
the level of working capital to be brought from external source. Operating
efficiency of the firm results in optimum utilization of resources at minimum
cost. Proper utilization of resources improves the profitability of the firm which
will in turn release greater funds for working capital purposes.

i) Working Capital Cycle

The working capital cycle begins with the purchase of raw materials and ends
with realization of cash from sale of finished product. Generally, the working
capital cycle involves purchase of raw materials and stores, its conversion into
stock of finished goods through work-in-progress with progressive increment
of labor and services cost, conversion of finished goods into sales, debtors,
receivable and ultimately realization of cash. This cycle keeps on repeating
again and again. If it takes long time to finish one cycle, large amount of
working capital will have to be set aside and vice-versa.

j) Price Level Changes

Changes in the price level also affect the requirements of working capital.
Rising prices necessitates the use of more funds for maintaining an existing
level of activity. For the same level of current assets, higher cash outlays are
required. The effect of rising prices is that a higher amount of working capital
is needed. However, in the case of companies which can raise their prices
proportionately, there is no serious problem regarding working capital. The
implications of changing price levels on working capital position vary from
company to company depending on the nature of its operations, its standing in
the market and other relevant considerations.

k) Business Cycle
Business fluctuations lead to cyclic and seasonal change which in turn, cause a
shift in the working capital position particularly for temporary working capital
requirement. During the upswing of business activity, the need for working
capital is likely to grow to cover the lag between sales and receipt of cash as
well as to finance purchases of additional material to cater to the expansion of
the level of activity. The downswing phase of business cycle has exactly an
opposite effect on the level of working capital requirement.

l) Production Policy
The quantum of working capital is also determined by production policy. In the
case of certain lines of business, the demand for product is seasonal, that is,
they are purchased during certain months of the year. During the slack season,
the firms have to maintain their working force and physical facilities without
adequate production and sale. When the peak period arrives, the firms have to
operate at full capacity to meet the demand. In this situation, it can either
confine its production only that period when goods are sold or follow a steady
production policy. The former policy does not need more working capital than
the latter does. A production policy in tune with the changing demands may be
preferable.

m) Access to Money Market

The firm which has good relation with banks and financial institutions is apt to
get loans easily as a result of which the need for working capital can be
minimized.

n) Level of Taxes
The first appropriation out of profits is payment or provision for tax. Tax
liability, in a sense, is a short-term liability payable in cash. An adequate
provision for tax payments, therefore, is an important aspect of working capital
planning. If tax liability increases, it leads to an increase in the requirement of
working capital and vice-versa.

o) Transport and Communication Facilities

If transport and communication facilities are effective, they help to publicize
and distribute finished goods quickly, speed up the collection of necessary
materials and sale of finished goods leading to the requirement of less amount
of working capital. On the contrary, if these facilities are not adequately
available or not effective, reorder period will be longer. Similarly, longer will
be the time to sell the finished products meaning thereby, a larger sum of funds
will be blocked on procurement of raw materials and sale of finished products.

p) Attitude Toward Profit

Most funds involve a cost to the firm. Thus, a relatively large amount of current
assets tends to reduce the overall profit. Some firms are willing to accept
greater liquidity risks in order to achieve higher profits. Other firms are not
highly focused on maximizing profits and do not manage liquid assets
aggressively. These behaviors affect the level of working capital.

q) Attitude Toward Risk

The reverse side of the attitude toward profits involves risk. The greater the
level of working capital, the lower the risk and vice-versa. Cash provides safety
for paying bills. Inventories provide less risk of running out of goods to sell.
Firms that are averse to risk may maintain more current assets than firms
willing to accept higher levels of risks.
1.1.1
1.1.2 2.1.5 Objectives of Working Capital in Banks

A bank undertakes many transactions daily. Sometimes, customers deposit

large quantity and sometimes customers withdraw from their deposits in high
quantity. Investment fund of bank is covered by deposit collections of different
types of account holder. A bank should have to pay the money to depositors
when they want to withdraw. For daily operation of office and to meet the
administrative expenses, a bank should have certain level of working capital.
Working capital is required to run the business smoothly and efficiently in the
context of the set objectives. It is no doubt that no company can achieve its
goals without proper use of working capital. Therefore, it can compare as
lifeblood to the organization. The main objectives of arranging capital are as
follows;
To pay to depositors,
To maintain Cash Reserve Ratio (CRR) & Statutory Liquidity Ratio
(SLR),
To satisfy the customers by granting loans promptly and increase the
attraction of business etc.,
To meet the administrative expenses, perform the task as per objectives
of business and run the business smoothly,
To fulfill the present need of business as well as get ready for risk &
economic fluctuation in future.

1.1.3 2.1.6 Determinants of Working Capital of Banks

Working capital in banks is basically concerned with the liquidity management.

Thus, the working capital of banks is synonymous to liquidity of banks. Many
factors affect the liquidity or working capital of banks. They are:
a. External Factors
 Prevailing interest rate of bank: If interest rate is high cash demand is
low & liquidity need is low.
Savings & investment situation: If income & saving scale of people is
high, low liquidity. If investment in commercial field is high, high
liquidity.
Growth & scheming position of the financial market: If financial market
of bank is in growth & prosperity, then low liquidity and if opposite,
high liquidity.

b. Internal Factors
Lending policy of bank: Great quantity for long-term investment needs
high liquidity and if short-term loan policy, low liquidity.
Management capacity: If management is efficient & ready to bear risk,
low liquidity.
Strategic planning & funds flow situation: Liquidity depends upon
planning, & strategy. Current A/C needs high liquidity & payment. On
the other hand fixed deposit needs low liquidity.

2.1.7 Demand of Working Capital in Banks

Working capital is maintained at bank by current saving, & fixed deposit
collection. Specially, to grant loan and to pay cheques, creditors & account
holders demand the liquidity. Generally, banks need liquidity for maintaining
following goals
Transaction motive
Security motive
Speculative motive

2.1.8 Working Capital Policy

Working capital policy refers to the firms basic policies regarding level of
each category of current assets and how current assets will be financed
(Weston,et al., 1996:333). To have a clear insight on the working capital
policy, we have to know about two basic policies: current assets investment
policy and current assets financing policy.

2.1.8.1 Current Assets Investment Policy

Current assets investment policy refers to the policy regarding the total amount
of current assets to be carried to support the given level of sales. There are
three alternative current assets investment policies which are as follows:

a. Relaxed Current Assets Investment Policy

This is the policy where relative large amount of cash, marketable securities,
and inventories are carried and where sales are stimulated by the use of credit
policy that provides liberal financing to customers and a corresponding high
level of receivables (Weston, et al., 1996:344). This policy is also known as
fat cat policy. It creates longer inventory and cash conversion cycles and longer
receivable collection period due to the liberal credit policy. Thus, this policy
provides the lowest expected return on investment with lower risk.

b. Restricted Current Assets Investment Policy

The policy under which a firm holds minimum amount of cash, marketable
securities, inventory and receivable to support a given level of sales is known
as restricted current assets investment policy or lean and mean policy. In this
policy, the firm follows a tight credit policy and bears the risk of losing sales.

c. Moderate Policy
This is the policy that lies between relaxed and restricted policies. In this
policy, a firm holds the amount of current assets in between the relaxed and
restricted policies. Both risk and return are moderate in this policy.

Figure: 2.1
Alternative Current Assets Investment Policies

2.1.8.2 Current Assets Financing Policy

There are different sources by which current assets are financed. However,
each and every source entails certain level of cost and risk. Therefore, a careful
study is required before making decision as to the financial sources of current
assets. The manner in which the permanent and temporary current assets are
financed is called the firms current assets financing policy.
A firm can adopt one of the following policies regarding raising funds for
current assets.
a. Aggressive Policy
Degree of aggressiveness in financing the current assets depends upon how the
current assets have been financed. A firm is generally regarded aggressive if it
finances all of its fixed assets and part of the permanent current assets with
long term debt plus equity plus spontaneous current liabilities and all of the
temporary current assets with short-term, non-spontaneous liabilities. If part of
the fixed assets is also financed with current debt or short term credit, then the
firm will be regarded more aggressive.

Figure: 2.2
Aggressive Financing Policy

b. Conservative Policy
This is the policy in which all of the fixed assets, all of the permanent current
assets, and some of the temporary current assets of a firm are financed with
long-term capital. This is a very safe financing policy and, therefore, not very
appropriate from the standpoint of profit.
 Figure: 2.3
Conservative Financing Policy

c. Maturity Matching Policy

Maturity matching policy, also known as self-liquidating policy calls for
matching assets and liability maturities. This strategy minimizes the risk that
the firm will be unable to pay off its maturing obligations if the liquidations of
the assets can be controlled to occur on or before the maturities of the
obligations.

At the limit, a firm could attempt to match exactly the maturity structures of its
assets and liabilities. Inventory expected to be sold in 30 days could be
financed with a 30-day bank loan; a machine expected to last for five years
could be financed by a 5-year loan; a 20-year building could be financed by a
20-year mortgage bond; and so forth. In this policy, generally, the firm finances
permanent current assets with long term financing and temporary with short-
 term financing. It means the firm matches the maturity of financing sources
with an assets useful life. It lies between the aggressive and conservative
policies.

Figure: 2.4
Maturity Matching Policy

1.1.4 2.1.9 An Overview of Working Capital

Management

Working Capital Management refers to the administration of all aspects of

current assets, namely cash, marketable securities, stock and current liabilities.
It is the functional area of finance that covers all the current accounts of the
firm. It is concerned with the adequacy of current assets as well as the level of
risk posed by current liabilities. It is a discipline that seeks proper policies for
managing current assets by current liabilities and practical technique for
maximizing the benefits from managing working capital.

The term working capital management closely relates with short-term

financing; it is concerned with collection and allocation of resources. Working
capital management relates to problems that arise in attempting to manage the
current assets, the current liabilities and interrelationships that exist between
them (Smith, 1974:5).

Working capital management is the crucial aspect of the financial management.

It is the life-blood and controlling nerve center for any types or business
organization because without the proper control upon it no business can run
smoothly. The management of current assets and current liabilities is necessary
for daily operations of any organizations. Thus, it plays the vital role in the
success and failure of the organizations as it deals with the part of assets, which
are transformed from one form to another form during the course of
manufacturing cycle. Therefore, the role of working capital management is
more significant for every business organization irrespective to their nature.

By the definition of various experts of working capital management, we

conclude that, all institution, whether private or public, financial institution,
manufacturing or non-manufacturing that need just adequate working capital to
compete with competitive market. It is because over or under adequacy of
working capital is dangerous from the firms objective points of view. Over
investment on working capital affects the firms profitability just as idle
investment. On the other hand, under investment on working capital affects the
liquidity position of the firm and causes to financial hindrance and failure of
the company. It is therefore, a recognized fact that any mistake made in
management of working capital can cause to adverse effects in business and
reduces the liquidity, turnover and profitability and increases the cost of
financing of the organization.

Need of working capital is directly related to firms growth. A firm can have
different level of current assets to support the same level of output. The level of
current assets can be measured by relating current assets to fixed assets. Its
proportion upon the fixed assets of the firm indicates the working capital policy
of the firm namely conservative and aggressive in two extreme ends. Dividing
current assets by fixed assets gives Current Assets to Fixed Assets (CA/FA)
ratio. Assuming a constant level of fixed assets, a higher CA/FA ratio indicates
a conservative current assets policy and a lower CA/FA ratio means an
aggressive current assets policy assuming other factors to be constant. A
conservative policy implies greater liquidity or lower risk, while an aggressive
policy indicates higher risk and poor liquidity (Panday, 1999.:822). Higher
level of current assets implies greater liquidity and solvency of the firm. There
is less risk of technical insolvency, but a considerable amount of funds will be
tied up in current assets, which causes to lower the profitability. On the other
side, to have a higher profitability, a firm can take an aggressive current assets
policy maintaining lower level of current assets, which will lower the solvency
of the firm and the level of risk in the same manner. Thus the reasonable
approach is to balance the cost of maintaining current assets and risk associated
in such a way that the tradeoff between risk and return is minimized.

Figure: 2.5
Alternative Current Assets Policies

A
Conservative Policy

B
Level of current assets

Average Policy

C
Aggresive Policy

Fixed assets level

Output

2.2 Review of Previous Studies

This section deals with views of different scholars in relation to working capital
management which lay down conceptual foundation for this study.
2.2.1 Review of Books
Weston and Brigham (1984) in their book Managerial Finance have given
theoretical insights into working capital management. The bond conceptual
findings of their study provide sound knowledge and guidance for the further
study in the field of management of working capital of any enterprise and
naturally to this study as well. They explain, in the beginning, the importance
of working capital, concept of working capital, financing of working capital,
the use of short term versus long-term debt, relationship of current assets to
fixed assets. In the next chapter they have dealt with the various components of
working capitals and their effective management techniques. The components
of working capital they have dealt with the cash, marketable securities,
receivable and inventory for the efficient management of cash, they have
explained the different cash management models. They have also explained the
major sources and forms of short term financing, such as trade credit, loans
from commercial banks and commercial paper.

Pradhan (1988) has published a book on management of working capital in

Nepalese PEs. This book is based on the study of nine manufacturing public
enterprises of Nepal for the duration of ten years from 1973 to 1982 AD. In his
study, he aimed at examining the various aspects of management of working
capital in selected manufacturing public enterprises of Nepal. The specific
objectives undertaken in his study were:
To conduct risk return analysis of liquidity of working capital position.
To assess the short term financial liquidity position of the enterprises.
To assess the structure and utilization of working capital and
To estimate the transaction demand functions of working capital and its
various components.
His study has mentioned the following findings.
It was found that most of the selected enterprises have been activating
a tradeoff between risk and return thereby following neither an
aggressive nor a conservative approach.
It has showed a poor liquidity position of most of the enterprises. This
poor liquidity position has been noticed as the enterprises have either
negative cash flows or negative earnings before tax or they have
excessive net current debts which cannot be paid within a year.
The Nepalese manufacturing public enterprises have on an average
half of their total assets in the form of current assets. Of all the different
components of current assets, on an average, the share of inventories in
total assets is the largest followed by receivables and cash in most of the
selected enterprises?
The economics of scale have been highest for inventories followed by
cash and gross working capital, receivable and net working capital.
The regressions results also show that the level of working capital and
its components and enterprise desires to hold depend not only on sales
but on holding costs also.

Van Horne (2000) another well known expert of financial management and
writer in his book Financial Management and Policy, has given the concept
of capital management, it is usually described as involving the administration
of these assets namely cash, marketable securities, receivables, inventories and
the administration of current liabilities. It means the working capital
management is concerned with the problem that arises in attempting to manage
the current assets, the current liabilities and the inter-relationship that exist
between them. He has also described the different methods for efficient
management of cash and marketable securities and various models for
balancing cash and marketable securities. For the management of receivable,
different credit and collection policies have been described and various
principles of inventory have been examined for inventory management and
control.

Shrestha (1995) has published Portfolio Behavior of Commercial Banks in

Nepal based on the study of two local commercial banks, three joint-venture
banks and one development bank as a sample for the study. Some major
findings of her study are hereunder.
Total deposits have been the major sources of fund for all the banks.
Capital and reserve funds do not seem to have changed much over the
year.
The user of fund analysis shows that the resources of commercial banks
are allocated in the liquid funds, investment on securities, loans and
advances. Bills purchased and discounted.
Among the portfolio, for Nepalese banks loan and advances share
highest volume of the resources and the bills purchased and discounted
the least over the year.
The excess reserves of the commercial banks show unused resource. The
cash reserve exceeds much more than the required cash reserve.

1.2 2.2.2 Review of Journals/Articles

Pradhan (1988) has published another article relating to working capital
management. He studied on the demand for working capital by Nepalese
corporation. He analyzed the selected nine manufacturing public corporation
with the 12 years data from 1973-1984. Regression equation has been adopted
for the analysis. His study has summarized that the earlier studies concerning
about the demand for cash and inventories by business firm did not report
unanimous findings. A lot of controversies exist in respect to the presence of
economics of scale, roles of capital cost, capacity utilization rates and the speed
with which actual cash and inventories adjusted to describe cash and
inventories respectively. To pooled regression, result shows the presence of
economics of scale with respect to the demand for working capital and its
various components. The regression results suggest strongly that the demand
for working capital and its components is function of both sales and their
capital cost. The estimated results show that the inclusion of capacity
utilization variable in model seems to have contributed to the demand function
cash and net working capital only. The effect of capacity utilization on the
demand for inventories, receivables and gross working capital is doubtful.
Shrestha (July 1982 - June 1983) in his study Working capital management
in public enterprises, based on ten selected public enterprises, states that
manager often lacks basic knowledge of working capital and its overall impact
on the operative efficiency and financial viability of public enterprises. The
sample public enterprises are Birgunj Sugar Factory, Janakpur Cigarette
Factory, Raghupati Jute Mills, Dairy Development Corporation, National
Trading Ltd., Royal Drugs Ltd., National Construction Company of Nepal,
Harisiddhi Brick and Tile Factory, Nepal Cheeuri Ghee Industry Ltd., and
Chandeswori Textile Ltd. Specially, his study is focused on the liquidity
turnover and profitability position of those enterprises. In this analysis, he
found that four public enterprises have maintained adequate liquidity position,
two public enterprises have excessive and remaining others public enterprises
had failed to maintain desirable liquidity position. On the turn over side, two
public enterprises had negative turnover, four had adequate turnover, and one
had higher turnover on net working capital. He had also found that out of ten
public enterprises six were operating in loss while only four were setting some
percentage of profit. With the reference of his findings, he has pointed certain
policy flaws such as deficient financial planning, negligence of working capital
management, deviation between liquidity and turnover of assets and inability to
show the positive relationship between turnover and return on net working
capital. At the end, he has made some suggestive measures to overcome from
the above policy issues. These are identification of management information
system, positive attitude towards risk and profit and determination of right
combinations of short-term and long-term sources of funds to finance working
capital needs.
Mahat (May 26 2004), also has published article relating to spontaneous
resources working capital management. He has defined the three major sources
of working capital i.e. equity financing, debt financing and spontaneous
sources of financing, regarding the working capital management. Debt
financing include short-term bank financing such as bank overdraft, cash credit,
bills purchase and discounting, letter of credit etc. whereas spontaneous sources
of working capital include trade credit, provisions and accrued expenses
(Mahat, May 26 2004: Vol. XII, No. 98).

Mahat has defined that working capital management is one of the important
pillars of corporate finance. However, Nepalese industries are facing difficulty
in their survival by the cause of recession, which can bring best and worst in
corporate finance such an environment should be efficient enough to cope with
the possible worst happenings in future for working capital management. He
has said that managing the working capital resources for a profit making
industries are routine affairs of just making payment and arranging collection
of debtors. In contrast, the company in debt trouble, it is rather difficult to meet
its working capital gap by way of debt financing, the company should have to
bear interest, which may cause to increase in the percentage of operating
expenses to the turnover and depletion in the profits. Therefore, spontaneous
sources of working capital will be a better source for working capital in order
to improve its performance.

Consequently, in a changed economic scenario, every company should realize

that inability to manage working capital might land them in a vicious circle that
can be hard to get out from. It is indeed essential for industries to tighten their
belts and checks their financial stability to face and stand in forthcoming
competitive day.
Acharya (Jan - Mar, 1985) has published an article relating on working
capital management. He has defined the two major problem i.e. operational
problems and organizational problems, regarding the working capital
management in Nepalese public enterprises. The operational problems; he
found were increase of current liabilities than current assets, not allowing the
current ratio 2:1 and slow turnover of inventories. Similarly, change in working
capital in relation to fixed capital had very low impacts over the profitability,
than transmutation of working capital employed to sales, absent of apathetic
management information system. Break-even analysis, funds flow analysis and
ratio analysis were either undone or ineffective for performance evaluation.
Finally, monitoring of the proper functioning of working capital management
has never been considered as managerial job.
In the second part, he has listed the organizational problems in the public
enterprises. In most of the public enterprises, there is lack of regular internal
and external audit system as well as evaluation of financial results. Similarly
very few public enterprises have been able to present their capital requirement
functioning of finance department is not satisfactory and some public
enterprises are even facing the under utilization of capacity.

2.2.3 Review of Previous Research Works

Dhungana (2013) has carried out research A Study on Working Capital
Management of selected Joint Venture Banks in Nepal
Main Objectives:
To study the position of current Assets and current liabilities of NABIL,
NIBL and SCBNL, and their impact on Liquidity.
To analyze the composition of working capital and liquidity utilization
of NABIL, NIBL and SCBNL.
To analyze the composition of working capital and assets utilization of
NABIL, NIBL and SCBNL.
To analyze the comparative study of working capital Management
among NABIL, NIBL and SCBNL.
 On the basis of the analysis, to provide recommendations and
suggestions for the improvement of working capital management of
NABIL, NIBL and SCBNL in the future.

Major Findings:
The average major components of the current assets i.e. cash and bank
balance, loan and advance are higher in NIBL, money at call or short
notice, government securities and miscellaneous assts are higher at
SCBNL.
The liquidity position of sample banks are analyzed with the current
ratio and quick ratio has highest current ratio and SCBNL has highest
quick ratio.
Correlation between government securities and total deposit of sample
banks are not significant; it shows that there is not close relationship
between two variables. But there is highly significant correlation
between loan and advance and total deposit of NABIL, NIBL and
SCBNL. The banks have better utilization of their loan and advance and
total deposit. There is positive correlation between cash and bank and
current liabilities and highly significant in NABIL, NIBL and SCBNL.
Therefore, the banks have been better utilization of their cash and bank
balance and current liabilities.
The composition of working capital are cash and bank balance, money
at call or short notice, loan and advance, government securities and
miscellaneous current assets are significantly different. There is
significant difference in composition of working capital among NABIL,
NIBL and SCBNL. Since, the mean value of loan and advance on total
current assets of sample banks are significantly high and invest their
fund in income generating sector.
The liquidity position of the sample banks current ratio is not
significantly different. But quick ratio is significantly different in
liquidity position of NABIL, NIBL and SCBNL. The mean value of
 current ratio of NIBL is higher than NABIL and SCBNL but quick ratio
of SCBNL is higher, however, liquidity position of SCBNL is better.
Major Recommendations:
SCBNL segregates very low portion in the loan and advance, so it is
unable to maximize the shareholders value. SCBNL should increase
loan and advance portion. The bank should improve its current
investment policy about loan and advance.
All the sample banks liquidity position is not good. Their current and
quick ratio is lower than normal standards. So they have faced liquidity
problem. It is better, as soon as SCBNL, NABIL and NIBL try to
maintain the standard by increasing current and quick assets.
By adopting the matching working capital management policy instead of
adopting conservative policy these banks can improve their profitability
in the short as well as in the long run.
All of three banks need to utilize the outsiders as well as insiders fund
effectively and efficiently on order to keep all the stakeholders happy.
As the service of these banks have been limited to urban and semi urban
regions of the nation, they should imitate some measures to widen their
reach to the people of rural areas,
These banks should also focus on research and development activities in
order to retain and keep their position up, as more and more players are
entering into the limited market of banking industry of Nepal.

Acharya (2009) has carried out research Working Capital Management of

Manufacturing Companies Listed in NEPSE.
Main Objectives:
To analyze the current assets and current liabilities policies to examine
the factors affecting working capital on profitability.
To examine factors affecting working capital management.
To provide appropriate suggestions.
Major Findings:
It is found out that the companies are accompanied with various
hindrances like lower turnover, lower return, lower net working capital
or poor liquidity position.
There is lack of proper working capital policy, deteriorating financing
situation, lack of appropriate credit and collection policy.

Major Recommendations:
The companies should formulate appropriate working capital policies as
per their need, invest idle fund in marketable securities, and adopt
definite credit and collection policies.
The researcher suggests the companies to initiate steps towards
minimizing administrative and operating expenses, maintain proper
relation and interaction among production, marketing and sales
departments.
It is suggested to develop appropriate information system in determining
exact need of working capital.
There should be training, participation in the management conferences,
foreign enterprises tour etc. for employees in order to increase their
efficiency.

Pandey (2010) has done a research on working capital management of hotel

industry of Nepal using the financial statements of three sample hotels for five
years from 2057/58 to 2061/62 under the heading Working Capital
Management in Hotel Industry (With Reference To Hotel Radisson, Hotel
Soaltee and Hotel Hyatt).
Main Objectives:
To analyze the composition of working capital, liquidity position, and
profitability position.
To evaluate the relationship between sales and different variables of
working capital.
 To examine the working capital cash flow cycle and cash conversion
cycle of the said hotels
Major Findings:
It is found that all three companies have been following aggressive
financing policy.
They have negative working capital during the study period; none of the
hotels seem to have solid view of the management of working capital.
Hotel Hyatt has very poor liquidity position as compared to other hotel
turnover of the entire hotels is decreasing due to unstable political
situation for more than a decade.
Sales revenue is decreasing but operating expenses is in increasing trend
accounting for the loss to the hotels.
Hotel Radisson and Hotel Hyatt have been paying high amount of
interest expenses than Hotel Soaltee.
Major Recommendations:
It is recommended all the hotels to increase the net working capital by
reducing short-term loan.
The researcher suggested introducing effective inventory control
techniques, credit policies for collecting receivables.& reduce loan from
outside and reduce internal controllable expenses as far as possible in
order to confront the liquidity crisis.
Hotel Hyatt is suggested to reduce loan, advances and deposits and
increase cash and bank balance.
All hotels should also focus on local tourists for generating regular
income rather than paying attention to foreign tourists only.

Dahal (2010) has done a research on A Case Study of a Working Capital and
its Impact with reference to NIC and NABIL Bank

Main Objectives:
 To analyze the liquidity, assets utilization, long term solvency and
profitability position of Banks.
To study the current assets and current liabilities and their impact on
liquidity and profitability.
To provide appropriate recommendation and suggestion for the
improvement of the working capital management and enhancing the
profitability scenario of Nepalese commercial banks.
Major findings:
The average cash and bank balance percentage and loans and advances
percentage are higher in NIC than NABIL. But the average government
securities percentage is higher in NABIL than NIC.
The liquidity position of NIC is better than NABIL. The trend of
Liquidity ratio i.e. quick ratio and cash and bank balance ratio of both
banks are decreasing. The both banks tried to reduce its idle money,
however, it is shown that the liquidity position of NIC is always better
than NABIL. It means NIC is bearing Lower risk, which mean lower
profits in commercial banks; higher liquidity is not always the cause of
Lower profitability.
NABIL has better turnover than NIC. Thus NABIL has better utilization
of deposits in income generating activity than NIC. However, NIC is
utilizing its saving deposit in loans and advances more effectively than
NABIL.
Profitability measures the efficiency of the firm. The profitability
position of NABIL is far better than NIC although the interest earned by
NABIL and NIC is equal.
The average long term debt to net worth ratio of NABIL is higher than
that of NIC. So NABIL has higher proportion of outsiders claim in total
capitalization than NIC or NABIL has more risky and aggressive capital
structure than NIC.
Correlation between cash and bank balance and current liabilities in
NABIL bank is positive which shows the positive relationship between
 two variables. On the other hand, coefficient of correlation between cash
and bank balance to current liabilities in case of NIC also shows positive
relationship. After considering the probable error there is highly
significant relationship between net working capital and net profit in
both banks.
The mean value of current ratio and quick ratio of NABIL are
statistically different than NIC. But the cash and bank balance to deposit
ratio are not significantly different.
The mean value of interest earned to total assets ratio is not significantly
different, but net profit to total assets and net profit to total deposit are
significantly different of NABIL and NIC.

Major recommendations:
The large portions of total current assets of both NABIL and NIC banks
have cover by loans and advances and it is decreasing in NABIL and
increasing in NIC. As, banks should give priority to invest their fund on
loan and advances to get higher return, NABIL has not as much of loans
and advances proportion on total current assets than NIC. So, NABIL
should seriously adjust its policy of investment on loans and advances.
Total deposits turns over position of studied banks are less than one
which is not satisfactory. Fixed deposits and savings deposits turn over
position are satisfactory on both NABIL and NIC banks. Though, saving
deposits turns over of both NABIL and NIC is satisfactory, NABIL is
not utilizing short term fund of outsiders more effectively than NIC.
Although interest earned to total assets ratio is equal on both banks, net
profit ratio is higher in NABIL than NIC. It may be due to higher cost
on NIC. So, NIC should give an attention of reducing cost of operation
so it can have least operation cost, which further maximize its
profitability and maximize shareholders return.
The average current ratio of NIC is higher than that of NABIL. It helps
to conclude that the liquidity position of NABIL is worse than that of
 NABIL. So NABIL should give attention to increase the current assets
to build ability to meet its current obligation.
Due to the large amount of term debt and low net worth the proportion
of outsiders claim in total capitalization is higher in NABIL. NABIL
has more risky and aggressive capital structure than NIC. Though both
banks use high short term liabilities to cover total capital, NABIL should
decrease the long term to increase the degree of protection against long
term creditors and to protect total capital against long term debt.

Pathak (2012) has done a research work on Working Capital Management of

Commercial banks in Nepal a comparative study of EBL and NBBL.
Main Objectives:
To study the working capital Management of EBL and NBBL.
To study the position of current assets and current liabilities and their
impact.
To examine the liquidity and profitability position of EBL and NBBL.
On the basis of the analysis to provide recommendation and suggestion
for the improvement of the working capital management of EBL and
NBBL.

Major Findings:
The net working capital of NBBL is negative in some year so the
sufficient amount of working capital for operational requirement for
NBBL in case of EBL, the net working capital is positive.
There is very high variability of net working capital maintained by
NBBL and EBL.
In case of EBL fluctuation of the study period, this shows that EBL is
more efficiency than NBBL.
The profitability position of NBBL is better than EBL.
Correlation between investment on government security and total
deposit of EBL is highly significant. It shows that there is close
 relationship between investment on government securities and total
deposit of EBL. However, it is not significant in case of NBBL.
While testing the hypothesis of composition of working capital, it has
been observed that the mean value of proportion of cash and bank
balance, loan and advance and government securities of NBBL and EBL
are not statistically different.
While testing the hypothesis of liquidity management it has been
observed that the mean value of current ratio, quick ratio, and cash and
bank balance to deposit ratio of NBBL and EBL are not significantly
different. It shows that liquidity management policy of these banks is
significantly difference.
While testing the hypothesis of profitability position, it is observed that
the mean value of net profit to total assets, net profit to total deposit and
interest on to total assets of NBBL is not statistically different from that
of EBL.

Major Recommendations:
The loan and advances percentage as a part of current assets of EBL was
in the increasing trend. So, it should review, its policy are to reverse the
trend, as they are most productive assets. On the other hand the average
loan and advances percentage as a part of current assets of NBBL was
just more than EBL. So, it should increase the percentage by adopting
new policies.
The standard liquidity ratio should be 2:1, but the low liquidity ratio of
both banks suggests that they should enhance their liquidity position by
keeping optimum current assets.
Both of the banks had low average turnover on total deposits which is
less than one. Due to low turnover non earning idle funds might be high
on these banks. So, these banks should give proper attention on the
utilization of idle funds in more productive sector.
 Low return on assets of EBL suggests that it should cut down its
operating cost in order to maximize its profitability.
Both the banks need to utilize the outsiders as well as insiders fund
effectively and efficiently in order to keep all the stakeholders happy.
These banks should also focus on research and development activities in
order to retain and keep their position up, as more and more players are
entering into the limited market of banking industry in Nepal.
As the services of these banks have been limited to urban and semi
urban areas of the nation they should imitate some measures to widen
their reach to the rural areas.

2.3 Research Gap

All above studies are concerned with research of Working capital. Some
researchers have selected various different companies for this research and
some have concentrated on only one company. But this study selects NIBL,
HBL, EBL & NABILs Working Capital to cover the analytical part &
fulfillment of objectives of study. This research has covered 2007/08 to
2011/12where as other previous thesis is only up to the year 2011.
In this study, it is tried to carry out the distinct from other previous thesis
studies in the term of sample size, nature of sample banks, methodology &
statistical tools used. Analysis of standard deviation, regression analysis, and
trend line analysis & field survey are used as main model of study with the
view to obtain the relevant & accurate result. So, it has been believed that the
study will be different than earlier one.

CHAPTER - III
RESEARCH METHODOLOGY

3.1 Research Design

Selection of appropriate research design is necessary to meet the study
objectives of any research. Research design is a plan structure and strategy of
investigation conceived so as to obtain answer to research questions and to
control variances.

The study aims to portraying accurately on the working capital (or current
assets and current liabilities) and its impact on overall financial position of
sample banks. It is based on recent 5 years data from F/Y 2064/065 to
2068/069. The study has been conducted to assess the existing situation of
working capital management of commercial banks and describe the situation
and events occurring at present. The research design followed for this study is
basically a historical, empirical and descriptive-cum-analytical.

3.2 Population and Sample

At present there are 32 commercial banks operating in Nepal. Among them
Nepal Investment Bank Limited, Himalayan Bank Limited, Everest Bank
Limited & NABIL Bank Limited have been taken as a sample for the study.
This sample banks are the pioneer leading bank in the context of deposit
collection and loan disbursement. Financial statements of last five fiscal years
from F/Y 2064/065 to 2068/069 have been taken as sample data for evaluating
working capital management.

3.3 Sources of Data

This study is conducted on the basis of both primary and secondary data
relating to working capital. The secondary data have been extracted mainly
through the annual report of NIBL, HBL, EBL & NABIL. Besides these, the
annual report of Nepal Rastra Bank has also been equally reviewed. Further,
the directives issued by NRB have also been taken as the secondary source of
data. Similarly, various data and information are collected from the periodicals,
economic journals, managerial and economic magazine and other published
and unpublished reports and documents from various sources. Likewise, the
primary data have been collected by distributing questionnaire to the
employees and the shareholders of the sample banks.

3.4 Tools Used

Under this study, financial as well as statistical tools have been used to analyze
the gathered data and information.

3.4.1 Financial Tools

In this research study various financial tools are employed for the analysis. The
main focus will be on Ratio Analysis. Ratio analysis is the most important tools
of the financial analysis, which help to ascertain the financial conditions of the
organizations. Various ratios are employed and grouped for the analysis of
composition of working capital, liquidity position, activity or turnover position,
profitability position and capital structure or leverage position.

A) Total Assets Financing

The total asset of the bank is financed through outside and inside financing.
The inside financing involves shareholders equity whereas the outside
financing involves both long term debt and short term debt. Higher the debt
financing signals adoption of aggressive working capital policy and vice versa.

B) Total Debt Composition

The total debt of the bank is composed of long term debt and short term debt.
The short term debt is easy to obtain in comparison to long term debt. But,
short term debt carries higher risk. Thus, higher use of short term debt to
financing the working capital means the adoption of aggressive policy.
C) Gross Working Capital
Generally gross working capital means current assets. Thus, higher the current
asset indicates higher gross working capital and eventually higher net working
capital as well. Under this, the growth rate of gross working capital within the
five year period is analyzed.

D) Net Working Capital Growth

The net working capital is the difference between the current assets and the
current liabilities. Lower the net working capital implies higher amount of short
term financing and thus having aggressive policy and so on. The growth rate of
net working capital is given by;

E) Working Capital Financing Policy

This ratio measures the relationship between the short term debt capital and the
current assets of the bank. In other word, this ratio evaluates what percentage
of the working capital has been financed through the short term debt, and thus
enlightens on the working capital policy adopted.

F) Working Capital to Total Assets

This ratio measures the relationship between the working capital and total
assets of the bank. This ratio is germane to the management for making policy
in the types of finance to be adopted. This ratio also shows the representation
of working capital in total assets of the bank.

G) Cash Reserve Ratio

To ensure the security of the deposit holders, each bank has to keep certain
percentage of the total local deposit collection as cash balance in NRB, as per
the provision of NRB. Currently such requirement is 5.5%. Thus, this ratio
measures the liquidity to be maintained by the bank.

H) Return on Equity
This ratio measures the efficiency of the bank in optimally utilizing the
shareholders equity in generating profit. Higher the return on equity indicates
that the bank has adopted aggressive working capital policy, and thus the bank
is risk taker.

3.4.2 Statistical Tools

The major statistical tools used for analyzing the data are as follows;
A) Arithmetic Mean or Average (X)
An average is a single value that represents a group of values. It depicts the
characteristic of the whole group. It is a representative of the entire mass of
homogeneous data, its value lies somewhere in between the two extremes, i.e.
the largest and the smallest items. It is obtained by dividing the sum of the
quantities by the number of items. Thus,
Where,
X = sum of the sizes of the items
N= number of items

B) Standard Deviation (S.D.)

It is the most usual measure of dispersion and it represents the square root of
the variance of a group of numbers, i.e., the square root of the sum of the
squared differences between a group of numbers and their arithmetic mean.
Generally, it is denoted by small Greek letter (read as sigma) and is obtained
as follows.

Where,
N = Number of items in the series.
X = mean
X = Variable

The standard deviation measures the absolute dispersion or variability of a

distribution; the greater the amount of dispersion or variability the greater the
standard derivation, for the greater will be the magnitude of the deviations of
the values from their mean.

C) Coefficient of Variation
Karl Pearson developed this measurement to measure the relative dispersion. It
is used in such problems where we want to compare the variability of two or
more series. It is denoted by C.V. and is obtained by dividing the arithmetic
mean to standard deviation. Thus,
D) Coefficient of Correlation
The correlation analysis refers to the techniques used in measuring the
closeness of the relationship between the variables. It helps us in determining
the degree of relationship between two or more variables. It doesn't tell us
anything about cause and effect relationship. It describes not only the
magnitude of correlation but also its direction. The coefficient of correlation is
a number, which indicates to what extent two things (variables) are related to
what extent variations in one go with the variations in the other.

The value of coefficient of correlation as obtained shall always lie between +1,
a value of 1 indicating a perfect negative relationship between the variables,
of +1 a perfect positive relationship, and of no relationship when correlation
coefficient is zero. The zero correlation coefficient means the variables are
uncorrected. It is defined by Karl Pearson as:

E) Probable Error
The probable error denoted by P.E. is used to measure the reliability and test of
significance of correlation coefficient. Significance of relationship has been
tested by using the probable error (P.E.) and it is denoted by the following
model:

Where, r = the value of correlation coefficient

n = number of pairs of observations

If r < P.E., it is insignificant, i.e. there is no evidence of correlation

If r > 6 P.E., it is significant
If P.E. < r < 6 P.E., nothing can be concluded

F) Regression Analysis
Regression is a statistical method for investing relationships between the
variables by the establishment of an approximate functional relationship
between them. It is considered as a useful tool for determining the strength of
relationship between two or more variables. The regression line of Y on X is
given by;

G) Trend Analysis
A widely and most commonly used method to describe the trend is the method
of least square. Let the trend line between the dependent variable y and the
independent variable x (i.e. time) be represented by;
Yc = a + bx (i)

Where,
a = y intercept or value of y when x = 0
b = slope of the trend line or amount of change that comes in y of a unit change
in x.

To find the value of x and y, the following equations should be solved;

y = na + bx .. (ii)
xy = ax + bx2 (iii)
 CHAPTER - IV
PRESENTATION AND ANALYSIS OF DATA

This chapter has the purpose of fulfilling the main objective of the present
study. So this is the crucial part of this study. This chapter of has divided into
three sub parts. The first part presents secondary data analysis, like as total
assets financing, composition of debt, gross and net working capital status of
selected Banks analyze which includes size, structure and utilization of current
assets and current liabilities, liquidity and profitability position, relation
between current assets and total assets as well as fixed assets, financing
policies etc. of Banks. Second part focuses on presentation and analysis of
primary data and finally third part presents major findings of the analysis.

4.1 Analysis of Secondary Data

In this section, the data from the annual report of NIBL, HBL, EBL & NABIL
have been extracted and tabulated to compute the relative ratios that are
essential for evaluating the working capital management of the bank.

4.1.1 Total Assets Financing

The total asset of the bank is financed through the outside funding and internal
funding. The internal funding involves shareholders equity whereas outside
funding involves both long term debt and short term debt. A good combination
between these two funding is necessary for the optimal profit achievement. The
financing of total assets of the selected banks is presented in the Table: 4.1.
 Table: 4.1
Total Assets Financing
(Unit in %)
FY NIBL HBL EBL NABIL
Equity Debt Equity Debt Equity Debt Equity Debt
2007/08 92.39 6.40 93.60 5.61 94.39 7.55 92.45
7.61
2008/09 92.60 6.95 93.05 7.08 92.92 6.56 93.44
7.4
2009/010 91.46 7.93 92.07 5.97 94.03 7.14 92.86
8.54
2010/011 92.48 8.05 91.95 6.67 93.33 7.35 92.65
7.52
2011/012 92.29 8.65 91.35 6.55 93.45 7.12 92.88
7.71
Mean 7.76 92.24 7.60 92.40 6.38 93.62 7.14 92.86
S.D. 0.45 0.45 0.90 0.90 0.58 0.58 0.37 0.37
C.V.% 5.84 0.49 11.91 0.98 5.19 0.40
9.15 0.62
(Source: Appendix I)
Figure: 4.1
Total Assets Financing

The above table and figure show the method adopted by the banks to finance
the total assets. The table reveals that each bank gives predilection to debt
capital than equity capital while financing the total assets. Thus, the total assets
of each bank can be considered risky. Looking individually, the equity capital
of NIBL has followed increasing trend and thus has ranged from 7.61% in the
fiscal year 2007/08 to 7.71% in the fiscal year 2011/12. Similarly, the debt
financing of the bank has ranged from 92.39% in the fiscal year 2007/08 to
92.29% in the fiscal year 2011/12. In average, NIBL has financed the total
assets by 7.76% inside fund and 92.24% outside fund. Also, the coefficient of
variation in inside funding is 5.84% and that in outside funding is 0.45%.
However, the percentage of debt financing in total assets of HBL has decreased
during the period and the percentage of equity financing has increased
simultaneously. The equity financing to total assets of HBL has ranged from
6.40% in the fiscal year 2007/08 to 8.65% in the fiscal year 2011/12. Likewise,
the debt financing to total assets has gradually decreased from 93.60% in the
fiscal year 2007/08 to 91.35% in the fiscal year 2011/12. In average, HBL
financed 7.60% of the total assets through equity capital and 92.40% of the
total assets with debt capital.
Similarly, the percentage of equity financing in EBL has fluctuating the
percentage of debt financing has also irregular. The equity capital has ranged
from 5.61% in the fiscal year 2007/08 to 6.55% in the fiscal year 2011/12, and
debt capital has ranged from 94.39% to 93.45% in the same fiscal year. In
average, the equity capital and debt capital have represented 6.38% and 93.62%
of the total assets respectively.
Alike in EBL, NABIL has practiced to deduct the internal fund and increase
the outside fund while financing the total assets. The equity financing in
NABIL has ranged from 7.55% in the fiscal year 2007/08 to 7.12% in the fiscal
year 2011/12 and debt financing has ranged from 92.45% to 92.88% in the
same fiscal year respectively. In average, NABIL financed 7.14% of the total
assets through equity capital and 92.86% of the total assets through debt
capital. The coefficient of variation on equity financing is 5.19%, indicating
quite uniformity and debt financing is 0.40%, indicating high uniformity.
Comparatively the debt capital representation is extensively higher than the
equity capital in all the selected banks, and thus represents much risk in total
assets of the bank. In addition it can be considered that the total assets of HBL
and NABIL are much riskier than that of NIBL and NABIL, since the debt
capital representation in EBL and NABIL is higher.

4.1.2 Total Debt Composition

The total debt composition shows the attitude of the bank in taking the risk.
Higher amount of short term debt than long term debt states that the bank is
risk taker, while the opposite states that the bank is risk averter. This ratio
indicates on which debt capital is the bank focusing in financing the working
capital.
Table: 4.2
Total Debt Composition
(Unit in %)
FY NIBL HBL EBL NABIL
LTD STD LTD STD LTD STD LTD STD
2007/08 1.84 98.16 1.90 98.10 1.48 98.52 3.50 96.50
2008/09 1.92 98.08 2.80 97.20 1.19 98.81 4.61 95.39
2009/010 1.99 98.01 1.38 98.62 1.76 98.24 4.86 95.14
20010/011 2.01 97.99 1.27 98.73 1.82 98.18 0.78 99.22
2011/012 2.27 97.73 0.87 99.13 1.62 98.38 0.88 99.12
Mean 2.01 97.99 1.64 98.36 1.57 98.43 2.93 97.07
S.D. 0.16 0.16 0.74 0.74 0.25 0.25 1.98 1.98
C.V.% 8.06 0.17 45.33 0.76 16.04 0.26 67.68 2.04
(Source: Appendix I)

Figure: 4.2
Total Debt Composition
The above table and Figure show the financing policy of the banks through
debt. The table depicts that all the banks have extensively used short term debt
than long term debt. The use of long term debt does not cross 5% of the total
debt capital. Looking each bank, NIBL has not used long term debt in the fiscal
year 2007/08 to 2011/12. Thus, long term debt represents 1.84% in lowest to
2.27% in highest. In average the long term covers only 2.01% of the total debt
capital however the coefficient of variation is 8.06% indicating high
inconsistency. The long term debt financing percentage and short term debt
financing percentage, however, in HBL are in fluctuating trend and thus the
long term debt financing percentage has ranged from 0.87% in the fiscal year
2011/12 to 1.90% in the fiscal year 2007/08. The short term debt financing
percentage has ranged from 98.10% in the fiscal year 2007/08 to 99.13% in the
fiscal year 2011/12. In average, the long term debt financing and short term
debt financing have represented 1.64 % and 98.36% of the total debt capital.
Similarly, the long term debt capital percentage has followed decreasing trend
and the short term debt capital percentage has followed increasing trend for the
first four fiscal years in EBL. The short term debt capital and long term debt
capital have represented 98.43% and 1.57% of the total debt capital in average.
Similarly, the mobilization of long term debt in NABIL is quite higher than that
 of NIBL and thus has ranged from 1.84% in the fiscal year 2007/08 to 2.27% in
the fiscal year 2011/12. It seems that use of long term debt percentage in
NABIL has been increasing trend up to year 2009/10. Simultaneously, the short
term debt percentage has been in decreasing trend up to year 2009/10. Short
term debt has ranged from 96.50% in the fiscal year 2007/08 to 99.12% in the
fiscal year 2011/12. In average, the short term debt and long term debt
represent 2.93% and 97.07% of the total debt. Also, the variation in long term
debt financing percentage is extensively higher than that of short term debt
financing.
Considering the composition of total debt capital, it can be assumed that the
working capital of the banks is much riskier, since uses of higher short term
debt demands repayment in every few month, which ultimately desires higher
liquidity and thus can cause bankruptcy in case of low current assets. Further,
the interest rates on short term debt fluctuate widely than in long term debt.

4.1.3 Gross Working Capital Status

Gross working capital means the current assets. The below table 4.3 shows the
gross working capital in different fiscal years, and growth percentage of gross
working capital. Higher the gross working capital indicates higher liquidity.

Table: 4.3
Gross Working Capital Status
(Rs. in Millions)
FY NIBL HBL EBL NABIL
GWC Growth GWC Growth GWC Growth GWC Growth
% % % %
2007/08 23232.53 7.89 32945.08 13.92 21262.47 34.51 26966.50 22.51
2008/09 24953.98 7.40 35449.46 7.60 26788.84 25.99 36534.72 35.48
2009/010 25234.48 1.12 38368.12 8.23 36489.68 36.21 43206.40 18.26
2010/011 26445.90 4.80 41655.25 8.57 40919.67 12.14 51370.70 18.89
2011/012 24239.53 4.58 43882.90 5.34 42727.95 4.42 55239.67 7.53
Mean 24,619.88 5.16 38,460.16 8.73 33,637.72 22.65 42,663.60 20.53
S.D. 1,385.03 2.70 4,447.01 3.16 9,271.55 13.93 11,382.31 10.05
C.V.% 5.63 52.33 11.56 36.20 27.56 61.50 26.68 48.97
(Source: Appendix I)
Figure: 4.3
Gross Working Capital Status

The above table and figure present the gross working capital, i.e. current assets,
situation of the bank. Clearly, the gross working capital of the banks has
gradually increased during the periods. The gross working capital of NIBL has
increased from Rs. 23232.53 millions in the fiscal year 2007/08 to Rs.
24239.53 millions in the fiscal year 2011/12. In average, the bank has
maintained Rs. 24,619.88 millions working capital. And the coefficient of
variation in the working capital is 5.63%, indicating quite inconsistency.
Further the growth rate of working capital has varied from 7.89 % in the fiscal
year 2007/08 to 4.58% in the fiscal year 2011/12. In average, the growth rate of
working capital is 5.16%. Likewise, the working capital of HBL has been
increased from Rs. 32945.08 millions in the fiscal year 2007/08 to Rs.
43882.90 millions in the fiscal year 2011/12. In average the working capital of
HBL is Rs. 38,460.16 millions. Also, the growth rate of working capital has
ranged from 13.92% in the fiscal year 2007/08 to 5.34% in the fiscal year
2011/12. The average growth rate in gross working capital of bank is 8.73 %,
however, the inconsistency in growth rate is higher.

Similarly, the gross working capital of EBL has increased from Rs. 21262.47
millions in the fiscal year 2007/08 to Rs. 42727.95 millions in the last year.
Consequently the growth rate in gross working capital of EBL has ranged from
34.51 % in the fiscal year 2007/08 to 4.42% in the fiscal year 2011/12. In
average, the gross working capital of EBL is Rs. 33,637.72 millions and the
growth rate is 22.65%.
Alike in other banks, the working capital of NABIL is lowest, Rs. 26966.50
millions, in the fiscal year 2007/08 and by the arrival of the fiscal year 2011/12,
it has been raised to Rs. 55239.67 millions. In average, the working capital in
NABIL is Rs. 42,663.60 millions and the coefficient of variation is 26.68%,
indicating high inconsistency. Similarly, the working capital of the bank has
grown up by 7.53% in lowest in the fiscal year 2010/11 and by 35.48% in
highest in the fiscal year 2008/09.

Summarizing the analysis, it can be concluded that the banks have paid attention
to increase the gross working capital to have sound liquidity management.
Among the four banks, NABIL has highest gross working capital however HBL
has left behind NABIL in raising the gross working capital.

4.1.4 Net Working Capital Growth

Net working capital means the excess of current assets to current liabilities.
Higher the current asset than short term debt demands higher amount of other
capital, either long term debt capital or equity capital. The net working capital
of the banks for the five fiscal year periods and the growth has been shown in
the table below.

Table: 4.4
Net Working Capital Status
(Rs. in millions)
FY NIBL HBL EBL NABIL
NWC Growth NWC Growth NWC Growth NWC Growth
% % % %
2007/08 2848.78 21.25 2168.41 25.34 1331.42 19.87 2652.73 21.42
2008/09 2920.88 25.30 2730.10 25.90 1860.74 39.76 3439.16 29.65
2009/010 3482.45 19.23 2667.68 -2.29 2388.47 28.36 4450.56 29.41
2010/011 3245.46 6.80 2877.35 7.86 3000.65 25.63 3430.14 -22.93
2011/012 3132.44 3.89 2732.42 5.04 3105.47 3.50 3597.25 4.87
Mean
3126.0 15.29 2635.19 12.37 2337.35 23.42 3513.97 18.88
S.D. 255.10 9.40 272.05
56.75 753.60 13.28 640.02 29.00
C.V.% 8.16 61.45 10.32
91.75 32.24 56.70 18.21 123.57
(Source: Appendix I)
 Figure: 4.4
Net Working Capital Status

The above table and Figure show the net working capital of the banks. It is
clear that the net working capital of NIBL is in increasing trend within the five
year periods. The net working capital of such bank is lowest, i.e. Rs. 2848.78
millions, in the fiscal year 2007/08 and highest, i.e. Rs. 3482.45 millions, in the
fiscal year 2009/10. In average, the net working capital of the bank is Rs.
3126.00 millions, and has grown up by 3.89% in lowest in the fiscal year
2011/12. The highest growth rate is 25.30% in the fiscal year 2008/09. In
average the net working capital of the bank has been raised by 15.29%,
although the current assets, gross working capital, and current liabilities of the
HBL have increased during the periods, the net working capital has fluctuated
during the periods. This indicates that increment in the gross working capital
and the increment in short term debt have differed. The net working capital is
lowest, Rs. 2168.41 millions, in the fiscal year 2007/08 and highest, Rs.
2877.35 millions, in the fiscal year 2010/11. In average, the net working capital
of the bank is Rs. 2635.19 millions and the increment is 12.37 % annually.
However, the net working capital in EBL has increased by near about 3 times
within the five year periods and thus has reached to Rs. 3105.47 millions in the
fiscal year 2011/12 from Rs. 1331.42 millions in the fiscal year 2007/08. In
average, the net working capital of EBL is Rs. 2337.35 millions and the growth
rate in such capital is 23.42 % in average.
Alike in NIBL, the net working capital in NABIL is also in increasing trend
and thus has reach Rs. 2652.73 millions in the base year 2007/08 to Rs.
3597.25 millions in the final year 2011/12. Also, the growth rate of NWC has
ranged from 21.42% in the fiscal year 2007/08 to 4.87% in the fiscal year
2011/12. In average, the NWC is Rs. 3513.97 millions and average growth rate
is 18.21% and the coefficient of variation in NWC is 123.57%, indicating
inconsistency.
The table clearly indicates that the banks have given more concentrations in
increasing the current assets by greater amount than increasing the current
liabilities. Thus it can be concluded that the banks are following aggressive
working capital policy, since the short term debt has been extensively used to
finance current assets. Even though the net working capital of NABIL is
highest, the growth rate in net working capital of EBL is highest, from which it
can be considered that EBL has paid greatest attention in increasing net
working capital than other does.

4.1.5 Working Capital Financing Policy

The observed banks used short term debt comparatively much higher than the
long term debt to finance the total assets. This indicates that the short term debt
financing is also extensively used to finance the working capital. The table
below shows to what extent the short term debt has been used to finance
working capital of the bank.

Table: 4.5
Working Capital Financing Policy
Bank Fiscal Year Mean S.D. C.V. %

2007/08 2008/09 2009/010 2010/011 2011/012

NIBL
STD 13593.47 15932.64 16922.11 17216.98 18934.23
WC 15801.23 17234.19 18232.78 18210.93 19343.39
Ratio 92.74 4.32 4.66
86.03 92.45 92.81 94.54 97.88
HBL
STD 30776.67 32719.36 35700.44 38777.90 39423.90
WC 32945.08 35449.46 38368.12 41655.25 42636.35
Ratio 93.42 92.30 93.05 93.09 92.47 92.86 0.47 0.50
EBL
STD 14696.47 19931.05 24928.10 37919.02 38595.29
WC 15807.20 21262.47 26788.84 40919.67 42325.59
Ratio 92.97 93.74 93.05 92.67 91.19 92.72 0.94 1.02
NABIL
STD 24313.77 33095.56 38755.84 47940.56 48234.48
WC 26966.50 36534.72 43206.40 51370.70 52898.34
Ratio 90.16 90.59 89.70 93.32 91.18 90.99 1.41 1.55
(Source: Appendix I)
 Figure: 4.5
Working Capital Financing Policy

The above table and Figure depict the working capital financing policy of the
banks. The table shows that the banks use extensive amount of short term debt
to finance the gross working capital. The financing of working capital in NIBL
through short term debt is in fluctuating trend, although it is higher, and thus
has ranged from 86.03% in the fiscal year 2007/08 to 97.88% in the fiscal year
2006/07. In average, NIBL has financed 92.74% of the working capital through
short term debt and the coefficient of variation in such financing is only 4.66%,
indicating consistency in the financing policy.
Alike in NIBL, the short term debt financing in working capital has fluctuated
in HBL as well. In average, HBL has financed 92.86% of the total working
capital through short term debt, and the coefficient of variation in such
financing policy is only 0.50%, indicating consistency. The short term debt to
working capital of bank is highest, 93.42%, in the fiscal year 2007/08 and
lowest, 92.30%, in the fiscal year 2008/09. Likewise, the short term debt has
covered 91.19% of the working capital in lowest in the fiscal year 2011/12, and
92.97% of the working capital in highest in the fiscal year 2007/08 of EBL. In
average, EBL has financed 92.72% of the working capital through short term
debt. Similarly, the short term debt to working capital of NABIL has been
fluctuated during the periods, and thus is maximum, 93.32%, In 2010/11 and is
lowest, 89.70%, in the year 2009/10. In average, the short term debt has
covered 90.99% of the total working capital of the bank, and the coefficient of
variation in the ratio is only 1.55%.
The coefficient of variation indicates high uniformity ratio in the policy.
Further, the extensive use of short term financing indicates that the banks are
risk taker and thus demand higher liquidity. Among the four banks, HBL can
be considered as the higher risk taker bank, since the utilization of short term
debt capital percentage on working capital is highest.

4.1.6 Working Capital to Total Assets

The working capital to total assets measures the relationship between these two
variables. Higher the ratio indicates higher amount of working capital which
ultimately requires higher amount of short term debt, which is easier than long
term debt to obtain, and bears low interest amount.
 Table: 4.6
Working Capital to Total Assets
Bank Fiscal Year Mean S.D. C.V.
2007/08 2008/09 2009/010 2010/011 2011/012 %
NIBL
WC 15801.23 17234.19 18232.78 18210.93 19343.39
TA
16,233.03 17,727.00 18,601.08 18,749.03 19,742.18
Ratio 97.34 97.22 98.02 97.13 97.98
97.54 0.43 0.439
Growth
9.20 4.93 0.80 5.30 9.20
HBL
WC 32945.08 35449.46 38368.12 41655.25 42343.43
TA 33519.14 36175.53 39320.32 42717.12 43,234.05
Ratio 98.29 97.99 97.58 97.51 97.94
97.86 0.32 0.327
Growth 0.13 -0.30 -0.42 -0.07 1.21
EBL
WC 21262.47 26788.84 36489.68 40919.67 41021.93
TA 21432.57 27149.35 36916.83 41382.76 41,427.92
Ratio 99.21 98.67 98.84 98.88 99.02
98.92 0.20 0.02
Growth 0.16 -0.54 0.17 0.04 0.14
NABIL
WC 26966.50 36534.72 43206.40 51370.70 52321.34
TA 27253.39 37132.76 43867.39 52150.23 52,983.64
Ratio 98.95 98.39 98.49 98.51 98.75
98.62 0.23 0.02
Growth 0.38 -0.56 0.11 0.02 0.25
(Source: Appendix I)

Figure: 4.6
Working Capital to Total Assets
The above table & Figure present the ratio of working capital to total assets of
the bank. The working capital to total capital of NIBL has been in fluctuating
trend. The ratio is 97.13% in lowest in the fiscal year 2010/11 and 98.02% in
highest in the last fiscal year. In average, the working capital has covered
97.54% of the total assets of the bank and the coefficient of variation in such
coverage is 0.439%, indicating uniformity. The uniformity in the ratio is also
verified by the paltry increment in growth rate of the ratio, i.e. from 9.2% in the
fiscal year 2007/08 to 9.2% in the fiscal year 2011/12. Similarly, the presence
of working capital in total assets in HBL has also varied throughout the
periods, and thus is maximum, 98.29%, in the fiscal year 2007/08 and
minimum, 97.51%, in the fiscal year 2010/11. In average, 97.86% of the total
assets of HBL are covered by working capital. Also, the working capital to
total assets of EBL has ranged from 99.21% in the fiscal year 2007/08 to
98.67% in the fiscal year 2008/09. In average, the ratio is 98.92% and the
variation in ratio is 0.02%, indicating high uniformity.
Likewise, the representation of total assets by working capital in NABIL has
ranged from 98.95% in the fiscal year 2007/08 to 98.75% in the fiscal year
2011/12. In average, 98.62% of the total assets of the bank have been covered
by working capital and the fluctuation in such coverage is only 0.020%. In
addition, the growth in ratio has ranged from 0.38% in the fiscal year 2007/08
to 0.25% in the fiscal year 2011/12.
On the basis of working capital to total assets, it can be concluded that NIBL
has high liquidity, since the ratio is highest in NIBL, and HBL has low
liquidity. However, all the banks differ in paltry in the ratio.

4.1.7 Cash Reserve Ratio

Sound working capital management means sound liquidity, which ensures the
security of deposit holders. Cash reserve ratio is considered as the major tool
for measuring the banks liquidity. As per the NRBs directives commercial
banks have to keep 5% of the local deposit as balance in NRB from fiscal year
2003/04 to fiscal year 2007/08, while such rate has been increased to 5.5%
from the fiscal year 2008/09. To identify whether bank has sound liquidity or
not, the cash reserve ratio has been determined in the table below.

Table: 4.7
Cash Reserve Ratio
FY NRB NIBL HBL EBL NABIL
Req. CRR Excess CRR Excess CRR Excess CRR Excess
2007/08 5.00 5.02 0.02 5.92 0.92 2.94 -2.10 6.00 1.00
2008/09 5.00 5.43 0.43 5.13 0.13 4.56 -0.44 8.37 3.37
2009/010 5.00 6.70 1.70 6.76 1.26 14.26 8.76 9.03 3.53
2010/011 5.50 6.04 0.54 6.76 1.26 15.53 10.03 3.02 -2.48
2011/012 5.50 6.34 0.84 6.79 1.29 14.93 9.43 5.97 0.47
Mean 5.906 6.27 10.44 6.48
S.D. 0.68 0.74 6.15 2.37
C.V.% 11.51 11.75 58.92 36.64
(Source: Appendix I)
Figure: 4.7
Cash Reserve Ratio

The above table & Figure measures the liquidity of the bank to ensure the
security of the deposit holders. The table shows that the cash reserve ratio
maintained by NIBL is above the minimum standard set out by NRB in all the
fiscal years. The CRR of NIBL has followed increasing trend from the year
2007/08 and thus is maximum, 6.34%, in the fiscal year 2011/12 and is
minimum, 5.02%, in the fiscal year 2007/08. In average, NIBL has kept
5.906% CRR within the five year periods, and the coefficient of variation in
such ratio is 11.51%. Like as NIBL, HBL has also fully implemented the
direction of NRB regarding the minimum cash reserve ratio, and thus has
exceeded the minimum ratio in each fiscal year. The CRR of HBL is highest,
6.79%, in the fiscal year 2011/12 as well as lowest, 5.13%, in the fiscal year
2008/09, and in average the CRR is 6.27%. In contrast, fiscal year 2007/09 and
2008/09, EBL cannot meet the minimum CRR of NRB and thus represents
poor liquidity management. The CRR of EBL in the first fiscal year 2007/08,
i.e. 2.94%, is far below the minimum CRR, 5%, and in the fiscal year 2011/12,
i.e. 14.93%, is far above the minimum CRR. Whatever, in average the CRR of
EBL is 10.44% and the coefficient of variation in the ratio is 58.92%,
indicating high inconsistency. However, NABIL has not met the minimum
standard of NRB in the fiscal year 2010/11., which may be pernicious to
security of deposit holders. The CRR maintained by NABIL has ranged from
3.02% in the fiscal year 2010/11 to 9.03% in the fiscal year 2009/10, and in
average the ratio is 6.48%.
Comparing four banks, it can be concluded that the NIBL is advanced to other
banks in managing liquidity. Next to NIBL, HBL has managed the liquidity
better than other banks, while EBL is inferior in managing liquidity. Thus it
can be inferred that NIBL is quite success in managing working capital to have
sound liquidity position.

4.1.8 Return on Equity

The aggressive policy uses more short term debt, the conservative policy uses
less short term debt and the moderate policy uses moderate. Therefore the
return on equity is higher in aggressive policy when the equity growth is lower
and vice-versa. To determine whether the bank is following aggressive working
capital policy, the return on equity and the relationship of ROE with equity
growth have been measured.
Table: 4.8
Return on Equity
FY NIBL HBL EBL NABIL
ROE Eq. Gr. ROE Eq. Gr. ROE Eq. Gr. ROE Eq. Gr.
2007/08 22.91 21.53 24.67 35.62 32.76 9.71
13.45 15.25
2008/09 25.30 17.07 23.49 25.07 30.63 18.48
15.34 16.65
2009/010 24.13 24.15 28.99 14.70 32.94 28.44
16.75 19.64
2010/011 14.79 10.24 30.15 25.21 29.70 22.51
19.95 22.96
2011/012 13.34 13.52 29.45 27.56 30.65 39.46
13.45 15.25
Mean 15.79
20.09 27.35 31.34
S.D.
2.71 5.59 3.04 1.44
C.V.%
17.17 27.83 11.12 4.58
(Source: Appendix I)
Figure: 4.8
Return on Equity

The above table & Figure present the achievement of the banks in terms of
return on equity and the relationship of ROE with the equity growth. The table
shows that the return on equity of NIBL has fluctuated during the periods. The
ROE is highest, 19.95%, in the fiscal year 2010/11 and lowest, 13.45%, in the
fiscal year 2011/12. In average, the bank achieved 15.79% of the equity capital
as return. Also, the growth rate of working capital has ranged from 15.25% in
the fiscal year 2007/08 to 22.96% in the fiscal year 2010/11. Likewise, the
return on equity of HBL for the fiscal year 2007/08 is 22.91%, which has
increased to 25.03% in the fiscal year 2008/09, further has decreased to 13.34%
in the fiscal year 2011/12. In average, the return on equity is 20.09%, which
indicates that HBL has generated Rs. 20.09 from Rs. 100 mobilization of
equity capital to finance working capital. Also, the coefficient of variation of
27.83% in the ratio indicates quite uniformity in the ratio. However, the
relationship of return on equity on equity capital growth is in inverse order. In
other words, the return on equity has increased in the year when the equity
capital growth has decreased in the same year compared to that in the previous
year. Also, the ROE of EBL has ranged from 24.67% in the fiscal year 2007/08
to 29.45% in the fiscal year 2011/12, and in average the ROE is 27.25%,
indicating generation of Rs. 27.35 return from Rs. 100 investment of equity
capital. Finally, the growth rate of working capital has ranged from 24.67 % in
the fiscal year 2007/08 to 29.45% in the fiscal year 2011/12.
Similarly, the ROE of NABIL has been found to be in irregular trend and thus
has ranged from 29.70% in the fiscal year 2010/11 to 32.94 in the fiscal year
2009/10. In average, NABIL has generated 31.34% of equity capital as return.
In addition, the growth rate on equity capital of the bank has ranged from
9.71% in the fiscal year 2007/08 to 39.46% in the fiscal year 2011/12, and thus
has no perfect inverse relationship with ROE.
Thus, it can be said that HBL is following perfect aggressive working capital
policy, since the principle of working capital states that when the return on
equity increases and equity capital decreases, the working capital is said to be
aggressive. However, in other bank there is no such strong inverse relationship.
Although, it cant be ignored that, the remaining banks are also following
aggressive working capital policy.

4.1.9 Statistical Analysis

Under this the relationship between the variables that are germane to the
working capital management has been determined. Mainly, the Karl Pearson
correlation coefficient, regression line and trend analysis have been used.

4.1.9.1 Correlation and Regression Analysis

This statistical tool measures the relationship between the variables. The
correlation coefficient measures the relationship whereas the regression
analysis measures to what extent the dependent variable is affected by the per
unit change in independent variable.

4.1.9.1.1 Net Profit & Net Working Capital

To measure the relationship of net profit with net working capital, the net profit
(Y) has been assumed to be the dependent variable on net working capital (X),
independent variable. Then the correlation coefficient and regression line
calculated in appendix have been summarized below.

Table: 4.9
Correlation & Regression Analysis between Net Profit & Net Working Capital
Correlation between Net Profit & NWC Regression Equation
Bank R r2 P.E. 6 P.E. Remarks
NIBL 0.1301 0.0169 0.2965 1.7793 Significant NP = 937.065 + 0.372
NWC
HBL 0.7405 0.5484 0.1362 0.8174 Significant NP = 327.60 + 0.16 NWC
EBL 0.5783 0.3345 0.2008 1.2045 Significant NP = 205.94 + 0.15 NWC
NABIL 0.9993 0.9986 0.0004 0.0026 Insignificant NP = -124.93 + 0.32NWC
(Source: Appendix II)

The above table shows the relationship between the net working capital and the
net profit after tax. The table delineates that the net profit of EBL and HBL has
positive relationship with the net working capital. NIBL and NABIL have
Negative relationship with the net working capital thus net profit
increases/decreases with the increment/decrement in net working capital with
respect to EBL and HBL. The correlation between net profit and net working
capital of NIBL is 0.1301, HBL is 0.7405, EBL is 0.5783 and NABIL is
0.9993. Also, the coefficient of determination indicates that 1.69%, 54.84%,
33.45% 99.86% variation in net profit of NIBL, HBL, EBL and NABIL
respectively has been explained by change in net working capital.
The probable error in the relationship between these two variables is 0.2965,
0.1362, 0.2008, and 0.0004 and the six times probable error is 1.7793, 0.8174,
1.2045, and 0.0026 in NIBL, HBL, EBL and NABIL, respectively. Since, the
value of r is greater than the calculated 6 P.E. of NIBL and EBL, it can be
considered that the relationship between net profit and net working capital is
statistically significant in these banks, and thus net profit increases with the
increase in net working capital and vice-versa. On the other hand the value of
r is smaller than the calculated 6 P.E. of HBL and NABIL, it can be
considered that the statistically relationship between net profit and net working
capital is not significant in case of these banks, and thus net profit is not
increases with the increase in net working capital and vice-versa.

Further, the regression line of net profit on net working capital indicates that
the net profit increases by Rs. 0. 37 in NIBL, Rs. 0.16 in HBL, Rs. 0.15 in
EBL, and Rs. 0.32 in NABIL with per rupee increment in net working capital,
if the other variable of the respective banks remains constant.

4.1.9.1.2 Net Profit & Short Term Debt

Let the net profit be the dependent variable and short term debt is the
independent variable. Then the relationship between them in terms of
correlation coefficient and regression line has been presented in the table
below.
Table: 4.10
Correlation & Regression Analysis between Net Profit & Short Term Debt
 Correlation between Net Profit & STD Regression Equation
Bank r r2 P.E. 6 P.E. Remarks
NIBL 0.2573 0.0662 0.2875 1.6902 Significant NP = 733.65 + 0.033 STD
HBL 0.9575 0.9168 0.0251 0.1505 Significant NP = 205.02+ 0.02 STD
EBL 0.4338 0.1882 0.2449 1.4693 Significant NP = 174.62 + 0.01 STD
NABIL 0.9846 0.9695 0.0092 0.0552 Insignificant NP = -168.60 + 0.03 STD
(Source: Appendix II)
The above table measures the relationship between net profit and short
term debt. The table depicts that NIBL, HBL & NABIL have perfect positive
relationship between net profit & short term debt and in the case of EBL there
is negative relationship between net profit & short term debt. of each bank,
since the correlation coefficient is higher, i.e. 0.9846 in NABIL, 0.9575 in
HBL, and 0.4338 in EBL and lower 0.2573 in NIBL. Further, the coefficient
of determination indicates that 6.62%, 91.68%, 18.82% and 96.95% variation
in net profit of NIBL, HBL, EBL and NABIL respectively has been caused by
variation in short term debt. Also, the P.E. and 6 P.E. calculated are 0.2875 and
1.6902 in NIBL, 0.0251 and 0.1505 in HBL, 0.2449 and 1.4693 in EBL, and
0.0092 and 0.0552 in NABIL respectively.

Since the value of r is greater than the value of 6 P.E. in each bank, certainly
there exists statistically significant relationship between net profit and short
term debt in each bank. And, thus net profit increases/decreases with the
increase in decrease in short term debt. Thus, the bank will earn more profit by
using higher short term debt to finance the working capital. Consequently, the
regression line of net profit on short term debt indicates that net profit of the
NIBL increases by Rs. 0.09, HBL increases by Rs. 0.02, EBL increases by Rs.
0.01, and NABIL increases by Rs. 0.03, if the respective variable remains
constant.

4.1.9.1.3 Net Profit & Long Term Debt

To measure the relationship between net profit and long term debt, the
correlation and regression line between them have been determined in
appendix, which has been summarized below.
Table: 4.11
Correlation & Regression Analysis between Net profit & Long Term Debt
Correlation between Net Profit & LTD Regression Equation
2
Bank r r P.E. 6 P.E. Remarks
NIBL 0.8915 0.7948 0.0619 0.3713 Significant NP = 869.92 + 0.10 LTD
HBL 0.1898 0.0366 0.2908 1.7447 Significant NP = 900.51 + 0.06 LTD
EBL 0.2290 0.0524 0.2858 1.7150 Significant NP = 479.92 + 0.15 LTD
NABIL 0.9400 0.8835 0.0351 0.2108 Insignificant NP = -23.83 + 1.16 LTD
(Source: Appendix II)
The above table evaluates the relationship between net profit and long term
debt. The table reveals that there exist negative relationship between net profit
and long term debt in NIBL. From the above table correlation coefficient of
NIBL is 0.8915. There is low positive relationship between net profit and long
term in NABIL and HBL, since the correlation coefficient between these two
variables is 0.1898 in HBL and 0.2290 in EBL, and high positive relationship
between these two variables in NABIL, correlation coefficient is 0.9400.
However, the coefficient of determination indicates that 79.48%, 3.66%,
5.24%, 88.35% variation in net profit is caused by long term debt NIBL, HBL,
EBL and NABIL respectively.

To verify this statement, the probable error and 6 P.E. have been determined.
The probable error in the relationship is 0.0619, 0.2908, 0.2858 and 0.0351 and
the 6 P.E. is 0.3713, 1.7447, 1.7150 and 0.2108 in NIBL, HBL, EBL and
NABIL respectively. The relationship between these two variables is
statistically insignificant in NIBL, HBL and EBL, since the value of r is
lower than the value of 6 P.E, and statistically significant in NABIL, since the
value of r is greater than the value of 6 P.E. Hence net profit may not increase
by Rs. 0.10 in NIBL and Rs. 0. 06 in HBL, and certainly increases by Rs.0.15
in EBL and Rs. 1.16 in NABIL with per rupee increment in long term debt, as
the regression line specifies, if the respective variable remains stable.

4.1.9.2 Trend Analysis

The trend analysis aids to predict the future value on the basis of the past years.
To know the efficiency in working capital management of bank in future, the
variables that are related to working capital have been estimated.

4.1.9.2.1 Trend Analysis of Net Working Capital

Let Year (X) 1, 2, 3, 4 and 5 denotes fiscal year 2007/08, 2008/09, 2009/10,
20010/11 and 2011/12 respectively. Then regression line of net working capital
(Y) on year calculated in appendix has been presented below along with the
trend value.
Table: 4.12
Trend Analysis of Net Working Capital
Fiscal Year NIBL HBL EBL NABIL
2007/08 2848.78 2168.41 1331.42 2652.73
2008/09 2920.88 2730.10 1860.74 3439.16
2009/010 3482.45 2667.68 2388.47 4450.56
2010/011 3245.46 2877.35 3000.65 3430.14
2011/012 3132.44 3923.43 3219.41 3678.42
2012/013 3783.37 4700.31 3272.89 3389.48
2013/014 4185.48 5220.3 3552.29 3843.17
Regression Y = 3371.27+ Y =3469.65+ Y = 2660.84+ Y = 3554.81+
Line 192.324 X 512.57 X 368.494 X 96.422 X
(Source: Appendix III)
The table shows that the estimated value of net working capital in the fiscal
year 2012/13 will be Rs. 3783.39millions for NIBL, Rs. 4700.31millions for
HBL, Rs. 3272.89 millions for EBL, and Rs. 3389.48 millions for NABIL and
in the fiscal year 2013/14 will be Rs. 4185.48 millions for NIBL, Rs. 5220.30
millions for HBL, Rs 3552.29 millions for EBL and Rs. 3843.17 millions for
NABIL. Also, the regression line of net working capital on the time period
indicates if the other variable remains constant that the net working capital
increases by Rs. 192.324 millions in NIBL, Rs. 512.57 millions in HBL, Rs.
368.494 millions in EBL, and Rs. 96.422 millions in NABIL per year, Thus, it
can be concluded that the pace of working capital will be highest in HBL in
future as well.

Figure: 4.9
Trend Analysis of Net Working Capital

4.1.9.2.2 Trend Analysis of Short Term Debt

Let the dependent Variable, STD be denoted by Y and the independent
variable, Year be denoted by X. Then, the regression equation of STD on Year
and the trend value of STD are presented in the below table.
 Table: 4.13
Trend Analysis of Short Term Debt
Fiscal Year NIBL HBL EBL NABIL
2007/08 23639.97 30776.7 19931.05 24313.77
2008/09 27321.52 32719.4 24928.10 33095.56
2009/010 31003.07 35700.4 34101.21 38755.84
2010/011 34684.62 37457.90 37919.02 40940.56
2011/012 38366.17 39131.54 40232.43 43152.54
2012/013 40212.98 42043.54 45252.53
42047.72
2013/014 42989.42 44234.53 47835.63
45729.27
Regression Line Y = 34684.62 Y = 36998.334 Y = 34769.983 Y = 39049.49
+ 3681.55X + 1966.30 X + 4045.447X + 3545.579 X
(Source: Appendix III)
The table shows that the short term debt increases with the lapse of time. The
estimated value of short term debt in the fiscal year 2012/13 and will be Rs.
42047.72 millions for NIBL, Rs. 40212.98 millions for HBL, Rs. 42043.54
millions for EBL, and Rs. 45252.53 millions for NABIL, and in the fiscal year
2013/14 will be Rs. 45729.27 millions for NIBL, Rs. 42989.42 millions for
HBL, Rs. 44234.53 millions for EBL, and Rs. 47835.63 millions for NABIL.
Thus, it can be said that, as in past, NABIL will continue to use extensive
amount of short term debt to finance the working capital. Also, the regression
line of short term debt on year delineates that short term debt increases by Rs.
3681.55 millions in NIBL, Rs. 1966.30 millions in HBL, Rs. 4045.44 millions
in EBL, and Rs. 3545.579 millions in NABIL per year, if the variable remains
inflexible.
 Figure: 4.10
Trend Analysis of Short Term Debt

4.1.9.2.3 Trend Analysis of Net Profit after Tax

The trend value of net profit after tax, and the regression line of NPAT,
dependent variable (Y), on the fiscal year, independent variable (X), are
presented in the table below.
 Table: 4.14
Trend Analysis of Net Profit after Tax
Fiscal Year NIBL HBL EBL NABIL
2007/08 491.82 296.4 673.95
658.75
2008/09 635.87 451.21 746.46
691.66
2009/010 752.83 638.73 1031.05
818.92
2010/011 508.79 831.76 1139.09
1025.11
2011/012 545.51 845.34 1221.21
1085.87
2012/013 1132.43 645.33 886.43 1398.32
2013/014 1243.53 745.54 943.53 1523.63
Regression Line Y = 950.896 Y = 617.955 Y = 699.057 + Y = 1104.81
+103.673X + 20.455 X 107.801X + 144.39 X
(Source: Appendix III)
The above table measures the relationship of net profit with the time period.
The table shows that net profit has positive relationship with the time, and thus
net profit increases in each year. As a result, the estimated net profit after tax in
the fiscal year 2013/14 will be Rs. 1243.53 millions in NIBL, Rs. 745.54
millions in HBL, Rs. 943.53 millions in EBL, and Rs. 1523.63 millions in
NABIL, and in the fiscal year 2012/13 will be Rs. 1132.43 millions in NIBL
Rs. 645.33 millions in HBL, Rs. 886.43 millions in EBL, and Rs.1398.32
millions in NABIL.
Likewise, the regression line of net profit on fiscal year indicates that the net
profit of increases by Rs. 103.673 millions in NIBL, Rs. 20.455 millions in
HBL, Rs. 107.801 millions in EBL and Rs. 144.39 million in NABIL per year,
if the other variable remains uniform. Thus, it can be concluded that the pace
of growth in net profit per year is highest in NABIL.
 Figure: 4.11
Trend Analysis of Net Profit after Tax

4.2 Primary Data Analysis

For the purpose of collecting primary data, a questionnaire having a set of 8
questions were prepared and presented to 30 respondents. However, only 24
respondents showed interest to respond. The respondents were selected
randomly from the employees of the selected banks and share-known
personalities especially from the share buyer/purchasers in NEPSE floor. The
questions contained variety in types. From Question No. 1 to 7, the respondents
were asked to choose the best alternative from the list whereas Question No. 8
contained ranking.

4.2.1 Classification of Respondents

A total of 24 respondents were surveyed randomly for the questionnaire.
Among these, 4 respondents were high level employee, 8 were middle level
employee and 12 were shareholders. Likewise, the respondents are classified in
terms of their age and sex as given in Table 4.15.
 Table: 4.15
Classification of Respondents
S.N. Basis of Classification Male Female Number Percentage
Occupation
High Level Employee 3 1 4 17
1 Middle Level Employee 5 3 8 33
Shareholder 7 5 12 50
Total 15 9 24 100
Age
Below 25 2 2 4 17
2 25 to 40 6 6 12 50
40 above 7 1 8 33
Total 15 9 24 100
Sex
Male 9 37
3
Female 15 63
Total 24 100
(Source: Field Survey, 2013)

4.2.2 Performance Role of working Capital

Working capital management is considered as the crucial faction of financial
management. Thus, the first question asked to the respondents is to know the
importance of role of working capital. Table 4.16 shows the results of the
responses.

Table: 4.16
Role of Working Capital
No. of Respondents Total
Responses High Level Middle Level Shareholder No. %
Employee Employee
Highly 4 4 8 16 67
Important
Important 0 2 4 6 25
Not so 0 2 0 2 8
Important
Total 4 8 12 24 100
(Source: Field Survey, 2013)
The table manifests the responses of the surveyed respondents regarding the
magnificent of the performance role of the working capital for sound financial
management. The table emblazons that the entire high level employee
considered as working capital role to be highly important for the financial
management of the banks. However, only 4 out of 8 middle level employees
have considered as highly important, and only 8 out of 12 shareholders have
considered being most crucial for financial management. Likewise, 2 out of 8
middle level employees and 4 out of 12 shareholders have considered the role
of working capital as only important for efficient financial management of the
banks. In contrast, 2 out of 8 middle level employees have considered role of
working capital weighs not so important role for the success of financial
management of banks.

In overall, the majority of the respondents, 16 out of 24, indicating 67% of the
total respondents, have considered the performance role of working capital is
highly important for smooth running of business. Likewise, only 25% (6 out of
24) and 8% (2 out of 24) of the respondents give the response that the
performance role of working capital is important and not so important for
business respectively. Thus, considering the overall majority and the majority
of each category of the respondents, it can be assumed that the role of working
capital is highly significant in financial management of the bank.

Figure: 4.12
Role of Working Capital
4.2.3 Responsibility to Manage Working Capital
A well managed working capital is the necessity of every business
organization. Now, to clear the query that who is responsible to manage an
effective working capital, the respondents were asked on this regard. The
responses were obtained as shown in Table 4.17.

Table: 4.17
Responsibility to Manage Working Capital
No. of Respondents Total
Responses High Level Middle Level Shareholder No. %
Employee Employee
Top Level 4 6 10 20 83
Management
Middle Level 0 2 2 4 17
Management
Lower Level 0 0 0 0 0
Management
Total 4 8 12 12 100
(Source: Field Survey, 2013)
The table delineates that the entire high level employees have agreed that the
top level management is obliged for the effective management of working
capital. To substantiate this fact, 6 out of 8 middle level employees and 10 out
of 12 shareholders have also stated that the top level management is most
responsible for the management of working capital. In contrast to the above
statement, just 2 out of 8 middle level employees and 2 out of 12 shareholders
have claimed that the middle level management should be much onus for the
effective management of the working capital.

In overall, the majority of the total respondents, 20 out 14 (83%) have stated
that high level management is responsible for managing working capital.
Likewise, 17% respondents stated that middle level management should be
responsible to manage working capital whereas nobody pointed out Lower
Level Management to be responsible for working capital. Paraphrasing the
analysis, it can be considered, on the basis of the overall majority and the
majority of each category, the top level management should be most
responsible for the effective management of working capital.
Figure: 4.13
Responsibility to Manage Working Capital
4.2.4 Working Capital Policy
There are three types of working capital viz. aggressive, moderate and
conservative. The policy depends upon the nature of the business. So, to know
which type of working capital befits in bank, the respondents were asked on
this regard. The responses obtained from them are presented in the table: 4.18.
Table: 4.18
Working Capital Policy
No. of Respondents Total
Responses High Level Middle Level Shareholder No. %
Employee Employee
Aggressive 4 8 6 18 75
Moderate 0 0 4 4 17
Conservative 0 0 2 2 8
Total 4 8 12 24 100
(Source: Field Survey, 2013)

The table depicts that entire high level employees are in the opinion that the
bank should following aggressive working capital policy, which means that the
banks should finance its fund mostly through the debt capital, especially using
the short term debt. Also, the entire middle level employees have supported this
opinion. However, only 6 out of 12 surveyed shareholders have buttressed this
view. In contrast, 4 out of 12 shareholders have opined that the bank should
adopt moderate working capital policy, which indicates that the bank should
use the equity capital and debt capital in equal proportion to meet the fund
requirement. Finally, 2 out of 12 shareholders has stated that the bank should
adopt conservative working capital policy, indicating the equity capital should
be higher than the debt capital to reduce the risk that can arise from outside
financing.

In overall, it has been revealed that 75% of the respondents think that
aggressive working capital is the best policy for the bank, whereas 17% and 8%
of the respondents think that moderate and conservative policy is the best
policy respectively. Considering the majority of the respondents, it can be
assumed that the aggressive working capital policy would be the best policy for
the bank for having sound financial management.

Figure: 4.14
Working Capital Policy
4.2.5 Impact of Working Capital on Profitability
To know the degree of impact of working capital on profitability, the
respondents were asked whether working capital affects on profitability or not.
The responses obtained are presented in the following table.
Table: 4.19
Impact of Working Capital on Profitability
No. of Respondents Total
Responses High Level Middle Level Shareholder No. %
Employee Employee
Yes 4 6 6 16 67
No 0 0 2 2 8
Dont Know 0 2 4 6 25
Total 4 8 12 24 100
(Source: Field Survey, 2013)
The table shows that the entire high level employees, 6 out of 8 middle level
employees and 6 out of 12 shareholders are in the view that certainly the
working capital has affect on the profitability of the bank in some extent. In
contrast to this view, 2 out of 12 shareholders has opined that the working
capital policy has no relationship with the profitability of the bank, while 2 out
of 8 middle level employees and 4 out of 12 investors have opined have been
bewildered with this question and said that they have no idea on this issue.
In overall, two-third (67%) of the respondents stated that certainly working
capital policy highly impacts the level of profit earning. However, 8% of the
respondents said that working capital does not affect profitability, whereas 25%
of the respondents remained neutral. Analyzing the majority of the respondents,
and the majority of each category, it can be categorically said that working
capital policy of the bank has high impact on its profitability.

Figure: 4.15
Impact of Working Capital on Profitability

4.2.6 Working Capital and Risk

Also to know whether working capital has impact on risk of the company or
not, the respondents were asked on this matter. The responses obtained are
presented in the following table: 4.20.
Table: 4.20
Working Capital and Risk
 No. of Respondents Total
Responses High Level Middle Level Shareholder No. %
Employee Employee
Yes 4 4 8 16 67
No 0 2 2 4 17
Dont Know 0 2 2 4 16
Total 4 8 12 24 100
(Source: Field Survey, 2013)
It has been observed that the entire high level employee (4 out of 4), half of the
middle level employees (4 out of 8) and two-third of the shareholders (8 out of
12) contemplates that working capital policy affects on the risk of the
company. In contrast, 2 out of 8 middle level employees and 2 out of 12
shareholders are in the view that the working capital has nothing to do with the
risks that is confronted by the banks. In addition, it has been ascertained that 2
out of 8 middle level employees and 2 out of 12 shareholders have no idea on
this issue.

In total, most of the respondents have agreed that working capital has impact
on risk of the company. About two-third of the respondents (67%), 16 out of
24, stated that working capital policy affects the risk of the company,
approximately 17% of the respondents and 16% of the respondents said that
working capital policy does not have impact on risk of the company and
remained neutral respectively. Thus, on the basis of the overall majority and the
majority of each category of respondents, it can be concluded that working
capital policy certainly affects the risks of the banks.
Figure: 4.16
Working Capital and Risk
4.2.7 Liquidity Position
Since the liquidity ratios plays a crucial role in paying debts and preventing
company from turning bankruptcy, the respondents were asked whether the
liquidity position of the bank is appropriate. The responses obtained are
presented in the following table 4.21.
Table: 4.21
Liquidity Position
No. of Respondents Total
Responses High Level Middle Level Shareholder No. %
Employee Employee
Yes 2 2 4 8 34
No 2 6 6 14 58
Dont Know 0 0 2 2 8
Total 4 8 12 24 100
(Source: Field Survey, 2013)

The table shows that only 2 out of 4 high level management, 2 out of 8 middle
level management, and 4 out of 12 shareholders are in the view that the banks
are maintaining satisfactory level of liquidity. In contrast, 2 high level
employees, 6 middle level employees and 6 shareholders are in the opinion that
the banks are not maintaining adequate liquidity to meet the obligations and
thus it might jeopardize the credibility owned by the bank to depositors,
investors and other related bodies. However, 2 shareholders have said nothing
on this issue.

In overall, it can be considered that the liquidity position of the bank is not so
good. Almost more than half of the respondents (58%) said that the liquidity
position of the bank is not appropriate. Similarly, one-third of the respondents
(34%) stated that the liquidity position of the bank is appropriate, whereas 8%
(2 out of 24) remained neutral. This deduction has also been substantiated by
the secondary data of the observed banks, since only two observed banks have
met the minimum CRR in all the observed periods.

Figure: 4.17
Liquidity Position

4.2.8 Working Capital Investment Policy

To know which working capital investment policy the most of the commercial
bank is adopting, the respondents were asked to express their view on this
regard. The responses obtained from them have been presented in the following
Table 4.22.
Table: 4.22
Working Capital Investment Policy
 No. of Respondents Total
Responses High Level Middle Level Shareholder No. %
Employee Employee
Relaxed 4 6 10 20 67
Moderate 0 2 2 4 17
Restricted 0 0 0 0 16
Total 4 8 12 24 100
(Source: Field Survey, 2013)
The table manifests that the entire high level employees, 6 middle level
employees and 10 shareholders are in the view that the banks are adopting
relaxed working capital investment policy; whereas 2 middle level employees
and 2 shareholders have assumed that the banks are adopting moderate working
capital investment policy. In overall, it has been ascertained that most of the
commercial banks are adopting relaxed working capital investment policy.
About 83% of the respondents, 17% of the respondents and 0% of the
respondents said that the company is adopting relaxed, moderate and restricted
working capital investment policy respectively. Looking the majority, 20 out of
24 and the financial statement, where current assets is higher than fixed assets
in each year, it can be considered that the company is adopting relaxed working
capital investment policy.

Figure: 4.18
Working Capital Investment Policy
 4.2.9 Factors Affecting Working Capital
On the basis of the responses collected from the respondents, the different
indicators which influence the working capital of the bank most has been
ranked as follows in the table 4.23.

Table: 4.23
Most Influential Factor of Working Capital
Influencer Basis Rank Total Weight Mean Overall
1 2 3 4 5 6 Weight Rank
Nature and Total 12 10 2 0 0 0 24 87 1.53 1
Size of High Level Employee 2 2 0 0 0 0 4 3 1.5 1
Business Middle Level Employee 6 2 0 0 0 0 8 5 1.25 1
Shareholder 4 6 2 0 0 0 12 11 1.83 1
Total 0 0 2 0 14 8 24 93 5.19 5
Current Assets High Level Employee 0 0 0 0 2 2 4 11 5.5 3
Policy Middle Level Employee 0 0 2 0 4 2 8 19 4.75 5
Shareholder 0 0 0 0 8 4 12 32 5.33 5
Total 2 2 14 6 0 0 24 268 3.17 3
High Level Employee 0 0 2 2 0 0 4 7 3.5 2
Credit Policy
Middle Level Employee 0 0 4 4 0 0 8 14 3.5 4
Shareholder 2 2 8 0 0 0 12 15 2.5 3
Total 0 4 4 16 0 0 24 237 3.47 4
Growth and High Level Employee 0 0 2 2 0 0 4 7 3.5 2
Expansion Middle Level Employee 0 2 2 4 0 0 8 13 3.25 3
Shareholder 0 2 0 10 0 0 12 22 3.67 4
Total 10 8 2 2 2 0 24 171 2 2
High Level Employee 2 2 0 0 0 0 4 3 1.5 1
Profit Margin
Middle Level Employee 2 4 0 0 2 0 8 10 2.5 2
Shareholder 6 2 2 2 0 0 12 12 2 2
Total 0 0 0 0 8 16 24 194 5.64 6
High Level Employee 0 0 0 0 2 2 4 11 5.5 3
Level of Taxes
Middle Level Employee 0 0 0 0 2 6 8 23 5.75 6
Shareholder 0 0 0 0 4 8 12 34 5.67 6

(Source: Field Survey, 2013)

The rank analysis has substantiated that the nature and size of the business is
the most influential factor for designing working capital policy. Precisely, 2
high level employees, 6 middle level employees, and 4 shareholders have
ranked 1 for the nature and size of business. Similarly, the rank analysis depicts
that the profit margin of the bank has been ranked 2 for the determinant of the
working capital. Likewise, credit policy of the bank has been ranked 3, growth
and expansion of the bank has been ranked 4, current assets policy of the bank
has been ranked 5 and level of taxes has been ranked 6 as the most influencing
factor of the working capital policy of the bank.

4.3 Major Findings of the Study

From the above data analysis, the following major findings have been drawn;
Findings from Secondary Data Analysis
 Operating efficiency of bank, Dividend policy, working capital cycle,
change in price level, nature and size of business, attitude towards risk and
profit, level of taxes, NRB directives, economic policy of government etc
are the major components affecting working capital management of
banks.
Most of the banks finance total assets by using extensively debt capital
than equity capital. In average, debt capital represents 92.24 %, 92.4 %,
93.62 % and 92.86 % of the total assets finance in NIBL, HBL, EBL and
NABIL respectively. However, only 7.76%, 7.60%, 6.38% and 7.14 % of
the total assets finance is represented by equity capital in NIBL, HBL,
EBL and NABIL respectively.
Long term debt has been used in paltry amount compared to short term
debt. Short term debt represents 97.99 % in NIBL, 98.36% in HBL,
98.43% in EBL and 97.07% in NABIL of total debt capital.
The gross working capital of banks has followed increasing trend. During
the five year periods, the average gross working capital is Rs. 24,619.88
millions in NIBL, Rs. 38460.16 millions in HBL, Rs. 33637.72 millions in
EBL, and Rs. 42663.60 million in NABIL. And the average growth rate in
gross working capital is 5.16%, 8.73%, 22.65% and 20.53% in NIBL,
EBL, HBL & NABIL respectively.
Each bank has extensively used short term debt to finance working
capital, current assets. 92.74%, 92.86%, 92.72% and 90.99%, of the total
working capital of NIBL, HBL, EBL and NABIL respectively has been
financed through short term debt.
The working capital has represented 97.54% in NIBL, 97.86% in HBL,
98.92% in EBL and 98.62% in NABIL, of the total assets.
The liquidity position of the bank is not so satisfactory; the bank is also
adopting relaxed working capital investment policy. During the study
period only NIBL and HBL have met the minimum cash reserve ratio
directed by NRB with in whole years. EBL maintains 14.26 %, 15.53%
and 14.93 % CRR in the year 2009/10, 2010/11 and 2011/12. It is much
 greater than the directives of NRB. The average CRR maintained during
the five year periods is 5.906% by NIBL, 6.27% by HBL, 10.44% by EBL
and 6.48% by NABIL.
The relationship of return on equity and equity growth is in complete
reverse order only in HBL first 3 years, which also indicates the adoption
of perfect aggressive working capital policy by the bank. NIBL, HBL,
EBL and NABIL have generated Rs. 15.79, Rs. 20.09, Rs. 27.35 and
Rs.31.34 respectively from Rs. 100 investment of equity capital.
The net profit has positive relationship with net working capital and short
term debt. On the other hand net profit has positive relationship with long
term debt however it is negative with respect NABIL. The relationship
between net profit & long term debt is statistically insignificant in
NABIL.
The estimated value of net working capital in the fiscal year 2013/14 will
be Rs. 4185.48 millions for NIBL, Rs. 5220.30 millions for HBL, Rs.
3552.59 millions for EBL and Rs. 3843.17 millions for NABIL.
The short term debt in 2013/14 will be Rs. 45729.27, Rs. 42989.42, Rs.
44234.53 and Rs. 47835.63 for NIBL, HBL, EBL and NABIL
respectively.
The net profit in the fiscal year 2013/14 will be Rs. 1243.53 millions for
NIBL, Rs. 745.54 millions for HBL, Rs. 943.53 millions for EBL and Rs.
1523.63 millions for NABIL
Findings from Primary Data Analysis
The primary data analysis shows that the performance role of working
capital is very important in the banks.
Working capital is highly significant in financial management of the bank.
Top level management should be responsible for managing working
capital.
Aggressive working capital policy is appropriate in the commercial banks.
 Working capital has greater impact on the profitability and risk of the
bank.
Working capital policy certainly affects the risks of the banks.
The liquidity position of the bank is not so satisfactory; the bank is also
adopting relaxed working capital investment policy.
Eventually, the nature and size of the business is the most influential
factor in the working capital management of the banks.

CHAPTER -V
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

5.1 Summary
The primary goal of the developing country like Nepal is to develop economy
rapidly and to promote the welfare of the people and nation. So, very recently,
Nepal has adopted the path of economic liberalization for the sake of the
economic growth of the nation. The development process of a country involves
the proper mobilization and deployment of available resources. Financial
institutions assist in the economic development of the country and are
considered as the catalyst. Commercial banks are the major financial
institutions that occupy quite an important place in the framework in the
economy development sectors as well as in saving and investment sectors.
Commercial banks are the suppliers of finance for trade and industry and play a
vital role in the economic and financial life of the country. After the
implementation of the open market policy, joint venture commercial banks are
opened as private banks. The liberal trade and investment policies have
facilitated joint venture banks to invest in Nepal. Joint venture bank has been
helpful in transferring foreign investment and advanced technology from one
country to another. The establishment of joint venture banks gave a new
horizon to the financial sector of the country.

Commercial bank is income oriented, thus proper financial decision-making is

more important in banking transaction for its efficiency and profitability. Most
of the financial decisions of a bank are concerned with current assets and
current liabilities. Working capital management is concerned with current
assets and current liabilities. Generally, working capital refers to the difference
between current assets and current liabilities. Thus, working capital
management has been regarded as one of the conditioning factor in the
decision-making issues of commercial banks. The term working capital
management closely relates with short-term financing; it is concerned with
collection and allocation of resources. Working capital management relates to
problems that arise in attempting to manage the current assets, the current
liabilities and interrelationships that exist between them.

The main objective of the study is to study the working capital management of
banks, especially in Nepal Investment Bank Limited, Himalayan Bank Limited,
Everest Bank Limited and NABIL Bank Limited. To fulfill this objective of
this study and other specific objective as described in chapter one, an
appropriate research methodology has been developed which includes the ratio
analysis as financial tools and trend analysis, correlation coefficient as
statistical tools. The major ratio analysis consists of the composition of
working capital position, liquidity position, turnover position, capital structure
position and profitability position. Under these, main ratios and their trend
position are studied in the chapter five. In order to test the relationship between
the various components of working capital, Karl Pearsons correlation
coefficient r is calculated and analyzed.

To achieve the objectives of the study, both the primary data and secondary
data have been analyzed. The primary data has been collected by collecting the
opinions of the respondents through questionnaire, while the secondary data
have been extracted from the annual reports of the respective banks. Further,
both financial tools and statistical tools have been effectively utilized to get the
result.

Finally, the major findings have been extracted from the analysis of primary
and secondary data, and the conclusion has been made on the basis of major
findings. For the enhancement of the credit management of the sampled banks,
the recommendations have been given, considering the major findings and
conclusion, at the end of the study.

5.2 Conclusions
Working capital is regarded as the lifeblood and nerve of a business concern
and is essential to accommodate the smooth operations of any organization.
Under and over allocation of working of working capital is harmful to an
enterprise to achieve its primary objectives. Therefore, maintaining optimal
level of working capital is the crux of the problem as it is strongly related to the
tradeoff between risk and return. The following major conclusions have been
drawn:

It is difficult to point out as to how much working capital need by a

particular business organization. An organization, which is not willing
to take more financial risks, can go for more short-term liquidity.
The debt capital has been the main source of funds for banks than equity
capital while financing the total assets. Among the four selected banks,
the preponderance of debt capital is highest in EBL and NABIL, which
ultimately has visualized higher risk in total assets in these banks in
comparison to other banks.
It has been ascertained that the short term debt has been used abound
than long term debt in meeting the funds requirement. HBL has been
found in advanced position in mobilizing highest portion of short term
debt, which consequently indicates that the working capital of HBL is
most risky. However, all the banks are following aggressive working
capital policy.
Further, the banks have paid more concern in raising the gross working
capital for having befit liquidity. Likewise, the banks have increased the
current assets in greater extent to current liabilities; as a result it can be
asserted that the net working capital has been augmented.
It can be inferred that the observed banks are risk takers since the short
term financing to working capital is higher in each banks. In addition,
HBL can be considered as the highest risk taker, since the utilization of
short term debt capital percentage on working capital is highest.
On the basis of highest ratio, it can be assumed that EBL has highest
liquidity. This axiom has also been categorically buttressed by the cash
reserve ratio, as the cash reserve ratio is highest in EBL. However, it is
quite disappointing that except NIBL and HBL, the other two observed
banks have not met the minimum cash reserve ratio as directed by NRB.
Thus, it cannot be ensured that that the deposits are asylum in the banks.
 Observing the relationship of return on equity and equity capital growth,
it can be considered that only HBL is following the perfect aggressive
working capital policy.
It can be assumed that the relationship between net profit and net
working capital is significant, and thus net profit increases/decreases
with the increase/decrease in net working capital. Also, the same
situation exists between the net profit and short term debt. However, the
relationship between net profit and long term debt is positive and
significant in NIBL, HBL and EBL.
The responsibility of top level management should be more liable than
lower echelon management in managing the required working capital.
Further, the bank should be risk taker and should adopt the aggressive
policy for the sustainability of the bank in long run, since the working
capital has crucial impact on the profitability and risk.
On the basis of questionnaire survey, it can be concluded that the role of
working capital is crucial for smooth operation of the bank. And
astoundingly, it can be concluded that the liquidity position of the banks
are not satisfactory, and the banks should review the liquidity
management to ameliorate the liquidity.

5.3 Recommendations
On the basis of major findings and the conclusion drawn, the following
recommendations, which will undoubtedly enhance the banks performance,
are made;
Positive working capital represents the sound financial management of the
banks. Similarly, the negative working capital represents the poor
financial management. In case of concerned Banks, positive working
capital is found during the study period. This bank should be maintained
optimum size of current assets and liabilities.
The banks should follow moderate policy, to minimize the risk. They
should use equity capital as well in the same level of debt capital.
 The banks should use the long term debt capital instead of large amount of
short term debt capital to reduce the risk.
The banks should follow the cash reserve ratio directed by NRB to
minimize the liquidity risk.
The observed banks should promote fixed deposit to lessen the immediate
requirement of cash and thus having sound working capital management.
Considering the cash and bank balance, the bank should increase the
portion of cash and bank balance in total assets.
Similarly, the observed banks should effectively mobilize their total
assets, shareholders equity and total deposit to maximize its profit and
sustain in long run. Also, these bank needs to reduce its cost of services to
maximize their profit.
The bank needs to adopt the best capital structure that will best suit its
interest and thus maximizes profitability and liquidity and minimizes cost.
Finally, the banks need to have highly positive relationship between loan
and advances with total deposit and loan and advances with net profit.